70 T.C. 86">*87 Respondent determined deficiencies in petitioners' Federal income taxes in the following amounts:

1978 U.S. Tax Ct. LEXIS 133">*138 After concessions by the parties, the following issues remain for our consideration:

(1) Whether a corporate distribution received by petitioner Stephan Schaffan in 1970 was a distribution in complete liquidation of Fletcher Plastics, Inc., treated under section 331, I.R.C. 1954, ² or a distribution of money in pursuance of a plan of reorganization involving Fletcher Plastics, Inc., and Atlas Tool Co., Inc., treated in whole or in part as a dividend under section 356(a);

(2) In the latter case, whether the amount of a dividend under section 356(a) is measured by the earnings and profits only of Fletcher Plastics, Inc., or by those of Atlas Tool Co., Inc., as well;

(3) Whether Atlas Tool Co., Inc., is liable for the income tax deficiencies of Fletcher Plastics, Inc., at issue in this case; and

(4) Whether Atlas Tool Co., Inc., was formed or availed of for the purpose of avoiding the income tax with respect to its shareholder, Stephan Schaffan, by permitting its earnings and profits to accumulate instead of being distributed, within the meaning of section 532.

1978 U.S. Tax Ct. LEXIS 133">*139 FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

70 T.C. 86">*88 Petitioners Stephan Schaffan and Mildred Schaffan filed a joint individual Federal income tax return for calendar year 1970, during which year they were husband and wife. At the time of filing their petition in this case, they each resided in New Jersey. Petitioner Atlas Tool Co., Inc. (hereinafter Atlas), filed corporate Federal income tax returns for its fiscal years ending June 30, 1969, and June 30, 1970. Fletcher Plastics, Inc. (hereinafter Fletcher), filed corporate Federal income tax returns for its fiscal years ending November 30, 1968, November 30, 1969, and November 30, 1970. At the time of filing its petitions in this case, Atlas maintained its principal place of business in Hillside, N. J.

Stephan Schaffan's father organized the Atlas Tool Co. as a sole proprietorship in 1924. The proprietorship manufactured tools, dies, jigs, and fixtures for metal forming, blanking, and stamping and produced certain specialized equipment. Stephan Schaffan began working in the business in 1931. He became a partner in 1945. Beginning in 1945, the partnership became involved in manufacture1978 U.S. Tax Ct. LEXIS 133">*140 and sales in the model railroad industry. It simultaneously phased out its manufacture of tools and dies for unrelated parties. After 1949 and to date, the company's efforts have been devoted almost exclusively to the hobby industry, including model railroads and model motoring.

After his father's death in 1948, Stephan Schaffan operated the business as a proprietorship until it was incorporated in 1949 as Atlas Tool Co., Inc. Stephan Schaffan has always been president and principal stockholder of Atlas. During the years in issue, he was the sole stockholder.

Prior to 1960, Atlas conducted design, manufacturing, assembly, and sales functions as an integrated operation. It manufactured principally track, switches, and accessories for model railroads. In 1960, Fletcher was incorporated by Stephan Schaffan, who became its president and sole stockholder. Atlas' plastic injection molding machines were transferred to Fletcher, and Fletcher then performed molding and production of subassemblies for Atlas. Thereafter, Atlas conducted only design, assembly and sales functions. Fletcher made only a few, isolated sales of goods to buyers other than Atlas. Atlas, however, purchased 1978 U.S. Tax Ct. LEXIS 133">*141 inventory from unrelated domestic and foreign manufacturers for inclusion in its sales line.

Fletcher's operations, its machinery, equipment, employees, 70 T.C. 86">*89 books, and records, were located at 378 Florence Avenue, Hillside, N. J., in a building owned by West Shelton Realty Co., a corporation owned solely by Stephan Schaffan. Fletcher's machinery occupied the first floor of the building. This building also served as the main plant and offices of Atlas, which also leased its space from the realty company.

The operations of Atlas were housed in four buildings during the years in issue. The original building, 413 Florence Avenue, was acquired in 1948 and expanded twice between 1950 and 1952. The 378 Florence Avenue building was constructed in 1951 and expanded in 1959 and 1968. Two other buildings were constructed in 1961 and 1964. Stephan Schaffan owned the 413 Florence Avenue property personally. Aside from 378 and 413 Florence Avenue, the other buildings were owned by Atlas.

A fifth building was constructed by Atlas on land acquired from Stephan Schaffan in 1972. The need for additional space had become apparent about 1969, and the active planning for the building was begun1978 U.S. Tax Ct. LEXIS 133">*142 in 1973. Construction was commenced in 1974, and Atlas received a certificate for occupancy on May 28, 1975. The total cost of the building, including mechanical equipment it contained, was $ 783,934. At least $ 533,412 of this amount was paid prior to March 15, 1975.

