*306 Decision will be entered under Rule 50.
Petitioner owned 1,755 shares of stock in C corporation which were pledged to a bank as collateral security for loans made to him to help finance a new venture, R corporation, under an arrangement whereby all distributions on the C stock were to be applied by the bank in satisfaction of the indebtedness. Petitioner had exhausted his credit, and to relieve himself from his difficult financial situation he determined to sell the C stock. In June of the taxable year 1941 he sold the stock, at par, to eight individuals, including his wife, four sisters, and three nonrelatives, all of whom were financially responsible persons. The consideration was the assumption by the vendees of the greater portion of petitioner's indebtedness to the bank and their personal notes to petitioner for the balance of the purchase price. Petitioner reported and paid tax on the gain from the sale of the stock. In the same month, the eight vendees and petitioner formed an investment partnership, to which the vendees contributed their C stock and their R stock and petitioner contributed a large number of his shares of R stock. Dividends on the C stock were applied*307 by the bank in satisfaction of the indebtedness assumed by the vendees, and the vendees reported and paid tax on their proportionate shares of the dividends as their distributive shares of partnership income. In 1943 one of the partners died, and the investment partnership was then liquidated and its assets distributed in kind among the surviving partners and the heirs of the deceased partner. Held, the sale of C stock by petitioner was a bona fide transaction, and the investment partnership was a bona fide business venture; and petitioner is taxable only on the gain realized from the sale of C stock and on his distributive share of the partnership income.
*136 Respondent determined against petitioner an income tax deficiency of $ 28,212.01 for 1941. Petitioner has conceded the correctness of *137 certain minor adjustments made by respondent. By amended answer respondent asks an increased deficiency in the amount of $ 480.36, making a total of $ 28,692.37. Petitioner *308 likewise does not contest the adjustment proposed in the amended answer.
The issue remaining for decision is whether a sale of certain corporate stock by petitioner and the subsequent formation of an investment partnership by petitioner and the eight vendees of the stock were bona fide, or to be disregarded for Federal income tax purposes and the dividends on the stock, both ordinary and liquidating, taxed to petitioner as his income.
The case was submitted upon a stipulation of facts, documentary evidence, and the oral testimony of a number of witnesses.
FINDINGS OF FACT.
Since 1939 petitioner has been a resident of Oregon. His income tax return for the calendar year 1941 was filed with the collector for the district of Oregon.
Prior to 1939 petitioner lived in Arkansas, and for a great many years he had been connected with the Caddo River Lumber Co. (hereinafter referred to as Caddo) both as stockholder and an officer and director. Caddo was a Delaware corporation, with offices at Kansas City, Missouri. It owned and operated timber properties and sawmills in Arkansas.
By 1937 a number of Caddo's timber properties had been cut over, and in that year Caddo began a series of partial*309 liquidations which continued until 1945. During the period material here, however, Caddo realized substantial earnings from its operations and paid sizeable dividends on its stock.
After moving to Oregon, petitioner took no active part in the management of Caddo's affairs. In Oregon he acquired some timber properties and organized a corporation, known as Rosboro Lumber Co. (hereinafter sometimes called Rosboro), to develop them.
Petitioner borrowed heavily from banks to finance his new undertaking, and by 1941 he had about exhausted his credit. All his stock in Caddo was pledged to the Union National Bank at Kansas City, Missouri, under an arrangement whereby all ordinary and liquidating dividends paid on the stock were to be applied by the bank in satisfaction of his indebtedness to it. Petitioner was thus faced with the embarrassing prospect of having insufficient income from the Rosboro Lumber Co. or other sources with which to pay the income taxes he would owe on account of dividends on the Caddo stock.
To relieve himself from his financial predicament petitioner determined to sell his Caddo stock. He made efforts to sell it to some ten or more individuals and business concerns, *310 offering it first at $ 125 a *138 share and later at its par value of $ 100 a share, but all without success. He next tried to arrange a sale at $ 100 a share to Rosboro Lumber Co., but the approval of the Reconstruction Finance Corporation was necessary, since Rosboro Lumber Co. was indebted to it in excess of $ 500,000 to finance construction of the Oregon plant.
