*157 Decision will be entered under Rule 50.
Petitioners controlled corporations H, N, and G. Petitioners transferred to H all of their N and G stock and received in return $ 64,850 cash and H stock worth $ 48,640. Held, since section 351, I.R.C. 1954, applies, the language of sections 302(d) and 301(a) precludes dividend treatment despite the fact that section 304 also applies.
*562 Respondent determined a deficiency of $ 82,224.86 in petitioners' income tax liability for 1958.
Some of the issues have been settled. The issue remaining for decision is whether stock and $ 64,850 received by Henry McK. Haserot from his controlled corporation in return for stock in two other controlled corporations are taxable as a dividend or are to be treated as payment for stock and taxed as long-term capital gain.
FINDINGS OF FACT
Some of the facts have been stipulated.
The petitioners are husband and wife and reside in Cleveland, Ohio. Their cash basis joint Federal income tax*161 return for the calendar year 1958 was filed with the district director of internal revenue at Cleveland, Ohio. Petitioner Henry McK. Haserot will hereinafter sometimes be referred to as petitioner.
Northport Cherry Factory, Inc. (hereinafter sometimes referred to as Northport), was incorporated in Michigan on February 25, 1930. Since then, Northport has been engaged in the business of owning and operating cherry orchards and a fruit canning and packing plant at Northport, Mich. Its office is at Port Clinton, Ohio. Northport's products are principally cherries and apple juice, a large part of which are canned or packed under the brand name "Northport," a registered trademark. At all material times, Northport had outstanding 4,562 shares of stock of the only class authorized.
The Gypsum Canning Co. (hereinafter sometimes referred to as Gypsum) was incorporated in Ohio on June 16, 1900. At all material times Gypsum was engaged in the business of owning and operating cherry orchards and a fruit and vegetable canning and packing plant at Port Clinton. Its office is at Port Clinton. Gypsum's products were principally cherry, tomato, and pumpkin food products, a large part of which*162 were canned or packed under the brand names "Ottawa Chief," "Lake Shore," and "Bellevue," all registered trademarks. *563 At all material times, Gypsum had outstanding 6,582 shares of stock of the only class authorized.
The Haserot Co. (hereinafter sometimes referred to as Company) was incorporated in Ohio on March 7, 1894. Its principal office and place of business are in Cleveland, Ohio. Since its incorporation, Company has been engaged in the business of importing, blending, and roasting coffee; importing spices, condiments, and other food products; purchasing canned and preserved fruits and vegetables and other food products from Northport, Gypsum, and others; and marketing those goods to wholesalers, distributors, and large consumers. Company markets products under its own brand names which are registered trademarks and under the brand names of Northport, Gypsum, and others.
Northport and Gypsum sold the entire output of their canning and packing plants, except for damaged and rusted cans sold for salvage and casual sales to local purchasers, to Company for resale through the latter's sales and distributing organization. Northport and Gypsum had no sales or distributing*163 organizations of their own.
Company furnished the principal management for Northport and Gypsum and provided the seasonal financing necessary for their crops and canning operations. This financing was provided in part by substantial cash advances, evidenced by negotiable interest-bearing notes, and in part by Company's guaranty of the accounts of Northport and Gypsum to their suppliers. The cash advances to each company averaged about $ 445,000 per year.
The food purchased annually by Company from Northport and Gypsum has varied in the 10 years 1952 through 1961 from a low of $ 649,745 in 1952 to a high of $ 1,420,860 in 1959. This has constituted approximately 10 percent of Company's overall food purchases each year. The food purchased from Northport and Gypsum was important to Company beyond the dollar amounts directly involved, since it permitted Company to furnish a wider range of food products to its customers. This enabled Company's salesmen to have initial access to more purchasers, which was beneficial to the entire line of products. Also, by increasing the number of items sold per sales call, it reduced the sales expense for each particular item.
