These appeals are from two decisions of the Tax Court, one sustaining a deficiency income tax assessment of $184,073.30 against Ray A. Maher and his wife, Rose,1 the other sustaining taxpayer's liability as transferee. Taxpayer has filed two appeals, one on behalf of himself and his wife, and one solely on behalf of himself as transferee. The Commissioner of Internal Revenue, while seeking affirmance of the Tax Court's decisions, has filed protective appeals in both cases. All appeals have been consolidated.

The facts, which are not in dispute, are fully delineated in the opinion of the Tax Court, reported at 55 T.C. 441 (1970). We review the essential facts in order to convey a proper understanding of the issues generated by the transactions under consideration.

In April, 1963, taxpayer entered into an agreement for the purchase of all of the outstanding stock of four corporations, Selectivend, Surevend, Selvend and Selvex. The total sale price was $500,000.00, of which $250,000.00 was represented by two interest-bearing promissory notes executed by taxpayer and payable in annual installments over a ten-year period.

In accordance with the agreement, the stock certificates of the four corporations were endorsed in blank and placed in escrow as collateral security for the payment by taxpayer of the installment notes.

On December 31, 1963, as part of a plan to combine the assets and operations of Selvex with Selectivend, taxpayer assigned his contractual interest in the Selvex stock to Selectivend in exchange for the latter's assumption of taxpayer's liability on the promissory notes. Taxpayer remained secondarily liable on the notes, and the stock certificates continued to be held in escrow.

Selvex was dissolved on March 31, 1964, and its assets and liabilities were taken over by Selectivend. Surevend and Selvend were subsequently liquidated on June 30, 1965, and Selectivend was itself officially dissolved on October 16, 1967, and its assets transferred to taxpayer.

Prior to dissolution Selectivend made the following payments of principal and interest on the two notes:

Selectivend deducted the interest payments on its corporate tax returns for the appropriate years. After final payment, all stock was released from escrow.

The Commissioner determined that taxpayer realized income taxable as a dividend to the extent of the earned surplus of Selectivend either in the year Selectivend assumed taxpayer's liability on the notes (1963), or, alternatively, in the years Selectivend made principal and interest payments thereon (1965, 1966, 1967). If the dividend occurred in the years of payment, the Commissioner determined that the deductions claimed by Selectivend for the interest payments were not allowable, and therefore taxpayer, as Selectivend's transferee, was additionally liable for the resulting deficiencies.

Taxpayers Maher and wife petitioned the Tax Court for a redetermination of the deficiencies alternatively alleged by the Commissioner. Maher as transferee petitioned for a redetermination of transferee liability for the alleged deficiencies in the corporate returns of Selectivend. The cases were consolidated for trial below.

The Tax Court held that the transactions in question constituted a redemption of stock under Sec. 304(a)(1) of the Internal Revenue Code of 1954 which was essentially equivalent to a dividend under Sec. 302, and taxable as such under Sec. 301(a) in 1963 to the extent of Selectivend's earnings and profits. Having so ruled, the Tax Court held that taxpayer had not received dividends in 1965, 1966 and 1967, the years in which payments were actually made on the notes, and that, therefore, Selectivend was entitled to the deductions it had claimed for the amounts paid as interest on the notes. Finally, the Tax Court held that taxpayer was liable as transferee for taxes due from Selectivend in 1964 and 1965.2 From the decisions entered pursuant to these determinations, the taxpayer has appealed, and the Commissioner has filed protective appeals.

The issues presented on appeal are: (1) whether the transfer by taxpayer to Selectivend of his rights in the Selvex stock in exchange for the assumption by Selectivend of taxpayer's liability on the two notes constituted a redemption of stock under Sec. 304(a)(1)3 of the Internal Revenue Code of 1954 which was equivalent to a dividend under Sec. 3024 and is therefore taxable under Sec. 301(a)5 at ordinary income rates; (2) if dividend income is held to be taxable to taxpayer as a result of the transactions, whether it is taxable in 1963, the year in which taxpayer's liability on the contract was assumed by Selectivend, or in 1965, 1966 and 1967, the years of payment; (3) if dividend income is held to be taxable in the years 1965-67, whether the interest paid by Selectivend was properly deducted on its corporate returns for those years, or whether such amounts were additional dividend income to taxpayer; and (4) whether the statute of limitations bars the Commissioner from assessing transferee liability against taxpayer for any deficiencies determined to be due from Selectivend for the taxable years 1964 and 1965.

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We affirm the determination that the transaction constituted a redemption of stock equivalent to, and taxable as, a dividend, and we do so on the basis of the Tax Court's opinion.

However, for reasons stated below, we disagree with the Tax Court's holding that the dividend was received in 1963, the year in which Selectivend assumed taxpayer's liability on the notes. We hold that taxpayer received dividends in 1965, 1966 and 1967, in the amount of the actual payments of principal and interest made by Selectivend on the notes.

