Petitioners in Docket Nos. 39447, 39449, 39450, 39451, 39454, and 39455 filed their returns for the taxable years 1946 and 1947 with the collector of internal revenue for the first collection district of New Jersey, at Camden, New Jersey.

Petitioners in Docket Nos. 39448, 39452, and 39453 filed their returns for the taxable years 1946 and 1947 with the collector of internal revenue for the district of Florida. Petitioners are all members of the Cramer family.

Immediately prior to the first transaction involved herein in 1946 the shares of the capital stock of Radio Condenser Company, Western Condenser Company, S. S. C. Realty Company, and Manufacturers Supply Company were owned by petitioners as follows: 20 T.C. 679">*681

Radio Condenser Company, hereinafter called Radio, began business on January 1, 1924, with a net worth of $ 31,314.14. Its business from that time to the present has been primarily the manufacture of condensers for radios.

The net income of Radio for the taxable year 1944, after renegotiation and taxes, was $ 171,782.37.

Its net income for the taxable year 1945, after renegotiation and taxes, was $ 127,375.22.

Its net income for the taxable year 1946, after taxes, was $ 1,213,849.30.

The earned surplus of Radio as of December 31, 1946, was $ 1,922,900.97, and as of December1953 U.S. Tax Ct. LEXIS 107">*111 31, 1947, $ 1,995,767.08.

S. S. C. Realty Company, hereinafter called S. S. C., was formed in 1930 by the stockholders of Radio to acquire a building alongside Radio's plant. A separate corporation was formed to own this real estate because the stockholders did not wish to subject this investment to the hazards of the radio condenser business. The building was leased to Radio and over a period of years substantial improvements were made to the premises. S. S. C. made the improvements if it had the funds, otherwise they were made by Radio. By 1946 the original reason for the creation of S. S. C. had ceased and Radio desired to acquire the premises to eliminate what had become a troublesome situation. Petitioners desired to sell their investment in S. S. C. at that time. The fair market value of the stock was arrived at by employing appraisers to determine the net liquidation value of the corporate assets. Petitioners sold their stock in S. S. C. to Radio on November 25, 1946, for an amount equal to the appraised fair market value of the assets of S. S. C., less the corporate liabilities at that time.

On November 25, 1946, Radio, and petitioners as owners of the capital stock1953 U.S. Tax Ct. LEXIS 107">*112 of S. S. C., executed an agreement whereby the former purported to buy and the latter purported to sell to Radio all of the 20 T.C. 679">*682 shares of the capital stock of S. S. C. On the same date, petitioners delivered their shares of the capital stock of S. S. C. to Radio and received the sum of $ 140,515.20. On that date, after appreciating the value of its fixed assets by $ 46,661.12 to reflect their appraised market value S. S. C. had a net worth of $ 140,503.97 and surplus of $ 110,590.77.

The Manufacturers Supply Company, hereinafter called Manufacturers, was formed in 1939 by Stanley S. Cramer and Russell E. Cramer to engage in the manufacture of radio condensers at Shelton, Connecticut. The principal advantage of conducting manufacturing operations at this location was that the labor rates were 30 per cent to 35 per cent below those prevailing in Camden, New Jersey, where Radio was located. The Radio plant was unionized and there had been a serious strike in 1937. The officers of Radio were afraid that if Radio either directly or through a subsidiary should begin manufacturing operations at Shelton the union at Camden would have both operations included in the one labor contract. 1953 U.S. Tax Ct. LEXIS 107">*113 To avoid the loss of the differential in wage rates and other disadvantages of having the Shelton operation included in the same labor contract as the Radio plant at Camden, New Jersey, Manufacturers was formed by the Cramers to engage in this business.

