Decision will be entered for the respondent.
In 1961, petitioner incorporated its research division into a separate corporation (Swiss Controls) which then issued its debenture bonds and stock warrants to two small business investment companies (SBIC's) in exchange for $ 300,000. In May 1962, the SBIC's investment was converted into cash plus 70,000 shares of Swiss Controls common stock. Between May and August 1961, petitioner sold 110,000 shares of Swiss Controls stock it held to certain of its and Swiss Controls' officers and stockholders. Defaults in payments on these stock purchases occurred 1 year later, and on Dec. 26, 1962, petitioner formally repossessed 107,250 shares of defaulted Swiss Controls stock. Also on Dec. 26, 1962, petitioner purchased the 70,000 shares of stock previously held by the SBIC's. Thereafter, on Dec. 31, 1962, Swiss Controls was liquidated and its assets, subject to its liabilities, were distributed to petitioner. Held, Swiss Controls was solvent on Dec. 31, 1962, and therefore a valid sec. 332 liquidation occurred, so that sec. 381 was applicable to permit petitioner to succeed to and take into account Swiss Controls' net operating loss carryovers *157 Held, further, regardless of the applicability of sec. 381, the net operating loss deductions claimed by petitioner must be disallowed under sec. 269, since petitioner acquired control of Swiss Controls for the principal purpose of evading or avoiding the Federal income tax by securing the benefit of those deductions.
*25 Respondent determined deficiencies in the income tax of petitioner as follows:
| TYE | |
| Aug. 31 -- | Deficiency |
| 1962 | $ 6,399.48 |
| 1963 | 18,609.82 |
| 1964 | 43,110.82 |
After concessions by the parties in regard to several items, the sole question remaining for our consideration relates to petitioner's right to net operating loss deductions in 1963 and 1964 based on the net operating loss carryovers petitioner claims to have obtained on the liquidation of its subsidiary.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
The Swiss Colony, Inc. (hereinafter referred to as petitioner), is a *26 Wisconsin corporation with its principal *158 place of business in Monroe, Wis. Petitioner filed its Federal income tax returns for the taxable years ended August 31, 1962, 1963, and 1964, with the district director of internal revenue, Milwaukee, Wis.
The stockholders of petitioner are Raymond R. Kubly (hereinafter referred to as Kubly) and his wife Margaret, owning 90 percent of the stock, and Glen Kubly, owning the remaining 10 percent.
During the period 1956 to May 8, 1961, petitioner maintained an engineering division. Initially, the engineering division was designed to develop, manufacture, and sell electronic equipment and products for use in the dairy industry. The scope of the engineering division's operations was later expanded to include electronic equipment and products for use in other industries, such as the gas transmission industry. The activities of the engineering division during the above period resulted in an excess of expenditures over income, according to petitioner's books and records, as follows:
| Fiscal year ended | Excess of expenditures |
| Aug. 31 -- | over income |
| 1956 | $ 40,647.61 |
| 1957 | 53,279.04 |
| 1958 | 68,615.33 |
| 1959 | 84,938.23 |
| 1960 | 65,191.72 |
| 1961 | 59,488.84 |
| 372,160.77 |
On May 8, 1961, petitioner organized a wholly owned subsidiary, *159 Swiss Controls & Research, Inc. (hereinafter referred to as Swiss Controls), a Wisconsin corporation, to engage in the development, manufacture, and sale of electronic products. Swiss Controls had an authorized capital of 1 million shares of common stock with a par value of $ 1 per share.
On May 17, 1961, petitioner transferred the entire assets and business of its engineering division, including all patents, patent applications, research, and know-how relating to pressure, temperature, steam, vacuum, voltage, electrical current and other controls, scanning devices and similar products, all production machinery, tools, and testing equipment, and its inventory of products and parts, to Swiss Controls in exchange for 200,000 shares of the common stock of Swiss Controls.
The directors of Swiss Controls valued the assets transferred to it by petitioner at $ 400,000, which valuation is equivalent to $ 2 per share of the Swiss Controls common stock issued in exchange. The opening balance sheet of Swiss Controls on May 8, 1961, showed the following assets and liabilities: *27
| Inventory | 1 $ 29,151.40 | |
| Equipment | $ 17,866.27 | |
| Less reserve for depreciation | 7,836.18 | 1 10,030.09 |
| Patents and patent applications | 360,818.51 | |
| Total assets | 400,000.00 | |
| Capital stock, 200,000 shares at $ 2 share | 400,000.00 |
On May 16, 1961, Northwest Capital Corp. of Milwaukee, Wis. (hereinafter referred to as Northwest), and Business Capital Corp. of Chicago, Ill. (hereinafter referred to as BCC), two small business investment companies licensed under the Small Business Investment Act of 1958, each made a cash loan to Swiss Controls of $ 150,000. In exchange, each received 150 $ 1,000 face value debenture bonds, payable semiannually, with interest at 7 percent until final maturity on March 1, 1968, together with 35,000 stock purchase warrants at $ 2 a share, for the common stock of Swiss Controls & Research, Inc., to be exercised on or before March 1, 1970.
