*187 Decision will be entered for the respondent.
Petitioner was the sole shareholder of Massachusetts Enterprises. The sole asset of the latter corporation was a parcel of unimproved land. Negotiations were carried on for the sale of the land and an oral agreement reached with the purchaser. The subsequently prepared written agreement provided for the sale of the Massachusetts Enterprises stock by petitioner's shareholders. On the closing date, such stock was distributed by petitioner as a dividend in kind and immediately transferred to the purchaser by petitioner's shareholders. Held, sec. 311(a), I.R.C. 1954, does not preclude the application of Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945), and United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451 (1950), and petitioner is taxable under the principles enunciated by those cases on the gain from the sale of the shares of Massachusetts Enterprises.
*399 Respondent determined a deficiency in petitioner's corporate income tax in the amount of $ 37,457.37 for the taxable year 1959. The sole issue for our consideration is whether the gain derived from a sale of all the stock in petitioner's wholly owned subsidiary should be taxable to petitioner.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly.
Petitioner Waltham Netoco Theatres, Inc. (sometimes hereinafter referred to as Waltham), *189 had its principal place of business in Boston, *400 Mass., at the time of the filing of the petition herein. It timely filed its Federal income tax return for the taxable year with the district director of internal revenue, Boston, Mass.
American Theatres Corp., Inc. (hereinafter referred to as American), owned all the stock of Pilgrim Theatres Corp. (hereinafter referred to as Pilgrim), which, either directly or through subsidiaries, owned all or a majority of the outstanding shares of stock of numerous other corporations, including petitioner herein. The principal business of American, Pilgrim, petitioner, and the other affiliated corporations (hereinafter sometimes collectively referred to as the American Group) was the management and operation of motion-picture theaters. American provided management services to each of its affiliates pursuant to individual written management agreements.
Throughout 1959, the outstanding stock of petitioner was held as follows:
| Pilgrim | 501 | shares class A |
| Anna V. Doyle | 31 | shares class B |
| Mary A. Kelleher | 31 | shares class B |
| James H. Doyle, Jr | 32 | shares class B |
| South Boston Theatre Co | 125 | shares class B |
| Harold E. Gordon | 83 1/3 | shares class B |
| Ellis L. Gordon | 83 1/3 | shares class B |
| Sidney Gordon | 83 1/3 | shares class B |
| Marie L. Doyle | 31 | shares class B |
| Total shares | 1,001 |
*190 The holders of class A stock were entitled to elect three members of the five-member board of directors, the remaining two being elected by class B stockholders. Otherwise, the rights of class A and class B stock were equal, share for share. During the time relevant herein, none of petitioner's stockholders owned any shares or were otherwise interested in American.
During 1958 and at least until June 30, 1959, the principal business of petitioner was the operation of two motion-picture theaters. One of its assets was all of the issued and outstanding stock of Massachusetts Enterprises, Inc., whose sole asset was a parcel of unimproved real estate, which it had originally acquired in 1954 for the purpose of constructing a drive-in theater. Because of a general decline in the motion-picture business in addition to various financial and zoning problems, such purpose was never accomplished. By 1959, the value of the land had increased substantially above its original cost. Legal title to the land was held in the name of a nominee for Massachusetts Enterprises.
During the period in question, the following offices were held by the designated persons in American, Pilgrim, Massachusetts*191 Enterprises, petitioner, and all of the affiliated corporations: *401
| President | Samuel Pinanski |
| Treasurer | Edward S. Canter |
| Assistant treasurer | Robert Foster |
| Clerk | Benjamin A. Trussman |
The salary of Edward S. Canter was paid entirely by American.
As of January 1959, Pilgrim had outstanding defaulted financial obligations in the amount of approximately $ 3 million to the First National Bank of Boston. In addition, certain Pilgrim subsidiaries were indebted to the same bank in an aggregate amount of more than $ 400,000. All of these debts were secured by mortgages on property of Pilgrim or its subsidiaries. Pursuant to discussion with officers of First National, it was orally agreed that if Pilgrim could make a cash payment of approximately $ 300,000, the bank would write down the total indebtedness to approximately $ 1,400,000 and would also reduce the interest rate on such amount. In order to raise the $ 300,000 essential to this proposed refinancing, the management of American and Pilgrim anticipated raising $ 150,000 from the American stockholders and utilizing $ 65,000 already on deposit representing the proceeds from earlier sales of certain theater properties*192 of the American Group. It was hoped that the balance could be derived from the proceeds of the sale of the real estate owned by Massachusetts Enterprises.