In 1944 Manufacturers was unable to renew its lease and was unable to locate any other suitable plant in which to continue its business. It therefore ceased manufacturing operations, sold some of its equipment and leased the balance of its equipment to the Western Condenser Company. The officers of Manufacturers did not terminate its existence at that time because they thought that, after the war, plant facilities would be available and they could resume manufacturing operations. After the end of the war they gave up hope of resuming manufacturing operations because of a shortage of engineers, trained personnel, and equipment. There was then no longer any reason for continuing the existence of the company. Radio was interested in acquiring the manufacturing machinery and equipment of Manufacturers and on November 25, 1946, Radio purchased the stock of Manufacturers from petitioners for an amount equal to the appraised fair market1953 U.S. Tax Ct. LEXIS 107">*114 value of its assets less its liabilities, in order to acquire this machinery and equipment.

On November 25, 1946, Radio, and petitioners as owners of the capital stock of Manufacturers, executed an agreement whereby the former purported to buy and the latter purported to sell to Radio all of the shares of the capital stock of Manufacturers. On the same date, petitioners delivered their shares of the capital stock of Manufacturers to Radio and received the sum of $ 169,380.60. On that date, after appreciating the value of its fixed assets by $ 38,711.26 to reflect their appraised market value, Manufacturers had a net worth of $ 169,380.60, 20 T.C. 679">*683 and a surplus of $ 154,380.60. Its current assets were $ 101,230.20 and its current liabilities $ 5,801.98.

Western Condenser Company, hereinafter called Western, was formed in 1939 by Stanley S. Cramer and Russell E. Cramer to manufacture condensers at Watseka, Illinois. The principal advantage of manufacturing at that location instead of Camden, New Jersey, was that labor rates were approximately one-third less than they were in Camden. Western was formed as a separately owned company to preserve the advantage of lower labor rates, 1953 U.S. Tax Ct. LEXIS 107">*115 which the officers feared would be lost, if Radio either directly or indirectly engaged in this operation.

Western sold all its production to Radio because Radio had the sales organization and the trade standing with the manufacturers of radio sets. With the passage of time this arrangement gave rise to troubles in customer relations and to many duplications of expenses. For these reasons Radio desired to acquire the assets of Western and on October 21, 1947, Radio purchased the stock of Western from petitioners for an amount equal to the appraised fair market value of its assets less its liabilities.

On October 21, 1947, Radio, and petitioners as owners of the capital stock of Western, executed an agreement whereby the former purported to buy and the latter purported to sell to Radio all of the shares of the capital stock of Western. On or about October 31, 1947, petitioners delivered their shares of Western to Radio and received $ 397,416.55 in cash and $ 562,500 in mortgage bonds secured by a mortgage upon the real estate of Radio. As of October 31, 1947, after appreciating the value of its fixed assets by $ 184,127.59 to reflect appraised market values, Western had a net worth1953 U.S. Tax Ct. LEXIS 107">*116 of $ 959,916.55 and a surplus of $ 924,916.55. Its current assets were $ 798,279.35 and its current liabilities $ 304,521.41.

After the acquisition by Radio of the stock of S. S. C., Manufacturers, and Western, these corporations were, respectively, liquidated and dissolved and their assets were transferred to Radio in liquidation.

S. S. C. Manufacturers, and Western were formed as separate corporations for business reasons. At the time of their formation and for many years thereafter there was no thought of their stock or their assets at any time being sold to Radio.

S. S. C., Manufacturers, and Western have always been treated as separate corporations, with their own books, records, bank accounts, property, and employees. They have also been consistently treated as separate corporations for Federal tax purposes.

The sales by petitioners of their stock in S. S. C., Manufacturers, and Western were sales of capital assets and petitioners' profits on the transactions are taxable as capital gains.