Atlas began purchasing components from foreign sources in 1959. It increased the amount and variety of these imported items throughout the 1960's, purchasing from companies in Germany, Italy, Yugoslavia, Austria, Japan, and Hong Kong. It found that these imports were cheaper than domestically manufactured goods and that their quality was good. Atlas experienced only occasional problems with the quality and shipping arrangements of its imports before 1970. Atlas became increasingly dependent on these imports. During its fiscal years ending June 30 in 1968, 1969, and 1970, imports were approximately 46.6 percent, 45 percent, and 47 percent, respectively, of Atlas' total purchases.

During the years in issue, Atlas normally employed irrevocable letters of credit to pay for its imports. It also used checks and sight drafts for small orders. The letters of credit were obtained through the First National State Bank1978 U.S. Tax Ct. LEXIS 133">*143 of New Jersey in the amount of a purchase order and forwarded to the foreign manufacturer. The manufacturer was not required to begin production on the order until receipt of the letter of credit, but 70 T.C. 86">*90 in fact Atlas' regular suppliers usually had already begun production when the letter was issued. The manufacturer was entitled to payment on the order, according to the terms of the letter of credit, upon placing the goods with the carrier. At that point, Atlas' account was charged for the payment and a debit notice was mailed to it. Atlas then received the goods in due course from the carrier, usually within 2 to 3 weeks. Until the manufacturer received payment, the letter of credit represented only a contingent liability. Payment was due only if and when the goods were shipped. However, the letter of credit served as security for the manufacturer while the order was prepared.

Dozens of individual letters of credit were outstanding over the course of any of the years in issue. They could be extended, and many were extended, during those years. During the calendar years 1968, 1969, and 1970, the total amounts of the letters of credit issued on behalf of Atlas were 1978 U.S. Tax Ct. LEXIS 133">*144 $ 991,250, $ 1,497,700, and $ 385,640, respectively. Fewer letters of credit were issued in 1970 because certain European suppliers were beginning to extend credit to Atlas and were shipping goods without the benefit of letters of credit. The total amount of letters of credit outstanding at any one time during the fiscal years ending June 30, 1968, and June 30, 1969, was between $ 500,000 and $ 600,000.

During 1970, 1971, and 1972, Atlas had lines of credit at First National State Bank of Newark in the amounts of $ 650,000, $ 650,000, and $ 240,000, respectively. Atlas had a line of credit with that bank in the other years in issue as well. However, Atlas never borrowed on its line of credit during any of these years. Atlas paid all of its letters of credit and its other payables currently with funds on hand. Purchasers from Atlas usually paid for their purchases within approximately 30 days of shipment.

The assets and liabilities of Atlas for its fiscal years ending in 1964 through 1974, taken from its balance sheets, are summarized on table 1, page 92. Also noted are the dividends it paid during the year and its retained earnings as of the end of each year.

Atlas maintained1978 U.S. Tax Ct. LEXIS 133">*145 its cash in checking and savings accounts and in certificates of deposit.

The assets and liabilities of Fletcher for its fiscal years ending in 1962 through 1969, taken from its balance sheets, are summarized on table 2, p. 93. Also noted are the dividends it paid 70 T.C. 86">*91 during the year and its retained earnings as of the end of each year.

On his joint Federal income tax returns for 1968, 1969, and 1970 and on his return for 1971, Stephan Schaffan reported the following adjusted gross income and total income tax liabilities:

After prior consideration, the decision was made in 1969 that the manufacturing operations carried on by Fletcher were no longer essential since the components it produced were available from foreign sources. Pursuant to this decision the following actions were planned and executed:

(1) An appraisal of all of Fletcher's equipment and machinery was obtained from an unrelated appraisal company. The appraisal report, dated June 1, 1970, and forwarded under a cover letter dated August 3, 1970, concluded that1978 U.S. Tax Ct. LEXIS 133">*146 the fair market value of the described equipment and machinery was $ 100,250.

(2) On October 14, 1970, meetings were held of the directors and shareholders of Fletcher Plastics, Inc., which authorized dissolution of the corporation and liquidation and distribution of its assets expressly pursuant to section 337 of the Internal Revenue Code of 1954. ³

(3) On October 15, 1970, Fletcher's attorneys filed with the District Director of Internal Revenue, Newark, N. J., a Form 966, "Corporate Dissolution or Liquidation," reciting that the liquidation was to be "complete" and 1978 U.S. Tax Ct. LEXIS 133">*147 performed under section 337.

