Rev. Rul. 55-15

Advice has been requested whether a sale by the sole stockholder of the stock of M Corporation to N Corporation, also wholly owned by him, shall be treated as a bona fide sale realizing long-term capital gain or a distribution taxable as an ordinary dividend.

M Corporation was engaged in the business of owning and renting terminal buildings and transportation equipment. N Corporation was a motor freight common carrier. Most of the transportation terminal buildings and all of the transportation equipment owned by M Corporation were rented to N Corporation. Both corporations had substantial accumulated earnings and profits as indicated by their balance sheets. Both M Corporation and N Corporation were wholly owned by the same shareholder. In order to set up the business of N Corporation as an integrated operation thus eliminating administrative expenses and simplifying the dual operation, the sole shareholder sold his stock of M Corporation to N Corporation. The fair market value of the assets of M Corporation was determined by an independent appraisal. Upon consummation of the plan, the initial payment in the first year did not exceed 30 percent of the approved selling price, and the remaining balance was to be paid in annual installments.

Section 115 of the Internal Revenue Code of 1939 relating to distributions by corporations provides in part:

(a) DEFINITION OF DIVIDEND.--The term "dividend" * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year * * *.

In the instant case it is evident that there is no economic reality to the sale insofar as any relinquishment of interest by the sole shareholder in M Corporation is concerned. The shareholder received a cash distribution from N Corporation and, through the ownership of the stock of that corporation, he still retains effective control of the M Corporation, the stock interest which the shareholder was purporting to sell. Although it is a well settled principle that the taxpayer has the legal right to minimize his taxes by means which the law permits, the true nature of the transaction is not to be disguised by the mere formalism employed. Tax liabilities are measured by the reality of the transaction, not the mere form employed in bringing it about. See Evelyn F. Gregory v. Helvering, 293 U. S. 465, Ct. D. 911, C. B. XIV-1, 193 (1935), and Commissioner v. Court Holding Co., 327 U. S. 331, Ct. D. 1636, C. B. 1945, 58.

Accordingly, it is held that the sale by the sole shareholder of his stock in M Corporation to another corporation wholly owned by him resulted in the distribution of a taxable dividend within the purview of section 115(a) of the Internal Revenue Code.