*188 Decision will be entered under Rule 50.
Held, the various transactions, viewed as a whole, by which the real property of the old corporation was transferred to two new corporations controlled by the same stockholder constituted a reorganization under section 112 (g) (1) (D) of the 1939 Internal Revenue Code, and held, further, the distributions of cash and other property to the sole stockholders under such reorganization had the effect of a taxable dividend under section 112 (c) (2) of the 1939 Code.
*306 The respondent determined the following deficiencies in income tax for the year 1950: *307
| Docket No. | Petitioner | Deficiency |
| 55824 | Ethel K. Lesser | $ 40,329.00 |
| 55825 | Estate of Joseph Low, Ethel | |
| K. Lesser, Trustee | 30,077.89 |
The two cases were consolidated at the hearing. The issues are (1) whether certain corporate distributions to petitioners as sole stockholders are taxable as distributions in liquidation under section 115 (c) of the 1939 Internal Revenue Code or whether such distributions were made pursuant to a reorganization and taxable as a dividend under section 112 (c) (2) of the 1939 Code; (2) whether, if the distributions were made pursuant to a reorganization, such distributions are taxable as ordinary dividends under section 115 (g) (1) of the 1939 Code; and (3) whether certain gains from the sale of stock were properly accounted for.
FINDINGS OF FACT.
All of the stipulated facts are herein incorporated by this reference.
Ethel K. Lesser, the petitioner in Docket No. 55824, is a resident of the District of Columbia. *190 She filed her 1950 income tax return with the then collector of internal revenue at Baltimore, Maryland. Petitioner in Docket No. 55825 is a testamentary trust, with Ethel K. Lesser as sole trustee, created by the will of her former husband, Joseph Low (hereinafter called the decedent), who died January 6, 1949. The 1950 return for the trust was filed with the then collector of internal revenue at Baltimore, Maryland.
Decedent's will left half of the adjusted gross estate to his widow, Ethel K. Lesser, and the residue was left in trust for his children, with Ethel K. Lesser as sole trustee. Ethel K. Lesser will hereinafter be referred to as the petitioner. Under the terms of the will the petitioner and the trust received (among other assets) in equal parts 203 shares of the capital stock of the Capital Investment and Guarantee Company (hereinafter called Capital) and 48 shares of the capital stock of the Metropolitan Investment Company (hereinafter called Metropolitan). On the date of decedent's death, the 203 shares of Capital stock had a fair market value of $ 190,750.98, and the 48 shares of Metropolitan stock had a fair market value of $ 144,034.08.
Capital was a Delaware*191 corporation formed on September 22, 1926. It had a total outstanding stock of 500 shares of common. The corporation owned three apartment buildings in the District of Columbia, Blair Apartments, Earlington Apartments, and Le Marquis Apartments, and rented the dwelling units in such apartment buildings.
*308 On May 10, 1950, the petitioner, together with the trust, received from a third party 297 shares of Capital stock, with a fair market value of $ 300,422.75, in exchange for the 48 shares of Metropolitan stock and $ 104,955 in cash. A long-term capital gain of $ 51,433.67 was realized on the transfer of the 48 shares of Metropolitan stock. One-half of this gain, $ 25,716.84, was reported by the petitioner as a long-term capital gain in her individual income tax return for 1950 and one-half of the gain was reported in the fiduciary return for 1950. Petitioner and the trust became the sole stockholders of Capital as a result of this transaction, each owning one-half of the outstanding stock.
Petitioner decided to separate the properties held by Capital into two separate corporations. Blair Apartments was in an undesirable neighborhood, and the petitioner wanted to place*192 this apartment building in a separate corporation to facilitate the future disposition of this particular property. On November 17, 1950, the petitioner, individually and as trustee, executed a consent to the dissolution of Capital. The consent was filed in the office of the secretary of state of Delaware on November 21, 1950, and a certificate of dissolution was issued by the secretary of state of Delaware on the same day.
