*283 Decisions will be entered under Rule 50.
1. Petitioners E and W each owned 50 of the 100 shares of the stock of C corporation and in 1948 they caused it to convey part of its assets to two newly formed corporations, O and P, in exchange for all of their capital stock. E then surrendered 5 of his shares in C in exchange for 500 of the 1,000 shares of O and 1 of the 1,000 shares of P, and W simultaneously surrendered all of his shares in C in exchange for the remaining 500 shares in O and the remaining 999 shares of P. Held, the transaction failed to qualify as a tax-free reorganization under section 112 (g) (1) (D) and (h), I. R. C. 1939, because at the completion thereof neither transferee corporation was controlled by the transferor corporation, C, or its stockholder, E, or both, and hence there was a lack of continuity of interest.
2. The returns of E and W for 1948 were filed more than 3 but less than 5 years before the mailing of the statutory notices of deficiency to the petitioners. E did not omit income properly includible therein in excess of 25 per cent of his reported gross income but W did. Held, under section 275 (a) and (c), I. R. C. 1939, the deficiency*284 for 1948 is barred as to E but not as to W.
*285 *648 The Commissioner determined deficiencies in the petitioners' income taxes as follows:
| Petitioners | Year | Deficiency |
| Frank W. and Helene Williamson | 1948 | $ 54,045.26 |
| John R. and Carrie L. Edwards | 1948 | 6,466.40 |
| 1950 | 2,633.90 |
The parties have stipulated that there is a deficiency for the year 1950 in the proceeding of John R. and Carrie L. Edwards in the amount of $ 2,262.88.
The only issues for decision are:
1. Whether or not shares of stock of two corporations received by petitioners in 1948 in exchange for certain shares of stock owned by them in a third corporation were received pursuant to a tax-free reorganization.
2. Whether the assessment and collection of either or both of the deficiencies determined*286 by the Commissioner for 1948 against the Williamsons and the Edwards are barred by the statute of limitations pursuant to section 275 (a) and (c) of the Internal Revenue Code of 1939.
FINDINGS OF FACT.
Frank W. and Helene Williamson are husband and wife and during all the years here involved they were residents of Okeechobee County, Florida. Their joint Federal income tax return for 1948 was filed January 16, 1949, with the collector of internal revenue for the district of Florida. The total income reported thereon was $ 7,809.49.
John R. and Carrie L. Edwards are husband and wife and during all the years here involved were residents of Okeechobee County, Florida. Their joint Federal income tax return for 1948 was filed *649 with the collector of internal revenue for the district of Florida on May 9, 1949, pursuant to an extension of time to file until May 15, 1949. The gross income reported thereon was $ 40,728.40.
The statutory notices of deficiency as to all of the petitioners were mailed on February 1, 1954, more than 3 years but less than 5 years from the dates the returns were filed.
The Williamsons are taxable on additional income of $ 4,288.62 for the year 1948 which*287 adjustment is necessitated by an error in their return for that year whereby the amount of $ 3,210.76 instead of $ 7,499.38 was brought forward to Schedule C, page 2, of their return as net profit from business as shown by the schedule on Form 1040 F filed therewith.
Williamson was a district supervisor with the United States Department of Agriculture from 1935 to 1941 in charge of all farm and ranch loans in south Florida. In 1941 he became the Government representative and general manager of the Dixie Cattlemen's Association (hereinafter sometimes referred to as the association), a Government-sponsored Florida corporation organized for the purpose of assisting small cattlemen. The association's land was just north of Okeechobee, Florida. While managing the association, Williamson purchased for it approximately 81,000 acres of land and 50,000 to 60,000 head of cattle. The Department of Agriculture subsequently decided to dispose of the Government's interest in the venture and to withdraw the mortgage money it had advanced.
After making various unsuccessful attempts to dispose of the association's properties to private outside interests, Williamson conceived the idea in the early*288 part of 1945 of purchasing these assets in conjunction with Edwards, a cattleman with whom he had done business over the previous 3 or 4 years and whose ability and honesty he trusted. After a thorough discussion of the situation, the two came to the conclusion that they could operate the properties then owned by the association as a privately owned ranch on a profitable basis. Edwards purchased an option on the properties from a previous holder. In order to obtain the necessary financing, Edwards approached Wiley R. Reynolds, Sr., a Florida banker who agreed to assist Edwards in obtaining the necessary loan to buy the properties, but only upon the condition that he be allowed to own the equity in one-half of the ranching operation after it was acquired from the association. Edwards and Williamson consented to this and thereafter on July 12, 1945, the Edwards Cattle Company was organized as a Florida corporation with a capital stock consisting of 100 shares of no-par common stock all of which was issued to the stockholders who paid in $ 5 cash per share. Fifty shares were issued to Edwards and 25 shares each to Wiley R. Reynolds, Jr., and Annette R. Ramsing of Palm Beach, Florida, *289 the children of Wiley R. Reynolds, Sr. Williamson *650 became general manager of the company. It was understood between him and Edwards that he had a one-half interest in the shares issued to Edwards.
