42 T.C. 558">*558 The Commissioner determined deficiencies in income tax as follows: 42 T.C. 558">*559

Various issues have been settled by the parties. The sole remaining issue is whether distributions by Moffatt & Nichol, Inc., to its shareholders were liquidating distributions1964 U.S. Tax Ct. LEXIS 89">*93 under sections 331 and 346, I.R.C. 1954, taxable as capital gains, or were distributions incident to a plan of reorganization under sections 354 and 368 and taxable as dividends under section 356.

FINDINGS OF FACT

Some of the facts and exhibits have been stipulated and are incorporated herein by this reference.

The petitioners, John G. and Mary E. Moffatt, Frank E. and Ruth H. Nichol, George G. and Anna Mae Murray, are husbands and wives, respectively, all residing in California. The Moffatts and the Nichols timely filed their respective 1958 separate income tax returns and 1959 joint income tax returns and the Murrays timely filed their 1958 and 1959 joint income tax returns, all with the district director of internal revenue at Los Angeles, Calif.

Moffatt & Nichol, Inc., was a corporation incorporated under the laws of California on September 29, 1947; its principal place of business was in Long Beach, Calif.

Prior to 1947, petitioners John G. Moffatt and Frank E. Nichol and a man named Harrison Roberts were partners in a consulting engineering business. Upon the incorporation of Moffatt & Nichol, Inc., Moffatt and Nichol conducted their former partnership activities in behalf1964 U.S. Tax Ct. LEXIS 89">*94 of the corporation; Roberts did not become a shareholder or an employee of the corporation.

The authorized capital stock of Moffatt & Nichol, Inc., consisted of 750 shares of $ 100 par value common stock, of which only 100 shares were ever issued. On January 21, 1948, 50 shares were issued to Moffatt and 50 shares to Nichol. On September 4, 1952, Moffatt and Nichol each sold five shares of stock to petitioner George G. Murray, an employee of the corporation, for $ 500. During the years in question the outstanding stock was held as follows:

42 T.C. 558">*560 From the time of its organization until approximately October 7, 1957, the principal business activity of Moffatt & Nichol, Inc., was the practice of consulting engineering. Among the corporation's activities were: The preparation of studies and reports; the making of plans, specifications, and designs; and the supervision of construction. It was also licensed as a building contractor and had participated in various joint ventures; however, the record does not disclose that it engaged in any actual building activities. Moffatt, 1964 U.S. Tax Ct. LEXIS 89">*95 Nichol, and Murray were employed by the corporation as licensed engineers and were its "key" employees. During the period January-September 1957, the corporation had an average of 67 employees. About one-third of its employees were professional people; there was also an office manager and about four "clerical people"; and the remaining employees were "subprofessional" or draftsmen.

Between September 29, 1947, and October 1, 1957, Moffatt & Nichol, Inc., entered into a substantial number of consulting engineering contracts which called for architect-engineer services. The acquisition of these contracts depended almost entirely on the personal efforts of petitioners Moffatt and Nichol. Approximately one-half to two-thirds of these contracts were with Government agencies.

In the spring of 1954, Glen Miller, a mechanical engineer, became associated with Moffatt & Nichol, Inc. Petitioners Moffatt and Nichol had an understanding with Miller that the latter could purchase from them 10 percent of the corporation's stock at book value. However, the parties did not reach a firm agreement concerning this purchase because Miller thought book value of the stock to be an excessive purchase1964 U.S. Tax Ct. LEXIS 89">*96 price.

William J. Bobisch, a structural engineer, became an employee of Moffatt & Nichol, Inc., in August 1955. Prior to Bobisch's employment by the corporation, Moffatt and Nichol offered to sell to him 10 percent of the corporation's stock at book value; payment for this stock was to be made from Bobisch's share of the company's earnings. Subsequent to his becoming an employee, Bobisch accumulated approximately $ 10,000 from sales and bonuses with which to pay for the stock. However, Bobisch thought the stock was overpriced at book value and was concerned that any investment he might make would be subject to contingent liabilities which the corporation had incurred in ventures entered into prior to his employment. Bobisch proposed that he pay $ 8,000 for 10 percent of the stock which then had a book value in excess of $ 16,000.

Negotiations between petitioners Moffatt and Nichol and Miller were suspended in October 1956, and Miller left the employ of the corporation in February 1957. Negotiations with Bobisch continued through 1956 and the early part of 1957, when, in April or May of that year, an impasse was reached.

42 T.C. 558">*561 The taxable income of Moffatt & Nichol, Inc., 1964 U.S. Tax Ct. LEXIS 89">*97 increased from $ 24,048.31 in 1953 to $ 128,122.75 in 1956 and $ 97,401.38 in 1957, and its accumulation of earned surplus increased from $ 49,761.34 at the end of 1952 to $ 197,487.18 at the end of 1957.

From the time of its inception on September 29, 1947, until its formal resolution to liquidate in December 1958, Moffatt and Nichol, Inc., formally declared and paid only one dividend to its shareholders. This dividend was in the amount of $ 30,000; it was declared on December 31, 1954, and paid on March 31, 1955.

The balance sheets of Moffatt & Nichol, Inc., as of December 31, 1957, 1958, and 1959 reflected in part the following:

On April 12, 1957, Henry E. Howard, a certified public accountant, was employed to perform accounting services for Moffatt & Nichol, Inc. On or about April 30, 1957, Howard had a conference with the attorney for that corporation, Brian Kennedy; Kennedy had been serving as counsel for the corporation for some time prior to April 30, 1957. Also present at this conference were a partner of Howard's and another attorney. The purpose of this conference was to enable Howard to familiarize himself with the affairs of Moffatt & Nichol, Inc., and for Howard to furnish Kennedy with any ideas which he might have concerning the tax affairs of the company. The conference 42 T.C. 558">*562 lasted approximately 4 hours and there was discussion of both the tax problems of Moffatt & Nichol, Inc., and the tax problems of the individual shareholders.

Subsequent to the conference held on April 30, 1957, Howard, at the request of Kennedy, prepared a memorandum which covered the tax problems discussed at the conference. Three copies of this memorandum1964 U.S. Tax Ct. LEXIS 89">*99 were sent to Kennedy. The memorandum read in part as follows:

May 6, 1957

Introductory Statement

At the conference held in your office Tuesday last, certain proposals were discussed relating to the tax problems of the above corporation and its principal stockholders. Several tentative solutions were set forth. Briefly: [1] Liquidation of the corporation and forming of a new entity, partnership or corporation. [2] Sale by principal stockholders of a portion of their holdings. [3] Purchase of real estate by stockholders and subsequent sale. [4] Tax planning for existing corporation. * * * [6] Problems of principal stockholders relating to bad debt loss resulting in capital loss carryovers.