Although the food products*164 obtained from Northport and Gypsum might have been obtained from other sources, had control of Northport and Gypsum been lost, there were many business advantages to obtaining the products from Northport and Gypsum and to having control over these canneries, some of which are as follows:
(1) Independent and competing canneries are not reliable sources of supply. In bad crop seasons they provide for their own brands first and a small independent company such as Company would be *564 the first to go short. Even in good seasons, the particular types of packaging available may not meet Company's particular needs.
(2) The brand names of the Northport and Gypsum products are not nationally known and advertised. However, they are well and favorably known to Company's customers. The loss of these brand names would result in an immediate loss of business and customer goodwill. It is a long and difficult process for a small company to develop new brand names.
(3) The development and maintenance of goodwill for a small company and its brand names require constant attention to quality control. Such control cannot be assured where canned goods are bought from an independent source for*165 resale under the company's labels.
(4) The locations of the Northport and Gypsum canneries are very favorable, both in geographical proximity to Company's markets, and in the quality of the surrounding growing areas.
(5) A middleman, such as Company, cannot change its prices to meet market fluctuations except in conjunction with the packer which is its source. Control of the packer permits the decisions for both companies to be made together, with a resulting advantage in speed and flexibility.
Company was founded by petitioner's uncle and his father, Francis H. Haserot, hereinafter sometimes referred to as Francis H. Prior to 1942, Francis H. was the president of Company, Northport, and Gypsum. In 1942, petitioner became president of Company; however, Francis H. continued as president of Northport and Gypsum until 1951.
During the period from 1942 to 1951 there was a lack of common control over Company and the canneries, resulting in costly, inefficient production practices at the canneries, morale and communication problems, and related difficulties. These problems stemmed in part from the fact that management of Company did not always know what orders had been given to the *166 canneries by Francis H., and coordination with him became very difficult. In part, the problems stemmed from the afflictions of age, Francis H. then being in his late 80's.
In 1951, Francis H. resigned as president of Northport and Gypsum; at the same time he gave his stock in those companies to petitioner, who thereby became the controlling shareholder and president of both companies.
At various times beginning after his acquisition of the Northport and Gypsum stock in 1951, petitioner informally discussed with the other directors the advisability of transferring that stock to Company. The other directors favored such a transfer.
*565 The directors' reasons for preferring direct stock ownership by Company were:
(1) The loss of Northport and Gypsum as suppliers would have been extremely serious.
(2) Divided control, even within the Haserot family and without loss of Northport and Gypsum as suppliers, had proved inefficient, unpleasant, and costly.
(3) As long as the Northport and Gypsum stock was held by an individual there was a danger that those shares would become separated from the shares of Company, either by voluntary transfer (which had been responsible for the prior *167 division of control), by involuntary transfer, by inheritance, or by other events after the death of the individual.
(4) In early 1958, petitioner was 68 years old.
(5) In assessing the chances of such an inter vivos or testamentary division of the stock all parties involved were deeply influenced by the lack of judgment displayed by Francis H. in his late years, and in particular by the latter's actual decision in 1942 to divide control.
Francis H. died on February 14, 1954. His will was admitted to probate by the Probate Court of Cuyahoga County, Ohio. The Cleveland Trust Co. was appointed executor of the estate. At the time of his death, Francis H. owned 10,293 shares of Company, all of which was bequeathed to petitioner. The bequest was conditioned, however, upon the payment by petitioner to the estate of certain amounts the total of which was ultimately computed to be $ 80,984.28. Any stock not passing under the bequest, due to failure to make such payment, would have fallen into the residue, which was to be divided equally between Francis S. Haserot (hereinafter sometimes referred to as Francis S.) and Margaret Haserot (hereinafter sometimes referred to as Margaret), petitioner's*168 brother and sister.
Francis S. had worked for Company for 1 month during a school vacation many years earlier. He had had no other connection with Company, Northport, or Gypsum, as officer, shareholder, director, or employee. He had formerly been a college professor of philosophy but by 1958 had retired to Florida. In February 1958, Francis S. was 63 years old.