At that time petitioner was advised by counsel that before selling his Caddo stock to Rosboro Lumber Co. he should reduce his stockholdings in that company below 80 per cent. Accordingly, on March 31, 1941, petitioner sold 400 shares of his Rosboro stock to his sister, Mattie R. Holliday, of Texarkana, Texas, for a total consideration of $ 20,000 -- the stated value of the stock being $ 50 a share. On the same date petitioner gave 400 shares of his Rosboro stock to his wife, Anna W. Rosborough. This gift was reported in a gift tax return filed by petitioner for 1941.
Negotiations were conducted for several weeks with the Reconstruction Finance Corporation, which finally refused to give its approval to the sale of petitioner's Caddo stock to Rosboro Lumber Co. Thereafter, Spencer R. Collins, B. S. Cole, and R. *311 T. Watts proposed to petitioner that he sell his Caddo stock to a group consisting of themselves, Mrs. Rosborough, and sisters of petitioner, and that the vendees, together with petitioner, form an investment partnership in which they would pool their Caddo and Rosboro stockholdings.
Collins was a certified public accountant at Eugene, Oregon, and Rosboro Lumber Co. was one of his firm's best clients. He was thus financially interested in the success of Rosboro. Both Cole and Watts were employees and stockholders of Rosboro, and their financial welfare depended on the success of the company. Watts was the husband of one of petitioner's nieces. Collins, Cole, and Watts knew that several of petitioner's sisters had considerable means of their own, and suggested that they be included in the group to help finance the transaction.
At first petitioner was not receptive to the idea of forming an investment partnership, but Collins, Cole, and Watts insisted. They wanted the partnership in order to provide a source of funds to finance Rosboro Lumber Co., to give them a chance to acquire additional stockholdings in the company, to preserve it in case of petitioner's death, and to provide*312 a level income for all the partners over a period of years through pooling of investments. Since it offered the only apparent solution to his financial problem, petitioner finally agreed to both the sale and the formation of the investment partnership.
About the first of May 1941 petitioner began corresponding with Mrs. Holliday and another sister, Nelle R. Beidelman of Shreveport, Louisiana, with reference to the sale and the partnership. This correspondence continued into June.
*139 On June 1, 1941, petitioner's indebtedness to the Union National Bank at Kansas City amounted to $ 150,857.75. All his Caddo stock, then 1,755 shares, and about 2,500 of his approximately 7,300 shares of Rosboro stock were pledged as security for the debt.
After obtaining his sisters' assent, in June, petitioner sold, at par, all his Caddo stock to the following individuals in the amounts set opposite their names:
| Shares | |
| Anna W. Rosborough | 540 |
| Nelle R. Beidelman | 270 |
| Mattie R. Holliday | 270 |
| Jennie R. Cox | 135 |
| Annie R. Jacks | 135 |
| R. T. Watts | 135 |
| B. S. Cole | 135 |
| Spencer R. Collins | 135 |
| 1,755 |
Mrs. Cox and Mrs. Jacks were also sisters of petitioner, living in Texarkana, Texas. Mrs. *313 Beidelman, Mrs. Holliday, Mrs. Jacks, and Watts already owned other Caddo stock. Cole at one time had owned stock in Caddo, but had earlier disposed of it. All the vendees except Collins owned some Rosboro stock.
In payment of the Caddo stock the vendees assumed $ 125,000 of petitioner's indebtedness to the bank and gave petitioner notes for $ 50,500, the balance of the purchase price. Notes of the vendees, dated June 2, 1941, payable to the bank and payable to petitioner were executed as follows:
| Payable to | ||
| Maker | Union Nat. | Payable to |
| Bank | petitioner | |
| Anna W. Rosborough | $ 38,461.50 | $ 15,538.50 |
| Nelle R. Beidelman | 19,230.78 | 7,769.22 |
| Mattie R. Holliday | 19,230.77 | 7,769.23 |
| Jennie R. Cox | 9,615.39 | 3,884.61 |
| Annie R. Jacks | 9,615.39 | 3,884.61 |
| R. T. Watts | 9,615.39 | 3,884.61 |
| B. S. Cole | 9,615.39 | 3,884.61 |
| Spencer R. Collins | 9,615.39 | 3,884.61 |
Each of the transferees was a financially responsible person. Some of them could have paid cash for the stock, but the particular method of payment was adopted in order to make available to petitioner the installment basis of reporting his gain on the sale. The transferees knew the Caddo stock was a good investment and *314 thought that in all probability the dividends thereon would pay the purchase price. But each understood that the notes were his personal obligations which he would have to pay at all events. Petitioner had no agreement or understanding whatever with any of them to indemnify them against loss on the transaction.