I

While we appreciate that this would provide the principal stockholders with the sought-after capital gains, it would present other problems which could very well offset the advantages obtained. The principal disadvantage would be the amount of taxes required to be paid in the year of liquidation. This corporation is reporting profits on a hybrid-accrual method. If this method is adhered to consistently it is doubtful that a change will be made by the commissioner1964 U.S. Tax Ct. LEXIS 89">*100 [I.R.C. 446 [c]], however if the corporation ceases operations and liquidates it is probable that all earned income both recorded and unrecorded will immediately become subject to corporate tax rates and also be subject to liquidating dividends. [Rev. Rul. 1953-255]. [Jud Plumbing and Heating, Inc. 5 T.C. 127">5 T.C. 127, affirmed, 153 Fed. [2d] 681.]* * *

* * * *

An alternative may be found in the delaying of liquidation with a transfer of operations. Under this plan the existing corporation would remain in existence for a period of time, its only activity being completion of present projects and collection of outstanding accounts. This would be accompanied by the formation of a new organization to take on new contracts. The effect would be to defer the payment of the taxes mentioned before and also to cover the possibility of additional non-business bad debts in the hands of the individuals which may occur in future years. This plan of course would require a division of labor and other costs with the resulting increase of time and cost in record keeping. The period for which liquidation could be delayed 1964 U.S. Tax Ct. LEXIS 89">*101 would be determined by application of section 531, which would probably be about one year after the plan became effective.

II

In order that the stockholders may obtain capital gains, with which to offset their existing and probable future capital losses, a portion of the capital 42 T.C. 558">*563 stock now held by them could be sold to key employees of the organization. It is possible for the principal stockholders to dispose of 39 shares of their stock and still retain 51% of the outstanding stock. The gain on the sale of stock would be approximately $ 2,000 per share. In order to obtain an $ 80,000 gain, it would be necessary to dispose of 40 shares. The stock could be sold in exchange for notes with the stock being transferred and held as security. Payments could be made by the purchaser from funds obtained in the form of salaries from the corporation. The effect being that the purchaser would pay ordinary income tax on the salaries and the sellers would receive the remaining amount tax free. This proposal would cover the existing losses, however it is doubtful if enough of a gain could be garnered to cover additional losses. It would also depend1964 U.S. Tax Ct. LEXIS 89">*102 on the desire of the stockholders to distribute the holdings.

III

Another plan directed toward the procuring of capital gains in the hands of stockholders would be the purchase of real property and erection and leasing of a building. Under an accelerated method of depreciation, a rapid decline of adjusted basis would result, and a sale could be made at any time that a gain would result. Such a sale if made to the corporation would probably escape the provisions of section 1239 if some dispersal of holdings were made prior to the date of sale. Conceivably this would take some time to effect and would only be advantageous in its application to future capital losses.

IV

It is recognized that this corporation, if it remains in existence, is lacking in tax planning. At the present time the salaries and/or bonuses paid are being set up on the records monthly in accordance with the instructions of the Board of Directors under the title of "Earnings Participation". We feel that a more descriptive title can be found to cover its true purpose, which is the compensation of officers and employees commensurate1964 U.S. Tax Ct. LEXIS 89">*103 with their services and contributions to the affairs and operations of the corporation. The corporate minutes for the past years are inadequate and should be reviewed carefully. Background and present duties of the principal employees should be reviewed to substantiate the salaries now being paid. Other tax saving plans may become apparent, and it is urgently recommended that the Board of Directors make available to themselves competent legal advice periodically for this purpose.

* * * *

VI

The individual returns for all open years and years in which there occurred bad debt losses should be completely reviewed in order that we are sure of the year to which losses can be carried forward. Separate returns should be filed for all open years in order that taxpayers can avail themselves of the double deduction for capital losses. We can find no authority for this, however the 1954 code removed the elective provision contained in the 1939 code section 51 [g].

Petitioners Moffatt and Nichol had each suffered capital losses or personal nonbusiness bad debt losses in 1954, 1956, and 1957 in the 42 T.C. 558">*564 amounts of $ 37,247.40, $ 3,525, and $ 6,573.63, respectively. 1964 U.S. Tax Ct. LEXIS 89">*104 It was also anticipated that certain outstanding loans made by them to a person named Powers would result in bad debt losses in later years.

The primary purpose of the proposed solutions in Howard's memorandum was to provide the principal stockholders of Moffatt & Nichol, Inc., with sufficient capital gain against which they could apply both their capital loss or nonbusiness bad debt carryovers from 1954 to 1957, and the nonbusiness bad debts which they anticipated for future years in connection with their personal ventures with Powers outside the corporation.

Subsequent to the preparation of the memorandum of May 6, 1957, Howard's suggested plan for a solution to the tax problems of Moffatt & Nichol, Inc., and its principal shareholders, involving a delayed liquidation of Moffatt & Nichol, Inc., accompanied by transfer of operations and employees of Moffatt & Nichol, Inc., to a newly formed corporation, was in substance carried out. There were minor differences between Howard's plan and what was actually done; such differences were not inconsistent with the dominant purpose of the plan.

On July 22, 1957, Moffatt and Nichol, Engineers, hereinafter referred to as Engineers, was incorporated1964 U.S. Tax Ct. LEXIS 89">*105 under the laws of the State of California. Its principal place of business was the same as that of Moffatt & Nichol, Inc. Kennedy was instrumental in preparing and filing the articles of incorporation.

On October 10, 1957, the Division of Corporations of the State of California authorized Engineers to sell and issue 25,000 shares of stock at $ 1 per share. The stock was to be issued as follows:

The permit given by the Division of Corporations to Engineers was on the condition that none of the stock be issued unless and until an escrow holder was selected, and that no stock be sold or transferred until the sale or transfer was approved in writing by the Commissioner of Corporations. No stock was in fact issued until September 2, 1958, as hereinafter set forth.

Moffatt, Nichol, and Murray obtained loans in the aggregate amount of $ 22,500 from Moffatt & Nichol, Inc., on their notes payable in order to pay for their Engineers stock. Payment for the stock was made on October 1, 1957, by having Moffatt & Nichol, Inc., issue its check for $ 22,5001964 U.S. Tax Ct. LEXIS 89">*106 to Engineers. The obligations of Moffatt, Nichol, and Murray on their notes were discharged on December 23, 1957, through deductions from their salaries by Engineers which were applied for that 42 T.C. 558">*565 purpose. Bobisch paid for his stock by check on or about October 30, 1957.

In December 1957, Bobisch approached Moffatt and Nichol and discussed with them the possibility of his buying stock in Moffatt & Nichol, Inc.

