The opinion
Smith,
dissenting: In the Revenue Act of 1918 (section 202 (b)), and in each subsequent revenue act, Congress has provided that certain profits arising from the exchange of property upon the reorganization, merger, or consolidation of corporations shall not be taxed until there has been a sale or other disposition by the taxpayer of the property received in exchange. The purpose of these statutory provisions was to facilitate corporate reorganizations, or rather not to discourage and block necessary business readjustments by taxing mere paper gains before such gains are realized in money. See Federal Income Tax: Definition of “ Reorganization,” 45 Harvard Law Review 648, note 1, quoting S. Rept. 275, 67th Cong., 1st sess., pp. 11, 12.
In the drafting of the reorganization provisions of the statutes Congress had the active cooperation and assistance of the Treasury Department and, in fact, those of the later acts, highly technical in character, were the handiwork of direct representatives of the Treasury Department. Great weight must therefore be given to the interpretation placed upon them by the respondent. His application of them to situations which have arisen has been given wide publicity in Treasury publications. See “ Reorganization and Other Exchanges in Federal Income Taxation ”, by Robert N. Miller, et ah, for an analysis of such rulings. In I. T. 2392, Cumulative Bulletin VI-2, p. 17, a form of reorganization substantially the same as that involved in the instant proceeding was held to be a “reorganization ” within the meaning of the statute. Relying upon such interpretations, many reorganizations have been effected in past years. One of these was the Sharp & Dohme transaction in 1929. The *679 respondent held that the transaction amounted to a reorganization within the meaning of the statute and the deficiencies herein involved have been determined on that view. He never raised any question as to the correctness of his determination until June 7,1938, when he filed amended answers in these proceedings asking increased deficiencies on the ground that he had erred in holding that there had been a reorganization of the 1926 corporation in 1929.
Without regard to the history of the legislation or to the interpretation which has been placed upon it by the respondent in past years, I am of the opinion that there are no decisions of the courts that warrant the respondent’s claim that the 1926 corporation “ sold its assets ” to the 1929 corporation in such a way that in 1929 there was no reorganization of the 1926 corporation. In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U. S. 599 (cited with approval in Pinellas Ice & Coal Storage Co. v. Commissioner, 287 U. S. 462 ), it was stated:
* * * In defining “ reorganization,” section 203 of tlie Revenue Act [of 1926] gives the widest room for all hinds of changes in corporate structure, but does not abandon the primary requisite that there must be some con-tinunity of interest on the part of the transferor corporation or its stockholders in order to secure exemption. Reorganization presupposes continuance of business under modified corporate forms.
The definition of “ reorganization ” referred to in the above cited decision (section 203 (h) (1) of the Revenue Act of 1926) is identical with that contained in section 112 (i) (1) of the Revenue Act of 1928.
The facts in these proceedings show that the stockholders of the 1926 corporation received 46.87 percent (225,000 out of 485,000 ¡shares) of the issued common stock and 36.53 percent (59,359 out of 162,500 shares) of the issued preference stock of the 1929 corporation. There was, therefore, a continuity of interest in the stockholders of the 1926 corporation in the 1929 corporation.
In the opinion of the Board in these proceedings it is stated “ that there was no combination of the two corporations ”; that therefore there was “ no real semblance to a merger or consolidation.” The evidence shows, however, that the 1929 corporation was incorporated on July 17,1929; that a large part of its stock was issued to bankers for cash; and that with this cash and additional shares it acquired all the assets of the 1926 corportion. From this it appears that there were two corporations existing side by side for a short period and that the 1929 corporation took over all the assets and business of the 1926 corporation. For some unexplained reason the 1929 corporation did not see fit at once to dissolve the 1926 corporation. It was continued as a mere shell of a corporation, its only assets consisting of its franchise and $500 in cash paid into its treasury by the 1929 *680 corporation in exchange for all its capital stock. If substance and not form is to control in a situation of this character, I am of the opinion that the continued existence of the 1926 corporation is without significance.
In Pinellas Ice & Cold Storage Co. v. Commissioner, supra, it was definitely held that the parenthetical clause included in the definition of a reorganization expands:
* * * the meaning of'“ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. * * *
I think that this expanded definition of the phrase “ merger or consolidation ” covers the transaction before us. It was so considered by the respondent until June 7, 1933. I do not think that there are any decisions of the courts that warrant a different view.
Black, Arundell, Matthews, Leech, and Adams agree with this dissent.