*82 Decision will be entered under Rule 50.
Petitioner acquired 58 per cent of the outstanding stock of another corporation in exchange for its own 3 per cent 15-year collateral trust bonds issued pursuant to the transaction. Petitioner in its return for the taxable year in question claimed deductions for state documentary stamps purchased in connection with the bond issue, for interest accrued on such bonds during the taxable year, and a dividends received credit on dividends paid on the acquired stock. Held, the principal purpose of petitioner's acquisition of control of another corporation was not, within the meaning of section 129 of the Internal Revenue Code, the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or allowance, which it would not have otherwise enjoyed; held, further, petitioner's stock purchase was made with a real and substantial business purpose, and the deductions in issue should be allowed.
*411 This proceeding involves a corporate income tax deficiency for the taxable *84 year ended December 31, 1944, in the amount of $ 4,042.95. The primary issue is whether, within the meaning of section 129 (a) of the Internal Revenue Code, petitioner's principal purpose in acquiring control of another corporation through the purchase of 58 per cent of its outstanding stock was the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which taxpayer would not have otherwise enjoyed.
Petitioner assigns as error respondent's disallowance in its 1944 return of a deduction claimed for interest of $ 275.77 accrued from December 21 to December 31, 1944; of a dividends received credit of $ 13,842.22; and of an item of $ 305.10 for documentary transfer stamps paid to the State of Florida.
Petitioner abandons its objections to the disallowance of certain other deductions, and requests the Court to state in its opinion that such abandonment is without prejudice to petitioner's claim to the same or similar deductions in taxable years subsequent to 1944.
FINDINGS OF FACT.
The Commodores Point Terminal Corporation, hereinafter referred to as petitioner, is a corporation organized and existing under *412 *85 the laws of the State of Florida. Its corporation income and declared value excess profits tax return for the year 1944 was filed with the collector of internal revenue for the district of Florida, at Jacksonville, Florida. Petitioner owns about 100 acres of land in Jacksonville, Florida, operates a deep water terminal, and receives its operating revenues from wharfage and the rental of industrial sites.
Petitioner was organized in 1933, following the foreclosure of a real estate mortgage given by petitioner's predecessor. The organizers of petitioner who had owned the mortgage bonds of the predecessor included the Atlantic National Bank of Jacksonville, the Barnett National Bank of Jacksonville, the Florida National Bank of Jacksonville, and the Cummer family. At the time of its organization petitioner issued to the 3 banks and the Cummer family, in approximately 4 equal parts, its first mortgage bonds in the sum of $ 602,500 and its 1,000 shares of capital stock.
From the date of organization up to and including the year 1940, petitioner lost money. In 1941 it showed a profit of $ 2,600, but suffered further losses of approximately $ 26,000 in 1942 and of approximately $ 21,000*86 in 1943.
In the latter part of 1943 James Cranford, vice president of the Atlantic National Bank and a director and assistant secretary and treasurer of petitioner, contacted W. R. Lovett in an effort to dispose of petitioner's mortgage bonds and stock. W. R. Lovett was at that time, and is at the present, the sole stockholder of the Suwannee Fruit & Steamship Co. This company is primarily engaged in the shipping business as an agent for various steamship and motor vessels and handles terminal operations for such ships. As one of the lines it represented operated in and out of Jacksonville, acquisition of petitioner's facilities was mutually beneficial to both the Suwannee Co. and petitioner.
Lovett agreed to and did purchase on December 28, 1943, at par value, half the bonds held by the Atlantic Bank, the Barnett Bank, and the Cummer family, and acquired all of petitioner's stock held by them, consisting of 778 shares out of a total of 1,000 shares outstanding, at $ 5 per share. On October 18, 1944, Lovett acquired an additional 30 shares, which brought the total number of shares owned by him on that date to 808, or 80.8 per cent of petitioner's stock. He acquired 184 shares*87 on November 18, 1946, and the remaining 8 shares on March 20, 1947.
The business of petitioner showed marked improvement following the acquisition of control by Lovett in 1943. The gross operating revenue of petitioner for the years 1941 to 1947, inclusive, was as follows: *413
| 1941 | $ 89,600 |
| 1942 | 69,700 |
| 1943 | 65,800 |
| 1944 | 83,250 |
| 1945 | 119,700 |
| 1946 | 114,159 |
| 1947 | 126,886 |
Prior to his acquisition of any interest in the petitioner, Lovett owned 200,000 shares of Piggly Wiggly Corporation, or 58 per cent of the 342,616 shares outstanding, having acquired 75,000 of the shares in the latter part of 1941 and 125,000 shares in early 1942. The Piggly Wiggly Corporation sells a merchandising system, on a royalty basis, licensing proprietors of grocery stores, and in addition operates stores of its own.
