*119 Decision will be entered under Rule 50.
Petitioner, in the taxable year 1940, was the owner of about one-fifth, or 10,000 shares, of the common capital stock of Pacific-Atlantic Steamship Co. In June 1940 the large stockholders of that company, including petitioner, met to consider an offer to purchase its remaining 4 ships at $ 50 per deadweight ton. Dant, a stockholder, did not want Pacific-Atlantic to go out of the shipping business. He assured the other stockholders they would not suffer loss if the ships were not sold, but did not say how this assurance was to be carried out. On October 21, 1940, petitioner declared a dividend in kind of its Pacific-Atlantic shares to American-Hawaiian, its sole stockholder, which company reported the market value of the shares for income tax purposes. On October 31, 1940, Dant's attorney suggested the sale of the 4 remaining ships to one of the companies Dant controlled, at $ 35 per deadweight ton. The stockholders rejected this proposition. On November 11, 1940, Dant advanced a similar proposition, which was again rejected. Later that day Dant offered to purchase the shares of Pacific-Atlantic stock, which offer was accepted and*120 the shares were transferred to States Steamship Co., which Dant controlled. Held, the appreciated value of the Pacific-Atlantic shares was not taxable to petitioner on the theory that it had "in substance" made the sale.
*248 This proceeding involves income tax, declared value excess profits tax, and excess profits tax liabilities for the year 1940, as follows:
| Income tax | $ 120,582.34 |
| Declared value excess profits tax | 61,778.29 |
| Excess profits tax | 812.02 |
The sole issue is whether petitioner, having distributed as a dividend in kind shares of another corporation to its sole stockholder, is taxable on the gain realized from the sale of such shares by the latter to a third party. The facts stipulated are so found. Other facts contained in our findings are found from the evidence.
FINDINGS OF FACT.
Petitioner is a corporation, organized under New York laws. For the calendar year 1940 it filed its income and excess profits tax returns with the collector of internal revenue for the second district of New York. Petitioner*121 was organized on December 27, 1935, under the name of Brooklyn Dock & Storage, Inc., for the purpose, among others, of engaging in shipping, terminal, dock, and warehouse operations. At all times it was a wholly owned subsidiary of American-Hawaiian Steamship Co. (hereinafter called American-Hawaiian), a New Jersey corporation. During 1940, and for many years prior thereto, American-Hawaiian was engaged in the intercoastal shipping trade, operating between 35 and 40 ships between ports on the Atlantic and Pacific coasts. In 1935 it acquired for cash all of petitioner's original authorized capital stock of $ 20,000. On December 10, 1937, petitioner's corporate name was changed to Transport, Trading & Terminal Corporation and its authorized capital was increased to $ 250,000, represented by 2,500 shares, each of a par value of $ 100. Subsequently petitioner issued 800 of these additional shares at par to American-Hawaiian, and American-Hawaiian in addition then contributed $ 70,000 to petitioner's paid-in surplus.
The principal officers and directors of petitioner and American-Hawaiian during the taxable year 1940 were as follows: *249
| Name | American-Hawaiian | Petitioner |
| Roger D. Lapham | Chairman of Board | Director. |
| Director. | ||
| Edward P. Farley | Chairman executive | |
| committee | Director. | |
| Director. | ||
| John Cushing | President | Director. |
| Director. | ||
| Walter S. McPherson | Vice president | President. |
| Director. | Director. | |
| Donald S. Morrison | Vice president in charge of | Vice president in charge of |
| financial matters. | financial matters. | |
| Director. | ||
| C. M. Fedderman | Vice president. | |
| Director. | ||
| Mr. Anderson | Vice president. | |
| W. J. Mahoney | Director. |
*122 Petitioner and American-Hawaiian during 1940 occupied the same offices at 90 Broad Street, New York, New York, with the exception of one or two rooms which were used exclusively by petitioner's employees. Petitioner paid rent for the offices it used. All of petitioner's officers were on the pay roll of American-Hawaiian and petitioner paid them no salaries, except it reimbursed American-Hawaiian for the salary of Anderson.
