"Item V -- Distribution to Shareholders" of the "Plan of Liquidation" of the Kentucky bank provided as follows:

After the payment, or provision for the payment, by the Land Bank of its obligations in the manner hereinabove set forth, liquidating dividends shall be 3 T.C. 853">*863 paid to the shareholders of the Land Bank, equally and ratably according to the number of shares held by 1944 U.S. Tax Ct. LEXIS 118">*138 them, respectively, from time to time, as the Directors of the Land Bank may prescribe, subject always, however, to the prior approval of the Farm Credit Administration; provided that no such liquidating dividends shall be authorized or paid until after January 1, 1939, and that all such liquidating dividends shall be fully paid on or before December 30, 1942. At or before the time of the payment of each of said liquidating dividends the shareholders shall present to the Land Bank their certificates of stock, upon which shall be endorsed a notation of the liquidating dividends paid thereon, after which said certificates of stock shall be returned by the Land Bank to the respective owners thereof; provided, however, that upon the payment of the last of said liquidating dividends the shareholders shall surrender to the Land Bank their certificates of stock, which, immediately upon being delivered to the Land Bank, shall be cancelled by it. If any shareholder or shareholders shall fail to surrender their certificates of stock to the Land Bank at the time of the payment of the last of said liquidating dividends, on or before December 30, 1942, the Land Bank, on or before December 30, 1944 U.S. Tax Ct. LEXIS 118">*139 1942, shall deposit in a special account in Security Trust Company of Lexington, Kentucky, the amounts due said shareholders on their unpresented certificates of stock, with instructions and directions to said Security Trust Company to complete the payment to said shareholders, respectively, for said certificates of stocks as and when said certificates may be presented for payment and thereupon cancel said surrendered certificates. Should any of said certificates of stock not be presented for payment on or before December 30, 1942, the Land Bank, upon depositing in said Security Trust Company the amounts due thereon for the credit of said shareholders owning said certificates, shall be relieved entirely of all responsibility and liability in connection therewith.

It is the intent and purpose of this plan of voluntary liquidation of the Land Bank to provide for its "complete liquidation" within the meaning of this term as expressed in Section 115 of the Revenue Act of 1938 of the United States, and in order to complete the liquidation of the Land Bank within a period of three years from the close of the taxable year during which is to be made the first of the series of distributions1944 U.S. Tax Ct. LEXIS 118">*140 under this plan (the first of said series of distributions to be made during the year 1939), it is specified herein that the final liquidation shall be completed before or during the year 1942. If, after this plan of liquidation of the Land Bank shall have been adopted, it shall appear that the "complete liquidation" of the Land Bank, within the meaning of said Section 115 of the Revenue Act of 1938, must be effectuated sooner than the time herein specified, then and in that event the period herein provided for the liquidation of the Land Bank shall be deemed to be, and is hereby, reduced to such extent as to effectuate said liquidation within the time specified in said Section 115 for a "complete liquidation."

The "Plan of Liquidation" so adopted November 29, 1938, was the only plan of liquidation of the Kentucky bank which was ever submitted to or voted upon by its stockholders, and no steps to place the corporation in involuntary liquidation were ever taken by the Farm Credit Administration.

Following the approval by the Farm Credit Administration of the above described plan of liquidation, the officers and directors of the Kentucky bank caused its then remaining assets, other1944 U.S. Tax Ct. LEXIS 118">*141 than cash, to be reduced to cash and its then remaining indebtedness to be paid, and 3 T.C. 853">*864 the balance was distributed to the shareholders as liquidating dividends upon the dates and in the amounts, as follows:

As the foregoing distributions were made, the amounts thereof were endorsed or noted on the stock certificates, and upon the final distribution, on April 23, 1941, the stock certificates of the shareholders were surrendered to the Kentucky bank and were canceled. By reason of these distributions in liquidation, petitioner realized total capital gains as follows:

The last meeting of the board of directors of the Kentucky bank was held on April 9, 1941, and the last meeting of the stockholders of said bank was held on April 1944 U.S. Tax Ct. LEXIS 118">*142 10, 1941. The charter of the Kentucky bank was surrendered to the Farm Credit Administration following the payment of the final liquidating dividend, on April 23, 1941.

