*36 Decision will be entered under Rule 50.
Petitioner was a stockholder of corporation A, which in 1937 adopted a plan to completely liquidate within the two-year period prescribed by section 115 (c), Revenue Act of 1936. In pursuance of the plan the corporation distributed part of its assets in kind to its stockholders in 1937. Petitioner returned his gain from such distribution as capital gain under section 117 (a), Revenue Act of 1936. Conditions changed between 1937 and 1939 and in 1939 a plan of reorganization was adopted whereby the remaining assets of corporation A were transferred to corporation B for a certain number of the latter's shares of stock and these shares were immediately distributed to the stockholders of corporation A in exchange for their stock in that corporation. These shares were immediately canceled and corporation A was dissolved. Held, the change in plan in 1939 resulting in corporation A being a party to a reorganization did not affect the fact that corporation A was completely liquidated within the two-year period provided by section 115 (c) and petitioner is taxable on the gain received from the 1937 distribution according to the percentages*37 prescribed by section 117 (a), Revenue Act of 1936.
*918 The Commissioner has determined a deficiency in petitioner's income tax of $ 3,211.33 for the year 1937. The deficiency results from two adjustments made by the Commissioner in the income tax return filed by petitioner for the taxable year. Only one of these adjustments is contested. It is adjustment (a) and was explained in the deficiency notice as follows:
(a) It is held that the amount of $ 9,071.56 received by you in 1937 from Alexander Yawkey Timber Company constituted a distribution in partial liquidation of the corporation. In accordance with the provisions of Section 115 (c), Revenue Act of 1936, 100 per centum of the gain is taken into account in computing your taxable net income.
| Total liquidating dividend received | $ 9,071.56 |
| Amount reported in return -- (40% of $ 9,071.56) | 3,628.62 |
| Additional income | $ 5,442.94 |
Petitioner by an appropriate assignment of error alleges that the distribution in question was one of a series of distributions which was*38 made in accordance with a plan to completely liquidate the Alexander-Yawkey Timber Co. within a period of two years and the gain therefrom was taxable as capital gain under the provisions of sections 115 (c) and 117 (a) of the Revenue Act of 1936 and was not taxable as a partial liquidation with 100 percent of the gain taxed as the Commissioner has determined.
FINDINGS OF FACT.
The petitioner resides at Wausau, Wisconsin. He filed his income tax return for the period here involved with the collector for the district of Wisconsin at Milwaukee, Wisconsin.
The Alexander-Yawkey Timber Co. (hereinafter called the Timber Co.) was incorporated on June 20, 1928, under the laws of Delaware, to engage in the business of "purchase and sale of timber lands and *919 allied business." It was the owner of large tracts of timber in Crook, Jefferson, Lane, and Coos Counties, Oregon.
In 1937 the company's land in Lane and Coos Counties was considered inaccessible and it did not appear likely that the timber thereon would be cut or that a market for said land would be available for many years. Its timber in Crook and Jefferson Counties, however, was accessible and could be economically cut and*39 marketed. Informal arrangements had been made with experienced operators to undertake such operation.
During the year 1937 it was decided by the Timber Co. to distribute the land in Crook and Jefferson Counties in kind to its stockholders in proportion to their respective interests. At a special stockholders' meeting of the Timber Co. held on the 5th day of August 1937 the following resolution was adopted:
Resolved, That the proper officers of the Company be, and they are hereby authorized and directed to convey to the stockholders of record on August 5, 1937 the timberlands owned by the Company and located in Crook and Jefferson Counties in the State of Oregon, as a partial liquidation of the Company; that such distribution is one of a series of distributions which will eventually result in complete cancellation or redemption of all of the outstanding stock; that the manner and form of effecting these conveyances be such as may be approved by such officers.
Resolved, That the Officers of the Company be, and they hereby are fully authorized, empowered and directed to take such action as may be necessary to carry out the Plan of Liquidation within two years, and to in all respects*40 comply with the requirements of the provisions of the United States Revenue Act in effect so as to complete the liquidation of the Company within the required two year statutory period; and to likewise comply with any provisions of the Wisconsin Income Tax Law relative to completing the liquidation of the Company within the required two year statutory period.
Resolved, That the officers of the Company be, and they are hereby authorized to take such action as may be necessary or proper to render effective any action authorized at this meeting.
The Timber Co. conveyed the timberland in Crook and Jefferson Counties to its stockholders on October 8, 1937.
On July 26, 1929, petitioner purchased 944 shares of the capital stock of the Timber Co. at a cost of $ 63,817.76, which stock was held by him continuously from that date to December 15, 1939. The fair market value of the distribution above mentioned received on October 8, 1937, by petitioner was $ 72,889.32.
