Full opinion text
DECISION, FINDINGS OF FACT, AND CONCLUSIONS OF LAW HAUK, District Judge. Two actions against the United States for refund of Federal corporate income taxes erroneously and illegally assessed, collected by the Government and overpaid by the individual taxpayer plaintiffs as shareholders and transferees of three dissolved corporations; and one counteraction by the United States against the said individual taxpayers, the three dissolved corporations and three holding companies who were the distributees of the assets of the dissolved corporations. These controversies, consolidated for trial, arise over the proper tax treatment to be accorded to the taxpayers under a series of transactions whereby three predecessor corporations built and sold tract homes under long-term contracts of sale, reporting income on the installment basis; then, while the contracts of sale were still in force, the individual shareholders of these predecessor corporations sold their stock therein to three other successor corporate holding companies which thereupon liquidated the predecessor corporations, distributed the residential installment sales contracts and obligations by refinancing and deeding out the properties to the home buyers, and reported their income by applying a stepped-up tax basis tied to the purchase price of the stock. In the first two actions, the individual taxpayers seek refunds totaling approximately $400,000, on the theory that under the applicable provisions of the Internal Revenue Code of 1954 then in force, and since the predecessor corporations were 80 percent subsidiaries of the successor holding companies when the predecessor corporations were liquidated and when the installment obligations were distributed to the successor holding companies, no gain or loss should have been recognized to the successor holding companies; and further, since no such gain or loss should have been recognized to the successor holding companies upon such liquidation and distribution, no gain or loss should be recognized to the predecessor corporations. In the counteraction, the Government seeks recovery against the individual taxpayers and also against all of the defendants either directly or as transferees of one another for the full amount of the refunds sought by the individual plaintiffs in their actions against the Government. But only in the event the individual taxpayers receive judgment under the first two actions does the Government press its counteraction. After ten-day, non-jury trial the Court makes its decision, findings of fact and conclusions of law in favor of plaintiffs in the first two actions and of defendants in the counteraction, ordering judgment for the taxpayers and against the Government. The first two actions in this case were brought by the individual taxpayer plaintiffs against the United States for the recovery, by way of refund, of approximately $400,000 in Federal corporate income taxes which it is claimed were erroneously and illegally assessed and later collected by the Government and overpaid by the taxpayers as shareholders and transferees of three dissolved corporations. Jurisdiction is based on 28 U.S. C.A. § 1340 and § 1346(a) (1) The third action, a sort of counteraction, virtually in the nature of a counterclaim or cross-claim, is brought by the United States against the aforesaid three dissolved corporations, against the same individual taxpayers as shareholders and transferees of the three dissolved corporations, and against three successor holding companies, as well as against the individual taxpayers and the three dissolved corporations as transferees of the successor holding companies. The Government seeks recovery of the identical sums which the individual taxpayers seek in their refund actions, but only in the event the refund actions are successful. In this counteraction, jurisdiction is based upon 28 U.S.C.A. § 1340 and § 1345 along with 26 U.S.C.A. § 7401 and § 7402(a) , the alleged transferee liability being founded upon 26 U.S.C.A. § 6901(a) (1) The tax controversies of these three actions, consolidated for trial, arose from the fact that three corporations, namely Loraine Park Homes, Ben Lomond Homes, Inc., and Coast Investment Company (sometimes, for convenience, called the predecessor corporations), had built and sold tract homes to purchasers under long-term contracts of sale and had reported their income on the installment basis. At a time when each of the predecessor corporations still had unreported installment income, the shareholders, desirous of obtaining capital gain treatment, sold their shares of stock to new corporate entities, namely Hartford Builders, Inc. (which later sold to Flower Street Investments, Inc.), HAQ Investments, Inc., and Alosta Corporation, (sometimes, for convenience, called the successor corporations or holding companies). The successor holding companies promptly proceeded to liquidate their newly acquired subsidiaries and, thereafter, made a disposition of the remaining installment obligations in a manner more fully described hereafter. The successor corporations thereupon reported their income by applying to these installment obligations a new stepped-up tax basis tied to the price of the stock. The United States seeks to hold the predecessor corporations (and their former shareholders as transferees) for increased tax liabilities on the theory that the predecessor corporations should be taxed with the full amount of the installment obligations not previously taxed. Alternatively, it seeks to hold the successor holding companies (and the former stockholders of the predecessor corporations as alleged transferees of the successor corporations) for increased tax liabilities on the theory that the successor corporations did not acquire a new stepped-up tax basis in the assets which they acquired upon liquidation of their subsidiaries. The individual taxpayer plaintiffs contend that, under the applicable provisions of the Internal Revenue Code of 1954 in force at all times material to the litigation, they are entitled to recover the overpaid taxes. Relying upon Section 332 of the Code, they assert that the predecessor corporations were 80 percent subsidiaries of the successor holding companies when the predecessor corporations were liquidated and when the tract home contract sale installment obligations were distributed to the successor holding companies; and that, therefore, no gain or loss should have been recognized to the successor holding companies. Then turning to Section 453(d) (4) (A) they contend that since no gain or loss should be recognized to the successor holding companies upon such liquidation and distribution, it follows that no gain or loss should be recognized to the predecessor corporations. The Government on the other hand contends that the predecessor corporations, and therefore the individual taxpayers as transferees thereof, were properly taxed because the transactions between the predecessor corporations, the individual taxpayers as shareholders and transferees, and the successor holding companies were sham, and that the successor holding companies were mere funnels or conduits through which the installment obligations owned by the predecessor corporations flowed into the hands of the refinancing agencies — California Federal Savings and Loan Association