Since the trial and the filing of briefs in this case we have decided that section 483 can be applied to certain types of "B" reorganizations to tax a portion of the stock received as ordinary income. In Solomon v. Commissioner, 67 T.C. 379">67 T.C. 379 (1976), we rejected many of the arguments raised by petitioners to support their claim that sections 368 and 354 take precedence over section 483. We held that the express language of section 483 is broad, reflecting a congressional intent to have section 483 apply "to any deferred payment received on the exchange of property under a contract in which no interest or inadequate interest is provided, irrespective of whether gain or loss is recognized on the exchange, except in those five instances specified in subsection (f)." 67 T.C. 379">67 T.C. 385. See also Catterall v. Commissioner, 68 T.C. 413">68 T.C. 413 (1977). Cf. Jeffers v. United States, 556 F.2d 986">556 F.2d 986 (Ct. Cl. 1977).

We do not believe the absence of a clear expression in either the statute or the legislative history that section 483 applies1977 U.S. Tax Ct. LEXIS 80">*103 to tax-free reorganizations precludes such application. The statute is worded broadly with its only intended exceptions enumerated in section 483(f). 67 T.C. 379">Solomon v. Commissioner, supra at 385. We believe Congress intended section 483 to apply to tax-free reorganizations, and we reject petitioners' contention that section 1.483-2(b)(3)(i), Income Tax Regs., ⁷ is invalid. 68 T.C. 413">Catterall v. Commissioner, supra.The regulation is neither unreasonable nor clearly inconsistent with the statute. Commissioner v. South Texas Lumber Co., 333 U.S. 496">333 U.S. 496, 333 U.S. 496">501 (1948).

68 T.C. 544">*555 Petitioners argue that no income was realized or recognized on the exchange 1977 U.S. Tax Ct. LEXIS 80">*104 and the Commissioner cannot "create" income through the use of section 483. This argument is in part irrelevant and in part wrong. It is irrelevant in that section 483 requires neither the realization nor recognition of gain for its application. The section applies to payments regardless of whether the exchange resulted in a gain or loss. H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 198. While the purpose of the statute has been said to be to prevent the conversion of ordinary income into capital gain, 67 T.C. 379">Solomon v. Commissioner, supra at 383-384, ⁸ its purpose is not limited to that. The broader purpose of the statute is to prevent the conversion of interest into principal. The principal portion of any payment may represent gain to the seller, but it may also represent a return of his capital investment at either no gain or a loss.

Section1977 U.S. Tax Ct. LEXIS 80">*105 483 reflects a congressional intent to tax transactions according to substance, not form. S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 606. And in substance a portion of the deferred payments received in certain sales or exchanges represents compensation paid for the use of property during the period of deferral (i.e., interest). This interest is income within the meaning of section 61(a)(4) and is realized by petitioners when received. Neither Congress nor the Commissioner has sought to "create" income where none exists. Section 483 merely seeks to tax what in substance is interest income to sellers in deferred payment sales or exchanges.

The interest portion of these deferred payments is severable from the principal portion and is not a payment for the property exchanged. Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 14.56, p. 14-144 (3d ed. 1971). The interest, therefore, does not constitute "boot" which would disqualify the transaction from treatment as a reorganization under section 368(a)(1)(B). See sec. 1.483-2(a)(2), Income Tax Regs.

68 T.C. 544">*556 Petitioners argue that the application of 1977 U.S. Tax Ct. LEXIS 80">*106 section 483 to their circumstances is discriminatory and invalid. They note that section 1.483-1(b)(1), Income Tax Regs., states:

Section 483 does not apply to a distribution in complete liquidation of a corporation, regardless of whether the corporation is liquidated in one distribution or in a series of distributions. * * *

See also Rev. Rul. 74-89, 1974-1 C.B. 125, which indicates the Commissioner will not apply section 483 to partial liquidations under section 346(a)(1). Petitioners claim their position is indistinguishable from the liquidation of a corporation and, therefore, they should be treated the same. ⁹

Respondent answers that a liquidation differs from a reorganization because in the former the shareholder divests his entire interest in the corporation, but in the latter he does not. Such answer we find inadequate. To begin with, a shareholder may1977 U.S. Tax Ct. LEXIS 80">*107 or may not divest himself of his entire interest in a corporation in a partial liquidation. Moreover, whether he does or not is irrelevant for section 483 because that section often applies to deferred payment sales where the seller completely divests himself of whatever it is he sold.