The properties of the Dixie Cattlemen's Association, the acquisition of which was the motivating influence for the organization of the Edwards Cattle Company, consisted of approximately 80,000 acres of ranch land located in Okeechobee County, Florida, and a herd of approximately 5,100 cattle located thereon, together with machinery and equipment for the operation of a ranching business. On August 1, 1945, Edwards assigned the option to purchase these ranch properties, which he had personally acquired at a cost of $ 4,000, to Edwards Cattle Company in exchange for the reimbursement of his cost therefor.
Thereafter, an agreement was entered into with W. R. Reynolds & Company of Maine to lend the Edwards Cattle Company $ 660,219 which was the purchase price of the assets covered by the option. The Edwards Cattle Company exercised the option and the assets were transferred to it by the Dixie Cattlemen's Association. A mortgage upon all the assets so acquired by the company in this*290 transaction was given to W. R. Reynolds & Company by Edwards Cattle Company to secure the loan made to the latter.
Not long after the purchase of the assets of the Dixie Cattlemen's Association, Edwards and Williamson developed an opportunity for the Edwards Cattle Company to dispose of approximately 20,208 acres of the land which it had acquired from the association, at a price of $ 205,080. They were concerned about the size of the company's outstanding indebtedness and were of the opinion that the land should be sold and the proceeds applied in reduction of the mortgage loan.
Reynolds, Sr., at this point expressed his desire to recall his company's loan and to withdraw from his stock participation in the Edwards Cattle Company. Williamson, therefore, negotiated with the Connecticut Mutual Life Insurance Company for a loan in an amount which, when added to the proceeds of the proposed sale of the 20,208-acre tract, would be sufficient to pay off the lender, W. R. Reynolds & Company. The negotiations were successful and on January 16, 1946, the insurance company made a commitment to the Edwards Cattle Company for a $ 400,000 mortgage loan on the land owned by it as reduced by *291 the 20,208 acres, the disposal of which was contemplated in the proposed sales.
The following plan of refinancing for Edwards Cattle Company (hereinafter sometimes referred to as the company) was carried out on or about January 22, 1946. The sales of the 20,208 acres of the company's land previously negotiated on a tentative basis by Edwards and Williamson were consummated and the purchase price of $ 205,800 was *651 applied against the outstanding loan of $ 660,219 from W. R. Reynolds & Company; the original loan was further reduced to $ 400,000 by payments from the proceeds of sales of some of the company's cattle; the Connecticut Mutual Life Insurance Company loaned the company $ 400,000 secured by a first mortgage on the company's land remaining after the sale of the 20,208 acres and on all of its other assets; the entire proceeds of this loan were used to pay off the balance of the loan from W. R. Reynolds & Company; the members of the Reynolds family severed their connections with the company on January 22, 1946, surrendering their 50 shares of stock to Edwards; and these shares subsequently, in the spring of 1946, were issued to Williamson, who was at that time secretary-treasurer*292 and a director of the company.
As of January 23, 1946, the total mortgaged indebtedness outstanding against the company was $ 400,000 all of which was owed to the Connecticut Mutual Life Insurance Company.
Williamson and Edwards continued the day-to-day management of the company together, without one having greater authority than the other. They had daily contact with one another. The company continued to conduct a general ranching business. At first Williamson and Edwards agreed as to the method of operation. However, Edwards was more concerned than Williamson over the size of the company's indebtedness and wanted to follow a policy of liquidating better assets, such as top-grade cattle, for high prices in order to reduce this debt while Williamson wished to follow a policy of long-range development of the properties which involved retention of the best cattle in order to breed a better herd. This he believed would yield a greater eventual return than Edwards's policies.
The differences between the two equal owners of the company as to management policy reached a point where they decided the problem had to be resolved. The solution agreed upon was to divide the ranch properties*293 owned by the company so that Edwards and Williamson could each carry out his own ideas on a particular tract. The company's assets then consisted of approximately 40,000 acres of land and 2,500 head of cattle. The major tracts of land to be divided were:
Tract A (Edwards Cattle Company) -- Approximately 12,000 acres with considerable improved pasture, the best of the company's land, and capable of operation without development expense.
Tract B (Caloosa) -- Approximately 10,000 acres of which about 4,000-5,000 acres were under water a good portion of the year, and land which best lent itself to development.
