*1445 1. What the parties actually do, i.e., the substance of an act rather than its mere form, is the controlling element in matters of income taxation. Weiss v. Stearn,265 U.S. 242">265 U.S. 242.
2. Upon the record, held the petitioner's stockholders sold their stock to a competitor bank, who then took over petitioner's assets in complete liquidation of its affairs, in which liquidation petitioner realized neither a gain nor a loss.
*964 This proceeding is for the redetermination of a deficiency in income taxes for the calendar year 1926, in the amount of $14,327.34.
The issues are (1) whether gain or loss was recognizable to petitioner in the transfer during January, 1926, of petitioner's assets to the Fourth and Central Trust Company, and, if so, (2) whether the basis used by the respondent in determining the gain on the transfer should be increased by an amount representing the fair market value of petitioner's good will owned by it on March 1, 1913, and the determination of that amount, if any existed.
FINDINGS OF FACT.
Petitioner, *1446 before its dissolution during the year 1926, and for at least 17 years prior thereto, was a banking corporation, organized under the laws of the State of Ohio, with its principal office at 3129 Spring Grove Avenue in Cincinnati. At the time of filing its petition its corporate capacity to prosecute this proceeding was still in existence under the laws of the state of its incorporation.
During December, 1925, it became known that the Fourth and Central Trust Company (hereinafter referred to as the Trust Company) desired to acquire the banking business of petitioner, and to conduct it thereafter as a branch of its own. At that time petitioner had outstanding 1,000 shares of common capital stock of the par value of $100 per share. The Trust Company, like petitioner, was a banking corporation, incorporated under the laws of the State of Ohio.
The term "bank" under the laws of the State of Ohio is defined to include "commercial banks, savings banks and trust companies." (Sec. 710-2, General Code of Ohio.) The Trust Company was authorized by its charter, in addition to its other banking and trust powers, to carry on the business of a savings bank. Section 710-140, General Code*1447 of Ohio, dealing with investments by savings banks, provides in part that "No purchase or investment shall be made in *965 the stock of any other corporation organized or doing business under the provisions of this Act or of the National Banking Act of the United States," and section 710-86 provides in part that "A bank may consolidate with, or transfer its assets and liabilities to, another bank. * * * No such consolidation or transfer shall be made without the consent of the Superintendent of Banks."
On December 17, 1925, at a called meeting of the board of directors of petitioner, Charles H. Dater, petitioner's president, announced to the board that the object of the meeting was the consideration of an offer in writing by A. Clifford Shinkle (then president of the Trust Company) and associates to purchase all of the shares of stock of petitioner at a price of $400 per share. At that meeting the board of directors adopted a motion putting the board on record as being in favor of the acceptance of the offer, and recommending acceptance to the stockholders. On the same day petitioner's secretary addressed a letter to its stockholders which read in part as follows:
At*1448 a meeting of the Board of Directors of this Bank, held this 17th day of December 1925, it was unanimously decided to recommend to all stockholders of this bank, the acceptance of the written offer of A. Clifford Shinkle and his associates to purchase all of the stock of this bank for Four Hundred ($400.00) Dollars per share.
We believe that this figure will give to our stockholders more than they could reasonably expect to receive from any other source, and we strongly recommend that you accept this offer and sign the herewith option in favor of our President, Chas. H. Dater, as Trustee, who will either forward your portion of the proceeds on a basis of this proposed sale, or return your stock and option. Also endorse your stock and send or bring it to Mr. Dater at the Bank.
On December 23, 1925, at a special meeting of the board of directors of petitioner, Dater announced that since the meeting of the board on December 17th last, Shinkle and his associates had acquired by purchase approximately 95 per cent of all of the capital stock of the bank, and thereupon directed the secretary to make transfer of record on the books of petitioner of the stock certificates of its former*1449 stockholders so purchased by Shinkle and his associates, which was done. At this meeting all of the old officers and directors of petitioner resigned and certain officers and directors of the Trust Company were elected as the new officers and directors of petitioner. In this election G. W. Williams, who was then the first vice president of the Trust Company, was elected president of petitioner.