The liquidation of the Kentucky bank commenced on December 3, 1938, when its plan of liquidation was approved by the Farm Credit Administration.

The Dallas bank was organized July 3, 1919, pursuant to the provisions of the Federal Farm Loan Act of July 17, 1916. Its charter and bylaws were identical as regards powers and general organization with that of the Kentucky bank, except that the area in which the Dallas bank was authorized to make mortgage loans was the States of Texas and Oklahoma. The stock of the Dallas bank was at all times owned by individuals and private corporations. These stockholders elected the directors of the bank, who in turn elected its officers and controlled its policies.

The Dallas bank during the years 1930, 1931, and 1932 was the owner, in each of the years, of farm mortgage loans, U. S. Government securities, purchase money mortgages, real estate contracts, notes receivable, accrued interest, real estate, and sheriff's certificates, as well as miscellaneous assets. Its principal liabilities1944 U.S. Tax Ct. LEXIS 118">*143 consisted of farm loan bonds and interest payable. The unmatured principal of loans outstanding, which reached a peak of $ 42,888,116 on December 31, 1928, had fallen to $ 32,933,982 by April 30, 1933, of which 54.1 percent was delinquent.

3 T.C. 853">*865 The Dallas bank, after enactment of the Emergency Farm Mortgage Act of May 12, 1933, did not issue any farm loan bonds or make any new farm mortgage loans except such as were necessary and incidental to the refinancing of existing loans or bond issues or to the sale of real estate then owned or thereafter acquired through foreclosures. In the period after May 12, 1933, the Dallas bank continued to own assets of the same kind as it owned on May 12, 1933, but in varying quantities, and retired its bonded debt as farm loans were liquidated.

(a) At December 31, 1935, the bank had 3,235 6 percent mortgage loans outstanding. It owned 610 farms, sheriff's certificates, etc. All of the bank's farm loan bonds outstanding bore interest at the rate of 5 percent.

(b) At December 31, 1936, the bank had 2,813 6 percent mortgage loans outstanding and owned 597 farms, sheriff's certificates, etc. During 1936 the bank called at par $ 5,432,000 of 1944 U.S. Tax Ct. LEXIS 118">*144 its 5 percent bonds and issued $ 1,000,000 of refunding bonds bearing interest at the rate of 3 percent.

(c) At December 31, 1937, the bank had 2,529 6 percent mortgage loans outstanding and owned 465 farms, sheriff's certificates, etc. During 1937 the bank called at par $ 12,646,000 of its 5 percent bonds and issued $ 11,700,000 of refunding bonds bearing interest at the rate of 3 percent.

(d) At December 31, 1938, the bank had 2,252 6 percent mortgage loans outstanding. It owned 402 farms, sheriff's certificates, etc. During 1938, the bank called at par $ 1,354,000 of its 3 percent and 5 percent bonds.

(e) At December 31, 1939, the bank had 503 6 percent mortgage loans outstanding and owned 341 farms, sheriff's certificates, etc. From January 1 to December 31, 1939, gross assets and bonds decreased $ 2,943,566 and $ 3,029,000, respectively, and during 1939 the bank called at par $ 2,824,000 of its 3 percent bonds.

The net worth of the Dallas bank for the years 1930 through 1939 was as follows:

3 T.C. 853">*866 No distributions of any kind were made to stockholders of the Dallas bank during the years 1933 through 1939 except a dividend of 1 percent which was authorized in 1931, but was not paid until 1936, to stockholders of record as of March 20, 1932.

At a meeting on March 27, 1940, by a vote of over two-thirds of the stock of the Dallas bank, there was adopted a "Plan of Liquidation." This plan of liquidation was identical with that adopted by the Kentucky bank as to the steps to be taken in liquidation, except that the period for distribution to the shareholders was limited to December 31, 1943. This plan of liquidation was approved without change by the Administrator of the Farm Credit Administration on May 2, 1940, and following such approval distributions in liquidation were made to Dallas bank stockholders in the years involved as follows:

On December 27, 1943, the final distribution in liquidation under the plan was made. By reason of these distributions, petitioner 1944 U.S. Tax Ct. LEXIS 118">*146 realized total capital gains during the years 1940 and 1941 in the respective amounts of $ 1,576.50 and $ 1,350.