Margaret also had never been an officer, shareholder, director, or employee of Company, Northport, or Gypsum. She was not a "business person." She lived on a farm near Novelty, Ohio, where she raised horses and thoroughbred dogs. In February 1958, Margaret was 66 years old.
Company had long and vigorously maintained a policy that only present or former employees should own its stock. Until 1950 it was provided in the terms of the stock that it had to be sold if the holder *566 left Company for any reason. After 1950, an agreement to similar effect was signed annually by every shareholder. In 1958 no shares in Company were owned by other than employees, former employees, or the estates of former employees. The ownership of large blocks of stock by Francis S. and Margaret would have been inconsistent with this policy.
*169 In accordance with Francis H.'s will, petitioner paid to the executor of Francis H.'s estate, a total of $ 80,984.28 as follows: On August 26, 1956, petitioner caused Company to draw its check for $ 27,000 payable to the order of the executor and delivered the check to the executor. On February 11, 1958, petitioner caused Company to draw its check for $ 53,984.28 payable to his own order. He thereupon endorsed the check to the order of and delivered it to the executor. In each instance, the amount was charged to petitioner's account on Company's books.
Immediately prior to February 18, 1958, the outstanding shares of Northport and Gypsum were owned as follows:
| Owner | Northport | Gypsum |
| Petitioner | 1,999 | 4,486 |
| Company | 1,250 | 2,022 |
| Gypsum | 1,312 | 0 |
| Mabel Carnes | 1 | 74 |
| 4,562 | 6,582 |
Mabel Carnes was at all pertinent times an employee and the secretary of Northport and Gypsum but otherwise unrelated in any way to either petitioner or his wife.
On or about February 14, 1958, petitioner offered to transfer to Company his 1,999 shares of Northport stock and his 4,486 shares of Gypsum stock in return for 2,432 shares of Company's authorized but unissued stock and $ 64,850*170 cash. As of February 18, 1958, petitioner had held his Northport and Gypsum stock for more than 6 months, his aggregate adjusted basis in that stock was $ 72,905.15, and those shares were capital assets in his hands.
On February 18, 1958, Company's board of directors accepted petitioner's offer. As of that date, Company had earnings and profits accumulated after February 28, 1913, in excess of $ 113,490. Thereafter, and until 1962, Company operated at a profit.
On February 21, 1958, petitioner transferred his Northport and Gypsum stock to Company. Company credited petitioner's account on its books with $ 113,487.50 1 (the value of the Northport and Gypsum stock); debited Haserot's account with $ 48,637.50 1 (the *567 value of Company's 2,432 shares of stock); and, pursuant to petitioner's instructions, issued the 2,432 shares to his son, Henry M. Haserot, Jr. (hereinafter sometimes referred to as Henry), as a gift. At that time, Henry was executive vice president of Company. The following schedule indicates the effect of the foregoing transactions on Haserot's account with the Company:
| Balance: | Debit | Credit |
| Jan. 1, 1958 | $ 12,446.47 | |
| Jan. 6, 1958 -- check | $ 1,000.00 | |
| Jan. 14, 1958 -- check | 10,000.00 | |
| Jan. salary | 2,083.33 | |
| Jan. salary -- payroll tax (W. tax and Soc. Sec.) | 436.57 | |
| Feb. 11, 1958 -- check No. 5908 | 53,984.28 | |
| Feb. 21, 1958 -- 4,486 shares Gypsum stock | ||
| at $ 17.50 each | 78,505.00 | |
| Feb. 21, 1958 -- 1,999 shares Northport stock | ||
| at $ 17.50 each | 34,982.50 | |
| Feb. 21, 1958 -- 2,432 shares Haserot Co. | ||
| stock $ 20 each less $ 2.50 | 48,637.50 | |
| Feb. salary | 2,083.33 | |
| Feb. salary -- payroll tax (W. tax and Soc. Sec.) | 436.57 | |
| Totals | 114,494.92 | 130,100.63 |
| 114,494.92 | ||
| Balance -- Feb. 28, 1958 | 15,605.71 |
Immediately after the transaction with Company and the gift to Henry, Company had 35,446 shares issued and outstanding, owned as follows:
| Petitioner | 29,188 | (including the 10,293 shares acquired from |
| Francis' estate) | ||
| Henry | 3,455 | |
| 18 others | 2,803 | |
| 35,446 |
Petitioner borrowed the $ 53,984.28 represented by the February 11, 1958, check in anticipation of his February 14 offer and Company's February 18 acceptance.