While we disagree with respondent's attempted justification for treating reorganizations in a manner different from liquidations, we do feel that petitioners' reorganization is sufficiently distinguishable from liquidations in general that petitioners may not obtain relief from tax under the guise of discrimination.

Speaking of liquidations and reorganizations generally is very difficult because of the myriad of transactions encompassed within those terms. All liquidations are not alike, just as all reorganizations are not alike. So too, some liquidations are identical with reorganizations for certain purposes. See Movielab, Inc. v. United States, 494 F.2d 693">494 F.2d 693 (Ct. Cl. 1974); Eastern Color Printing Co. v. Commissioner, 63 T.C. 27">63 T.C. 27 (1974); Performance Systems, Inc. v. United States, 382 F. Supp. 525 (M.D. Tenn. 1973),1977 U.S. Tax Ct. LEXIS 80">*108 affd. per curiam 501 F.2d 1338">501 F.2d 1338 (6th Cir. 1974). Cf. Rogan v. Starr Piano Co., Pacific Division, 139 F.2d 671">139 F.2d 671 (9th Cir. 1943), cert. denied 322 U.S. 728">322 U.S. 728 (1944).

68 T.C. 544">*557 Some generalizations, however, can be made:

In general, the concept of complete liquidation envisions a final termination of the corporate enterprise (either through a sale of its assets to outsiders, followed by a distribution of the sale proceeds to its shareholders, or by a distribution in kind of the assets to its shareholders, so that they may either sell these properties or continue to operate the business in noncorporate form). The applicable statutory pattern for liquidations, found in §§ 331 to 337, provides generally for nonrecognition at the corporate level, capital gain or loss for the shareholders, and a new fair market value basis for the liquidating corporation's assets, supra Ch. 11. Reorganization, on the other hand, as noted by Regs. § 1.368-1(b), involves continuity of business operation under modified corporate forms, coupled with a continuity of shareholder investment in that enterprise. In keeping with1977 U.S. Tax Ct. LEXIS 80">*109 this premise, the statute provides not only for nonrecognition of gain or loss by the various parties to the reorganization exchanges, but for continuation of the tax basis for the properties involved therein and for inheritance of the acquired corporation's other tax attributes as well. Even more important, however, is the possibility of dividend income by virtue of the boot dividend provisions of § 356(a)(2), a risk not present in the case of a true liquidation. [Bittker & Eustice, supra at par. 14.54, p. 14-122.]

Recognizing the differences between reorganizations and liquidations, Congress has adopted many different rules governing the treatment of each. See secs. 331-346 and secs. 354-368.

Under section 483Congress has sought to tax what is, in substance, interest income. Interest has been defined as compensation for the use of borrowed money. Deputy v. duPont, 308 U.S. 488">308 U.S. 488 (1940). The liquidating corporation, however, has not in any sense "borrowed" its shareholders' equity investment. The payment of liquidation proceeds to shareholders does not represent the satisfaction of an indebtedness of the liquidating corporation (such as1977 U.S. Tax Ct. LEXIS 80">*110 might arise under contractual obligations in a reorganization). In the absence of such indebtedness, the Commissioner's determination not to impute interest income to the shareholders under section 483 appears to comport with the substantive economic realities of the transaction. While some reorganizations may be identical with certain liquidations, there can be no claim here that the Cocker-Kidde reorganization was in any sense the liquidation of a corporation. We believe the shareholders of a liquidating corporation are in significantly 68 T.C. 544">*558 different circumstances than petitioners, and consequently, we reject petitioners' claim of discrimination. ¹⁰

1977 U.S. Tax Ct. LEXIS 80">*111 Petitioners next contend that respondent is "estopped" from applying section 483 to a "B" reorganization by virtue of section 483(f)(3). ¹¹1977 U.S. Tax Ct. LEXIS 80">*112 They claim that imputed interest income constitutes "boot" in a "B" reorganization and is taxable as ordinary income under section 356(a). ¹² They conclude that since the only income recognized on the exchange is ordinary income, the transaction falls within the exception provided in section 483(f)(3).

Initially, we note that petitioners' argument is not an estoppel argument at all, but rather one of statutory construction. Petitioners focus only on the income imputed under section 483 and conclude that the exception provided in section 483(f)(3) applies.

