*851 1. Corporation A, a domestic holding corporation, and others, owned stock in two California public utility corporations. Certain bankers became interested in the purchase of this stock and negotiations were entered into between them and representatives of the stockholders. After a proposed agreement providing for the payment of the price asked by the stockholders for their stock had been reduced to writing in New York City, corporation A caused corporation B to be organized under the laws of Canada. Corporation A then wrote to corporation B, offering to transfer its public utility stocks to the latter corporation in exchange for all of its capital stock. This offer was approved and accepted by the directors and officers of corporation B, all of whom were either members or employees of a Canadian law firm retained by corporation A to bring about the organization of corporation B. When the stocks were transferred into the name of corporation B, its directors elected the vice president of corporation A treasurer of corporation B, and vested in him the exclusive custody of the stocks, which remained in the United States until their delivery to the purchaser. All negotiations for*852 the sale of the stocks were carried on within the United States, and several proposed agreements were reduced to writing (but not signed) in New York City. All of the agreements were signed in Montreal, Canada. The Canadian directors and officers of corporation B, who approved and signed such agreements, with one exception, never saw them until they were brought to Canada. When the time arrived for the delivery of the stocks to a domestic corporation formed by the bankers to acquire them, the president of corporation A, who in the meantime had been designated a vice president of corporation B, took the stocks to Canada, signed the final agreement, delivered the stocks to the purchaser, received the consideration consisting of cash and bonds, and immediately transferred practically all of the cash to a bank in Los Angeles. The only persons authorized to draw checks or drafts against the funds of corporation B were the president and vice president of corporation A. Substantially all of the cash received on the sale was transferred to corporation A as a loan. The Canadian officers and directors then resigned, corporation B secured permission to transact business in California, moved*853 into the office of corporation A, the officers of corporation A became the officers of corporation B and three of the five directors of corporation A became the sole directors of corporation B. Held:
(a) Corporation B was a mere agency or instrumentality of corporation A, created by the latter to make it appear that the sale had been made in Canada by a foreign corporation, and its separate corporate identity should be disregarded.
(b) The real owner and vendor of the public utility stocks was corporation A.
2. Transfer of utility stocks by corporation A to the purchasing corporation in exchange for cash and bonds of the latter, held made pursuant to a plan of reorganization and under the provisions of sections 203(b)(2) and (d)(1) of the Revenue Act of 1926 the gain from the transaction is recognized, but only in an amount which does not exceed the cash received.
*647 Respondent determined deficiencies in the case of Kaspare Cohn, Inc., Docket No. 58428, in the amount of $707,404.40 for the calendar year 1927, and in the case of Kaspare Cohn Co. Limited (formerly Rayben Limited), Docket No. 53696, in the amount of $641,116.63 for the fiscal year ended October 31, 1928. These proceedings were consolidated for hearing and the petitioners seek a redetermination of the deficiencies. The questions presented for our determination are: (1) Whether the petitioners, or either of them, realized taxable income on the sale of stock of the Southern California Gas Co. and the Midway Gas Co., to the Southern California Gas Corporation; and (2) if so, whether the sale was a partially tax-free reorganization, the gain from which is recognizable in an amount not in excess of the cash received.
FINDINGS OF FACT.
The petitioner, Kaspare Cohn, Inc., hereinafter referred to as Cohn, Inc., is a corporation organized in 1909 under the laws of California, with its principal office in the Union Bank Building at Los Angeles, California. During the taxable year 1927, its capital stock, consisting of 1,000 shares, was owned and held as follows: *855
| Stockholder | Shares owned |
| Ben R. Meyer | 1 |
| Ray C. Meyer | 424 |
| Milton E. Getz | 1 |
| Estelle Getz | 423 |
| Louise Ray Getz | 1 |
| Hulda Cohn (estate) | 150 |
| Total | 1,000 |
Ray C. Meyer was the wife of Ben R. Meyer; Milton E. Getz was the brother-in-law of Ben R. Meyer. Estelle Getz was the wife of Milton E. Getz and a sister of Ray C. Meyer, the wife of Ben R. Meyer. Louise Ray Getz was the daughter of Milton E. and Estelle Getz; and Hulda Cohn, who died in January 1927, was the widow of *648 Kaspare Cohn, and the mother of Mrs. Ben R. Meyer, and of Mrs. Milton E. Getz.
Ben R. Meyer was president and Milton E. Getz was vice president of Cohn, Inc., in 1927. Meyer was also vice president and a director of the Southern California Gas Co. and a director of the Midway Gas Co., two large public utility corporations, serving Los Angeles, and other counties of southern California.
Early in the year 1927 some New York bankers became interested in acquiring a controlling interest in the stock of the Southern California Gas Co. and the Midway Gas Co. At that time a majority of the common stocks of the two gas companies was registered on their books as being held by Ben*856 R. Meyer, William G. Kerkhoff, and A. C. Balch, by members of their respective families, and by holding companies whose stock was owned by members of their respective families. In February 1927, Paul Plunkett, a broker of New York City, went to Los Angeles, where he met Balch, and casually met Meyer. Plunkett returned to New York in the latter part of March 1927 and held a series of conferences with Murray W. Dedge, vice president of the Chase Securities Corporation. Plunkett recommended that a syndicate be formed to purchase the common stock of the two gas companies.
In April 1927, Balch and Meyer went to New York where they, and other representatives of the stockholders of the two gas companies, participated in conferences with representatives of the Chase Securities Corporation, Pynchon & Co., and Hunter, Dulin & Co., in relation to a contemplated purchase and sale of the controlling interest in the stock of the two gas companies. At this time Meyer engaged the services of a New York law firm, which thereafter acted as counsel for the petitioners in connection with the sale of the utility stocks. Rollin Browne was a member of this firm.
As a result of the conferences*857 a proposed agreement was drafted on or prior to May 27, 1927, for the sale of the common stock of the Southern and Midway Companies on the basis of $550 per share of $100 par value, which was the price brought to the conferences by the representatives of the stockholders. The par value of the common stock of the Southern California Gas Co. was changed from $100 to $25 in the spring of 1927 with a corresponding increase in the number of shares outstanding. The parties, in making computations continued, however, as a matter of convenience to employ the old par value basis.
On May 27, 1927, a syndicate agreement was entered into between Chase Securities Corporation, Hunter, Dulin & Co., Pynchon & Co., the Shermar Corporation, and Stone & Webster, Inc. The agreement stated, among other things, that the three companies first *649 mentioned had theretofore been in negotiation under a preferential option with certain principal holders of the common stock of the Southern and Midway Companies and were about to sign a contract with these stockholders. A syndicate was formed for the purpose of acquiring all of the stock of a new corporation which was to acquire the common stock*858 of the Southern and Midway Companies, and also for the purpose of purchasing mortgage bonds of the Southern Co. and/or collateral trust bonds of the new corporation. The members of the syndicate authorized Chase Securities Corporation, Hunter, Dulin & Co., and Pynchon & Co. to enter into the contract with the stockholders in their own names on behalf of the syndicate. Chase Securities Corporation was designated syndicate manager. An unsigned copy of the proposed agreement drafted on or prior to May 27, 1927, was attached to the syndicate agreement.
At the time the proposed agreement was drafted, Cohn, Inc., was the owner of 7,800 shares of the common stock of the Southern Co. and 2,277 shares of the stock of the Midway Co., all of the shares having par value of $100 per share. Meyer received verbal authority from his wife, sister-in-law, and brother-in-law, three of the five directors of Cohn, Inc., and the owners of a majority of its stock, to act for that corporation in connection with the sale of the utility stocks.
