10 T.C. 1090">*1091 This case involves an income tax deficiency for 1936 in the amount of $ 79,040.62. The question presented is whether a distribution received by petitioners' decedent in 1936 from the Timber Securities Co. was a distribution in liquidation of that corporation, taxable under the provisions of section 115 (c) of the Revenue Act of 1936 as a capital gain, or whether it was a distribution made in pursuance of a plan of reorganization and taxable under the provisions of section 112 (c) (2) of the same act.

FINDINGS OF FACT.

Elise W. Hill, the taxpayer to whom the deficiency notice was mailed, died January 10, 1946, 1948 U.S. Tax Ct. LEXIS 163">*166 a resident of Poughkeepsie, New York. Her 1936 income tax return was filed with the collector of internal revenue for the fourteenth district of New York.

Timber Securities Co. (hereinafter called Timber) was organized under the laws of Delaware on March 8, 1916. It was a personal holding company within the meaning of section 351 of the Revenue Acts of 1934 and 1936. On December 31, 1935, it had a portfolio of approximately $ 35,000,000 of investments, which included stocks and bonds of domestic and foreign corporations, government obligations, notes and accounts receivable, and approximately $ 2,000,000 in cash. All the capital stock of Timber was owned directly or controlled through family trusts by the members of seven branches of the Weyerhaeuser family. Timber was managed mainly by F. E. Weyerhaeuser and in part by his two brothers, John P. and R. M. Weyerhaeuser.

With the imposition of surtaxes upon personal holding companies and particularly when the rates were increased by the Revenue Act of 1935, the Weyerhaeusers became apprehensive as to what might be the tax situation of their family holding company. Representatives of all branches of the family held a two or three-day1948 U.S. Tax Ct. LEXIS 163">*167 meeting in St. Paul, where the affairs of Timber were discussed with their legal 10 T.C. 1090">*1092 adviser. He and F. E. Weyerhaeuser were directed to keep abreast of the situation and further advise the family.

About $ 19,500,000 of the investments of Timber was in assets which were easily divisible and distributable pro rata to its stockholders. The remaining investments of approximately $ 15,500,000 were in assets which, for one reason or another, were not readily distributable. The legal adviser considered a number of plans for liquidating Timber, among them the use of a trust to handle the assets which were not readily divisible and distributable.

Other family conferences were held in 1936, and in October of that year the decision was reached to transfer the approximately $ 15,500,000 of assets to another corporation, known as Bonners Ferry Lumber Co. (hereinafter called Bonners), in exchange for all the latter's stock, and then to liquidate Timber and distribute all its assets, including the Bonners stock, to the Timber stockholders. Bonners had been incorporated in Delaware on December 14, 1920, but had never engaged in business. Though it was dormant, the Weyerhaeuser family1948 U.S. Tax Ct. LEXIS 163">*168 had kept the charter alive.

This plan was adopted and formally approved at stockholders' and directors' meetings held on October 19 and October 26, 1936. On October 20 the assets above mentioned, constituting 43.779 per cent of Timber's total holdings and producing approximately 10 per cent of its income, were transferred to Bonners in exchange for all the latter's stock, 13,034 shares. Among the transferred assets there were, in round figures, $ 7,300,000 of past due notes of the Clearwater Timber Co.; $ 1,500,000 of debentures of Potlatch Forests, Inc., on which an extension was contemplated; $ 1,500,000 of accounts receivable and notes from Bonners Ferry Lumber Co., Ltd., then in liquidation; $ 994,000 in notes of Elise W. Hill, payable at her death; $ 440,000 in notes of the Northwest Paper Co., then in process of liquidation; and $ 200,000 in bonds of the Cowlitz County Diking District.

On October 26 Timber was liquidated by the distribution of its remaining assets and the Bonners stock pro rata to its stockholders in exchange for their Timber stock, which was thereupon canceled. The stockholders took the Bonners stock into their accounts at approximately $ 730 a share. Bonners1948 U.S. Tax Ct. LEXIS 163">*169 carried the assets acquired from Timber on its books at exactly the same figures at which those assets had been carried by Timber.

After the transfer of assets to Bonners, that corporation became a personal holding company. Its board of directors was composed of the same members of the Weyerhaeuser family who were directors of Timber, R. M. Weyerhaeuser and F. E. Weyerhaeuser, president and secretary, respectively, of Timber, became president and secretary of Bonners.

10 T.C. 1090">*1093 Since it acquired the Timber assets Bonners has reported taxable income and paid dividends every year except in 1941, in which year it had a loss of $ 940,108.73. Its total net income for the years 1937 to 1946, inclusive, except for 1941, was $ 620,929.11. During that period it paid dividends of approximately $ 2,000,000, and its assets decreased in the amount of approximately $ 4,000,000.

Timber, prior to its liquidation, had made substantial investments in stocks or securities of companies having to do with the timber business, such as timber-holding companies, logging companies, logging manufacturing companies, paper companies, and fabricating companies. Bonners has acquired and disposed of capital1948 U.S. Tax Ct. LEXIS 163">*170 assets during all the years of its active corporate existence from 1936 to date. It has made some investments in timber properties, though not on so extensive a scale as Timber. Its heaviest investments in timber properties were made in 1946 through purchases from the estate of Elise W. Hill in order to liquidate notes approximating $ 1,000,000 payable at her death. It made one other large timber investment to preserve its equity in the Hill-Davis Co. Bonners' investment in government obligations has substantially increased, while its investment in corporation stocks has been decreasing. At the time of the trial of this case, Bonners was still an active personal holding company. During its first 10 years of operation it increased cash $ 849,000, acquired treasury stock $ 700,000, and increased government obligations $ 3,498,000. It reduced its notes receivable $ 6,539,000 and its domestic stocks and bonds $ 1,943,000.

At the time of the liquidation of Timber, Elise W. Hill owned 50,000 shares of its capital stock, which had a basis for gain or loss to her of $ 42.50 a share. Her profit upon the liquidation of Timber was $ 202,365.97 which she reported as capital gain, including1948 U.S. Tax Ct. LEXIS 163">*171 30 per cent thereof, or $ 60,709.79, as subject to tax. Timber had accumulated earnings and profits of $ 4,078,833.20, of which 43.779 per cent was allocable to Bonners, leaving $ 2,293,160.81 available earnings of Timber on 651,700 shares of its outstanding stock. Elise W. Hill's pro rata share of the earnings and profits was $ 175,936.85. In the deficiency notice the Commissioner determined that that amount was taxable as ordinary or dividend income and that only the balance of $ 26,429.12 was capital gain, 30 per cent of which, or $ 7,928.73, was subject to tax.

The transfer of approximately 44 per cent of the assets of Timber to Bonners in exchange for all the latter's stock, and the liquidation of Timber and distribution of its assets, including the Bonners stock, were integrated steps of a unitary plan. The transfer of assets to Bonners was undertaken for reasons germane to the continuance of the corporate business. There was a business purpose in the transaction, and the plan which was adopted and carried out effected a reorganization 10 T.C. 1090">*1094 of corporate business, with a continuity of the enterprise and continuity of interests therein in the same persons under a modified1948 U.S. Tax Ct. LEXIS 163">*172 corporate structure. The distribution received by Elise W. Hill from Timber was made in pursuance of a plan of reorganization and, to the extent of her pro rata share of the accumulated earnings and profits of Timber, it had the effect of the distribution of a taxable dividend.

The stipulation of facts is adopted by this reference.

OPINION.

Petitioners seek to have the distribution received by Elise W. Hill, the decedent, in 1936 taxed at capital gain rates, as a distribution in complete liquidation under section 115 (c) of the Revenue Act of 1936. ¹ They contend, first, that the transfer of assets from Timber to Bonners was a separate transaction, not a part of the liquidation of Timber, and, second, that there was no business purpose sufficient to support a reorganization under section 112 (g). We find no merit in either contention. It is not open to question on this record that the transfer of assets to Bonners and the liquidation of Timber were parts of the same plan, which had been carefully thought out and decided upon in advance.

