*206 Decision will be entered under Rule 50.
Corporation A in the course of liquidation distributed cash and undivided interests in three mills as a liquidating dividend to its shareholders. They immediately exchanged the cash and mills for all shares of the taxpayer, a corporation organized for the sole purpose of selling the mills. The taxpayer sold the mills within a few months to purchasers who had never negotiated with corporation A; thereafter liquidated and dissolved. Held:
(1) Although a part of A's assets was transferred to the taxpayer and immediately thereafter A's shareholders were in control of the taxpayer, there was no reorganization within section 112 (g) (1) (D), Internal Revenue Code, because the taxpayer transferee did not carry on any part of A's corporate business, and was not created for such purpose, but only for the purpose of selling assets.
(2) The taxpayer's bases for computing gain or loss on sale of the mills are the bases of the transferor shareholders. Sec. 113 (a) (8) (B), Internal Revenue Code.
*709 The Commissioner determined a deficiency of $ 28,871.75 in income tax of the petitioner for the period May 24-July 31, 1943, and a deficiency of $ 35,253.34 for the fiscal year ended July 31, 1944, in part by recomputing gains on the sales of mills which were contributed to it as paid-in surplus by its shareholders. Undivided interests in these mills had been distributed as a liquidating dividend to the shareholders immediately prior to their transfer to petitioner by a corporation in which the shareholders owned interests proportionate to their shareholdings in petitioner, and, under the view that the transfer through the shareholders was not recognizable for tax purposes because lacking in substance, the Commissioner determined that petitioner acquired the mills in the course of a reorganization of the transferor and accordingly used the transferor's bases in computing profit from petitioner's sales. Petitioner contends that there was no reorganization.
FINDINGS OF FACT.
Petitioner, a Texas corporation with principal office at Houston, Texas, filed its income tax returns for the period May 24-July 31, 1943, and for the fiscal year ended July 31, 1944, with the*208 collector of internal revenue for the first district of Texas. It was organized on May 24, 1943, and on the following day issued all of its shares to shareholders of the Standard Rice Co. (hereinafter called Rice), acquiring from them $ 29,894 in cash and three rice mills, located at Houston, Texas; Stuttgart, Arkansas; and Crowley, Louisiana. It sold the three mills in 1943 for a total of $ 385,000.
These mills and one at Memphis, Tennessee, had been owned and operated by Rice, a Texas corporation organized in 1902 by W. K. Morrow. Rice successfully engaged in the milling and marketing of rice, making purchases of crops directly from farmers, storing them in its warehouses, processing them in its mills, and selling the finished product in bulk or in packages bearing its registered trade names and trade-marks. Over the years it spent great sums in advertising and expansion, and developed a world-wide market. To carry the necessary inventories, Rice required an operating capital of from $ 1,500,000 to $ 3,000,000, and was dependent on bank loans. Substantial fluctuations *710 in price and the absence of a futures market permitting hedging operations make the rice business*209 hazardous and speculative, and to conduct it successfully experience and skill are necessary. W. K. Morrow supplied these, and under his direction Rice's business was normally very profitable. He died on February 8, 1938, and management was thereafter entrusted to one Farda, the only person connected with the company who was properly qualified. About a year later defalcations aggregating $ 1,800,000 were discovered, and Farda committed suicide.
Rice's capital stock, represented by 14,947 shares, was owned by members of the Morrow family, the Paine family, E. W. Gruendler, and some minor shareholders. A number of shares were held by fiduciaries for estates. Gruendler, a man nearly 80 years of age and in poor health, succeeded Morrow as president; Morrow's son Kyle became a director and vice president, and his son-in-law West, assistant to Gruendler. None of them had the necessary experience to conduct the company, having engaged in other businesses, and none wished to do so. After the defalcations were discovered, efforts were made to sell Rice's assets and business as a whole; prospectuses were submitted to large firms; the assistance of a New York brokerage house was engaged; *210 and negotiations with General Foods, Inc., were carried on for a year, but no sale resulted. After war began, the foreign market for rice was curtailed by the British blockade; the domestic price dropped because of a surplus; and the company sustained serious losses. It was then resolved to dispose of assets separately, and on December 22, 1942, Rice sold the Memphis mill for $ 135,000, realizing a capital gain of $ 68,141.96. This mill had maintained Rice's position in the Memphis area, and its sale gave some public indication of Rice's intention to withdraw from business.
