4 T.C. 19">*19 Respondent determined a deficiency of $ 17,981.04 in income tax and $ 5,416.73 in excess profits tax for the year 1939. By this proceeding petitioner challenges respondent's action in disallowing a deduction of $ 195,141.36 claimed by it as a loss on the sale of stock to a wholly owned subsidiary in 1939. Other adjustments have been conceded.

FINDINGS OF FACT.

The facts have been embodied in a stipulation, of which the following is a summary. Petitioner is a corporation organized September 6, 1928, under the laws of the State of Delaware, to acquire securities of1944 U.S. Tax Ct. LEXIS 60">*61 companies engaged in the manufacture and sale of crown corks, cork, and related products. It filed its income and excess profits tax return for the taxable year 1939 with the collector of internal revenue for the fifth district of New Jersey.

In 1929, 1930, and 1931 petitioner acquired 19,994 shares of the capital stock of Societe du Bouchon Couronne, S. A., hereinafter referred to as "Bouchon," of a total outstanding issue of 20,000 shares. Bouchon, a corporation organized under the laws of France, is engaged 4 T.C. 19">*20 in the manufacture and sale of crown corks and related products. It sustained substantial losses after the acquisition of its stock by petitioner.

Foreign Manufacturers Finance Corporation, hereinafter called "Finance," organized in 1930 under the laws of the State of Delaware for the purpose of acquiring investments in and financing crown cork and cork manufacturing and selling companies, has been wholly owned by petitioner since its organization.

On December 28, 1939, petitioner had outstanding 237,958 shares of class A capital stock and 200,000 class B capital stock. The latter class of stock is entitled to elect two-thirds of the directors, and the former one-third. 1944 U.S. Tax Ct. LEXIS 60">*62 On December 28, 1939, all of the class B stock was owned by Crown Cork & Seal Co., and the class A stock was owned by approximately 2,360 persons.

On that date petitioner sold to Finance 12,000 shares of Bouchon for $ 60,000 in cash. These shares had cost petitioner $ 255,141.36. The $ 5 per share at which the 12,000 shares of Bouchon were sold represented their net worth per share according to the books of Bouchon. The fair market value of the shares on that date was $ 2 per share. Minutes of the meeting of the board of directors of petitioner on December 11, 1939, at which time authorization was given to sell the Bouchon shares at a price of not less than $ 5 per share, record that "The Secretary recalled that efforts had been made prior to the outbreak of the war in Europe to sell all or any part of the Company's interests in * * * [Bouchon] but without success." "The Secretary further advised the Meeting that in the opinion of the officers it was deemed advisable to sell all or any part of the holdings of this Company in * * * [Bouchon] at a price of not less than $ 5.00 per share."

At a special meeting of its directors held on December 27, 1939, Finance was authorized to1944 U.S. Tax Ct. LEXIS 60">*63 accept the offer of petitioner to sell 12,000 shares of Bouchon at a price of $ 5 per share, payable in cash upon delivery. The minutes recorded in respect to this meeting stated in part:

The Secretary outlined to the meeting the major effects of the European War on the foreign companies in which this company owns an interest, namely, Productos Corticeiros Portugueses, Ltda., Lisbon, Portugal, Bouchonneries Internationales, S. A. R. L., Hussein-Dey, Algeria and Societe de Bouchage Metallique, S. A., Paris, France, and in particular commented upon the various exchange regulations affecting these companies.

The Secretary pointed out that the operations of the latter two companies are closely allied to the operations of Societe du Bouchon Couronne, S. A., of Viry-Chatillon, France, a company controlled by Crown Cork International Corporation, in that the said Societe du Bouchon Couronne, S. A., is the principal user of the discs manufactured by Bouchonneries Internationales, S. A. R. L., and the sole supplier of crowns sold by Societe de Bouchage Metallique, S. A. 4 T.C. 19">*21 In view of the close relationship existing among these three companies and in view of the fact that there was 1944 U.S. Tax Ct. LEXIS 60">*64 an opportunity of acquiring a controlling interest in the shares of Societe du Bouchon Couronne, S. A., from Crown Cork International Corporation, the officers had discussed with Crown Cork International Corporation the terms on which that company would be willing to sell a controlling interest in the shares of Societe du Bouchon Couronne, S. A.

The Secretary stated that as a result of the negotiations with Crown Cork International Corporation, that company had offered to sell 12,000 shares of the capital stock of Societe du Bouchon Couronne, S. A., out of a total outstanding amount of 20,000 shares, at a price of $ 5.00 per share, or for a total amount of $ 60,000.00, payable in cash upon delivery of the shares.