The developmental work of the engineering division was originally conducted by Mirl E. Whitenack, an engineer and inventor (hereinafter referred to as Whitenack). Two or three years after the engineering division was formed, petitioner hired two University of Wisconsin professors as consultants on a part-time basis, and Clarence Seaton, an engineer on a full-time basis, to assist Whitenack in the developmental work. These individuals, together with Wilhelm *161 I. Kolster, at the company's Michigan City, Ind., facilities, represented the engineering staff of Swiss Controls.
On April 1, 1960, Whitenack assigned the following inventions and patent applications to petitioner, who in turn assigned them on May 8, 1961, to Swiss Controls:
| Number | Description |
| Patent No. 2,359,955 | Electric control |
| Patent No. 2,961,165 | Condensate control device |
| Serial No. 611,283 | Control device |
| Serial No. 837,458 | Control system |
| Serial No. 80,843 | Method and apparatus for mixing |
| fluids |
And on July 1, 1961, Whitenack reaffirmed the assignment to petitioner of these inventions and patent applications, together with the results *28 of his research, including the research in the following fields of endeavor:
(a) Automatic condensate control devices
(b) Hydraulic and/or electronic control devices
(c) Butter fat tester devices
(d) Wing control devices
(e) Inter-leaver devices
(f) Calorimeter and other measuring devices
(g) Peak shaving equipment, including all control devices therefor
(h) Liquid level control devices
(i) Space heating control devices
(j) Control systems
(k) Electronic steam trap
(l) Weighing control device
(m) Bellows type pressure sensing device
(n) Slicing machine
(o) Four-way valve
(p) *162 Boiler feed water level indicators
Whitenack also entered into a royalty and employment agreement with Swiss Controls, limited to $ 50,000 in any calendar year, plus a salary of $ 7,200 per year.Harold E. Koch (hereinafter referred to as Koch), an engineer, was president of Swiss Controls and ran the company with only limited direction from its board of directors. It was Koch who attracted and encouraged the small business investment companies to invest in Swiss Controls.
In its initial operations, the management of Swiss Controls concentrated much of its efforts on additional research rather than directing its attentions to the development of a sales organization and the sale of the products which it had developed. It took the company several months to realize that it was losing money.
Whitenack, Swiss Controls' chief engineer, died in the fall of 1961. His death materially slowed the progress of Swiss Controls because the company's other engineers had to reconstruct much of Whitenack's work due to his reluctance to convey information to his assistants. This delay in progress amounted to 3 to 6 months on certain projects. However, Swiss Controls' remaining engineers were able to *163 backtrack and reconstruct most of the knowledge lost through Whitenack's death, and development continued, as evidenced by the subsequent filing, in 1962, of two patent applications by Swiss Controls' employees.
For various reasons, including management's failure to concentrate on sales, the delays occasioned by Whitenack's death, and the lack of market potential of some of its products and inventions, Swiss Controls had an accumulated earnings deficit of $ 211,523.96 on April 30, 1962.
*29 At a meeting of the directors of Swiss Controls held March 14, 1962, the representatives of Northwest and BCC suggested that their companies, the debenture holders, might be interested in taking cash and some stock in lieu of the debentures which they then held. This was the first suggestion that Swiss Controls should refinance. The directors, who were not representatives of the debenture holders, requested time to consider other refinancing alternatives and from March 14, 1962, to May 24, 1962, the representatives of the respective parties negotiated as to various alternative plans.
During this period of time, Kubly, the major stockholder and president of petitioner, as well as the holder of a large *164 block of Swiss Controls stock, met with his counsel and accountants in regard to the proposed refinancing of Swiss Controls. During these meetings the operating losses and tax aspects of the proposed refinancing were discussed.
On April 5, 1962, and May 7, 1962, respectively, Kubly wrote letters to Robert Sullivan of Northwest which contained the following excerpts:
April 5, 1962
* * * *
While it appears to me there are a couple bright spots in the picture, I must tell you frankly if it were not for Northwest Capital and Business Capital, I would be tempted to fold the whole thing up and forget about it. Under the circumstances, however, I feel we must give it another try. I hope we will be successful for your sake.
May 7, 1962
* * * *
Without carrying on, the chances of recovery of your losses are nill [sic]. Even if we were to close down and salvage all we could, I doubt there would be more than an extra $ 15,000 left over, after all our current obligations are taken care of.