On May 27, 1927, Rayben Limited was organized and incorporated under the laws of Canada, by direction of Ben R. Meyer as president of Cohn, Inc. Its authorized*859 capital stock, all of which had a par value of $100, consisted of 2,500 shares of common stock and 2,500 shares of 6 percent cumulative preferred. The incorporation was accomplished through LaFleur, Macfarlane, & Barclay, attorneys of Montreal, Canada. A. K. Hugessen was a member and J. B. Taylor was the office manager of this law firm. All of the original incorporators, officers and directors of Rayben Limited were members or employees of this Canadian law firm. They had no beneficial interest in the corporation. The law firm received a retainer for its services. The name of Rayben Limited was changed on February 17, 1930, to "Kaspare Cohn Company Limited."
In a letter dated Montreal, Canada, May 30, 1927, addressed to Rayben Limited, and signed by Ben R. Meyer, as president of Cohn, Inc., an offer was made to sell, assign and transfer to Rayben Limited 7,800 shares ( $100 par value) of common stock of the Southern California Gas Co. and 2,277 shares of stock of the Midway Gas Co. owned by Cohn, Inc., in exchange for all of the capital stock of Rayben Limited. On the same date, May 30, the board of directors of Rayben Limited held a meeting which was attended by Lawrence*860 Macfarlane, A. K. Hugessen, and W. F. Macklaier, all members of *650 the Canadian law firm, at which a resolution was adopted that the offer of Cohn, Inc., be accepted. The acceptance of the offer was then typed on the letter from Cohn, Inc., and signed by Lawrence Macfarlane and James B. Taylor, as president and secretary, respectively, of Rayben Limited.
The agreement drafted on or prior to May 27, 1927, was reduced to writing in New York City at that time, but was not signed by the parties. The names of the bankers were typed at the end of the agreement, but no names appeared under the word "shareholders." This agreement was later taken to Montreal, Canada, by an attorney representing the Chase Securities Corporation, Hunter, Dulin & Co., and Pynchon & Co., referred to as the bankers. On May 31, 1927, the board of directors of Rayben Limited, composed of Macfarlane, Hugessen, and Macklaier, held a meeting at Montreal at which they approved the agreement and inserted an unsigned copy thereof in the minutes of the meeting. On the same day the agreement was signed by Lawrence Macfarlane and James B. Taylor, as president and secretary, respectively, of Rayben Limited and*861 Meridian, Limited. In August of the same year, Kerckhoff, Limited, having contracted to acquire a large block of shares of Southern and Midway stock owned by a domestic corporation, signed the agreement as of May 31, 1927. This agreement will be referred to hereinafter as the agreement of May 31, 1927.
The agreement of May 31, 1927, provided among other things, that a new domestic corporation be organized for the purpose of acquiring substantially all of the common stock of the two gas companies, the stock of this new corporation to be purchased by the bankers; that the payment of $550 per share for the gas stock be made by the new corporation in cash to the extent of approximately 56 percent of the purchase price, the balance to be in collateral trust bonds of the new company; that the Southern Co., after securing the approval of the Railroad Commission of California, should issue $35,000,000 of 5 percent first mortgage baonds and use part of the proceeds from the sale of these bonds to acquire from the new corporation the stock of Midway Co. and the remainder for refunding and other corporate purposes; and that the bankers make an investigation of the gas companies' properties*862 and affairs upon the completion of which they should advise A. C. Balch and Ben R. Meyer, as representatives of the shareholders, whether or not they had determined to proceed with the purchase of the gas companies' stock.
Immediately after the signing of the syndicate agreement of May 27, 1927, Stone & Webster, Inc., took steps to begin an investigation of the properties of the gas companies at Los Angeles, California, in *651 behalf of the bankers' syndicate. Their first men left Boston on May 29, 1927. A preliminary report was made on or prior to July 6, 1927, and a final report was made on July 16, 1927. On July 6, 1927, Murray W. Dodge wired Meyer that he saw no reason why the deal should not be closed shortly after Labor Day if the railroad commission approved the refinancing plan.
On June 24, 1927, Balch and Meyer constituted themselves a deposit committee and the Union Bank & Trust Co. of Los Angeles, California, depositary to receive shares of stock of the gas companies from such minority shareholders as desired to become parties to the sale under the terms of the agreement of May 31, 1927. The terms of these deposit agreements were never changed.
The board*863 of directors of Cohn, Inc., held a meeting on August 2, 1927, in Los Angeles and adopted a resolution ratifying the offer made to Rayben Limited on May 30, 1927, by Ben R. Meyer as president of Cohn, Inc. Meyer on August 2 and 8, caused the certificates of stock of the Southern and Midway Companies mentioned in the offer of May 30 to be transferred into the name of Rayben Limited.
On August 8, 1927, the board of directors of Rayben Limited, held a meeting at Montreal. At this meeting, Hugessen and Macklaier, constituting a quorum of the board, elected Meyer vice president and a director of Rayben Limited. They also elected Milton E. Getz secretary and treasurer of Rayben, and vested in him the exclusive custody of and control over all of the securities of the corporation. At this same meeting they passed a resolution providing that the funds of the company be deposited with the Union Bank & Trust Co. of Los Angeles, which bank was authorized to pay out any funds deposited with it upon and according to checks or drafts of the company signed by Meyer or Getz. At this meeting also Rollin Browne, one of the New York attorneys employed by Meyer, was elected a director of Rayben*864 Limited. On the same date Meyer and Browne each received one share of the common stock of Rayben Limited.
Prior to August 5, 1927, a proposed supplemental agreement between the bankers and the stockholders was drafted in New York City. It was taken to Montreal on August 5 by an assistant secretary of the Chase Securities Corporation, the syndicate manager. on August 6, 1927, at Montreal, two members of the Canadian law firm, acting as the board of directors of Rayben Limited, approved the proposed supplemental agreement and incorporated an undated, unsigned mimeographed copy thereof in the minutes of the directors' meeting. On the same date the agreement was signed in Montreal by the assistant secretary of Chase Securities Corporation on behalf of the bankers' syndicate, and by A. K. Hugessen as vice president, and James B. Taylor, as secretary of Rayben Limited, and six other *652 Canadian corporations. Four of these Canadian corporations were not parties to the agreement of May 31. The supplemental agreement provided that the bankers should have until August 16, 1927, to notify the shareholders of their determination to proceed with the purchase of the gas stocks, *865 and that this notice should be mailed or delivered to them at Montreal, Canada, instead of to Balch and Meyer as originally provided. On August 16, 1927, the bankers gave formal notice that they had determined to proceed with the purchase of the gas stocks.
The agreement of May 31, 1927, had as one of its conditions the approval by the Railroad Commission of California of the refinancing plan agreed upon by the parties. Under date of September 13, 1927, the commission notified the Southern Co. that it would not permit that company to issue the amount of bonds requested in applications filed with it on July 1 and August 4, 1927. This action of the commission made it necessary for the parties (Balch and Meyer, representing the shareholders and Murray W. Dodge, the bankers' syndicate) to get together on a different basis for financing the purchase price of the gas stocks, if the transaction were to be consummated. Accordingly, further negotiations were had between September 13 and September 30, 1927, as the result of which it was agreed that the stockholders would accept an additional $5,000,000 of bonds, increasing the issue of the proposed new holding company from $20,000,000*866 as originally contemplated, to $25,000,000, and that $3,000,000 additional stock of the new holding corporation would be purchased by the bankers. The parties further agreed upon the terms of an amended application which was filed with the Railroad Commission of California on September 30, 1927. In this new application the Southern Co. requested permission to issue $8,646,000 principal amount of its first mortgage and refunding gold bonds and an additional 200,000 shares of its $25 par common stock, such stock to be sold at such prices as to aggregate not less than $50 per share for each share sold, and to use $12,795,200 of the proceeds of said bonds and common stock for the purchase of the properties of the Midway Co., the remainder of the proceeds to be used for corporate and other purposes. So far as material here, the commission on October 11, 1927, approved the amended application of September 30, 1927.