There were no distributions by the Dallas bank in 1940 prior to approval of the plan of liquidation, and this plan of liquidation was the only plan of liquidation ever voted upon by the stockholders of the Dallas bank or approved by the Farm Credit Administration. No steps were ever taken by the Farm Credit Administration to place the Dallas bank in involuntary liquidation.

The liquidation of the Dallas bank commenced on May 2, 1940, when its plan of liquidation was approved by the Farm Credit Administration.

The North Carolina bank was organized July 5, 1922, pursuant to the provisions of the Federal Farm Loan Act of July 17, 1916. The charter and bylaws of this bank were identical with that of the Kentucky bank, except that the area in which the North Carolina bank was authorized to make farm mortgage loans was North Carolina and Virginia. The stock of the North Carolina bank was at all times owned by individuals and private corporations. These stockholders elected the directors of the bank, who in turn elected its officers and controlled its policies.

During the years1944 U.S. Tax Ct. LEXIS 118">*147 1930 to 1932, inclusive, the North Carolina bank was the owner of farm mortgage loans, United States Government securities, notes receivable, accounts receivable, delinquent installments on mortgage notes, accrued interest, real estate, and sheriff's certificates, as well as cash in substantial amounts. Its principal liabilities 3 T.C. 853">*867 consisted of its farm mortgage loan bonds and accrued interest on these bonds. The unmatured principal of loans outstanding and owned by the North Carolina bank reached a peak of $ 14,364,489 on January 31, 1929, but had fallen to $ 8,351,874 by April 30, 1933, of which 55.4 percent was delinquent. The amount of bonded debt was greatest on April 30, 1928, amounting to $ 13,700,000. The amount was reduced to $ 11,253,000 on April 30, 1933, and notes payable of $ 126,895 were outstanding.

The North Carolina bank, after enactment of the Emergency Farm Mortgage Act of May 12, 1933, did not issue any farm loan bonds or make any new farm mortgage loans except such as were necessary and incidental to the refinancing of existing loans or bond issues, or to the sale of real estate then owned or thereafter acquired through foreclosure. During the years1944 U.S. Tax Ct. LEXIS 118">*148 1933 to 1941, inclusive, the North Carolina bank continued to own assets similar to those held prior to May 12, 1933, in diminishing amounts as regards the farm loan mortgages, and its liabilities on its farm loan bonds were substantially reduced.

(a) At December 31, 1935, the bank had 1,912 6 percent mortgage loans outstanding and owned 501 farms. Its outstanding farm loan bonds bore interest at 5 percent.

(b) At December 31, 1936, the bank had 1,700 6 percent farm mortgage loans outstanding and owned 393 farms.

(c) At December 31, 1937, the bank had 1,565 6 percent mortgage loans outstanding and owned 267 farms. During 1937 the bank called at par $ 729,500 of its 5 percent bonds.

(d) At December 31, 1938, the bank had 1,463 6 percent mortgage loans outstanding and owned 172 farms. During 1938 gross assets and bonds decreased $ 1,194,122 and $ 2,578,000, respectively, while notes payable increased $ 1,422,000. During the year 1938 the bank called at par $ 5,551,000 of its 5 percent farm loan bonds and issued $ 3,075,000 of refunding bonds bearing interest at 1 1/2, 2, and 3 percent.

(e) At December 31, 1939, the bank had 1,368 6 percent mortgage loans outstanding and owned 1501944 U.S. Tax Ct. LEXIS 118">*149 farms. During 1939 the bank called at par $ 192,000 of its 2 percent bonds and issued $ 150,000 of refunding bonds bearing interest at three-fourths of 1 percent.

(f) At December 31, 1940, the bank had 774 6 percent mortgage loans outstanding and owned 114 farms.