Shortly before the dissolution of Capital, the petitioner organized the Blair Apartment Corporation (hereinafter called Blair) and the Earlington Investment Corporation (hereinafter called Earlington), both Delaware corporations. On November 20, 1950, at a special meeting of the Capital stockholders, the following resolution was adopted:
Whereas, the stockholders have consented in writing to the dissolution of this corporation, and desire to have the corporation's real property conveyed to their nominees hereinbelow mentioned,
Now, Therefore, Be It Resolved, that Ethel K. Low, President, and Lida L. Clemens, Secretary, are hereby authorized and directed to transfer on behalf of this corporation by appropriate deed to Blair Apartment Corporation, a Delaware corporation, *193 the property known as the Blair Apartments, located at 1321 M Street, N. W., Washington, D. C., being lot 807 in Square 245, together with the improvements thereon; and that Bernard S. White is hereby appointed attorney in fact to acknowledge and deliver the deed; and further
Be It Resolved, that Ethel K. Low, President, and Lida L. Clemens, Secretary, are hereby authorized and directed to transfer on behalf of this corporation by appropriate deed to Earlington Investment Corporation, a Delaware corporation, the following properties:
(1) The Earlington Apartments, located at 3033 16th St., N. W., Washington, D. C., being Lot 199 in Square 2671, together with the improvements thereon; and
(2) Le Marquis Apartments, located at 2308 Ashmead Place, N. W., Washington, D. C., being Lot 806 in Square 2541, together with the improvements thereon:
and that Bernard S. White is hereby appointed attorney in fact to acknowledge and deliver the deed conveying each of said properties.*309 On the same day, the board of directors of Earlington passed the following resolution:
Resolved, that this corporation enter into a contract offered by Ethel K. Low, individually and as Trustee under*194 the Will of Joseph Low, to this corporation and the Board of Directors do hereby adjudge and declare that said properties are of the actual value of Two Hundred (200) shares and that same is necessary for the business of the corporation;
Further, resolved, that the proposed agreement for the sale of said property presented at this meeting be and the same is hereby approved as to form and the President and Secretary of the corporation are hereby authorized and directed to execute said agreement in the name of and on behalf of this corporation * * *
Also on November 20, 1950, the petitioner entered into a contract with Earlington, reading, in part, as follows:
This Agreement, Made this 20th day of November, 1950, by and between ETHEL K. LOW, Individually and as Trustee under Will of Joseph Low (hereinafter called the "vendor"), of the first part, and EARLINGTON INVESTMENT CORPORATION, a corporation organized under the laws of the State of Delaware having its registered principal office with the Delaware Registration Trust Company, at Wilmington, Delaware (hereinafter called the "Corporation"), of the second part.
Whereas, the vendor is the owner of the property, contracts and rights*195 hereinafter described; and
Whereas, the Corporation has been duly organized pursuant to the laws of the State of Delaware, with an authorized capital stock of Two Hundred (200) shares without par value; and
Whereas, the Corporation desires, by an issue of its capital stock as hereinafter provided, to purchase and acquire said property, contracts and rights; and
Whereas, the Board of Directors of the Corporation has ascertained, adjudged and declared that the said property, contracts and rights are of the actual value of Two Hundred (200) shares, and that the acquisition of said property, contracts and rights is necessary for the business of the Corporation and to carry out its contemplated objects:
Now, Therefore, It is hereby agreed by and between the vendor and the Corporation as follows:
I. That the vendor has sold, assigned, transferred and set over, and does hereby sell, assign, transfer and set over unto the Corporation, its successors and assigns, all right, title and interest in and to the following described properties, situate in the District of Columbia, to wit:
1. The Earlington Apartments, located at 3033 16th Street, N. W., being Lot 199 in Square 2671, subject to*196 existing deed of trust; and, in addition, all personal property appurtenant to or used in the operation of said apartments.