As early as January 1958, the real estate was listed with the brokerage firm of R. M. Bradley & Co., Inc. (hereinafter referred to as Bradley), through Fred F. Stockwell, the firm's vice president. Efforts to sell the land were handled by Canter on behalf of the seller and Bradley as broker for the seller, with all of the latter's correspondence being addressed to Canter at American.
Prior to the listing with Bradley, Canter had had conversations with Harold Gordon, one of petitioner's minority stockholders. Canter understood that Gordon also represented the other minority stockholders. Gordon had often expressed the desire of the minority stockholders to get some cash dividends from petitioner and was desirous that the land be sold.
After discussing the matter with Gordon, Canter authorized Bradley to quote a price for the land of $ 250,000. For the remainder of 1958 and the early part of 1959, the land remained unsold. In March 1959, Stockwell began negotiations for the sale of the land with Clevite Transistor Products Corp. *193 (hereinafter referred to as Clevite). Clevite expressed a definite interest in the land.
In a letter dated March 31, 1959, from Stockwell to Canter, the former transmitted an offer on behalf of Clevite to pay $ 3,000 for a 60-day option to purchase the land for $ 200,000, contingent upon a rezoning of the 10 residential acres. Upon receipt of this offer, Canter consulted further with Gordon, and they agreed to make a counteroffer to close *402 the deal for a price of $ 200,000 net after Bradley's commission -- i.e., a purchase price of $ 214,300. In the early part of April 1959, Stockwell advised Canter that Clevite had accepted this counterproposal. At no time prior to April 1959 had Canter ever mentioned, either in his discussions or in other communications with Stockwell, the name of petitioner or Massachusetts Enterprises. Neither Stockwell nor Clevite appeared to have any knowledge of the relationship of either the petitioner or of Massachusetts Enterprises to the land.
Having learned through Stockwell that Clevite was agreeable to his proposal, Canter turned the matter over to Mr. George P. Davis of Nutter, McClennen & Fish, counsel to the American Group, and asked*194 him to prepare the necessary papers. Prior to that time, no one having any connection with American, Pilgrim, or the petitioner had discussed with counsel any aspect of the transaction.
On April 27, 1959, an agreement for the sale of all of the stock of Massachusetts Enterprises was entered into between each of the shareholders of petitioner, including Pilgrim, and Clevite. Canter signed the agreement on behalf of Pilgrim. The agreement was contingent on rezoning the land. This was accomplished early in June 1959.
The reason for handling the above transaction as a sale of stock by petitioner's shareholders was to realize for Pilgrim the maximum net amount possible after taxes for use in the proposed bank refinancing.
On June 30, 1959, a special meeting of the board of directors of petitioner was held. At this meeting, the directors agreed to cancel an outstanding indebtedness of Massachusetts Enterprises to petitioner and treat the same as a contribution to the capital of the subsidiary. In addition, the directors declared a dividend of all of the stock of Massachusetts Enterprises "payable this day to stockholders of record on the date of this meeting, in equal proportions *195 according to the number of shares held by such stockholders."
Also on June 30, 1959, subsequent to the above declaration of a dividend, all of the stockholders of petitioner endorsed their respective shares of Massachusetts Enterprises to Clevite. After the closing, Bradley rendered, directly to the stockholders of petitioner, its bill for services in connection with arranging the sale. The bill was paid by a check of Nutter, McClennen & Fish out of the proceeds of the sale.
As the holder of 501 shares of the outstanding stock of the petitioner, Pilgrim received $ 97,282.48 as its share of the net proceeds from the sale. Of this amount, $ 90,000 was paid to the bank for application against Pilgrim's indebtedness to it, the balance being used to reduce another debt of Pilgrim. Subsequent to the Clevite sale, a written refinancing agreement incorporating the previous oral understanding was entered into between Pilgrim and the bank. Pursuant to this agreement, Pilgrim made up the balance of the $ 300,000 required cash *403 payment from the $ 65,000 proceeds of earlier property sales and $ 145,000 provided by the stockholders of American.