(g) At December 31, 1941, the bank had 206 6 percent mortgage loans outstanding. In addition it held 234 purchase money mortgages and real estate sales contracts. It owned 21 farms. During 1941, the bank called at par $ 2,250,000 of its 1, 1 1/4, 1 3/8, and 1 1/2 percent bonds and issued $ 2,100,000 of refunding bonds bearing interest ranging from 3/8 of 1 percent to 1 percent. It also redeemed $ 200,000 of its 6 percent bonds which matured during this year.

3 T.C. 853">*868 The net worth and accumulated earnings of the North Carolina bank for the years 1930 through 1941 (excluding a liquidating dividend in 1941) were as follows:

On August 8, 1941, the stockholders of the North Carolina bank, by a vote of more than two-thirds of its outstanding capital stock, adopted a plan of liquidation. This plan of liquidation was substantially identical, as to provisions and procedure to be followed, with the plan of liquidation adopted by the Kentucky bank, except that it called for the payment of the final liquidating dividend on or before December 31, 1944. This plan of liquidation was approved by the Farm Credit Administration on August 8, 1941, and was the only plan of liquidation ever voted upon by the stockholders of the North Carolina bank or approved by the Farm Credit Administration. No steps were ever taken by the Farm Credit Administration to place the North Carolina bank in involuntary liquidation.

No distributions were made by the North Carolina bank to its stockholders from May 12, 1933, until December 22, 1941. Distribution among its stockholders of all the assets of the North Carolina bank remaining after payment of its debts was made as follows:

1944 U.S. Tax Ct. LEXIS 118">*151 The charter of the North Carolina bank was surrendered early in 1943. By reason of the distribution in 1941, petitioner realized a total capital gain in that year of $ 834.63.

The liquidation of the North Carolina bank commenced on August 8, 1941, when its plan of liquidation was approved by the Farm Credit Administration.

The plans of voluntary liquidation which were adopted by the respective stockholders of the Kentucky, Dallas, and North Carolina banks in 1938, 1940, and 1941, were bona fide plans of liquidation. The distributions received by petitioner in the taxable years were 3 T.C. 853">*869 made under those plans, and they were amounts distributed in complete liquidation of the banks.

Issue II.

In addition to his compensation as president of the Security Trust Co. of Lexington, Kentucky, and of the Kentucky bank, the petitioner derived income in 1928 from investments in real estate and in securities. Among the securities owned by petitioner in 1928 were 4,525 shares of the common stock of the Fayette Home Telephone Co., hereinafter referred to as the Fayette Co., and stock of the Woodford Telephone Co. The petitioner received dividends on the stock of the Fayette Co. in each1944 U.S. Tax Ct. LEXIS 118">*152 of the years 1927, 1928, and 1929.

Petitioner, together with a majority of the other stockholders of the Fayette Co., contracted in 1928 to sell all of his stock in the Fayette Co. to S. E. Stern for an agreed consideration of approximately $ 30 per share. This sale was consummated on April 1, 1929, as a result of which the petitioner received on or about that date the sum of $ 132,356.25 by reason of his ownership of 4,525 shares of Fayette Co. stock. Petitioner in this connection realized a gain of $ 109,093.75, which he duly reported in his income tax return for 1929. In its income tax return for the year 1929 the Fayette Co. did not include any income from the transactions heretofore set forth. Thereafter, respondent determined that the Fayette Co. sold its assets in 1929 at a profit to it of $ 2,282,422.56, and on December 28, 1930, sent, by registered mail, a notice of deficiency to the Fayette Co., wherein that company was notified of a determined deficiency of $ 251,066.48 for the year 1929 which had been made the subject of a jeopardy assessment. No petition was filed with the Board of Tax Appeals for a redetermination of this deficiency. By separate notices of deficiency1944 U.S. Tax Ct. LEXIS 118">*153 dated February 7, 1933, the respondent determined that petitioner, together with other former stockholders of the Fayette Co., was a transferee of the assets of the Fayette Co. and liable for the deficiency for the year 1929 to the extent of the sum of $ 132,356.25, so received by him, together with interest.