2. Le Marquis Apartments, located at 2308 Ashmead Place, N. W., being Lot 806 in Square 2541, subject to existing deed of trust; and, in addition, all personal property appurtenant to or used in the operation of said apartments.
II. The Corporation hereby agrees, in consideration of said sale and upon the delivery of said property to it, to issue to the vendor and her nominees as hereinafter provided, or to such other nominees as the vendor shall in writing hereinafter direct, at such time and in such amounts as she shall direct, certificates of stock of the Corporation to the aggregate amount of 200 shares, and said shares shall be deemed to be and are hereby declared to be full-paid *310 shares and not liable to any further call, and the holders of such stock shall not be liable to any further payment thereon.
III. Said stock shall be issued as follows:| To -- | Shares |
| Ethel K. Low | 100 |
| Ethel K. Low, Trustee under Will of Joseph Low | 100 |
On November 20, 1950, the board of directors of Blair passed the following resolution:
Resolved, that this corporation*197 enter into a contract offered by Ethel K. Low, individually and as Trustee under the Will of Joseph Low, to this corporation and the Board of Directors do hereby adjudge and declare that said properties are of the actual value of One Hundred (100) shares and that same is necessary for the business of the corporation;
Further, resolved, that the proposed agreement for the sale of said property presented at this meeting be and the same is hereby approved as to form and the President and Secretary of the corporation are hereby authorized and directed to execute said agreement in the name of and on behalf of this corporation * * *
On the same date, the petitioner entered into a contract with Blair similar to the Earlington contract set out above, under which the Blair Apartments were to be conveyed to Blair in exchange for all of Blair's capital stock, 50 shares to go to petitioner individually and 50 shares to petitioner as trustee.
On November 20, 1950, Capital conveyed the Earlington and Le Marquis apartment buildings to Earlington, including the land and equipment of each and the prepaid insurance thereon, subject to the outstanding mortgages, and Earlington issued in return 200 shares*198 of stock, 100 shares to petitioner individually and 100 shares to her as trustee. On the same day, Capital conveyed the Blair apartment building to Blair, including the land and equipment, subject to an outstanding mortgage, and Blair in return issued 50 shares of stock to petitioner individually and 50 shares to her as trustee. On November 30, 1950, Capital transferred notes receivable in the amount of $ 13,737.08 to the trust, and on November 20 and December 19, 1950, Capital transferred $ 97,019.63 in cash to the trust and $ 110,756.72 in cash to the petitioner.
After November 20, 1950, Capital conducted no business and after December 19, 1950, had no assets or liabilities. After November 20, 1950, Earlington and Blair were engaged in the business of operating for rental purposes the apartment buildings conveyed to each. At all times relevant here the petitioner, individually and as trustee, was the sole stockholder of Capital, Blair, and Earlington. She was president and a director of each of the three corporations and had complete control over the direction of their affairs. The board of directors was the same for both Blair and Earlington.
*311 During the years 1941*199 to 1950 Capital made no dividend payments to its stockholders. Its total net income after taxes over this period was $ 169,695.40.
The various transactions which took place constitute a reorganization under section 112 (g) (1) (D) of the 1939 Internal Revenue Code. The distributions made by Capital to petitioner were pursuant to the reorganization. Such distributions, to the extent of the gain recognized, have the effect of a taxable dividend within the meaning of section 112 (c) (2) of the 1939 Code.
The total assets distributed by Capital had a fair market value of $ 515,756.80, and the excess of that amount over the basis of the Capital stock ($ 491,173.73) held by the petitioner and the trust (plus an attorney's fee of $ 65) was $ 24,518.07. Petitioner treated the distributions as distributions in liquidation under section 115 (c) of the 1939 Internal Revenue Code and reported $ 12,259.04, or one-half of the total gain realized, as a long-term capital gain on her individual income tax return for 1950, and she reported, as trustee, $ 12,259.04 in the fiduciary income tax return of the trust for 1950. Respondent included this gain in the income of the petitioner and the trust*200 as taxable dividends under section 115 (g) of the 1939 Code.
