The only issue on this appeal is whether the District Court erred in holding that the taxpayer's interest in a profit sharing trust was distributed to him because he was separated from the service of his employer within the meaning of §§ 402(a) (2) and 402(e), Internal Revenue Code, 1954, thus qualifying for preferential capital gains treatment.1

Northwest Motor Service Company was engaged in the business of maintaining and servicing truck and motor bus equipment. In 1949, it established a qualified profit-sharing plan — the Trust.

The taxpayer was a participant and beneficiary of the Trust. In 1953, Northwest discontinued its maintenance and service operations and leased its building and equipment to others. Thereafter, Northwest had three employees — the taxpayer (President and only compensated employee), his mother and his father.

On December 20, 1963, the Directors of Northwest — the taxpayer, his mother and his father — adopted a plan of reorganization. This plan called for the transfer of Northwest's net assets to the Virginia Corporation in exchange for Virginia stock. The Virginia stock was then to be distributed to Northwest's stockholders and Northwest was to be dissolved. Prior to the transfer, the taxpayer owned all of the Virginia stock.

Northwest notified the advisory committee to the trustee and the trustee that the statutory dissolution of the corporation was about to take place. The committee, acting pursuant to the trust agreement, directed the trustee to make lump sum payments to each beneficiary.2

On December 30, 1963, the trustee distributed the corpus of the trust to the taxpayer, his mother and three other employees whose employment had been terminated in 1953.

On December 31, 1963, the stockholders of Northwest (the taxpayer, his wife, his children and his father as trustee for the children) adopted the reorganization plan.

On January 3, 1964, the Virginia stock was distributed to Northwest stockholders and Northwest was dissolved.

The taxpayer reported the $32,000 received by him as an item of capital gain. The Commissioner determined that the distribution was taxable as ordinary income and sent the taxpayer a deficiency letter. The taxpayer, who had over-estimated his tax, brought action in District Court for a refund.

The trial court, relying on Martin v. Commissioner, 26 T.C. 100 (1956) and Miller v. Commissioner, 22 T.C. 293 (1954), affd. per curiam, 226 F.2d 618 (6th Cir. 1955), held:

"This Court * * * recognizes the law to be that `. . . if the former corporation [Northwest] continued in existence and the employee continues in its service there is no "separation from the service"' * * *

"[But] the taxpayer avoided [this pitfall].

* * * * * *

"In this case, it is clear that the employer corporation's [Northwest's] existence as a legal entity did in fact terminate; that the employer-employee relationship which had existed between it and the taxpayer had ceased; that the taxpayer's employment by the employer corporation had in fact terminated; that the taxpayer had separated `from the service of the employer'; and that the distribution was made on account of the taxpayer's separation from such service. It is a fact that following separation from the service of Northwest — after dissolution of the corporate employer and after distribution of the subject fund — the taxpayer continued in his previous relationship with another corporation [Virginia] which had acquired the assets of the dissolved corporate employer. However, this Court is unable to read into the statute any effect such action would have upon the determination of the issue now before it."

We cannot accept the reasoning of the trial court. Martin and Miller, based as they are on pre-1954 Code provisions, are not controlling here.

The Code was amended in 1954 to meet problems raised in Miller-type situations.3 Section 402(a) (2) was amended and a new § 402(e) was added. These sections now read:

"(2) Capital gains treatment for certain distributions. — In the case of an employees' trust described in section 401(a), which is exempt from tax under section 501(a), if the total distributions payable with respect to any employee are paid to the distributee within 1 taxable year of the distributee on account of the employee's death or other separation from the service, * * *, the amount of such distribution, * * * shall be considered a gain from the sale or exchange of a capital asset held for more than 6 months. * * *

* * * * * *

"(e) Certain plan terminations. — For purposes of subsection (a) (2), distributions made after December 31, 1953, and before January 1, 1955, as a result of the complete termination of a stock bonus, pension, or profit-sharing plan of an employer which is a corporation, if the termination of the plan is incident to the complete liquidation occurring before the date of enactment of this title, of the corporation, whether or not such liquidation is incident to a reorganization as defined in section 368(a), shall be considered to be distributions on account of separation from service. * * *"