On or about March 7, 1958, Bobisch terminated his relations with Engineers as an officer, director, and shareholder and transferred to petitioners Moffatt and Nichol, equally, his right to receive 2,500 shares of the capital stock of that company for a total cash consideration of $ 2,500, the amount that he had previously paid therefor.

Certificates of Engineers stock were actually issued for the first time on September 2, 1958. On that date certificates for 25,000 shares of its stock were issued as follows:

As of October 7, 1957, petitioners Moffatt, Nichol, and Murray were officers and directors of both Moffatt & Nichol, Inc., and Engineers.

As of October1964 U.S. Tax Ct. LEXIS 89">*107 1, 1957, all employees of Moffatt & Nichol, Inc., were transferred to Engineers. At the same time the entire payroll of Moffatt & Nichol, Inc., was transferred to the books of Engineers; the corporation then had from 65 to 70 employees, including its officers.

Moffatt & Nichol, Inc., at the time of the transfer, had contracts to perform engineering services for both Government and civilian entities. None of these contracts were assigned to Engineers. However, an agreement was made between the two companies whereby Engineers agreed to complete the work in process of all contracts then pending in the hands of Moffatt & Nichol, Inc. Subsequently, Engineers performed and completed all work previously contracted to Moffatt & Nichol, Inc.; the latter company issued its own invoices and deposited the payments which it received in its own bank accounts.

Engineers carried on its operations in the same rented premises that Moffatt & Nichol, Inc., had conducted its operations; it also used the same office furniture and equipment, which were made available to it by Moffatt & Nichol, Inc., for a rental equal to depreciation plus 10 percent. After the transfer of its entire staff to Engineers1964 U.S. Tax Ct. LEXIS 89">*108 as of October 1, 1957, Moffatt & Nichol, Inc., entered into no new contracts to render consulting engineering services, or services of any other kind; such contracts which it would have obtained were thereafter entered into by Engineers in its own name. Engineers had its own bank accounts, books of account, payrolls, and cost system.

On October 1, 1957, Engineers entered into a written agreement 42 T.C. 558">*566 whereby it was to be reimbursed for work performed on contracts of Moffatt & Nichol, Inc., on the basis of direct costs plus an allowance for overhead, with the understanding that in any event Engineers should not incur losses in connection with this work. On December 19, 1957, it was agreed that pending final negotiations, billings were to be made on the basis of direct costs plus 35 percent for overhead. Subsequently, the engineering business of the new company became quite depressed; revenues decreased and there was a concomitant increase in overhead costs per contract. On September 10, 1958, it was agreed that in order to avoid losses by Engineers, it should bill the old company for "actual" direct costs plus "actual" overhead.

Subsequent to October 1, 1957, Moffatt & Nichol, 1964 U.S. Tax Ct. LEXIS 89">*109 Inc., had no paid employees, no equipment, and no facilities for conducting an engineering business. Moffatt & Nichol, Inc., had made available to Engineers all of the equipment and facilities necessary to carry on the engineering business it had previously conducted. Its assets consisted, in addition, of cash and liquid items (including accounts receivable), land, and building plans relating to such land. Cash necessary for the operation of the consulting engineering business was made available to Engineers by means of loans, and accounts receivable were ultimately transferred to Engineers, all as hereinafter set forth. The land, hereinafter described, had never in fact been used in the business.

Moffatt & Nichol, Inc., had to remain in existence after October 1, 1957, in order to "phase out" outstanding Government contracts in its hands at that time. These contracts were nonassignable. The primary activity of Moffatt & Nichol, Inc., subsequent to the October 1957 transfer, was the collection of accounts in respect of contracts in its name for which work had been done both by it (prior to the transfer) and by Engineers (subsequent to the transfer).

Subsequent to October 1, 1964 U.S. Tax Ct. LEXIS 89">*110 1957, the selection of Engineers for contracting work was done on the assumption that the same key personnel were employed by it as had been previously employed by Moffatt & Nichol, Inc.

By letter dated December 11, 1957, Moffatt, in behalf of Engineers, advised the U.S. Army Corps of Engineers that since October 1, 1957, the operations of the Long Beach office were being handled under the name of Engineers, a California corporation, and asked that all brochures and other information in the file of Moffatt & Nichol, Inc., be considered as pertaining to Engineers. The letter provided in part:

We certify that all of the officers and personnel of Moffatt & Nichol, Inc. are in Moffatt & Nichol, Engineers and that the resources of Moffatt & Nichol, Inc. are pledged to Moffatt & Nichol, Engineers.

In a brochure prepared by Engineers which was sent to various customers, Engineers imputed to itself the experience of Moffatt & Nichol, 42 T.C. 558">*567 Inc. In a "U.S. Government Architect-Engineer Questionnaire," on file with the U.S. Government, Form 251, dated May 31, 1963, Engineers refers to the former firm of Moffatt & Nichol, Inc., and likewise imputes to itself the experience of that corporation.

1964 U.S. Tax Ct. LEXIS 89">*111 John P. Hatteberg, an engineer with the U.S. Army Corps of Engineers, Los Angeles district, who participated in the selection of engineering concerns to do work for the Army, relied on the experience of Moffatt & Nichol, Inc., in recommending that the Army enter into engineering contracts with Engineers.

The most valuable asset of a consulting engineering business, such as that conducted by Moffatt & Nichol, Inc., consists of its staff of trained personnel and the past performance and qualifications of its employees.

In 1954, Moffatt & Nichol, Inc., attempted to purchase a parcel of land on which to erect a building for its own use; however, there was a cloud on the title and a bank loan could not be obtained. In October 1956, the company negotiated for another property but the owners refused its offer. In January 1957, the company purchased an unimproved parcel of land at a cost of $ 60,000 for the purpose of erecting a building for its own use in its business. On January 25, 1957, the board of directors opened up a separate bank account for the purpose of establishing a building fund, authorizing monthly transfers of $ 5,000 to said account. In the early part of 1957, Moffatt1964 U.S. Tax Ct. LEXIS 89">*112 & Nichol, Inc., began to draw up plans for the new building. These plans were completed in December 1957 at a total cost of $ 15,015.52. A model of the new building was made. It was estimated that a building, which was to have 15,000 square feet, would cost approximately $ 185,000 to construct. By December 11, 1957, the company had accumulated $ 72,447 in this building account. Construction of the building was never started because of adverse business conditions.

In October and November 1958, Moffatt & Nichol, Inc., attempted to enter into a joint venture involving the purchase of a large parcel of land. The corporation deposited its check for $ 50,000 in escrow on an option price of $ 2,550,000. However, the property was sold to other parties and the check was returned on November 12, 1958. It also investigated a project in San Diego which would have involved an investment of approximately $ 3,300,000. Another venture that was considered in 1958 was the purchase of an aerial survey business.