OPINION.
Respondent contends that the various transactions through which the three apartment buildings owned by Capital were conveyed to two new corporations controlled by the same stockholders who controlled Capital, and which resulted in the dissolution of the old corporation, Capital, with cash and other assets being distributed to the stockholders, must be viewed as a whole and, so viewed, constitute a reorganization within the meaning of section 112 (g) (1) (D) of the 1939 Internal Revenue Code. We believe that the various transactions that occurred here were pursuant to a plan of reorganization. It is not necessary that a plan of reorganization be embodied in a formal written document. James G. Murrin, 24 T.C. 502">24 T. C. 502. We may examine the first and the last in the series of transactions in order to decide whether or not a reorganization was effected. William M. Liddon, 22 T. C. 1220, reversed on another issue 230 F. 2d 304 (C. A. 6, 1956). Here, all the transactions took place within a very short period of time. On November 17, *201 1950, the stockholders of the old corporation filed a consent to its dissolution and just prior to that two new corporations had been formed by the same stockholders; on November 20, 1950, all the various corporate resolutions were passed and the contracts enacted by all interested parties, i. e., the old corporation, the two new corporations, and the petitioner who was sole *312 stockholder of both the old and the new corporations; also the real estate properties were conveyed to the two new corporations on that same date; and the cash and other liquid assets of the old corporation were distributed to the petitioner, as sole stockholder, on November 20, November 30, and December 19, 1950. From all the evidence, we are convinced that the first of these several transactions was taken only with a view toward the last, as each of the various transactions was made in pursuance of a plan previously agreed upon.
The requirements for a reorganization under section 112 (g) (1) (D) are met here. That section defines a reorganization as "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*202 or both are in control of the corporation to which the assets are transferred." Section 112 (h) of the 1939 Internal Revenue Code defines "control" as 80 per cent stock ownership, and such control is met here, since the petitioner, individually and as trustee, was sole stockholder of both the old and the new corporations involved here.
There is no dispute that the requisite business purpose existed here. The business of Capital was carried on by the two new corporations. Moreover, there can be a liquidation of the old corporation incidental to the reorganization, Bard-Parker Co., 18 T. C. 1255, affd. 218 F.2d 52">218 F. 2d 52; Estate of John B. Lewis, 10 T.C. 1080">10 T. C. 1080, affd. 176 F.2d 646">176 F. 2d 646. The motives of the stockholders are immaterial if there has been, in fact, a reorganization. Pebble Springs Distilling Co., 23 T. C. 196, affd. 231 F. 2d (C. A. 7, 1956); Richard H. Survaunt, 5 T.C. 665">5 T. C. 665, affirmed on this point 162 F.2d 753">162 F. 2d 753.
We need look no further than petitioner's own evidence to find the*203 distribution in this case was part of a plan of reorganization. She said it was. She said she had decided to liquidate Capital and operate its properties by two new corporations -- which new corporations she formed before the liquidation so they could receive the title to the properties. Petitioner's counsel makes much of the fact that she entered into no binding contract with anyone to have the properties received in liquidation from Capital transferred to the new corporations. Counsel points out she was free to accept the properties from the liquidation and not have them transferred to the two new corporations. In short, she was free to change her mind and not carry out the plan she had decided upon prior to the liquidation. But she was really the sole stockholder of Capital. There was no occasion for her to agree with anyone else before one can say the plan was adopted. Such an agreement for the plan of reorganization might be necessary where there are many stockholders and an agreement between them as to the plan is necessary before it can be said the plan was adopted. The adoption of the plan here rests on the testimony of petitioner that *313 she decided upon it*204 and on the acts of the corporate officers and the corporation records showing it was carried out.
