Comm'r of Internal Revenue

This case is not covered by Casetext's citator
Tax Court of the United States.Aug 19, 1964
42 T.C. 914 (U.S.T.C. 1964)

Docket Nos. 841-63 842-63.



Alfred E. Holland, for the petitioners. Leo A. McLaughlin, for the respondent.

Alfred E. Holland, for the petitioners. Leo A. McLaughlin, for the respondent.

Held, retail furniture corporation's transfer of installment financing activities to new corporation in exchange for stock of the latter which was distributed to its own stockholders was a nonrecognizable spin-off. Sec. 355, I.R.C. 1954. On the facts of this case the transaction was not a device for the distribution of earnings and profits within the meaning of section 355(a) (1)(B), and the installment financing activities complied with the active business requirements of section 355(a)(1)(C) and (b)(2)(B).

The Commissioner determined deficiencies in 1958 income tax in the amount of $11,838.30 against Marne S. and Marjorie M. Wilson, and in the amount of $11,710.28 against Lyle C. and Peggy Wilson.

At issue is whether petitioners' receipt of stock in Wil-Plan Co. in a so-called spin-off qualified for nonrecognition under section 355, I.R.C. 1954.


Petitioners Marne S. and Marjorie M. Wilson, husband and wife, and Lyle C. and Peggy Wilson, husband and wife, residing in Sacramento, Calif., filed their respective joint income tax returns for the calendar year 1958 with the district director of internal revenue at San Francisco, Calif. The husbands will sometimes hereinafter be referred to as the petitioners.

Wilson's Furniture, Inc., hereinafter referred to as Wilson's, Inc., is a corporation organized under the laws of California on August 29, 1955; it is engaged in the retail furniture business at 1309 J Street, Sacramento, Calif. The corporation's furniture business had its beginning in 1922 when William C. Wilson, the father of Marne and Lyle, started Wilson's Furniture Exchange, a used furniture business in Sacramento, Calif. William operated this business as a community proprietorship with his wife Virla until the time of his death in 1950. After William's death the business was operated as a partnership by Virla, Marne, and Lyle; each of the partners had a one-third interest in the profits. The name of this partnership was Wilson's Furniture.

During the period 1950-55 the nature of the furniture business changed; the partnership began selling new furniture and began to make such new furniture sales on credit. During this period credit sales accounted for an increasingly higher percentage of the partnership's total sales. Credit sales were made on the basis of either a 30-day open charge account, or a conditional sales contract with payments for periods up to 24 months. The conditional sales contracts accounted for the larger portion of credit sales.

The partnership during these years retained as many of the conditional sales contracts as its available resources permitted and sold the remainder to third parties. During the early years of the partnership, the largest amount of conditional sales contracts held by it was approximately $90,000. In 1953 the partnership sold conditional sales contracts to the Anglo-California Bank of Sacramento and a year or so later to Re-Dis-Co, a financing subsidiary of American Motors; the partnership was a Kelvinator appliance dealer and through this connection did business with Re-Dis-Co. Contracts sold to the bank was transferred without recourse; all collections were made by the bank and it absorbed all losses from nonpayment. Contracts sold to Re-Dis-Co were on a recourse basis; Re-Dis-Co made collections on the contracts but in the event of nonpayment, the contracts were returned to the partnership and Re-Dis-Co charged the unpaid balance to the partnership, which would then attempt to collect the balance or repossess the furniture. Collections on unsold conditional sales contracts were made by personnel of the partnership. During this period all of the foregoing conditional sales contracts reflected sales to furniture customers of the partnership.