Efforts to interest Morrow, West, and others in the remaining mills failed, and on March 5, 1943, Rice's directors resolved to call a stockholders' meeting to consider liquidation and dissolution and to discontinue operations. At the meeting, held on March 23, 1943, liquidation was approved, and it was further resolved that the mills be closed, receivables be collected, inventories be sold, and, as soon as practicable in the directors' judgment, the mill properties:
* * * be declared out as dividends in kind to the stockholders of the corporation, the several stockholders receiving undivided interests in the*211 mill properties in proportion to their stock holdings. * * *
All other assets were to be sold, the proceeds distributed as liquidating dividends, and the corporation dissolved. A liquidating dividend of $ 30 a share, aggregating $ 448,480, was immediately declared, and notice of the liquidation plan was mailed to the Commissioner of Internal Revenue.
*711 Thereafter several plans were considered for adoption after undivided interests in the mills should be distributed to the shareholders, among them the formation of a corporation to take over the mills. A trusteeship was suggested by counsel for one stockholder, incompetent because a minor, and a suit for partition and forced sale was discussed as another possibility. Quick action was prompted by an apprehension that Gruendler might die, with resulting probate complications. He did in fact die within a few months. The shareholders had disagreements causing delay, but between April 23 and May 21 agreement to form a corporation was reached and all shareholders separately executed powers of attorney, authorizing three individuals to act for them in receiving a liquidating dividend of $ 2 a share; to pay this dividend to the*212 new corporation for its shares, and to receive and convey to the corporation any interest in real property declared by Rice as a dividend to them. On May 21, 1943, Rice declared a cash dividend of $ 2 a share and dividends in kind of the three mill properties. The following day, pursuant to the plan of liquidation, Rice conveyed the mills to its shareholders as a liquidating dividend in kind. In Rice's hands the three mills had bases aggregating $ 116,780.27.
On the same day, May 22, 1943, Gruendler, Morrow, and West made application to organize petitioner as a corporation "to purchase and maintain mills, grain elevators and public warehouses for the storage of products and commodities," alleging that $ 29,894 had been subscribed for 14,947 shares. Rice paid the $ 30 dividend, aggregating $ 448,480, and that amount the shareholders kept. It also paid the $ 2 dividend, aggregating $ 29,894, and that amount they paid to petitioner for its shares, each receiving the same number that he held in Rice. Petitioner's charter was granted on May 24, and at the first meeting of its board of directors, held on that day, Gruendler was elected president. After he had stated that all Rice*213 shareholders had agreed to convey their interests in the mill properties to petitioner, the directors resolved to accept them, and to instruct the officers:
* * * to take such steps and to enter into such negotiations as seemed appropriate to them to bring about and accomplish the sale, either separately or together, of the mill properties. * * *
By separate deeds of May 25, 1943, all the shareholders of Rice conveyed to petitioner their undivided interests in the three mill properties. These properties were credited to paid-in surplus, initially at a nominal value, and share certificates of Rice were stamped to indicate that the mills had been distributed as a liquidating dividend in kind.
At the time of the conveyance there were no pending negotiations for the mills' sale. In reply to an inquiry of May 11, however, about the Stuttgart mill, Rice's attorney wrote to a possible purchaser on May 25, 1943:
*712 As I explained to you, the Standard Rice Company could not itself enter into negotiations for sale, and we did not think it wise for others to do so while the property was still held by Standard Rice.
The property has now been placed in shape for liquidation, and we *214 can discuss the purchase by you of the Stuttgart mill at any time that is convenient to you.
In June petitioner procured authorizations to do business in Arkansas and Louisiana, but its cash capital was inadequate for this, being barely enough for maintenance; it did not acquire Rice's valuable trade names and trade-marks; and no decision to operate the mills was ever made. Efforts to sell were made, however, soon after petitioner's acquisition, and they resulted in a sale of the Houston mill to a farmers' cooperative association on July 29, 1943, for $ 182,500; of the Stuttgart mill on August 23, 1943, for $ 125,000, and of the Crowley mill on October 23, 1943, for $ 77,500. In each transaction negotiations for sale with the purchaser were initiated after petitioner had acquired the mills and were conducted by petitioner's representative. Rice's distribution of the mills to its shareholders, their conveyance to petitioner for sale, and the shareholders' acquisition of petitioner's stock were component parts of a preconcerted plan. Under this plan as conceived and executed petitioner did not carry on in whole or in part the corporate business of Rice or carry out any prior sale*215 contract or understanding between Rice and the purchasers of the mills. Petitioner was created for the sole purpose of selling the mills.