On its Federal income tax return for *196 1959, petitioner reported a net loss of $ 12,517.36 (including a $ 5,603.73 operating loss carryover from 1958). No gain was reported with regard to the sale of the stock in Massachusetts Enterprises.
OPINION
The precise issue arises in the context of section 311(a) of the Internal Revenue Code of 1954. 1 In pertinent part and except for certain circumstances not relevant herein, that section provides that "no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of * * * property." Petitioner contends that, since the instant situation does not fall within any of the exceptions to section 311(a), that section operates as an iron curtain against taxability, and any inquiry as to the applicability of Commissioner v. Court Holding Co., 324 U.S. 331">324 U.S. 331 (1945), and United States v. Cumberland Pub. Serv. Co., 338 U.S. 451">338 U.S. 451 (1950), is improper. Alternatively, petitioner asserts that, in any event, the subsequent sale of the distributed stock was made independently by and on behalf of petitioner's shareholders, thus falling under the umbrella of Cumberland. Respondent counters*197 that the sale was in reality made by petitioner pursuant to a prearranged plan, which was totally lacking in substance and had as its sole purpose the avoidance of a tax at the corporate level. He therefore claims that Court Holding Co. applies and relies heavily upon his own regulations which provide that "the proceeds of the sale of property in form made by a shareholder receiving such property in kind from the corporation may be imputed to the corporation if, in fact, the corporation made the sale." See 1.311-1(a), Income Tax Regs. (Emphasis added.)
We deal first with the assertion that the principles of Court Holding and Cumberland do not apply to the instant case and that section 311(a) standing alone governs. Concededly, at the time the 1954 Code was enacted, Congress did not look with favor upon the fine distinctions developed by the courts in applying these two cases and, as a consequence, incorporated*198 section 337 into the Code. 2 See H. Rept. No. 1337, 83d Cong., 2d Sess., pp. 38, A106 (1954); S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 48, 258 (1954). Section 337 was a specific legislative elaboration on section 336, which provides that generally "no gain or loss shall be recognized to a corporation on the distribution of property in partial or complete liquidation." No similar elaboration *404 was engrafted upon section 311(a), although the statutory language used is substantially identical to that of section 336. Moreover, at the time of the enactment of section 311(a), Congress clearly indicated that existing case law, imposing a tax at the corporate level in situations involving distributions in kind, was to remain intact, except, of course, where section 337 was applicable. See H. Rept. No. 1337, supra at A108; S. Rept. No. 1622, supra at 247; Mintz and Plumb, "Dividends in Kind -- The Thunderbolts and the New Look," 10 Tax L. Rev. 41">10 Tax L. Rev. 41, 45, fn. 22. Consequently, it has been held that the courts remain free to apply the nonstatutory rules enunciated by the decided cases, including not only assignment of income situations such as *199 was involved in Commissioner v. First State Bank, 168 F. 2d 1004 (C.A. 5, 1948), but those encompased by Court Holding and Cumberland as well. Wood Harmon Corporation v. United States, 311 F. 2d 918, 924 (C.A. 2, 1963); A.B.C.D. Lands, Inc., 41 T.C. 840">41 T.C. 840, 847 (1964). See generally Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders, 176-185 (2d ed. 1966); Mintz and Plumb, supra at 44-48.
In view of the foregoing, we are satisfied that the principles of Court Holding and Cumberland retain their vitality in the area of section 311(a) (see Williamson v. United States, 292 F. 2d 524, 530-531 (Ct. Cl. 1961)), although it may be that, in situations where the safe harbor of Cumberland would be available, the taxpayer will face another barrier (see*200 p. 405-406, infra). We recognize that, in the context of these two decisions, it can be argued that the formalities of handling a particular transaction assume a disproportionate importance and that a premium is placed on consulting one's lawyer early enough in the game. Certainly the necessary distinctions "may be particularly shadowy and artificial when the corporation is closely held." See United States v. Cumberland Pub. Serv. Co., 338 U.S. at 454-455. But, in light of the applicable legislative history and case law, we conceive it to be our function herein first to consider the circumstances surrounding the sale of the Massachusetts Enterprises stock in light of the tests enunciated in Court Holding and Cumberland.