On June 26, 1941, the stock was transferred on the books of Caddo from petitioner's name to those of the vendees, and new certificates *140 therefor were issued. On June 28, 1941, the Union National Bank agreed to accept the notes of the vendees in substitution for petitioner's original note of $ 150,857.75. It required petitioner to endorse the vendees' notes in lieu of making financial investigations of the vendees. Each vendee executed an agreement pledging his Caddo stock to the bank, under an arrangement whereby all ordinary and liquidating dividends were to be applied in reduction of his own indebtedness to the bank. Petitioner gave the bank his new note for $ 25,857.75, the balance of his indebtedness, and, as additional security, was required to endorse to the bank the vendees' notes payable to him. Upon completion of the transaction the bank returned to *315 petitioner his original note and pledge agreement.
Each vendee also executed an agreement pledging or assigning his Caddo stock to petitioner, subject to the bank's prior lien, as security for the payment of his note to petitioner. These pledges the petitioner assigned to the bank as further collateral.
On June 28, 1941, petitioner and the eight vendees of his Caddo stock entered into a partnership agreement under the firm name of Rosboro Investment Co. Petitioner contributed 1,244 shares of Rosboro stock and the others contributed their 1,755 shares of Caddo stock and 1,200 shares of Rosboro stock, 400 shares by Mrs. Rosborough, 200 shares each by Mrs. Beidelman and Mrs. Holliday, and 100 shares each by Mrs. Cox, Mrs. Jacks, Watts, and Cole. Collins, who owned no Rosboro stock, contributed $ 5,000 cash instead. Total capital contributed was $ 302,700. The partnership interests were fixed at 35 per cent for petitioner, 20 per cent for Mrs. Rosborough, 10 per cent each for Mrs. Beidelman and Mrs. Holliday, and 5 per cent each for the rest.
The original capital contributions were not in proportion to the partnership interests, in view of the fact that the other partners were indebted*316 to the bank and to petitioner for their Caddo stock contributed. It was therefore provided in the partnership agreement that the partners other than petitioner should make withdrawals from capital to apply to their indebtedness, and that petitioner should make no withdrawals from capital until such time as their indebtedness had been liquidated and the capital accounts of all partners had thus been brought into conformity with their partnership interests.
A certificate of doing business under the assumed name "Rosboro Investment Company" was subsequently filed with the county clerk of Bowie County, Texas.
Since the Caddo stock was pledged to the Union National Bank, it was not transferred to the partnership name at the outset, but each vendee executed a declaration of trust reciting that he held the stock for the partnership. The Rosboro stock of all the partners was transferred *141 on the books of Rosboro Lumber Co. to the name of Rosboro Investment Co. on June 28, 1941.
Collins kept records and accounts for the partnership at his office in Eugene, Oregon. All the income of the partnership consisted of dividends from the Caddo stock, which amounted to $ 73,710 from June *317 28 to December 31, 1941. This amount was applied by the Union National Bank in satisfaction of the indebtedness of the partners other than petitioner. The partnership returns for 1941 reported the $ 73,710 as gross income and, after deducting expenses of $ 56.87, a net income of $ 73,653.13. Each of the partners, including petitioner, reported his distributive share of partnership net income in his individual return and paid the tax due thereon. Since they did not actually receive any cash from the partnership, they used their other funds to pay the tax due on their shares of partnership income. No part of the income of Rosboro Investment Co. was attributable to personal services, but its entire income represented a return on capital investment.