On petitioner's books the credit to paid-in surplus on May 25, 1943, was made to conform to the sale price of each mill. This amount was the fair market value of the mill on that date, and the shareholders used it in reporting gain on receipt of the mill interests as a liquidating dividend. The value of the assets transferred to petitioner represented not over 15 per cent of the total assets which Rice had owned prior to its transfer of the mills to its shareholders. Rice was dissolved on March 6, 1946; petitioner, on July 28, 1945.
On its income tax return for the period May 24-July 31, 1943, petitioner reported sale of the Houston mill, using $ 182,500 as cost and as selling price. On its income tax return for the fiscal year ended July 31, 1944, petitioner reported sale of the Stuttgart mill, using $ 125,000 as cost and as selling price, and sale of the Crowley mill, using $ 77,500 as cost and as selling price. Thus no gains were reported. Under the view that petitioner "acquired the property in a reorganization," the Commissioner determined*216 a long term capital gain on the sale of each mill, computed by the use of Rice's bases, being $ 37,250.30 for the Houston mill and $ 53,239.57 for the Stuttgart and Crowley mills jointly. There was also a small adjustment for taxes.
OPINION.
Petitioner reported no profit from sale of the three mills, treating as their bases to it fair market value at the time *713 that the shareholders transferred them to it, which value was deemed equal to their selling price a short time thereafter. Having received the mills as a liquidating distribution from Rice just before transferring them to petitioner, the shareholders used that value in reporting gain on receipt of the respective mill interests distributed to each as a liquidating dividend. Despite this, the Commissioner computed a gain to petitioner on its sale to the mills by use of Rice's bases, and he defends that determination by the argument that the transfers to petitioner were made pursuant to a preconcerted plan of reorganization as defined by section 112 (g) (1) (D), Internal Revenue Code; 1 that no gain or loss was recognizable at the time of the transfers, section 112 (b) (4), 2 and, hence, petitioner's bases are those*217 of the transferor, Rice. Section 113 (a) (7)3 so provides.
Admitting, as he must, that literally there was no transfer of the mills by one corporation to another, *218 respondent characterizes Rice's conveyance to its shareholders and their conveyance to petitioner as transitory phases of a preconcerted plan which were lacking in substance and which should be disregarded for tax purposes under the doctrince of Helvering v. Alabama Asphaltic Limestone Co., 315 U.S. 179">315 U.S. 179; Griffiths v. Commissioner, 308 U.S. 355">308 U.S. 355; Higgins v. Smith, 308 U.S. 473">308 U.S. 473; and Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. If they are disregarded, then Rice can be deemed to have transferred the mills to petitioner and immediately after the transfer Rice's shareholders were in control of the transferee, so that the factual conditions of a reorganization as prescribed by subsection (D), supra, are met. It seems settled that if all the steps taken were in pursuance of a reorganization plan to which Rice and petitioner were parties, the channeling of the mills through the shareholders may properly be disregarded. In sustaining the Commissioner's contention that a reorganization was effected by shareholders' transfers of liquidated assets to a new corporation*219 which continued the business of the liquidating one, this Court so held in Richard H. Survaunt, 5 T. C. 665 (affirmed on this point (C. C. A., 8th Cir.), 162 Fed. (2d) 753), saying:
It does not change the result that the stockholders acted as a conduit for the delivery of the assets, Mark Kleeden, 38 B. T. A. 821; * * * that the plan itself was not formally reduced to writing, Hortense A. Menefee, 46 B. T. A. 865; *714 Walter S. Heller, 2 T. C. 371; affd. (C. C. A., 9th Cir.), 147 Fed. (2d) 376; certiorari denied, 325 U.S. 868">325 U.S. 868; or even that the stockholders had a personal -- as opposed to a corporate -- reason for the arrangement. Lyon, Inc., 42 B. T. A. 1094; affirmed on other grounds (C. C. A., 6th Cir.), 127 Fed. (2d) 210.