(4) Also in October of 1970, the corporation applied for a tax clearance certificate from the State of New Jersey in order to commence dissolution.

(5) On November 5, 1970, Fletcher transferred to Atlas all of 70 T.C. 86">*92

70 T.C. 86">*94 its equipment and machinery, as described in the appraisal report, and received a check from Atlas for $ 100,250. Fletcher also transferred its inventory to Atlas for $ 14,600, its cost to Fletcher. The only accounts receivable by Fletcher at the time were from Atlas, which paid them in full.

(6) On November 19, 1970, Stephan Schaffan received a cash distribution from Fletcher which represented all of its remaining assets.

(7) Final tax returns were filed with both State and Federal authorities.

(8) On June 11, 1971, a certificate of dissolution1978 U.S. Tax Ct. LEXIS 133">*151 was filed for Fletcher by Stephan Schaffan with the New Jersey secretary of state.

No written plan of liquidation existed other than the documents evidencing these actions.

After these actions the machinery and equipment transferred to Atlas remained in place at 378 Florence Avenue. It was idle from approximately November 5, 1970, until the end of February 1971. Fletcher's employees remained in the employ of Atlas, which used them initially in its packing and shipping departments. It was Atlas' policy not to fire personnel other than for cause, since its attrition rate was high.

Atlas' sales were seasonal. The heaviest sales volume occurred from September through February with a high concentration of sales before Christmas. To meet this seasonal demand, Atlas stockpiled its inventory during the periods preceding highest demand. Fletcher's manufacturing equipment was operated continuously throughout the year, although its operations were slower in December and January. Normally, after Atlas was sufficiently supplied for the current sales season, Fletcher's operations contributed to stockpiles for the following year.

In 1970, in anticipation of terminating Fletcher's manufacturing1978 U.S. Tax Ct. LEXIS 133">*152 activities, additional orders were placed by Atlas with foreign suppliers for items previously supplied by Fletcher. Stockpiles of these items were deemed sufficient to last through the peak sales season.

In December of 1970, problems with the quality of foreign supplies began appearing. Initially, Atlas received a shipment of railroad track that was twisted, and Mr. Schaffan flew to Europe in December or the following January to help remedy the problem. He was not successful, and defective track 70 T.C. 86">*95 continued to be shipped. Furthermore, other defective material was received in the 3 or 4 months following November 5, 1970, and delays in shipments occurred. Some of the defective material was returned, and some was repaired by Atlas.

About the end of February 1971, Atlas became worried about maintaining its inventory through the next season. At that time it began manufacturing components for its product line with 2 or 3 of the 29 injection molding machines acquired from Fletcher on November 5, 1970. During 1971, Atlas continued to experience inadequate deliveries and quality from the foreign suppliers, and additional machines were placed in service. By the fall of 1971, 1978 U.S. Tax Ct. LEXIS 133">*153 all of the manufacturing equipment and machinery acquired from Fletcher had been placed in operation. At the time of the hearing in this case, Atlas was still manufacturing components for its product lines. Some of the machines acquired from Fletcher were still in use, and new machines had been purchased and updated.

On their income tax return for 1970, Stephan and Mildred Schaffan reported a capital gain of $ 390,000 on the cash distribution to Stephan Schaffan from Fletcher. They reported a gross sales price of $ 400,000 and an adjusted basis of $ 10,000. In his notice of deficiency to these petitioners, respondent made the following determination:

The alleged sale of the operating assets of Fletcher Plastics, Inc. to Atlas Tool Co., both commonly owned by Stephan Schaffan, and a distribution of assets of Fletcher Plastics, Inc. to Stephan Schaffan, constituted a reorganization under Code Section 368(a)(1)(D) and a dividend distribution under Code Section 356(a). Further no "complete liquidation" of Fletcher Plastics, Inc. occurred here and hence Section 337 of the Code does not apply. Accordingly, the distribution of $ 482,246.86 is taxable as an ordinary dividend.

Petitioner1978 U.S. Tax Ct. LEXIS 133">*154 Atlas Tool Co., Inc., has petitioned from two notices mailed to it by respondent. In the first, addressed to Atlas Tool Co., Inc., respondent "determined that earnings and profits [had] been accumulated beyond the reasonable needs of the business" and imposed an accumulated earnings tax for Atlas' fiscal years ending June 30, 1969, and June 30, 1970, in the amounts of $ 131,762.47 and $ 87,477.54, respectively. The second notice was addressed to "Atlas Tool Co., Inc., Successor to Fletcher Plastics, Inc." and was labeled a "Notice of Deficiency." This notice made the following determination:

It has been determined that Atlas Tool Co., Inc. is the successor to Fletcher 70 T.C. 86">*96 Plastics, Inc. because Atlas Tool Co. acquired the business of Fletcher Plastics, Inc. within the ambit of section 368(a)(1)(D) of the Internal Revenue Code.