On May 24, 1962, Swiss Controls entered into a refinancing agreement with Northwest and BCC. Pursuant to the terms of the refinancing agreement, Swiss Controls acquired its entire issue of 7-percent debentures *165 in the total principal amount of $ 300,000, together with all the stock purchase warrants held by Northwest and BCC, by paying to those two companies a total of $ 70,000 in cash ($ 35,000 to each company) in exchange for $ 70,000 of 7-percent debentures, and by issuing 70,000 shares of Swiss Controls, $ 1 par value common stock (35,000 shares to each company), for the remaining total of $ 230,000. Swiss Controls also issued to each small business investment company its promissory note in the principal amount of $ 4,375 in payment of interest accrued but not paid on the 7-percent debentures. The cash paid in the refinancing by Swiss Controls to Northwest and BCC, i.e., $ 70,000, was taken from the company's cash account which had been increased by bank borrowings.
*30 On December 11, 1962, the board of directors of Swiss Controls adopted corporate resolutions ratifying and confirming the actions of its officers in entering into the refinancing agreement with Northwest and BCC.
In December of 1962, representatives of Northwest and BCC offered to sell their stock in Swiss Controls to petitioner, and negotiations followed. On December 26, 1962, petitioner purchased the 70,000 shares of Swiss *166 Controls common stock held by Northwest and BCC, together with two promissory notes of Swiss Controls, each in the amount of $ 4,375, held by those corporations. For this acquisition, petitioner transferred 2,500 shares of Gateway Chemical Corp. stock, having a value of $ 10 per share, and its note for $ 25,000 to be paid over the next 3 years for a total consideration of $ 50,000, or $ 25,000 to each of the small business investment companies.
Between May 23, 1961, and August 28, 1961, petitioner entered into written contracts with certain officers and stockholders of petitioner and Swiss Controls for the sale by petitioner to such persons of 110,000 shares of Swiss Controls common stock at a price of $ 2 per share. Pursuant to the terms of these contracts, which were substantially identical, the purchasers were to pay for the stock in installments and the stock certificates were to be held by petitioner as security until full payment was received. Each purchaser gave the petitioner a power of attorney authorizing the transfer of such shares to petitioner in the event of the purchaser's default under the sales contract. All of the purchasers defaulted under their contracts, each *167 default occurring 1 year after the date of execution thereof. These defaults are summarized as follows:
| Date of default | Shares defaulted |
| May 30, 1962 | 42,250 |
| June 2, 1962 | 10,000 |
| Aug. 29, 1962 | 53,500 |
A schedule of the stock sales, the cash payments actually made, and the stock certificates delivered is set forth below:
| Sales | Paid and delivered | |||
| Purchaser and contract date | ||||
| Shares | Price | Shares | Paid | |
| Harold E. Koch, president of Swiss | ||||
| Controls 5/29/61 | 20,000 | $ 40,000 | 2,000 | $ 4,000 |
| W. C. Coleman, chairman of board, Swiss | ||||
| Controls 5/29/61 | 15,000 | 30,000 | 250 | 500 |
| Herman Frentzel 5/29/61 | 10,000 | 20,000 | 250 | 500 |
| Gerhardt Jersild 6/1/61 | 10,000 | 20,000 | 250 | 500 |
| Raymond R. Kubly, president of petitioner | ||||
| and Michael Kubly, his son 8/28/61 | 55,000 | 110,000 | 1,500 | 3,000 |
| Total | 110,000 | 220,000 | 4,250 | 8,500 |
*31 On August 22, 1962, Koch and Frentzel, respectively president and vice president of Swiss Controls, resigned from their positions.
On December 26, 1962, petitioner obtained 107,250 of the 110,000 shares of Swiss Controls common stock sold to individuals under sale contracts in 1961, by formally repossessing for default pursuant to the terms of the contract, that number of shares which were then being held for purchasers on which no payments had been made, except *168 in the cases of Raymond R. Kubly and Michael Kubly, all of whose shares (55,000) were repossessed. These repossessions are summarized as follows:
| Sold | Repossessed | |
| Raymond R. Kubly | 50,000 | 50,000 |
| Michael Kubly | 5,000 | 5,000 |
| W. C. Coleman | 15,000 | 14,750 |
| Harold E. Koch | 20,000 | 18,000 |
| Herman Frentzel | 10,000 | 9,750 |
| Gerhardt Jersild | 10,000 | 9,750 |
| Total | 110,000 | 107,250 |
After the repossessions and purchase of shares, as hereinabove described, petitioner owned 267,250 of the 270,000 issued and outstanding shares of common stock of Swiss Controls.