Lovett, in August of 1944, decided to transfer the Piggly Wiggly shares to petitioner, and instructed petitioner's attorneys to draw the necessary papers. At a special meeting of petitioner's board of directors held November 6, 1944, it was resolved that petitioner would acquire the Piggly Wiggly stock from Lovett in exchange for 3 per cent 15-year collateral trust bonds of*88 the aggregate par value of $ 305,000, to be dated December 1, 1944, and to mature December 1, 1959. A collateral trust indenture dated December 1, 1944, was entered into between petitioner and the Atlantic National Bank of Jacksonville, as trustee, providing for the 3 per cent 15-year collateral trust coupon bonds payable to bearer of the aggregate par value of $ 305,000 and providing for and evidencing the transfer to the trustee of the 200,000 shares of Piggly Wiggly stock.
On December 12, 1944, Piggly Wiggly Corporation, by R. G. Clark, president, advised Lovett of its intention to pay dividends on December 26, 1944, to stockholders of record on December 23, 1944, and indicated that it expected the stock transfer to be completed prior to that date. The transaction was consummated on December 21, 1944, by the exchange of the Piggly Wiggly stock and the collateral trust bonds between petitioner and Lovett.
Petitioner's purpose in acquiring the Piggly Wiggly stock was to secure the dividend payments therefrom, which would enable it to pay debts, repair and maintain its properties, and pay interest on its mortgage bonds. Since the transfer petitioner has expended approximately $ *89 200,000 for repairs and the construction of new buildings and an oil terminal.
Lovett's purpose in transferring the Piggly Wiggly stock was that the exchange would build up petitioner's income and permit it to effect needed improvements, and at the same time it would reduce his personal income taxes. In addition, Lovett, who was required to borrow considerable money at times, regarded petitioner's bearer bonds as a better collateral and a more convenient form of security than the stock. Since the transaction Lovett has used the bonds *414 for this purpose, and at the time of this proceeding he had the bonds, with the exception of $ 5,000, up as collateral.
Petitioner paid out, incident to this bond issue, Florida documentary stamp taxes of $ 305.10 and Federal documentary stamp taxes of $ 335.50, and claimed deductions in these amounts in its 1944 income tax return.
Petitioner, as a result of its acquisition of the 200,000 shares of Piggly Wiggly stock, received from that company dividends of $ 20,000 in 1944. Petitioner claimed in its 1944 return a dividends received credit of $ 13,842.22 under section 26 (b) of the Internal Revenue Code. Petitioner received further dividends*90 of $ 20,000 in 1945, $ 50,000 in 1946, and $ 50,000 in 1947. These dividends were largely responsible for petitioner's profits, before income taxes, of $ 16,000 in 1944, $ 62,500 in 1945, $ 89,800 in 1946, and $ 80,900 in 1947.
Petitioner kept its books and records and filed its corporate income and declared value excess profits tax returns on the accrual basis for the calendar year. Interest on the 3 per cent collateral trust bonds was accrued on petitioner's books from December 21 to December 31, 1944, inclusive, in the sum of $ 275.77, such interest being paid by petitioner at the maturity of the No. 1 semiannual interest coupon, June 1, 1945. Petitioner claimed this amount as a deduction in computing its income tax liability for 1944. During the period January 1 to June 1, 1945, the petitioner accrued and paid interest on the said bonds, but at no time thereafter has interest been accrued or paid, the interest having been waived and the coupons canceled by W. R. Lovett, owner of all of petitioner's collateral trust bonds.
The acquisition of the Piggly Wiggly stock by petitioner did not reduce the former corporation's taxable income or its income tax. The receipt of dividends*91 from the Piggly Wiggly stock increased petitioner's taxable income and its resulting income tax liability. Stock in this corporation was considered an income-producing investment, dividends having been paid on such stock in every year since 1931.
No deduction, credit, or allowance affecting petitioner's 1944 tax liability was transferred to or acquired by petitioner either from the Piggly Wiggly Corporation or W. R. Lovett by virtue of the stock and bond transaction in question, or the resulting acquisition of a controlling interest in the Piggly Wiggly Corporation by petitioner.
OPINION.
The principal issue involved herein is whether respondent's disallowance of certain deductions on the basis of section 129 of the Internal Revenue Code was proper. Respondent's contention *415 is that petitioner's principal purpose in its acquisition of control of the Piggly Wiggly Corporation was to avoid or evade Federal income or excess profits tax by securing the benefit of a deduction, credit, or allowance which it would not have otherwise enjoyed.