of Los An-geles, and Mutual Savings and Loan Association of Pasadena — resulting in tax avoidance or tax evasion schemes that provided the form but not the substance of actual stock sales and liquidations which, says the Government, were in truth and in fact mere contrivances to bail out corporate earnings at capital gains rates and were, therefore, within the interdiction of Section 269 of the Revenue Code denying tax allowances in corporate acquisitions made to evade or avoid income tax. Upon this theory, the Government in its counteraction seeks recovery of the full amount of any tax refund that the individual taxpayers may recover in their two actions. Alternatively, the Government seeks to recover taxes from the successor holding companies (as well as the predecessor corporations as transferees of the successor holding companies and the individual taxpayers as transferees of both) on the theory that the successor holding companies did not acquire a new stepped-up tax basis in the assets (including the residential contract sale installment obligations) which were distributed to them in the liquidation of their subsidiary predecessor corporations. The Government argues that Section 384(b) (2) of the Internal Revenue Code does not apply because, again, the taxpayer transactions are all sham, mere conduits or funnels or contrivances setting up the form but not the substance of actual stock sales and liquidations, and constitute tax evasions or avoidances within the meaning of Section 269 of the Code. There are two essential and closely allied factual issues in these cases; once they have been resolved, the application of the pertinent provisions of the Internal Revenue Code seems clear and unquestionable. Those questions are: 1. Did the predecessor corporations intend to, attempt to, or actually, whether directly or indirectly, dispose of their installment obligations (by borrowing the full amount of their equities in the properties and causing the properties to be deeded to the homeowners) ? 2. Did the shareholders of the predecessor corporations make a real, actual genuine and bona fide sale of their shares of stock to the successor corporations (and was disposition of the installment obligations accomplished only by the successor corporations) ? Since these fact questions are closely allied, the record evidence relating to both will be discussed together. Although it is plain that the predecessor corporations could have disposed of their installment obligations by refinancing the residential properties with the savings and loan institutions, thereby incurring an immediate tax on their deferred profits, the record evidence is undisputed that, if this had been the only available choice, they would have refrained from exercising it since not only did they desire to avoid a costly accelerated tax burden which would attend such an immediate realization of income, but there were additional business reasons why the predecessor corporations would otherwise have retained those installment obligations. By retaining the contracts, they would continue to earn added profits because of a spread between the interest collected from the homeowners and the interest paid to the savings and loan institutions, and because of other charges sometimes collected from the homeowners. There is no evidence that the predecessor corporations intended to dispose of their installment obligations in .. taxable transaction. On the contrary, the uncon-tradicted evidence shows, affirmatively, that the predecessor corporations did not intend to make such a disposition. While the shareholders of the predecessor corporations, acting principally through the plaintiff Ray K. Cherry, did make active inquiry of Mr. Neelley of California Federal Savings & Loan Association regarding the possibility of a refinancing of the properties, all of the testimony and all of the pertinent, contemporaneous documentary evidence makes it overwhelmingly clear that such inquiries were being made, not oh behalf of the predecessor corporations or because these corporations were interested in obtaining refinancing, but only because the shareholders were interested in selling their shares of stock, consistent with the tax advice previously received; and because, acting as prudent business people, they wanted to know what a purchaser of their shares of stock could reasonably expect. Where a closely held corporation is involved, there can always be a question whether the activities of the persons who are the shareholders, officers and directors are being conducted on behalf of the corporation and, consequently, are corporate activities; or whether the individuals are acting on their own, personal behalves. The plain teaching of Unit-States v. Cumberland Public Service Co., 338 U.S. 451, 453-455, 70 S.Ct. 280, 94 L.Ed. 251 (1950) is that, even with respect to corporate asset which they intend to receive on a corporate liquidation, the individual shareholders can act on their own, and that their individual activities are not to be ascribed to the corporation and do not subject the corporation, to a taxable transaction. Of course, when a corporation has embarked on a transaction which, when consummated, would result in a taxable event at the corporate level, and the shareholders later attempt to consummate the transaction on their own behalves, rather than on behalf of the corporation, the entire factual picture, reinforced by the obvious attempt to backtrack and to shift taxable entities in mid-action, can lend credence to the conclusion that the corporation is in reality the taxable entity which is acting and to which the taxable transaction should be ascribed. Such was the situation in Commissioner v. Court Holding Company, 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981 (1945) and in Blueberry Land Co., Inc. v. C. I. R., 361 F.2d 93 (5th Cir. 1966), upon which the United States places its overwhelming reliance in the case before us. Here, however, the evidence is overwhelmingly clear that the predecessor corporations never intended to have and actually did not have involvement in the refinancing; it is also clear that the individual taxpayers were acting in their individual capacities, consistently with their intention to sell their shares of stock in the predecessor corporations. It should be stated and Government counsel now admit that the record contains no support for the thesis originally advanced by the Government that California Savings and Loan Association and Mutual Savings and Loan Association had entered into legally binding obligations with the predecessor corporations to refinance the residential properties. There are at least two reasons why this contention fell in the face of the facts developed at the trial and must be rejected. First of all, the witness Neelley made it plain that the so-called moral “commitments” to Ray Cherry regarding the refinancing of the properties were no more than statements of intent and were to be distinguished from written commitments for which a fee is charged and which are intended to be and actually are legally enforceable. These commitments or assurances, moreover, were made to Cherry, in his individual capacity, not to the predecessor corporations nor to Cherry as an officer or director thereof, and were made on the supposition that the increased loans