Petitioner contested the respondent's effort to enforce transferee liability against him, being successful in the Board of Tax Appeals and later in the United States Circuit Court of Appeals for the Sixth Circuit. Litigation was terminated in May 1939 by the decision of the Circuit Court of Appeals. During 1939 petitioner paid to counsel who represented him in the above described litigation attorneys' fees of $ 3,000 and legal expense of $ 11.48, which amounts were claimed as deductions on petitioner's income tax return for the year 1939. This deduction was disallowed by the respondent both as to the attorneys' fees and as to the legal expense.

3 T.C. 853">*870 Petitioner in 1939 owned income-producing stocks and bonds having a value in excess of $ 132,356.25. The only property owned by petitioner during the year 1939 the income from which was not subject to Federal income tax consisted1944 U.S. Tax Ct. LEXIS 118">*154 of certain United States Treasury notes in the face amount of $ 3,000.

OPINION.

Petitioner realized gains from the distributions by the three banks during the taxable years. There is no dispute over the amount of the gains realized. The controversy relates only to the question of whether the gains are short term taxable gains, taxable to the extent of 100 percent thereof, as respondent has determined, or whether they are long term capital gains, less than 100 percent of which are to be taken into account in computing net income. The question arises under section 115 (c) of the Internal Revenue Code, ¹ which was in effect during the taxable years.

1944 U.S. Tax Ct. LEXIS 118">*155 Under section 115 (c) the general provision is that gains recognized from corporate distributions in liquidation are to be considered as short term capital gains, but an exception is made with respect to amounts distributed in "complete liquidation" which is defined. Petitioner claims the benefit of the exception. Respondent contends that the distributions were not made in complete liquidation as defined.

Respondent takes the view that, under the facts, the adoption by the stockholders of the respective banks of plans of voluntary liquidation in the years 1938, 1940, and 1941 are not material or determinative of the question. He takes the view that the banks were in liquidation after May 12, 1933, when the Emergency Farm Mortgage Act of 1933 was enacted, and that the distributions in question were made in pursuance of a liquidation, in each instance, which began in 1933. We understand this argument to mean that the respondent contends that the distributions in question were not made "in accordance with a bona fide plan of liquidation and under which the transfer of the property 3 T.C. 853">*871 under the liquidation is to be completed within a time specified in the plan," etc., within1944 U.S. Tax Ct. LEXIS 118">*156 the meaning of section 115 (c). Respondent contends that the plans of voluntary liquidation adopted by the stockholders of the banks can not be said to be bona fide plans of liquidation, within the meaning of the statute, if in fact the liquidation was begun in 1933. Respondent urges that the question presented under the particular facts should be considered with regard to the rules that are often given attention where a tax avoidance motive is present, such as the rules that questions of taxation should be determined by viewing what was actually done rather than the declared purpose of the participants, citing Weiss v. Stearn, 265 U.S. 242">265 U.S. 242; and that where there is doubt about a taxpayer's right to a privilege or exemption, the statute must be construed in favor of the Government, citing Bank of Commerce v. State of Tennessee, 161 U.S. 134">161 U.S. 134. Respondent also contends that the exception provided in section 115 (c) was intended to apply only to liquidations which began after December 31, 1937, and was not intended to apply to liquidations which were in progress prior to January 1, 1938. The fact on which respondent1944 U.S. Tax Ct. LEXIS 118">*157 places chief reliance is that after the enactment of the Emergency Farm Mortgage Act of 1933 the banks could not issue any tax-exempt bonds or make any farm loans except such as were necessary in the refinancing of existing loans. He relies upon the statements of the purpose of the Emergency Farm Mortgage Act which have been set forth in the findings of fact to the effect that the effect of the act was to restrict the joint stock land banks to an orderly liquidation of their assets. Respondent says that all of the banks in question were "in process of liquidation" from May 12, 1933, until the date of payment of the final liquidating distributions to the stockholders.

Upon due consideration of respondent's argument, we can not agree that the plans of liquidation adopted by the stockholders of the banks in question were not bona fide. We agree that all of the facts are to be considered and that the formal steps taken by the stockholders should not be isolated from the background, but we must conclude that the over-all view of the facts brings us to a result other than that reached by the respondent.

