but in an amount not in excess of the cash. This gain is subject to both normal tax and surtax or in lieu thereof, to tax as capital gain under section 101 of the Revenue Act of 1928 if the stock of Standard had been held for a period of more than two years.

The third question, however, presents a more difficult situation.

It is accordingly held that the distributions in liquidation of Standard did not have the effect of distributions of taxable dividends but that the entire amounts should be considered as having been received in exchange, with the limitation on gain as set forth in the discussion of the second point.

Petitioner Richard K. Mellon, in his income tax return filed for 1930, included in "Item 11-Other Income" the $40,000 cash distributed to him during that year by Standard, and attached to the return was a rider stating as follows:

Item #11-Liquidating Dividend (Other Income)

During the year 1930 the Standard Steel Car Company of Butler, Pa., of which the taxpayer was a stockholder, was merged with Pullman, Inc., stockholders of Standard Steel Car Co. receiving two shares of Pullman, Inc. for each share of Standard Steel Car Co. Certain assets of Standard Steel Car Co. were liquidated from which the taxpayer received the sum of $40,000.00 in cash, and which is reported under Item #11-Other Income.

Petitioner Sarah Mellon Scaife, in her income tax return filed for 1930, reported in "Item 11-Other Income" the $20,000 cash distributed to her during that year by Standard as a distribution in liquidation "of Certain Assets in merger with Pullman, Inc."

In the income tax returns filed for 1930 by the Union Trust Co. of Pittsburgh, trustee for each petitioner under separate agreements of trust of Richard B. Mellon, dated December 7, 1926, the $916,900 cash distributed to each trust by Standard during 1930 was included in "Schedule D-Capital Net Gain," with the explanation: "45,845 Shrs. Standard Steel Car (Cash Distribution)."

The Federal income tax return, Form 1120, filed by Standard for 1929 contained a statement which is in part as follows:

During the year 1930, Standard Steel Car Company entered into two reorganizations, as a result of which there was distributed to its stockholders on each share of stock held by them, respectively, the following securities and cash:

One Share of Stock of Standard Car Securities Company, Par Value $1.00

Two Shares of Stock of Pullman Incorporated, without nominal or Par Value

$20.00 in Cash

The first transaction was between Standard Steel Car Company and Standard Car Securities Company, whereby, as a result of a plan of reorganization entered into on January 29, 1930, Standard Steel Car Company transferred certain of its properties, securities and assets in exchange for all of the capital stock of the Standard Car Securities Company on February 8, 1930, which said shares of stock were thereupon distributed on February 9, 1930 to the stockholders.

The second transaction was between Standard Steel Car Company and Pullman Incorporated, whereby, as a result of a plan of reorganization entered into

on February 18, 1930, Standard Steel Car Company transferred substantially all of its property and assets of every description owned by it at the time of such exchange, for shares of stock of Pullman Incorporated and cash, and/or United States Government bonds at their market value. The plan of reorganization also provided for the distribution, as soon as practicable, to the stockholders of Standard Steel Car Company of all the stock and cash so received from Pullman Incorporated, the surrender of their stock by the stockholders of the Standard Steel Car Company after such distribution, and the dissolution of the Standard Steel Car Company following said distribution.

Pursuant to the plan of reorganization so entered into, Standard Steel Car Company, on March 1, 1930, delivered to Pullman Incorporated deeds and instruments of conveyance and assignment for substantially all of its properties, not including any cash, and received from Pullman Incorporated in exchange therefor an aggregate amount of 560,000 shares of Pullman Incorporated stock and cash.

During March and April, 1930, pursuant to the plan of reorganization, Standard Steel Car Company distributed to its stockholders said 560,000 shares of Pullman Incorporated stock and approximately 93.5% of the cash so received by it. The balance of the cash received by Standard Steel Car Company, on March 1, 1930, could not be immediately distributed by it for the reasons that, under the provisions of the contract, the aforesaid cash payment made by Pullman Incorporated was an estimated amount, being subject to adjustment when the exact amount due was finally determined by the accounting representatives of Pullman Incorporated and Standard Steel Car Company, to which such adjustments had been left under the contract for determination.

These transactions have, in the opinion of Counsel, Messrs. Moorehead & Knox, Pittsburgh, Pennsylvania, constituted reorganizations within the meaning of the Revenue Laws of the United States, and in the preparation of this return they have been returned accordingly.