Petitioner believed that the stock owned by him at his death would go into a trust, and that the effect of this would be to give voting control to whoever owned over 50 percent of the stock not held in the trust. He wanted to receive 2,432 shares in Company and give those shares to Henry, the only other member of the family active in the business, in order to insure that Henry would have voting control after petitioner's *172 death.
In planning the transaction, petitioner was unaware that it involved either tax problems or tax advantages. He did not consult in advance *568 with counsel or with anyone else as to the income tax consequences of the transaction.
Petitioners' Federal income tax return for the year before us omitted any reference to the transaction at issue.
In January 1960, petitioner turned over the presidency of all three companies to Henry.
The earnings and dividend record of Company for the years 1949 through 1958 was:
| Cash dividend | |||
| as | |||
| Net profit | Cash dividend | percent of | |
| Year | after taxes | paid | net profit |
| 1949 | $ 57,393.78 | $ 13,657.60 | 23.796 |
| 1950 | 106,789.23 | 67,740.00 | 63.433 |
| 1951 | 58,166.18 | 13,499.60 | 23.208 |
| 1952 | 55,023.81 | 13,500.00 | 24.535 |
| 1953 | 36,772.13 | 13,396.40 | 36.430 |
| 1954 | 37,933.44 | 13,364.80 | 35.232 |
| 1955 | 23,916.24 | ||
| 1956 | 27,736.16 | 13,180.80 | 47.522 |
| 1957 | 41,165.93 | 13,205.60 | 32.079 |
| 1958 | 25,886.00 | 14,110.00 | 54.508 |
In the deficiency notice adjustment here at issue, respondent increased petitioners' income by $ 113,490, the aggregate of the cash ($ 64,850) and fair market value of Company stock (determined by respondent to be $ 48,640) *173 petitioner received in the February 1958 transaction.
OPINION
This case involves one of those unusual situations where a transaction comes within the literal language of two sections of the Code 2 -- 351 and 304. For purposes of section 351 (a), (b), 3*174 there was a transfer of property (Northport and Gypsum stock) in exchange for stock in a corporation (Company) that was controlled (owned at least 80 percent of the stock) immediately thereafter by the transferor (petitioner). *569 For purposes of section 304(a)(1), 4 one person (petitioner) was in control (direct or constructive ownership of at least 50 percent of the stock) of three corporations (Northport, Gypsum, and Company) and in return for property (money) one of the corporations (Company) acquired stock in the other corporations (Northport and Gypsum) from the person in control (petitioner).
*175 Respondent now concedes that the 2,432 shares of Company stock issued to petitioner did not constitute taxable income. Respondent also concedes that if section 351 is applicable, the gain should be taxed at capital gains rates.
Both parties present a multiplicity of arguments as to which section controls. If section 351 controls, the gain is to be taxed as a capital gain. If section 304 controls, then the gain is to be taxed as a capital gain or the $ 64,850 cash payment is to be taxed as a dividend, depending upon the relevant parts of section 302. 5
*176 *570 We agree with petitioners' contention that the effect of sections 301(a)6 and 302(d) on the facts of this case, by eliminating the possibility of dividend treatment, is to cause the payment by Company to be treated as a payment in exchange for the Northport and Gypsum stock, giving rise to a capital gain.
We have no reason to believe that Congress had any intent with regard to the fact pattern of this case. However, the statements in sections 301(a) and 302(d), "except as otherwise provided in this chapter [or subchapter]" of the Code, indicate that Congress made the policy decision that dividend treatment will result from the application of section 302 only if no other provision in the relevant parts of the Code requires*177 other treatment. 7Section 351 has no such limitation. That section is, by its terms, applicable. 8 That section provides for tax treatment of the payment in question in a manner other than and different from the distribution treatment provided for by sections 302(d) and 301. Consequently, the very words of the latter sections preclude dividend treatment in this case.
*178 We recognize that this interpretation of the Code implies that brother-sister corporation redemptions may be so arranged that they continue to be subject to special scrutiny and possible dividend treatment only if the controlling party has less than 80-percent control -- that greater control (with concomitant greater power for mischief) may confer the benefits of capital gains treatment. Congress might have provided that sections 301, 302, and 304 controlled or at least had coordinate status with other provisions of subchapter C. It might have provided for dividend or ordinary income treatment in the event of section 351 "boot." However, Congress chose to subordinate the dividend path of sections 302(d) and 301(a) to other provisions of the subchapter and, unlike the "boot" provisions of sections 356(a)(2), Congress chose to treat section 351(b) "boot" as a payment in exchange. 9
*179 *571 Respondent relies upon Jack L. Easson, 33 T.C. 963 (1960), revd. 294 F. 2d 653 (C.A. 9, 1961), for the proposition "that what is now section 351 will not be construed literally if a literal application will be contrary to the purpose of the statute by producing absurd results or frustrating the tax laws as a whole." In Easson, we were concerned that a literal application of section 112(k) of the 1939 Code (the predecessor of subsections (a) and (b) of section 357) would result in avoidance of a tax, even though that section and 112(b)(5) of the 1939 Code, the predecessor of section 351, were enacted merely to postpone that tax. Here, both sides agree that a tax is presently due. The only question is whether the tax is to be at capital gains rates and only upon the gain, or at ordinary rates, upon the total cash payment, and with a corresponding upward adjustment in basis of other stock, in effect, deferring a reduction of tax. Even without giving consideration to the decision of the Court of Appeals in Easson, we cannot say that in the case before us the frustration of congressional purpose is so apparent*180 that we must ignore the statutory language.
Respondent cites National Securities Corp. v. Commissioner, 137 F. 2d 600 (C.A. 3, 1943), affirming 46 B.T.A. 562 (1942), and Rooney v. United States, 305 F. 2d 681 (C.A. 9, 1962), as examples of section 351 giving way when in conflict with other sections. In National Securities the court held that the predecessor of section 48210 was intended to supersede conflicting provisions of the revenue acts. Rooney, too, involved a conflict between sections 351 and 482. The Court of Appeals there followed National Securities on that point. 305 F. 2d at 686. By contrast, the conflicting provisions we are here concerned with, specifically note that they are to give way. Consequently, here, section 351 takes precedence.
*181 Respondent's cause is not advanced by his reliance upon the explanation of section 304 in Radnitz v. United States, 294 F. 2d 577, 578 (C.A. 2, 1961), to wit: "The clear intent of this provision is to make all sales of stock to related corporations subject to the rules of section 302." In Radnitz the court held that a transaction was not exempted from section 304 merely because the taxpayer received from the corporation no more than the fair market value of the stock he surrendered. Such a fair exchange is no more exempt from section 304 than a direct redemption at fair market value would be from *572 section 302. Radnitz was followed on this point in United States v. Collins, 300 F. 2d 821, 824 (C. A. 1, 1962). Neither Radnitz nor Collins involved a conflict between different sections of the Code. In both cases, the appellate courts determined to apply the statute as it was written, declining the taxpayers' invitations to imply exceptions to its terms. What we do here is perfectly consistent with Radnitz and Collins.