One of the principal motives of the sale of the 12,000 shares of Bouchon was to secure a tax saving.

During the year 1939 petitioner owned 81.85 percent of the outstanding stock of Crown Cork Co., Ltd., a corporation organized under the laws of England and engaged in the manufacture and sale of crown corks and related products.

Prior to the sale of 12,000 shares of Bouchon stock by petitioner to Finance, petitioner made the following sales of Crown Cork Co., Ltd., stock in1944 U.S. Tax Ct. LEXIS 60">*65 1939:

Finance sold the 5,000 shares of Crown Cork Co., Ltd., stock referred to in the table above on August 8, 1939, to Brown, Harriman & Co. of London for the sum of $ 27,500, and the 20,000 shares of Crown Cork Co., Ltd., referred to in the above table on December 4, 1939, to Brown, Harriman & Co. of London for the sum of $ 70,042.50. The gains resulting from the last two transactions have been included in petitioner's income by respondent. Petitioner concedes the correctness of this action.

Respondent disallowed the loss on the sale of the Bouchon stock and this action petitioner contests.

Neither petitioner nor Finance was a personal holding company in the year 1939.

We find the facts as so stipulated and, in addition, make the following findings: Finance during the years in question1944 U.S. Tax Ct. LEXIS 60">*66 was under the complete domination and control of petitioner and in substance there was no distinction between the two. The only motive for the transaction was to secure a tax saving.

4 T.C. 19">*22 OPINION.

The question whether a corporation may be permitted to deduct a loss sustained on a sale to its wholly owned subsidiary is dealt with to a limited degree by section 24 (b) (1), Internal Revenue Code. ¹

1944 U.S. Tax Ct. LEXIS 60">*67 Since, however, the provisions of that section are confined to personal holding company transactions and since it is stipulated here that neither of the corporations was a personal holding company, it becomes apparent that the statutory provisions do not operate by their own force to disallow the loss. The question, then, narrows to whether these provisions were intended to be exclusive so that the failure of Congress to provide specifically that the transaction must be disregarded requires the contrary result -- that it be given effect for tax purposes.

While there is little on the face of the legislation which can aid in ascertaining the answer, the committee reports accompanying the original (1937) provision explain the legislative intent. It is there stated (Ways and Means Committee, 75th Cong., 1st sess., H. Rept. 1546, p. 26, 1939-1 C. B., part 2, pp. 722, 723) that: "This provision of existing law is not exclusive," and that "as in the case of the provisions of existing law, it is not intended by this amendment to imply any legislative sanction of claiming deductions for losses on sales or exchanges in cases not covered thereby, where the transaction lacks the elements of1944 U.S. Tax Ct. LEXIS 60">*68 good faith or finality, generally characterizing sales and exchanges of property." While this reference tends to eliminate any uncertainty as to the exclusive nature of the statutory provision, it has the further effect of raising an additional question. We must determine whether the elements of "good faith and finality" are present before we can dispose of a controversy of this sort; and in that operation the sense in which these words were used constitutes a necessarily connected inquiry.

The case of Higgins v. Smith, 308 U.S. 473">308 U.S. 473, was decided subsequent to the enactment of the 1937 Act, so that its doctrine was unavailable to the legislators, but, on the other hand, it dealt with an earlier year, 4 T.C. 19">*23 so that the 1937 amendment was not directly involved. It consequently exerts no conclusive authority upon the present question. Nevertheless, numerous expressions in that opinion seem to us to have a bearing on it. It is stated, for example, that:

* * * Indeed this domination and control is so obvious in a wholly owned corporation as to require a peremptory instruction that no loss in the statutory sense could occur upon a sale by a taxpayer1944 U.S. Tax Ct. LEXIS 60">*69 to such an entity.

At another point the Court observed:

* * * The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. * * * [Emphasis added.]

And that:

* * * Title, we shall assume, passed to Innisfail [taxpayer's wholly-owned corporation] but the taxpayer retained the control. Through the corporate forms he might manipulate as he chose the exercise of shareholder's rights in the various corporations, issuers of the securities, and command the disposition of the securities themselves. There is not enough of substance in such a sale finally to determine a loss.