Section 129, enacted as law in the Revenue Act of 1943, so far as it is material in the present case is set out below. 1
*92 An examination of the legislative intent behind the enactment of section 129 is necessary to the determination of its scope and applicability in the facts before us.
Section 129 was introduced at the first session of the 78th Congress as section 115 of H. R. 3687 and read, in part: "If any person or persons acquire, on or after October 8, 1940, directly or indirectly, an interest in, or control of, a corporation, or property, and the Commissioner finds that one of the principal purposes for which such acquisition was made or availed of is the avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance, then such deduction, credit, or other allowance shall not be allowed." In the accompanying report of the Committee on Ways and Means of the House it was stated that "this section is designed to put an end promptly to any market for, or dealings in, interests in corporations or property which have as their objective the reduction through artifice of the income or excess profits tax liability."
In the Senate, this section became section 122, and the House version was amended by eliminating the necessity of an express finding by *93 the Commissioner, and the phrase "or availed of." Another amendment was made by the addition of the phrase "which such person would not otherwise enjoy." This qualification limited the applicability of the section to those cases where the deduction, credit, or allowance resulted from, or was attributable to, the acquired control. The report of the Senate Committee on Finance stated that the objective of the section was "to prevent the distortion through tax avoidance of the deduction, credit, or allowance provision of the code, particularly those of the type represented by the recently developed practice of corporations with large excess profits (or the interests controlling such corporations) acquiring corporations with current, past, or prospective *416 losses or deductions, deficits, or current or unused excess profits credits, for the purpose of reducing income and excess profits taxes. The House Report also recognized that the legal effect of the section is, in large, to codify and emphasize the general principle set forth in Higgins v. Smith, 308 U.S. 473">308 U.S. 473, and in other judicial decisions, as to the ineffectiveness of arrangements distorting*94 or perverting deductions, credits, or allowances so that they no longer bear a reasonable business relationship to the interests or enterprises which produced them and for the benefit of which they were provided." The report also stated: "Your committee believes that the section should be operative only if the evasion or avoidance purpose outranks or exceeds in importance any other one purpose."
In the report of the Conference Committee the categories of tax evasion and tax avoidance selected for specific treatment under section 129 were described as those "characterized either by the acquisition of control of a corporation, or by the acquisition of property (with a transferred basis) by one corporation from another not controlled immediately prior to such acquisition by such first corporation. As contrasted with the House bill, the conference agreement narrows the scope of the section, considered desirable in view of the extent to which the House provision overlapped the broad provisions of section 45 of the Code (control cases) and 141 of the Code (affiliated cases), and of the principle of Higgins v. Smith, 308 U.S. 473">308 U.S. 473, and in order to emphasize*95 the special function of the section, namely, to give tax enforcement agencies a clear basis for administration in those areas in which abuses are most apt to occur."
As to the acquisition of control, it is stated in Treasury Regulations 111, section 29.129-3, that "the principal purpose for which the acquisition was made must have been the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy. The principal purpose actuating the acquisition must have been to secure the benefit which such person or persons or corporation would not otherwise enjoy. If this requirement is satisfied, it is immaterial by what method or by what conjunction of events the benefit was sought. If the purpose to evade or avoid Federal income or excess profits tax exceeds in importance any other purpose, it is the principal purpose."
The applicability of section 129, upon which respondent has based his disallowance of the deductions in issue, is contingent upon the existence of two conditions: (1) The "person" must have acquired, directly or indirectly, on or after October 8, *96 1940, control of a corporation, and (2) the principal purpose for which the acquisition was made must have been the evasion or avoidance of Federal income or excess *417 profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy. 2
*97 The first condition, that of acquired control, on or after October 8, 1940, presents no difficulty in the present case, as petitioner's control of the Piggly Wiggly Corporation is conceded by petitioner to have come about on December 21, 1944, with its acquisition of 200,000 shares of the 342,616 shares then outstanding.
However, control in itself is not determinative. This section condemns tax avoidance only when there is acquisition of control and the employment of that control for the principal purpose of avoiding or evading tax, the acquiring person thereby securing the benefit of a deduction, credit, or allowance "which such person or corporation would not otherwise enjoy." The word "otherwise" can only be interpreted to mean that the deduction, credit, or allowance, if it is to be disallowed, must stem from the acquired control.