In October 1958, Engineers was advised by Howard to elect to be taxed as a partnership under the small business corporation provisions that had recently been enacted. After this election1964 U.S. Tax Ct. LEXIS 89">*113 was made it was discovered that the loss for 1958 would run somewhere between $ 50,000 and $ 100,000; Howard felt that the stockholders would not be able to deduct any amounts in excess of their capital and loan investments 42 T.C. 558">*568 in the company. Accordingly, he recommended that additional money be put into it.

Subsequent to the transfer of the engineering business to Engineers, various loans were made to it by Moffatt & Nichol, Inc. On or about October 7, 1957, the board of directors of Moffatt & Nichol, Inc., authorized a loan of $ 50,000 to Engineers; the lender was given short-term or demand notes; interest was payable at 5 percent per annum. On February 4, 1958, the board of directors authorized an additional loan of $ 25,000 on similar terms; the notes were to mature on or before June 30, 1958. On March 19, 1958, a further loan on similar terms was authorized, with notes maturing within 6 months from the date the notes were made. Interest on these notes was payable periodically by Engineers.

Pursuant to the foregoing authorizations, Moffatt & Nichol, Inc., made loans to Engineers as follows:

1964 U.S. Tax Ct. LEXIS 89">*114 By December 24, 1958, payments totaling $ 33,000 had been madeon these notes, leaving a balance of $ 56,000.

On December 23, 1958, the board of directors of Moffatt & Nichol, Inc., at a special meeting, adopted a resolution to wind up the affairs of the corporation and to dissolve it, pursuant to the written consent of the stockholders.

On December 30, 1958, "as of December 23, 1958," ² Moffatt & Nichol, Inc., distributed promissory notes of Engineers to petitioners Moffatt and Nichol; each received notes in the amount of $ 20,000. These promissory notes were subsequently turned in to Engineers in 42 T.C. 558">*569 exchange for new promissory notes payable by Engineers to Moffatt and Nichol in the same principal amounts.

In 1959 petitioners Moffatt and Nichol each incurred personal bad1964 U.S. Tax Ct. LEXIS 89">*115 debt losses in the amount of $ 24,923.47 in respect of their personal loans to Powers.

On December 22, 1959, "as of November 30, 1959," ² Moffatt & Nichol, Inc., distributed $ 60,000 cash to its stockholders.

On December 31, 1959, "as of November 30, 1959," ² Moffatt & Nichol, Inc., distributed to its stockholders autos, office furniture, and other equipment, having a total book value and fair market value of $ 10,169.93.

1964 U.S. Tax Ct. LEXIS 89">*116 On December 31, 1959, Moffatt & Nichol, Inc., distributed the following properties to its stockholders:

On December 31, 1959, certificates for 25,000 additional shares of $ 1 par value common stock of Moffatt & Nichol, Engineers, were issued as follows:

Payment for such stock was made by reducing, to the extent of $ 25,000, the amount owed by the corporation to the stockholders on outstanding notes, as hereinafter set forth.

On January 2, 1960, Engineers purchased from petitioners Moffatt, Nichol, and Murray all of the office equipment and autos (with the exception of one auto which had been sold to an employee at its depreciated cost of $ 397.60) for a total consideration of $ 9,772.33. On the same date Engineers purchased from the same individual petitioners accounts receivable (net) for a total consideration1964 U.S. Tax Ct. LEXIS 89">*117 of $ 18,799.17.

On January 14, 1960, Moffatt & Nichol, Inc., made a final distribution to its stockholders in cash in the total amount of $ 24,083.64, which they then transferred to Engineers.

The assets transferred to Engineers which were referred to in the foregoing two paragraphs, in the aggregate amount of $ 52,655.14, were reflected in a liability account on its books entitled "Wardlow Property Account," and payments by Engineers were thereafter made 42 T.C. 558">*570 to petitioners Moffatt, Nichol, and Murray during the following 20 months to close out that account.

Engineers incurred losses in the years 1957, 1958, and 1960 in the amounts of $ 56,436.20, $ 68,049.14, and $ 20,912.46, respectively; it earned income in 1959 in the amount of $ 27,743.85.

Moffatt & Nichols, Inc., had some 65 to 70 employees as of October 1, 1957, who were transferred to Engineers. The number of employees thereafter declined as a consequence of adverse business conditions. In September of 1958 and 1959 Engineers employed 45 and 46 employees, respectively. Direct labor costs for 1957, 1958, and 1959 were $ 348,999.72, $ 228,652.06, and $ 284,201.42, respectively.

On January 3, 1961, Moffatt, Nichol, and1964 U.S. Tax Ct. LEXIS 89">*118 Murray held 10 notes of Engineers with a total balance of $ 134,350. Two of the notes, totaling $ 40,000, were the notes issued by Engineers to Moffatt and Nichol in exchange for the notes it had previously issued to Moffatt & Nichol, Inc., for cash loans, and which had been distributed by that corporation in December 1958 to Moffatt and Nichol. Three of the notes had been issued for cash loans by Moffatt, Nichol, and Murray, which, after having been satisfied in part by a cash repayment and in part by the issuance of 25,000 additional shares of Engineers stock in December 1959, reflected a total net balance of $ 30,450. The remaining five notes, with a total balance of $ 63,900 also represented "cash loans" by Moffatt, Nichol, and Murray; these loans were made by endorsing certain salary checks and returning them to Engineers in exchange for the notes. Three of these latter loans were made by Moffatt, Nichol, and Murray on December 23, 1959, in the aggregate amount of $ 55,900

John and Mary Moffatt's 1958 separate income tax returns reflected in part the following:

1964 U.S. Tax Ct. LEXIS 89">*119 In their 1958 returns they reported a long-term gain in the amount of $ 15,500 in respect of a liquidating dividend of Moffatt & Nichol, Inc. An "unused capital loss carryover from 5 preceding taxable years" in the amount of $ 39,221.03 was applied against this gain and no net capital gain was reported in 1958.

Frank and Ruth Nichol's 1958 separate income tax returns reflected in part the following:

42 T.C. 558">*571 In their 1958 returns they reported a long-term gain in the amount of $ 15,500 in respect of a liquidating dividend of Moffatt & Nichol, Inc. An "unused capital loss carryover for 5 preceding taxable years" in the amount of $ 38,633.18 was applied against this gain and they reported no net capital gain in 1958.