Petitioner makes the argument that there can be no reorganization here under section 112 (g) (1) (D) because the real property of Capital, the old corporation, was conveyed first to the sole stockholder who in turn conveyed such property to the two new corporations, instead of being conveyed directly from the old to the new corporations. Actually, the argument is not factually correct for there was not a conveyance of the title to the realty from Capital to petitioner. But in any event, the agreement to convey to petitioner's nominee would make her no more than a go-between from the old corporation and her nominees, the two new corporations. A similar argument was rejected by this Court in Bard-Parker Co., supra, where we said that the liquidating directors there involved were no more than a conduit between the old and the new corporations, and, as such, did not preclude a reorganization. See also James G. Murrin, supra;Richard H. Survaunt, supra.The same is true here. Petitioner merely directed*205 the old corporation to convey the three parcels of real property to the two new corporations. If title in this real property ever vested in the petitioner, it was only nominally, and at best the petitioner was little more than a conduit in achieving the end result. It is apparent from all the evidence that the plan was to convey the real property to the two new corporations, and there is no indication that the petitioner was ever to have anything more than a bare legal title.
Under section 112 (b) (3) of the 1939 Internal Revenue Code, no gain or loss is recognized where "stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to a reorganization." Gain is recognized, however, where the exchange is not solely in kind, section 112 (c) (1) of the 1939 Internal Revenue Code, 1*207 and under section 112 (c) (2) 2*314 this gain may, under some circumstances, be treated as a taxable dividend. Petitioner argues that the exchanges involved here do not fall within section 112 (b) (3) and consequently sections 112 (c) (1) and (2) never*206 come into play. Petitioner contends that she acquired the stock in the new corporations in exchange for the properties conveyed by her to them, not in exchange for her stock in Capital, the old corporation. This old stock, petitioner argues, was surrendered to Capital in exchange for cash and other liquid assets, and then canceled by Capital. We do not agree. This is merely another facet of petitioner's position that we must atomize the several transactions and view each transaction in the series separate and apart. It is proper for this Court to consider all the transactions together rather than separately. Helvering v. Limestone Co., 315 U.S. 179">315 U.S. 179; William M. Liddon, supra, and where, as here, we hold that a reorganization did take place, the exchange by the petitioner of stock in the old corporation was for the stock in the two new corporations.
Petitioner, in her individual capacity, received in the reorganization cash in the amount of $ 110,756.72, in addition to stock in the two new corporations, and, as trustee, received cash in the amount of $ 97,019.63 and notes receivable amounting to $ 13,737.08, in addition to the stock. There was a total gain realized by petitioner, as individual and as trustee, of $ 24,518.07, and under section 112 (c) (1) this gain is recognized in*208 full. Section 112 (c) (2) taxes this gain if the distribution to the petitioner "has the effect of the distribution of a taxable dividend." No distinction is made by this section between liquidating dividends and ordinary dividends. William M. Liddon, supra;John S. Woodward, 30 B. T. A. 1216. Here, the old corporation, Capital, had earnings and profits of $ 169,695.40 for the years from 1941 to November 20, 1950. In all this time, Capital paid no dividends. The petitioner was in complete control of the old corporation and was also in complete control of the two new corporations. We hold that the distribution of the cash and the notes receivable to petitioner was pursuant to a plan of reorganization and said distribution has the effect of a distribution of a taxable dividend and the gain to the petitioner, individually and as trustee, was taxable under section 112 (c) (2) of the 1939 Internal Revenue Code. William M. Liddon, supra.
As earlier stated respondent computed the deficiency under section 115 (g) (1) of the 1939 Internal Revenue Code3 which would render *315 the distribution*209 of all of Capital's earnings and surplus taxable as a dividend. This would result in a much higher tax and respondent now concedes in his brief that "the distributions fall within the reorganization, and the amount of the dividend should be computed under section 112 (c) (2)." We agree.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(c) Gain from Exchanges not Solely in Kind. --
(1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5), or within the provisions of subsection (1), of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph or by subsection (1) to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.↩
2. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(c) Gain from Exchanges not Solely in Kind. --
* * * *
(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.↩
3. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
(g) Redemption of Stock. --
(1) In General. -- If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend.↩