Finally we note the following:

The Government urges that the principle underlying Gregory v. Helvering [293 U.S. 465">293 U.S. 465] finds expression in the rule calling for a realistic approach to tax situations. As so broad and unchallenged a principle furnishes only a general direction, it is of little value in the solution of tax problems. If, on the other hand, the Gregory case is 1944 U.S. Tax Ct. LEXIS 60">*70 viewed as a precedent for the disregard of a transfer of assets without a business purpose but solely to reduce tax liability, it gives support to the natural conclusion that transactions, which do not vary control or change the flow of economic benefits, are to be dismissed from consideration. There is no illustion about the payment of a tax exaction. Each tax, according to a legislative plan, raises funds to carry on government. The purpose here is to tax earnings and profits less expenses and losses. If one or the other factor in any calculation is unreal, it distorts the liability of the particular taxpayer to the detriment or advantage of the entire taxpaying group. [Emphasis added.]

The effect of the Smith case is thus summed up in Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436:

* * * In general, in matters relating to the revenue, the corporate form may be disregarded where it is a sham or unreal. In such situations the form is a bald and mischievous fiction. Higgins v. Smith, 308 U.S. 473">308 U.S. 473, 308 U.S. 473">477-478; Gregory v. Helvering, 293 U.S. 465">293 U.S. 465.

Applying these1944 U.S. Tax Ct. LEXIS 60">*71 expressions against the background of the Ways and Means Committee's language, there emerges a fairly practical rule for application in such situations as the present. Not all transactions between a wholly owned corporation and its parent are to be disregarded. But where either the relationship between the two is such that they are in fact inseparable, so that the individual existence of the two entities is an unsupported fiction and the "finality" of the loss to the combined enterprise is consequently negatived, cf. Interstate Transit Lines v.4 T.C. 19">*24 , 319 U.S. 590">319 U.S. 590, or the transaction itself is without a true purpose except that of tax avoidance, so that its effectiveness to "change the flow of economic benefits," its "good faith," as an incident of the conduct of a business, is suspect, cf. Wickwire v. United States (C. C. A., 6th Cir.), 116 Fed. (2d) 679, then taxpayers have failed to show themselves entitled to the benefit of the loss.

This view finds support in the language of Commissioner v. Laughton (C. C. A., 9th Cir.), 113 Fed. (2d) 103. That opinion analyzes1944 U.S. Tax Ct. LEXIS 60">*72 the Smith case at some length, since it was considered as "controlling this proceeding." Dealing with the reference in the Smith case to a peremptory instruction denying the possibility of a loss in the case of a wholly owned corporation, the court says:

That the phrase "wholly owned" in this dictum regarding instruction to the jury means something more than mere stock ownership is to be inferred from a ruling at the end of the opinion. * * *

* * * *

It is arguable that the Higgins decision means that no matter what the particular "tax event" may be, if it be more profitable to the tax collector to disregard the intervening corporate entity this must be done. However, it seems to us that if this were the intent of the court it would have said so and not spread its consideration of the cases over many pages of the opinion with such qualifying language as is quoted above.

We take the opinion to mean that the "tax event" is not an unreal attempt to use a corporation for a sham transaction, procuring an advantageous tax consequence to the taxpayer, if it may be considered as one primarily for an independent business purpose and not a transfer of assets * * * with a retention1944 U.S. Tax Ct. LEXIS 60">*73 of their control, solely to reduce tax liability.

Applying this criterion to the instant case the question here is not whether Industries, Ltd., was formed for a business purpose. The corporation in 308 U.S. 473">Higgins v. Smith, supra, was formed and used for profitable business purposes causing it to pay federal and state income taxes. * * *

* * * *

There is evidence here from which it might be inferred that tax avoidance by a sham transfer by Laughton of his services was the primary purpose of the use of the corporation. There is also evidence from which it may be inferred that it was not. * * * [Among other things] Laughton had no intention to avoid taxes; * * * the purpose of engaging himself for five years as an employee of Industries, Ltd., was to join his efforts with other employees of the company to create motion pictures; * * *

* * * the directors of his company were not dominated and controlled by him as in the case of 308 U.S. 473">Higgins v. Smith, supra, that, on the contrary, they were business men who ran the business with a free hand * * *.

Because the Board's decision there under review had antedated Higgins v.1944 U.S. Tax Ct. LEXIS 60">*74 Smith and there were no ultimate findings on the issue as framed by the appellate court, the case was remanded for further proceedings. See also Inland Development Co. v. Commissioner (C. C. A., 10th Cir.), 120 Fed. (2d) 986; Kaspare Cohn Co., Ltd., 35 B. T. A. 646; National Investors Corporation v. Hoey (C. C. A., 2d Cir.), 144 Fed. (2d) 466.