Dividends have been deemed received when the taxpayer has received an economic benefit as a result of a payment made to him or for his benefit by a corporation. Commissioner of Internal Revenue v. Riss, 374 F.2d 161, 167 (8th Cir. 1967); Noble v. Commissioner of Internal Revenue, 368 F.2d 439, 443 (9th Cir. 1966); Sullivan v. United States, 363 F.2d 724, 728 (8th Cir. 1966), cert. denied, 387 U.S. 905, 87 S. Ct. 1683, 18 L. Ed. 2d 622 (1967); Idol v. Commissioner of Internal Revenue, 319 F.2d 647, 651 (8th Cir. 1963); Sachs v. Commissioner of Internal Revenue, 277 F.2d 879, 883 (8th Cir.), cert. denied, 364 U.S. 833, 81 S. Ct. 63, 5 L. Ed. 2d 59 (1960). An assumption, reduction or cancellation of a liability of a taxpayer by a corporation, to be sure, may give rise to the requisite "economic benefit." The underlying theory of a realization of income under these circumstances is the freeing of the debtor's assets from liability for the debt. Sullivan v. United States, supra, at 729. Hence the general rule is that there is no income unless and until there has been a release of liability. 1 Mertens, Law of Federal Income Taxation, Sec. 11.19. In the present case, while Selectivend contractually assumed primary liability on the two notes, taxpayer remained secondarily liable until the notes were actually paid. Whatever "economic benefit" may have accrued to taxpayer from the reduction of his liability from primary to secondary is clearly incapable of being evaluated on an objective basis.6

Our research discloses that in the small number of cases in which a corporation has assumed a personal obligation of a shareholder in one year, and satisfied that obligation in a later year, courts have generally found with little or no discussion that the shareholder realized a taxable dividend only in the year or years in which the obligation was paid. Vinnell v. Commissioner of Internal Revenue, 52 T.C. 934 (1969); Kleedon v. Commissioner of Internal Revenue, 3 CCH Tax Ct. Mem. 1123 (1944); Cf. Sachs v. Commissioner of Internal Revenue, 277 F.2d 879 (8th Cir. 1960); Wall v. United States, 164 F.2d 462 (4th Cir. 1947); Schalk Chemical Co. v. Commissioner of Internal Revenue, 32 T.C. 879 (1959), aff'd, 304 F.2d 48 (9th Cir. 1962). But cf. Wiseman v. United States, 259 F. Supp. 90 (D.Me.), aff'd, 371 F.2d 816 (1st Cir. 1967).

The cases relied upon by the Tax Court in deciding that taxpayer should be taxed in the year that Selectivend assumed his obligation are inapposite. In those cases the assumption of a mortgage by a buyer was declared immediate gain to the seller on the ground that to do otherwise would "defeat the intention of another [section of the Act] or . . . frustrate the Act as a whole . . . ." Crane v. Commissioner of Internal Revenue, 331 U.S. 1, 13, 67 S. Ct. 1047, 1054, 91 L. Ed. 1301 (1947). We are not faced with similar difficulties here.

The Commissioner concedes that if the dividend occurred in 1963, Selectivend correctly deducted from its corporate returns the interest payments made in 1965, 1966 and 1967, since, under that view, the interest payments were made solely on account of a corporate obligation. If, however, as we have held, the dividends are taxable in the years of payment, then the Commissioner argues that the interest payments made by Selectivend were additional dividend income to taxpayer, and non-deductible by Selectivend. We agree.

The usual meaning of the term "interest" is the amount which one has contracted to pay for the use of borrowed money. Old Colony R. Co. v. Commissioner of Internal Revenue, 284 U.S. 552, 561, 52 S. Ct. 211, 76 L. Ed. 484 (1932). If Selectivend's assumption of taxpayer's liability was not taxable as a distribution of property to him until actual payments on the notes were made, it follows that the attendant contractual liability for interest payments became part and parcel of taxpayer's obligation which the corporation effectively discharged only by payment. Therefore, the interest payments were additional dividend income to taxpayer in the years of payment.

Taxpayer stipulated that he is liable as transferee of the assets of Selectivend for any income tax deficiencies due from the corporation in 1964 and 1965 unless the statute of limitations has run. However, taxpayer argues that since no notice of deficiency for 1964 and 1965 was sent to Selectivend within three years after the corporate returns were filed, the statute of limitations, Sec. 6501(a), bars any assessment against Selectivend and precludes any liability of Selectivend and, a fortiori, any liability of a transferee.

It is true that all reasonably possible remedies against the transferor must be exhausted before the transferee may be held liable. 9 Mertens, Law of Federal Income Taxation, Sec. 53.26. However, it is equally well settled that once a corporation has dissolved, the Commissioner is not required to proceed against it before asserting transferee liability.7 Selectivend was liquidated in 1967, several months before the expiration of the period of limitations for its 1964 taxable year. As found by the Tax Court, taxpayer agreed within the applicable period of limitations, Sec. 6901(c), to an extension of time within which the Commissioner might assess transferee liability. Subsequent assessments were made within the extended period of limitations for the year 1964 and within the statutory period for the year 1965.

In short, as a matter of federal tax procedure, it is well established that the Commissioner's assessment of transferee liability against taxpayer was both correct and timely.

Inasmuch as we disagree with the Tax Court's finding that taxpayer received taxable income in 1963, we remand to that court for computation of the tax liability in accordance with the dictates of this opinion. Costs to be taxed against taxpayer.