Tract C (Okeechobee) -- Approximately 19,000-20,000 acres of cut over pine timberland not suitable for development.
Edwards and Williamson agreed that tract A was suited to the method of operation of the former and tract B was suited to the long-range plans of the latter while tract C could be operated jointly.
*652 As of February 5, 1948, the total mortgage indebtedness of the company was $ 180,000 all of which was owed to the Connecticut Mutual Life Insurance Company. The mortgage then encumbered all of the company's land including tracts A, B, and C.
On February*294 13, 1948, the officers, directors, and stockholders of Edwards Cattle Company were as follows:
| Stockholders | Shares | Directors |
| J. R. Edwards | 50 | J. R. Edwards |
| Frank W. Williamson | 49 | Frank W. Williamson |
| T. W. Conely, Jr | 1 | T. W. Conely, Jr. |
| Total outstanding shares | 100 | |
| Officers | ||
| President and general manager | J. R. Edwards | |
| Vice president | T. W. Conely, Jr. | |
| Secretary and treasurer | Frank W. Williamson |
T. W. Conely, Jr., held his share of stock as agent for Frank W. Williamson.
A special meeting of the board of directors of the Edwards Cattle Company consisting of the above-named individuals, all of whom were present, held on February 5, 1948, approved the following plan of reorganization and voted to submit it for approval of the stockholders at a stockholders' meeting called later the same day:
1. Okeechobee Cattle Company (hereinafter referred to as Okeechobee) was to be organized as a Florida corporation with an authorized capital stock of 1,000 shares without par value.
2. Edwards Cattle Company was then to convey the following properties to Okeechobee in exchange for all of its authorized common voting stock:
| Description | Acreage |
| Middle Pasture | 1,208.5 |
| South Pasture | 18,026.5 |
| South Pasture building | |
| South Pasture fences | |
| Sales pen | 90.0 |
| Sales pen buildings | |
| Sales pen fences |
*295 3. Okeechobee was then to assume $ 80,000 of Edwards Cattle Company's debt to Connecticut Mutual Life Insurance Company as part of the consideration for transfer of the above properties and to execute an $ 80,000 mortgage to the insurance company, and Edwards Cattle Company was to apply to the insurance company for a release from its mortgage indebtedness to the extent of $ 80,000 and for a release of Edwards Cattle Company from the mortgage insofar as it covered the above-described property.
4. Immediately upon its receipt of the stock of Okeechobee, *653 Edwards Cattle Company was to exchange all of such stock for 10 per cent of its own capital stock.
5. Another corporation, Caloosa Ranch, Inc. (hereinafter referred to as Caloosa), was to be organized under Florida law with an authorized capital stock of 1,000 shares of no par value.
6. Edwards Cattle Company was then to convey the following-described properties to Caloosa in exchange for all of its authorized stock:
| Description | Acreage |
| Opal Pasture, including buildings and fences | 6,970.5 |
| South Pasture | 3,019.5 |
| Railway right-of-way | 30.84 |
| Fourth Acre tract | 40 |
| Cattle: | |
| 553 head breeding cows | |
| 219 2-year old heifers | |
| 282 calves | |
| 33 registered bulls | |
| Equipment: | |
| 2 Athens discs | |
| 3 Caldwell choppers | |
| 1 Martin weed chopper | |
| 2 One-half foot sections | |
| 1 1946 Ford coupe | |
| 1 1947 Jeep | |
| 1 TD-9 tractor |
*296 7. The above-described property was to be transferred to Caloosa free and clear of all debts and an application was to be made to the insurance company for the release of this property from the mortgage in order that such transfer could be accomplished.
8. Immediately upon its receipt of the stock of Caloosa, Edwards Cattle Company was to exchange all of such stock for 45 per cent of its own capital stock.
9. The stockholders of Okeechobee and Caloosa were then to advance to those corporations on their unsecured notes sufficient sums of money to provide them with working capital for the purpose of purchasing whatever they needed in the way of cattle, machinery, equipment, etc., necessary for the conduct of a general cattle-raising operation. The two new corporations were then to actively engage in the business of raising cattle and other business similar to the type of business being conducted prior to the reorganization by the Edwards Cattle Company.
10. The Edwards Cattle Company was to continue its operations and its business of raising cattle as it had conducted such business prior to the reorganization.
11. All of the foregoing transfers and exchanges were to be carried out *297 pursuant to section 112 (b) and (g) of the Internal Revenue Code of 1939.
The plan of reorganization was adopted, approved, and authorized *654 at a special meeting of the stockholders of Edwards Cattle Company held later in the day of February 5, 1948, and the directors and officers of the company were instructed to carry it out.