In the revenue agent's report dated October 14, 1932, covering the examination of the income tax return and books and records of petitioner Richard K. Mellon for 1930, the item of $40,000 was transferred from "Other Income" to "Capital Gain," with the following explanation: "Item 11-Other Income-$40,000.00 is also shown and fully explained on schedule attached to the original return."

In the revenue agent's report dated September 12, 1932, covering the examination of the income tax return and books and records of petitioner Sarah Mellon Scaife for 1930, the item of $20,000 was transferred from "Other Income" to "Capital Gain" with the following explanation:

*** Further income of $20,000.00 was received by the taxpayer in cash from the merger of the Standard Steel Car Company with the Pullman, Inc., the entire amount of cash received is reported as income.

The taxpayer reported the sum of $20,000.00, cash received in the merger of the Standard Steel Car Company, with the Pullman, Inc., as ordinary income, whereas, the said income is held to be a capital net gain from assets held more than two years, and the same is applied against a capital net loss of $33,420.00 sustained in the sale of stock of the American Locomotive Company, said stock also being held for more than two (2) years, leaving a capital net loss of $13,420.00 taxable at 12%

The above adjustments in the revenue agent's reports were approved by the Bureau of Internal Revenue in the final determination of the income tax liability of both petitioners for 1930.

Petitioner Sarah Mellon Scaife on August 13, 1942, sold 1,000 shares of stock of Pullman acquired on January 19, 1932, by gift from her father, Richard B. Mellon, who had acquired these shares by purchase on September 23, 1931, at a cost of $30,862.50. Petitioner in her income tax return for the year 1942 reported the selling price of such shares, $24,898 using as basis the donor's cost, $30,862.50 and claimed a long term capital loss in the amount of $5,964.50 and took into account 50 per cent thereof, $2,982.25. The average selling price of common stock of Pullman on the New York Stock Exchange on the date of the gift, January 19, 1932, was $21.8125. The loss claimed by petitioner in her income tax return for 1942 was not adjusted by respondent and petitioner agrees that, under the provisions of section 113 (a) (2) of the Internal Revenue Code, no loss is allowable on the sale.

It was stipulated, in the event of a final decision in favor of respondent, that:

(a) the basis of all shares of common stock of Pullman sold by petitioners in the years 1941, 1942 and 1943 is $30.668 per share for the purpose of determining gain and $6.2861 for the purpose of determining loss;

(b) with respect to petitioner Richard K. Mellon, respondent erred in allowing deductible capital losses in the amounts of $37,363.20 and $38,482.86 on sales of stock of Pullman in the years 1941 and 1942, respectively, by using a basis of $30.668 per share instead of $6.2861 per share;

(c) with respect to petitioner Sarah Mellon Scaife, respondent erred in allowing deductible capital losses in the amounts of $38,449.07, $19,465.44 and $5,663.46 on sales of stock of Pullman in the years 1941, 1942 and 1943, respectively, by using a basis of $30.668 per share instead of $6.2861 per share. For the year 1943, said petitioner realized a net long-term capital gain in the amount of $5,229.24 of which 50% thereof, namely $2,614.62, should be taken into account; and

(d) the adjustments resulting from the facts stipulated in this paragraph and in the foregoing paragraph with respect to the 1,000 shares of Pullman sold on August 13, 1942, by petitioner Sarah Mellon Scaife shall be given effect in any computations to be made under Rule 50.

OPINION.

VAN FOSSAN, Judge: The question to be determined is the proper basis to be used in determining gain or loss on the sale of certain Pullman stock by petitioners in the taxable years. The decision of this question depends upon whether the Pullman stock was received in 2230 by petitioners in a taxable or nontaxable transaction.

It is contended by petitioners that the transaction did not constitute a reorganization within the meaning of section 112 (i) (1) (A) of the Revenue Act of 19281 for the reasons, (1) that the "plan of reorgani

SEC. 112. RECOGNITION OF GAIN OR loss.

) GENERAL RULE-Upon the sale or exchange of property the entire amon

zation and consolidation" under the agreement between Standard and Pullman of February 18, 1930, as supplemented by the agreement of March 1, 1930, was not intended to, nor did it, comply with any requirements for consummating a merger or consolidation as provided by the statutes of the states of their creation; (2) that Pullman did not acquire "substantially all of the properties" of Standard; and (3) that Pullman was not a "party to the reorganization" within the meaning of section 112 of the Revenue Act of 1928, and that therefore the 1930 transaction was taxable and the basis to be used in determining gain or loss on the sale of the Pullman stock in the taxable years is the fair market value thereof at the time of distribution, viz., $82.0625 per share, as stipulated.