After the railroad commission on October 11, 1927, had authorized the Southern Co. to issue $8,646,000 face value of first mortgage bonds, the bankers addressed a letter dated New York, N.Y., October 17, 1927, to the Southern Co. offering to buy $5,704,000 of said bonds*867 at 95 percent of principal amount and accrued interest to date of delivery, subject to the condition that they should not be required to accept delivery of said bonds unless and until arrangements were *653 effected for the purchase, simultaneously at a like price either from the Midway Co. or its stockholders, of all or substantially all of the $2,942,000 of the bonds issuable to that company as part of the consideration for the purchase of its assets by the Southern Co. The offer of the bankers was accepted on the same date by A. C. Balch as vice president of the Southern Co.
On or about October 15, 1927, two new contracts were prepared and reduced to writing (but not signed) in New York City by attorneys representing the bankers' syndicate and the majority stockholders. One of these contracts provided for the cancellation of the agreement of May 31, 1927, and the supplemental agreement of August 6, 1927. The other contract provided (1) that the shareholders agreed to transfer, to a new corporation to be organized by the bankers, all of the stock of the Southern and Midway Companies owned or controlled by them and the stock of the minority stockholders deposited with*868 the Union Bank & Trust Co.; (2) that the bankers agreed to purchase the stock of the new corporation and pay therefor cash sufficient to pay that part of the purchase price of the stock of the Southern and Midway Companies payable in cash; (3) that the bankers would cause the new corporation to issue its collateral trust bonds "5% series, due 1937" under a collateral trust indenture in an amount sufficient to pay that part of the purchase price of the utility stock payable in bonds; (4) that the bankers would cause the new corporation to purchase and pay for the common stock of the Southern and Midway Companies to be transferred to it at the price therein provided; and (5) that the bankers would cause the new corporation, as soon as practicable, to have distributed to it by way of liquidation its pro rata share of the 80,000 shares of Southern Co. common stock which the Midway Co. would receive for its properties and assets. This contract further provided that for each share of the common stock of the Southern Co. (par value $25) owned or controlled by the majority shareholders, the purchase price was to be $60.39 in cash and $77.80 in bonds; and for each share of the common stock*869 of the Midway Co. (par value $100), the purchase price was to be $241.48 in cash and $311.22 in bonds; this purchase price to be paid by the new corporation upon the delivery of the shares at such bank in Montreal, Canada, as the shareholders should designate.
On October 15, 1927, the bankers executed the following instrument:
NEW YORK, N.Y.
October 15, 1927.
The undersigned hereby irrevocably authorize C. F. Batchelder on their respective behalfs in Montreal, Canada, to execute, deliver and accept delivery of the contracts hereto annexed.
Rollin Browne, one of the New York attorneys employed by Meyer, took the two instruments above referred to, or counterparts thereof, *654 to Montreal, Canada, on October 15, 1927. At Montreal, Browne and A. K. Hugessen, as directors of Rayben Limited, constituting a quorum of the board, held a meeting on October 17, 1927, at which they approved said agreements and incorporated them in the minutes of said meeting.
On October 17, 1927, at Montreal, Canada, Batchelder signed the two contracts on behalf of the bankers as attorney in fact, and Hugessen, as president, and James B. Taylor, as assistant secretary, signed the same*870 contracts on behalf of Rayben Limited, and other Canadian corporations, designated "the shareholders." Hugessen and Taylor saw the said contracts for the first time in Montreal, Canada, on the date of their execution. They were never in the United States in connection with the affairs of Rayben Limited and had no part in arriving at the terms of the contracts.
On October 31, 1927, the Midway Gas Co. executed and delivered to the Southern California Gas Co. a deed, bill of sale and assignment, conveying all of its property to the Southern Co., and on the same date the Southern Co. issued and delivered to the Midway Gas Co. its bonds in the principal amount of $2,942,000 and 80,000 shares of common stock, having a par value of $2,000,000. The deed from the Midway Co. to the Southern Co., with the necessary consent of its stockholders attached, was recorded on November 3, 1927.
At a meeting of the board of directors of the Midway Co. held on October 31, 1927, a resolution was adopted which provided that after the transfer of the business, assets and franchises of the Midway Co. to the Southern Co., the Midway Co. should liquidate and not engage in business other than such as might*871 be appropriate or incidental to such liquidation. A resolution was adopted at the same meeting that an application be made to the Commissioner of Corporations of California for authority to distribute in partial liquidation the 80,000 shares of the Southern Co. common stock to be received by Midway on the transfer of its properties and assets.
The bankers' syndicate, on November 12, 1927, organized and incorporated a new Delaware corporation under the name of Southern California Gas Corporation, hereinafter referred to as the Southern Corporation. A collateral trust indenture of the Southern Corporation to the Chase National Bank, trustee, dated November 1, 1927, had been printed and made ready for execution upon the receipt of the gas stocks by the trustee.
The contract signed in Montreal, on October 17, 1927, provided that the purchase price of the Southern and Midway stock was subject to adjustment on account of accrued dividends on the stock and accrued interest on the bonds. On or about November 15, 1927, a written schedule was prepared under the supervision of Ben R. *655 Meyer in New York City, showing in detail the precise amount of cash and bonds which each*872 shareholder participating in the sale was entitled to receive for his or its respective share of the gas stocks. This schedule will be referred to as the Meyer schedule.
The Meyer schedule was verified by L. W. Snow, assistant secretary of the Chase Securities Corporation, after which it was turned over the George A. Kinney, trust officer of the Chase National Bank, on or prior to November 16, 1927. Kinney caused separate cashier's checks to be drawn on the Chase National Bank payable to those who were listed as stockholders on the Meyer schedule. The checks were drawn in the precise amounts shown on said schedule, aggregating $21,151,284.11, and were countersigned, but funds to cover the checks had not then been deposited. At the same time Kenney also caused separate bonds of the Southern Corporation to be registered in the names of the record holders of the utility stocks in the amounts shown on the Meyer schedule, aggregating in face amount $24,942,000. The total of the cash and bonds stated constituted the agreed aggregate purchase price of the gas stocks in the total amount of $46,093,284.11.
After the Meyer schedule of payments had been completed in New York City, *873 a proposed agreement between the majority shareholders, the bankers' syndicate and the Southern Corporation, supplementing and amending the agreement of October 17, 1927, was reduced to writing (but not signed) in New York City on or prior to November 15, 1927, incorporating the Meyer schedule. This agreement provided for the transfer and assignment by the bankers to the Southern Corporation of all of their rights to acquire the gas stocks. It also provided that the agreement of October 17, 1927, be amended to provide that the majority shareholders of the Southern Co. be paid for each share (par value $25) $60.975675 in cash and $77.1755 in bonds; and that the shareholders of the Midway Co. be paid for each share (par value $100) $243.907 in cash and $308.702 in bonds. No change was thereafter made in this proposed agreement.
On the night of November 15, 1927, Ben R. Meyer left New York for Montreal, Canada, accompanied by Rollin Browne and others, taking said proposed supplemental agreement and the schedule of payments with him, and also the certificates of stock of the Southern and Midway Companies registered in the name of Rayben Limited. Prior to this time these certificates*874 had been in the custody of Milton E. Getz in the United States.