In 1929 American-Hawaiian purchased 10,000 shares of common stock of Pacific-Atlantic Steamship Co. (hereinafter called Pacific-Atlantic) at a cost of $ 500,000, which represented about 20 per cent of the outstanding shares of that company. On December 24, 1937, American-Hawaiian sold and petitioner purchased at public auction these 10,000 shares of the common stock of Pacific-Atlantic at a price of $ 20,000. The auctioneer was instructed not to accept a bid less than two dollars per share and petitioner was the only bidder. American-Hawaiian in its income tax returns for the year 1937 claimed a loss of $ 480,000 on the sale of such stock, which loss was used to offset substantial capital gains for that year.
Petitioner's income tax return for the taxable year*123 1937, as adjusted by respondent, disclosed a net income of $ 26,637.14, which did not reflect receipt of nontaxable income of $ 750. Petitioner's 1937 Federal income taxes total $ 4,666.98.
Pacific-Atlantic was organized in 1929, and in the early part of 1940 it was engaged in intercoastal shipping trade between ports on the Pacific and Atlantic coasts. At the beginning of 1940 it had outstanding 9,600 shares of preferred stock of the par value of $ 50, and approximately 52,000 shares of no par value common stock, which was held by 69 stockholders, many of whom held only a small number of shares. At that time it had outstanding bonds totaling $ 2,000,000. The large stockholders of Pacific-Atlantic included States Steamship Co. and Dant & Russell, which together owned about 20,000 shares of the common stock; petitioner owned 10,000 shares; Williams-Dimond & Co. owned 6,000 shares; and R. A. Nichol & Co. owned 4,000 shares. Cecil Stewart was also a substantial stockholder.
*250 In 1940 the officers of Pacific-Atlantic included S. P. Fleming, president; R. A. Nichol, vice president; and Ernest McCormick, vice president. Its directors included the three foregoing officers as*124 well as John E. Cushing and Charles E. Dant. Nichol was president of R. A. Nichol & Co.; McCormick was an officer of Williams-Dimond & Co., agent of Pacific-Atlantic in San Francisco; Cushing was president and director of American-Hawaiian and director of petitioner; and Dant was president of and controlled States Steamship Co. and also controlled Dant & Russell, a corporation.
The operations of Pacific-Atlantic had been unprofitable until 1940 and no dividends had been paid upon its preferred or common stock since its organization in 1929. At the beginning of 1940 it owned 13 ships. Petitioner and most of the other large stockholders were desirous of getting out of the company. Early in 1940 there was a good market for ships and the Pacific-Atlantic directors decided it was a propitious time to endeavor to dispose of the company's ships, which were old and in need of reconditioning. On March 13, 1940, the larger stockholders of Pacific-Atlantic decided it was for the best interests of all the stockholders that the ships and assets of the company be sold, and the stockholders were requested to consent to the sale of the ships. Prior to March 13, 1940, 2 ships had been sold and*125 contracts had been entered into for the sale of 5 others. The stockholders were advised that if the sales were consummated the company would be able to redeem all of the outstanding bonds and retire the preferred stock, which would leave the company in a good financial position. On April 17, 1940, pursuant to authority from the stockholders, the Pacific-Atlantic directors authorized Fleming and Dant to negotiate and enter into contracts for the sale of any or all of the company's ships. By June 1, 1940, Pacific-Atlantic had sold 9 ships and 4 remained unsold. The company used the proceeds from the sale of the 9 vessels to retire its $ 2,000,000 bond issue and all of its preferred shares held by others than the States Steamship Co.
There was then pending an offer from the British Ministry of Shipping for the purchase of the remaining four ships at $ 50 per deadweight ton. On June 10, 1940, Dant went to San Francisco and called an informal meeting of some of the Pacific-Atlantic stockholders to discuss the offer from the British Ministry of Shipping. Present at the meeting were Dant and Harvey Black, his attorney, Ernest McCormick and Richard McLaren, of Williams-Dimond Co., and*126 Cushing, Lapham, and Mahoney, of petitioner. Some of the stockholders of Pacific-Atlantic felt that the offer of the British Ministry of Shipping should be accepted. Dant was averse to accepting the offer. He felt that Pacific-Atlantic's name and trade had some value and he did not want the company to go out of the shipping business. He stated to those present that if they would not insist on the sale of the ships he *251 would guarantee them "against any loss if the ships were not sold either by buying them or working out some other agreement." Dant did not say how he would carry out his assurance. At this meeting the parties present reached a basis for the valuation of the common stock of Pacific-Atlantic as follows:
1. The four steamers "San Clemente", "San Rafael", "Jefferson Myers" and "Peter Kerr" unsold on that date, were to be valued at $ 50.00 per deadweight ton; treated as though they had been sold at that price, and the apparent profit on that basis taken into account subject to Federal and State taxes.