The Alexander-Yawkey Lumber Co. (hereinafter referred to as the Lumber Co.) was incorporated on September 1, 1937, under the laws of Delaware, and thereafter engaged in the lumbering business. On November 1, 1937, the petitioner*41 and other distributees of the Timber Co. transferred to the Lumber Co. the land in Crook and Jefferson Counties received on October 8, 1937, in exchange for capital stock of that company. By reason of developments unanticipated in *920 1937, the remaining assets of the Timber Co., consisting principally of the above mentioned timberlands in Lane and Coos Counties, became marketable before the end of 1939. Some sales were consummated and a substantial part of the assets was converted into land and timber contracts, deferred accounts, and other liquid assets. These assets when so converted required considerable administration and attention, unlike the dormant timber and timberland which the Timber Co. had originally contemplated distributing to its stockholders. The above mentioned sales indicated a probability that the remaining timber would become marketable in the near future, either in place or by cutting. For the foregoing reasons, among others, it was considered desirable by the stockholders of the Timber Co. that the remaining assets of the Timber Co. as above described should be transferred to the Lumber Co. in exchange for shares of its common stock, these shares *42 to be distributed to the stockholders of the Timber Co., instead of such assets being transferred to stockholders of the Timber Co. as had been contemplated when the first distribution to stockholders was made October 8, 1937.
To effect this change a plan of reorganization was adopted at a special meeting of the stockholders of the Timber Co. held October 30, 1939. This plan was as follows:
Plan of Reorganization of Alexander-Yawkey Timber Company and Alexander-Yawkey Lumber Company
1. That all of the remaining assets of Alexander-Yawkey Timber Company be conveyed, transferred and assigned to Alexander-Yawkey Lumber Company, in exchange for thirty-five thousand shares of the Ten Dollar ($ 10.00) par Value Voting Capital Stock of Alexander-Yawkey Lumber Company.
2. That thereupon the thirty-five thousand shares of Alexander-Yawkey Lumber Company so received by Alexander-Yawkey Timber Company will be by it exchanged for the 24,640 shares of Alexander-Yawkey Timber Company stock presently outstanding, on a proportionate basis in accordance with the respective interests of the stockholders of Alexander-Yawkey Timber Company.
3. That the exchange by Alexander-Yawkey Timber Company of the*43 35,000 shares of Alexander-Yawkey Lumber Company for such 24,640 shares of its outstanding stock will result in the total liquidation of Alexander-Yawkey Timber Company * * *.
A portion of the minutes of a special meeting of the board of directors of the Timber Co. held on October 30, 1939, reads as follows:
The President outlined to the Directors the negotiations that had been conducted with the officers of Alexander-Yawkey Lumber Company relative to the remaining assets of the Company, and submitted to the Directors the Plan of Reorganization that had been agreed upon. He advised the Directors that the adoption of the Plan of Reorganization as to the remaining assets was consistent with but not contemplated in the original plan of liquidation approved *921 by the stockholders at the meeting held August 5, 1937. He explained that the reorganization was made necessary by reason of the changed status of the remaining assets which instead of consisting solely of timberlands as was contemplated in 1937, were by virtue of unexpected sales consummated, converted in substantial part, into sales contracts, accounts, and liquid assets. He advised further that the Plan of Reorganization*44 had been approved by the Directors and Stockholders of Alexander-Yawkey Lumber Company, and that in accordance therewith, there had been received the following proposal from that Company: * * *. [Not necessary to be set out here.]
The plan of reorganization which had been agreed upon between the two corporations was carried out. At some time during 1939, after the adoption of the plan of reorganization on October 30, 1939, the remaining assets of the Timber Co. were transferred to the Lumber Co. in exchange for 35,000 shares of the stock of that company. These 35,000 shares of stock were thereupon at some time before the close of the year 1939 distributed to the stockholders of the Timber Co. on a pro rata basis in exchange for their stock in the Timber Co. The Timber Co. was thereafter dissolved, the certificate of dissolution being filed in the office of the Secretary of State of the State of Delaware on December 15, 1939.
Any part of the stipulation of facts not incorporated in these findings of fact is incorporated herein by reference.
OPINION.
There is no controversy in this proceeding as to the amount of gain which petitioner had as a result of a distribution of timberlands*45 which he received October 8, 1937, from the Timber Co., being his pro rata part of the distribution on shares of stock which he owned in the Timber Co. The controversy arises as to how much of such gain is to be taken into account in determining petitioner's income tax for the year 1937. Petitioner in his income tax return reported 40 percent of his gain from the distribution as capital gain under the provisions of sections 115 (c) and 117 (a) of the Revenue Act of 1936. The Commissioner determined that the distribution to petitioner in 1937 constituted a distribution in partial liquidation of the Timber Co. and that in accordance with the provisions of section 115 (c), Revenue Act of 1936, 100 percent of petitioner's gain was taxable. Sections 115 (c) and 117 (a) of the Revenue Act of 1936, are printed in the margin. 1
*46 *922 The Commissioner does not contend that, when the Timber Co. on August 5, 1937, adopted a plan for its complete liquidation within the two-year period prescribed by section 115 (c), Revenue Act of 1936, the plan was not bona fide. Nor does he contend that the distribution by the Timber Co. in 1937 to its stockholders of its timberlands located in Crook and Jefferson Counties, Oregon, was not fully intended by the Timber Co. to be one of a series of distributions looking to the complete liquidation of the Timber Co. within the two-year statutory period. What respondent does contend is that certain events occurred after the 1937 distribution which made the Timber Co.'s lands in Coos and Lane Counties, Oregon, more accessible to logging and that, owing to these changed conditions, the Timber Co. sold some of these lands and determined to not distribute the land contracts and cash received and the remaining part of the timber to its stockholders in kind but to enter into a plan of reorganization with the Lumber Co. whereby all these remaining assets should be transferred to the Lumber Co. in consideration of 35,000 shares of its common stock, these shares to be distributed *47 to the stockholders of the Timber Co. and the latter company to be dissolved. Respondent contends that this change in plan, which took place in 1939 and was carried out, resulted in no complete liquidation of the Timber Co. under the provisions of section 115 (c), Revenue Act of 1936, and, therefore, the distribution on October 8, 1937, was a distribution in partial liquidation of the Timber Co. rather than one of a series of distributions which resulted in its complete liquidation.