In Montreal, on November 16, 1927, Hugessen, Meyer, and Browne, as directors of Rayben Limited, held a meeting and approved the said proposed supplemental agreement prepared in New York, incorporating the same in the minutes of the directors' meeting. At *656 this same meeting they also passed resolutions (1) authorizing Meyer and Getz for and on behalf of the company to endorse any registered bonds of the Southern Corporation for transfer or exchange; (2) appointing the Royal Bank of Canada the banker of the company in Canada; (3) authorizing Meyer for and on behalf of the company to deposit with or transfer to this bank any checks or orders for the payment of money; (4) authorizing Meyer on behalf of the company to make and sign checks or orders for the payment of moeny; (5) providing "that funds of the company be deposited with" Cohn, Inc., and authorizing Getz to open an account with Cohn, Inc., in the name of the company; and (6) authorizing Cohn, Inc., to pay out the funds on deposit with it upon an according to checks or drafts of the company signed by Meyer or Getz.
By letter dated November 15, 1927, the*875 Chase Securities Corporation as manager of the bankers' syndicate, advised the Chase National Bank that the syndicate was to acquire the capital stock of the Southern Corporation on Thursday, November 17, 1927, and that the syndicate disired to borrow $18,600,000 on a general loan and collateral agreement thereto attached, the shares of the Southern Corporation to be pledged for the payment of the loan.
On November 16, 1927, in New York, the bankers' syndicate transferred to the Southern Corporation its contract with the majority shareholders for the purchase of the utility stocks, in consideration of the agreement by the Southern Corporation to carry out the terms of said contract. The syndicate also agreed to purchase common and preferred stocks of the Southern Corporation for a total of $18,599,000, to purchase in advance from the Southern Corporation $2,942,000 principal amount of bonds of the Southern California Gas Co. to be received by the Southern Corporation and to advance to the Southern Corporation the purchase price of said bonds upon the understanding that the latter corporation would make the delivery within 24 hours thereafter, or within such time as the syndicate*876 might allow.
On the same date, to wit, November 16, 1927, in New York, the Southern Corporation approved the agreement supplemental to the contract of October 17, 1927, providing for the sale of the gas stocks to it, and said supplemental agreement was incorporated in the minutes of the meeting of the directors of the corporation of November 16, 1927. The president or any vice president of the Southern Corporation was authorized to execute the agreement on its behalf.
On the night of November 16, 1927, George A. Kinney, trust officer of the Chase National Bank, accompanied by Van Ness, vice president of the Southern Corporation, left New York for Montreal, carrying with him the checks heretofore referred to, in the total *657 amount of $21,151,284.11, dated November 17, 1927, which had been countersigned in New York. He also took with him the bonds totaling $24,942,000 which had been registered in the respective names shown on the Meyer schedule, including Rayben Limited, in the registration department of the Chase National Bank in New York City, on or before November 16, 1927.
On the following day, November 17, 1927, at a meeting in the offices of the Canadian law*877 firm in Montreal, the supplemental agreement drafted in New York on or about November 15 was signed by authorized representatives of the bankers' syndicate and the Southern Corporation, and by the seven Canadian corporations, including Rayben Limited, whose names were listed on the Meyer schedule as the majority shareholders of the stock of the Southern and Midway Companies. The agreement was signed for Rayben Limited, by Ben R. Meyer, as vice president, and James B. Taylor, as assistant secretary.
At this same meeting Meyer delivered to Van Ness, vice president of the Southern Corporation, the certificates of stock of the Southern and Midway Companies registered in the name of Rayben Limited and also certificates representing the shares of the minority stockholders. The other shareholders or their representatives did likewise. Van Ness then handed the certificates to A. E. Peat, assistant secretary of the Southern and Midway Companies, who issued new certificates for the same number of shares in the name of the Southern Corporation, and handed the new certificates to Van Ness. At this point Kinney communicated by long distance telephone with the Chase National Bank in New York*878 City and was advised that sufficient funds had been received in the trust department of the bank to cover the cashier's checks totaling $21,151,284.11 hereinbefore referred to. Van Ness then handed the stock certificates to Kinney.
Prior to this time but on the same date, November 17, 1927, the Chase Securities Corporation, syndicate manager, had drawn its check in favor of the Southern Corporation for the amount of $18,599,000 in payment for the capital stock of the Delaware corporation. The syndicate manager had likewise drawn its check in favor of the Southern Corporation for the amount of $2,825,954.44, being the purchase price at 95 percent, plus earned interest, of $2,942,000 principal amount of the Southern Co. bonds. These checks had been deposited in the Chase National Bank to the credit of the Southern Corporation on November 17, 1927, and on the same day the Southern Corporation had drawn its check in favor of the Chase National Bank in the amount of $21,151,284.11.
On November 17, 1927, in Los Angeles, the directors of the Midway Gas Co. declared a dividend payable in bonds of the Southern California*658 Gas Co. of the face amount of $2,942,000 and Peat, *879 in Montreal, Canada, was advised of the fact by telegram on the said date. Immediately thereupon, in Montreal, Van Ness received from Balch, who was president of the Midway Gas Co., temporary registered bond No. TRLA 1 for the principal amount of $2,942,000 of the Southern Co. bonds.
After Kinney had received the gas stocks in Montreal, and on the same day, namely, November 17, 1927, the trust indenture of the Southern Corporation to the Chase National Bank, trustee, under which the gas stocks were pledged, was executed in New York. Thereupon Kinney authenticated the separate bonds of the Southern Corporation in the aggregate amount of $24,942,000 and handed them to Van Ness. Van Ness then handed the cashier's checks and the bonds of the Southern Corporation to the respective persons and corporations listed on the Meyer schedule, including a cashier's check payable to Rayben Limited, in the amount of $2,464,712.61 and bonds of the Southern Corporation registered in the name of Rayben Limited, in the principal amount of $3,110,500.
Delivery of the certificates of stocks of the Southern and Midway Companies was made at Montreal at the request of the vendors. It made no difference*880 to the purchasers whether the certificates were delivered in New York or in Montreal. The vendors also requested that payment be made in United States funds.
On the same day that Meyer, in behalf of Rayben Limited, received the cashier's check for $2,464,712.61 in Montreal, namely, on November 17, 1927, he deposited the check payable in United States funds to the credit of Rayben Limited in the Royal Bank of Canada, at Montreal. On the same day $2,000,000 of said deposit was withdrawn and two days later, on November 19, 1927, was deposited to the credit of Rayben Limited in the Union Bank & Trust Co. at Los Angeles, California.
Also on November 17, 1927, Meyer made two withdrawals from the Royal Bank of Canada, one in the amount of $133,999.35 covering advances made by him in connection with the sale of the gas stocks, and the other in the amount of $71,042.85 for "proportionate expense at $7.05 per share." He also made a withdrawal on November 18 of $10,077 for organization expenses. On November 21, 1927, an additional withdrawal of $240,000 was made and this amount was deposited to the credit of Rayben Limited, in the Union Bank & Trust Co. at Los Angeles, leaving a balance*881 in the Royal Bank of Canada on the latter date of $9,593.41. Ben R. Meyer was president of the Union Bank & Trust Co.
The expenses in connection with the sale of the utility stocks were paid by Meyer out of his personal funds. He acted as agent in this *659 connection for all of the stockholders who sold their stock to the Southern Corporation and was later reimbursed by them.