4 T.C. 19">*25 Reverting to the present controversy, the stipulated facts fail to disclose any information from which it is possible to arrive at an independent conclusion as to the relationship between petitioner and its subsidiary, and particularly from which we may draw the material for an ultimate finding as to the separation of the two businesses or the extent of domination and control exercised by petitioner as the sole owner of its affiliate's stock. The personnel of the respective boards of directors is not disclosed. For all that appears, it may have been identical. There is no showing whether or not the subsidiary had officers of its own, as distinguished from those of the parent, whether its business was conducted by a separate organization, 1944 U.S. Tax Ct. LEXIS 60">*75 whether, even in theory, it was capable of reaching independent decisions, or how its properties and finances were carried and operated. We do know that the stated purpose of the organization of the two corporations was sufficiently similar so that a combined conduct of their joint business would not be unreasonable. The subsidiary was organized "for the purpose of acquiring investments in and financing crown cork and cork manufacturing and selling companies," while the purpose of petitioner was "to acquire securities of companies engaged in the manufacture and sale of crown corks, cork and related products." We know also that the subsidiary agreed to a price heavily weighted in favor of the parent. At any rate, it is clear that the burden of proving any facts favorable to it in this respect has not been borne by petitioner and, consequently, the record would warrant only a finding that the subsidiary is under the complete domination and control of petitioner, and that there is in substance no distinction between the two. Southern Pacific Co. v. Lowe, 247 U.S. 330">247 U.S. 330; North Jersey Title Ins. Co. v. Commissioner (C. C. A., 3d Cir.), 84 Fed. (2d) 898.1944 U.S. Tax Ct. LEXIS 60">*76 It would follow that a transfer from one to the other was no more than a shifting from one department or branch to another of the same entity, and hence that the loss is utterly lacking in finality. On that ground alone, its disallowance would be required.

More than this, however, we are faced with a lack of any business purpose for the transaction necessary to justify the recognition of loss resulting from it. No more is shown in this connection than excerpts from the minutes of the meetings of the board of directors of the two corporations. It may perhaps be inferred from the subsidiary's proceedings that the acquisition of the shares in question was desirable because it already held stock in companies conducting a related business. This is the sole consideration urged by petitioner in its brief. But why it should for this reason be concerned to secure the property for itself when it already rested in the complete control of its parent, and particularly why it should desire this consequence so fervently as to be prepared to accomplish it at a cost of two and a half times the market value of the stock, is not even suggested.

4 T.C. 19">*26 Even, however, if the reason for the subsidiary's1944 U.S. Tax Ct. LEXIS 60">*77 action were more convincing, petitioner would yet appear to be thrust into an irreconcilable dilemma. Its sale to the wholly owned subsidiary can be given effect only on the assumption that there exists in fact a measure of independence between the two commonly owned corporate entities. But, if so, the intention and purposes of the one may not successfully be attributed to the other. It would only be the assumption that the subsidiary could reach and effectuate a decision independent of and unrelated to that of the parent which would warrant the conclusion that their separate existence justifies recognition of intercorporate transactions.

But by that token any ground which the subsidiary may independently have expressed to explain its participation would furnish no validity to assumptions regarding the reciprocal participation of the parent. With this eliminated, there is absent from the record any suggestion of a possible business purpose on the part of petitioner, the parent, for the transfer of these securities. ² The only motive shown is that described by the stipulation -- "to secure a tax saving." That is not sufficient to avoid the impact of the Gregory case "as a1944 U.S. Tax Ct. LEXIS 60">*78 precedent for the disregard of a transfer of assets without a business purpose but solely to reduce tax liability." 308 U.S. 473">Higgins v. Smith, supra.

It seems to us to follow that no loss was sustained by petitioner upon the transaction in controversy which is cognizable as matter of tax liability; and that this is so not solely because petitioner's wholly owned subsidiary was the other participant, but rather by reason of the 1944 U.S. Tax Ct. LEXIS 60">*79 domination and control exercised over the actions of the subsidiary, and because on this record the principal and indeed the only motive for the transfer from parent to wholly owned affiliate was that of avoiding taxes, with no true business purpose shown or even suggested. In those circumstances the transaction must, for tax purposes, be characterized as sham, unreal, and lacking in good faith and finality, and, consequently, as one which it was not the intention of the lawmakers to include among deductible losses. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465. Respondent's determination is sustained.

Decision will be entered for the respondent.