A reading of the sections leads us to the same conclusion as that reached by the Fifth Circuit in United States v. Johnson, 331 F.2d 943 (5th Cir. 1964):

"* * * After 1954 distributions will not qualify for capital gain treatment if they are made as a result of the termination of a plan incident to a corporate reorganization, even if the corporate employer is completely liquidated. * * * In other words, after 1954 a separation from service would occur only on the employee's death, retirement, resignation, or discharge; not when he continues on the same job for a different employer as a result of a liquidation, merger or consolidation of his former employer. * * *"

Id. at 949.

This conclusion is supported by the legislative history of the 1954 amendments.4 The House bill had extended:

"* * * capital gains treatment to lump-sum distributions to employees at the termination of a plan because of a complete liquidation of the business of the employer, such as a statutory merger, even though there is no separation from service. This was intended to cover, for example, the situation arising when a firm with a pension plan merges with another firm without a plan, and in the merger the pension plan of the first corporation is terminated."

Sen.Rep. No. 1622, 83rd Cong., 2d Sess., 54, 3 U.S.C. Cong. & Adm. News, pp. 4621, 4685 (1954).

"* * * the possibility that reorganizations which do not involve a substantial change in the make-up of employees might be arranged merely to take advantage of the capital gains provision. Thus, your committee's bill would grant capital gains treatment to lump-sum distributions occurring in calendar year 1954 where the termination of the plan is due to corporate liquidation in a prior calendar year. The purpose of granting capital gains treatment to such distributions is to avoid hardship in the case of certain plans which it is understood were terminated on the basis of mistaken assumptions regarding the application of present law."

Sen.Rep. No. 1622, 83rd Cong., 2d Sess., 54, 3 U.S.C. Cong. & Adm. News, pp. 4621, 4685-4686 (1954).

The Senate version was accepted.

The result reached in Johnson was also reached in United States v. Martin, 337 F.2d 171 (8th Cir. 1964); McGowan v. United States, 277 F.2d 613 (7th Cir. 1960); Nelson v. United States, 222 F. Supp. 712 (D.Idaho 1963); and Gittens v. Commissioner, 49 T.C. 419 (1968).

The Tax Court suggested in Gittens that capital gains treatment should, despite the broad language of § 402(e), be accorded to distributions spawned by reorganizations involving substantial changes in the make-up of employees and more than technical changes in their employment relationship. A concurring minority in the same opinion would extend preferential treatment to those distributions fostered by reorganizations accompanied by meaningful changes in the beneficial ownership of the business.

It is unnecessary for us to decide whether §§ 402(a) (2) and 402(e) should be so extended. Here, there was no substantial change in the make-up of employees, there was only a technical change in the employment relationship, and there was no meaningful change in the beneficial ownership of the business.

The taxpayer argues that Johnson, McGowan and Martin are distinguishable on their facts. He points out that in each of the cited cases, the taxpayer had been and continued to be employed by the surviving corporation. Here, he had been employed by the corporation which lost its identity and his employment relationship ended when it was dissolved.

We cannot accept this distinction. While each of the Courts supported their opinions by pointing out that no change of employment occurred, the Court, in Johnson, expressly rejected this distinction,5 the McGowan Court did not express an opinion, and this Court characterized Judge Wisdom's opinion in Johnson as a "well-reasoned opinion, exhaustively [considering] the contentions here made."

Finally, the taxpayer correctly argues that his position is supported by Rev.Rul. 65-147, 1965-1 Cum.Bull.180.6 We could distinguish it on the grounds urged in Gittens: (1) that there has not been a substantial change in the make-up of employees, and (2) that there has not been more than a technical change in the employment relationship; but it is not necessary for us to do so here. Our decision here is compelled by the statute.

Reversed.