On February 13, 1948, the officers of the company procured the organization of the two new corporations, Okeechobee and Caloosa, each of which had an authorized capital stock of 1,000 common voting shares of the par value of $ 1 each.
On March 20, 1948, Edwards Cattle Company was still indebted to the Connecticut Mutual Life Insurance Company in the sum of $ 180,000, but the mortgage securing this indebtedness had been divided into 2 separate mortgages, 1 in the amount of $ 80,000 encumbering 2 tracts of the company's land known as Middle Pasture and South Pasture containing 1,208.5 acres and 18,026.5 acres, respectively, and the second in the amount of $ 100,000 encumbering a tract of the company's land known as Taylor Creek Pasture containing 12,698.5 acres. All of the above land was located in Okeechobee County, Florida.
On March 20, 1948, steps *298 numbered 2 and 6 of the plan of reorganization as set out above were accomplished. The assets transferred by Edwards Cattle Company to the 2 new corporations on this date were conveyed at their book values as they appeared on the records of the company. Okeechobee assumed an $ 80,000 mortgage encumbering Middle Pasture and South Pasture and the insurance company released the Edwards Cattle Company from any liability thereon. The property transferred to Caloosa by Edwards Cattle Company pursuant to step 6 was located in Okeechobee County, Florida, and was transferred free and clear of any and all debts, liabilities, and encumbrances.
At the time of the transfers, the land conveyed to Caloosa was the least valuable tract of the Edwards Cattle Company.
The fair market values of the shares of stock of the two new corporations as of March 20, 1948, were as follows:
| Okeechobee Cattle Company | $ 23.95 per share |
| Caloosa Ranch, Inc | $ 121.61 per share |
The balance sheets of the three corporations as of March 20, 1948, after the transfers, showed the following:
| Edwards | Caloosa | Okeechobee | |
| Cattle | Ranch, Inc. | Cattle | |
| Company | Company | ||
| Current assets | $ 45,493.21 | $ 5,640.00 | |
| Fixed assets | 95,122.34 | 81,310.94 | $ 81,274.55 |
| Other assets | 5,986.43 | ||
| Total assets | $ 146,601.98 | $ 86,950.94 | $ 81,274.55 |
| Current liabilities | $ 55,435.63 | ||
| Mortgage payable | 100,000.00 | $ 80,000.00 | |
| Capital stock | 225.00 | $ 1,000.00 | 1,000.00 |
| Surplus (capital) | 85,950.94 | 274.55 | |
| Surplus (earned) | (9,058.65) | ||
| Total liabilities and net worth | $ 146,601.98 | $ 86,950.94 | $ 81,274.55 |
*299 *655 Williamson and Edwards exchanged stock in Edwards Cattle Company on March 20, 1948, for stock in Okeechobee and Caloosa as follows:
| Original | Surrendered | Received | |
| Williamson | 50 shs. Edwards Cattle | 50 shs. Edwards | 500 shs. Okeechobee 999 |
| Company. 1 | Cattle Company. | shs. Caloosa. 2 | |
| Edwards | 50 shs. Edwards Cattle | 5 shs. Edwards | 500 shs. Okeechobee 3 1 |
| Company. | Cattle Company. | sh. Caloosa. |
The following schedule sets forth the stockholders, directors, and officers of these corporations on March 20, 1948:
| Edwards Cattle Company | ||
| Stockholders (before reorganization) | Shares | Directors (before and |
| after reorganization) | ||
| J. R. Edwards | 50 | J. R. Edwards |
| Frank W. Williamson | 49 | Frank W. Williamson |
| T. W. Conely, Jr | 1 | T. W. Conely, Jr. |
| Total outstanding | 100 | |
| Stockholder (after reorganization) | ||
| J. R. Edwards | 45 | |
| Officers (before and after reorganization) | ||
| President and general manager | J. R. Edwards | |
| Vice president | T. W. Conely, Jr. | |
| Secretary and treasurer | Frank W. Williamson |
| Caloosa Ranch, Inc. | ||
| Stockholders | Shares | Directors |
| Frank W. Williamson | 998 | Frank W. Williamson |
| J. R. Edwards | 1 | J. R. Edwards |
| M. Helene Williamson | 1 | M. Helene Williamson |
| Total outstanding | 1,000 | |
| Officers | ||
| President | Frank W. Williamson | |
| Vice president | J. R. Edwards | |
| Secretary-treasurer | M. Helene Williamson |
| Okeechobee Cattle Company | ||
| Stockholders | Shares | Directors |
| Frank W. Williamson | 500 | Frank W. Williamson |
| J. R. Edwards | 499 | J. R. Edwards |
| James E. Fahey | 1 | James E. Fahey |
| Total outstanding | 1,000 | |
| Officers | ||
| President | J. R. Edwards | |
| Vice president | James E. Fahey | |
| Secretary-treasurer | Frank W. Williamson |
*656 After the above exchanges, Williamson and Edwards had no further conflict over the management of the properties. The former managed Caloosa, the latter Edwards Cattle Company, and the two of them jointly managed Okeechobee. The three corporations continued to conduct a cattle business.