On August 29, 1955, Wilson's, Inc., was formed to take over the furniture business operated by the partnership. All of the partnership's business assets, including goodwill, were transferred to Wilson's Inc., in exchange for shares of stock and promissory notes bearing 2-percent interest as follows:

+-------------------------------------+ ¦ ¦Common ¦ ¦ +---------------+----------+----------¦ ¦ ¦stock, par¦Promissory¦ +---------------+----------+----------¦ ¦ ¦value $100¦notes ¦ +---------------+----------+----------¦ ¦ ¦(shares) ¦ ¦ +---------------+----------+----------¦ ¦ ¦ ¦ ¦ +---------------+----------+----------¦ ¦Marne S. Wilson¦400 ¦$1,994.84 ¦ +---------------+----------+----------¦ ¦Lyle C. Wilson ¦400 ¦1,994.84 ¦ +---------------+----------+----------¦ ¦Virla R. Wilson¦0 ¦49,310.31 ¦ +---------------+----------+----------¦ ¦Total ¦1 800 ¦53,299.99 ¦ +---------------+----------+----------¦ ¦ ¦ ¦ ¦ +-------------------------------------+

The total par value of the stock and face value of the notes approximated the net worth of the partnership as of June 30, 1955.

The officers and directors of Wilson's, Inc., from its formation in 1955 until 1961 were as follows:

+--------------------------------------------+ ¦Marne S. Wilson¦President and director. ¦ +---------------+----------------------------¦ ¦Lyle C. Wilson ¦Vice president and director.¦ +---------------+----------------------------¦ ¦Virla Wilson ¦Director. ¦ +---------------+----------------------------¦ ¦Peggy Wilson ¦Secretary. ¦ +---------------+----------------------------¦ ¦Marjorie Wilson¦Treasurer. ¦ +--------------------------------------------+

Wilson's, Inc., adopted the accrual method of accounting and reported its income on its tax returns on a fiscal year ended June 30. Its first return covered a full year's operation of the business beginning July 1, 1955.

The corporation continued the partnership's activities in respect of conditional sales in much the same manner as the partnership had conducted such activities.

The 1309 J Street location of Wilson's, Inc., which was also the location of its predecessor partnership, consists of a two-story building. The furniture display and sales areas are on the first floor and the office is located on the mezzanine. To reach the office it is necessary to cross the main display floor and to go upstairs to the mezzanine. In 1956, any new customer of Wilson's, Inc., desiring to purchase furniture on a credit basis was taken by the salesman to the mezzanine office where the necessary credit information was obtained. Credit customers, in 1956, made all payments, either in person at, or by mail to, the 1309 J Street address, except in those instances where the installment contracts had been sold and had not been returned to Wilson's, Inc., as delinquent accounts. In 1956, Wilson's, Inc., had approximately seven employees, including four salesmen. Both Marne and Lyle were salesmen for the furniture business. All of Wilson's, Inc.‘s employees were directly involved in the conduct of its retail furniture business, including sales, financing, and collections.

In 1956, Wilson's, Inc., for public relations purposes, began to use the fictitious name Wil-Plan Co. on delinquency notices and other communications relating to the conditional sales contracts retained by it; however, such contracts did not indicate that a separate entity, such as Wil-Plan Co., was handling the financing.

In 1957 the corporation hired Sam Parisi, who devoted all of his time to credit and collection activities.

In August 1957, Wilson's, Inc., made arrangements to borrow funds from the Bank of America to enable it to carry conditional sales contracts which it received from sales of furniture. The bank approved a $75,000 line of credit to the corporation, which agreed to transfer to the bank its customer contracts as security for any loans made to it. Loans made by the bank were based on a certain percentage of the unpaid balance of the conditional sales contracts. Wilson's, Inc., made the collections on these contracts. That line of credit was increased to $100,000 in May 1958, to $250,000 on July 23, 1958, and finally to $350,000 on November 6, 1958.

Upon obtaining the foregoing line of credit, the corporation repurchased all of the outstanding customer contracts which it had previously sold to Re-Dis-Co. It did not thereafter sell any conditional sales contracts.

In 1958, Marne and Lyle decided to start three new furniture operations in the northern California area. Pursuant to these plans, they organized and incorporated during the latter part of 1958 and early 1959 Abbet Furniture, Inc., S.E.E. Furniture Inc., and Furniture of Fresno, Inc. It was contemplated that financing of furniture sales of the new corporations was to be handled along with the financing of conditional sales made by Wilson's, Inc. At about the same time Marne and Lyle gave consideration to begin purchasing customer contracts of unrelated retailers.