The evidence establishes and we have found that Rice's liquidating distribution of the mills, the shareholders' transfer of them to the newly organized petitioner for sale by it, and the shareholders' *220 acquisition of petitioner's shares were steps of a preconcerted plan. While true that the shareholders' resolution of March 23, 1943, directing that the mills "be declared out as dividends," preceded their decision to organize petitioner, the time of distribution was left to the judgment of Rice's directors, who alone could implement it, and they nicely correlated it with the plan adopted. When the directors took action, they were privy to the plan.
Petitioner argues, however, that the plan, if any, was not a "plan of reorganization," but of liquidation. The evidence supports this view: Rice had already sold one mill; it had attempted unsuccessfully to sell the three distributed; and its purpose to discontinue operations is manifest from its prior efforts to dispose of the business as a whole, from the stockholders' resolution of March 23, 1943, to liquidate and dissolve, and from the dissolution which actually followed. It is equally clear that petitioner's only purpose was a sale of the mills, not their operation. Attempts to interest one or more shareholders in continuing the rice business had failed, and at its first meeting petitioner's board of directors instructed its *221 officers to enter into sale negotiations. Petitioner's cash resources of $ 29,894, paid for its shares, were wholly inadequate for operating purposes, being the estimated minimum required for the mills' maintenance; none of Rice's valuable trade-marks and trade names were acquired by petitioner; and no decision to operate was ever made by its directors. Negotiations to sell the mills, on the contrary, were promptly initiated and carried to a successful conclusion within a short time. This medium of sale through a corporation was prompted by apprehension of probate complications in case of the death of Gruendler, a large shareholder.
It is thus apparent that, even though Rice did transfer the mills to petitioner, channeling them through its shareholders, and even though Rice's shareholders were immediately thereafter in control of the transferee, as contemplated by section 112 (g) (1) (D), no business was reorganized or continued thereby and no business was ever intended. But to warrant an application of section 112 (g) (1) (D), it must appear that there was a transfer to petitioner:
* * * made "in pursuance of a plan of reorganization" * * * of corporate business; and not a transfer*222 of assets by one corporation to another in pursuance of a plan having no relation to the business of either * * *. [Gregory v. Helvering, supra.]
*715 As held by the Supreme Court in the Gregory case, the liquidation of a part of the transferor's assets by the transferee is not such a purpose. It is true that petitioner sold assets and distributed the proceeds to its shareholders, while in the Gregory case the transferee merely distributed the assets in kind. Yet the sole object of the transfer in each case: "was the consummation of a preconceived plan, not to reorganize a business or any part of a business but to transfer [assets]. * * *"
Respondent correctly argues that a statutory reorganization may comprise the liquidation of a corporate party to it, citing Morley Cypress Trust Schedule "B," 3 T.C. 84">3 T. C. 84. And to this may be added Survaunt v. Commissioner, supra; Love v. Commissioner (C. C. A., 3d Cir.), 113 Fed. (2d) 236; Fisher v. Commissioner (C. C. A., 6th Cir.), 108 Fed. (2d) 707; Helvering v. Schoelkopf (C. C. A., 2d Cir.), 100 Fed. (2d) 415,*223 and others. But in all of these cases there was a continuance of business by the transferee corporation, and that fact was of crucial significance, for, as stressed in Survaunt v. Commissioner, supra:
* * * The plan of reorganization must comprehend, and the new corporation created, must when consummated carry on in whole or in part the corporate business of the old corporation. * * * In the Gregory case the new corporation did not comply with these requirements of the statute. It never transacted any business connected with or related to the business enterprise carried on by the old corporation.
Similarly, in George D. Graham, 37 B. T. A. 623 (second issue), no reorganization was held to result from a liquidating corporation's transfer of its remaining assets to a new corporation formed solely to dispose of them and not to carry on any business. We are of opinion that petitioner did not acquire the mills in the course of a statutory reorganization and that the Commissioner erred in computing gain from the sale of them by use of their bases to Rice.
*224 Decision will be entered under Rule 50.
Footnotes
1. (1) The term "reorganization" means * * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred * * *.↩
2. (4) * * * No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.↩
3. (7) Transfers to Corporation. -- If the property was acquired --
* * * *
(B) In a taxable year beginning after December 31, 1935, by a corporation in connection with a reorganization, then the basis shall be the same as it would be in the hands of the transferor * * * [with adjustments for gain or loss previously recognized].↩