Williamson's purpose in having 1 share of stock issued to Edwards was, first, to provide a continuity of interest in the new corporation in accordance with advice received from counsel and, second, to have Edwards in a position to temporarily*301 take over its management in the event anything happened to Williamson.
Williamson and Edwards sought to make the division of the properties in such a manner that the separate parcels could be separately managed and that the property interests to be continually received by each would be of approximately equal value.
The following property sales were made by two of the three corporations on the dates indicated:
| Edwards Cattle Company | ||
| June 20, 1946 | 10,627.5 acres for | $ 85,020 |
| July 19, 1946 | 8,321 acres for | 83,210 |
| Dec. 28, 1949 | 6,497.5 acres for | 194,925 |
| Okeechobee Cattle Company | ||
| 1948 | Sales pens of 90 acres | $ 4,000 |
| 1949 | 9,233 acres for | 80,000 |
| 10,105 acres for | 90,000 |
On April 1, 1949, Edwards sold his 500 shares of stock in Okeechobee to Williamson's wife for $ 13,250 and on October 20, 1950, he sold his 45 shares of stock (the total outstanding) in Edwards Cattle Company for $ 313,984.26.
The internal revenue agent who audited the tax returns of the Edwards Cattle Company for the year 1948 found entries on its books as follows:
An adjusting journal entry as of March 1, 1948, on the books of Edwards Cattle Company showed the following debits and credits with*302 the explanation that it was to record the acquisition of 1,000 shares of the $ 1-par-value stock of Okeechobee Cattle Company:
| Debits | Credits | ||
| Investment in Okeechobee Cattle Company | $ 1,274.55 | ||
| Mortgage notes payable | 80,000.00 | ||
| Reserve for depreciation | 688.30 | ||
| Reserve for depreciation of fences | 425.43 | ||
| Land | $ 74,548.28 | ||
| Building | 5,300.00 | ||
| Fences | 2,540.00 |
*657 The second part of that entry on the company's books showed the following with the explanation that it was to record the exchange of 1,000 shares of Okeechobee Cattle Company stock for 10 shares of Edwards Cattle Company no-par-value stock ($ 5 per share original issue price) -- 500 for 5 to Edwards and 500 for 5 to Williamson:
| Debits | Credits | ||
| Capital stock | $ 50.00 | ||
| Surplus | 1,224.55 | ||
| Investment in Okeechobee Cattle Company | $ 1,274.55 |
A further adjusting journal entry as of March 1, 1948, was as follows:
| Debits | Credits | ||
| Investment in Caloosa Ranch, Inc | $ 86,950.94 | ||
| Reserve for depreciation of buildings | 292.39 | ||
| Reserve for depreciation of fences | 651.39 | ||
| Reserve for depreciation of equipment | 1,283.89 | ||
| Reserve for the breeding herd | 4,716.25 | ||
| Land | $ 40,797.48 | ||
| Building | 2,250.00 | ||
| Fences | 3,900.00 | ||
| Equipment | 8,856.47 | ||
| Cows | 25,620.91 | ||
| Yearling heifers | 5,640.00 | ||
| Bulls | 1 6,930.00 |
This entry was explained as being for the purpose of recording the assets exchanged for 1,000 shares of $ 1-par-value stock of Caloosa.
The next part of this entry showed the following with the explanation that it was to record the exchange of 1,000 shares of Caloosa for 45 shares of Edwards Cattle Company:
| Debits | Credits | ||
| Capital stock | $ 225.00 | ||
| Surplus | 86,725.94 | ||
| Investment in Caloosa Ranch, Inc | $ 86,950.94 |
The journal entry did not disclose who surrendered the 45 shares of stock of Edwards Cattle Company.
The stipulation of facts and the exhibits annexed thereto are incorporated herein by this reference.
OPINION.