The following table shows the total sales, gross profit, finance income, and net taxable income of the partnership for the taxable periods January 1, 1952-June 30, 1955, and of Wilson's, Inc., for the taxable periods July 1, 1955-June 30, 1958.

+----+ ¦¦¦¦¦¦ +----+

Year Total sales Gross profit Finance Net taxable income 1 income 1952 $255,499.01 $90,575.14 $6,284.05 3 $44,052.51 1953 239,803.26 100,054.79 5,999.15 3 45,597.56 1954 254,339.93 104,710.36 7,876.16 47,497.19 Jan. 1-June 30, 1955 146,942.95 60,246.61 2 8,414.82 3 31,021.54 June 30, 1956 340,480.83 134,791.55 2,998.67 20,500.43 June 30, 1957 432,552.69 123,678.84 8,812.84 2,368.25 June 30, 1958 443,469.35 145,419.99 46,348.25 23,255.69

Income of the partnership and of Wilson's, Inc., from finance charges provided in the conditional sales contracts was segregated from other business income in the records of the business; however, expenses incurred in earning this income were not charged against it, rather they were included in the general operating expenses of the business as a whole.

On July 7, 1958, the board of directors of Wilson's, Inc., adopted a plan to transfer all of the corporation's conditional sales contracts to a new corporation, the Wil-Plan Co., hereinafter referred to as Wil-Plan. The new corporation was formed on July 11, 1958. On July 28, 1958, the directors of Wil-Plan accepted the offer of Wilson's, Inc., to transfer its conditional sales contracts to Wil-Plan in exchange for 1,250 shares of Wil-Plan stock and its assumption of a debt to the Bank of America for funds which had been borrowed to finance these contracts. An automobile with a value of $2,527.46 was transferred to Wil-Plan along with the foregoing contracts. As of July 28, 1958, the face value of the conditional sales contracts transferred to Wil-Plan was $265,126.81; the indebtedness to the Bank of America in respect of such contracts was in the principal amount of $119,132.88.

On November 17, 1958, the board of directors of Wilson's, Inc., authorized the transfer of 1,250 shares of Wil-Plan to Marne and Lyle. On December 1, 1958, 1,250 shares were transferred to Marne and Lyle, each receiving 625 shares. The fair market value of the stock received by each of them on December 1, 1958, was $69,020.07.

The officers and directors of Wil-Plan from its formation in 1958 until 1961 were as follows:

+---------------------------------------------------+ ¦Marne S. Wilson¦President and director. ¦ +---------------+-----------------------------------¦ ¦Marjorie Wilson¦Vice president and director. ¦ +---------------+-----------------------------------¦ ¦Lyle C. Wilson ¦Secretary, treasurer, and director.¦ +---------------------------------------------------+

The accumulated earnings and profits of Wilson's, Inc., as of June 30, 1959, were $48,889.98.

The adjusted basis of the 400 shares in Wilson's, Inc., owned by each of the petitioners on December 1, 1958, was $40,000.

On December 8, 1958, the Bank of America granted a line of credit in the amount of $350,000 to Wil-Plan. A branch loan credit report of the Bank of America contained the following:

The above concern has been organized by Marne Wilson and Lyle Wilson, principals in Wilson Furniture Co., for the purpose of financing contracts under an indirect collection line. The new corporation will take over an existing indirect line of credit previously approved for Wilson Furniture Co. At the present time, it is anticipated it will handle contracts developed by Wilson Furniture Co. only since the affiliation with S.E.E. has been discontinued and no further contracts will be accepted from the S.E.E. outlet. Likewise, contracts from the Abbet Furniture Co., Concord, will not be included under the Wil-Plan line since they are presently discounted by the discount house in Concord. The new financing entity is formed for convenience and income tax advantages.