The banks in question were chartered pursuant to the Federal Farm Loan Act, sec. 1944 U.S. Tax Ct. LEXIS 118">*158 811, Title 12, U. S. C. A., p. 843. Under that act they were restricted as to the kind of business they could transact and were subject to regulation by the Farm Credit Administration, but they were nevertheless "privately owned corporations organized for profit to the stockholders." Federal Land Bank v. Priddy, 295 U.S. 229">295 U.S. 229; Bankers Farm Mortgage Co., 1 T.C. 406; Dallas Joint Stock Land Bank v. State, 133 S. W. (2d) 827. Under Federal statute, sec. 822, Title 12, U. S. C. A., p. 850, provision is made for the voluntary3 T.C. 853">*872 liquidation of joint stock land banks, under which each bank is given the right to go into liquidation at any time provided it has made provision, with the approval of the Federal Farm Loan Board, for the payment of its liabilities and has been authorized to liquidate by vote of two-thirds of its stockholders. Andrews v. St. Louis Joint Stock Land Bank, 107 Fed. (2d) 462, 467. The above provision for voluntary liquidation is found in section 16 of1944 U.S. Tax Ct. LEXIS 118">*159 the Federal Farm Loan Act of July 17, 1916, as amended by the Act of May 29, 1920, ch. 215, 41 Stat. 691, and the Emergency Farm Mortgage Act of 1933 did not amend or affect the provisions of section 16 of the Federal Farm Loan Act of 1916, as amended. Also, the Emergency Farm Mortgage Act did not direct or require liquidation of any joint stock land bank at any specified time, but left the matter of liquidation to the judgment and discretion of the stockholders of those banks, except in cases of insolvency. The Emergency Farm Mortgage Act permitted the joint stock land banks to continue limited operations and to hold their assets even though they were prohibited from issuing new farm mortgage bonds or making new farm loans and were eventually to be liquidated. In so far as the Federal statutes relating to the joint stock land banks are pertinent to the question presented here, it can not be concluded that under the 1933 Emergency Act there was a mandate to the stockholders of the banks to immediately liquidate which excluded and made inconsistent with the terms of that act the voluntary liquidation of the banks by a two-thirds vote of the stockholders. Our conclusion is that 1944 U.S. Tax Ct. LEXIS 118">*160 the action of the stockholders of the banks in question in adopting plans of voluntary liquidation was consistent with and in accord with the applicable Federal statutes. We do not understand respondent to make a very strong argument to the contrary.

As we see the problem, the real question is whether the adoption of the plans of voluntary liquidation by the stockholders of the respective banks in 1938, 1940, and 1941 shows a lack of bona fides when considered with the procedures followed during the respective intervals between May 12, 1933, and the dates of adoption of the plans. The facts have been set forth fully and we do not repeat them. We only conclude that there was no lack of bona fides. We think the officers and directors of the banks were exercising their honest judgment in putting the affairs of the banks in order and in endeavoring to operate them profitably during an extremely difficult period. Their efforts were devoted to a program of operations which would facilitate orderly liquidation and dissolution of the banks at some future time. Cf. W. E. Guild, 19 B. T. A. 1186. Such efforts continued over a period of from 5 to 71944 U.S. Tax Ct. LEXIS 118">*161 years, and they proved profitable to the banks, and upon liquidation were profitable to the stockholders, including petitioner. Under the facts, it is held that the respective plans of 3 T.C. 853">*873 voluntary liquidation adopted by the stockholders of the several banks involved were bona fide.

Our views as expressed above mean, of course, that we reject respondent's view that the plans of voluntary liquidation should be disregarded in determining the question at issue. We conclude that they are entitled to full recognition under all of the facts. That being so, respondent's contentions fall. Both the terms of the plans of voluntary liquidation and the carrying out of the provisions of the plans are within the provisions of section 115 (c). It was clearly provided in the plans of voluntary liquidation that the liquidations, in so far as it involved the transfer of the assets of the banks to the stockholders in cancellation of their stock, were to be completed within a three-year period, and actually they were completed within that period. Also, it is clear that there were no plans for the transfer of the assets of the banks to the stockholders in cancellation of their stock, and 1944 U.S. Tax Ct. LEXIS 118">*162 no such transfers were made to the stockholders, at any time prior to the adoption of the plans of voluntary liquidation. Thus the amounts distributed as liquidating dividends come squarely within section 115. It is held that the distributions received by petitioner in the taxable years were "amounts distributed in complete liquidation" within the provisions of section 115 (c). Respondent's determination is reversed.