would be applied for and obtained by successor corporate entities which actually purchased the shares of stock in the predecessor corporations. Secondly, the witnesses from Mutual Savings and Loan also testified that the commitment that Mutual made was for such a successor corporation. To be sure, in the then prevailing conditions of the money market, the possibilities were overwhelming that the increased loans would be made to the successor corporations. But the legal risk (however small the practical risk) that the lending institutions would, because of a change in the money market or because of any reason or no reason at all, refuse to follow through on the prior commitment or statement of intent, fell on the successor corporations, as the purchasers of the stock of the predecessor corporations. No matter from what aspect it is approached, the trial record evidence is convincing that the shareholders of the predecessor corporations made a bona fide, actual and genuine sale of their shares of stock to the successor corporations. True, the shareholders of the successor corporations were also the attorneys and tax advisors for the predecessor corporations and the plaintiffs; and, admittedly, the parties were motivated by a desire to minimize the tax burden of the predecessor corporations and to achieve a single, capital gains tax for the plaintiffs as selling shareholders. The circumstances invite close scrutiny; standing alone, these facts might well lead to a strong inference that the stock sales were not bona fide, actual and genuine, but were mere sham transactions or superficial formalities designed to obscure the fact that the successor corporations were acting as mere conduits or agents for the predecessor corporations and their shareholders. But no such inference can legitimately stand in the light of the affirmative, uncontradicted record of the trial. The attorneys and shareholders in the successor corporations, Messrs. Axelrad and Quirk, were thoroughly credible and unimpeachable witnesses and both testified that they were acting, not as attorneys or agents, but as investors interested in making profits. Their testimony was confirmed by the uncontradicted evidence given by Cherry. And the successor corporations, indeed, acted as real, actual, genuine, bona fide and viable entities intent on making profits. Once the successor corporations acquired the stock of the predecessor corporations, the plaintiffs did not attempt to, nor did they in fact, in any way control the actions of the successor corporations or their shareholders. The successor corporations, after acquiring the stock brought about a real, actual, genuine and bona fide liquidation of the predecessor corporations. As the then owner of the properties, they took all the necessary action to obtain the increased financing and to engage in legitimate corporate activities. None of the profits earned by the successor corporations ever inured to the benefit of the shareholders of the predecessor corporations nor did the predecessor corporate shareholders assume or share in any of the risks incurred by the successor corporations. Notwithstanding the voluminous documentary evidence and the extensive testimony of witnesses throughout the ten-day trial, and despite the intensive discovery proceedings which were conducted, the Government was unable to produce any evidence which would support or tend to lend credence to the theory that the transactions were sham, unreal or artificial, or that the successor corporations acted as mere conduits, tools or agents. While there was strong tax motivation throughout, the objective being to secure a capital gains tax to the selling shareholders while avoiding a tax to the predecessor corporations on their deferred installment obligations, and while the successor corporations were intent on obtaining a new tax basis for these installment obligations on the liquidation of their newly acquired subsidiaries, such tax motivation does not, of itself, require the conclusion that the tax consequences are to be determined by what the parties could have done rather than by the course of action which they deliberately chose and actually followed. To the contrary, so long, as the actions of taxpayers are not mere sham, window dressing or disguise and so long as the taxpayers act in a substantive manner, the tax consequences are to be determined by what they did actually do, not by what they could have done. And it matters not that they were fully aware that they chose a course of conduct deliberately designed to minimize their tax burden. United States v. Cumberland Public Service Co., 338 U.S. 454, 455, 70 S.Ct. 280, 282, 94 L.Ed. 251 (1950) . See also: Commissioner v. Brown, 380 U.S. 563, 572, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965); Hanover Bank, Executor v. Commissioner, 369 U.S. 672, 687, 82 S.Ct. 1080, 8 L.Ed.2d 187 (1962) ; Samson Tire & Rubber Corp. v. Rogan, 136 F.2d 345, 347, (9th Cir. 1943); C. I. R. v. South Lake Farms, Inc., 324 F.2d 837, 840 (9th Cir. 1963); Granite Trust Co. v. United States, 238 F.2d 670, 675 (1st Cir. 1956). Any other conclusion would be opposed to the realities of the business world for, faced with the intricacies of the incredibly complex taxing statutes, prudent businessmen do not normally move without first consulting their tax advisors. Thus, in the present situation,- the fact that the predecessor corporations would have incurred a corporate tax on their deferred installment obligations, had they made a disposition of these obligations by refinancing and deeding out the properties, does not mean that they can be taxed in this manner simply because the motivation was to avoid such a tax. This motivation is not of significance, except insofar as it might sometimes, in more dubious circumstances, cast light on what the parties really did do. As was aptly said in Kraft Foods Company v. Commissioner, 232 F.2d 118, 128, (2nd Cir. 1956): “The inquiry is not what the purpose of the taxpayer is, but whether what is claimed to be, is in fact.” In the present cases, where the facts are overwhelmingly clear as to what was done, the relevant provisions of the Internal Revenue Code must be applied to the facts which actually did transpire and the acts which actually were done, tax motivation aside. The only disposition of installment obligations made by the predecessor corporations took place after the individual taxpayer-shareholders had sold their shares of stock therein to the successor corporations and such disposition took place in the course of real, actual, genuine and bona fide liquidations by the then successor parent corporations. The applicable statutory provision is Section 453 (d) (4) (A) of the Internal Revenue Code which, as it read during the taxable years in controversy, provided in pertinent part as follows: “(A) Liquidations to which section 332 applies.