2. The profits on all voyages in progress at June 10, 1940, were to be taken into account. The results of voyages begun on or after June 10, 1940, were not to*127 be considered in the valuation.
At a meeting of the directors of Pacific-Atlantic held in Portland, Oregon, on June 26, 1940, the authority of Fleming and Dant to sell the four remaining ships was rescinded. Morrison attended the meeting by invitation.
On June 18, 1940, petitioner entered into a lease with the United States Maritime Commission covering the Army Base Terminal, at Norfolk, Virginia, for a period of 10 years beginning July 1, 1940. The lease provided for payment of 31 per cent of the gross terminal revenue as an annual rental, but in no event was the rental to be less than $ 125,000 per annum. On June 27, 1940, McPherson, president of petitioner, wrote to Farley, chairman of the executive committee of American-Hawaiian, stating that operations under the lease of June 18, 1940, would call for a substantial increase in petitioner's working capital and, furthermore, that a long-standing indebtedness of $ 50,000 due from petitioner to American-Hawaiian should be capitalized. He referred to the necessity of additional capital if the petitioner was to expand its activities through purchase of ships or securities of shipping companies and stated that petitioner would need*128 additional working funds of about $ 200,000 to finance the Norfolk terminal operation and pay off the debt due American-Hawaiian, and that an additional $ 350,000 would enable petitioner to take advantage of favorable opportunities to acquire vessels or securities of shipping companies. He suggested that petitioner issue to American-Hawaiian 9,000 shares of its $ 100 par value stock, 5,370 shares to be paid for by American-Hawaiian in cash, and the balance to be exchanged for 9,020 shares of preferred stock and 45,650 shares of the common stock of Eastern Steamship Lines, Inc., which were owned by American-Hawaiian.
On July 15, 1940, petitioner's directors voted the issuance of such additional shares to American-Hawaiian. On July 17, 1940, petitioner's authorized capital was increased to $ 1,000,000. On the same date petitioner issued 8,760 shares of its capital stock to American-Hawaiian in exchange for 9,020 shares of preferred stock of Eastern Steamship Lines, Inc., (accepted at $ 20 per share) 39,650 shares of *252 common stock of Eastern Steamship Lines, Inc., (accepted at $ 4 per share) and $ 537,000 in cash. On October 11, 1940, petitioner issued 240 shares of its *129 capital stock to American-Hawaiian in exchange for 6,000 shares of the common stock of Eastern Steamship Lines, Inc., and, following the increase in its capital, petitioner submitted bids for some of the Maritime Commission's ships, but was not a successful bidder. On October 1, 1940, Fleming and Dant instructed Peat, Marwick, Mitchell & Co., accountants, to compute the book value of the Pacific-Atlantic common stock as of June 10, 1940, treating the 4 unsold ships as having been sold on that date at $ 50 per deadweight ton and taking into account the profits thereon, together with the profits on all voyages in progress at June 10, 1940. The accountants' report was transmitted to the directors of Pacific-Atlantic by letter dated October 28, 1940. In that report it is stated that September 30, 1940, was selected as the proper date upon which to compute the book value of the shares outstanding on June 10, 1940, because by September 30, 1940, all voyages in progress on June 10, 1940, had been completed and the profits thereon had been added to the surplus account. The audit on such basis shows a book value of the common stock of Pacific-Atlantic as $ 63.11 per share. A balance sheet*130 of Pacific-Atlantic as of September 30, 1940, attached to the audit, shows total assets of $ 4,322,260.97, of which $ 3,900,463.37 consists of cash in banks and on hand. Liabilities, exclusive of capital stock, are shown to be $ 1,057,525.13, of which sum the amount of $ 931,413.31 is a reserve for Federal income taxes.
On October 21, 1940, petitioner's directors adopted the following resolution:
Resolved, That there is hereby declared on the capital stock of this Corporation a dividend of 10,000 shares of the common stock of Pacific-Atlantic Steamship Co. now owned by this Corporation, and that the proper officers of this Corporation are authorized and directed to take such action as they may deem appropriate promptly to effect the transfer and delivery of such 10,000 shares of stock to American-Hawaiian Steamship Company as holder of all the issued and outstanding capital stock of this Corporation.