Issue II.

Petitioner claims deduction under section 23 (a) (2) of the Internal Revenue Code, as amended by section 121 of the Revenue Act of 1942, of the sum of $ 3,011.48, as a nonbusiness expense. These expenditures in 1939 were incident to litigation before the United States Board of Tax Appeals in 1936, and to an appeal which was taken from the decision of the Board. Respondent contends that the expenditures are not deductible under the above provision of the statute because the subject matter of the litigation did not bear a reasonable and proximate relation to the production or collection of income, or to the management, conservation, or maintenance of property held for that purpose. Respondent relies upon John W. Willmott, 2 T.C. 321.1944 U.S. Tax Ct. LEXIS 118">*163

The subject matter of the litigation appears in the report on the proceeding entitled Southern Bell Telephone & Telegraph Co., 34 B. T. A. 540, in which proceeding petitioner, along with others, was a petitioner. Respondent had determined a deficiency in the income tax of the Fayette Co. for the year 1929 in the sum of $ 256,623.89, and proposed to assess the same proportionately against all of the petitioners as transferees of the assets of the Fayette Co., under section 311 of the Revenue Act of 1928. The total outstanding common stock 3 T.C. 853">*874 of the Fayette Co. was 101,240 shares, and it appears that petitioner owned 4,525 shares thereof. It was the respondent's theory in that case that, disregarding the form and the steps of the transaction under which petitioner and the others sold their stock, there had been a transfer by Fayette Co. of its assets to the petitioners, and a sale of the assets by petitioner and the others to a third party. The Board of Tax Appeals rejected respondent's theory, holding that the several petitioners were not liable as transferees. That holding made, the Board of Tax Appeals did not consider other issues including1944 U.S. Tax Ct. LEXIS 118">*164 the issue whether the Fayette Co. realized any gain upon the transfer of its assets in 1929.

The question in the proceeding before the Board of Tax Appeals was dependent, inter alia, upon whether the stockholders of the Fayette Co. had sold their stock or whether they had sold the assets of the company. Petitioner, in this proceeding, argues that in the earlier litigation before the Board of Tax Appeals he was endeavoring to establish a valid sale of his stock and his right to retain the proceeds of the sale, which included a profit of roughly $ 109,000. In the Willmott case we said that "Attorney's fees and expenses of litigation are deductible under section 121 of the Revenue Act of 1942 only when the subject matter of the litigation bears a reasonable and proximate relation to the production or collection of income or to the management, conservation, or maintenance of property held for that purpose." We examined the transaction between the taxpayer and his wife, the transfer by him of a one-half interest in property to the wife, to determine whether the original transaction was proximately related to the production or collection of income. We concluded that it was not, 1944 U.S. Tax Ct. LEXIS 118">*165 and that "any litigation arising out of the transaction involving its tax consequences would also not be related" to the production or collection of income. We held that the fees and expenses paid in connection with the litigation were not deductible under section 121.

However, following the same approach here, we think a different result must be reached. The original transaction was the sale of the Fayette Co. stock, and petitioner entered into that transaction for profit and realized profit. Expenditures in litigation relating to that transaction would have come within section 121 as expenditures in connection with the collection of income. In Walter S. Heller, 2 T.C. 371, 375, upon which petitioner relies, we pointed out that Congress intended the term "income" to embrace income from the disposition of property. Applying the reasoning which was employed in the Willmott case, we must say here that since the original transaction was proximately related to the production or collection of income, any litigation arising out of that transaction involving its tax consequences would also proximately relate to the production or collection of income, 1944 U.S. Tax Ct. LEXIS 118">*166 3 T.C. 853">*875 and, therefore, fees and expenses paid in connection with such litigation would be deductible under section 121.

Accordingly, under the authority of the Willmott and Heller cases, petitioner is sustained and it is held that the expenditures are deductible under section 121.

Decision will be entered under Rule 50.