The entire line is guaranteed by Wilson Furniture and individually by Marne and Lyle and their wives. We shall obtain a similar continuing guaranty from the Abbet Furniture Co.

Subsequent to the incorporation of Wil-Plan, credit customers of Wilson's, Inc., made all payments in person at, or by mail to, the 1309 J Street address. Inquiries by credit customers of Wilson's, Inc., concerning their accounts were made at the mezzanine office at 1309 J Street. As officers of Wil-Plan, Inc., both Marne and Lyle were called off the first-floor sales floor from time to time by Sam Parisi to assist him in dealing with credit customers. There were no markings, placards, or signs at or near 1309 J Street advising any furniture corporation credit customer that Wil-Plan was located at that address.

The only way a customer knew that he was dealing with a separate corporation was by the letterhead on a bill sent to him, or a statement sent to him, or by seeing the payment book when he personally made payment. A customer of Wilson's, Inc., was not put on notice at the time of a sale, that, in respect of financing, he was dealing with a separate corporation. The conditional sales contract indicated that the customer was dealing with Wilson's, Inc.; no reference to Wil-Plan appeared therein.

Books of account of both Wilson's, Inc., and Wil-Plan are maintained in the mezzanine office at 1309 J Street; Wilson's, Inc., also has an office which handles its bookkeeping on the first floor. All payments on any credit arrangement concerning furniture sold at 1309 J Street are made at that address and are recorded by Sam Parisi in the books of account.

Wil-Plan also occupied an office in a building in which S.E.E. Furniture, Inc., was located. Subsequent to its incorporation, Wil-Plan has employed between two and four persons. Wil-Plan did not pay rent for office space. It serviced the open accounts receivable for Wilson's, Inc., and S.E.E. Furniture, Inc.

A newspaper advertisement by Wilson's, Inc., showed, in the lower left-hand corner of the advertisement, the following:


Wil-Plan purchased conditional sales contracts in the following aggregate face amounts from the following businesses:

+-----------------------------------------------------------------------+ ¦Fiscal year ended¦Wilson's, Inc.¦S.E.E. Furniture,¦Hi-Fi TV sales¦Other¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦June 30— ¦ ¦Inc. ¦ ¦ ¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦1959 ¦$142,595.90 ¦$33,603.69 ¦$3,454.09 ¦$406 ¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦1960 ¦431,321.66 ¦ ¦ ¦ ¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦1961 ¦260,729.77 ¦ ¦ ¦ ¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦1962 ¦398,132.97 ¦ ¦ ¦ ¦ +-----------------+--------------+-----------------+--------------+-----¦ ¦1963 ¦421,513.36 ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------+

After transferring its outstanding conditional sales contract to Wil-Plan in November of 1958, Wilson's, Inc., ceased to hold any such contracts and immediately on receipt sold all new one to Wil-Plan. For the fiscal years ending after June 30, 1959, Wilson's, Inc., had no income from finance charges.

On December 1, 1960, Wilson's, Inc., and Wil-Plan entered into a contract with Jon M. and Frances B. Siler, owners of a furniture business in Sacramento, Calif., known as Jon Siler Interiors. Pursuant to the foregoing contract, the assets of Jon Siler Interiors, except accounts receivable in the amount of $9,648.58, were transferred to Wilson's, Inc., in exchange for that corporation's promissory note in the amount of $9,900 payable in its stock. The foregoing accounts receivable in the amount of $9,648.58 were transferred to Marne and Lyle who in turn transferred them to Wilson's, Inc., in exchange for that corporation's promissory note in the amount of $9,648.58. Wilson's, Inc., issued 99 shares of its capital stock on November 15, 1961, to Jon Siler in exchange for the corporation's note in the amount of $9,900. Marne and Lyle each transferred 69 shares of Wil-Plan stock to Jon M. and Frances B. Siler. On December 1, 1961, the board of directors of Wilson's, Inc., accepted an offer by Marne and Lyle to cancel the foregoing obligation of $9,648.58 owed to them by the corporation.

There have been no sales or transfers by either Marne or Lyle of any shares either Wilson's, Inc., or Wil-Plan, other than the transfer of 138 shares of Wil-Plan to Jon M. and Frances B. Siler. The shares of these corporation now issued and outstanding are as follows:

+-------------------------+ ¦WILSON'S FURNITURE, INC. ¦ +-------------------------¦ ¦ ¦Shares ¦ +----------------+--------¦ ¦Marne S. Wilson ¦400 ¦ +----------------+--------¦ ¦Lyle C. Wilson ¦400 ¦ +----------------+--------¦ ¦Jon M. Siler ¦99 ¦ +----------------+--------¦ ¦ ¦ ¦ +-------------------------+

WIL-PLAN CO. Shares Marne S. Wilson 556 Lyle C. Wilson 556 Jon M. Siler and Frances B. Siler 138

The balance sheets of Wil-Plan as of July 11, 1958, and June 30, 1959, reflected the following:

+---------+ ¦ASSETS ¦ +---------¦ ¦ ¦ ¦ ¦ ¦ ¦ +---------+

Current assets: July 11, 1958 June 30, 1959 Cash 0 $858.95 Notes and accounts receivable $145,993.93 152,180.59 Depreciable assets $2,527.56 $2,527.56 Less: depreciation 0 2,527.56 505.51 2,022.05 Total assets 148,521.49 155,061.59

LIABILITIES AND CAPITAL Current liabilities and capital: Notes payable $2,527.56 $3,057.35 Accrued taxes 341.07 Provision for income taxes 2,000.75 Capital stock 125,000.00 125,000.00 Paid in surplus 20,993.93 20,993.93 Earned surplus 0 3,668.49 Total liabilities and capital 148,521.49 155,061.59

The balance sheets of Wilson's, Inc., reflected notes and accounts receivable in the following amounts on the following dates:

+--------------------+ ¦June 30—¦Amount ¦ +--------+-----------¦ ¦1955 ¦$85,676.85 ¦ +--------+-----------¦ ¦1956 ¦82,308.76 ¦ +--------+-----------¦ ¦1957 ¦66,374.88 ¦ +--------+-----------¦ ¦1958 ¦244,566.30 ¦ +--------+-----------¦ ¦1959 ¦42,654.95 ¦ +--------------------+

The income tax returns of Wil-Plan reflected in part the following:

+------------------------------------------------------+ ¦Fiscal year ended June 30—¦Gross income¦Net income ¦ +--------------------------+------------+--------------¦ ¦1959 ¦$25,112.86 ¦$5,240.70 ¦ +--------------------------+------------+--------------¦ ¦1960 ¦48,293.16 ¦8,019.99 ¦ +--------------------------+------------+--------------¦ ¦1961 ¦58,827.91 ¦12,051.10 ¦ +--------------------------+------------+--------------¦ ¦1962 ¦47,173.51 ¦445.45 ¦ +--------------------------+------------+--------------¦ ¦1963 ¦35,779.04 ¦1 (7,792.74)¦ +------------------------------------------------------+ Of course, the parenthetical limitation in sec. 355(a)(1)(B) provides that the ‘mere’ fact that the distributed stock is sold subsequent to the distribution shall not be construed to mean that the transaction was used principally as the prohibited device unless the sale were pursuant to an arrangement negotiated or agreed upon prior to distribution. But these provisions do not state negatively that the absence of any such sale may not be taken as evidence that the transaction was not used for the prohibited purpose. Indeed, the very objective which the parenthetical provisions seek to attain would be furthered by taking into account the passage of a substantial period of time without any sale, particularly when accompanied by credible evidence that no sale was in fact planned or intended. The record does contain a memorandum of the Bank of America in connection with transferring the $350,000 line of credit from Wilson's Inc., to Wil-Plan, stating that ‘The new financing entity is formed for convenience and income tax advantages.’ It did not identify the nature of those ‘advantages,‘ but, whatever they were, we are satisfied they were not related to the distribution of earnings and profits. Perhaps the additional surtax exemption for the second corporation was contemplated, which, however, might be subject to attack under sec. 1551; but the purpose of obtaining that exemption could not convert the transaction into a device for distributing earnings and profits. There is no controversy between the parties by reason of the financing activities having been conducted by the partnership rather than by Wilson's, inc., prior to its incorporation in 1955. See sec. 355(b)(2)(C), fn. 1, supra.

$80,000 par value.

Petitioners contend that their receipt of the Wil-Plan stock in 1958 was pursuant to a so-called spin-off that was entitled to nonrecognition under section 355 of the 1954 Code.
When Wilson's, Inc., transferred its financing operations, consisting primarily of its installment sales contracts, to the newly organized Wil-Plan Co., and caused the stock of the latter to be distributed to petitioners, stockholders of Wilson's, Inc., the transaction fell precisely within the terms of section 355(a)(1)(A), which sets forth the first condition for nonrecognition. Wilson's, Inc., was plainly a ‘distributing corporation,‘ and it distributed to its own stockholders, Marne and Lyle Wilson, solely stock of Wil-Plan Co., which it controlled immediately before the distribution— all in literal compliance with section 355(a)(1)(A). So much is not disputed by the Government. But the Government does intend that two other conditions for nonrecognition have not been met, namely, the requirement in section 355(a)(1) (B) that ‘the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation (Wilson's, Inc.),‘ and the condition in section 355(a)(1)(C) making applicable the requirements of section 355(b) relating to ‘active businesses.’ It does not rely upon any other statutory provisions to defeat nonrecognition which otherwise is literally available to petitioners under section 355. We hold that, on the facts of this case, the requirements of both (a)(1)(B) and (a)(1) (C) in conjunction with subsection (b), have been satisfied.
1. Whether the transaction ‘was not used principally as a device for the distribution of the earnings and profits' of Wilson's, Inc.— Sec. 355(a)(1) (B).— The burden of proof in respect of this requirement is upon petitioners. They have undertaken to meet that burden in part by attempting to prove alleged business reasons for the transaction having no connection with any distribution of earnings and profits. They contend that the transfer of conditional sales contracts and the financing operations to the new corporation was motivated by the following objectives: (a) To enable a separate finance company to make repossessions and to bring suits for delinquent payments in its own name without unfavorable customer reactions and without jeopardizing the goodwill of Wilson's, Inc.; (b) to enable a separate finance company to more easily purchase conditional sales contracts from other retail stores; (c) to make the sales program of Wilson's, Inc., more efficient by having its personnel devote all of their time to selling.
We are highly skeptical on the record before us that these three reasons, either separately or in the aggregate, were responsible to any substantial degree for the transfer. We think these reasons were largely colorable rather than real.
The action of Wilson's, Inc., subsequent to the incorporation of Wil-Plan contradicts petitioners' stated purpose to have a separate finance company make repossessions and to bring suits for delinquent payments in its own name so as not to jeopardize the goodwill of Wilson's, Inc. There has no attempt whatever by Wilson's, Inc., to disassociate itself from credit activities, which were carried on at the same premises, by the same persons, and in the same manner as they were prior to the incorporation of Wil-Plan. It was only after a sale was made that a customer was put on notice that a separate corporate entity was involved in connection with credit matters, and the record gives every indication that the customer would associate Wilson's, Inc., with Wil-Plan to such an extent that the reputation and goodwill of the former could hardly be protected in any meaningful way by the incorporation of the latter.
Nor are we persuaded by the evidence that an expectation of financing conditional sales of other retail stores was a bona fide reason for the incorporation of Wil-Plan. The financing of conditional sales or other enterprises controlled by the petitioners could be handled just as easily without incorporating Wil-Plan, and we are not convinced by the fragmentary evidence that there was any real plan to finance the sales to any significant extent of any enterprises not controlled by them.
The third alleged reason— to make more effective utilization of personnel—seems to be spurious, since the relevant personnel activities after incorporation of Wil-Plan appear to have been substantially the same as before.
Notwithstanding that the three foregoing reasons do not appear to have been bona fide motives for the incorporation of Wil-Plan, we are nevertheless satisfied that the requirement of section 355(a)(1)(B) has been met. After all, that requirement is simply that ‘the transaction was not used principally as a device for the distribution’ of earnings and profits, and the three reasons considered above were intended merely to prove motives other than to effect a distribution of earnings and profits. But even if petitioners failed to persuade us as to these three reasons, it was still open to them to convince us that the transaction was not in fact used principally as a device for the distribution of earnings and profits. And we think that the record before us establishes that the transaction was not so used.
This is not a case where accumulated cash or property having a readily realizable value was transferred to the newly organized corporation so that the distributee-stockholders could obtain such cash or property or the cash equivalent thereof, either by selling the distributed stock or liquidating the corporation, thereby converting what would otherwise be dividends taxable as ordinary income into capital gain— a transaction sometimes referred to as a ‘bail-out.’ Although the assets transferred to Wil-Plan had a high degree of liquidity, as stressed by the Government, we are satisfied by the evidence that the Wilsons intended to continue the financing activities with those assets, and that they had no intention either to liquidate Wil-Plan, to sell the stock of Wil-Plan, or in any other manner to siphon off for themselves the assets (or their equivalent) that had been transferred from Wilson's, Inc., to Wil-Plan.