— If— (i) an installment obligation is distributed by one corporation to another corporation in the course of a liquidation, and (ii) under section 332 (relating to complete liquidation of subsidiaries) no gain or loss with respect to the receipt of such obligation is recognized in the case of the recipient corporation, then no gain or loss with respect to the distribution of such obligation shall be recognized in the ease of the distributing corporation.” The plain language of the statute requires a holding that the predecessor corporations did not make a taxable disposition of their installment obligations. Nor is there anything in the statute to indicate that an opposite conclusion would be appropriate simply because the predecessor corporations had previously disposed of or had sold all their other properties and owned only installment obligations at the time of their liquidation. A parallel situation was involved in Bijou Park Properties, Inc. v. Commissioner, 47 T.C. No. 19 (decided November 28,1966) CCH Tax Ct. Rptr. 2895 (1966) and the Tax Court there similarly held that on the liquidation by a parent corporation of its newly acquired subsidiary corporation, the subsidiary did not make a taxable disposition of its installment obligations (which, like here, resulted from sales of real estate under long-term contracts of sale) in distributing them to the parent upon liquidation, even though all its other properties were previously sold and even though its only assets consisted of such installment obligations. We agree with the Tax Court in Bijou that the conclusion reached there and in the present cases is dictated by the “scalpel-like precision with which Congress has fashioned the applicable statutory provisions”. Moreover, a recent Amendment to Section 453(d) (4) (A) — Public Law 89-809, 80 Stat. 1539, Section 202(c) and (d), 89th Cong., 2d Sess., approved November 13, 1966 — confirms our conclusion that the liquidations and distributions of installment obligations involved in the actions before the Court here are not taxable. This Amendment, as Bijou points out, provides only prospectively that a distribution of installment obligations in a Section 334(b) (2) liquidation constitutes a taxable disposition by the distributing corporation. The legislative history of this Amendment is most enlightening. It indicates to this Court beyond any doubt that the purpose was “to eliminate the tax avoidance possibility under present law” by providing that in the future, that is, after the effective date of the Amendment and in connection with transactions occurring after November 13, 1966, the then existing tax loophole, which worked and still works to the advantage of taxpayers in the present case before this Court, should be closed. The Amendment provides that, in the future, installment notes transferred to a holding company in liquidation of a subsidiary should be treated as “disposed of” and therefore resulting in gain to the distributing corporation in the same manner as if it had sold the notes, when the holding company receives a stepped-up basis for the notes. This Amendment, P.L. 89-809, Sec. 202 (c) and (d), started out in Congress as H.R. 18230, in language identical to the final enactment. It was accompanied by a Report of the House Ways and Means Committee which contains the following explanation of the proposed Amendment (emphasis ours): “Installment notes. — When one corporation buys more than 80 per cent of the stock of another within 12 months and causes the corporation acquired to be liquidated within 2 years of the last acquisition of stock, the basis of the assets acquired is the amount paid for the stock (properly allocated). In such a case, generally no gain is recognized to the distributing corporation (unless it is a corporation which elected 341(f) treatment to avoid danger of being treated as a collapsible corporation, or unless the sections dealing with the recapture of depreciation apply). “If the property received on a liquidation of the type described above (to which sec. 334(b) (2) applies) consists of installment notes, then the gain which would normally be taxed on the sale or collection of such notes may, in whole or in part, permanently escape income taxation. This would result if the basis of such notes were raised to the amount paid for them by the acquiring corporation even though no gain were recognized to the distributing corporation. “This bill eliminates the tax avoidance possibility under present law by providing that installment notes transferred in a liquidation of the type described above are to be treated as ‘disposed of’ for purposes of the installment sale provision (sec. 453 (d)). Accordingly, gain is to be recognized to the distributing corporation, in the same manner as if it had sold the notes. “This provision is effective with respect to distributions made after the date of enactment.” It will be noted that the House was concerned that under the then existing law, gain which would normally be taxed on the sale or collection of installment notes received in 334(b) (2)-type liquidations was permanently escaping income taxation, and it proposed this bill in order to “eliminate the tax avoidance possibility under present law”. In the Senate, the House Bill H.R. 18230 was tacked onto the so-called Foreign Investors Tax Act of 1966 , accompanied by Senate Report No. 1707 of October 11, 1966, 89th Cong., 2d. Sess., which at pp. 60-61 incorporated, on behalf of the Senate, the deep concern of the House that existing law permitted gain upon installment notes received in 334(b) (2) liquidations to permanently escape income taxation. And it. recommended enactment of the Amendment, stating that: “Existing law may be adequate to deal with certain types of situations” and using this language as a substitute for the House Report’s statement that “this bill eliminates the tax avoidance possible under present law.” The Conference Report No. 2327 of both the House and the Senate, October 19, 1966, 89th Cong., 2d Sess., p. 8, adopts and confirms the Senate Report for description of the changes which the Amendment makes in existing law. From this legislative history it is impossible to conclude other than that Congress was concerned about the fact that existing law prior to November 13, 1966 —the law governing the ease and the actions now before the Court, permitted these transactions we have before us here to result in perfectly legal tax avoidance. The Amendment was passed to eliminate this tax avoidance but it was not made retroactive. It applies only prospectively by the very terms of the Amendment itself, section 202(d) Public Law 89-809. Since Congress has not seen fit to apply it to prior transactions which were resulting in installment obligations escaping taxation in 334(b) (2)-type liquidations, it certainly is not within the province of this Court to do so. We do not do so. In fact, we cannot do so because we are not legislators. And as a result it is perfectly plain that in the case before the Court no taxable disposition of their installment obligations was ever made by the predecessor corporations when they distributed these installment obligations to their successor holding companies upon liquidation. The decision of the Tax Court and the affirming opinion of the Court of Appeals in Blueberry Land Co., Inc. v. C. I. R,. are not opposed to the result here being reached or to the result in Bijou Park Properties, Inc. In Blueberry, because the corporation desired to dispose of its installment obligations and had taken appropriate corporate action to effectuate that purpose, a last minute and hastily devised effort to disguise the transaction by a purported stock sale to a transitory corporation was held not to alter the true nature of what actually took place. The