We have already concluded that the stock received by petitioners representing interest income under section 483 is not "boot" under section 368 (a)(1)(B). Neither do we believe such stock is "other property or money" within the meaning 68 T.C. 544">*559 of section 356(a)(1)(B). ¹³Section 356 is not the operative provision which makes a portion of the stock received by petitioners taxable as ordinary income. Rather, section 483 alone makes a portion of such stock taxable as ordinary income. Petitioners' argument, therefore, is tantamount to saying that since the only income recognized on the exchange would be ordinary income in the form of interest (if section 483(a) were applied), the exception provided in section 483(f)(3) applies. 1977 U.S. Tax Ct. LEXIS 80">*113 We think this construction of the statute is strained.

Section 483(f)(3) does not necessarily preclude the application of section 483(a) where the only income realized (or recognized) from the transaction by the seller is ordinary income in the form of interest. To conclude otherwise would be to preclude the application of section 483(a) in every deferred payment sale resulting in a loss.

The legislative history behind section 483(f)(3) states:

in the case of the seller, this provision is to apply only if some part of the gain from the sale or exchange1977 U.S. Tax Ct. LEXIS 80">*114 of the property would be considered as gain from a capital asset or as gain from depreciable property. If the property is sold at a loss, this provision will nevertheless apply if, had there been a gain, some part of it would have been considered as gain from a capital asset or from depreciable property. * * * [S. Rept. 830, 88th Cong., 2d Sess. (1964), 1964-1 C.B. (Part 2) 607.]

It is clear that Congress intended section 483 to apply to loss sales as well as gain sales. Indeed, Congress has stated the determination of whether the exception in section 483(f)(3) applies (and thus whether section 483(a) applies) is to be made without regard to whether in fact a gain was realized on the exchange or whether such gain (if any) would be recognized. H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 335. What subsection (f)(3) focuses on, apart from the character of any gain actually realized or recognized, is the asset sold or exchanged. Subsection (f)(3) seeks to have section 483(a) apply (in the case of sellers) only to sales or exchanges of capital assets or property described in section 1231. We do 68 T.C. 544">*560 not1977 U.S. Tax Ct. LEXIS 80">*115 find it significant that the only income recognized by petitioners on the exchange in question is ordinary income in the form of interest. Nothing in the record suggests that the Cocker stock in their hands was anything other than a capital asset, and accordingly, the exception provided in section 483(f)(3) is inapplicable to the facts of this case. ¹⁴

In addition, we believe the commonsense understanding of section 483(f)(3) is that it refers to gain, if any, occurring on the exchange before section 483(a) is applied, not after. This follows from the wording of the exception itself which precludes the application of section 483(a) in the first instance, and does not purport to deal with the consequences flowing from the section's application.

We conclude, therefore, that the Commissioner is not precluded from applying section 483(a) to the facts of this case by1977 U.S. Tax Ct. LEXIS 80">*116 section 354, 356, 368, or 483(f)(3).

Petitioners contend that even if section 483 applies to future payments in certain reorganizations, it does not apply to their particular circumstances. They point out that the regulations and revenue rulings dealing with this subject only involve situations where the delayed payments are based on future earnings. ¹⁵

1977 U.S. Tax Ct. LEXIS 80">*117 It will be helpful to delve into the wording of the reorganization agreement in order to resolve the remaining disputes herein. Paragraphs 2.2(a) and (b) of the agreement base the computation of the "second distribution" on the earnings of Cocker subsequent to the date of the reorganization. But paragraph 2.2(c) indicates that if the figure arrived at under paragraphs 2.2(a) and (b) when added to the amount 68 T.C. 544">*561 of the "first distribution" totals less than $ 1,800,000, then this latter figure ($ 1,800,000) is to be used as a base amount. The applicable base figure arrived at must then be reduced by certain "liabilities and claims" provided for in paragraph 2.2(d), subject to the "floor" limitation in paragraph 2.2(d)(i) which will be discussed later.

Petitioners argue rather vigorously that because the aggregate value of stock distributions was $ 1,745,269.25, the future earnings of Cocker played no part in the computation and, therefore, section 483 does not apply.