There is no real dispute as to the relevant underlying facts herein. The initial objective was to sell the land owned by Massachusetts Enterprises and the negotiations were all carried on in that context. Nothing in the record before us indicates that the conversations between Canter and Gordon, representing the other shareholders of petitioner, encompassed anything but the desire of all concerned to sell the land *201 as a means of obtaining cash. All of the discussions between, and actions by, Canter and the broker fit a pattern of negotiations at the corporate level. There was never any break in the negotiations. They were active and continuous right up until the moment *405 that the deal with Clevite had been made and the matter had been turned over to the lawyers for the preparation of the legal documents. It was not until after that point in time that a sale at the noncorporate level by petitioner's shareholders was suggested.
Petitioner seeks to avoid the application of Court Holding herein by seizing on the fact that the negotiations were in respect of a sale of the land and never in respect of the sale of the stock; that the multiple capacity of Canter provided a legitimate cover for the identity of the seller which was never revealed during the negotiations; and that, in the end, it was the stock of Massachusetts Enterprises which was actually sold. Petitioner may not thus utilize the "hidden ball" play with a screened ball carrier at the expense of the Federal fisc. That the stock of Massachusetts Enterprises was substituted for the land at the last minute does not detract*202 from the fact that the sale herein was never conceived and negotiated as a sale by the shareholders of petitioner. Cf. Merka Holding Co., 27 T.C. 82">27 T.C. 82 (1956); Doyle Hosiery Corporation, 17 T.C. 641">17 T.C. 641 (1951). The presence of substantial negotiations on behalf of the shareholders, not to mention the fact that the corporation expressly refused to sell the asset at the corporate level, was the distinguishing feature in Cumberland. The absence of this element, namely, independent negotiations at the noncorporate level, is the essential weakness of petitioner's position herein.
We cannot accept petitioner's premise that, because there were no negotiations with respect to the sale of the Massachusetts Enterprises stock, the sale must be considered as having been made by petitioner's shareholders. We think that, in order to claim the protection of Cumberland, it was incumbent on petitioner to show that the sale was independently negotiated on behalf of its shareholders. Petitioner having failed so to do, we see no reason to disturb respondent's determination that the gain on the sale should be taxable to the entity, *203 i.e., the petitioner, who owned the asset throughout the negotiations and up to the very day of actual transfer to the purchaser. In this connection, we note that the dividend in kind of the stock of Massachusetts Enterprises was not distributed until the day of its prearranged transfer to Clevite. In short, whether we consider the sale itself as having been made by petitioner, or simply that the negotiations had been sufficiently finalized prior to the distribution in kind to warrant attributing the gain to petitioner, we hold that it is taxable on the gain from the sale under the principles of Court Holding and Cumberland.
We are not unmindful of the language in some decisions that the protection of Cumberland may not be available to nonliquidating distributions in kind by an ongoing corporation and that the corporation may be held taxable simply on the ground that there was a tax-motivated preconceived plan. E.g., United States v. Lynch, 192 F. 2d 718*406 (C.A. 9, 1951); Commissioner v. Transport Trad. & Term. Corp., 176 F. 2d 570 (C.A. 2, 1949); A.B.C.D. Lands, Inc., supra;*204 but see Diggs v. Comissioner, 281 F. 2d 326 (C.A. 2, 1960). See also Bittker and Eustice, supra at 182; Mintz and Plumb, supra at 46-48; Bierman, "Corporate Distributions of Appreciated and Depreciated Property: Gain or Loss to the Distributor," 8th Ann. N.Y.U. Tax Inst. 792 (1950); Comment, "The Imputed Sale and Anticipatory Assignment of Income Doctrines: Their Effect on I.R.C. Sections 311, 1336," 15 Buffalo L. Rev. 154 (1966). Although the difficulties of applying the distinctions of Court Holding and Cumberland might be avoided if we were to adopt the broader concept suggested with respect to nonliquidating distributions, we would then be faced with equal, if not greater, difficulties in deciding the relative importance of other factors, such as the character of the assets involved, the effect of a distribution clearly in partial liquidation, the presence or absence of a prior commitment of the shareholders to sell the distributed assets or of an expectation of sale by the shareholders, and the impact of an exclusively or predominant tax-avoidance motivation. Particularly since the actual facts of*205 the above-cited cases do not require the more general rationale found in the opinions, we see no point in exploring such wider horizons until we are compelled to do so. None of the foregoing cases prohibits the application of Court Holding and it is that decision which is the foundation of our conclusion herein.
Decision will be entered for the respondent.