On December 29, 1925, at the regular meeting of the board of directors of the Trust Company, Shinkle stated that he and his associates (all of whom were officers of the Trust Company) had acquired by purchase about 95 per cent of the capital stock of petitioner at a price of $400 per share; that they should within a short time be able *966 to acquire the remainder of the stock at the same price per share; and that "said stock was acquired for the purpose of enabling the purchase by this, The Fourth and Central Trust Company, of all of the assets and property of said The Stock Yards Bank, at a price of $400,000." Shinkle then submitted to the meeting a copy of the proposed agreement to be entered into by the Trust Company with petitioner for the accomplishment of the above mentioned*1450 purpose, the material part of which is as follows (the designation "first party" therein meaning petitioner, and the designation "second party" therein meaning the Trust Company):
First party agrees to sell, assign, convey, transfer and deliver all of the assets and property, real and personal, of whatsoever kind, nature and description, including good will, to party of the second part, for the sum of Four Hundred Thousand ($400,000.) Dollars, payable in cash on delivery of proper instruments of conveyance and transfer; and the party of the second part agrees to purchase and acquire of the party of the first part all of said property and assets, and to make payment of said purchase price on delivery of title papers as aforesaid, subject to the following conditions, viz: * * *
The principal conditions were that the sale was to be closed as of January 2, 1926 (with certain exceptions not material here); that second party was to assume all the debts and obligations of first party as shown by its books on January 2, 1926; that first party, as soon as convenient, would surrender its charter "subject, however, to the transfer to party of the second part of the good will heretofore and*1451 now established in the use of its corporate name of 'The Stock Yards Bank,' the use and good will attaching to which is included in said sale"; and that the proposed agreement was not to be binding upon either party until ratified by their respective stockholders, and approved by the superintendent of banks. Resolutions were then adopted at this meeting approving the form of the contract and directing the submission of the proposal to the stockholders of the Trust Company at the regular annual meeting to be held on January 12, 1926.
On January 4, 1926, at the regular meeting of the (new) board of directors of petitioner, the above mentioned form of contract for the sale of the assets, property and good will of petitioner to the Trust Company was approved, and a resolution was adopted directing submission of the proposal to stockholders at the annual meeting to be held on January 12, 1926.
At 2 p.m. on January 12, 1926, at the annual meeting of the stockholders of the Trust Company, a resolution was adopted approving the action taken by the directors at the meeting held on December 29, 1925, in connection with the proposed contract for the sale of petitioner's assets, property*1452 and good will to the Trust Company. A similar resolution was adopted at the annual meeting of the (new) *967 stockholders of petitioner held on the same date at 3:30 p.m., and at which meeting a resolution was also adopted, the material part of which is as follows:
WHEREAS, this Bank has sold, subject to the approval of the Superintendent of Banks of the State of Ohio, all of its assets and property of every kind, nature and description, including good will, to The Fourth and Central Trust Company, under the terms of which sale said The Fourth and Central Trust Company assumes all of the debts, obligations and liabilities of this Bank as of January 2, 1926 * * * which sale has been ratified by the stockholders of this Bank at its annual meeting held this day, and also by the stockholders of said The Fourth and Central Trust Company: Now, THEREFORE, be it
RESOLVED, that this, The Stock Yards Bank, of Cincinnati, a corporation under the laws of Ohio, be placed in voluntary liquidation under the provisions of Sec. 710-85 of the General Code of Ohio, to take effect at the close of business this 12th day of January, 1926; and be it further * * *.
On January 12, 1926, at 4*1453 p.m., at a special meeting of the (new) board of directors of petitioner, two resolutions were adopted. The first resolution dealt with the placing of petitioner in voluntary liquidation, and the second resolution authorized the president and secretary "to assign, transfer and convey" to the Trust Company all the assets, property and good will of petitioner, and to execute and deliver "all deeds and other instruments of assignment, transfer and conveyance necessary and proper" to the Trust Company.