We find it unnecessary to determine whether the "second distribution" received by petitioners was in any way based on the future earnings of Cocker. Section 483 does not apply only to "earn-out" situations. The1977 U.S. Tax Ct. LEXIS 80">*118 examples in the regulations and legislative history dealing with future earnings are simply examples. They were not intended to be exclusive. 67 T.C. 379">Solomon v. Commissioner, supra at 386. In Solomon, section 483 was applied to delayed stock payments which were contingent on the value of the acquiring corporation's stock at a future date.

Section 483(d)¹⁶ indicates that section 483 applies to payments "which the liability for, or the amount or due date of * * * cannot be determined at the time of the sale or exchange." The $ 1,800,000 figure relied on by petitioners as a "guaranteed minimum purchase price" was in no sense a floor below which the total amount of the first and second distributions could not go. Paragraph 2.2(d) of the agreement allows a reduction of the $ 1,800,000 figure for certain "claims and liabilities." There is no indication in the record that these "claims and liabilities" could be determined at the date of the exchange in 1964, and consequently, we believe the amount of the "second distribution" could not be determined within the meaning of section 483(d).

1977 U.S. Tax Ct. LEXIS 80">*119 We qualify this last statement somewhat because we do think a portion of the "second distribution" (though not as much as petitioners have suggested) could be determined at 68 T.C. 544">*562 the time of the exchange. Paragraph 2.2(d)(i) of the agreement states that in "no event" will the "claims and liabilities" reduce the amount of the "second distribution" to less than the difference between the stockholder equity shown on the Cocker Balance Sheet on July 3, 1964 ($ 1,410,498), and $ 1,500,000. Accordingly, $ 89,502 of the "second distribution" was fixed at the time of the exchange in 1964.

However, establishing a "minimum guaranteed" or fixed amount does not preclude the application of section 483. Indeed, in a typical installment sale the total amount to be paid under the contract is often "guaranteed" in the sense that it is fixed and definite. It is apparent from reading the statute and its legislative history that Congress intended section 483 to apply to deferred payments regardless of whether the amount of or liability for such payments could be determined at the time of the exchange. Accordingly, even though a portion of the "second distribution" was fixed and determinable 1977 U.S. Tax Ct. LEXIS 80">*120 at the time of the exchange, section 483 applies to the entire amount of this "second distribution." The only significance in deciding that a portion of the deferred payments is definite and a portion indefinite lies in the method of computation of the interest. See sec. 1.483-1(e)(1) and (3), example (1), Income Tax Regs.; H. Rept. 749, 88th Cong., 1st Sess. (1963), 1964-1 C.B. (Part 2) 334. Because the Commissioner did not compute interest income in his notices of deficiency using the figures we have established for definite and indefinite payments, a computation under Rule 155, Tax Court Rules of Practice and Procedure, is necessary.

Petitioners' last argument is that their situation is comparable to Rev. Rul. 70-120, 1970-1 C.B. 124, and accordingly section 483 does not apply. Rev. Rul. 70-120 indicates that where delayed payments are placed in escrow at the time of the exchange in a "B" reorganization, section 483 will not be applied. Petitioners claim that a reserve was established for the future shares of Kidde stock to be distributed under the reorganization 1977 U.S. Tax Ct. LEXIS 80">*121 agreement and such reserve should be treated the same as the escrow account referred to in the ruling.

Without passing on the validity of the ruling, we conclude that petitioners do not come within its provisions. The theory implicit in the ruling is that placing a portion of the shares in escrow is the equivalent of a "payment" under section 483. 68 T.C. 544">*563 See sec. 1.483-1(b)(6), example (8), Income Tax Regs. In such circumstances there are no deferred payments as described in section 483(c).

The significant factors present in the ruling and absent in our case are the rights of the former shareholders of the acquired corporation to vote the stock of the acquiring corporation placed in escrow and receive any dividends paid thereon. The transfer into escrow shifted at least some of the economic benefits of ownership to these shareholders. Petitioners, however, have failed to show they received any economic benefits of ownership in the Kidde stock distributed under the "second distribution" at the time of the exchange in 1964, and accordingly, we conclude that Rev. Rul. 70-120 is not applicable to the facts of this case.

For the foregoing1977 U.S. Tax Ct. LEXIS 80">*122 reasons, we believe that the payments of Kidde stock received by petitioners under the "second distribution" specified in the reorganization agreement (which comprised two actual distributions of stock) are subject to the imputed interest provisions of section 483.

Decisions will be entered under Rule 155.