20 T.C. 679">*684 OPINION.

We are unable to distinguish the present facts from Rodman Wanamaker Trust, 11 T.C. 365, affd. (C. A. 3) 178 F.2d 10.1953 U.S. Tax Ct. LEXIS 107">*117 That section 115 (g), Internal Revenue Code, was later amended to cover some but not all transactions in which the stock of related corporations is sold to another corporation by its stockholders ¹ could not in any event affect the present situation. The amendment was expressly made applicable only to years ending subsequent to August 31, 1950. If respondent's argument were valid that section 115 (a) defining a dividend ² is alone sufficient to make this transaction taxable, section 115 (g) would have been unnecessary in the first place, the amendment in the 1950 Act is redundant, and the Wanamaker case erroneously decided.

1953 U.S. Tax Ct. LEXIS 107">*118 It is only because such arrangements do not precisely conform to the definition of dividends, but are "essentially equivalent" thereto that section 115 (g) comes into play. As we said in Shelby H. Curlee, Trustee, 28 B. T. A. 773, affd. (C. A. 8) 76 F.2d 472, certiorari denied 296 U.S. 599">296 U.S. 599: "If this were sound, that provision of the statute would be surplusage, as such a dividend would be taxable under other provisions. Cf. United States v. Katz, 271 U.S. 354">271 U.S. 354. The purpose of this section is to tax distributions which effect the cash distribution of surplus otherwise than in the form of a legal dividend * * *."

Nor is there validity to the suggestion that this was property acquired in such a way as to be equivalent to a dividend under section 112 (c) (2). That section requires for its application that "a distribution [be] made in pursuance of a plan of reorganization * * * within the provisions of paragraph (1) of this subsection * * *"; and paragraph (1) in turn applies only where "an exchange would be within the provisions of subsection (b) (1), (2), (3), 1953 U.S. Tax Ct. LEXIS 107">*119 or (5)." The only one of these subsections relied upon by respondent is 112 (b) (3) covering the exchange of "stock for stock on reorganization"; and that section is stated to be applicable solely on the ground that petitioners in effect already owned all the stock in Radio and, hence, the result was similar to an exchange. Such reasoning would make it impossible for a stockholder ever to sell for cash property to a corporation in which he was interested. We think the construction too strained to be given serious consideration.

20 T.C. 679">*685 Disregarding the technical provisions and treating only the substance of the arrangement, we see no analogy adequate to constitute this transaction ordinary income. If not considered as a transfer by petitioners to Radio of stock of entirely separate corporations, and assuming that the purpose was to place in Radio's ownership the property represented by the shares, ³ the reality of the situation can be validly described as that of a sale of the underlying property for cash. In either case the prices paid by Radio were at least equal to those which would have been present in an arm's length transaction. Even the cash received by the stockholders1953 U.S. Tax Ct. LEXIS 107">*120 did not hence represent a diminution of corporate surplus since Radio's assets were increased by property at least as valuable as the cash with which it parted. See Palmer v. Commissioner, 302 U.S. 63">302 U.S. 63, 302 U.S. 63">69. Even if we assume, contrary to the facts, that the other three corporations had first been liquidated, the underlying property itself distributed in liquidation to the stockholders and thereupon sold to Radio for the equivalent amount of cash, the only tax due would be measured by the capital gain of the individual stockholders on the liquidation, section 115 (c), Internal Revenue Code, a consequence identical to that to which the stockholders are now concededly subject.

1953 U.S. Tax Ct. LEXIS 107">*121 Although not stated in so many words, respondent's position can accurately be described only as tantamount to disregarding the separate entities of the corporations owning the assets and assuming that they and the property owned by them were in reality already owned by Radio, so that the payments of cash by Radio were gratuitous. But the three corporations had for some time operated as separate business units; their taxes had been computed on that assumption; the basis of the property doubtless carried and taxed on that theory; and no valid reason is suggested why we should now treat them differently. National Carbide Corp. v. Commissioner, 336 U.S. 422">336 U.S. 422. Cf. Gregory v. Helvering, 293 U.S. 465">293 U.S. 465.

We are unable to perceive any valid ground for sustaining the contested deficiencies.

Decisions will be entered under Rule 50.