On December 27, 1962, the board of directors of Swiss Controls adopted a resolution recommending the adoption by the shareholders of a plan of complete liquidation on December 27, 1962, and Swiss Controls' statement of intent to dissolve was filed and recorded December 28, 1962. The articles of dissolution of Swiss Controls, dated January 8, 1963, were filed with the secretary of state of Wisconsin on January 14, 1963, and recorded with the register of deeds of Milwaukee County, Wis., on January 15, 1963. At the close of business on December 31, 1962, the assets of Swiss Controls were distributed in consideration of the complete cancellation and redemption of all of its outstanding *169 shares pursuant to the plan of liquidation. Cash in the amount of $ 1,964.28, or approximately 71 cents per share, was distributed to the minority shareholders and the balance of the assets of Swiss Controls, tangible and intangible, was distributed to petitioner and petitioner assumed all of the liabilities of Swiss Controls.
The following statement of assets and liabilities of Swiss Controls, dated December 31, 1962, reflects the assets, valued at cost, and the liabilities of the company on that date: *32
| Assets | |||
| Current assets: | |||
| Cash in bank | $ 950.57 | ||
| Accounts receivable -- net | 2,549.03 | ||
| Inventory: | |||
| Work in process inventory | 1 $ 25,677.55 | ||
| Raw material inventory | 30,266.07 | 2 56,179.79 | |
| Total current assets | 2 $ 59,679.19 | ||
| Fixed assets: | |||
| Machinery, equipment, furniture, | |||
| and tools | 22,895.79 | ||
| Less: reserves for depreciation | 10,653.71 | ||
| 12,242.08 | |||
| Other assets: | |||
| Patents and patent applications | 360,818.51 | ||
| Less: allowance for amortization | 36,000.00 | ||
| 324,818.51 | |||
| Deferred charges | 2,167.44 | ||
| Organization expense | 8,106.75 | ||
| Less: allowance for amortization | 5,241.92 | 2 4,864.83 | |
| 403,772.05 | |||
| Liabilities | |||
| Current liabilities: | |||
| Notes payable | 20,550.00 | ||
| Accounts payable | 2,603.22 | ||
| Accruals: | |||
| Interest payable | 231.66 | ||
| Payroll taxes payable | 88.29 | ||
| Other | 1,211.00 | 1,530.95 | |
| Total current liabilities | 24,684.17 |
Among the assets received by petitioner on the liquidation of Swiss Controls were patents or patent applications on the following items: Calorimeter, pressure regulator, condensate control, peak shaver, fluid level gauge.
E. C. Koerper, professional engineer of Koerper Associates, Inc., at the request of Northwest, prepared a Product and Market Evaluation Report of Swiss Controls products (hereinafter referred to as the Koerper Report), dated January 15, 1962. Included therein were the following conclusions:
Patents and Applications
* * * *
It is my personal opinion that --
Condensate Control Patent No. 2,961,165. -- This patent is quite limited and has little commercial advantage in a very competitive field.
*33 Patent Application 80,843. -- Method for mixing fluids. Could be easily circumvented by less expensive methods already commercially available.
Patent Application 611,283. -- Has little commercial value in its disclosed hydraulic *171 form because of the cost of building such a system. Other forms of power would be less expensive and more applicable.
Recent development work at Swiss Controls on a small precise pressure control system using a diaphragm and a small electric motor appears far more interesting in its operation, cost and potential application.
Patent Application 837,458. -- Precise pressure sensing device -- using the "dither" principle could be most valuable. The possibility of having this patent granted depends entirely on a satisfactory response to the citation of Patent 2,343,212 against it.
* * * *
TENTATIVE CONCLUSIONS
* * * *
6. Of the 3 patent applications now being acted on, only the pressure control system is considered significant. This one could be quite valuable if granted in the light of citations against it. 1
Subsequent to January 15, 1962, the following patent applications were filed by employees of Swiss Controls, the full right, title, and interest thereof being in that company:
| Inventor | Serial No. | Filed | Title |
| Wilhelm I. Kolster | 215,847 | 8/9/62 | Instrument |
| Clarence A. Seaton and Otto A. Uyehara | 240,261 | 11/27/62 | 1 Calorimeter |
On December 10, 1962, First Electronics Corp. made a letter offer to purchase all of the outstanding common stock of Swiss Controls for 40 cents per share, a total of $ 108,000, which offer was rejected by Swiss Controls.
On November 1, 1963, petitioner organized a wholly owned subsidiary, Swiss Controls & Research, Inc. (hereinafter referred to as Swiss Controls -- Illinois), an Illinois corporation, and assigned to that corporation certain assets received by petitioner in the earlier liquidation of Swiss Controls, principal among them being the rights to the calorimeter invention, subject to royalty to petitioner of 5 percent of net sales. In exchange, petitioner received 50,000 shares of Swiss Controls -- Illinois stock.