On October 25, 1940, the certificate issued by Pacific-Atlantic for 10,000 shares of its common stock was endorsed by petitioner's treasurer to American-Hawaiian and delivered to Morrison. On October 31, 1940, an entry was made on petitioner's books charging dividends-paid account and*131 crediting securities account in the amount of $ 20,000. On December 30, 1940, petitioner paid a cash dividend of $ 50,000 to American-Hawaiian. At the close of the taxable year 1940 an entry was made on petitioner's books charging surplus and crediting dividends paid account in the amount of $ 70,000, representing the two above described dividends. Petitioner's policy had been to pay out in dividends a very large proportion of its earnings of each year. For *253 1940 petitioner reported net taxable income of $ 153,812.59. It reported and paid Federal income and excess profits taxes on such income totaling $ 50,255.30.
On October 31, 1940, a meeting was held in New York City, which was attended by Morrison, vice president of American-Hawaiian; Harvey Black, attorney for Dant and his companies; and R. A. Nichol and Cecil Stewart. After discussion of Dant's assurance to the Pacific-Atlantic stockholders on June 10, 1940, Black inquired whether the group present would agree to the sale of the remaining ships of Pacific-Atlantic to Dant or to one of his companies at $ 35 per ton. Morrison objected to a sale of the ships to anyone at less than their market value. Black then*132 suggested that Morrison arrange a meeting with Dant at a later date on the west coast. A meeting was held at San Francisco on November 11, 1940, which was attended by Dant, Black, McCormick, McLaren, Nichol, Lapham, Cushing, and Morrison. Dant and Black brought up the previous proposal of the sale of the Pacific-Atlantic ships to Dant at $ 35 per ton. The rest of the stockholders would not agree. Various other ways of reaching a solution were discussed, but the meeting broke up without agreement. After lunch the meeting was resumed and finally Dant stated that he or one of his companies would offer $ 60 per share for the Pacific-Atlantic stock, provided the stockholders would adjust the price to reflect possible additional tax liabilities that might attach to Pacific-Atlantic in the near future, but with no escrow or bond. A final agreement was drafted, which culminated in the formal agreement executed by American-Hawaiian and the States Steamship Co. on November 22, 1940.
On November 19, 1940, the directors of States Steamship Co. adopted a resolution to purchase any or all of the common stock of Pacific-Atlantic at a price not exceeding $ 60 per share. On November 25, 1940, *133 the certificate for the Pacific-Atlantic shares was delivered to States Steamship Co. in exchange for its check in the amount of $ 600,000, payable to American-Hawaiian. The sale price for these shares, as later adjusted pursuant to the agreement, was $ 582,285. The directors of American-Hawaiian on November 27, 1940, adopted a resolution approving the sale. Neither petitioner nor American-Hawaiian has at any time controlled States Steamship Co. through stock ownership, or otherwise.
American-Hawaiian, in its income tax return for 1940, reported dividends in the amount of $ 582,285 with respect to the receipt of the 10,000 shares of Pacific-Atlantic stock. It treated that sum as its cost basis and, consequently, reported no gain in its return for that year on account of the sale. The respondent included in petitioner's income for the taxable year 1940 the sum of $ 562,285, which was the difference between the net proceeds of the sale of the Pacific-Atlantic *254 stock and petitioner's cost basis of $ 20,000. The petitioner paid income taxes, declared value excess profits taxes, and excess profits taxes in the amounts and on the dates stipulated.
OPINION.
The issue is whether, *134 under the facts disclosed by this record, the gain realized upon the sale of 10,000 shares of the capital stock of Pacific-Atlantic by American-Hawaiian, sole stockholder of petitioner, can be attributed to petitioner, which had previously distributed such shares in the taxable year 1940 as a dividend in kind.