In 1948 the Edwards Cattle Company, a corporation the stock of which was equally owned by petitioners Williamson and Edwards, transferred certain assets to a newly formed corporation, Okeechobee Cattle Company, and also transferred certain other assets to a second newly formed corporation, Caloosa Ranch, Inc., in exchange for all the capital stock of these corporations. The Edwards Cattle Company retained some of its original assets so that all three *658 corporations thereafter*304 were able to conduct a cattle ranch business. The stock of Okeechobee was distributed equally to Edwards and Williamson who, prior to the transactions herein described, were the sole stockholders of Edwards Cattle Company, while 999 of the 1,000 shares of Caloosa were distributed to Williamson (including 1 share to his wife) and 1 share was transferred to Edwards. In exchange for the stock of the two new corporations thus distributed, Williamson surrendered all of his stock, 50 shares, in Edwards Cattle Company and Edwards surrendered 5 of his 50 shares, retaining 45 which were thereafter the only shares of Edwards Cattle Company outstanding. The alleged business purpose for this transaction was to remove an impasse between Williamson and Edwards concerning the management of the original cattle ranch properties and to so divide these properties as to permit each to manage a portion in accordance with his own theories and both to continue to manage a third portion as to which they held similar views.
Petitioners contend that the foregoing transactions constituted a reorganization as defined in section 112 (g) (1) (D) of the Internal Revenue Code of 1939; that the receipt of the *305 stock of the two new corporations by Edwards Cattle Company in exchange for certain of its properties was tax free under section 112 (b) (4); and that the subsequent receipt of this stock by petitioners in exchange for stock in Edwards Cattle Company was tax free under section 112 (b) (3).
The respondent determined that the petitioners realized income upon their receipt of the shares of Okeechobee and Caloosa and that the series of transactions in connection therewith did not constitute a tax-free reorganization, basing his determination upon the following grounds:
1. The purported reorganization was not consummated pursuant to a plan of reorganization within the meaning of section 112 in that the various steps were not effected in accordance with the plan as adopted by the stockholders and directors at their meetings on February 5, 1948. The plan called for the distribution by Edwards Cattle Company of all of the stock of Okeechobee in exchange for 10 per cent of its own capital stock, and of all of the stock of Caloosa for 45 per cent of its own capital stock. The alleged surrender of 5 shares of Edwards Cattle Company by each of the petitioners for the Okeechobee stock would have*306 left each with 45 shares, and the respondent urges that there is no possible way that Williamson could have exchanged his 45 shares for 999 shares of Caloosa and for Edwards to have received 1 share of Caloosa and yet to have maintained an equal division of the assets. A comparison of the values, respondent contends, shows that if Edwards received 500 shares of Okeechobee and 1 share of Caloosa for 5 shares of Edwards Cattle Company, Williamson must have received the same and hence on his surrender of his remaining *659 45 shares of stock in Edwards Cattle Company, which was 45 per cent of the shares outstanding at the beginning of the series of transactions, he could have received no more than 998 shares therefor and, contrary to the plan, 100 per cent (1,000 shares) of Caloosa would not have been exchanged for 45 per cent of the stock of Edwards Cattle Company. Hence, he argues, the steps actually taken were not pursuant to the plan of reorganization.
2. The reorganization lacked a business purpose and was a mere sham primarily designed to permit a postponement of taxation on an exchange of stock, the record failing to support petitioners' contention that it was undertaken*307 to resolve the management differences of two equal owners.
3. There was an absence of continuity of interest by the parties as a result of the transaction.
The deficiency notices herein were both issued more than 3 years but less than 5 years after the filing of the returns for 1948. Petitioners have pleaded the statute of limitations as a bar to the assessment and collection of the deficiencies determined by the respondent. Sec. 275 (a). The respondent, in turn, has alleged that he is not barred from collecting the deficiencies under the 5-year rule of section 275 (c). Under the circumstances, the respondent has the burden of proving in each case that the petitioners omitted from their gross income for 1948 an amount properly includible therein and that the amount so omitted was in excess of 25 per cent of the gross income reported by the petitioners in their respective returns for that year. C. A. Reis, 1 T. C. 9; Sidney N. LeFiell, 19 T.C. 1162">19 T. C. 1162.
We are in agreement with the respondent's third contention that the purported reorganization herein fails for lack of continuity of interest and we have, therefore, found*308 it unnecessary to consider or discuss the first two arguments urged by him.
The applicable provisions of the statute are set out in the margin hereof. 1 The determination of whether the corporation or its shareholders or both are in control of the transferee corporation within the meaning of these provisions is to be made at the conclusion of the entire transaction even though it involves several steps which for this purpose must be regarded as a whole. West Texas Refining & Development Co. v. Commissioner, 68 F. 2d 77 (C. A. 10, 1933); Halliburton *660 v. Commissioner, 78 F. 2d 265 (C. A. 9, 1935); Commissioner v. Schumacher Wall Board Corporation, 93 F. 2d 79 (C. A. 9, 1937).