Meyer left Montreal on the evening of November 17, 1927, for New York and on November 18, 1927, in New York City, the stock certificates of Rayben Limited issued to the petitioner, Cohn, Inc., in exchange for the shares of the utility stocks, were delivered to him by Rollin Browne. These certificates had been sent to Browne by Hugessen on September 17, 1927, for delivery to Cohn, Inc.
On November 17, 1927, the Southern Co. had 320,000 shares of common and not more than 167,178 shares of preferred stock issued and outstanding. All of this stock had equal voting rights. Immediately after the exchange on November 17, the stock of the Southern Co. was owned as follows:
| Shareholders | Shares owned |
| COMMON STOCK: | |
| Southern California Gas Corporation | 239,608 |
| Midway Co | 80,000 |
| Others | 392 |
| PREFERRED STOCK: | |
| Various | 167,178 |
| Total | 487,178 |
*882 On November 17, 1927, the Midway Co. had outstanding 23,264 shares of capital stock, all of which had equal voting rights. Immediately after the exchange on November 17, the stock was owned as follows:
| Shareholders | Shares owned |
| Southern California Gas Corporation | 23,076 |
| Others | 188 |
| Total | 23,264 |
On November 18, 1927, the State Corporation Department of California issued its permit for the distribution by the Midway Co. to its shareholders of the 80,000 shares of the Southern Co.'s common stock received by it as part consideration for the transfer of its assets to the Southern Co. and on December 10, 1927, the distribution was made in pursuance of a resolution of its board of directors passed on that date. As a result of this distribution, the Southern Corporation received 79,508 shares of the Southern Co.'s common stock.
On January 4, 1928, the bankers' syndicate purchased part of the bonds of the Southern Corporation which had been delivered to Rayben Limited on November 17, 1927, and the latter corporation received a cashier's check in the amount of $1,303,036.25 dated January 4, 1928. This check was deposited on the same day in the Royal Bank*883 of Canada at Montreal. One million three hundred thousand *660 dollars of this deposit was immediately withdrawn and deposited on January 5, 1928, to the credit of Rayben Limited in the Union Bank & Trust Co. at Los Angeles, California.
During November and December 1927, Cohn, Inc., received from Rayben Limited, $2,250,000; during January 1928, $100,000; and during February 1928, $260,000. On the books of Rayben Limited these transactions were treated as loans made to Cohn, Inc.
On February 17, 1928, all of the officers of Rayben Limited resigned and Meyer was elected president, Getz vice president, and Margaret E. Feehan, who had been employed by Cohn, Inc., as a bookkeeper, secretary. They held the same offices in Cohn, Inc. On the same date Hugessen and Browne resigned as directors of Rayben Limited and Milton E. Getz and Estelle Getz were appointed to succeed them. As a result of these changes Cohn, Inc., and Rayben Limited had the same officers and three of the five directors of Cohn, Inc., became the sole directors of Rayben Limited. Milton E. and Estelle Getz each received one share of the common stock of Rayben Limited on February 29, 1928.
In a letter*884 dated Los Angeles, California, February 17, 1928, addressed to "Rayben Limited, Montreal, Canada", Cohn, Inc., offered to transfer and convey to Rayben Limited all of the property and assets owned by it at the close of business February 29, 1928, in consideration of the cancellation and extinguishment by Rayben Limited of all indebtedness and liabilities owing to it by Cohn, Inc., and the assumption by Rayben Limited of all other liabilities of Cohn, Inc., existing at the close of business February 29, 1928. This letter was signed by Milton E. Getz and M. E. Feehan, as vice president and secretary, respectively, of Cohn, Inc. The following was typed at the bottom of the page upon which the letter was written: "The foregoing offer is hereby accepted. Dated February 17, 1928", followed by the signatures of Milton E. Getz and M. E. Feehan, as vice president and secretary, respectively, of Rayben Limited.
On February 29, 1928, Rayben Limited was authorized by the Department of State of California to transact business in that state, and moved into the office occupied by Cohn, Inc., in Los Angeles. On this same date the assets (excepting the capital stock of Rayben Limited and cash) *885 and liabilities of Cohn, Inc., were transferred to Rayben Limited. The liabilities so transferred included an indebtedness due to Rayben Limited in the amount of $2,610,000 and additional notes payable of $435,730. The assets included notes receivable, accounts receivable due from Ben R. Meyer and his wife and Milton E. Getz and his wife, stocks and bonds, real estate and furniture and fixtures, all of the book value of $4,376,437.62. The assets exceeded the liabilities so transferred by $1,330,356.32, and the surplus of Cohn Inc., was thereby reduced in that amount. The accounts not *661 transferred to Rayben Limited were taken from the loose-leaf ledger of Cohn, Inc., and that ledger then became the ledger of Rayben Limited.
The only office or place of business maintained by Rayben Limited in Canada was the office of the Canadian law firm. The office manager of the law firm kept the stock book, a minute book, and a file of documents belonging or pertaining to Rayben Limited at the offices of the law firm, along with similar records of approximately one hundred other companies. The activities of Rayben Limited in Canada consisted only of those set out in these findings.
*886 On October 26, 1927, a firm of chartered accountants in Montreal was appointed by Hugessen as the accountant for Rayben Limited and it was instructed to open and maintain proper books of account for the corporation. This firm prepared opening entries covering the period May 27 to September 15, 1927, inclusive, and set them up in the books. Under date of January 23, 1928, the firm of accountants wrote to Los Angeles, asking for a memorandum giving particulars of transactions of Rayben Limited to December 31, 1927, in order that appropriate entries might be made in the books. This information was forwarded to the firm of accountants by Cohn, Inc., under date of February 9, 1928. Later, under date of March 20, 1928, cash book and journal entries covering transactions of Rayben Limited from September 15, 1927, to February 29, 1928, were forwarded to the accounting firm from Los Angeles, and entries showing such transactions were entered in the books of Rayben Limited In March 1928.
The books of Cohn, Inc., and the books of Rayben Limited were kept on the basis of actual cash receipts and disbursements.
Respondent determined the amount of profit derived from the sale of the*887 gas stocks, the correctness of which amount is not in controversy, as follows:
| Southern California Gas Co.: | |||
| Total amount received: | |||
| Cash and Bonds | $4,123,692.61 | ||
| Cost | $9,447.45 | ||
| Commission on Sale | 54,990.00 | ||
| 64,437.45 | |||
| Net Profit | $4,059,255.16 | ||
| Midway Gas Co.: | |||
| Total amount received: | |||
| Cash and Bonds | $1,216,730.84 | ||
| Cost | $38,854.54 | ||
| Commission on Sale | 16,052.85 | ||
| 54,907.39 | |||
| Net Profit | $1,161,823.45 | ||
| Total Net Profit | $5,221,078.61 |
*662 No part of the profit was included in the gross income reported by Cohn, Inc., for the calendar year 1927, nor in the gross income reported by Rayben Limited for its fiscal year ended October 31, 1928.
In the case of Rayben Limited (Docket No. 53696) respondent determined that the profit constituted income realized by it from sources within the United States. In the statement attached to the deficiency notice sent to Cohn, Inc. (Docket No. 58428) the respondent determined that it was liable for the tax upon the profit resulting from the sale, under the provisions of sections 217 and 240(f) of the Revenue Act of 1926, which authorize*888 the Commissioner, in certain instances, to consolidate the accounts of related trades or businesses owned or controlled by the same interests. However, in his answer to the amended petition filed in this case, he affirmatively alleges that the sale of the utility stock in the year 1927 was in truth and in fact made by Cohn, Inc., and that it is liable for the tax upon the profit whether the accounts of the two corporations are consolidated or not.