1This income is from finance charges provided in the conditional sales contracts which were not sold but were held by the partnership or by Wilson's, Inc.$5,000 of this amount was a rebate from a reserve fund of Re-Dis- Co.

The evidence before us shows that some 5 years have elapsed since the 1958 transaction, that Wil-Plan has been an actively operating corporation during this period, that there have not been any distributions in liquidation or partial liquidation of Wil-Plan, and that petitioners have not in fact sold or disposed of their Wil-Plan stock apart from the comparatively small amount transferred to the Silers several years later in 1960 or 1961 in connection with bringing about the absorption of Jon Siler Interiors into the Wilson furniture enterprise. Thus, the transaction has not in fact been used as a device or a cover for distributing earnings. Moreover, Marne Wilson testified that neither at the time of incorporating Wil-Plan nor thereafter have there been any plans or intentions to sell its stock or the stock in Wilson's, Inc. To be sure, this was self-serving testimony that might carry but little weight in other circumstances, but it rang true to us in the context of this record. We hold that the transaction was not used as a device for distributing earnings and profits.
We note the understandable concern expressed by the Government in its reply brief, particularly as applied to the next point but also equally applicable to the point now under discussion:
Although Congress has clearly provided for the tax-free division of an existing corporation, through the provisions of section 355, it is hard to believe that it intended to encompass thereby the case of the incorporation of accounts receivable, installment paper, etc. It would hardly be a difficult trick for the shareholder recipients to either collapse or sell off such a corporation at capital gain rates and immediately start accumulating new accounts or paper in a new corporation.
The answer to that position is that in the present case we have found that there was no plan or intention to achieve any such result and no attempt to do so has in fact been made. Where the distributees fail to carry their burden of proving that ‘the transaction was not used principally as a device for the distribution’ of earnings and profits, the case will be decided against them. But that is no reason for refusing to rule in favor of these petitioners, who have convinced us on this record that they were not motivated by the prohibited purpose.

The parties have stipulated that the “Net Taxable Income” for 1952, 1953, and Jan. 1, 1955, to June 30, 1955, was $31,532.51, $33,117.56, and $22,921.54, respectively. However, the accompanying returns for 1952 and 1953 and petitioners' reconstructed income statement for the period Jan. 1, 1955, to June 30, 1955, show that the stipulated figures represented net taxable income as reduced by salaries paid to partners. It is necessary to add such salaries back, as was in fact done in the 1952 and 1953 returns, in order to arrive at the correct “Net taxable income,” as found in this table.


A stipulation of facts filed by the parties is incorporated herein by reference.


RAUM, Judge: