13 T.C. 547">*547 This proceeding involves a deficiency of $ 1,543.94 in income tax and a deficiency of $ 2,327.52 in excess profits tax asserted against the petitioner for the year 1943. The only question to be determined is whether the petitioner sustained a loss from the distribution in kind of certain of its assets to one of its three stockholders in exchange for one-third of its outstanding common stock held by that stockholder.

FINDINGS OF FACT.

Lucius Pitkin, Inc., the petitioner, was incorporated in 1916 under the laws of the State of New York, with principal office at 47 Fulton Street, New York City. Its income and declared value excess profits tax, and excess profits tax returns for the period here involved were filed with the collector of internal revenue for the second district of New York.

In petitioner's income and declared value excess profits tax return there was deducted a claimed loss1949 U.S. Tax Ct. LEXIS 65">*67 of $ 8,737.42, which was computed as follows:

Petitioner's common stock consisted of 1,000 shares without nominal or par value; its preferred stock consisted of 500 shares without nominal 13 T.C. 547">*548 or par value, with preference as to dividends and assets, cumulative as to dividends, and it was nonvoting.

On April 27, 1929, and prior thereto, Erskine B. Mayo owned 60 per cent and Thomas A. Wright owned 40 per cent of the capital stock of petitioner. Under date of April 27, 1929, Mayo, Wright, and one Sam Tour entered into an agreement under the terms of which Mayo and Wright each agreed to sell enough of their shares of common stock of petitioner to reduce each of their holdings to a one-third interest in the corporation, and Tour agreed to purchase such shares, admitting him to a one-third interest. Tour agreed to pay $ 4,995 for the 333 shares of common stock that he was to acquire. The agreement1949 U.S. Tax Ct. LEXIS 65">*68 also provided that the three, Mayo, Wright, and Tour, were to receive equal amounts in salaries, that they were also to turn over to petitioner all contracts that they then had or were thereafter to obtain covering consulting or other professional service, and, further, with certain exceptions (not material here), they were to turn over to petitioner all patents that they should thereafter acquire in their names. The agreement further provided that petitioner would take out or assume life insurance policies on each of the three stockholders in the amount of $ 15,000, and provided, in case of a stockholder's death, two optional plans to be exercised by his executor. One of the options was that the petitioner would pay the total amount of the insurance, i. e., $ 15,000, to the decedent's estate for the common shares representing his one-third interest in petitioner. The other option was that if the executor should desire to retain the common stock with the view to the eventual entry of a son into the business, $ 1,000 of the proceeds of the insurance policies was to be paid to the widow, if living, or, if not, to the estate of said decedent, and that the balance of the $ 15,000 was1949 U.S. Tax Ct. LEXIS 65">*69 to be set aside by petitioner to be disbursed as the directors desired, with one restriction, that it could not be used to increase salaries, except with the unanimous consent of all the common stockholders. The agreement provided that in case one of the signers of this agreement wanted to retire the two remaining stockholders would purchase his one-third interest at a price to be mutually agreed upon, but in no event to be less than $ 15 per share of common stock; further, that no share of common stock of petitioner then or thereafter held by any of the above mentioned three was to be sold or transferred to others than the parties signing the agreement except with the consent of all the common stockholders.

Pursuant to the terms of the agreement of April 27, 1929, Tour acquired 333 shares of petitioner's common stock, previously owned by Mayo and Wright, so that each of the three parties to the transaction thereafter owned 333 shares. There remained one share of common stock in the treasury of the petitioner.

13 T.C. 547">*549 Tour became vice president of petitioner and organized, managed, and was head of the metallurgical department. This department was built up to the point where petitioner1949 U.S. Tax Ct. LEXIS 65">*70 could no longer accommodate it in the quarters where the company maintained its laboratories. To meet this need, two floors of the building next to the building occupied by the petitioner were leased. Petitioner equipped these leased quarters for this purpose and the entire metallurgical department was moved into that space.

Because of differences in business policies, management friction arose between Tour, on the one hand, and Mayo and Wright, on the other.

Under date of June 26, 1943, petitioner, Mayo, Wright, and Tour entered into an agreement whereby petitioner would give certain equipment and material of the value of $ 5,000 for the 333 shares of common stock owned by Tour, and Tour agreed to surrender the stock for the equipment and material on or before June 30, 1943. The agreement also provided that petitioner would retire from the metallurgical and engineering fields, but could reenter those fields if it chose to do so; that Tour was to take over the staff of the metallurgical and engineering departments, as well as the contracts and clients that were willing to be so taken over; and that Tour could enter the assay, chemical, spectographic, and sampling fields if he chose1949 U.S. Tax Ct. LEXIS 65">*71 to do so. Petitioner was to pay accounts payable of all natures in connection with the metallurgical and engineering departments up to and including June 30, 1943. The agreement also contained certain specific provisions relating to the transfer of the property that was to be transferred to Tour, and the relinquishment of the premises to the respective parties interested. Tour was to take over the lease of the property located at 45 Fulton Street, as of July 1, 1943. Other provisions in regard to carrying of fire, public liability, workmen's compensation, and war damage insurance was also included in the agreement. Provisions were also made for the separation of electrical lines, telephone lines, and interoffice communications for the petitioner and the new enterprise to be established by Tour. Detailed provisions were made for the separation of certain parts of the business between petitioner and Tour. Petitioner agreed to continue certain royalty contracts with a third party and pay Sam Tour 25 per cent of the royalties received, and Sam Tour was to pay petitioner 25 per cent of profits from future exploitation of certain patents taken over by him. The petitioner agreed 1949 U.S. Tax Ct. LEXIS 65">*72 to assign to E. I. Valyi an agreement regarding "the soro process." Petitioner was also to pay off a loan of $ 816.29 on "the life insurance policy" on Tour and turn "these policies" back to Tour. Petitioner was to pay Tour the amount due him on two notes, as well as all current salary to June 30, 13 T.C. 547">*550 1943. No business was to be solicited, transacted, or conducted by Tour under the name of "Pitkin or Lucius Pitkin, Inc.," or upon the premises of 47 Fulton Street, New York, and no business was to be solicited, transacted, or conducted by petitioner from the premises of 45 Fulton Street, New York.

Minutes of a special meeting of the board of directors of petitioner, held June 26, 1943, indicate the corporation's acceptance of the above described agreement.

At a special meeting of the board of directors of petitioner, held July 1, 1943, the resignation of Tour as vice president and director of the corporation was accepted as of June 30, 1943.

The 333 shares of common stock owned by Tour were surrendered to the petitioner and canceled by the petitioner on June 30, 1943.

At a special meeting of the board of directors of petitioner, held on July 1, 1943, a stock dividend of 334 shares1949 U.S. Tax Ct. LEXIS 65">*73 of the common stock of the petitioner was declared payable on the same date to the present holders of the common stock in proportion to the amounts held by each stockholder. These shares represented one share of the stock held in the treasury of the company and 333 shares issued in the place of the 333 shares previously owned by Tour and canceled by the petitioner. The shares so issued as a stock dividend were divided equally between Mayo and Wright, with the result that each became the owner of 50 per cent of the common stock of petitioner.

When Tour left the petitioner he arranged his own corporation for the purpose of engaging in his own business. Mayo was president of the petitioner up to June 30, 1934, when he became chairman of the board of directors and treasurer. In addition to his duties as president, he had been head of the sampling department of petitioner.

The leasehold improvements turned over to Tour were the improvements to the quarters of the building adjoining that of petitioner and occupied by the metallurgical department.

The balance sheet of June 30, 1943, shows as an asset "Cash Surrender Value Life Insurance" in the amount of $ 16,341.95, less "loans" $ 4,042.38, 1949 U.S. Tax Ct. LEXIS 65">*74 or net value of $ 12,299.47. The balance sheet also shows capital and surplus as follows:

13 T.C. 547">*551 The redemption value of the preferred stock of the petitioner was $ 55 per share. The dividend arrears of petitioner's preferred stock on June 3, 1943, were $ 18,083.33.

Wright died May 25, 1945, and respondent, in fixing the estate tax, valued Wright's common stock in petitioner at $ 15.57 per share.

The balance sheet of petitioner, May 31, 1945, shows as an asset "Cash Surrender Value Life Insurance" in the amount of $ 4,011.05. The balance sheet also shows capital and surplus as follows:

OPINION.

The question to be1949 U.S. Tax Ct. LEXIS 65">*75 determined is whether the petitioner sustained a loss from the distribution in kind of certain of its assets to one of its three stockholders in exchange for one-third of its outstanding common stock held by that stockholder. Petitioner's primary argument is based on the application of section 29.22 (a)-15 of Regulations 111. ¹1949 U.S. Tax Ct. LEXIS 65">*76 The respondent argues primarily that there was a distribution in kind in partial liquidation under section 115 of the Internal Revenue Code, and that under Regulations 111, section 29.22 (a)-20, ² no gain or loss was realized.

After study of the statute, the above regulations, and the cases cited by the parties, we have come to the conclusion that the transaction here involved constituted not a sale of assets, but a distribution in 13 T.C. 547">*552 kind in partial liquidation, with no loss resultant therefrom. Under either regulation we are to determine the real nature of the transaction involved. Commissioner v. Woods Machine Co., 57 Fed. (2d) 635; Spear & Co. v. Heiner, 54 Fed. (2d) 134. We have done so. The Commissioner in the deficiency notice held the transaction to be "a mere distribution of its assets in kind, in partial a complete liquidation," from which, though the statement is typographically indefinite, it is apparent that the intention was to hold that there was distribution of assets in kind in either partial1949 U.S. Tax Ct. LEXIS 65">*77 or complete liquidation. The petitioner has the burden of showing, prima facie, to the contrary. In our view, it has not done so. The arrangement among the stockholders had for years provided for the elimination of a stockholder who wished to withdraw. This was accomplished. The language of the agreement is not that of a contract of purchase and sale, as was the case in C. M. Menzies, Inc., 34 B. T. A. 163, involving this point. It provides that petitioner "will give for" the shares of Sam Tour certain equipment and material and that he "agrees to surrender" his shares. Neither the word "purchase" nor the word "sell" appears. It is true that the corporate minutes of the same date stated that Tour was "desirous of selling his one-third interest"; also that he presented a proposition to "accept as payment for his stock" the equipment and material but, in our opinion, this recitation is not sufficient to overcome the effect of the agreement. It not only provided for the surrender of the stock, and that Sam Tour receive the equipment and materials, but provided the settlement of a great many other details between the parties -- and it will be noted1949 U.S. Tax Ct. LEXIS 65">*78 that insurance was not included in the "equipment and materials of the value of $ 5,000" which petitioner would give for the shares of stock, though the petitioner on brief includes the cash surrender value of an insurance policy. The insurance policy was merely one of numerous other matters settled by the agreement, others being, for example, that petitioner would turn over to Tour certain patents and that Tour would pay petitioner 25 per cent of future profits therefrom, while the petitioner agreed to continue with a certain royalty agreement and to pay Tour 25 per cent of the royalties received. Again it was agreed that the petitioner should assign a certain agreement regarding "the soro process" to E. I. Valyi; also that petitioner would pay off a loan on the life insurance of Sam Tour and pay two notes due him; also that no business was to be solicited by Tour on petitioner's property and none by petitioner on the property to be taken over by Tour. All this is obviously not a mere agreement of purchase and sale.

The object plainly was to eliminate Tour and his stock from the organization, leaving it as it was originally, as is indicated by the seemingly unnecessary care in1949 U.S. Tax Ct. LEXIS 65">*79 both canceling the stock and declaring a 13 T.C. 547">*553 dividend thereof to the two remaining stockholders. The cancellation of the stock complies with the definition of partial liquidation in section 115 (i) of the Internal Revenue Code, for therein we find that partial liquidation means distribution in complete cancellation of a part of the stock. Tour's stock was not only surrendered, but canceled. The dividend declared therein, later, was a gesture without real effect, since without it the two remaining stockholders owned the same interest in the corporate assets as with it. On all the facts, we conclude and hold that there was partial liquidation of the Tour stock, not sale. Under Regulations 111, section 29.22 (a)-20, no loss was realized. However, if we consider Regulations 111, section 29.22 (a)-15, relied on by the petitioner, the result is not different. Under the facts before us, we do not think the corporation dealt in its own shares as it might in the shares of another corporation; and we have already concluded that it did not receive the shares as consideration for sale of property by it.

Nor was this an operation which could as well have been accomplished by the dealing1949 U.S. Tax Ct. LEXIS 65">*80 in stock of another corporation. Clearly, the purchase of other corporate stock would not have eliminated Tour's interest in the petitioner; neither would it have eliminated the friction that gave rise to the transaction. We are convinced that the petitioner herein did not deal in its stock in the same way as it would have in the stock of another corporation.

See Brockman Oil Well Cementing Co., 2 T.C. 168, which was decided on facts similar to the ones in the instant case, except that the question there turned on the resale of the stock acquired in exchange for its (the corporation's) own assets, rather than, as in the instant case, whether the distribution of the corporation's assets for its own stock caused a taxable transaction. The following language from the Brockman Oil Well case is just as applicable in the instant case as it was in that case:

In the instant case the facts are stipulated and, of course, we must decide the case upon these facts. From the stipulated facts it seems entirely clear that when on January 23, 1939, petitioner acquired from one of its stockholders, J. V. Calvert, 12 1/2 shares of its authorized and issued capital1949 U.S. Tax Ct. LEXIS 65">*81 stock by paying over to him a ratable portion of the corporation's net assets, which represented approximately one-sixth of the then net worth of petitioner, it was not acquiring the shares as it would acquire the shares of another corporation for a subsequent resale at a profit. It was acquiring these shares because Calvert desired to sever his relations with petitioner and the remaining stockholders desired that this be done.

See also Hill v. Commissioner, 126 Fed. (2d) 570, where, as here, the stock of a certain stockholder was canceled, and though the corporate resolution authorized "purchase," it was held that there was complete cancellation, therefore, partial liquidation; also Oscar G. 13 T.C. 547">*554 , 32 B. T. A. 1192, where partial liquidation, as against purchase and sale, was found in the matter of transfer of corporate property to stockholders in proportion to holdings.

We distinguish the cases cited by petitioner. To substantiate its position as to the applicability of section 29.22 (a)-15, petitioner cites Commissioner v. Air Reduction Co., 130 Fed. (2d) 145; certiorari1949 U.S. Tax Ct. LEXIS 65">*82 denied, 317 U.S. 681">317 U.S. 681, and Aviation Capital, Inc. v. Pedrick, 148 Fed. (2d) 165; certiorari denied, 326 U.S. 723">326 U.S. 723. We agree that they are authority for the principle contained in the regulation, i. e., that when a corporation deals in its own shares of stock as it does in shares of stock of another corporation the transaction is subject to tax consequence, but in both cases the tax consequence arises because the shares of stock in question were resold by the corporation, and it was that transaction that gave rise to the applicability of the regulation in question. We are convinced that the real nature of the transaction here involved denies the realization of a taxable loss under section 29.22 (a)-15 of Regulations 111. The above conclusions render unnecessary the consideration of other arguments advanced by the respondent.

Decision will be entered for the respondent.