OPINION.
MELLOTT: Petitioners contend that Rayben Limited, the Canadian corporation, was the owner of the gas stocks (stock in the Southern California Gas Co. and stock in the Midway Gas Co.) when they were exchanged in 1927, for cash and bonds of the Southern California Gas Corporation. This ownership, it is argued, was complete and unconditional and had its inception in May 1927 at, or shortly after the incorporation of Rayben Limited, when Cohn, Inc., the domestic corporation, transferred the gas stocks owned by it to Rayben Limited in exchange for the capital stock of the latter corporation. It is therefore insisted that the sale was made by the Canadian corporation, in Canada, and that any profit derived therefrom does not constitute*889 income taxable in the United States.
Respondent contends that the sale of the gas stock (we shall discuss later the exchange and reorganization feature of this transaction, but for present purposes, shall refer to the exchange of the gas stocks for the cash and bonds simply as a sale) was in truth and in fact made by Cohn, inc.; that Rayben Limited was a mere corporate form created by Cohn, Inc., for use as an instrumentality to give the latter a basis for contending that the sale was made in Canada; that it was merely an agency or instrumentality of Cohn, Inc.; and that it was a mere conduit only for passing title to the gas stocks to the purchaser and for receiving the proceeds arising from the sale for Cohn, Inc., which was the actual and beneficial owner of the gas stocks and the proceeds derived from the sale.
The Revenue Act of 1926 provides that the term "gross income", in the case of a domestic corporation, includes gains or profits and *663 income derived from any source whatever, and in the case of a foreign corporation, the term means only gross income from sources within the United States. 1 It is apparent, therefore, that if Rayben Limited was the owner of*890 the stock in question, as contended by the petitioners, and sold it in Montreal, Canada, it is not required to include the profit resulting from the sale in its gross income. If, however, as contended by the respondent, Cohn, Inc., was the real owner and vendor of the stock it is required to include the profit in its gross income whether the sale was consummated in the United States or in Canada.
*891 Respondent urges that we disregard the separate corporate entity of Cohn, Inc., and Rayben Limited and find that the sale was actually made by Cohn, Inc., while petitioners insist that the separate corporate entity of the two corporations can not be disregarded. Upon brief petitioners say, "The Supreme Court in recent tax cases has had occasion to consider urgent demands for the disregard of corporate entities and in every instance has sustained their full recognition", in support of which they cite: ; ; ; ; ; .
While it is true that in each of the cited cases the Supreme Court, under the facts before it, applied the general rule that a corporation and its shareholders are to be treated as separate entities, it was careful to point out that "the rule is subject to the qualification that the separate entity*892 may be disregarded in exceptional situations" () or "under exceptional *664 circumstances" (;) on in cases presenting "peculiar situations." () It is not necessary to set out herein the facts which the Court had before it in the cited cases. Suffice it to state that in none of them was the Court dealing with a foreign subsidiary corporation, the property, management, and activities of which were completely dominated and controlled by a domestic parent corporation which created it for a special purpose.
In the cases relied upon by the respondent, the facts show that the transactions arose under "exceptional circumstances" or presented "peculiar situations." ; ; *893 ; ; and Palmolive Manufacturing Co. (Ontario) Ltd. v. The King, Canada Law Reports, 1935, p. 131. See also , and . In each of them the court disregarded the separate corporate entity.
The basic reason underlying the disregard of the corporate entities in the cited cases is succinctly expressed by the Supreme Court in , in the following language: "Where stock ownership has been resorted to, not for the purpose of participating in the affairs of a corporation in the normal and usual manner, but for the purpose * * * of controlling a subsidiary company so that it may be used as a mere agency or instrumentality of the owning company or companies. * * * In such a case the courts will not permit themselves to be blinded or*894 deceived by mere forms of law but, regardless of fictions, will deal with the substance of the transaction involved as if the corporate agency did not exist and as the justice of the case may require." The rule above quoted is of peculiar importance in tax cases. .
In , a tax, which had been laid upon a holding company for dividends declared upon a subsidiary's shares, was held to be invalid. The shares of the subsidiary were all owned by the holding company, which dominated and controlled its operations and affairs, and possessed its properties and funds. The Supreme Court said, "While the two companies were separate legal entities, yet in fact, and for all practical purposes they were merged, the former [the subsidiary] being but a part of the latter [the holding company], acting merely as its agent and subject in all things to its proper direction and control." Under somewhat analogous *665 facts, similar conclusions were reached in *895 , and Palmolive Manufacturing Co. (Ontario) Ltd. v. The King, supra.
In , where the taxpayer had formed a subsidiary corporation to hold and sell certain real estate which it was obliged to take over in order to protect its business, the court upheld the contention of the taxpayer that it should be permitted to include income and losses of its subsidiary in its income tax return, beasing its decision on the fact that the only purpose of the subsidiary corporation was to act as agent for and on behalf of its parent, and that, while in form they were admittedly two separate entities, in substance there was but one enterprise.
In , a parent corporation, which took possession of and operated vessels belonging to wholly owned subsidiary corporations and retained the earnings of such vessels, making only a bookkeeping division thereof, was held to be the "owner" of such vessels within a statute offering to the "owner" of a*896 vessel documented in the United States and operated in foreign trade, the allowance of a deduction for computation of war profits and excess profits taxes, as an inducement to invest earnings in additional ships.
We believe that the facts shown in our findings justify and require that we disregard the separate corporate entity and "deal with the substance of the transaction as if the corporate agency did not exist"; for the circumstances before us are quite "exceptional", if not unique, and create a "peculiar situation." We shall not attempt to point out all the facts upon which we rely in reaching this conclusion; but it may not be amiss to advert to some of them.
Substantially all of the activities of Rayben Limited in Canada were handled by "dummy" (but we use the word in no opprobrious sense) directors and officers, all of whom were either officers or employees of the Canadian law firm retained by Cohn, Inc., to bring about the organization and incorporation of Rayben Limited under the laws of Canada. They received no compensation from Rayben Limited, had no beneficial interest in the corporation, and were never in the United States in connection with any of its business. *897 They approved and accepted the offer made by Cohn, Inc., under date of May 30, 1927, to transfer and assign the gas stocks to Rayben Limited in exchange for all of its capital stock. When, in August 1927, the gas stocks were transferred into the name of Rayben Limited, they designated Milton E. Getz as treasurer of Rayben Limited, though he was not even a stockholder of Rayben Limited at that time. He was, however, the vice president of Cohn, Inc. He was given the *666 exclusive custody of the securities of Rayben Limited and the then members of the board of directors of Rayben Limited, which still consisted only of the officers and employees of the Canadian law firm, adopted a resolution providing that all of the corporate funds of Rayben Limited be deposited with the Union Bank & Trust Co. of Los Angeles, California. At about the same time one of the members of the law firm transferred one share of stock to Ben R. Meyer, who then became a director and vice president of Rayben Limited. Thereupon the directors of Rayben Limited authorized the Union Bank & Trust Co. to pay out the funds of the company upon checks or drafts signed by Meyer or Getz.
The only other activities*898 of the officers and directors of Rayben Limited, in Canada, prior to November 15, 1927, consisted of formally approving and signing agreements concerning the sale, or the contemplated sale, of the gas stocks. It is significant that all of such agreements were prepared in the United States after extended negotiations conducted by Meyer, who at all times was president of Cohn, Inc., and that none of the agreements was ever changed in any material way in Canada. It is also significant that the officers and employees of the Canadian law firm, who, during most of the time the negotiations were being carried on, constituted a majority of the board of directors of Rayben Limited, never saw any of the agreements until they were brought to Canada for their formal approval and signature.