On January 31, 1964, George Johnson and his wife purchased from Swiss Controls -- Illinois, 50,000 shares of its common stock for $ 50,000, thereby obtaining a 50-percent interest in that corporation.
*34 In its income tax returns for the taxable years 1963 and 1964, petitioner claimed net operating loss deductions in the amounts *173 of $ 43,062.68 and $ 102,253.10, 2 respectively. The deductions were the result of the carryover by petitioner of the net operating losses incurred by Swiss Controls prior to its liquidation on December 31, 1962. Respondent disallowed these claimed deductions in full.
ULTIMATE FINDINGS
Swiss Controls was solvent on December 31, 1962, the date of its liquidation and transfer of assets to petitioner.
Petitioner acquired control of Swiss Controls for the principal purpose of evading or avoiding Federal income taxes by securing the benefit of net operating loss deductions which it would not otherwise have enjoyed.
OPINION
The question for determination herein relates to petitioner's right to net operating loss deductions in 1963 and 1964 based on the net operating loss carryovers obtained on the liquidation of its subsidiary, Swiss Controls. Respondent's attack on petitioner's claimed deductions is twofold: (1) Petitioner did not succeed to Swiss Controls' net operating loss carryovers because section 381 3 was inapplicable to these loss carryovers since no valid section 332 liquidation existed due to *174 the insolvency of Swiss Controls at the time its assets were transferred to petitioner; and (2) petitioner's claimed net operating loss deductions should be disallowed pursuant to section 269 since petitioner acquired control of Swiss Controls for the principal purpose of avoiding or evading income taxes by securing the benefit of those deductions.
Section 381 IssueSection 381 4*176 provides a comprehensive set of rules for the preservation of tax attributes, including loss carryovers, in certain categories *35 of corporate acquisitions of assets. Included in these categories is the acquisition of assets upon the liquidation of a subsidiary under section 332. 5*177 Section 332(b)(2) provides that in order for a liquidation to qualify under that section, the distribution of the subsidiary must be in complete cancellation or redemption of all its stock. Thus, it has been held that section 332 is inapplicable to the liquidation of an insolvent subsidiary because in such instance there is nothing to distribute in cancellation or redemption of the liquidating corporation's stock. Spaulding Bakeries, Inc., 27 T.C. 684">27 T.C. 684 (1957), affd. *175 252 F. 2d 693 (C.A. 2, 1958); Iron Fireman Manufacturing Co., 5 T.C. 452">5 T.C. 452 (1945). In this regard, section 1.332-2(b), Income Tax Regs., provides:
(b) Section 332 applies only to those cases in which the recipient corporation receives at least partial payment for the stock which it owns in the liquidating corporation. * * *
In determining whether a subsidiary is insolvent for section 332 purposes, the fair market value6 of its assets is determinative. Northern Coal & Dock Co., 12 T.C. 42">12 T.C. 42 (1949); cf. Rev. Rul. 59-296, 2 C.B. 87">1959-2 C.B. 87; Rev. Rul. 68-602, 2 C.B. 135">1968-2 C.B. 135. Thus, if the fair market value of a corporation's assets exceeds the amount of its liabilities, the corporation is solvent, and the recipient corporation, which received all of the assets of the liquidating corporation subject to its liabilities, has received payment for the stock which it owned in the liquidating corporation, within the meaning of section 1.332-2(b), Income Tax Regs. Cf. Rev. Rul. 68-359, 2 C.B. 161">1968-2 C.B. 161.
Petitioner's right to the net operating *178 loss carryovers herein thus hinges on the solvency vel non of Swiss Controls at the time it transferred its assets subject to its liabilities to petitioner. 7 It is our opinion that Swiss Controls was solvent at that time.
In the instant case, this Court is faced with a situation where both respondent and petitioner ascribe unrealistic value to the assets in *36 dispute. Under such circumstances, our already difficult task is made all the more burdensome. As the Court of Appeals stated in Colonial Fabrics v. Commissioner, 202 F.2d 105">202 F.2d 105, 107 (C.A. 2, 1953), affirming a Memorandum Opinion of this Court:
For finding market value is, after all, something for judgment, experience, and reason on the part of the trier, and does not lend itself to dissection and separate evaluation.
Nevertheless, in our exercise of this judgment, experience, and reason, we are led to the conclusion that the fair market value of Swiss Controls' assets, while perhaps not worth the $ 511,000 ascribed thereto by petitioner, certainly was greater than its $ 24,684.17 of liabilities. *179 8
As regards Swiss Controls' tangible assets, i.e., inventory, machinery, and equipment, petitioner presented testimony by its accountant that the net liquidating value of these tangible assets was $ 47,000. In addition, a Swiss Controls employee testified that the machinery and equipment was in excellent condition and had a fair market value of approximately $ 22,000 to $ 25,000. Although this figure may be somewhat optimistic, we think petitioner has established that the machinery and equipment had an appreciable value on the date of liquidation.
Swiss Controls' most important category of assets was its patents and patent applications. Petitioner contends that the fair market value thereof was $ 425,000. Respondent, on the other hand, argues that those items were so speculative in value that no fair market value could be assigned to them as of December 31, 1962. *180 We think their true value lies somewhere between these two extremes. Petitioner presented the testimony of Clarence Seaton, an engineer in the employ of Swiss Controls up to September 1962, to the effect that the patents and patent applications relating to various devices being worked on by Swiss Controls during 1962 had fair market values totaling $ 425,000. We cannot accept the accuracy of these valuation figures as the witness's testimony was vague and largely lacking in supporting facts. However, certain other evidence leads us to conclude that at least some of Swiss Controls' patents and patent applications did have market value.
The Koerper Report, a product and market evaluation of Swiss Controls, conducted by an independent engineer, recognized that at least one of the Swiss Controls' patent applications, the pressure control system, was "significant" and "could be quite valuable." Also, subsequent to the date of the Koerper Report, on November 27, 1962, a patent application for a calorimeter was filed by two Swiss Controls *37 employees. The rights to this device were received by petitioner on the liquidation of Swiss Controls and later transferred to a new corporation, *181 Swiss Controls -- Illinois. Thereafter, in 1964, an unrelated investor purchased 50-percent ownership of Swiss Controls -- Illinois for $ 50,000. In 1965, a patent was issued on the calorimeter. On the basis of the above evidence, it is our opinion that the patents and patent applications of Swiss Controls, principally the pressure control system and the calorimeter, had some fair market value on December 31, 1962, and applying the principles of Cohan v. Commissioner, 39 F.2d 540 (C.A. 2, 1930), we attribute a value thereto of at least $ 40,000. Cf. J. T. Slocomb Co., 38 T.C. 752">38 T.C. 752 (1962), affd. 334 F.2d 269">334 F.2d 269 (C.A. 2, 1964).
Our conclusion that Swiss Controls was solvent on its liquidation is supported by a written offer by First Electronics Corp. to purchase all the stock of Swiss Controls for $ 108,000, made on December 10, 1962. Although we recognize the somewhat tenuous nature of this type of proof, we think the offer tends to show that the business and assets of Swiss Controls were considered to be of at least some value in the market place.
Respondent submits a series of arguments aimed at lessening or eliminating the effect of petitioner's evidence concerning the fair market *182 value of Swiss Controls' assets. While some of respondent's points are well taken, viewing the evidence as a whole, we are left with the conviction that while Swiss Controls was not in robust financial health, it was not quite as indigent as respondent would have us believe. On its liquidation it had assets, both tangible and intangible, of a combined value greater than its liabilities, and petitioner received this excess in value as payment for its stock in Swiss Controls.
We therefore hold that a valid section 332 liquidation did occur and that section 381 is applicable to permit petitioner to succeed to and take into account Swiss Controls' net operating loss carryovers.
Section 269 IssueRespondent alternatively contends that regardless of the applicability of section 381, the net operating loss deductions claimed by petitioner must be disallowed under section 269 9*183 since petitioner acquired *38 control of Swiss Controls for the principal purpose of evading or avoiding the Federal income tax by securing the benefit of those deductions.
Respondent's contention is presumptively correct and the burden of proof is on petitioner to show that respondent's determination was erroneous. American Pipe & Steel Corporation, 25 T.C. 351">25 T.C. 351 (1955), affd. 243 F. 2d 125 (C.A. 9, 1957). Indeed, it appears that the basic facts herein establish a prima facie case of a principal purpose of tax avoidance. Sec. 1.269-3(b)(1), Income Tax Regs.10*184
In response, petitioner asserts that its acquisition of control of Swiss Controls was brought about by its repossession of 107,250 shares of that corporation's stock pursuant to the terms of the sale contracts covering that stock; 11 that the purpose of the repossession was the protection of petitioner's position as creditor under those sale contracts; and that the purchase of the remaining 70,000 shares of stock from Northwest and BCC *185 occurred after petitioner had acquired control of Swiss Controls and thus was not subject to the provisions of section 269. We cannot accept petitioner's arguments.
Petitioner's position is bottomed upon the factual determination that the repossession preceded in time 12*187 and was independent from the purchase of stock from Northwest and BCC. Such a view, we think, represents petitioner's unrealistic attempt to segregate into isolated segments a course of conduct which was essentially unitary both in conception and impact. We are of the opinion that both transactions were part of a single plan intended to achieve 80-percent "control" of Swiss Controls in petitioner, so that it could avail itself of section 332 and therefore fall within the provisions of section 381. 13*186 The repossession of the 107,250 shares of stock gave petitioner only 73.05-percent ownership of Swiss Controls. Thus, the purchase of at least some of the stock outstanding in the hands of Northwest and BCC was necessary *39 for petitioner to succeed to Swiss Controls' net operating loss carryovers. Petitioner was cognizant of this fact, and we think it flies in the face of reality to conclude that petitioner acquired greater than 50-percent control of Swiss Controls by repossession of the defaulted stock and then independently purchased the additional stock necessary to give it greater than 80-percent control thereof. Rather, in our view, petitioner, pursuant to a single plan, acquired by means of both repossession and purchase, that degree of control (over 80 percent) necessary for it to accomplish its objective of obtaining Swiss Controls' net operating loss carryovers. Cf. Temple Square Mfg. Co., 36 T.C. 88">36 T.C. 88 (1961).
The unitary nature of petitioner's repossession and purchase of Swiss Controls stock is evidenced by petitioner's delay in formally repossessing the defaulted stock. Although the defaults occurred in May, June, and August of 1962, yet petitioner waited until December 26, 1962, after it was clear petitioner would be able to purchase (or already had purchased) the remaining shares of Swiss Controls, to formally repossess the defaulted stock. 14*188 Under these circumstances, we hold that the repossession and purchase were both part of an integrated arrangement whereby petitioner acquired control of Swiss Controls for purposes of section 269, and that petitioner has failed to establish that such acquisition of control was not for the principal purpose of evading or avoiding the Federal income tax.
Even though we were to agree with petitioner that the repossession constituted an independent transaction, prior in time to the purchase, resulting in the acquisition of control of Swiss Controls for purposes of section 269, we would be unable to agree with its further contention that this acquisition was not tax motivated. In our view, the record viewed in the manner most favorable to petitioner, establishes at most that there were two purposes of some significance in its repossession of the Swiss Controls stock -- a business purpose to protect its creditors' position and a tax-avoidance purpose to act as the first step in obtaining Swiss Controls' net operating loss carryovers. For petitioner to prevail, however, it must establish by a preponderance of the evidence, that tax avoidance was not the principal purpose of *189 the acquisition of control of Swiss Controls. J. T. Slocomb Co., supra;Hawaiian Trust Company Limited v. United States, 291 F.2d 761">291 F.2d 761 (C.A. 9, 1961). This it has failed to do.
*40 Judicial ascertainment of the subjective purpose which motivated particular actions is frequently difficult. However, our analysis of the entire record leads us to the conclusion that petitioner has failed to establish that tax avoidance was not the principal purpose involved in its acquisition of control of Swiss Controls, whether this acquisition be viewed as consisting of the repossession and purchase as an integrated arrangement, or the repossession and purchase as separate and independent transactions. Cf. Luke v. Commissioner, 351 F.2d 568">351 F.2d 568 (C.A. 7, 1965), affirming a Memorandum Opinion of this Court; Temple Square Mfg. Co., supra.Therefore, we hold that section 269 is applicable to disallow petitioner's net operating loss deductions in 1963 and 1964.
Decision will be entered for the respondent.
Tannenwald, J., concurring: I agree that section 269 cuts across section 381 and that it serves a useful purpose for the Court as a whole to formalize this principle, which has thus far only been *190 assumed or implied in the decided cases.
Whether this case fits the mold of section 269 is a more difficult question. I have serious doubts that the cancellation of the agreements with the employees meets the requirement of control within the intendment of section 269(a)(1). It may well be that, because of the employer-employee relationship, the substantial unpaid purchase price, and the absence of personal liability on the part of the employees to make payment, the agreements never deprived petitioner of the requisite control. However, since the petitioner did not argue this issue (see fn. 11 to the majority opinion), there is no need for us to resolve it.
As I read the majority opinion, the timing of the repossession of the employees' shares and of the purchases from Northwest and BCC does not per se require the conclusion that the proscribed purpose under section 269 existed, but is merely one fact to be taken into account in evaluating whether the principal purpose of these acquisitions was "evasion or avoidance of Federal income tax." On this issue, therefore, the majority decision merely reflects an ultimate finding of fact by the trial judge based on his determination of the *191 relative weight to be given to the various factual elements involved. Accordingly, I concur in that decision, although I, myself, might well have been inclined to accord different relative weight to those elements and to make a contrary determination.
