The opinion
Tannenwald, J., dissenting: I disagree with the majority’s conclusion that, on the facts presented herein, no reorganization occurred.
The reorganization provisions contemplate the continuation of a corporate enterprise in modified form, coupled with continuity of shareholder investment in that enterprise, while the concept of a complete liquidation presupposes the final cessation of a business at the corporate level. See Ringwalt v. United States, 549 F.2d 89,91 (8th Cir. 1977); Davant v. Commissioner, 366 F.2d 874, 882 (5th Cir. 1966), affg. in part and revg. in part South Texas Rice Warehouse Co. v. Commissioner, 43 T.C. 540 (1965); Lewis v. Commissioner, 176 F.2d 646, 648 (1st Cir. 1949), affg. 10 T.C. 1080 (1948); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, par. 14.54 (3d ed. 1971). It is well settled that the tax consequences of a corporate realignment are to be determined by reference to its overall net effect rather than the form given by the parties to any of its component parts. The situation should be considered as it existed at the beginning and the end of a series of steps. See Davant v. Commissioner, supra at 883; Liddon v. Commissioner, 230 F.2d 304, 309 (6th Cir. 1956), affg. on this point 22 T.C. 1220 (1954); Helvering v. Elkhorn Coal Co., 95 F.2d 732 (4th Cir. 1938); Atlas Tool Co. v. Commissioner, 70 T.C. 86, 98-99 (1978); American Manufacturing Co. v. Commissioner, 55 T.C. 204, 217 (1970); Wilson v. Commissioner, 46 T.C. 334,347 (1966); James Armour, Inc. v. Commissioner, 43 T.C. 295, 305 (1964); Grubbs v. Commissioner, 39 T.C. 42, 49 (1962). Whether a reorganization has occurred depends upon the factual pattern which emerges from the series of events involved. See Atlas Tool Co. v. Commissioner, supra at 97; DeGroff v. Commissioner, 54 T.C. 59, 69 (1970), affd. per curiam 444 F.2d 1385 (10th Cir. 1971).
In my opinion, the facts of this case lie within the ambit of the reorganization provisions. Prior to the transactions involved herein, Sales was primarily engaged in the business of selling folding doors under a franchise from American-Standard. In the end, Sales was dissolved, but the same business continued to be operated on the same premises by a corporation (Supply) owned by substantially the same shareholders. The majority has focused on an isolated element of the whole transaction — the fact that technically only American-Standard possessed the power to transfer the franchise — and has concluded that, since Sales would have had to liquidate regardless of who received the franchise from American-Standard when Sales lost it, the step transaction analysis is inappropriate.
However, the test for applying the step transaction analysis is not necessarily keyed to a requirement that there be mutual interdependence among the various steps in an absolute or technical sense. The test is one of the relationship among the various steps in the context of viewing the transaction as a whole. See Moffatt v. Commissioner, 363 F.2d 262 , 266 (9th Cir. 1966), affg. 42 T.C. 558 (1964); Davant v. Commissioner, supra at 883; James Armour, Inc. v. Commissioner, supra at 306.
The shift of the franchise to Supply and the liquidation of Sales were not merely coincidental. When American-Standard indicated that the franchise was to be shifted to another company, a representative of Sales proposed that Supply take it over. Thus, Sales acted in concert with American-Standard to achieve the transfer of the franchise. 1 Although the possibility of liquidating Sales had been discussed previously, no steps were taken toward liquidation until January of 1974 after the transfer of the franchise had taken effect on December 31, 1973. Compare Swanson v. United States, 479 F.2d 539 (9th Cir. 1973), affg. 319 F. Supp. 959,960-961 (E.D. Cal. 1970). Upon transfer of the franchise, the business of Sales was continued by Supply without interruption.
Under these circumstances, the fact that American-Standard was an independent third party, in the sense that it was not owned and controlled by the same interests as owned and controlled Sales and Supply, is a distinction without a difference. Similarly, the mere fact that Sales would, in any event, have lost the American-Standard franchise and liquidated does not prevent our holding that the interrelationship requisite to a reorganization existed among the various steps involved. To conclude otherwise would be to exalt form over substance — an approach which has been rejected by a myriad of cases too numerous to cite. Clearly, the circumstances herein do not place American-Standard in a sufficiently arm’s-length status to avoid the application of the analysis articulated in DeGroff v. Commissioner, supra, and the conclusion that Sales transferred the American-Standard franchise to Supply. See also Commissioner v. Morgan, 288 F.2d 676 (3d Cir. 1961), revg. and remanding 33 T.C. 30 (1959).
In sum, the steps taken herein were sufficiently related so that, in total, they amounted to a transfer by one corporation (Sales) of substantially all of its assets to another corporation (Supply) controlled by the shareholders of the transferor, followed by a liquidation of the transferor corporation. The overall result was the “continuity of business operations under a modified corporate form with a continuity of shareholder investment in the enterprise,” which is, as the majority states, “the very essence of a ‘D’ reorganization.”
In so concluding, I do not intend to enunciate any rule of law that, in deciding whether a “D” reorganization occurred, there will always be a transfer of an asset where a franchise, license, or other similar contractual arrangement ends up in the hands of another corporation controlled by substantially the same interests as the prior holder thereof. Under other circumstances— e.g., if American-Standard had taken the franchise away from Sales and given it to an unrelated third party who had proved unsuccessful in its use and thereafter American-Standard had given it to Supply — there might have been a sufficiently independent intervening event to justify finding that a complete liquidation of Sales, separate and apart from any reorganization, had occurred. Cf. Kind v. Commissioner, 54 T.C. 600 (1970). See also Pridemark, Inc. v. Commissioner, 345 F.2d 35 (4th Cir. 1965), revg. on this issue 42 T.C. 510 (1964).
The absence of an actual distribution of stock or securities of the transferee corporation does not preclude a finding that a “D” reorganization occurred if, when the transaction was completed, the stockholders of the old corporation retained their proprietary interest in the same business in another corporate shell. James Armour, Inc. v. Commissioner, supra at 307-308. See also Atlas Tool Co. v. Commissioner, supra at 97; American Manufacturing Co. v. Commissioner, supra at 221; Davant v. Commissioner, supra at 884-886. The owners of 94 percent of the stock of Sales already owned, in similar proportions, 98 percent of Supply. We have previously stated that the purpose of the final clause in section 368(a)(1)(D) is merely to assure that a transaction treated as a reorganization qualifies under section 354,355, or 356. Wilson v. Commissioner, supra at 344.
In view of the foregoing, the distribution to the shareholders of Sales represented “boot” in a reorganization taxable as a dividend to the extent provided in section 356. Since this case is appealable to the Fifth Circuit Court of Appeals, the earnings and profits of both Supply and Sales should be counted in determining the amount to be treated as a dividend (see Davant v. Commissioner, supra) under the rule of Golsen v. Commissioner, 54 T.C. 742 (1970), affd. on other issues 445 F.2d 985 (10th Cir. 1971), although we have previously indicated our adherence to our original position that only the earnings and profits of the transferor corporation should be taken into account in such a determination. American Manufacturing Co. v. Commissioner, supra at 230-231.
Featherston, Dawson, and Chabot, JJ., agree with this dissenting opinion. I also note that, although the majority opinion speaks in terms of a revocation of the franchise by American-Standard, the findings of fact indicate that American-Standard’s only action was the transfer of Sales’ distribution number to Supply.