It is contended by respondent that the transaction as carried out as of March 1, 1930, between Standard, Pullman, and New Standard except to the extent of the cash received, constituted a nontaxable reorganization under section 112 (i) (1) (A); that accordingly the basis of the Pullman stock in the hands of petitioners must be determined by reference to the basis of the stock of Standard.

The respondent argues that the transaction by which Standard divested itself of 34.15429 per cent in value of its assets by transfer thereof to Securities Co. should be regarded as a separate transaction for the purpose of determining whether the remaining assets subsequently transferred by Standard constituted all or substantially all of the assets of Standard; that Pullman was a party to the contract of February 18, 1930; that New Standard, its subsidiary, was not a party to such contract and was not in existence at that time; that Pullman, whose stock, plus cash, formed the entire consideration paid to Standard for its remaining assets, "was entitled to receive all of the assets of Standard and did receive such assets," and should be held to be a party to the reorganization on the authority of Schuh Trading Co. v. Commissioner (CCA-7), 95 Fed. (2d) 404; and that the facts herein are distinguishable from the facts before the Supreme Court in Groman v. Commissioner, 302 U. S. 82, and Helvering v. Bashford, 302 U. S. 454, relied upon by petitioners and hence such cases are not controlling.

In Gilbert D. Hedden, 37 B. T. A. 1082; affd. (CCA-3), 105 Fed. (2d) 311; certiorari denied, 308 U. S. 575; rehearing denied, 308 U. S.

gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.

(1) DEFINITION OF REORGANIZATION.-As used in this section and sections 113 and 115(1) The term "reorganization" means (A) a merger or consolidation (including the acquisition by one corporation of substantially all the properties of another

(2) The term "a party to a reorganization" includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

636, corporation H gave corporation B an option to acquire substantially all of its assets for bonds of B and a small amount of cash. B accepted, but named two subsidiaries U and M to receive the H assets. It was held that the entire gain to H was recognizable. The Board of Tax Appeals in its opinion, in reference to the Schuh Trading Co. case, stated, in part, as follows:

We respectfully decline to follow the opinion of the Circuit Court in the Schuh case because we can not distinguish it from the Groman and Bashford

cases.

See also Davis v. United States, 26 Fed. Supp. 1007; Whitney Corporation v. Commissioner, 105 Fed. (2d) 438; and Lawrence v. Commissioner (CCA-7), 123 Fed. (2d) 555, in which the Circuit Court of Appeals, Seventh Circuit, stated that the cases, including the Schuh Trading Co. case cited by petitioner to sustain his position that Socony-Vacuum was a party to the reorganization "cannot, in the light of the Groman case, be regarded as authorities.”

The fact that Pullman was a party to the agreement of February 18, 1930, and the supplemental agreement thereof of March 1, 1930, is not determinative of the question whether it was a party to the reorganization. In Groman v. Commissioner, supra, Glidden also was a party to an agreement with the shareholders of Indiana, pursuant to which Indiana transferred its assets and Indiana's shareholders their stock in Indiana to Ohio, a corporation organized by Glidden, which became the owner of all of Ohio's common stock, but none of its preferred stock. The shareholders of Indiana received 5,276 shares of the prior preference stock of Glidden, valued at $553,980; 5,000 shares of the preferred stock of Ohio, valued at $500,000; and cash of $153,036.66. Indiana dissolved. The Supreme Court in that case stated, in part, as follows:

Do the facts that Glidden contracted for the exchange and made It possible by subscribing and paying for Ohio's common stock in cash, so that Oh.o could consummate the exchange, render Glidden a party to the reorganization? No more so than if a banking corporation had made the agreement th Indiana's shareholders and had organized the new corporation, and, by sbscription to its stock and payment therefor in money and the banking company's stock put the new company in position to complete the exchange. Not every corporate broker, promoter, or agent which enters into a written agreement effectuating a reorganization, as defined in the Revenue Act, thereby becomes a party to the reorganization. And, if it is not a party, its stock received exchange, pursuant to the plan, is "other property" mentioned in section 12(e) (1) and must be reckoned in computing gain or loss to the recipient. Gdden was, in the transaction in question, no more than the efficient agent in ging about a reorganization. It was not, in the natural meaning of the em, a party to the reorganization.

Herein the exchange was between Standard and New Standard, the sidiary organized by Pullman. The fact that Pullman ‹