The dividends received credit claimed by petitioner in its 1944 return was in no sense dependent upon petitioner's acquisition of a controlling interest in the Piggly Wiggly Corporation. Petitioner would have received dividends and would have been entitled to claim a dividends received credit proportionately as great from any number of shares less *98 than an amount constituting a controlling interest. There is no evidence, nor does the respondent suggest, that petitioner received its dividends by virtue of its controlling interest. In this case the number of shares held by petitioner was determinative only of the amount of dividends received, and the control acquired was incidental to the primary purpose of the acquisition which was to increase the petitioner's gross income.
The documentary stamp tax deduction and the accrued interest deduction could not have been challenged by the respondent under section 129 had the purchase involved less than a controlling interest. The facts in the present case indicate nothing more than an accidental acquisition of a controlling interest which bore no real relation to the deductions claimed. Under these circumstances, respondent in his disallowance of these deductions was in error.
*418 Petitioner's purchase of the controlling interest in the Piggly Wiggly Corporation was not, as condemned by the report of the Senate Committee on Finance, an example of a corporation with large excess profits acquiring a corporation with current, past, or prospective losses or deductions, deficits, *99 or current or unused excess profits credits for the purpose of reducing income or excess profits taxes. There is no evidence that such deductions, credits, or allowances existed. The evidence, to the contrary, clearly shows that the deductions claimed by petitioner arose from the receipt of dividend payments and were never available to the "acquired" corporation or W. R. Lovett. It is significant that had the petitioner not received these dividends there would have been a net loss for the year 1944 and no tax liability whatsoever.
It is our opinion that the transaction consummated between petitioner and W. R. Lovett was not an arrangement which distorted or perverted deductions, credits, or allowances so that they no longer bore a "reasonable business relationship to the interests or enterprises which produced them and for the benefit of which they were provided."
The evidence indicates that a real and substantial business purpose existed behind this arrangement. Petitioner suffered losses of approximately $ 21,000 in 1943, and with the $ 20,000 received as dividends from Piggly Wiggly in 1944 it showed in that year a profit of only $ 16,000 before taxes. At the time of the transfer*100 it was apparent to the petitioner that it might expect annual dividends from the stock in excess of the $ 9,150 it would be obliged to pay as interest on its collateral trust bonds which were issued in exchange for such stock. Petitioner since 1944 has expended large sums on repairs and new installations, the money for which would not have been available except for this new source of revenue. There can be no doubt that the opportunity to secure this new source of income, which promised to provide the funds for repairs, the expansion of existing facilities, and the interest payments on its original mortgage bonds, was the principal purpose in its acquisition of the 200,000 shares of the Piggly Wiggly Corporation.
As pointed out in Treasury regulations and in the reports of the committees of Congress, a tax avoidance purpose incidental to such a transaction does not necessarily bring it within the condemnation of section 129. The tax avoidance purpose must exceed in importance any other purpose to constitute the "principal purpose." The fact that Lovett may have made a tax saving is of no moment.
From the facts contained in the record, and an examination and consideration of the *101 transaction in all its ramifications, we are satisfied that a real and substantial business purpose, beneficial to petitioner, *419 and not a sham or unrealistic plan primarily designed for tax evasion or avoidance, was the dominating motive behind the arrangement.
Petitioner's deductions for documentary stamps of $ 305.10 and for interest accrued in the sum of $ 275.77, and its dividends received credit of $ 13,842.22, should be allowed. Petitioner's concessions as to other deductions are without prejudice to claims for the same or similar deductions in taxable years subsequent to 1944.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 129. ACQUISITIONS MADE TO EVADE OR AVOID INCOME OR EXCESS PROFITS TAX.
(a) Disallowance of Deduction, Credit, or Allowance. -- If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) * * * and the principal purpose for which such acquisition was made is evasion or avoidance of federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For the purposes of clauses (1) and (2), control means the ownership of stock possessing at least 50 per centum of the total combined voting power of all classes of stock entitled to vote or at least 50 per centum of the total value of shares of all classes of stock of the corporation.↩
2. Sec. 29.129-1 [Regulations 111]. Meaning and Use of Terms. -- As used in section 129 * * *
(a) The term "allowance" refers to anything in the internal revenue laws which has the effect of diminishing tax liability. The term includes, among other things, a deduction, a credit, an adjustment, an exemption, or an exclusion.
(b) The phrase "evasion or avoidance" is not limited to cases involving criminal penalties, or civil penalties for fraud.
(c) The phrase "Federal income or excess profits tax" refers to any Federal tax imposed by Congress upon an income base.
(d) The term "control" means the ownership of stock possessing at least 50 per cent of the total combined voting power of all classes of stock entitled to vote, or at least 50 per cent of the total value of shares of all classes of stock of the corporation. * * *
(e) The term "person" includes an individual, a trust, an estate, a partnership, a company, or a corporation.↩