During the whole of the period, then, from May 27, 1927, to November 15, 1927, the activities of Rayben Limited in Canada were confined to the activities of its "dummy" directors and officers who, it is apparent, were dominated and controlled by Cohn, Inc. During this period it had no property or funds in Canada, all of its property and funds registered in its name being in the United States in the custody, *899 possession and control of Meyer and Getz, and it transacted no business in Canada. When the sale of the utility stocks was imminent, Meyer disregarded the "exclusive custody" which had been vested in Getz, and took the stocks to Canada on November 15. On November 16, the day preceding the delivery of the stock to the purchaser, the board of directors of Rayben Limited held a meeting, the only directors present being Meyer, Rollin Browne, a member of the firm of New York attorneys who had been made a director of Rayben Limited in August, and Hugessen, the "dummy" director and president. They saw to it that the interests of Cohn, Inc., were well protected by passing resolutions that the funds of Rayben be deposited with Cohn, Inc., and that Meyer and Getz only be authorized to draw checks or drafts against these funds. When on the following day Meyer delivered the stock to the *667 purchaser and received the consideration, he immediately transferred substantially all of the cash received, with the exception of amounts necessary to defray the expenses incident to the sale, to Los Angeles, where it was turned over to Cohn, Inc., in the form of a loan.
The only other transaction*900 entered into by Rayben Limited in Canada was in January 1928 when part of the bonds received on November 17 were delivered to the bankers in Canada for cash. The cash, however, was immediately transferred to Los Angeles. The gentlemen we have heretofore referred to as "dummy" directors and officers of Rayben Limited then resigned, Meyer became president, Getz became vice president, and Margaret E. Feehan, a bookkeeper for Cohn, Inc., became its secretary. They held the same offices in Cohn, Inc. On February 17, 1928, a letter was addressed to Rayben Limited at Montreal, signed by Getz, as vice president of Cohn, Inc., and Margaret E. Feehan, as secretary, offering to transfer all the assets of Cohn, Inc., to Rayben Limited in consideration of the cancellation of all indebtedness owing by Cohn, Inc., to it and the assumption by it of all liabilities of Cohn, Inc. Getz, as vice president of Rayben Limited and Margaret E. Feehan, as secretary of that corporation accepted the offer on the same day. Rayben Limited then moved into the office of Cohn, Inc., in Los Angeles, its name was changed to "Kaspare Cohn Company Limited", the ledger of Cohn, Inc., became the ledger of Rayben Limited, *901 and as a result of these manipulations, Cohn, Inc., had $2,610,000 of the proceeds of the sale and its transplanted offspring had all of its assets. Obviously it made no difference to Cohn, Inc., at that time whether its assets were carried in its name or in that of its alter ego.
Cohn, Inc., acting through its president, Ben R. Meyer, was the unquestioned master and dominated and controlled every move that was made from the time it became apparent in May 1927 that the bankers would purchase the gas stocks until the proceeds of the sale were safely deposited in Los Angeles, California. He directed the organization of Rayben Limited; employed New York attorneys to act for the petitioners before Rayben Limited was incorporated; wrote the letter offering to transfer the gas stocks to Rayben Limited; took a prominent part in all of the negotiations in the United States leading to the consummation of the sale; caused the gas stocks to be transferred into the name of Rayben Limited; had a schedule prepared under his supervision in New York City showing the precise amount of cash and bonds each of the record holders of the gas stocks was to receive; took the gas stocks to Canada; *902 received the consideration; transferred it to the bank of which he was president in California; and paid the legal expenses and broker's commission. *668 He had, as he expressed it, "verbal authority" from a majority of the stockholders and directors of Cohn, Inc., to act for that corporation in connection with the sale of the gas stocks. He had no such authority from Rayben Limited or its Canadian officers and directors and he needed none. He had employed the members of the Canadian law firm to do what he wanted done and that is all that they ever did. They served him and Cohn, Inc., just as they would have served any other client.
We can not escape the conclusion that Rayben Limited was acting as a mere agency or instrumentality of Cohn, Inc., in transferring the gas stocks to the Southern Corporation and receiving the consideration therefor. All of the facts show that it was created and brought into being by its parent for that very purpose. Cohn, Inc., never participated in the affairs of Rayben Limited in the manner that a parent corporation normally participates in the affairs of a subsidiary but, through its president, Meyer, dominated and controlled its every*903 move, especially during the period before it was transplanted in the United States. The whole transaction is not "in fact what it appears to be in form", and what was actually done "contradicts the apparent transaction." (; certiorari denied, .) We hold that Cohn, Inc., was the real owner and vendor of the gas stocks when the sale was made. "To hold otherwise would be to exalt artifice above reality." . We do not rest our decision upon the fact that the obvious purpose of the Canadian formalities was to escape taxation on the profit from the sale of the gas stocks. We recognize that a taxpayer has the legal right to decrease the amount of what otherwise would be its taxes by means which the law permits. But "fictional corporate camouflage can not be made the device to escape taxation." . It follows that the profit derived from the sale, to the extent hereinafter set out, should be included in the gross*904 income of Cohn, Inc., for the year 1927.
Having concluded that Cohn, Inc., owned and sold the stocks, we need not discuss the other questions raised by the parties upon brief One is whether the sale was consummated in the United States or in Canada; the other is whether the accounts of the two petitioners should be consolidated and the profit thus be allocated to Cohn, Inc., under the provisions of section 240(f) of the Revenue Act of 1926. If we are correct in our conclusion that the sale was made by Cohn, Inc., then it is liable for any tax upon the profit, regardless of whether the sale was made in the United States or elsewhere. (Sec. 213(a), supra. ) It is therefore unnecessary to determine where the sale was *669 made. It is likewise unnecessary to decide whether the accounts of the two corporations should be consolidated; for, if so, the only effect would be to allocate the profit to Cohn, Inc. We must, however, decide whether the transfer of the gas stocks to the Southern Corporation, which we have heretofore referred to as a sale, was in fact, as petitioners contend, a partially tax-free reorganization, the gain from which is not recognizable in any event*905 in excess of the amount of the cash received.
The pertinent provisions of the Revenue Act of 1926 are set forth in the margin. 2 In order to bring the transaction here in controversy within these provisions, petitioners must show (1) that there was a plan of reorganization; (2) that the Southern California Gas Co., the Midway Gas Co., and the Southern California Gas Corporation, were all parties to a reorganization; and (3) that there was an exchange of stock in one or more of these corporations for stock or securities in one of the others, and cash, pursuant to the plan of reorganization.
*906 The plan relied upon by petitioners is embodied in the agreement of October 17, 1927. It provided for the organization of a new corporation called the Southern California Gas Corporation; for the acquisition by the Southern Corporation of not less than 95 percent of the common stock of the Southern Co. and not less than 95 percent of the capital stock of the Midway Co. from the stockholders of those companies, in exchange for collateral trust bonds of the Southern Corporation to the extent of about 60 percent of the consideration and cash as to the balance; it provided further for the acquisition by the Southern Co. of all the assets of the Midway Co. in exchange for stock *670 and bonds of the former, and that the Midway co. be liquidated and distribute to the Southern Corporation its pro rata share of the 80,000 shares of the Southern Co.'s common stock which the Midway Co. received for its assets.