By March 10, 1942, the notes of petitioner's partners to the Union National Bank had been paid off through dividends on and partial retirement of their Caddo stock, and petitioner's note for the $ 25,857.75 balance of his original indebtedness was similarly paid off by May 29, 1942. On March 10, 1942, petitioner's partners were still indebted to him on their notes for the $ 50,500 balance of the purchase price of their Caddo stock, and*318 the stock thereafter remained subject to their pledges to him until the notes were finally satisfied by application thereto of further distributions from Caddo, that is, up until June or July of 1943.
The indebtedness of all the partners to the Union National Bank having been liquidated, on July 6, 1942, the Caddo stock was transferred on the books of Caddo from the names of the individual owners to the name of Rosboro Investment Co.
In the meantime, petitioner obtained on January 12, 1942, from the Union National Bank a $ 50,000 loan on behalf of the Rosboro Lumber Co. on the latter's note. The bank required both petitioner and his wife to endorse the note and further required him to pledge the eight notes from his partners to him (for the Caddo stock) and her to pledge her Caddo stock, all of which the bank already held as collateral securing petitioner's indebtedness, his wife's indebtedness, and the indebtedness of his other partners.
In March of 1942 petitioner sought a further personal loan to enable him to pay his taxes, and the bank agreed to lend him $ 25,000 if the Rosboro Lumber Co. made a $ 25,000 payment on its $ 50,000 note. That was done, and on April 13, 1942, petitioner*319 obtained a personal loan *142 on his own $ 25,000 note to the bank, which the bank required to be secured by the collateral it already held.
On June 17, 1942, petitioner borrowed $ 25,000, on his personal note, from the First National Bank of Eugene, Oregon, which he used to pay off his note of April 13, 1942, to the Union National Bank. Thereupon the latter bank released all the collateral it held, consisting among other things of petitioner's 2,588 shares of Rosboro stock, the notes of his eight partners payable to him, their pledge agreements to him, and the then remaining 1,226 shares of Caddo stock registered in their names.
Petitioner was required by the Eugene bank to pledge his Rosboro stock and put up the notes of his eight partners to him as security for his note to it. In addition, since the partners were still indebted to petitioner on their notes to him and their Caddo stock was still pledged to him to secure their indebtedness, and since the Caddo stock had been transferred to the name of the partnership after release by the Union National Bank, the other partners concurred with petitioner, on July 27, 1942, in executing an agreement in the name of Rosboro Investment*320 Co., pledging the 1,226 shares of Caddo stock to the Eugene bank as further collateral.
Caddo was notified of the pledge and instructed to pay dividends to the Eugene bank, which it did until July 3, 1943.
In September 1942 petitioner borrowed an additional $ 20,000 from the Eugene bank, likewise secured by the collateral already held by the bank.
Mrs. Beidelman died February 21, 1943, thus dissolving the partnership by operation of law. By then petitioner's financial situation, as well as that of Rosboro Lumber Co., had improved, and he was unwilling to continue with the other partners in Rosboro Investment Co., but preferred a liquidation and distribution of its assets.
The assets of Rosboro Investment Co. were accordingly distributed in kind to the surviving partners and the heirs of the deceased partner as follows:
| Name | Shares of | Shares of |
| Caddo | Rosboro | |
| T. W. Rosborough | 367.85 | 855.4 |
| Anna W. Rosborough | 210.20 | 488.8 |
| Heirs of Nelle R. Beidelman: | ||
| M. B. Watts | 35 | 81.4 |
| M. B. Lindsey | 35 | 81.4 |
| E. B. Pratt | 35.10 | 81.6 |
| Mattie R. Holliday | 105.10 | 244.4 |
| Jennie R. Cox | 52.55 | 122.2 |
| Annie R. Jacks | 52.55 | 122.2 |
| R. T. Watts | 52.55 | 122.2 |
| B. S. Cole | 52.55 | 122.2 |
| Spencer R. Collins | 52.55 | 122.2 |
*321 *143 Appropriate transfers were made on the books of Caddo on April 30, 1943, and on the books of Rosboro Lumber Co. on May 11, 1943, and new individual certificates were issued to the distributees.