John and Mary Moffatt's 1959 joint income tax return showed anunused loss carryover to that year in the amount of $ 21,721.03 from their 1954, 1956, and 1957 losses. It also showed the following:

1964 U.S. Tax Ct. LEXIS 89">*120 Their 1959 return reported a liquidating dividend from Moffatt & Nichol, Inc., in the amount of $ 72,662.89 against which there was applied the bad debt loss in the amount of $ 24,923.47 and the "unused capital loss carryover from 5 preceding taxable years" in the amount of $ 21,721.03. They reported net capital gain in the amount of $ 26,018.39.

Frank and Ruth Nichol's 1959 joint income tax return showed an unused capital loss carryover to that year in the amount of $ 21,133.18 from their 1954, 1956, and 1957 losses. It also showed the following:

Their 1959 return reported a liquidating dividend from Moffatt & Nichol, Inc., in the amount of $ 72,662.89 against which there was applied the bad debt loss in the amount of $ 24,923.47 and the "unused capital loss carryover from 5 preceding taxable years" in the amount of $ 21,133.18. They reported net capital gain in the amount of $ 26,606.24.

OPINION

Petitioners received1964 U.S. Tax Ct. LEXIS 89">*121 certain distributions from Moffatt & Nichol, Inc., in 1958 and 1959 in the course of the liquidation of that corporation. They treated such distributions as being in exchange 42 T.C. 558">*572 for their stock and determined capital gains thereon by subtracting the cost of their stock from the amounts distributed to them. ³1964 U.S. Tax Ct. LEXIS 89">*123 And they offset against such capital gains their unused capital loss carrycovers from 1954-57 as well as their nonbusiness bad debt losses incurred in 1959. If that's all there were to the matter, petitioners' position would be unassailable, and the Government does not contend otherwise. However, the Government's position is that there is more to the picture. It contends that pursuant to a prearranged plan there was a corporate reorganization under sections 368 and 354 ⁴1964 U.S. Tax Ct. LEXIS 89">*124 whereby a new corporation, Moffatt & Nichol, Engineers, succeeded to the business of Moffatt & Nichol, Inc., in 1957; that it was part of the plan to 42 T.C. 558">*573 delay the liquidation of the old company; that the latter had a large amount of accumulated earnings and profits; that the 1958 and 1959 distributions were merely an incident of the corporate reorganization, and to the extent of accumulated1964 U.S. Tax Ct. LEXIS 89">*122 earnings and profits the gains constituted dividends under section 356 ⁵ taxable to petitioners as ordinary income rather than capital gains; and that therefore the capital loss carryovers from prior years and the nonbusiness bad debt losses in one of the current years (1959) could not be used as an offset against such distributions as was done by petitioners. If the transaction did qualify as a corporate reorganization, petitioners do not contest the treatment of the distributions as taxable dividends under section 356(a)(2), with the consequence that the capital loss carryovers and nonbusiness bad debt losses may not be applied against them. They argue, however, that the liquidation of the old company was an entirely separate and independent transaction and that there was not in fact or in law the reorganization for which the Government contends. As we appraise the evidence in this case we think the Government's position is correct.

The word "reorganization" is defined in section 368, and1964 U.S. Tax Ct. LEXIS 89">*125 the Government relies particularly upon section 368(a)(1)(D) which begins by describing a "reorganization" to mean "a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders * * * is in control of the [transferee] corporation." There was here a transfer of the business of the old company to Engineers, ⁶ the same stockholders were in control of the new company, and there can be no doubt that the foregoing requirement of section 368(a)(1)(D) was met. However, there are additional requirements by reason of the fact that section 368(a)(1)(D) makes applicable the provisions of sections 42 T.C. 558">*574 354, 355, and 356, and it is operative only if, in pursuance of the plan, stock or securities of the new company are distributed in a transaction which qualifies under one of these other sections.

1964 U.S. Tax Ct. LEXIS 89">*126 The key provisions in controversy herein are found in section 354. There is a vigorous dispute between the parties as to whether the distributions were made in "pursuance of the plan of reorganization" under section 354(b)(1)(B), and whether there was an exchange of stock in the old company for stock in the new company under section 354(a)(1). The answer to these two questions depends upon whether the delayed liquidation of Moffatt & Nichol, Inc., was part of the original plan, that is, whether the various steps occurring over a period of several years were merely interrelated parts of a unified plan contemplating the transfer of the engineering business to a new corporation with the eventual disappearance of the old, so that, viewing the transaction as a whole, the distributions can be regarded as having beenmade in pursuance of the plan of reorganization and the stock in the new company can be regarded as having been received in exchange for stock in the old. In addition to the foregoing issues, a third question is presented as to whether Engineers acquired "substantially all of the assets" of Moffatt & Nichol, Inc., so as to satisfy the demands of section 354(b)(1)(A).

1. 1964 U.S. Tax Ct. LEXIS 89">*127 Whether There Was a Plan of Reorganization and Whether the Delayed Liquidation of Moffatt & Nichol, Inc., Was Part of That Plan. -- Howard's memorandum bearing the date May 6, 1957, recommended, in pursuance of providing the "principal stockholders with the sought-after capital gains," that Moffatt & Nichol, Inc., transfer its engineering business to a new corporation and make distributions which would extend over a period in excess of 1 year. It read in part as follows:

An alternative may be found in the delaying of liquidation with a transfer of operations. Under this plan the existing corporation would remain in existence for a period of time, its only activity being completion of present projects and collection of outstanding accounts. This would be accompanied by the formation of a new organization to take on new contracts. The effect would be to defer the payment of the taxes mentioned before and also to cover the possibility of additional non-business bad debts in the hands of the individuals which may occur in future years. This plan of course would require a division of labor and other costs with the resulting increase of time and cost in record keeping. The period1964 U.S. Tax Ct. LEXIS 89">*128 for which liquidation could be delayed would be determined by application of section 531, which would probably be about one year after the plan became effective.

The aforementioned plan was carried out in all important respects, ⁷42 T.C. 558">*575 and the fact that it was weighs heavily as tending to indicate that, at the time of the transfer, there was a plan to liquidate the transferor corporation.

On July 22, 1957, approximately 2 1/2 months after Howard had prepared his memorandum, Engineers was incorporated. As of October 1, 1957, all of the1964 U.S. Tax Ct. LEXIS 89">*129 personnel and employees of Moffatt & Nichol, Inc., were transferred to Engineers, and the latter corporation thereafter conducted the same consulting engineering business theretofore carried on by the transferor, at the same address and using the identical facilities. The same persons controlled the new corporation, bearing a similar name, and gave assurances to its principal client that there would be continuity of the enterprise without change in officers, personnel, or available resources. The primary activity of Moffatt & Nichol, Inc., subsequent to October 7, 1957, was the collection of accounts receivable. In December 1958, approximately 14 months after the transfer, Moffatt & Nichol, Inc., began to liquidate; the liquidation was completed in January 1960.