Blueberry situation, as already has been noted, was essentially the same as was involved in Commissioner v. Court Holding Company . Here, however, in the case now before us, just as in Bijou, there were bona fide, actual, genuine and real sales of stock followed by bona fide, actual, genuine and real liquidations. The taxes which are the subject of the refund suits here were exacted from the individual stockholders of the predecessor corporations on the ground that the taxpayers were liable as transferees of the obligations of these predecessor corporations. The theory of the Government, relative to transferee liability, was that the sales of stock were sham transactions, designed to disguise the true nature of what transpired. But, since the trial record of the evidence fails to support such a theory, there is no basis on which transferee liability can be imposed, regardless of the correctness of the conclusion in Bijou and here that Code Section 453(d) (4) (A) (prior to the Amendment) did not equate a liquidation of a subsidiary with a taxable disposition of its installment obligations. Thus, if, somehow, Section 453(d) (4) (A) could be read differently than what its plain language states, so that the predecessor corporations could properly be held to have made a taxable disposition of their installment obligations either when they transferred their assets to the successor corporations or when the successor corporations obtained the increased financing, the taxable event would have taken place after the plaintiff s-shareholders had actually sold their' shares to the successor corporations.. In such circumstances, having sold their shares of stock and having received no assets from the predecessor corporations, they cannot be held liable, as transferees, for the tax liabilities of the predecessor corporations. See: Boss v. United States, 290 F. 167 (9th Cir. 1923); W. S. Dudley v. Commissioner, 15 B.T.A. 570 (1929); J. T. S. Brown’s Son Company v. Commissioner, 10 T.C. 840 (1948); Gaines v. Commissioner, par. 53,157 P-H Memo. T.C. (1953); Lester L. Robison v. Commissioner, 22 B.T.A. 395 (1931); Motter v. Patterson, 68 F.2d 252 (10th Cir. 1933); Commissioner v. Southern Bell Telephone & Telegraph Co., 34 B.T.A. 540 (1936) aff’d, 102 F.2d 397 (6th Cir. 1939). In reporting their taxable income, the successor corporations determined the gain realized on the disposition of the installment obligations (which they acquired on the liquidations of the predecessor corporations — the then wholly owned subsidiaries of the successor corporations) by allocating an aliquot portion of the purchase price paid for the stock to arrive at a stepped-up tax basis for those installment obligations. The Government, however, in the counteraction instituted by it, seeks to collect income tax deficiencies from the successor corporations on the theory that they were, on the contrary, required to use the same basis which the predecessor corporations had; and further seeks to hold the shareholders of the predecessor corporations as transferees of the increased tax liabilities being asserted against the successor corporations. Code Section 334(b) (2) of the Internal Revenue Code provides in pertinent part as follows: “(2) Exception. — If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of section 332(b)), and if— (A) the distribution is pursuant to a plan of liquidation adopted— (i) on or after June 22, 1954, and (ii) not more than 2 years after the date of the transaction described in subparagraph (B) * * *; and (B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, * * * was acquired by the distributee by purchase * * * during a period of not more than 12 months, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. * * * ” That section is, in part, a codification of a judicially formulated rule which is exemplified by the decision in Kimbell-Dia-mond Milling Company v. Commissioner, 14 T.C. 74, (1950) aff’d 187 F.2d 718 (5th Cir. 1951), cert. den. 342 U.S. 827, 72 S.Ct. 50, 96 L.Ed. 626 (1951). The precise statutory requirements of Section 334(b) (2) have been met by the successor corporations in every respect, and they are required to determine the basis of the assets acquired from their subsidiary corporations in accordance with the provisions of that section upon the adjusted or stepped-up basis. It is true, as the Government points out, that the deferred profit on the installment obligations, not previously taxed to the predecessor corporations, will, in part, escape taxation at the corporate level once the successor, parent corporations acquire a new basis determined by reference to the purchase price paid for the shares of stock acquired. But that is the inevitable result of the rule originally judicially fashioned by the courts and legislatively adopted by Congress in Section 334(b) (2) which treats the parent corporations as though they had purchased assets directly. In every situation where assets have appreciated in value or where potential items of income have not yet been subject to taxation under the provisions of the taxing statute, such items of potential gain or income will not be taxed once the successor corporation acquires a new tax basis. But of course, the converse is also true, so that potential items of loss will confer no tax benefit when Code Section 334(b) (2) comes into play. Such was the situation in Kimbell-Diamond, where it was the Government which urged the adoption of this rule. The identical rule must be applied uniformly, regardless of how the chips fall. Nor is there anything in the statute which requires a differentiation between installment obligations and other corporate assets, tangible or intangible in nature. Indeed, in fashioning a solution to the “tax avoidance possibility under present law”, the solution recently adopted by Congress in Public Law 89-809 which we have discussed at length, is to require that in the future the subsidiary be taxed with income on its installment obligations at the time of its liquidation; Congress did not seek a legislative solution by refusing a new basis to the acquiring corporation. Yet, the Government seeks such a solution here — a solution which would fly in the teeth of the clear and unambiguous language of Code Section 334(b) (2). The Government contends, however, that the provisions of Code Section 269 can be applied to deny a new basis to the successor corporations. That section provides, in pertinent part, as follows: “(a) In general. — If— (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the trans-feror corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise; enjoy, then the Secretary or his delegate may disallow such deduction, credit or other allowance. * * * ” That section can have no application here for three distinct reasons. Section 269 does not come into play unless control of a corporation has been acquired with the “principal purpose” of “evasion or avoidance” of Federal income tax. The evidence in the trial record here establishes beyond all doubt that the principal purpose for the acquisition of the predecessor corporations was to permit the successor corporations to make a profit and to engage in regular business activities. It was not by any stretch of the imagination pure tax evasion or avoidance. Further, under Section 269 such evasion or avoidance must be by securing