*309 At the completion of the purported reorganization transaction, the following situation existed: (1) Edwards was the sole stockholder of the transferor corporation, Edwards Cattle Company, Williamson having surrendered all of his stock therein; (2) Edwards and Williamson were the equal owners of one transferee, Okeechobee; and (3) Williamson was the holder of 99.9 per cent of the stock of the second transferee, Caloosa, with Edwards owning the remaining one-tenth of 1 per cent of this corporation's stock. On this state of facts it is clear that neither the transferor corporation, Edwards Cattle Company, nor its sole shareholder, Edwards, was in control of either transferee corporation, Caloosa or Okeechobee. Control of Caloosa was in Williamson and control of Okeechobee was shared equally by Edwards and Williamson, the latter not then being a stockholder of the transferor corporation. The transaction, therefore, fails to qualify as a corporate reorganization because it fails to comply with the provisions of the statute intended to result in a continuity of interest by the transferor corporation or its stockholders, or both, in the transferee corporation. Paul L. Case, 37 B. T. A. 365,*310 affirmed on this point 103 F. 2d 283 (C. A. 9, 1939); Robert M. Morgan, 41 B. T. A. 379, affd. 117 F. 2d 334 (C. A. 2, 1941); Weicker v. Howbert, 105">103 F. 2d 105 (C. A. 10, 1939); Giles E. Bullock, 26 T.C. 276">26 T. C. 276.
Petitioners have addressed their principal arguments to the proposition that continuity of interest was not destroyed by the changes in the proportionate interests of Williamson and Edwards in the various assets upon the conclusion of the transaction. The cases they cite, for the most part, merely held that reorganizations under section 112 (g) (1) (D) did not fail where stockholder interests of the old corporation, constituting less than all but substantially more than a majority of the original interests, participated in the new corporation. Other cases cited by petitioners dealt with reorganization provisions different from the ones before us in the instant case. Petitioners' arguments on the proportionate interest question, however, are not in point since our decision is not based upon any change in the relative interests*311 of Edwards and Williamson in the original corporation's assets which, as a result of the transaction, were divided among three corporations, but upon the absence of the control by the transferor corporation and/or its stockholders of the transferee corporations at the time of the completion of the transaction, which control is required by the statute. Even the cases cited by petitioners in support of their arguments with respect to the nonapplicability of a proportionate interest test to the transaction herein recognize the necessity for the transferor or its stockholders, or both, to be in control of the transferee *661 immediately after the transfer. See, e. g., Roosevelt Investment Corporation, 45 B. T. A. 440, 452.
We do not agree with petitioners' argument that the several cases cited in support of our decision were wrongly decided, and we need only say in respect of the various hypothetical situations described by petitioners in urging us not to follow these cases that such situations are not before us for decision and, whatever their resolution might be, they do not bear upon our holding herein.
Section 368 (a) (1) (D) of the Internal Revenue*312 Code of 1954, which is not applicable to the year in issue, provides as follows:
SEC. 368 (a). Reorganization. --
(1) In general. -- For purposes of parts I and II and this part, the term "reorganization" means --
* * * *
(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;
The report of the Senate Committee on Finance, S. Rept. No. 1622, 83d Cong., 2d Sess., states as follows at pages 273-274:
Subparagraph (D) of subsection (a) (1) restates the definition of existing law appearing in section 112 (g) (1) (D) of the Internal Revenue Code of 1939. Under this definition the term "reorganization" includes a transfer by a corporation of all or a part of its assets to another corporation if immediately*313 after such transfer the transferor corporation, or its shareholders, or both, are in control of the transferee. Your committee's bill has altered the definition to provide that if the control of the transferee corporation is in the transferor corporation or in persons who were shareholders of the transferor, or any combination thereof, the transfer will, nevertheless, qualify as a reorganization under section 368 (a) (1) (D), the control owned by these persons need not be in the same proportion as it was before the transfer. For example, corporation A owns only properties connected with a drug store and a hardware store. Corporation A transfers the drug store properties to corporation D in exchange for all the stock of D and transfers the hardware store properties to corporation H in exchange for all the stock of H. Immediately thereafter, corporation A distributes all the stock in corporation D to X, one of the two shareholders in A, in exchange for all of X's stock and distributes all the stock in corporation H to Y, the other shareholder in A, in exchange for all his stock. The distributions qualify under section 355. The transfer of the properties by *314 A is a reorganization under subparagraph (D). It should be noted, however, that in the event that the values of the properties transferred to corporations D and H are disproportionate to the value of the stock in A held by shareholders X and Y, the transaction at the shareholder level may have the effect of a gift or a compensation. See section 355. [Emphasis supplied.]