Petitioners Moffatt and Nichol had each suffered nonbusiness bad debt losses in 1954, 1956, and 1957 in the amounts of $ 37,247.40, $ 3,525, and $ 6,573.63, respectively. And in 1959 they each suffered further personal bad debt losses in the amount of $ 24,923.47; these losses were anticipated by them at the time of the conference on April 12, 1957, which Howard attended. Petitioners Moffatt and Nichol utilized these 1964 U.S. Tax Ct. LEXIS 89">*130 losses by applying them against the "sought after" capital gains realized upon the liquidation of Moffatt & Nichol, Inc.

The action of both the corporation and its "principal stockholders" was hand-in-glove with Howard's plan. One could hardly conceive of a more perfect fit; it was indeed tailormade. It is abundantly clear that what on the surface might appear to be an unrelated transfer of a corporation's business in 1957 and a liquidation of that corporation some 14 months later, was in reality a series of integrated steps pursuant to a preconceived plan. And in such situation, the separate steps will be disregarded. Walter S. Heller, 2 T.C. 371">2 T.C. 371, 2 T.C. 371">382-383, affirmed 147 F.2d 376 (C.A. 9), certiorari denied 325 U.S. 868">325 U.S. 868; William M. Liddon, 22 T.C. 1220">22 T.C. 1220, 22 T.C. 1220">1225, approved as to this point but reversed on other grounds 230 F.2d 304 (C.A. 6), certiorari denied 352 U.S. 824">352 U.S. 824; Pebble Springs Distilling Co., 23 T.C. 196">23 T.C. 196, affirmed 231 F.2d 288 (C.A. 7), certiorari1964 U.S. Tax Ct. LEXIS 89">*131 denied 352 U.S. 836">352 U.S. 836; Ethel K. Lesser, 26 T.C. 306">26 T.C. 306, 26 T.C. 306">311; Southwell Combing Co., 30 T.C. 487">30 T.C. 487; David T. Grubbs, 39 T.C. 42">39 T.C. 42, 39 T.C. 42">49. Cf. D. W. Douglas, 37 B.T.A. 1122">37 B.T.A. 1122, 37 B.T.A. 1122">1127-1128, where distributions made by the transferor were treated as incident to a reorganization although they were made approximately 5 years after the transfer of assets to the transferee corporation.

42 T.C. 558">*576 Petitioners, in an effort to show that the liquidation of the old company was entirely unrelated to the transfer of the business to the new company, contend that the reason for the transfer was to enable Bobisch to acquire 10 percent of the stock for $ 2,500, and not, as the Commissioner contends, to secure capital gains. Indeed, this was the sole reason given by them for the transfer. We heard testimony in support of that position, but the short answer is that, in the context of the record before us, we did not find it credible. We think that the Bobisch evidence -- and we note that Bobisch himself was not called as a witness -- represents merely an ex post facto1964 U.S. Tax Ct. LEXIS 89">*132 effort to assign a reason for the transfer that was not in fact the motivating factor in the transaction. Cf. Weyl-Zuckerman & Co., 23 T.C. 841">23 T.C. 841, 23 T.C. 841">847-848, affirmed 232 F.2d 214 (C.A. 9); Frank Spingolo Warehouse Co., 37 T.C. 1">37 T.C. 1, 37 T.C. 1">5-6; Clearview Apartment Co., 25 T.C. 246">25 T.C. 246, 25 T.C. 246">253-254. And although there were various negotiations with Bobisch, we reject as unworthy of belief the testimony to the extent that it disavowed the existence of a preconceived plan to transfer the engineering business to a new corporation and then obtain the "sought after" capital gains at a later time through liquidation of the old company. Petitioners also make much of Moffatt's testimony that he never saw the Howard memorandum; but whether or not he did is a matter of little consequence. The point in this connection is that we are fully satisfied that the substance of that memorandum was communicated to those who controlled or guided the affairs of the corporation and that they acted upon the advice contained therein. We refuse to believe that it was all a grand coincidence.

Nor are we driven1964 U.S. Tax Ct. LEXIS 89">*133 to a contrary conclusion by the fact that during the interim period, prior to liquidation, consideration was given to entering into several new projects in behalf of the old corporation. Merely because those who dominated Moffatt & Nichol, Inc., saw a few seemingly attractive business opportunities and therefore possibly considered deviating from the plan of liquidating the corporation is no compelling reason to conclude that no such plan existed. Moreover, the acquisition of additional business interests is not inconsistent with a plan to liquidate, for such subsequently acquired assets could be distributed to the shareholders in carrying out the plan of liquidation. Cf. Malcolm C. Howell, 40 T.C. 940">40 T.C. 940, 40 T.C. 940">946.

We have taken various other items of evidence into account urged upon us by petitioners as negativing the existence of a preexisting plan to liquidate but we do not find them persuasive. We are convinced on the record before us that such plan did exist, and that the transfer of the engineering business to the new company and the delayed liquidation of the old company were carried out in accordance with that plan.

Charles R. Mathis, Jr., 19 T.C. 1123">19 T.C. 1123,1964 U.S. Tax Ct. LEXIS 89">*134 acq. 1953-2 C.B. 5, is not helpful 42 T.C. 558">*577 to petitioners. In Mathis the old corporation was liquidated and 9 months later a new corporation was organized to which assets formerly owned by the old corporation and other assets were transferred. The Court found (p. 1130) that, upon "[considering] all the facts in the record," the liquidation of the old corporation and the incorporation of the new company "were separate and independent transactions, and not part of the one overall plan conceived prior to the de facto distribution of all the Corporation's assets." Here there was no such gap between the time of liquidation and the time of incorporation since the engineering business was operated uninterruptedly under a corporate roof at all times; and in any event we cannot make the same finding here that was made in that case.