The certificate of assumed business name filed in Texas was subsequently withdrawn.
After July 3, 1943, all distributions of dividends on and in retirement of the Caddo stock were paid direct to the individual stockholders of record, as in the above table.
In the period from June 1941 through 1945, the eight vendees of petitioner's Caddo stock realized through ordinary and liquidating dividends an average return of $ 220 to $ 225 per share, including their original investment of $ 100 a share. All the vendees purchased the Caddo stock and entered into the investment partnership with the expectation of making profit.
In the taxable year 1941 (and after June 28), 351 shares of the 1,755 shares of Caddo stock sold by petitioner were redeemed by the corporation at par, $ 100 a share. No income was reported by the partnership on account of this transaction, since its basis was $ 100 a share.
Respondent has disregarded the stock sale and the partnership and has held that petitioner, whose*322 basis on the 351 shares of stock retired was $ 15,050.88 ($ 42.88 per share), realized income of $ 20,049.12 in connection with the partial liquidation. He has also held that petitioner is taxable on all the ordinary dividends paid on the Caddo stock, in the amount of $ 73,710.
In his individual return petitioner decided not to use the installment basis and reported a long term capital gain of $ 50,126.71 upon the sale of the 1,755 shares of Caddo stock. He also reported $ 25,785.82 as his distributive share of ordinary partnership net income.
The sale of Caddo stock by petitioner to his eight vendees was a bona fide business transaction, and the investment partnership was a bona fide business association among all the members thereof.
OPINION.
In determining the deficiency respondent disregarded petitioner's sale of his Caddo stock and the existence of the Rosboro Investment Co. partnership. In this proceeding respondent adheres to his original position.
As we see it, the basic issue is the bona fides, primarily, of the stock sale, and perhaps secondarily of the investment partnership. Although respondent does not expressly so state on brief, his whole argument amounts to*323 a contention that the transaction was a sham. This is apparent from the type of cases which he cites, among them Helvering v. Stuart, 317 U.S. 154">317 U.S. 154; Helvering v. Clifford, 309 U.S. 331">309 U.S. 331; Gregory *144 v. Helvering, 293 U.S. 465">293 U.S. 465; Higgins v. Smith, 308 U.S. 473">308 U.S. 473; and Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331, in connection with his contentions that petitioner's economic situation was not substantially changed and that petitioner retained such control and economic benefit as to justify taxing the income to him.
In support of his position respondent points out several aims which he attributes to petitioner in making the sale of Caddo stock and entering into the investment partnership. First, he contends that petitioner sought to avoid the impact of increased income taxes in 1941 and subsequent years; next, that petitioner sought to obtain an increase in tax basis on Caddo stock from $ 42.88 to $ 100 a share; third, that he sought to distribute his taxable income among members of his family; and, fourth, *324 that he sought a continuing reservoir of assets available to him as a source of credit.
With respect to the "tax motive" argument, we have no doubt that so far as petitioner was concerned he was prompted, at least to some extent, by a desire to relieve himself of a difficult tax burden and to extricate himself from his stringent financial situation. But, a motive to minimize taxes will not vitiate a transaction where the reduction of taxes is but a normal consequence of the transaction, otherwise real, complete, and bona fide in every respect. For example, a change in basis for gain or loss is only a normal consequence of the sale of stock at a profit, the vendor concomitantly paying a tax on the profit. So here, the mere fact that petitioner, by selling his stock, pays less tax than he would have been required to pay had he held it until the final wind-up of Caddo -- a fact much stressed by the respondent -- is not a controlling circumstance. It clearly appears that the purchasers of the stock had other motives, namely, the expectation of making profits; and some of them, whose future financial welfare was dependent upon the success of Rosboro Lumber Co., were also interested *325 in providing a source of funds to help finance that company. All of the purchasers were financially responsible individuals and understood that they were personally obligated to pay their notes, both to petitioner and to the bank, in all events.