Petitioner freely concedes that there was a change in plan in 1939 but contends that it did not result in the abandonment of the plan formed in 1937 to completely liquidate and dissolve the Timber Co. Petitioner contends that the transfer of the remaining assets of the Timber Co. to the Lumber Co. for 35,000 of the Lumber Co.'s shares and the distribution of these shares to the stockholders of the Timber *923 Co. in exchange for the Timber Co.'s 24,640 outstanding shares and the dissolution of the Timber Co. resulted in the complete liquidation of the Timber Co. within the two-year statutory period just as much as if the original plan had been pursued of distributing in kind the lands in Lane and*48 Coos Counties to the stockholders of the Timber Co. We think petitioner must be sustained in this contention.
Whether this exchange in 1939 by the stockholders of the Timber Co. of their 24,640 shares of stock for 35,000 shares of stock of the Lumber Co. was a nontaxable exchange made in a statutory reorganization we do not have before us for decision. The year 1939 is not before us. The facts in the record do not disclose what the Commissioner has done with respect to the taxability of the 1939 transactions. But, assuming that he has determined these latter transactions to have taken place in a nontaxable reorganization, we do not think that such a determination affects the situation as to the 1937 distribution which is before us. That distribution concededly was made in pursuance of a bona fide plan to completely liquidate the Timber Co. within the two-year period provided by the Revenue Act of 1936. There is no contention that this distribution was a part of any plan of reorganization. That complete liquidation of the Timber Co. did actually take place within the two-year statutory period, albeit the latter part of it may have been in pursuance of a plan of statutory reorganization, *49 seems clear. That section 115 (c) contemplates that the complete liquidation of one of the corporations which are parties to a reorganization may occur also seems clear by the language of section 115 (c). The language of that section is in part:
* * * Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. * * * [Italics ours.]
Therefore, even if it be assumed that the transfer by the Timber Co. to the Lumber Co. in 1939 of all its remaining assets in exchange for 35,000 shares of the Lumber Co.'s stock and the distribution of these shares ratably to the holders of the Timber Co.'s stock and the surrender of their shares followed by the dissolution of the Timber Co. was a nontaxable transaction under sections 112 (b) (3) and 112 (g) of the Internal Revenue Code, it simply means that in accordance with section*50 115 (c) the gain to the stockholders of the Timber Co. resulting from the complete liquidation of their stock in the Timber Co. is to be computed under section 111, but is to be recognized only to the extent provided by section 112. It would not mean that the liquidation of the Timber Co. is not complete. For a discussion of the *924 meaning of the liquidation of a corporation see Fred T. Wood, 27 B. T. A. 162; Rollestone Corporation, 38 B. T. A. 1093. Cf. W. F. Kennemer, 35 B. T. A. 415; affd., 96 Fed. (2d) 177.
If after the Timber Co. adopted the resolution August 5, 1937, to completely liquidate and made the distribution here in question on October 8, 1937, as one of a series of distributions which were to result in its complete liquidation, its stockholders had determined to not liquidate the corporation but to continue on in business as an active, going concern, then the Commissioner would doubtless be correct in refusing to treat the 1937 distribution as one of a series of distributions made in pursuance of a plan to completely liquidate the corporation*51 within the statutory period of two years, and would doubtless be correct in taxing petitioner on 100 percent of the gain resulting from the 1937 distribution.
But, as we have endeavored to point out, we have no such situation here. In 1939, as a result of the reorganization which took place between the Timber Co. and the Lumber Co., the Timber Co. disposed of its remaining assets, liquidated, and dissolved. This complete liquidation took place within the time specified in the plan, namely, within the statutory period which is "not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan." The first of the series of distributions under the plan was made October 8, 1937. The last was made when the stockholders of the Timber Co., including petitioner, received their pro rata part of the 35,000 shares of the Lumber Co. and surrendered their shares of stock in the Timber Co. for cancellation and the Timber Co. was dissolved. This was not later than December 15, 1939, and was not in excess of two years from the close of the taxable year 1937, which meets the test of section 115 (c). On this issue the Commissioner*52 is reversed.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
* * * *
(c) Distributions in Liquidation. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. For the purpose of the preceding sentence, "complete liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits.
SEC. 117. CAPITAL GAINS AND LOSSES.
(a) General Rule. -- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income:
* * * *
40 percentum if the capital assets has been held for more than 5 years but not more than 10 years;
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