2. Whether There Was an Exchange of Stock for Stock Within Section 354 (a)(1). -- Admittedly, the stockholders of the old company did not in form exchange their stock for stock in the new company. But the considerations discussed in 1, supra, establish that there was a unified plan of reorganization involving 1964 U.S. Tax Ct. LEXIS 89">*135 the delayed liquidation of the old company; accordingly, the transaction, which extended over a period of several years, must be viewed as a whole, disregarding the intermediate steps. "A given result at the end of a straight path is not made a different result because reached by following a devious path." Minnesota Tea Co. v. Helvering, 302 U.S. 609">302 U.S. 609, 302 U.S. 609">613. ⁸

Viewing the transaction as a whole, it is clear that when it was completed the shareholders had surrendered their stock in the old company and were stockholders in the new company carrying on the same business. Disregarding the intermediate steps there was in substance merely an exchange of stock for stock in a corporate reorganization, accompanied by the distribution of "boot" or a taxable dividend under section 356(a), footnote 5, supra. "The net result1964 U.S. Tax Ct. LEXIS 89">*136 was that petitioner and the other two stockholders had substituted their interest in the * * * [old] corporation for substantially the same interest in the * * * [new] corporation." Walter S. Heller, 2 T.C. 371">2 T.C. 371, 2 T.C. 371">383, affirmed 147 F.2d 376 (C.A. 9), certiorari denied 325 U.S. 868">325 U.S. 868. "In form this was not an exchange of stock for stock plus something 'to boot'. However, all of the transactions, when viewed as one plan of reorganization, culminated in an exchange of stock for stock plus money [or other property]." William M. Liddon, 22 T.C. 1220">22 T.C. 1220, 22 T.C. 1220">1226, approved as to this point but reversed on other grounds 230 F.2d 304 (C.A. 6), certiorari denied 352 U.S. 824">352 U.S. 824. "The petitioner also contends that there was not an exchange of stock for stock since the old corporation redeemed its stock and the stockholders paid cash for their stock in the new corporation. * * * Assuming that, as the petitioner says, the stockholders paid cash for the stock, that fact 42 T.C. 558">*578 does not take the transaction out of the statute. * * * 1964 U.S. Tax Ct. LEXIS 89">*137 The effect of these transactions was that the business was transferred to the new corporation and in pursuance of a plan of reorganization the stockholders received stock in a corporation * * * a party to a reorganization, and cash, in exchange for stock in another corporation a party to a reorganization. This is within the terms of sections 354 and 356." (Italics supplied.) David T. Grubbs, 39 T.C. 42">39 T.C. 42, 39 T.C. 42">51-52. Cf. also Commissioner v. Morgan, 288 F.2d 676, 679-680 (C.A. 3), reversing 33 T.C. 30">33 T.C. 30, certiorari denied 368 U.S. 836">368 U.S. 836, rehearing denied 369 U.S. 826">369 U.S. 826.

We hold that there was an exchange of stock for stock within the meaning of the pertinent statutory provisions.

3. Whether There Was a Transfer of "substantially all" of the Assets. -- We note preliminarily that "[the] term 'substantially all' is a relative term, dependent on the facts of any given situation." Daily Telegram Co., 34 T.C. 101">34 T.C. 101, 34 T.C. 101">105. Cf. R. & J. Furniture Co., 20 T.C. 857">20 T.C. 857, 20 T.C. 857">864, reversed on another issue1964 U.S. Tax Ct. LEXIS 89">*138 221 F.2d 795 (C.A. 6). "Whether the properties transferred constitute 'substantially all' is a matter to be determined from the facts and circumstances in each case rather than by the application of any particular percentage." Milton Smith, 34 B.T.A. 702">34 B.T.A. 702, 34 B.T.A. 702">705. Moreover, in considering the "facts and circumstances" in any given case it is a matter of importance to take into account the liabilities of the enterprise, so that the retention of what might be a large amount of assets in other situations would be of very little consequence if such assets were held back by the transferor in order to pay off its liabilities. Faigle Tool & Die Corporation, 7 T.C. 236">7 T.C. 236, 7 T.C. 236">243; Rev. Rul. 57-518, 1957-2 C.B. 253. And finally, it must be remembered that the "substantially all" requirement "has been subjected to [a] construction which in effect applies a continuity test rather than mere blind percentages." Southland Ice Co., 5 T.C. 842">5 T.C. 842, 5 T.C. 842">850, fn. 4.

That the necessary continuity was present here is amply demonstrated by the record. The 1964 U.S. Tax Ct. LEXIS 89">*139 entire consulting engineering business was transferred to the new company, bearing a similar name and controlled by the same persons. It employed the same personnel, used the same facilities, had the same address, and dealt with the same clients as though nothing had occurred apart from the minor change in name of the business. There was here the most complete continuity of enterprise -- the very kind of continuity that is basic to a corporate reorganization with its concomitant nonrecognition of gain or loss except for the distribution of "boot."

Bearing in mind the foregoing considerations and also the necessity of considering the transaction in its entirety -- from its inception in 1957 through its completion in early 1960 -- we are satisfied on the record before us that there was a transfer of "substantially all" the assets of the old company to the new.

42 T.C. 558">*579 Petitioners' position revolves largely around percentages of balance sheet assets of the old company distributed by it in December 1958, 1959, and January 1960. Their contention is fatally defective because (a) they fail to take into account the most important asset of the business that did not appear on the balance1964 U.S. Tax Ct. LEXIS 89">*140 sheet at all; and (b) they fail to consider the various steps as part of an integrated preconceived plan and therefore do not take into account certain balance sheet assets as actually having been transferred to the new company.

(a) The most valuable asset of the enterprise did not appear on the balance sheet in any way. It is of the utmost importance to remember that the consulting engineering business is basically a service business. It does not manufacture or sell products. Its income is derived from and its activities consist largely of the preparation of studies, reports, plans, specifications, designs, and related matters. Apart from several clerical employees, its total force of employees consists exclusively of licensed engineers, subprofessional personnel, and draftsmen. As we have found, the most valuable asset of such business is its staff of trained personnel and the past performance and qualifications of its employees. To that we may add the contacts and reputations of the two principals, petitioners Moffatt and Nichol, who were responsible for obtaining virtually all of the contracts for the enterprise through personal solicitation. And it was that package of 1964 U.S. Tax Ct. LEXIS 89">*141 trained employees, including the active participation of petitioners Moffatt and Nichol, that was transferred at the outset from the old company to the new. This was an asset of enormous importance in the context of this case, cf. Frederick R. Harris, Inc., 40 T.C. 744">40 T.C. 744, 40 T.C. 744">750; yet, it nowhere appears on the balance sheet, and was not taken into account in any way by petitioners in evaluating what was transferred from Moffatt & Nichol, Inc., to Moffatt & Nichol, Engineers.

(b) The balance sheet assets were distinctly of lesser importance to the business. Yet all of those assets that were of any consequence in the conduct of the business found their way into the hands of the new company. To be sure, there was no direct transfer of such assets by the old company to the new, but we have found that the entire transaction was carried out in conformity with a prearranged plan and the intermediate steps may therefore properly be disregarded. In one form or another the new company had the use and benefit of all the assets relating to the operation of the business, whether by "loans," "rentals" of equipment followed ultimately by sale thereof, or otherwise. 1964 U.S. Tax Ct. LEXIS 89">*142 And it finally wound up with all the assets that were necessary or appropriate to the conduct of the business. There remained in the hands of the stockholders only certain nonoperating assets that were not required in the business, and even these assets were "pledged" by Moffatt & Nichol, Inc., to the new corporation. In the context of this case, where the most important asset, 42 T.C. 558">*580 considered in (a) above, was not even taken into account by petitioners, and where all other assets of significance eventually found their way into the hands of the new company, we think there was a transfer of "substantially all" the assets within the meaning of section 354(b)(1)(A), and that in any event petitioners have not carried their burden of showing that there was not a transfer of substantially all the assets.