1948 U.S. Tax Ct. LEXIS 163">*173 In our opinion, what the parties did falls within not only the letter, but also the spirit, of section 112 (g) (1) (C), which defines a reorganization as "a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred." The transfer of approximately 44 per cent of the assets of Timber to Bonners in exchange for all the Bonners stock was certainly undertaken for reasons germane to the continuance of the corporate business, and Bonners ever since has been conducting business with the transferred assets or with reinvestments of proceeds therefrom. The same persons who had controlled and operated Timber control and operate Bonners. It is true that the investment policy of Bonners has been changed somewhat, in that more money has been invested in government obligations and less in corporate stocks and bonds, but there has been no disruption in the conduct of the business.

Unlike the new companies in George D. Graham, 37 B. T. A. 623, 10 T.C. 1090">*1095 and Standard Realization Co., 10 T.C. 708,1948 U.S. Tax Ct. LEXIS 163">*174 Bonners was not availed of merely to complete the orderly liquidation of the assets transferred to it. It has continued to carry on a part of the business which Timber formerly conducted. It has acquired and disposed of new securities and made reinvestments. Under these circumstances, we think it may not be said that there was no business purpose in the transaction.

Moreover, the transaction was brought about largely because of a change in the tax laws which adversely affected personal holding companies. The result of the plan which was adopted and carried out was that the readily divisible assets, which produced about 90 per cent of Timber's income, were taken out of the business and divided pro rata among the stockholders, thereby relieving the income produced by those assets from the burden of personal holding company surtax. It is difficult to find any lack of sound business prudence in such a transaction. As for the other assets which were not readily divisible, the parties in interest no doubt determined that the advantages to be derived from continued corporate management of those assets outweighed the disadvantage of personal holding company surtax on the income which1948 U.S. Tax Ct. LEXIS 163">*175 such assets produced. In any event, however, the motive behind the transaction is not determinative, but the inquiry, rather, is as to whether what was done is the type of thing with which the reorganization provisions of the statute were concerned. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465; cf. Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737.

It does not matter that substantially the same result, as the petitioners contend, could have been produced by a partial liquidation of Timber or by some other method. The tax consequences must be determined by what was done, rather than by what might have been done. The statutory provisions relating to reorganizations were intended to permit of some flexibility in changing the mode of conducting corporate business, and we know of no rule that there can be a statutory reorganization only when there is no other possible way of accomplishing the particular end desired.

Little need be added to what we have said in Estate of John B. Lewis, 10 T.C. 1080, decided this day, on the question as to whether there is a statutory reorganization in the type of situation1948 U.S. Tax Ct. LEXIS 163">*176 here involved. The facts in that case are quite similar to those here. The fact that there the corporation was engaged in a manufacturing business, while here the corporation was engaged in an investment business, makes for no difference in result. We hold that the transaction which occurred in October 1936 constituted a statutory reorganization within the meaning of section 112 (g) (1) (C) of the Revenue Act of 1936, and that the distribution received by the decedent was made pursuant thereto.

We do not understand petitioners seriously to contend that, if there 10 T.C. 1090">*1096 was a reorganization, the distribution to the decedent, to the extent of her pro rata share in corporate earnings and profits, is not taxable as a dividend in accordance with the respondent's determination; but, in any event, we think there can be no question on that score. While the receipt of the Bonners stock by the decedent in exchange for her Timber stock is a type of transaction calling for no recognition of gain under section 112 (b) (3) of the act, she received considerable other property and money, which are not permitted to be received without recognition of gain. Therefore, under section 112 (c)1948 U.S. Tax Ct. LEXIS 163">*177 (1) ² her gain, to the extent of the other property or money received, is to be recognized; and under section 112 (c) (2), 2 if a distribution has the effect of the distribution of a taxable dividend, it is to be taxed as such to the extent of the distributee's ratable share of undistributed corporate earnings and profits. It is stipulated that the decedent's ratable share of such profits was $ 175,936.85. We hold that the decedent's gain to that extent shall be taxed as a dividend. Commissioner v. Bedford's Estate, 325 U.S. 283">325 U.S. 283.

1948 U.S. Tax Ct. LEXIS 163">*178 Decision will be entered for the respondent.