Footnotes
1. Book value for Federal income tax purposes as shown on the books and records of petitioner.↩
1. Subsequent adjustment of the work in progress inventory raised that figure by $ 26,012.23 and the final figure, at cost, on Swiss Controls' books and records of its inventory transferred in liquidation to petitioner on January 1, 1963, was $ 82,192.02.↩
2. [sic]↩
1. Patent No. 3,213,684↩ on this device was issued on Oct. 26, 1965, to the named inventors, by mesne assignments, to the Swiss Colony, Inc.
1. It appears that patent No. 2,343,212↩ cited against the pressure control system was a patent owned by Swiss Controls which had already expired.
2. Net operating loss carryover of $ 122,409, less taxable income deficit of $ 20,155.90↩
3. All statutory references are to the Internal Revenue Code of 1954.↩
4. SEC. 381. CARRYOVERS IN CERTAIN CORPORATE ACQUISITIONS.
(a) General Rule. -- In the case of the acquisition of assets of a corporation by another corporation --
(1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 334(b)(2); or
(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D) * * * or (F) of section 368(a)(1),
the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c).* * * *
(c) Items of the Distributor or Transferor Corporation. -- The items referred to in subsection (a) are:
(1) Net operating loss carryovers. -- The net operating loss carryovers determined under section 172 * * *↩
5. SEC. 332. COMPLETE LIQUIDATIONS OF SUBSIDIARIES.
(a) General Rule. -- No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation.
(b) Liquidations to Which Section Applies. -- For purposes of subsection (a), a distribution shall be considered to be in complete liquidation only if --
(1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other corporation) possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote and the owner of at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends); and * * *
(2) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year * * *
6. "Fair market value" has been defined as "the price at which property would change hands in a transaction between a willing buyer and a willing seller, neither being under compulsion to buy nor sell and both being reasonably informed [as to all relevant facts]." O'Malley v. Ames, 197 F.2d 256">197 F.2d 256↩ (C.A. 8, 1952); see generally 10 Mertens, Law of Federal Income Taxation, sec. 59.01.
7. Swiss Controls upon liquidation also distributed cash in the amount of $ 1,964.28 in aggregate to its minority stockholders (1 percent).↩
8. Respondent suggests that the liabilities of Swiss Controls were higher than the figure on the balance sheet because of $ 22,500 of alleged "loans" to the company by Kubly and Koch, two of its stockholders. However, we are convinced that these amounts were contributions to capital and not loans by the two stockholders.↩
9. SEC. 269. ACQUISITIONS MADE TO EVADE OR AVOID INCOME TAX.
(a) In General. -- If --
(1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation * * *
* * * *
and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary or his delegate may disallow such deduction, credit, or other allowance. For purposes of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.↩
10. Sec. 1.269-3(b)Acquisition of control; transactions indicative of purpose to evade or avoid tax. If the requisite acquisition of control within the meaning of paragraph (1) of section 269(a) exists, the transactions set forth in the following subparagraphs are among those which, in the absence of additional evidence to the contrary, ordinarily are indicative that the principal purpose for acquiring control was evasion or avoidance of Federal income tax.
(1) A corporation or other business enterprise (or the interest controlling such corporation or enterprise) with large profits acquires control of a corporation with current, past, or prospective credits, deductions, net operating losses, or other allowances and the acquisition is followed by such transfers or other action as is necessary to bring the deduction, credit or other allowance into conjunction with the income * * *↩
11. Petitioner makes no argument that the repossession did not constitute an "acquisition" for the purposes of sec. 269. It argues only that the repossession was not made with the purpose proscribed by that section. The respondent having determined that the repossession did constitute an "acquisition" under sec. 269 and petitioner having in effect agreed, we so treat the repossession, but do not decide the question.↩
12. It is petitioner's contention that its acquisition of Swiss Controls stock by repossession occurred in May, June, and August 1962, when the defaults occurred, and not on Dec. 26, 1962, when the stock was formally repossessed. We need not decide this point, however, in light of our conclusion that the repossession and purchase were not independent transactions.
13. See p. 34 fn. 4, supra↩.
14. The fact that the formal repossession and the purchase of the Swiss Controls stock occurred in late December points up anew the tax advantages inherent in the entire arrangement. Under sec. 381(c)(1)(B), only a proportionate part of petitioner's taxable income (computed on a daily basis) for 1962 could have been offset by a net operating loss deduction attributable to Swiss Controls' loss carryover. Thus, petitioner's delay in obtaining 80-percent control of Swiss Controls and the concomitant delay in liquidating under sec. 332 produced the greatest possible tax advantage to petitioner from Swiss Controls' net operating loss carryovers.