the benefit of a “deduction, credit or other allowance” which would not otherwise have been enjoyed. Under Code Section 336, no gain or loss is to be “recognized” to a corporation when it distributes property to its shareholders in liquidation and under Section 453(d) (4) (A) no gain or loss is to be “recognized” on the distributions of installment obligations in the liquidation of subsidiary corporations. The term “recognized” like the term “realized” is a technical term used in many sections of the Internal Revenue Code, and has been used by Congress as a word of precise meaning. See 3 Mer-tens, Law of Federal Income Taxation (Zimet & Weiss rev. ed. 1965), Chapter 20, pp. 1-837. Likewise, the terms “deduction”, “credit” and “allowance”, as used in Section 269, are technical terms, each having its own precise meaning in the Internal Revenue Code. The point is that statutory provisions dealing with non-recognition of gain, as in Section 336 and 453(d) (4) (A), are not encompassed or rightfully described by the terms “deduction”, “credit” or “allowance” and, quite plainly, Section 269 does not deal with nonrecognition concepts. See Nutt v. Commissioner, 39 T.C. 231,250, (1962), rev’d on other issue, Nutt v. C. I. R., 351 F.2d 452 (9th Cir. 1965). Finally, Section 269 deals only with deductions, credits or allowances “which such person or corporation would not otherwise enjoy”. But, no matter how broadly the terms of Section 269 are construed, there is no benefit unless the acquiring corporations obtained a new basis in the assets of the predecessor corporations (including its installment obligations) under the Kimbell-Diwmond rule of Code Section 334(b) (2). Since the situation with respect to which Congress was legislating was one where a purchasing corporation would be treated as having bought assets, even though it, in fact, bought stock, and since such acquisitions normally are made to achieve the very tax result which Congress intended, it cannot be said that here in the case before us, any benefits have been secured which the parties “would not otherwise enjoy”. See Cromwell Corp. v. Commissioner, 43 T.C. 313, 317-322 (1964). Since no grounds exist for holding that there is a deficiency in the taxable income of the successor corporations, the question of transferee liability becomes academic. However, even if the successor corporations were not entitled to use a new basis for the installment obligations under Code Section 334(b) (2) and even if there were deficiencies in the income tax liabilities of the successor corporations, there can be no transferee liability on the part of the shareholders of the predecessor corporations since they had no interest in and never received any of the assets of the successor corporations. While they received the purchase price for their shares of stock from the successor corporations, which was set at 90 percent of the value of the predecessor corporations’ assets, there is no reason to believe that this price, determined as it was by arms’ length bargain, was not a full and adequate consideration. See Commissioner v. Brown, 380 U.S. 563, 85 S.Ct. 1162, 14 L.Ed.2d 75 (1965), supra. Consequently, the plaintiffs are not transferees of the successor corporations. Based upon the foregoing, which shall and does constitute part of the findings of fact and conclusions of law required by Rule 52, Federal Rules of Civil Procedure, upon the authorities therein set forth, and upon the evidence in the trial record herein, the Court now makes its formal Findings of Fact and Conclusions of Law. FINDINGS OF FACT 1. These actions were consolidated for trial. The actions in Docket Nos. 64-377-AAH Civil and 64-378-AAH Civil are for the recovery of corporate income taxes which were assessed against and collected from the individual plaintiffs as alleged transferees of certain corporations. The plaintiffs in Docket No. 64-377-AAH Civil are Ray K. Cherry (hereinafter “Cherry”) an individual who resides at 1494 Waverly Road, San Marino, California, and John H. Hadley (hereinafter “Hadley”), an individual who resides at 299 North Saltair Avenue, Los Angeles. These individuals are also plaintiffs in Docket No. 64-378-AAH Civil, along with two other individual plaintiffs who are A. G. Harrold (hereinafter “Harrold”), an individual who resides at 4920 Dickens Street, North Hollywood, California, and Max B. Elliott (hereinafter “Elliott”), an individual who resides at 1442 Belfast Drive, Los Angeles, California. The counter action in Docket No. 66-1163-AAH Civil was instituted by the United States of America in order to establish alleged income tax deficiencies against each of the corporate defendants and to establish transferee liabilities against each of the individual defendants named therein on various alternative bases. 2. In Docket Nos. 64-377-AAH Civil and 64-378-AAH Civil, jurisdiction is conferred upon this Court by Title 28, U.S.Code, Sections 1340 and 1346(a) (1), in that these are actions to recover Federal income taxes after claims for refund were duly filed and rejected. In Docket No. 66-1163-AAH Civil, jurisdiction is conferred by Title 28, U.S.Code, Sections 1340 and 1345, and by Sections 7401 and 7402 of the Internal Revenue Code of 1954, 26 U.S.Code, Sections 7401 and 7402. 3. Each of the individual plaintiffs in Docket Nos. 64-377-AAH Civií and 64-378-AAH Civil, who are also individual defendants in Docket No. 66-1163-AAH Civil, at all times material hereto was and is an individual, a citizen of the United States, and a resident of the County of Los Angeles, State of California. Each of the corporate defendants in Docket No. 66-1163-AAH Civil is a California corporation. 4. On or about May 28,1963, the Commissioner of Internal Revenue determined a deficiency in corporate Federal income taxes of Loraine Park Homes (hereinafter “Loraine”), a California corporation, in the amount of $38,798.24 for the taxable period February 1, 1957 to October 15,1957, it being determined by him that Loraine had additional, unreported taxable income in the amount of $80,347.55. Such determination was erroneous and illegal in all respects. 5. On or about May 28, 1963, the Commissioner of Internal Revenue determined that Cherry and Hadley each was liable, as transferee, for the full deficiency in Federal income taxes determined against Loraine for the period February 1, 1957 to October 15, 1957, in the amount of $38,798.24, together with interest thereon as provided by law. Such determination was erroneous and illegal in all respects. 6. On or about August 27, 1963, Cherry and Hadley each paid to the District Director of Internal Revenue, at Los Angeles, California, the sum of $19,399.-12, with instructions that such amount was to be credited to the principal amount of taxes (and not to interest) of the transferee liability assessed against Cherry and Hadley for the corporate income taxes referred to in paragraph 4 above, of Loraine. 7. The full principal amount of the deficiency in corporate income taxes determined against Loraine has been assessed and fully paid, except for the interest assessed as part of such deficiency. 8. On or about October 21,1963, Cherry and Hadley each filed with the District Director of Internal Revenue, Los An-geles, California, a claim for refund in the amount of $19,399.12, which claims were erroneously rejected by the Commissioner of Internal Revenue on January 23, 1964, and neither the amount of $19,-399.12, nor any portion thereof has been refunded to either plaintiff. 9. Loraine was organized as a California corporation in October of 1955. All of its issued and outstanding shares of stock (100 shares) were owned equally by Cherry and Hadley. Loraine was engaged in the business of building and selling homes at Glendora, California. It had originally constructed approximately 180 to 190 homes, which sold at prices ranging from $8,000.00 to $9,000.00. Such homes were sold to purchasers under contract’s of sale, the purchaser making a small down payment and the balance payable in monthly installments. Loraine reported its income from such sales as ordinary income in its Federal income tax returns on the installment basis. 10. During the latter part of 1956 and early in 1957, Hadley and Cherry had received advice from Irving I. Axelrad, tax counsel, and from Akeley P. Quirk, general counsel, to the effect that, generally, on a sale of their shares of stock in a corporation they would realize capital gain. They were also advised that if the purchaser of the stock were a corporation, which thereafter liquidated its wholly owned subsidiary, the subsidiary would realize no taxable income on the distribution in liquidation of any of its assets, including installment obligations, to its parent corporation; that the corporation would acquire a new basis for the assets received from the dissolved subsidiary corporation, including installment obligations ; and that on any disposition of such installment obligations by the parent corporation, it would realize gain, as ordinary income, to the extent of the difference between its new basis and the amount realized on such disposition. 11. Acting on the advice referred to in paragraph 10, Cherry had various conversations with Arthur E. Neelley (Senior Vice-President of California Federal Savings and Loan Association in charge of the Mortgage Loan Department) regarding the possibility that California Federal would increase the loan balances on the properties still owned by Loraine (which were then approximately 46 in number) to a corporate entity in the event that he and Hadley sold their shares of stock in Loraine to such a corporation. He made it plain to Neelley that he and Hadley intended to sell their shares of stock, if they could, and that Loraine was not attempting to obtain an increase in its own loans. California Federal is one of the largest savings and loan associations and it (including a predecessor organization, known as Standard Federal Savings and Loan) had financed the original construction of the homes built by Loraine and other corporations the stock of which was owned by Cherry and Hadley. Neelley made a so-called “oral commitment”, or a statement of intent, to the effect that California Federal would be interested in making such loans subject to the elimination of any title problems or credit risks on the part of any home purchaser whose credit rating might be in question. California Federal by virtue of such oral commitment or statement of intent, did not incur any valid subsisting legal obligation to make any loans. Since California Federal was collecting a lower rate of interest from Loraine than Loraine was collecting from its home purchasers and since California Federal, on such refinancing, would obtain a new higher interest rate (without ipcreasing the interest rate paid by the home buyer) and since California Federal would make various charges, sometimes known as points, for making the refinancing, and since this would diversify the risk of California Federal, Neelley indicated that California Federal would be interested in making such loans. California Federal looked primarily to the security of the property. In discussing the matter with Neelley, Cherry was acting on his own behalf and on behalf of Hadley as stockholders, and not as an officer or director of Loraine, nor on behalf of Loraine. 12. On or about September 24, 1957, Loraine had cash on hand of $84,234.02, of which $82,134.02 was obtained on said date in the following manner: (a) Beverly Place, Inc., a California corporation, whose stock was owned in equal proportions by Cherry and Had-ley, purchased certain lots from Loraine for the sum of $40,000.00. (b) Hadley-Cherry, Inc., a California corporation, whose stock was owned in equal proportions by Cherry and Hadley, paid off a note payable to Loraine in the amount of $17,500.00. (c) Cherry and Hadley each paid off a note payable to Loraine, together with interest at 5 percent per annum, the total payment of each being $12,-317.01, or a total of $24,634.02. 13. On or about September 24, 1957, Cherry and Hadley sold and transferred to Hartford Builders, Inc., a California corporation (hereinafter “Hartford”), all of their shares of stock of Loraine for a purchase price of $91,500.00 and Hadley and Cherry warranted that Loraine had net assets of $100,486.96, including an equity of $21,137.94 in the remaining residential properties sold under contracts of sale. The sale and transfer of the Loraine stock to Hartford was a real, actual, genuine and bona fide transaction reflecting the results of an arms’ length bargain, and the purchase price for such stock was paid for in full on September 24, 1957. Thereupon, Hadley and Cherry resigned as officers and directors and no longer had any interest in or control over the affairs and business of Loraine. 14. Hartford was, in 1957, a wholly-owned subsidiary of Gunther & Shirley Company, a Nebraska corporation with headquarters in California. Northland Manor Company, a corporation, was a partially owned subsidiary of Gunther & Shirley Company, which owned 66% percent of its stock, the remaining 33% percent of the stock of Northland Manor Company being owned by B. C. Deane, an individual. J. P. Shirley, Jr. was one of the principal stockholders of Gunther & Shirley Company; the other principal shareholders of that corporation were members of Shirley’s family. Some or all of these entities were competitors of Cherry and Hadley and their entities. 15. Flower Street Investments, Inc. (hereinafter “Flower Street”) was organized as a California corporation on August 28, 1957. At a special meeting of Flower Street’s Board of Directors held on August 29, 1957, A. P. Quirk subscribed for 50 shares of its no par value common stock for the price of $500.00 and Irving I. Axelrad and William Hinckle (hereinafter “Hinckle”) subscribed for 50 shares of its no par value common stock for the price of $500.00. Axelrad and Hinckle were acting as trustees for their then law partners, as well as for themselves in their individual capacities. Such shares of stock were paid for on October 14, 1957, and constituted all the issued and outstanding shares of Flower Street. Said sum of $1,000.00 represented the total assets of Flower Street on October 14, 1957. Except for the purchase of the stock of Loraine from Hartford, referred to in paragraph 16, Flower Street did no business prior to October 14, 1957. Flower Street was a regularly formed, validly existing, real, actual, genuine, bona fide and viable corporate entity whose principal purpose was profit making activity, primarily in the field of real estate investments. 16. Pursuant to a resolution of its Board of Directors on October 14, 1957, Flower Street purchased from Hartford all of the stock of Loraine for a purchase price of $91,500.00; Flower Street gave a demand note for $91,500.00 to Hartford which note was paid by Flower Street, $84,000.00 on October 17, 1957 and $7,500.00 on November 5, 1957. Hartford made the sale to Flower Street because, after acquiring the stock of Loraine, it decided that it preferred not to retain its investment. The sale from Hartford to Flower Street of the stock of Loraine was a real, actual, genuine and bona fide transaction reflecting the results of an arms’ length bargain and, thereafter, Hartford had no interest in or control over the affairs and business of Loraine. Cherry and Hadley extended the same guaranty regarding the net worth of Loraine to Flower Street that they originally had to Hartford. In acquiring the stock of Loraine, Flower Street did not have, as its principal purpose, the evasion or avoidance of Federal income taxes. 17. On October 14, 1957, Flower Street elected to wind up the affairs of Loraine and to voluntarily dissolve it. After complying with all requirements of California law, a certificate of election by Loraine to wind up and dissolve was executed on October 14, 1957 and filed with the Secretary of State of California on October 17, 1957. Pursuant to its plan of liquidation, Loraine transferred to Flower Street, in complete cancellation and redemption of its shares of stock, all of its assets, subject to liabilities. Such assets included title to 46 residential properties, previously sold under contracts of sale and cash in the amount of $88,269.34. At the time of its liquidation, Loraine had deferred and untaxed income on its installment obligations derived from the sale of houses, in the amount of $80,347.55. 18. Prior to the purchase of the Loraine stock from Hartford, Quirk had made inquiries from Neelley concerning the possibility of refinancing the properties owned by Loraine and the indication was that, subject to title and credit risk checks, he would recommend an increase in loans. After the liquidation of Loraine, Flower Street made due application for an increase in loans on each individual property in an amount equal to the unpaid contract balance owing from the homeowners. Appraisals were made by California Federal and such loans were approved by its Loan Committee. As a consequence, on October 31, 1957, an increased loan was made by California Federal to Flower Street and the proceeds of such loan in the amount of $346,427.64 were used by Flower Street to discharge existing indebtedness to California Federal in the amount of $324,863.20, to which the properties were subject, to pay interest and various loan charges and expenses, and California Federal’s check dated October 31, 1957 in the amount of $15,818.69, representing the balance of the loan proceeds was delivered to Flower Street. Contemporaneously, Flower Street executed first deeds of trust, with California Federal as the beneficiary, as to each of the individual properties, to secure an indebtedness on each separate property in an amount equal to the then unpaid purchase price owing from each individual purchaser to Flower Street. Flower Street then delivered grant deeds to each of the contract purchasers of each of the properties who, thereafter, held legal title to the property, subject to the first deeds of trust with California Federal as beneficiary, as described above. Each purchaser was advised to make future payments of principal and interest to California Federal. All of the activities of Flower Street, its officers, directors or stockholders were independently undertaken and were not controlled by nor were they done in any representative capacity for Cherry, Hadley or Loraine. 19. Flower Street investigated various real estate properties with a view to the making of investments. On February 7, 1958, Flower Street loaned to British American Pulp & Paper Company the sum of $8,000.00 at 8 percent interest per annum, which was repaid on November 7, 1958. On February 12, 1959, Flower Street purchased 500 shares of the stock of Bandini Petroleum Co., the stock of which was traded on the Pacific Coast Stock Exchange. The price paid by Flower Street, including costs and commissions, was $2,439.00. 20. Flower Street was voluntarily dissolved, and distributed all of its assets, including 500 shares of the capital stock of Bandini Petroleum Co., to its shareholders in cancellation and redemption of their shares of stock. A certificate of election by Flower Street to wind up and dissolve was executed on May 28, 1959 and was filed in the Office of the Secretary of State of California on June 19, 1959. 21. Flower Street correctly reported its taxable income for the period ending August 31, 1958, by allocating the purchase price paid for the shares of stock of Loraine to its tax basis for the properties received on the liquidation of Loraine. It correctly reported ordinary income of $5,572.97 as being realized on the “transfer of title to properties subject to liabilities”. On or about May 28, 1963, a delegate of the Secretary of the Treasury determined that there was a deficiency in Federal corporate income taxes of Flower Street in the amount of $35,192.92 for the taxable year ending August 31, 1958, it having been determined that Flower Street had additional, unreported taxable income in the amount of $74,774.58, and notice of said deficiency determination was sent to Flower Street by certified mail, pursuant to the provisions of Section 6212 of the Internal Revenue Code of 1954. Such determinations were illegal and erroneous. 22. Flower Street at no time filed a petition with the Tax Court of the United States for a redetermination of the said deficiency. On or about October 18, 1963 the Internal Revenue Service pursuant to the provisions of Section 6213(c) of the Internal Revenue Code of 1954 duly assessed Flower Street an audit deficiency in the amount of $35,192.92 in tax and $10,402.86 in interest, or an aggregate of $45,595.78 with respect to its taxable year ending August 31, 1958. Such assessment, no part of which was ever paid by Flower Street, was illegal and erroneous. 23. On or about May 28, 1963, the Commissioner of Internal Revenue determined a deficiency in corporate Federal income taxes of Ben Lomond Homes (hereinafter “Ben Lomond”), a California corporation, in the amount of $64,608.79 for the period July 1, 1959 to August 17, 1959, it being determined by him that Ben Lomond had additional, • unreported taxable income in the amount of $128,554.88. Such determination was erroneous and illegal in all respects. 24. On or about May 28, 1963, the Commissioner of Internal Revenue determined that Cherry and Hadley each was liable, as transferee, for the full deficiency in Federal income taxes determined against Ben Lomond for the period July 1, 1959 to August 17, 1959, in the amount of $64,608.79, together with interest thereon as provided by law. Such determination was erroneous and illegal in all respects. 25. On or about August 27, 1963, Cherry and Hadley each paid to the District Director of Internal Revenue at Los Angeles, California, the sum of $32,304.39, with instructions that such amount be credited to the principal amount of taxes (and not to interest) of the transferee liability assessed against Cherry and Hadley f