Respondent also reminds us of the rule that courts must look to the substance of transactions, rather than the form. In reaching our conclusion, we have had regard to the substance of the transactions here, which appears to us to be this: Before the sale of stock and the formation of the Rosboro Investment Co. petitioner owned 1,755 shares of Caddo stock and about 7,300 shares of Rosboro stock and was indebted to banks in excess of $ 150,000. After the termination and dissolution of the Rosboro Investment Co. he owned only about 365 shares of Caddo stock and approximately 6,950 shares of Rosboro stock, and the greater part of his indebtedness had been liquidated. The ownership *145 of the remaining Caddo stock and Rosboro stock with which he had parted was in others, who have since had the benefit of all the income and proceeds therefrom. It was a profitable business enterprise for all the members.
We see nothing in this substance*326 to justify disregarding the transactions and taxing all the income on the Caddo stock to petitioner. While, as it turned out, the Caddo stock sold to the eight purchasers paid for itself through the return thereon, the purchasers have paid the income tax on the stock earnings from the time of purchase, and they have had the benefit of ownership of the stock.
With respect to his contention that petitioner retained control over the Caddo and Rosboro stock in the hands of the purchasers and the partnership, respondent points to the fact that these shares were pledged to secure petitioner's indebtedness and to enable him to obtain further loans from banks in 1941 and 1942. As we see it, petitioner's so-called "control" was no more than, and his position was no different from, that of any secured creditor who has evidences of indebtedness owing to him and collateral securing the indebtedness. That is to say, the notes and collateral represent assets in his hands which he may use in obtaining further credit for himself. There is no showing that through the partnership petitioner had such control and economic benefit as to make applicable the principles urged by respondent to support*327 taxing the income to petitioner. There is not the slightest suggestion in the record that the other partners, whose interests in many respects were somewhat adverse to petitioner's, were in any way subservient to his will.
From all the evidence we conclude, and have found as a fact, that the sale of Caddo stock by petitioner to the eight purchasers was a bona fide transaction, and that the Rosboro Investment Co. was likewise a bona fide business association among the several members. Our conclusion is in accord with the decision of the Fifth Circuit Court of Appeals in Allen v. Beazley, 157 Fed. (2d) 970, a case involving facts in many respects similar to those here. In that case the Government made substantially the same arguments which the respondent is making here, namely, "that since the taxpayer thus got the benefit of the income from the securities in the payment of his indebtedness, he should be charged with the income tax so derived and applied," and that courts should "look at the actualities, the substance, the realities, and not the form of the transaction, in determining such tax liabilities." In some respects we think the facts in*328 that case were even less favorable to the position of the taxpayer than are the facts in the instant case. Yet the court there found that the transactions were real and bona fide and held that the income from purchased *146 securities was taxable to all the purchasers who owned an interest in them.
Finally, the respondent contends that at least as between petitioner and his wife the partnership should be disregarded, relying on the principles of Commissioner v. Tower, 327 U.S. 280">327 U.S. 280, and Lusthaus v. Commissioner, 327 U.S. 293">327 U.S. 293. We think those cases are inapplicable here. The Rosboro Investment Co. is not the usual family partnership. It might be more properly labeled a "joint venture" or an investment "pool"; but, as those terms are embraced within the statutory definition of a "partnership," section 3797 (a) (2), Internal Revenue Code, that is a matter of little consequence here. The important point is that personal services did not contribute in any way to the production of the organization's income. All of its income was attributable entirely to the capital invested. In these circumstances, where Mrs. *329 Rosborough owned an interest in the capital investment which produced the income, we see no more reason for disregarding the partnership (or whatever the business venture may properly be called) as to her than as to any of the other members. The capital which she contributed belonged to her. There is no evidence whatever that the gift of 400 shares of Rosboro stock made to her by petitioner in March of 1941 was accompanied by any condition, implied or otherwise, that the stock should be contributed to the Rosboro Investment Co. There is no evidence that the plan for organizing that company had even been conceived at the date of the gift. It was an outright gift with no strings attached, and petitioner reported it in his gift tax return. For the reasons stated, we hold that petitioner is not taxable on the distributive share of partnership income belonging to Mrs. Rosborough.
Decision will be entered under Rule 50.