It has been determined that the earnings and profits of Fletcher Plastics, Inc. have accumulated beyond the reasonable needs of the business in each of the taxable years ended November 30, 1968 and November 30, 1969. Therefore, the tax provided by section 531 of the Internal Revenue Code has been imposed in each taxable year. * * *

The amounts of 1978 U.S. Tax Ct. LEXIS 133">*155 accumulated earnings tax imposed were $ 13,728.82 and $ 20,147, respectively.

In prior action by this Court, we held that a valid, timely petition had been filed on behalf of Atlas in docket No. 7634-74, although the original petition had been captioned "Fletcher Plastics, Inc., Stephan Schaffan, Transferee," and we allowed Atlas to amend its pleadings to conform with the notice it received. Fletcher Plastics, Inc., Stephan Schaffan, Transferee v. Commissioner, 64 T.C. 35">64 T.C. 35 (1975). Subsequently, petitioner filed a motion to dismiss or in the alternative to require respondent to plead transferee liability. By order dated January 21, 1977, we denied the motion to dismiss, but allowed respondent to file an amended answer making proper allegation of transferee liability.

OPINION

Stephan Schaffan owned all of the stock of two corporations, Atlas and Fletcher. In 1970, Fletcher transferred all of its operating assets and inventory to Atlas and received cash in return. Fletcher then distributed to Schaffan all of its remaining assets, consisting only of cash. Subsequently in 1971, Fletcher was dissolved under1978 U.S. Tax Ct. LEXIS 133">*156 State law. Petitioners assert that these transactions should be characterized according to the forms they took, a sale by Fletcher to Atlas on which gain is not recognized under section 337, and a distribution in complete liquidation of Fletcher that was entitled to treatment as full payment in exchange of Stephan Schaffan's stock under section 331. Respondent, on the other hand, has determined that no complete liquidation of Fletcher occurred, that the transactions in fact 70 T.C. 86">*97 constitute a reorganization of Fletcher and Atlas described in section 368(a)(1)(D), ⁴ and that the distribution was wholly a taxable dividend to Stephan Schaffan under section 356(a).

Fact patterns1978 U.S. Tax Ct. LEXIS 133">*157 similar to that of the instant case have been the subject of frequent litigation. It is well established that in a proper case a transaction styled as a corporate sale of assets and liquidation may be recharacterized for Federal tax purposes as a reorganization and may lead to quite different tax results. See, e.g., DeGroff v. Commissioner, 54 T.C. 59">54 T.C. 59 (1970), affd. per curiam 444 F.2d 1385">444 F.2d 1385 (10th Cir. 1971); Wilson v. Commissioner, 46 T.C. 334">46 T.C. 334 (1966).

The facts of this case fall within the statutory definition of a reorganization described in section 368(a)(1)(D). ⁵ There was a transfer by Fletcher of a part of its assets to Atlas, and immediately after the transfer, the shareholder of the transferor was in control of the corporation to which the assets were transferred. Although no stock or securities were actually distributed by Atlas as a part of the transaction, we have repeatedly held that, when the stock ownership of transferor and transferee is identical, the actual distribution would be a mere formality and the statute may be satisfied without it. See American Manufacturing Co. v. Commissioner, 55 T.C. 204">55 T.C. 204, 55 T.C. 204">221 (1970);1978 U.S. Tax Ct. LEXIS 133">*158 James Armour, Inc. v. Commissioner, 43 T.C. 295">43 T.C. 295, 43 T.C. 295">307 (1964).

Furthermore, the distribution, had it been made, would have qualified under section 354. ⁶ The transferee corporation must 70 T.C. 86">*98 acquire "substantially all of the assets of the transferor" under section 354(b)(1)(A), but it is sufficient for this1978 U.S. Tax Ct. LEXIS 133">*159 requirement that all assets necessary or appropriate to the conduct of the transferor's business be transferred. 46 T.C. 334">Wilson v. Commissioner, supra at 345; Moffat v. Commissioner, 42 T.C. 558">42 T.C. 558, 42 T.C. 558">578 (1964). Here, all assets of Fletcher other than cash were transferred to Atlas, and this falls well within the statute. See 46 T.C. 334">Wilson v. Commissioner, supra at 346. All assets remaining in Fletcher after the transfer were distributed to its shareholder, satisfying section 354(b)(1)(B). Finally, these steps were taken pursuant to a plan of reorganization. Each step taken in connection with Fletcher's transfer of assets to Atlas and its distribution of residual assets to Stephan Schaffan were part of an overall plan by the management and stockholders of Atlas and Fletcher to achieve an end result that we find to be the reorganization of the two corporations. The labels attached to the transaction by petitioners do not alter the nature of the plan, and no formal written document is necessary. See 46 T.C. 334">Wilson v. Commissioner, supra at 345; Lesser v. Commissioner, 26 T.C. 306">26 T.C. 306, 26 T.C. 306">311-312 (1956).1978 U.S. Tax Ct. LEXIS 133">*160

In spite of the satisfaction of the statutory requirements, petitioners have asserted two grounds for finding on these1978 U.S. Tax Ct. LEXIS 133">*161 facts that no reorganization occurred. First, they contend that there was no tax avoidance motive for the steps taken by Fletcher and, therefore, that the form in which the steps were cast should control their tax effects. Second, petitioners contend "that there was no continuation of Fletcher's business enterprise in Atlas," which continuation they deem necessary for treatment as a reorganization.

Contrary to petitioners' first contention, there is no requirement that tax avoidance be found to be the motive of a transaction styled as a liquidation before that transaction can be properly recharacterized as a reorganization. Although tax 70 T.C. 86">*99 avoidance is often the motivation where steps are taken and labels are assigned which deny the true nature of a transaction, treatment of a transaction as a reorganization, in accordance with the substance of the transaction, does not depend upon such a motive. See 55 T.C. 204">American Manufacturing Co. v. Commissioner, supra;46 T.C. 334">Wilson v. Commissioner, supra;26 T.C. 306">Lesser v. Commissioner, supra; cf. Lewis v. Commissioner, 10 T.C. 1080">10 T.C. 1080, 10 T.C. 1080">1086-1088 (1948),1978 U.S. Tax Ct. LEXIS 133">*162 affd. 176 F.2d 646">176 F.2d 646 (1st Cir. 1949). ⁷ Here, all the steps relating to the transfer of Fletcher's operating assets to Atlas and the distribution of cash to Stephan Schaffan were taken as preconceived steps in a single plan of action. The intended and actual result of the plan was the realignment of assets among the two corporations and their stockholder. The tax effects of the realignment must be determined by viewing the transactions together rather than as unrelated steps, regardless of petitioners' motives. See 43 T.C. 295">James Armour, Inc. v. Commissioner, supra at 305. Therefore, the form in which any single step was cast cannot determine the tax consequences of the complete transaction.

1978 U.S. Tax Ct. LEXIS 133">*163 Furthermore, in our view, petitioners' denial of any tax avoidance motives cannot be fully accepted as fact. It is true that the decisions to interrupt Fletcher's activities indefinitely, to rely on imported goods, and to retain Fletcher's operating assets were made for reasons solely related to the businesses conducted by the two corporations. The steps taken to carry out these decisions were not dictated by these businesses, however, but by the personal concerns of Stephan Schaffan. It is our view that, having decided that his corporations would take certain actions for business reasons, Stephan Schaffan attempted to seize on the opportunity to extract cash from his corporations at favorable tax rates by carefully selecting the form of the transaction. We do not suggest that it is improper for a taxpayer to seek to reduce or avoid taxes in this manner, short of evasion. However, when the net result of the steps so taken is that of a reorganization described in section 368, a taxpayer cannot avoid the reorganization provisions simply by labeling his steps otherwise.

Petitioners' second contention relates to the nonstatutory 70 T.C. 86">*100 requirements of reorganizations. Mere mechanical1978 U.S. Tax Ct. LEXIS 133">*164 satisfaction of the statutory reorganization provisions alone will not result in reorganization treatment. Section 1.368-1, Income Tax Regs., provides in part:

The purpose of the reorganization provisions of the Code is to except from the general rule certain specifically described exchanges incident to such readjustments of corporate structures made in one of the particular ways specified in the Code, as are required by business exigencies and which effect only a readjustment of continuing interest in property under modified corporate forms. Requisite to a reorganization under the Code are a continuity of the business enterprise under the modified corporate form, and (except as provided in section 368(a)(1)(D)) a continuity of interest therein on the part of those persons who, directly or indirectly, were the owners of the enterprise prior to the reorganization. * * * [Sec. 1.368-1(b), Income Tax Regs.]

A plan of reorganization must contemplate the bona fide execution of one of the transactions specifically described as a reorganization in section 368(a) and for the bona fide consummation of each of the requisite acts under which nonrecognition of gain is claimed. Such transaction1978 U.S. Tax Ct. LEXIS 133">*165 and such acts must be an ordinary and necessary incident of the conduct of the enterprise and must provide for a continuation of the enterprise. A scheme, which involves an abrupt departure from normal reorganization procedure in connection with a transaction on which the imposition of tax is imminent, such as a mere device that puts on the form of a corporate reorganization as a disquise for concealing its real character, and the object and accomplishment of which is the consummation of a preconceived plan having no business or corporate purpose, is not a plan of reorganization. [Sec. 1.368-1(c), Income Tax Regs.]

Moreover, the transaction, or series of transactions, embraced in a plan of reorganization must not only come within the specific language of section 368(a), but the readjustments involved in the exchanges or distributions effected in the consummation thereof must be undertaken for reasons germane to the continuance of the business of a corporation a party to the reorganization. Section 368(a) contemplates genuine corporate reorganizations which are designed to effect a readjustment of continuing interests under modified corporate forms. [Sec. 1.368-2(g), Income Tax1978 U.S. Tax Ct. LEXIS 133">*166 Regs.]

The nonstatutory requirements are usually formulated as (1) continuity of the proprietary interest held by the shareholders of the transferor corporation, (2) continuity of the business enterprise, and (3) a business purpose for the reorganization. Norman Scott, Inc. v. Commissioner, 48 T.C. 598">48 T.C. 598, 48 T.C. 598">603 (1967). See also American Bronze Corp. v. Commissioner, 64 T.C. 1111">64 T.C. 1111, 64 T.C. 1111">1123 (1975). ⁸

70 T.C. 86">*101 Petitioners have framed their argument more narrowly than these formulations. The thrust of their argument is that a continuation of Fletcher's specific business activities by Atlas must occur for there to be a reorganization and that this continuation must be intended and uninterrupted. Petitioners assert that none of these conditions1978 U.S. Tax Ct. LEXIS 133">*167 were satisfied in this case.

In our view, neither the business purpose requirement nor the continuity of business enterprise requirement encompasses petitioners' asserted test. Although the business purpose of a reorganization may be more readily discerned if the transferor's business is continued, ⁹ petitioners themselves have asserted that there were substantial business purposes for the dissolution of Fletcher and transfer of its assets to Atlas and that there were no tax avoidance motives for these actions. Continuation of the transferor's business certainly is not a prerequisite to every imaginable business purpose for a reorganization. The purpose of petitioners to retain the assets in corporate solution to ensure a ready source of supply is a valid business purpose, especially where substantial risks are apparent.

1978 U.S. Tax Ct. LEXIS 133">*168 The Court has also held that the requirement of continuity of business enterprise in the context of reorganization qualification ¹⁰ does not require continuation of the transferor's business activity. In 64 T.C. 1111">American Bronze Corp. v. Commissioner, supra at 1123-1124, we held that:

Continuity of business enterprise focuses on the transferee's post-merger business. Nowhere does continuity import a requirement of identity; the continuing business need not be the same as that conducted by the transferor. Ernest F. Becher, 22 T.C. 932">22 T.C. 932 (1954), affd. 221 F.2d 252">221 F.2d 252 (2d Cir. 1955); Bentsen v. Phinney, 199 F. Supp. 363">199 F. Supp. 363 (S.D. Tex. 1961); United States v. Adkins-Phelps, Inc., 400 F.2d 737">400 F.2d 737 (8th Cir. 1968); Rev. Rul. 63-29, 1963-1 C.B. 77; cf. sec. 382(a)(1)(C) and regulations thereunder. Since after the merger petitioner [the transferee corporation] was actively engaged in the conduct of its jobbing business the requirement of continuity of business enterprise is satisfied.

See also Pebble Springs Distilling Co. v. Commissioner, 23 T.C. 196">23 T.C. 196 (1954),1978 U.S. Tax Ct. LEXIS 133">*169 affd. 231 F.2d 288">231 F.2d 288 (7th Cir. 1956), cert. denied 352 70 T.C. 86">*102 U.S. 836 (1956); Morley Cypress Trust, Schedule "B" v. Commissioner, 3 T.C. 84">3 T.C. 84 (1944).

Several "D" reorganization cases have dealt substantively with continuity of the transferor corporation's business and assets. Some cases have approached the problem in the context of termination of the transferor's business and transfer of its assets to a newly formed, related corporation for the sole purpose of disposal of those assets to unrelated parties. These cases have consistently held that no reorganization1978 U.S. Tax Ct. LEXIS 133">*170 occurred because no business of any kind was conducted by the transferee corporation after the transfer. Standard Realization Co. v. Commissioner, 10 T.C. 708">10 T.C. 708 (1948); Graham v. Commissioner, 37 B.T.A. 623">37 B.T.A. 623 (1938). Also, in Mitchell v. United States, 451 F.2d 1395">451 F.2d 1395 (Ct. Cl. 1971), there was no reorganization when, in furtherance of liquidation, corporate assets were sold for cash to a preexisting sister corporation where the parties intended for the sister corporation to sell the assets and not retain them for its own use. All salable assets were sold within a short period of time, although the sister corporation made some incidental use of a small amount of the transferor's equipment in its own business before disposal. ¹¹

1978 U.S. Tax Ct. LEXIS 133">*171 However, if the transferee corporation receives the transferor's assets with the understanding that it will operate any part of the transferor's business indefinitely and it does so, then Standard Realization Co., Graham, and Mitchell may be distinguished. Thus, in Lewis v. Commissioner, 176 F.2d 646">176 F.2d 646 (1st Cir. 1949), affg. 10 T.C. 1080">10 T.C. 1080 (1948), there was a reorganization even though the transferor corporation had attempted to sell all three of its lines of business, had sold two, and had transferred only one line to the transferee for operation until a fair price could be obtained. ¹² See also 64 T.C. 1111">American Bronze Corp. v. Commissioner, supra.

It is well established that the same business need not be conducted by the transferee as was conducted by the transferor. In several cases in which reorganizations were found, the transferor's assets have been taken1978 U.S. Tax Ct. LEXIS 133">*172 by a newly formed, related 70 T.C. 86">*103 corporation and employed in a different business. In 23 T.C. 196">Pebble Springs Distilling Co. v. Commissioner, supra, the shareholders of the transferor placed its distillery assets at auction, but formed a new corporation to make a minimum bid to prevent a sale below fair value. The new corporation, after making the high bid for the assets, rented storage space in part of the distillery facilities but did not engage in distilling. Nevertheless, this conduct of a different business by the transferee was sufficient to satisfy the reorganization provisions. See also Morley Cypress Trust, Schedule "B" v. 64 T.C. 35">Commissioner, supra; Bentsen v. Phinney, 199 F. Supp. 363">199 F. Supp. 363 (S.D. Tex. 1961).

In these last cases the principal assets transferred were themselves employed in the changed business conducted by the transferee corporation. But in Becher v. Commissioner, 22 T.C. 932">22 T.C. 932 (1954), affd. 221 F.2d 252">221 F.2d 252 (2d Cir. 1955), the assets transferred were primarily cash and assets expected to be turned into cash. Nevertheless, we held in that case that there 1978 U.S. Tax Ct. LEXIS 133">*173 was a reorganization, even though the transferor's business had been terminated prior to the transfer, no going business was transferred and the assets transferred were of the type described. We explained in 22 T.C. 932">Becher v. Commissioner, supra at 941:

The important factor is that [the transferee] was created to carry on corporate business indefinitely, although with a different line of manufacture from that conducted by its predecessor. Cf. Lewis v. Commissioner, (C.A. 1) 176 F.2d 646">176 F.2d 646. In the instant case the reorganization was effected for a sound "business purpose." Corporate business was to be continued indefinitely, and the same shareholders remained in "control" and their investment remained "in solution." Therefore, there was compliance with both the letter and spirit of section 112(g).

Here, as in Becher, there was a sound business purpose for the reorganization, a corporate business was conducted indefinitely by the transferee, and the same stockholder remained in control with his investment still in corporate solution. Aside from the receipt of boot by Stephan Schaffan, no change in the incidents of taxation 1978 U.S. Tax Ct. LEXIS 133">*174 should occur upon the realignment of Fletcher's operating assets within the corporate group. Other than that distribution, there was "no change of substance in the rights and relations of the interested parties one to another or to the corporate assets." Bazley v. Commissioner, 331 U.S. 737">331 U.S. 737 (1947).

The risks and benefits of ownership of Fletcher's operating 70 T.C. 86">*104 assets remained within a corporate vehicle controlled by Stephan Schaffan. They were retained for an indefinite period for possible use by the surviving corporate entity in its business in the event the planned alteration of the overall corporate operation was not satisfactory. The facts that Fletcher's business activity was halted indefinitely and that the assets transferred were inactive when received are no more significant here than was the fact that the principal assets transferred in Becher were cash or assets expected to be converted to cash. In both cases, the particular assets were transferred for reasons germane to the business actively conducted by the transferee corporation. The assets in this case were "used" by Atlas even while inactive, in the sense that they performed1978 U.S. Tax Ct. LEXIS 133">*175 the function of reducing the risks of the business. In this sense they performed a function as integrally related to Atlas' business as standby generating capacity performs for electric utilities.

We find that there is no general reorganization requirement, such as that asserted by petitioners, requiring a continuation by the transferee of the business activities of the transferor corporation. We find further that the facts of the instant case satisfy all existing nonstatutory reorganization requirements as evidenced in the cases discussed.

Our research has found statements in a few cases that would seem to reach a conclusion different from ours. However, we are not persuaded that these cases establish a test of reorganization similar to that proposed by petitioners. The bulk of these cases deal with asserted reorganizations described in section 368(a)(1)(F). See Home Construction Corp. v. United States, 439 F.2d 1165">439 F.2d 1165, 439 F.2d 1165">1168 (5th Cir. 1971); Pridemark, Inc. v. Commissioner, 345 F.2d 35">345 F.2d 35, 345 F.2d 35">42 (4th Cir. 1965), affg. in part and revg. in part 42 T.C. 510">42 T.C. 510 (1964); Book Production Industries, Inc. v. Commissioner, T.C. Memo. 1965-65.1978 U.S. Tax Ct. LEXIS 133">*176 We attribute the statements made in these cases regarding continuation of the transferor's business to the limitation of those cases to "F" reorganizations, to the peculiar definition of an "F" reorganization, and to the factual context in which most "F" reorganizations occur. We do not view these cases as endorsing a general rule for application in all reorganizations.

In two cases courts have appeared to take positions opposed to ours in contexts other than "F" reorganizations. 451 F.2d 1395">Mitchell v. United States, supra, has already been noted. In Wortham 70 T.C. 86">*105 , 521 F.2d 160">521 F.2d 160 (10th Cir. 1975), affg. 375 F. Supp. 835">375 F. Supp. 835 (D. Wyo. 1974), one of two commonly controlled corporations acquired the assets of the other in a purported "C" reorganization. However, the transferor had terminated its business several months before the transfer, and its assets were of no use to the transferee. The lower court had limited its opinion to a finding that there was no business purpose for the reorganization. Wortham Machinery Co. v. United States, 375 F. Supp. at 838-839.1978 U.S. Tax Ct. LEXIS 133">*177 The precise holding was sustained because it was supported by substantial evidence, but the court went on to note that there was no "continuity of business enterprise," apparently because the transferor's assets were not employed in a business conducted by the transferee. See Wortham Machinery Co. v. United States, 521 F.2d 160">521 F.2d at 163. No explanation or support was provided for the statements in either 521 F.2d 160">Wortham Machinery Co. v. United States, supra, or 451 F.2d 1395">Mitchell v. United States, supra.Each case reaches the proper result on grounds other than continuity of business. In light of our prior analysis, we do not view these unnecessary statements as authority for concluding that there must be a continuation by the acquiring corporation of the same business enterprise conducted by the transferor in order for the provisions of section 368(a)(1)(D) to be applicable.

Having found petitioners' arguments unpersuasive, we find that in this case all the statutory and nonstatutory requirements of a reorganization described in section 368(a)(1)(D) are satisfied as determined by respondent. This finding precludes the application of section1978 U.S. Tax Ct. LEXIS 133">*178 331 to Stephan and Mildred Schaffan. See Ringwalt v. United States, 549 F.2d 89">549 F.2d 89, 549 F.2d 89">91 (8th Cir. 1977); 43 T.C. 295">James Armour, Inc. v. Commissioner, supra at 310. ¹³ The distribution received by Stephan Schaffan in 1970 must be treated under section 356.

Respondent determined that Stephan Schaffan received a distribution from Fletcher of $ 482,246.86, and petitioners1978 U.S. Tax Ct. LEXIS 133">*179 have 70 T.C. 86">*106 neither presented evidence nor argued that the amount admittedly received was less than this amount. ¹⁴ As our previous discussion shows, this was received in connection with steps taken pursuant to a plan of reorganization described in sections 368(a)(1)(D) and 354 and was integrally related thereto. Section 356(a) provides:

SEC. 356. RECEIPT OF ADDITIONAL CONSIDERATION.

(a) Gain on Exchanges. --

(1) Recognition of gain. -- If --

then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

(2) Treatment as dividend. -- If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed1978 U.S. Tax Ct. LEXIS 133">*180 earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.