On February 8, 1926, the Superintendent of Banks of the State of Ohio issued a "Certificate" approving all that had been done in the acquisition by the Trust Company of all the assets, property and good will of petitioner.
The $400,000 paid by Shinkle to Dater as trustee for the old stockholders of petitioner was advanced to him as a loan, without interest, by the Trust Company. As the stock was purchased Shinkle would turn the certificates over to the Trust Company as collateral security for the loan. Shinkle also gave the Trust Company his personal notes for the amount of $358,800, and the balance of $41,200 was carried as an open account.
The dates and manner in which the*1454 stock was transferred from the old stockholders of petitioner are shown by the following schedule:
| Date | How transferred | Shares |
| December 18, 1925 | Endorsed to Shinkle | 5 |
| December 19, 1925 | Endorsed to Shinkle | 25 |
| December 21, 1925 | Endorsed to Shinkle | 133 |
| December 22, 1925 | Endorsed to Shinkle | 15 |
| December 23, 1925 | Endorsed to Shinkle | 684 |
| Subtotal | Endorsed to Shinkle | 862 |
| December 23, 1925 | New certificate to Shinkle | 5 |
| December 23, 1925 | New certificate to 7 associates | 35 |
| January 11, 1926 | New certificate to Shinkle | 93 |
| February 12, 1926 | Endorsed to Trust Company | 5 |
| Total | 1,000 |
*968 After all of the stock had been purchased from the old stockholders of petitioner and deposited with the Trust Company as collateral security for the loan of $400,000, the latter, in consideration of the surrender by Shinkle to it for cancellation of all such stock, returned to Shinkle his notes and canceled Shinkle's indebtedness to the Trust Company in the amount of $400,000. No interest was charged Shinkle on the loan.
No consideration of any kind was actually paid by the Trust Company to petitioner for the transfer of the assets, property and good*1455 will of the latter to the former.
Effective as of January 2, 1926, the banking business previously carried on by petitioner was thereafter conducted by the Trust Company as one of its branch banks.
On or about September 30, 1926, petitioner surrendered its charter.
Petitioner filed with the collector of internal revenue at Cincinnati an income-tax return for the year 1926, in which it reported no gross income and no deductions. The respondent, in his deficiency notice dated September 4, 1928, determined that during the year 1926 petitioner realized a net income of $106,128.44 determined as follows:
| Sale price of assets | $400,000.00 |
| Net value of corporation's assets at date of sale | 293,871.56 |
| Net profit | 106,128.44 |
OPINION.
LOVE: The principal issue in this proceeding is whether any gain or loss was recognizable to petitioner in the transfer of its assets, property and good will to the Trust Company.
The respondent relies upon the contract of sale between petitioner and the Trust Company, which was approved by both the stockholders and directors of each contracting party.
Petitioner contends that the manner in which the stock was purchased from*1456 its old stockholders and the subsequent transfer of its assets, property and good will to the Trust Company amounted to a "reorganization" as that term is defined in section 203(h) of the Revenue Act of 1926, and being a reorganization, section 203(b)(2), (3) and (4) of the same act, as interpreted by article 1574 of Regulations 69, specifically prohibited the recognition to petitioner of either gain or loss on the said transfer of its assets, property and good will.
We agree with the result contended for by petitioner, namely, that no gain or loss should be recognized on the transfer in question, but for entirely different reasons from those given by petitioner.
*969 As we analyze the record, the respondent has laid too much emphasis on section 710-140 of the General Code of Ohio, which provides in part that "No purchase or investment shall be made in the stock" of any other bank doing business in Ohio. For instance, in the statement attached to the deficiency notice the respondent says:
Your contention that no profit was realized by you upon the sale of your assets is denied. It is held that a profit was realized by you since under the laws of the State of Ohio, *1457 it was necessary for the purchasing corporation to purchase your assets, which it did through trustees.