Section 203(h)(1) of the Revenue Act of 1926, supra, provides that the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation is included within*907 the meaning of the term "reorganization." The Midway Co. had but one class of stock and had outstanding 23,264 shares. Its shareholders delivered 23,121 shares of this stock to the Southern Corporation on November 17. The Southern Corporation had outstanding on October 17, 1927, 240,000 shares of common stock and 166,879 shares of preferred, both classes of stock having equal voting rights. It later issued 80,000 additional shares of common stock which were delivered to the Midway Co. as part consideration for its property and assets. On November 17 the Southern Corporation received from the stockholders of the Southern Co. 239,608 shares of that company's common stock and when the Midway Co. liquidated on December 10 it received 79,508 of the 80,000 shares of the Southern Co.'s common stock which had been transferred to the Midway Co. It is apparent therefore that the plan embodied in the agreement of October 17 was a plan of reorganization, the Southern Corporation having acquired more than a majority of the total number of shares of the voting stock of the Southern and Midway Companies. Neither of these companies had outstanding any nonvoting stock.
The Southern Corporation*908 and the Southern and Midway Companies are clearly parties to a reorganization within the meaning of section 203(h)(2), supra, which provides that "a party to a reorganization" includes both corporations in the case of the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
We are of the opinion that the transaction here in controversy falls within the exchange and reorganization provisions of the statute, as Cohn, Inc., and the other stockholders of the Southern and Midway Companies transferred their stock in these two companies to the Southern Corporation in exchange for bonds of the latter, and cash. By reason of the receipt of the bonds, the stockholders acquired a definite and material interest in the affairs of the Southern Corporation which represented a substantial part of the value of the stock transferred. The exchange was made pursuant to a plan of reorganization, and we hold that under the provisions of section 203(d)(1), supra, the taxable gain to be recognized is limited to the *671 amount of the cash received, although the*909 actual gain is in excess of this amount. ; ; ; .
The profit from the sale of the utility stocks, to the extent of the cash received, should be added to the gross income reported by Cohn, Inc., for the year 1927. Having held that Cohn, Inc., and not Rayben Limited, made the sale, it follows that no part of the profit realized should be included in the gross income of Kaspare Cohn Co. Limited (formerly Rayben Limited) for the fiscal year ended October 31, 1928.
Reviewed by the Board.
Judgment will be entered under Rule 50.
TURNER, concurring: I concur in the conclusion reached in the majority opinion that the gain realized upon the sale of the stock in question is taxable to the petitioner, but for a different reason. In my opinion the facts definitely show that the sale was made in the United States and under the circumstances it matters not whether it was made by Cohn, Inc., or by Rayben Limited.
ARUNDELL*910 agrees with the above.
LEECH, dissenting: In my judgment, the theory upon which the majority opinion is supported, is not tenable. That theory seems to be that Rayben Limited, organized for the purpose of avoiding income taxes by its incorporator, but still existing and now owning the assets and business of that incorporator, Kaspare Cohn Co., shall be recognized for income tax purposes in a sale of its corporate property, merely as agent of its stockholders and shall there be deemed, only, a "fictional corporate camouflage * * * device to escape taxation", where such sale was conceived by its organizer before its incorporation, although no contract to sell then existed.
In my judgment, the legality of the corporate status and acts of Rayben Limited, its continued existence and present ownership of the proceeds of the disputed sale, contradict conclusively any such fictional characteristic. Nor does any authority cited in the majority opinion, or otherwise, so far as I know, justify the limitation of recognition of a corporation as a separate entity, in the status of principal, to those of its acts which were conceived after its incorporation. And, although*911 conceding "that a taxpayer has the legal right to decrease the amount of what otherwise would be its taxes by means which the law permits", the conclusion of the prevailing opinion nullifies that conceded rule.
*672 Moreover, I do not think a conclusion resulting in a deficiency in these proceedings can be sustained on any sound legal ground.
The purpose in organizing Rayben Limited is not material here. Cf. . The record discloses that the stocks in question were legally, effectively, and unconditionally transferred to a corporation in exchange for all of the stock of that corporation. The Revenue Act of 1926, section 203(b)(4), 1 is unambiguous. In my opinion, it is controlling. It may have been a legislative mistake that, under this act, the gain from such a transaction as is presented should escape tax. But that mistake, particularly in a taxing statute, affords the Board no proper authority for supplying, as it seems to me the majority opinion does, what Congress omitted. That Congress realized that this very so-called "serious loophole for avoidance of taxes" existed under the applicable revenue act, *912 supra, is clearly established by the Report of the Ways and Means Committee to the House of Representatives, accompanying the Revenue Act of 1932. 2*913 That legislation could and did supply the omission which Congress recognized existed in the earlier law. 3
Footnotes
1. SEC. 213. (a) * * *
The term "gross income" includes gains, profits, and income derived from * * * businesses, commerce, or sales or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; * * * or gains or profits and income derived from any source whatever.
SEC. 217. (a) In the case of a nonresident alien individual or of a citizen entitled to the benefits of section 262, the following items of gross income shall be treated as income from sources within the United States;
* * *
(e) * * * Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold, * * *.
(f) As used in this section the words "sale" or "sold" include "exchange" or "exchanged"; * * *
SEC. 233. (a) In the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in sections 213 and 217, except that mutual marine insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance.
(b) In the case of a foreign corporation, gross income means only gross income from sources within the United States, determined (except in the case of insurance companies subject to the tax imposed by sections 243 or 246) in the manner provided in section 217. ↩
2. SEC. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * *
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
* * *
(d) (1) If an exchange would be within the provisions of paragraph (1), (2), or (4) of subdivision (b) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
* * *
(h) (1) The term "reorganization" means (a) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation or substantially all the properties of another corporation), * * *
(h) (2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. ↩
1. RECOGNITION OF GAIN OR LOSS FROM SALES AND EXCHANGES.
SEC. 203. (b) (4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. ↩
2. House of Representatives, 72d Congress, 1st sess., Rept. No. 708, p. 20:
Property may be transferred to foreign corporations without recognition of gain under the exchange and reorganization sections of the existing law. This constitutes a serious loophole for avoidance of taxes. Taxpayers having large unrealized profits in securities may transfer such securities to corporations organized in countries imposing no tax upon the sale of capital assets. Then, by subsequent sale of these assets in the foreign country, the entire tax upon the capital gain is avoided. For example, A, an American citizen, owns 100,000 shares of stock in corporation X, a domestic corporation, which originally cost him $1,000,000 but now has a market value of $10,000,000. Instead of selling the stock outright A organizes a corporation under the laws of Canada to which he transfers the 100,000 shares of stock in exchange for the entire capital stock of the Canadian company. This transaction is a nontaxable exchange.↩The Canadian corporation sells the stock of corporation X for $10,000,000 in cash. The latter transaction is exempt from tax under the Canadian law and is not taxable as United States income under the present law. The Canadian corporation organizes corporation Y under the laws of the United States and transfers the $10,000,000 cash received from the sale of corporation X's stock in exchange for the entire capital stock of Y. The Canadian corporation then distributes the stock of Y to A in connection with a reorganization. By this series of transactions, A has had the stock of X converted into cash and now has it in complete control. [Emphasis supplied.]
3. SEC. 112. RECOGNITION OF GAIN OR LOSS.
(k) Foreign Corporation.↩ - In determining the extent to which gain shall be recognized in the case of any of the exchanges or distributions (made after the date of the enactment of this Act) described in subsection (b)(3), (4), or (5), or described in so much of subsection (c) as refers to subsection (b)(3) or (5), or described in subsection (d) or (g), a foreign corporation shall not be considered as a corporation unless, prior to such exchange or distribution, it has been established to the satisfaction of the Commissioner that such exchange or distribution is not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes.