The sole issue to be determined on this review is whether amounts distributed to the petitioners in 1948 by a closely held corporation were taxable as ordinary income or as a long term capital gain. The Tax Court found that the amounts in question were distributed as “boot” pursuant to a plan of reorganization, having “the effect of the distribution of a taxable dividend” under section 112(c) (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 112(c) (2). The petitioners contend the distribution was made in complete liquidation of the corporation and that it should therefore be taxed as a long term capital gain under section 115(c) of the 1939 Code, 26 U.S. C.A. § 115(c). The facts are not in dispute.
The petitioners were husband and wife in 1948. Together they owned eighty per cent of Liddon Motors, Inc., a Tennessee corporation, hereinafter called the “old corporation,” engaged in the business of selling and servicing automobiles under a franchise dealer contract with the Pontiac Motor Division of the General Motors Corporation, hereinafter called “Pontiac.” The petitioner husband was president and the petitioner wife was vice president of the corporation. The remaining twenty per cent of the stock was owned by R. H. Davis, the general manager of the corporation.
Among other things the franchise agreement provided: “Third: This Agreement constitutes a personal contract, having been entered into in reliance upon and recognition of W. M. Lid-don, R. H. Davis (jointly), the Dealer, or partner(s) in the dealership, or representative (s) of the Dealer who actively and substantially participate (s) in the ownership and/or operation of the dealership. Dealer shall not transfer nor assign this Agreement or any part thereof, nor make nor suffer to be made any substantial change in the ownership, financial interests or active management of Dealer.” It was elsewhere provided in the contract that Pontiac could terminate the agreement immediately upon the “Death, incapacity, or the removal, resignation, withdrawal, or elimination from the dealership * * * of * * * any person named in Paragraph Third of this Agreement.”
In April of 1948, because of ill health, Davis tendered his resignation as general manager of the corporation, and also notified the petitioners that he wished to sell or liquidate his interest in the corporation as soon as possible. On April 27, 1948, Davis wrote to Pontiac, advising that he had tendered his resignation, that he was “liquidating my stock ownership” and that it was “agreeable with me that in any future contracts between Pontiac Motor Division and Liddon Motors, Inc., or their successors, that I not be considered in Paragraph 3 of the contract.”
Special meetings of the shockholders and of the directors of the old corporation were held on April 26, 1948. The minutes of those meetings recite that Davis offered his stock for sale to the other stockholders (petitioners) at book value, but that they did not accept. The minutes further recite that it was after' further discussion “concluded by all stockholders that the practical and equitable way to liquidate the stock as requested by Mr. Davis would be to surrender the Charter of the Corporation,, selling the assets of the Corporation and liquidating the Corporation at the earliest possible date.” Accordingly, the corporation officers were authorized and directed to proceed to liquidate the corporation and surrender its charter, “and sell the assets of the Corporation, calling *306the outstanding stock, and distributing the proceeds to the stockholders in their rightful proportion and share.”
On May 1, 1948, Liddon Pontiac, Inc., hereinafter called the “new corporation” was incorporated by the petitioners under the laws of Tennessee. Its initial capital consisted of $5,000 contributed by the petitioners in cash, in addition to a $10.00 qualifying share held by a third party. Within three weeks the petitioners contributed an additional $20,000 to the capital of the new corporation. This total contribution of $25,000 was made from the petitioners’ personal funds.
On the day of its creation the new corporation entered into a franchise dealer agreement with Pontiac. This new agreement was essentially the same as the previous agreement between Pontiac and the old corporation, except that only the name of W. M. Liddon was entered in “Paragraph Third” of the new agreement, instead of the names of both Lid-don and Davis. Pontiac had cancelled the old agreement some time between April 27, the date of Davis’ letter, and May 1, the date of the agreement with the new corporation.
On May 6, 1948, at a special meeting of its Board of Directors, the old corporation was directed to sell its operating assets to the new corporation at book value, to permit the new corporation to use the remaining physical assets without charge pending negotiation for their sale, and to transfer its employees’ retirement fund to the new corporation. The new corporation accepted this arrangement.
At another special meeting of its Board of Directors, held on July 4, 1948, the old corporation was authorized to pay Davis $11.00 per share for his stock, its approximate book value. On the same day, the old corporation gave Davis its check for $22,000 and his shares were retired. At a subsequent meeting on July 13, 1948, the old corporation was authorized to distribute the balance of its assets to its two remaining stockholders, the petitioners. These assets, consisting of more than $150,000 in cash and notes, were promptly paid over to petitioners in equal shares. Four days later the old corporation surrendered its charter. Each petitioner reported the amount received, less the cost of his old corporation stock, as a long term capital gain for 1948.