And in his brief, after quoting from section 710-140, supra, the respondent continues as follows:
Petitioner seeks to limit this specific language to investments only and contends that the Bank could have purchased all of the stock of the Bank. No authority for such an interpretation of the statute has been cited and this interpretation seems clearly contrary to the specific language of the statute.
Williams' testimony to the effect that Shinkle was named as the nominee of the Trust Company to purchase the stock of petitioner for the Trust Company was in part as follows:
A Well, the matter was brought up as to how to handle it. We realized the bank could not own shares in the bank, so Mr. Shinkle was named as the nominee, and we agreed to lend Mr. Shinkle money to pay for those shares, without interest.
By the Member:
Q Whom do you mean by "we"?
A The Fourth and Central Trust Company, the loan committee, agreed to lend him the money to purchase these shares, and not charge him any interest. So we proceeded to buy them.
* * *
Q Did you tell the Court*1458 the nature of the loan made by The Fourth and Central Trust Company to Mr. Shinkle covered by these two notes and his open account, totalling $400,000?
A We made him our nominee, and lent him the money without interest.
* * *
Q Now, tell the Court how the thing was closed as a matter of your own recollection and knowledge?
A Under the agreement Mr. Shinkle said, "here is your stock; I want my notes", and the notes were given him for the stock and for nothing else.
We think the evidence clearly establishes the fact that the Trust Company, through its agent or nominee, Shinkle, purchased all of the stock of petitioner. This may or may not have been an ultra vires act, but in any event all of the acts referred to in our findings were approved by the Superintendent of Banks of the State of Ohio on February 8, 1926.
What was the effect of the contract entered into between petitioner and its sole stockholder, the Trust Company? True, in form it was clearly a contract of purchase and sale of assets, property and good *970 will for a stated consideration of $400,000. Plainer language could not have been used to draw up a contract with such an end in view. *1459 But in substance the transaction was nothing more than a distribution in complete liquidation of petitioner to its sole stockholder. No consideration of any kind was actually paid to petitioner by the Trust Company for the assets, property and good will so transferred. The latter already owned petitioner's stock and merely took over all of petitioner's assets, etc., with a view of surrendering petitioner's charter, which occurred later in the year. In Weiss v. Stearn,265 U.S. 242">265 U.S. 242, the Supreme Court voiced its opinion as to whether form or substance should control, in the following language:
Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants, and when applying the provisions of the Sixteenth Amendment and income laws enacted thereunder we must regard matters of substance and not mere form.
Section 201(c) of the Revenue Act of 1926 provides in part that "Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock" and that "The gain or loss to the distributee resulting from such exchange shall be determined under section*1460 202 * * *." We are not concerned here with gain or loss, if any, to the distributee resulting from such complete liquidation, or with the gain or loss realized to the old stockholders of petitioner upon the sale of their stock to the nominee of the Trust Company. We are only concerned now with the question whether petitioner realized a gain or loss when it distributed its assets, etc., to its sole stockholder in complete liquidation of its affairs. We believe that the respondent has correctly answered this question in article 548 of his Regulations 69, from which we quote:
No gain or loss is realized by a corporation from the mere distribution of its assets in kind upon dissolution, however they may have appreciated or depreciated in value since their acquisition.
Cf. Virginia Beach Golf Course Annex Corporation,23 B.T.A. 1169">23 B.T.A. 1169, Ezra Gould et al.,21 B.T.A. 824">21 B.T.A. 824.
In view of what we have said above, we do not deem it necessary to discuss further the arguments made by petitioner as to the applicability of section 203(b)(2), (3), (4) and (h) of the 1926 Act, or the second issue pertaining to the value of the good will and its proper place in*1461 the respondent's determination of profit.
Reviewed by the Board.
Judgment of no deficiency will be entered.