It appears from this report that Congress intended to extend tax-free treatment after the effective date of the Internal Revenue Code *662 of 1954 to the type of reorganization transactions effected by the petitioners herein. At least, the fact that control of the transferee corporations was either in the hands of or shared by Williamson, who was a shareholder of the transferor corporation immediately before the transfers, would not have prevented the qualification of the transaction as a reorganization. However, it is quite clear from the Senate Committee Report and from the change in the statutory language that the existing law was amended and that the amendment was not merely declaratory of the prior law.
The parties have stipulated the fair market values of the stock of Okeechobee and Caloosa on March *315 20, 1948, the date of the purported reorganization. These values differ from those used by the respondent in his deficiency notices, and in his brief he has recomputed the amount of the long-term capital gain realized by petitioners in the event we hold, as we have held, that the receipt of the stock in the new corporations was not pursuant to a tax-free exchange. Petitioners have raised no issue with respect to the amount of the gains recomputed upon the basis of the stipulated values and have not contested the new amounts so determined by respondent which are as follows: 2
| 50 per cent | ||
| taxable | ||
| Petitioners | Gain | portion |
| John R. and Carrie L. Edwards | $ 11,950 | $ 5,975.00 |
| Frank W. and Helene Williamson | 133,335 | 66,667.50 |
The parties have also stipulated that petitioners John R. and Carrie L. Edwards reported the following income on their return for*316 1948:
| Gross profit | $ 33,024.69 |
| Salary | 6,000.00 |
| Interest income | 1,703.71 |
| Total income | $ 40,728.40 |
| 25 per cent thereof | 10,182.10 |
For the purpose of determining whether petitioner Edwards omitted in excess of 25 per cent of his gross income from his return for 1948 under section 275 (c), only the portion of the capital gain which is to be taken into account in computing taxable income is to be considered. Emma B. Maloy, 45 B. T. A. 1104. It is obvious that the amount so omitted by Edwards ($ 5,975) was less than 25 per cent of the total gross income reported ($ 10,182.10), and that the assessment and collection of a deficiency for 1948 as to him and his wife is barred by section 275 (a) and (c). A deficiency for 1950 has been stipulated and is not barred.
The petitioners Frank W. and Helene Williamson reported a total *663 income of $ 7,809.49 on page 1 of their Federal income tax return for 1948. Annexed to this return was Form 1040F, Schedule of Farm Income and Expenses, containing a summary of their farm income and deductions computed on an accrual basis. This summary showed a gross profit of $ 10,710.14 (which amount also equaled*317 the total receipts plus increment in livestock), expenses of $ 3,210.76, and a net farm profit of $ 7,499.38. Through error, only the amount of $ 3,210.76 instead of $ 7,499.38 was carried forward to Schedule C, page 2, of the return, thereby causing an understatement of $ 4,288.62 in the total income reported on page 1 as $ 7,809.49. For the purpose of determining the applicability of section 275 (c), it will make no difference to the petitioners Williamson whether we deem their gross income for 1948 to have been one or another of the following: (1) $ 7,809.49 as shown on page 1 of their return; (2) $ 12,098.11 which would have been shown if the correct amount of the net profit of farming operations as shown on the annexed Form 1040F had been carried forward in the preparation of the return; or (3) $ 15,308.87 which would result from taking into account the gross profit from farming instead of the net profit. Even if the last and largest figure were to be used, 25 per cent thereof ($ 3,827.22) would be far less than the omitted amount of taxable income from the corporate transaction ($ 66,667.50). Nor is it necessary, in view of our decision that this amount of $ 66,667.50 was*318 omitted from the gross income of the Williamsons, to consider whether their erroneous failure to include in Schedule C, page 2, of their return an amount of at least $ 4,288.62, shown as properly includible therein by a schedule attached to the return, constituted an omission from gross income within the meaning of section 275 (c). The respondent has sustained his burden of proof and the deficiency determined with respect to the Williamsons for the year 1948 is not barred by the statute of limitations. Sec. 275 (c).
Decisions will be entered under Rule 50.
Footnotes
1. Includes 1 share held in the name of T. W. Conely, Jr.↩
2. Includes 1 share issued to M. Helene Williamson, Frank's wife.↩
3. Includes 1 share issued to James E. Fahey, petitioners' attorney.↩
1. The $ 100 discrepancy in the totals of this entry is unexplained.↩
1. SEC. 112 (g). Definition of Reorganization. -- As used in this section * * *
(1) The term "reorganization" means * * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred, * * *
SEC. 112 (h)↩. Definition of Control. -- As used in this section the term "control" means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.
2. Respondent's recomputation treated all 1,000 shares of Caloosa as having been received by Williamson. This item can be recomputed under Rule 50.↩