The Commissioner asserted a deficiency, claiming that these amounts should have been reported by the petitioners as ordinary income. In a decision reviewed by the full court the Tax Court sustained the Commissioner. 22 T.C. 1220.
Considering the above-described series of transactions as a whole, the Tax Court concluded that they evidenced a plan of reorganization. “The synchronization of these transactions is something more than mere coincidence. It appears to us as a plan of reorganization. And since the liquidation was part of the plan, respondent must be sustained.” 22 T.C. at page 1228.
Since the old corporation had transferred part of its assets to the new corporation, and since immediately after the transfer the old corporation’s shareholders were in control of the new corporation, the court pointed out that the transaction fell precisely within one of the statutory definitions of a reorganization.1
Moreover, since at the beginning of the series of transactions the petitioners held stock in the old corporation, and at the end they held stock in the new corporation, plus “money-to-boot,” the court *307reasoned that, although there was not a direct exchange of stock in the old corporation for stock in the new, plus “other property or money,” that was the net effect of what was done. Accordingly, the court concluded that the case was governed by sections 112(b) (3) and 112 (c) of the 1939 Code.
If those sections of the Code control, the result reached by the court was obviously correct, as petitioners in effect concede. Under section 112(b) (3) no gain was recognizable on the “exchange” of stock in the old corporation for stock in the new.2 The gain resulting from the distribution of the “other property or money,” however, since it did not exceed the value of such “other property or money” was recognizable in full by virtue of section 112(c) (l),3 and since the recognizable gain did not exceed the undistributed earnings and profits of the old corporation, it could properly be taxed as a dividend under section 112(c) (2).4 Commissioner of Internal Revenue v. Estate of Bedford, 1945, 325 U.S. 283, 65 S.Ct. 1157, 89 L.Ed. 1611.
The Tax Court not only relied upon the fact that one of the statutory definitions of a reorganization had been formally met, but also emphasized the substance of the situation presented, i. e., when the series of transactions was completed the petitioners were in control of the same going business as before, albeit in a new corporate shell, having in the meantime extracted a substantial portion of the accumulated earnings and profits of the business.
In asking us to reverse the Tax Court’s decision the petitioners place prime reliance upon the decision of this court in United States v. Arcade Co., 6 Cir., 1953, 203 F.2d 230. The facts in that case were significantly different, however, as Judge McAllister’s opinion in that case makes clear. There, the old corporation was dissolved and its assets distributed to trustees for its stockholders. Thereafter, at the direction of the stockholders, the trustees transferred the assets to a newly formed corporation in return for its stock, which the trustees delivered to the stockholders in shares proportionate to their ownership in the former corporation.
The opinion in the Arcade Co. case emphasizes that the circumstances did not fall within any statutory definition of a reorganization. “It is our conclusion that there was no transfer by the old corporation of its assets to the new corporation, within the meaning of section 112(g) (1); that neither the old nor the new corporation was a ‘party to a reorganization’, as set forth in section 112 (g) (2); and that the transactions out of which this controversy arose did not constitute a reorganization within the intendment of the Internal Revenue Code.” 203 F.2d at page 235. The case of Braicks v. Henricksen, D.C.Wash. *3081942, 43 F.Supp. 254, affirmed 9 Cir., 1943, 137 F.2d 632, also relied upon by petitioners, involved facts almost tical to those in the Arcade Co. case. In the present case, on the other hand, the statutory definition of a reorganization was precisely met. The old corporation's assets were transferred directly to the new corporation, and the petitioners were controlling stockholders of both. Therefore, quite unlike the situation in the Arcade Co. case, each corporation was a "party to a reorganization." 5
The petitioners contend, however, that where a corporation has been liquidated, as the old corporation in the present .case clearly was, the provisions of section 115 (c) of the Code relating to the effect of liquidation distributions must prevail over the previously cited sections relating to reorganizations.6 It is argued that this court has decided that where there has been a liquidation there can be no reorganization. The argument is based on a statement in the opinion in Mascot Stove Co. v. Commissioner, 6 Cir., 1941, 120 F.2d 153, at page 156-" * * * liquidation is the antithesis of reorganization." What the court was there referring to was liquidation in bankruptcy, as the first part of the sentence from which the quotation was lifted clearly indicates. "In the present case the bankruptcy proceeded to liquidation and liquidation is the antithesis of reorganization." Even a casual reading of the balance of Judge Simons' opinion in that case reveals that what the court there decided was that, since the old corporation was adjudicated a bankrupt, its shareholders had nothing to transfer. "The insolvency of the old company, its adjudication as a bankrupt, and the sale of all of its assets for less than its debts, put a period to its existence. The new company was a separate enterprise and its realized gains are taxable." 120 F. 2d at page 156.
That liquidation of a corporation may be and often is one of the steps in a plan of reorganization has, on the other hand, frequently been recognized by this and other courts. "Since the exchange was pursuant to a plan of reorganization, the fact that the Fisher Body Corporation was completely liquidated is not controlling." Fisher v. Commissioner, 6 Cir., 1939, 108 F.2d 707, 709. "The so-called liquidating dividend was but a step, albeit an essential one, in the reorganization." Love v. Commissioner, 3 Cir., 1940, 113 F.2d 236, 238. "The liquidation of the old company does not change matters because a statutory reorganization may encompass as one of its incidents the liquidation of one of the corporations a party to the reorganization." Lewis v. Commissioner, 1 Cir., 1949, 176 F.2d 646, 649.
The petitioners' further argument that because Davis' share in the business was completely liquidated during the progress of the transactions, there could be no reorganization within the intendment of the statute, is lacking in merit. It is not unusual in the process of corporate reorganizations for minority shareholders to liquidate their interests and withdraw. "It is our conclusion that the transaction in controversy amounted to a reorganization * * *; and it is unimportant that, in the transaction, a small number consented, or raised no objection to their elimination as stockholders" (citing cases). Seiberling Rubber Co. v. Commissioner, 6 Cir., 1948, *309169 F.2d 595, 598; “We attach no importance to the fact that some of the stockholders in the transferring corporation acquired no interest in the transferee.” Miller v. Commissioner, 6 Cir., 1936, 84 F.2d 415, 418.
Moreover, we are of the opinion that the Tax Court was correct in analyzing what was done in this case from the point of view of its overall net effect, rather than to permit one isolated transaction in a series to determine the tax consequences. The tax law, as has been often said, seeks generally to deal with substance rather than form, and particularly is this so in reorganization cases. “Transitory phases of an arrangement frequently are disregarded under these sections of the revenue acts where they add nothing of substance to the completed affair. * * * Here they were no more than intermediate procedural devices utilized to enable the new corporation to acquire all the assets of the old one pursuant to a single reorganization plan.” Helvering v. Alabama Asphaltic Limestone Co., 1942, 315 U.S. 179, 184-185, 62 S.Ct. 540, 544, 86 L.Ed. 775. See Seiberling Rubber Co. v. Commissioner, supra, 169 F.2d at page 599; Miller v. Commissioner, 6 Cir., 1939, 103 F.2d 58, 59; Lewis v. Commissioner, supra; Love v. Commissioner, supra.
For the reasons expressed we think there was no error in the Tax Court’s conclusions, with one important exception. The exception to which we refer is the failure of the Tax Court to give any consideration to the $25,000 contribution which petitioners made from their personal funds to the new corporation prior to the distribution to them of the liquid assets of the old. While it was proper for the Tax Court to determine the tax consequences upon the basis of the unitary effect of all that was done, it was not proper to disregard a significant component part in analyzing the whole.
To the extent of this $25,000 the amount distributed did not have “the effect of the distribution of a taxable dividend;” its effect was the repayment of an advance. Moreover, considering the series of transactions as a whole, the net effect of the $25,000 advance made to the new corporate shell in which the business was to be conducted, prior to the distribution made from the old corporate shell in which the business had been conducted, was pro tanto, to reduce the amount of that distribution. The $25,-000 stayed in the going business, just as though it had been transferred directly from the old to the new corporation, and as to it no gain was properly recognizable.
For the reasons expressed, the decisions of the Tax Court are reversed and the cases are remanded for further proceedings consistent with this opinion.
. Section 112(g) (1) provided in part:
“The term ‘reorganization’ means * * (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred * * Subsection 112(b) provided: “As used in this section the term ‘control’ means the ownership of stock possessing at least 80 per centum of the total combined voting power of all classes of stock entitled to vote and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.”
. Section 112(b) (3) of the Internal Revenue Code of 1939 provided: “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.”
. Section 112(c) (1) provided: “If an exchange would be within the provisions of subsection (b) * * * (3) * * * of this section 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 bo recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.”
. Section 112(c) (2) provided: “If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized undo- jmra-graph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property.”
. Section 112(g) (2) of the Internal Revenue Code of 1930 provided that: "The term `a party to a reorganization' includes a corporation resulting from a reorganization and includes both corporations in the case of a reorganization resulting from the acquisition by one corporation of ~tock or properties of another."
. Section 115(c) of the Internal Revenue Code of 1939 provided in pertinent part:
"Amounts distributed hi complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the dis-tributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112."