The respondent contends that the gain is taxable to petitioner since: (a) The transfer was without any business purpose and solely for tax saving purposes; (b) the sale was, in substance, a sale by petitioner; and (c) the appreciation in value of the stock is taxable to petitioner even though there was a valid distribution in kind. The respondent argues that, where a controlled corporation distributes property to its parent, without any business purpose and solely for tax-saving purposes, such distribution should be disregarded and the gain resulting from the sale by the parent treated as taxable to the controlled corporation. The respondent does not contend that the corporate entity should be disregarded. In support of this position he relies upon ; ;*135 ; ; certiorari denied, ; ; and ; affd., . Cf. . The business purpose test has been often applied in cases involving the reorganization sections of the revenue acts; in certain other instances we have not regarded the test as of controlling importance. ; ; ; . We do not think the rule should be applied in the instant case. Generally, individuals organize business corporations with the expectation that dividend*136 payments will eventually result from their operations. It is the province of the corporate directors to determine the time and the character of the dividend payment. It is unimportant here whether the stockholder is an individual or a corporate entity. If the declaration of a dividend is genuine and the transfer is unconditional and final, it is effective as such. Only where the transaction is unreal or a sham may it be disregarded for tax purposes. The respondent makes no such claim here.
The contention of the respondent that the sale was "in substance" *255 a sale by petitioner is based on the rationale of ;. This argument is predicated on the following facts. Petitioner, as early as June 1940, was aware that the principal stockholders of Pacific-Atlantic were desirous of disposing of their interests; it had already sold nine of its ships; a meeting of the large stockholders was called on June 10, 1940, to discuss an offer of the British Ministry of Shipping to purchase the four remaining ships at $ 50 *137 per deadweight ton; that Dant, who was not in favor of selling the ships, assured the other stockholders "against any loss if the ships were not sold either by buying them or working out some other arrangement"; and the parties then reached a basis for the valuation of the common stock of Pacific-Atlantic. The respondent says that petitioner, in order to minimize its state and Federal tax liabilities, thereupon determined to declare a dividend in kind of such shares, so that the gain would be realized by American-Hawaiian, its sole stockholder. The weakness of respondent's argument lies in the fact that at this, June 10, 1940, meeting no plan was agreed upon respecting Pacific-Atlantic. Neither petitioner nor any other stockholder agreed to sell their shares in Pacific-Atlantic. Dant made no definite commitment. In what form his assurance against loss by the stockholders if the offer of the British Ministry of Shipping was not accepted would be carried out was not then disclosed. Dant testified that at that time he was not in a position to purchase the shares of Pacific-Atlantic either individually or through the companies he controlled. Petitioner and the other stockholders*138 of Pacific-Atlantic were free to accept or reject any plan that Dant might submit.
Petitioner declared its dividend in kind on October 21, 1940. At a subsequent meeting held in New York City on October 31, 1940, Black, attorney for Dant, suggested the sale to Dant of the four remaining ships of Pacific-Atlantic at $ 35 per deadweight ton. This proposition was rejected. Black then suggested a further meeting with Dant on the west coast. Such meeting was held in San Francisco on November 11, 1940. A sale of the four ships to Dant at $ 35 per ton was again advanced and rejected. Later, on the same day, Dant offered $ 60 per share for the Pacific-Atlantic stock, provided the stockholders would adjust the price to reflect possible additional tax liabilities that might attach to Pacific-Atlantic in the near future. This offer was accepted and finally resulted in the purchase of all the shares of Pacific-Atlantic stock. This was the first intimation to American-Hawaiian that Dant would be willing to buy the stock instead of the ships. When this offer was made, petitioner was not the owner of the shares. The purchase was made by States Steamship Co., which was neither directly nor*139 indirectly controlled by either petitioner or its parent, American-Hawaiian. There is not *256 present here a situation where negotiations for the sale had been pushed to an advanced stage or had even been started by the corporation prior to the distribution or dividend so as to bring the instant case within the rationale of ;;. In the circumstances the conceded fact that when the dividend in kind was declared petitioner had knowledge that if Pacific-Atlantic were liquidated or its shares purchased it would have a large taxable gain is of no legal significance. ;. Likewise, we think it unimportant that petitioner in June 1940 chose to increase its capitalization by the sale of further shares to its parent, American-Hawaiian, rather than attempting to raise additional funds by the sale of*140 the 10,000 shares of Pacific-Atlantic. Such a choice was properly a matter relating to internal management of the corporation.
The respondent's final contention, that the appreciation in value of the Pacific-Atlantic shares is taxable to petitioner, also lacks merit. Respondent concedes that the case of , holds otherwise. He suggests, however, that the Supreme Court has recently broadened its concept of the realization of income. ; . The General Utilities case has been repeatedly followed. ; ; V. . We do so here. Petitioner having made certain payments on account of the asserted deficiency,
Decision will be entered under Rule 50.