The record does not contain a balance sheet of Moffatt & Nichol, Inc., for October 1 or 7, 1957, when the new company took over its business. However, there is a balance sheet as of December 31, 1957, which is set forth in our findings. It discloses a large amount of liabilities, which must be offset against assets in arriving at any realistic appraisal of what constitutes "substantially1964 U.S. Tax Ct. LEXIS 89">*143 all." Cf. 7 T.C. 236">Faigle Tool & Die Corporation, supra at 243. Moreover, to the extent of other assets on this balance sheet which appear to have been eliminated by the time Moffatt & Nichol, Inc., began formally to liquidate in December 1958, there is no showing that such assets were not used up or otherwise consumed in the conduct of the consulting engineering business -- e.g., "inventories," "prepaid expenses and supplies." To the extent that the new company needed working capital it was supplied by the old company in one form or another.

The record shows that when Moffatt & Nichol, Inc., began to liquidate formally in December 1958 through early January 1960, it had balance sheet assets in the aggregate amount of $ 230,001.16 to distribute.

The first distribution, in December 1958, consisted of two notes from the new company aggregating $ 40,000, which were turned over to petitioners Moffatt & Nichol. But these notes represents funds previously made available by Moffatt & Nichol, Inc., to the new company, and merely furnish the basis for subsequent tax-free receipts of the principal amounts thereof by petitioners Moffatt and Nichol when they are paid off. 1964 U.S. Tax Ct. LEXIS 89">*144 In every real sense the funds giving rise to these notes had been transferred by the old company to the new and cannot be excluded from the composition of those items making up "substantially all" of the assets.

The second formal distribution was made on December 22, 1959, consisting of $ 60,000 in cash paid to petitioners Moffatt, Nichol, and Murray. But there is more to the story in respect of this item. On December 23, 1959, petitioners Moffatt, Nichol, and Murray made "loans" to Engineers in the aggregate amount of $ 55,900. We refuse to believe that these two events were unconnected. In substance this again was simply a way of transferring funds from the old company to the new and setting the stage for the tax-free recovery of those funds in a later year by the petitioners when their notes would be paid off. Accordingly, we must regard the bulk of this $ 60,000 distribution 42 T.C. 558">*581 as includable in the items consisting of "substantially all" of the assets.

The third and fourth distributions were made on December 31, 1959. The third distribution consisted of autos, office furniture, and equipment having an aggregate fair market value of $ 10,169.93, all of which (except1964 U.S. Tax Ct. LEXIS 89">*145 an auto which was sold at its depreciated cost of $ 397.60 to an employee) was "sold" on the next business day, January 2, 1960, to the new company for $ 9,772.33. The old company owned no other tangible personal property; thus, all of its tangible personal property (except the one auto noted above) found its way ultimately into the hands of the new company.

The fourth distribution, also on December 31, 1959, consisted of accounts receivable, earned but unbilled accounts receivable, and land and building plans, having fair market values in the amounts of $ 1,979.33, $ 18,323.92, and $ 84,995.85, respectively. On January 2, 1960, the next business day, the new company purchased the foregoing accounts receivable to the extent of $ 18,799.17 (net), leaving $ 1,504.08 in the hands of the stockholders. Also left in the hands of the stockholders and not transferred to the new company was the land with its accompanying building plans.

The fifth and final distribution was made in January 1960; it consisted of $ 24,083.64 cash, which the stockholders then promptly transferred or advanced to the new company.

Thus, it is apparent that apart from a few very minor items the only asset of magnitude1964 U.S. Tax Ct. LEXIS 89">*146 that did not wind up in the hands of the new company was the vacant real estate and the building plans relating thereto. While it is true that there had at one time been an intention to use that property to construct a building in which to carry on the consulting engineering business, that project had been abandoned and the property no longer had any connection with the conduct of the consulting engineering business. It was a nonoperating asset, and was of no use whatever to the business. ⁹

Taking into account the transfer of the package of trained employees (including the principal officers) that is so important in the conduct of this1964 U.S. Tax Ct. LEXIS 89">*147 kind of business and that was not even valued by petitioners, and taking into account all the other assets necessary or appropriate to the conduct of the business that ultimately found their way into the hands of the new company, we conclude that the retention of a few minor items plus the land that was no longer of any importance to the enterprise did not prevent this transaction from satisfying the "substantially all" requirement. Cf. Western Industries Co. v. Helvering, 82 F.2d 461, 464 (C.A.D.C.), reversing 30 B.T.A. 42 T.C. 558">*582 809; Schuh Trading Co. v. Commissioner, 95 F.2d 404, 408 (C.A. 7), reversing 34 B.T.A. 1313">34 B.T.A. 1313 (Memo); Commissioner v. First National Bank of Altoona, 104 F.2d 865, 870 (C.A. 3), ¹⁰ petition for certiorari dismissed 309 U.S. 691">309 U.S. 691; Benjamin R. Britt, 40 B.T.A. 790">40 B.T.A. 790, 40 B.T.A. 790">795, affirmed 114 F.2d 10 (C.A. 4).

1964 U.S. Tax Ct. LEXIS 89">*148 Petitioners' reliance upon Joseph C. Gallagher, 39 T.C. 144">39 T.C. 144, is misplaced. There, the owners of 38.05 percent of the stock of the old company did not acquire any interest whatever in the new; and the owners of the remaining 61.95 percent acquired 72 2/3 percent of the stock in the new corporation. There was thus absent the necessary continuity of "control" required by section 368(a)(1)(D), since "control" is defined in section 368(c) to mean ownership of at least 80 percent of the stock. See footnote 4, 30 T.C. 487">supra at 572. Accordingly, there could be no "reorganization" in that case under section 368(a)(1)(D), which is involved herein. This was specifically recognized by the Court in 39 T.C. 144">Joseph C. Gallagher, supra at 161. In the present case, petitioners Moffatt, Nichol, and Murray, who owned 100 percent of the stock in the old company, acquired and at no time owned less than 90 percent of the stock of the new company, thus fully satisfying the requirements of section 368(a)(1)(D), which had not been met in Gallagher.

Decisions will be entered under Rule 50.