We do not lightly assume that Congress has legislated eccentrically. *182 J. C. Penney Co. v. Commissioner, 312 F. 2d 65, 68 (C.A. 2, 1962), affirming 37 T.C. 1013 (1962). Nevertheless, the language of the statute compels, in our view, the result here reached.
Since there is no dispute as to the amount of the gain and since that amount will in either event be taxed as a long-term capital gain, it is not necessary for us to determine in this proceeding whether that result is arrived at via section 351 or via sections 304 and 302(a).
Decision will be entered under Rule 50.
Footnotes
1. The parties have stipulated that these amounts were each understated by $ 2.50. The credit should have been $ 113,490 and the fair market value of the stock was $ 48,640.↩
2. All references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩
3. SEC. 351. TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.
(a) General Rule. -- 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 (as defined in section 368(c)) of the corporation. For purposes of this section, stock or securities issued for services shall not be considered as issued in return for property.
(b) Receipt of Property. -- If subsection (a) would apply to an exchange but for the fact that there is received, in addition to the stock or securities permitted to be received under subsection (a), other property or money then --
(1) gain (if any) to such recipient shall be recognized, but not in excess of --
(A) the amount of money received, plus
(B) the fair market value of such other property received; and
(2) no loss to such recipient shall be recognized.↩
4. SEC. 304. REDEMPTION THROUGH USE OF RELATED CORPORATIONS.
(a) Treatment of Certain Stock Purchases. --
(1) Acquisition by related corporation (other than subsidiary). -- For purposes of sections 302 and 303, if --
(A) one or more persons are in control of each of two corporations, and
(B) in return for property, one of the corporations acquires stock in the other corporation from the person (or persons) so in control,
then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the corporation acquiring it, as a contribution to the capital of such corporation.
(2) Acquisition by subsidiary. -- For purposes of sections 302 and 303, if --
(A) in return for property, one corporation acquires from a shareholder of another corporation stock in such other corporation, and
(B) the issuing corporation controls the acquiring corporation, then such property shall be treated as a distribution in redemption of the stock of the issuing corporation.↩
5. SEC. 302. DISTRIBUTIONS IN REDEMPTION OF STOCK.
(a) General Rule. -- If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
(b) Redemptions Treated as Exchanges. --
(1) Redemptions not equivalent to dividends. -- Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend.
(2) Substantially disproportionate redemption of stock. --
* * * *
(3) Termination of shareholder's interest. -- Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder.
(4) Stock issued by railroad corporations in certain reorganizations. * * *
(5) Application of paragraphs. -- In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. * * *
* * * *
(d) Redemptions Treated as Distributions of Property. -- Except as otherwise provided in this subchapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribution of property to which section 301↩ applies.
6. SEC. 301. DISTRIBUTIONS OF PROPERTY.
(a) In General. -- Except as otherwise provided in this chapter, a distribution of property (as defined in section 317(a)↩) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c).
7. We note that the House version of sections 301(a) and 302(b)↩ (which became 302(d) in the Code) contained no provisions subordinating their applicability in the event of conflict with other provisions of the Code.
8. Petitioners suggest that section 351 need not apply if only a de minimis number of shares are issued or if the transaction is a sham. We need not consider whether those limitations should be accepted and, if so, whether the boundaries lie between "real" section 351 transactions and those that may be disregarded. Here, the shares issued formed a substantial part of the entire consideration and the stockholdings were changed in fact in accordance with the form of the transaction. Cf. Richard M. Mills, 39 T.C. 393 (1962), where this Court held that the word "solely" in the statute precluded application of the de minimis↩ doctrine.
9. Compare sec. 368(a)(1)(B)↩ where any "boot" causes recognition of all gain, not merely gain up to the amount of the boot. Under secs. 356 and 351, gain in excess of the boot is not recognized.
10. SEC. 482. ALLOCATION OF INCOME AND DEDUCTIONS AMONG TAXPAYERS.
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Secretary or his delegate may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.↩