STOCK ACQUISITION FOLLOWED BY IMMEDIATE MERGER WAS 'A' REORG.

                     UNITED STATES COURT OF CLAIMS

OPINION OF COMMISSIONER

Bernhardt, Commissioner: This is an action to recover Federal income taxes paid by petitioner for the fiscal year ended June 30, 1960. The issues involve the proper characterization for tax purposes of the transaction in question, and the tax treatment of the resulting gain. The facts detailed in the accompanying report, condensed here, sustain the conclusion that the petitioner is entitled to recover.

Petitioner, King Enterprises, Inc., is a Tennessee corporation presently engaged in the business, inter alia, of holding and managing various investments. Prior to October 30, 1961, petitioner's business, then styled Fleetwood Coffee Company, was the sale of roasted coffee. It was one of 11 shareholders in Tenco, Inc., a corporation organized in 1951 to supply its shareholders with a reliable source of instant coffee for them to market under their own brand names. Tenco was financially successful over the years, and by 1959 had become the second largest producer of soluble coffee in the United States. Despite its financial success there was stockholder discontent.

Minute Maid Corporation had become by 1958 one of the nation's principal producers of frozen concentrated citrus juices. Because of financial reverses in 1957 Minute Maid decided to acquire other businesses in order to stabilize its income. Between January and July 29, 1959, Minute Maid submitted and the Tenco directors rejected three separate proposals for acquisition of Tenco stock. A fourth proposal was approved by the respective boards on August 25, 1959, and on September 3, 1959, petitioner and other Tenco shareholders signed an agreement with Minute Maid entitled "Purchase and Sale Agreement".

Pursuant to the Agreement providing for the sale of their Tenco stock to Minute Maid, the Tenco shareholders received a total consideration consisting of $ 3,000,000 in cash, $ 2,550,000 in promissory notes, ¹ and 311,996 shares of Minute Maid stock valued at $ 5,771,926. Petitioner's share of the total consideration consisted of $ 281,564.25 in cash, $ 239,329.40 in promissory notes, and 29,282 shares of Minute Maid stock valued at $ 541,717. The Minute Maid stock received by Tenco stockholders represented 15.62 percent of the total outstanding Minute Maid shares, and constituted in excess of 50 percent of the total consideration received.

On December 10, 1959, the Minute Maid directors approved the November 24th recommendation of its general counsel to merge the company's four subsidiaries, including Tenco, into the parent company, and authorized that the merger be submitted to its stockholders for approval at a meeting scheduled for February 1960. Minute Maid's annual report to stockholders announced the merger plan about December 3, 1959. On January 5, 1960, Minute Maid requested a ruling from the Commissioner of Internal Revenue whether in the event of the proposed Tenco merger the basis of Tenco assets in Minute Maid's hands would be determined under section 334(b) (2) of the Internal Revenue Code of 1954. This was approved by the Commissioner by ruling of February 25, 1960 that "Under the provisions of section 334(b) (2) that basis of the property received by Minute Maid upon the complete liquidation of Tenco will be determined by reference to the adjusted basis of the Tenco stock in the hands of Minute Maid." On April 30 and May 2, 1960, in accordance with the applicable state laws, Tenco and certain other subsidiaries were merged into Minute Maid.

On its income tax return for the fiscal year ended June 30, 1960, petitioner reported the cash and notes received as dividend income, subject to the 85 percent intercorporate dividends received deduction. The value of the Minute Maid stock received by petitioner was not reported, it being petitioner's position that such stock was received in connection with a nontaxable corporate reorganization. The District Director of Internal Revenue assessed a deficiency on the ground that the gain portion of the total consideration received (cash, notes, and Minute Maid stock) constituted taxable capital gain from the sale of a capital asset. Petitioner paid the deficiency, then sued here.

Petitioner contends that the transfer by the Tenco stockholders of their Tenco stock to Minute Maid in exchange for Minute Maid stock, cash and notes, followed by the merger of Tenco into Minute Maid, were steps in a unified transaction qualifying as a reorganization under section 368(a) (1) (A) of the 1954 Code. Consequently, petitioner continues, the Minute Maid stock was received by it pursuant to the plan of reorganization and is nontaxable as such, while the cash and notes received constitute a dividend distribution to which the 85 percent intercorporate dividends received deduction is applicable. The Government asserts that the transfer of Tenco stock to Minute Maid was an independent sales transaction; therefore, the entire gain realized by petitioner on the payment to it of cash, notes and Minute Maid stock is taxable as gain from the sale of a capital asset.

I

The Reorganization Issue

The threshold issue is whether the transfer of Tenco stock to Minute Maid is to be treated for tax purposes as an independent transaction of sale, or as a transitory step in a transaction qualifying as a corporate reorganization. Significant tax consequences turn on which characterization is determined to be proper.

The general rule is that when property is sold or otherwise disposed of, any gain realized must also be recognized, absent an appropriate nonrecognition provision in the Internal Revenue Code. ² One such nonrecognition provision, section 354(a) (1), ³ provides in pertinent part:

     No gain or loss shall be recognized if stock or securities in a

     If --

It is not disputed that there was a Type A reorganization in April 1960 when Tenco and Minute Maid were merged in accordance with state law. Nor does the Government dispute that Minute Maid continued the business of Tenco following the merger, or that the former Tenco shareholders had a continuity of interest in the enterprise by virtue of their ownership of stock in Minute Maid received in the exchange. The disagreement centers on whether the initial exchange of stock was a step in a unified transaction pursuant to a "plan of reorganization".

The underlying theory of the petitioner's claim is that the tax consequences of business transactions are properly determined by their substance and not by the form in which they are cast. Thus petitioner views the substance of the transaction under review to be an acquisition by Minute Maid of Tenco's assets in exchange for transferring Minute Maid stock, cash and notes to Tenco's stockholders. SeeRev. Rul. 67-274, 1967-2 C.B. 141; Commissioner v. Dana, 103 F. 2d 359 (3d Cir. 1939); George Whittell & Co., 34 B.T.A. 1070 (1936). The value of the Minute Maid stock received, which exceeded 50 percent of the total consideration, constituted a sufficient continuity of interest to support a Type A reorganization. ⁵ Petitioner concludes, therefore, that the net result of the entire transaction is a reorganization, not to be altered by splitting the entire transaction into its component transitory steps. See Berner v. United States, 151 Ct. Cl. 128, 282 F. 2d 720 (1960); Buhl v. Kavanagh, 118 F.2d 315, 320 (6th Cir. 1941); Helvering v. Alabama Asphaltic Limestone, 315 U.S. 179 (1942). Petitioner's conclusion is justified in fact and in law.

The problem of deciding whether to accord the separate steps of a complex transaction independent significance, or to treat them as related steps in a unified transaction, is a recurring problem in the field of tax law. ⁶ The principle that even extended business transactions have determinate limits for tax purposes is based on a strong preference for "closed transactions" upon which to impose tax consequences. This preference is tempered, however, with respect for the integrity of an entire transaction. Accordingly, the essence of the step transaction doctrine is that an "integrated transaction must not be broken into independent steps or, conversely, that the separate steps must be taken together in attaching tax consequences". Bittker and Eustice, Federal Income Taxation of Corporations and Shareholders, p. 18 (1966); see also, Buhl v. Kavanagh, supra. The mere recitation of the doctrine, however, does not clarify the necessary relationship between the steps requisite to characterization as an integrated transaction.

Analysis of the reported cases and the diverse business transactions they encompass reveals that there is no universal test applicable to step transaction situations. See Anheuser-Busch, Inc., v. Helvering, 40 B.T.A. 1100 (1939), aff'd, 115 F. 2d 662 (8th Cir. 1940), cert. denied, 312 U.S. 699 (1941); American Bantam Car Co. v. Commissioner, 11 T.C. 397 (1948), aff'd, 177 F. 2d 513 (3d Cir. 1949); cert. denied, 339 U.S. 920 (1950); South Bay Corp. v. Commissioner, 345 F. 2d 698 (2d Cir. 1965); Commissioner v. Gordon, 391 U.S. 83 (1968). It has been persuasively suggested that "the aphorisms about 'closely related steps' and 'integrated transactions' may have different meanings in different contexts, and that there may be not one rule, but several, depending on the substantive provision of the Code to which they are being applied". Mintz and Plumb, Step Transactions, pp. 247, 252-253 (1954).

In their attempt to define the criteria upon which application of step transaction principles depend, the courts have enunciated two basic tests. The "interdependence test" requires an inquiry as to "whether on a reasonable interpretation of objective facts the steps were so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series". Paul and Zimet, Step Transactions, Selected Studies in Federal Taxation (2d Series, 1938), pp. 200, 254. See also, American Bantam Car Co. v. Commissioner, supra; ACF-Brill Motors Co. v. Commissioner, 14 T.C. 263 (1950), aff'd, 189 F. 2d 704 (3d Cir. 1951); American Wire Fabrics Corp., 16 T.C. 607 (1951). The "end result" test, on the other hand, establishes a standard whereby:

     * * * purportedly separate transactions will be amalgamated into

In support of its position that the step transaction doctrine is inapplicable to the facts of this case the Government correctly points out that there was no binding commitment for the merger of Tenco to follow the acquisition of its stock. Defendant erroneously concludes, however, that the absence of such a commitment here renders the step transaction doctrine inapplicable. The binding commitment requirement, relied upon by the Government, was enunciated by the Supreme Court in Commissioner v. Gordon, supra, at 96, wherein the Court said "if one transaction is to be characterized as a 'first step' there must be a binding commitment to take the later steps". Analysis of the statement in its proper context, however, dispels its application to the case before us. In Gordon, Pacific transferred certain of its assets to a new company, Northwest, in exchange for all of the latter's common stock, and debt paper. In 1961 Pacific distributed to its shareholders rights to purchase about 57 percent of Northwest's common stock at $ 16 per share, a price below its market value. Pacific notified its stockholders that "[i]t is expected that within about three years * * * the Company by one or more offerings will offer for sale the balance of such stock * * *." 391 U.S., at 97. In 1963 the remaining Northwest stock was offered to Pacific stockholders through distributed rights. Taxpayers were minority stockholders of Pacific who received rights in the 1961 distribution. Taxpayers sold four rights and exercised the balance, but they reported no income for the year 1961 from these transactions.

The primary issue in Gordon was whether the 1961 distribution was part of a Type D reorganization. To qualify as a D reorganization, Pacific must have distributed all or an amount constituting control (80 percent) of the Northwest stock. Sec. 355(a) (1) (D). In disposing of taxpayers' contention that the 1963 distribution (43 percent), taken in conjunction with the 1961 distribution (57 percent), satisfied the statutory requirement, the Supreme Court said at pp. 96-7:

     * * * The Code requires that "the distribution" divest the

The doctrine derives vitality, rather, from its application where the form of a transaction does not require a particular further step be taken; but, once taken, the substance of the transaction reveals that the ultimate result was intended from the outset. See Anheuser-Busch, Inc., v. Helvering, supra; Chase v. Commissioner, 44 B.T.A. 39 (1941), aff'd, 128 F. 2d 740 (2d Cir. 1942); Edith G. Goldwasser, 47 B.T.A. 445 (1942), aff'd, 142 F. 2d 556 (2d Cir. 1944). In the majority of cases, it is the Government that relies on the step transaction doctrine for tax characterization. General application of the binding commitment requirement would effectively insure taxpayers of virtual exemption from the doctrine merely by refraining from such commitments. Such an untoward result cannot be intended by the Gordon opinion; indeed, defendant acknowledges as much in its brief by stating "the Supreme Court seems to have restricted the step transaction doctrine at least in one type of transaction, a corporate distribution of stock in a controlled corporation". ⁹ The present case involves no such transaction.

In the alternative, the Government asserts that the step transaction doctrine has no application to this case because the merger of Tenco into Minute Maid was not the intended end result from the outset. Although the appropriate standard is invoked, defendant's assertion is inconsistent with the inferences to be drawn from the record.

The operative facts emerging from the record in this case suggest that Minute Maid, desirous of diversifying its operations in order to stabilize its income, was presented with the opportunity to acquire the entire stock of Tenco for a bargain "price". Tenco's record of financial success and its asking price for Tenco stock of seven or eight times its earnings (while other companies were asking 20 times their earnings), without more, constituted an attractive investment. After the stock acquisition, moreover, Minute Maid was at liberty to operate Tenco as a wholly owned subsidiary, if it so desired. There is no persuasive evidence, however, that Minute Maid's appetite was limited to these goals, though worthy, when there was more in sight. On the contrary, the record reveals that, prior to the acquisition of Tenco stock, the officers of Minute Maid considered merging its existing subsidiaries into the parent in order to eliminate some of the general ledgers and extra taxes, and to bring about other savings. In fact, the merger of subsidiaries as a money-saving device was Mr. Speeler's (Minute Maid's vice president and general counsel) pet idea, which he discussed with Minute Maid's President Fox before the initial agreement with Tenco.

Shortly after the stock acquisition, Minute Maid instituted steps to consummate the merger of Tenco into Minute Maid. The proposed merger was motivated by a desire to avoid additional income tax on intercorporate dividends, to eliminate duplicate costs in the approximate amount of $ 50,000, and to obtain a stepped-up basis for stock in foreign corporations and other assets owned by Tenco. The potential step-up in basis for the foreign stock was estimated at $ 750,000 and the step-up for Tenco's other assets, although unable to be precisely ascertained, was considerable and probably sufficient as a justification for the merger independent of the other assigned reasons. ¹⁰

Minute Maid applied for on January 5, 1960, and received on February 25, 1960, a ruling by the Internal Revenue Service that Minute Maid's basis in property received upon the complete liquidation of Tenco would be determined under section 334(b) (2) by reference to the adjusted basis of Tenco stock in Minute Maid's hands. Subsequently, on April 30 and May 2, 1960, in accordance with applicable state laws, Tenco and certain other subsidiaries were merged into Minute Maid.

No express intention on the part of Minute Maid to effect a merger of Tenco surfaces in the record until after the initial agreement to exchange stock. It strains credulity, however, to believe other than that the plan to merge was something more than inchoate, if something less than announced, at the time of such exchange. One gains the impression that the record of intentions is edited, so in reconstruction we must lean heavily on the logic of tell-tale facts and lightly on chameleon words. It is difficult to believe that sophisticated businessmen arranging a multimillion dollar transaction fraught with tax potentials were so innocent of knowledge of the tax consequences as the testimony purports. Perhaps testimony from private tax authorities serving the parties would have yielded more explicit knowledge of the questions asked and the advice given, but a trial record is rarely perfect in retrospect and a decision must be reached on an objective appraisal of the facts, including the inferences to be squeezed from them.

The operative facts in this case clearly justify the inference that the merger of Tenco into Minute Maid was the intended result of the transaction in question from the outset, the initial exchange of stock constituting a mere transitory step. Accordingly, it is concluded that the initial exchange and subsequent merger were steps in a unified transaction qualifying as a Type A reorganization, and that petitioner received its Minute Maid stock pursuant to the plan of reorganization shown by the facts and circumstances above to have existed. ¹¹

II

The Dividend Issue

Pursuant to the plan of reorganization, petitioner received $ 281,564.25 in cash, $ 239,329.40 in promissory notes, and Minute Maid stock valued at $ 541,717. Section 356(a) (1), supra, provides that the amount of gain realized by petitioner must also be recognized, but not in excess of the cash and notes (i.e., "boot") received. With respect to the character of petitioner's recognizable gain, section 356(a) (2) provides:

     If an exchange is described in paragraph (1) but has the

     * * * It has been ruled in a series of cases that where stock of

The so-called "automatic dividend" approach generally attributed to the Bedford opinion, whereby section 356(a) (2) automatically converts any recognized gain into dividend income to the extent of the shareholder's ratable share of the transferor corporation's earnings and profits, has been narrowly restricted by most of the more recent decisions. See Idaho Power Co. v. United States, 142 Ct. Cl. 534, 161 F. Supp. 807, cert. denied, 358 U.S. 832 (1958); Hawkinson v. Commissioner, 235 F. 2d 747 (2d Cir. 1956); Ross v. United States, 146 Ct. Cl. 223, 173 F. Supp. 793 (1959), cert. denied, 361 U.S. 875 (1959). The operative words of section 356(a) (2) suggest a test of "dividend equivalence", rather than a conclusion of automatic dividend income merely because of the existence of earnings and profits, and the more recent cases have recognized this. In Ross v. United States, supra, this court stated:

     * * * The ultimate question finally narrows down to whether the

There can be little doubt, on the facts of the present case, that the receipt of boot by petitioner was essentially equivalent to a dividend. Defendant has conceded this by implication in declining to contest the issue in its brief. The amount of cash, promissory notes and Minute Maid stock, respectively, received by each of the Tenco stockholders was in direct proportion to his ownership of Tenco stock. The distribution on a pro rata basis, entailing no substantially disproportionate change in the continuing equity interests of the Tenco stockholders, constitutes a classic example of a transaction having the effect of the distribution of a dividend. See Boyle v. Commissioner, 14 T.C. 1382 (1950), aff'd, 187 F. 2d 557 (3d Cir. 1951), cert. denied, 342 U.S. 817 (1951); Commissioner v. Roberts, 203 F. 2d 304 (4th Cir. 1953); S. Rep. No. 1622, 83d Cong., 2d Sess., 49 (1954); Treas. Reg. Section 1.302-2(b). Accordingly, the gain recognizable under section 356(a) (1) by petitioner upon its receipt of boot is characterized under section 356(a) (2) as (1) dividend income to the extent of petitioner's ratable share of Tenco's accumulated earnings and profits, and (2) capital gain to the extent of any remaining recognizable gain. ¹³

III

The Deduction Issue

Section 243(a) provides, in parts pertinent to this suit, that:

     In the case of a corporation, there shall be allowed as a

In Rose v. Little Inv. Co., 86 F. 2d 50 (5th Cir. 1936), cash and notes were distributed by a domestic corporation to thetaxpayer (a corporate stockholder) pursuant to a plan of reorganization. In deciding that the boot received had the "effect of the distribution of a taxable dividend" entitling the taxpayer to a dividends received deduction, the court stated at page 51:

     * * * But taxing as a dividend to each distributee what is thus

Similarly, in Commissioner v. Forhan Realty Corp., 75 F. 2d 268 (2nd Cir. 1935), the taxpayer (a corporate stockholder) received cash pursuant to a plan of reorganization. In holding that the taxpayer's gain was includable in gross income as a dividend, though not taxable to the taxpayer as such, the court remarked at page 269:

     * * * where the distribution has the effect of what is ordinarily

A careful review of the relevant cases, statutory provisions and their legislative histories reveals no theory upon which a corporation deemed to have received a dividend under section 356(a) (2) is not entitled to the 85 percent dividends received deduction provided by section 243(a) (1). Defendant apparently recognizes this, declining to contest this issue as well in its brief. The legislative history of section 243(a) (1) and its predecessors discloses a congressional policy against double taxation of income by permitting dividends received deductions to corporations on "the theory that a corporate tax has already been paid upon the earnings out of which the dividends are distributed". H. Rep. No. 708, 72d Cong., 1st Sess., 12 (1932). Moreover, that portion of the dividend distribution which is presently not taxable to petitioner will be taxable to petitioner's individual stockholders when distributed to them. Accordingly, it is decided that petitioner is entitled to the 85 percent dividends received deduction provided by section 243(a) (1) for that part of its recognizable gain characterized by section 356(a) (2) as dividend income.

Findings of Fact

1. Petitioner, King Enterprises, Inc., is a Tennessee corporation, presently engaged in the business of holding and managing various investments, among other activities.

2. Prior to October 30, 1961, petitioner was named Fleetwood Coffee Company. As Fleetwood, petitioner was engaged in the business of selling roast coffee in the southeastern United States. On or about October 30, 1961, petitioner sold its operating assets to Duncan Foods, and changed its name to King Enterprises. (Petitioner had been founded by Henry King.) During the transactions involved in this case, petitioner's corporate name was Fleetwood Coffee Company. Reference throughout these findings will for simplicity usually be to the petitioner.

3. Recognizing the opportunity to market instant (soluble) coffee in the postwar period, but lacking the financial resources individually to carry on the necessary product research and development, petitioner and nine other regional roast coffee producers and distributors joined together and, on July 30, 1951, organized Tenco, Inc., a New Jersey corporation. The ten shareholders acquired equal stock interests by each contributing approximately $ 35,000. It was contemplated that Tenco would supply its shareholders with a reliable source of instant coffee for them to market under their own brand names, and also would attempt to get a share of the rapidly expanding instant coffee market through sales to chain stores.

4. The ten shareholders were petitioner, three members of the Aborn family, ¹ C. W. Antrim & Sons, Inc., Cain's Coffee Company, Donovan Coffee Company, Albert Ehlers, Inc., W. F. McLaughlin and Company, Martinson's Coffee, Inc., Tenscul, Inc., and John H. Wilkins Company.

5. In 1956 International Basic Economy Corporation (ibec) was added as an 11th equal shareholder. It was not a regional coffee producer or distributor. However, Tenco was beginning and considering further overseas operations and ibec, controlled by the Rockefeller family, was involved in developing investments in Latin America.

6. Tenco had 15 to 20 percent stock interests in coffee producing plants in San Salvador, Guatemala, and Mexico. ibec had from 15 to 30 percent stock interests in these plants. ibec felt that it should be involved in the product sales of these plants, and so ibenco, Inc., was formed to act as a sales agency for these foreign corporations. Tenco and ibec each held 50 percent of the ibenco stock. ibenco, Ltd., a Canadian corporation, and ibenco, g.m.b.h., a German corporation, were also formed at this time.

7. Each of the 11 Tenco shareholders had one person actively interested in Tenco who sat as a director on the board and was entitled to one vote. If a director could not attend a meeting, he would resign and his alternate would be elected to the board at the meeting. In this way, Mr. L. W. Oehmig, petitioner's vice president, was able sometimes to represent petitioner on the board in the place of petitioner's president, Mr. Overton Dickinson.

8. The president of Tenco was Edward Aborn, who was also president of Arnold & Aborn, Inc.

9. Tenco was a financial success, almost immediately, witness:

        YEAR ENDED           SALES /*/              NET

11. By 1959 Tenco became the second largest producer of soluble coffee in the United States, selling its coffee to those of its stockholders who were coffee roasters and to chains for marketing under private labels. Tenco had developed a private process for blending soluble coffee to obtain desirable flavor, which purportedly none of the other producers did. From May 1958 to May 1959, Tenco had added new equipment and retired its old equipment so that a substantial part of its depreciable plant and equipment was less than a year old as of May 1959.

12. In spite of Tenco's performance, there was shareholder discontent. ibec's representative, Mr. Streibert, was very critical of the Tenco management and tried to have the management changed because he was dissatisfied with Tenco's rate of growth. In addition, several stockholders which were very large coffee roasters purchasing in large quantities wanted to purchase instant coffee from Tenco at a low price and recover their profit from their consumers. The smaller roasters wanted Tenco's prices to be higher so that they could participate equally in Tenco's earnings.

13. Minute Maid Corporation (hereafter sometimes referred to as Minute Maid) was incorporated in 1945, and had become by 1958 one of the nation's principal producers of frozen concentrated citrus juices. Minute Maid's profits were dependent, however, on the erratic prices it had to pay for citrus fruits and, as a result, in the "deep freeze" year of 1957, it had suffered a bad year financially. Since 1957, therefore, Minute Maid was searching for other businesses to stabilize its income.

14. In late 1958 or early 1959, ibec, without the approval of the Tenco board of directors, told the chairman of Minute Maid's board of directors that it might be possible for Minute Maid to acquire Tenco.

15. The initial contact of Minute Maid was followed by direct negotiations between Tenco and Minute Maid. The Tenco board of directors appointed a special committee consisting of ibec's Mr. Streibert and Tenco's President Aborn to represent Tenco in negotiations and to report back to the board. The president of Minute Maid, Mr. Fox, was the principal negotiator for Minute Maid.

16. ibec's Mr. Streibert was in favor of Minute Maid's acquisition of the Tenco stock because he felt Tenco was not growing fast enough. President Aborn also favored the acquisition for the following reasons:

(a) The possibilities for future Tenco expansion on its own were limited. While Tenco had acquired 80 percent of the private label instant coffee business -- that is -- coffee packed for customers for sale under their own label,Tenco was likely to grow in the future only to the extent that the consumption of instant coffee increased. Tenco would probably not be able to sell additional stock to finance expansion of existing facilities or to market a new product because 50 percent or more of Tenco sales were to one customer, a & p.

(b) The combination of two of America's favorite breakfast beverages, orange juice and coffee, looked like a "natural marriage", a natural way for Tenco to expand and diversify. While Tenco did not have a brand name, Minute Maid had a brand name that was well recognized, well advertised, and well accepted.

(c) The conflicts between President Aborn and the directors and shareholders were becoming intolerable. Aborn was thinking of quitting as president.

(d) The acquisition of Minute Maid stock as part of the consideration was advantageous because the market price of that stock would jump as much as ten points when Minute Maid's earnings were increased by the addition of Tenco's earnings.

17. President Fox was anxious for Minute Maid to acquire Tenco. First, he had a consultant investigate Tenco, and the report on February 23, 1959, was that Tenco was a well-run and profitable operation which was in second place in the production and sale of instant coffee. Second, the asking price for Tenco stock was only about seven or eight times its earnings, while other companies were asking prices 20 times their earnings. Third, coffee was a natural area for Minute Maid to move into. President Fox was aware that 50 percent of Tenco's sales were to one customer, a & p, but on balance he was enthusiastic about the prospect of acquiring Tenco.

18. Prior to the transaction in question consideration had been given by the officers of Minute Maid to merging its existing subsidiaries into Minute Maid in order to eliminate some of the general ledgers and extra taxes, and to bring about other savings. See finding 40, infra.

19. Minute Maid suffered a financially disastrous year in 1957 and as a result took certain moves to effectuate savings. Minute Maid had a shortage of cash in 1959.

20. Between January and July 29, 1959, Minute Maid submitted and the Tenco board of directors rejected at least three separate proposals for the acquisition of Tenco stock, viz:

(a) The first proposal was a stock-for-stock exchange with a total consideration of $ 11,000,000. The Tenco board rejected this offer on February 13, 1959, because the price was too low, and because of doubts as to the soundness of Minute Maid stock.

(b) Minute Maid made a second proposal in early March 1959, involving part stock and part cash to be paid from future Tenco earnings. In spite of President Fox's personal appearance the Tenco board rejected this offer at the end of March 1959, because of the contingency feature of the cash payout.

(c) The third proposal which was a firm offer was arrived at as a result of negotiations in May 1959. The total consideration was $ 14,000,000, of which Minute Maid was to pay $ 3,500,000 cash, $ 3,500,000 in Minute Maid stock, and $ 6,000,000 from future Tenco earnings. Another $ 1,000,000 was to be distributed to the Tenco shareholders from Tenco earnings. Petitioner's board of directors rejected this offer on July 29, 1959, as did the Tenco board, again because of the contingency element in the payout of the $ 6,000,000.

21. After the July 1959 Tenco board decision, President Aborn decided to negotiate with President Fox himself and on the basis of a fixed price for the Tenco stock. On August 13, 1959, Presidents Aborn and Fox discussed the acquisition of Tenco stock at a fixed price. They agreed, subject to approval of their principals, on a purchase price of $ 12,000,000 to be paid $ 3,000,000 in cash, 300,000 shares of Minute Maid stock, and the remainder in promissory notes. On the same day, the Minute Maid board of directors authorized President Fox to negotiate with the Tenco shareholders on this basis.

22. On or shortly before August 25, 1959, President Aborn urged petitioner's directors, and especially Mrs. King, the widow of petitioner's founder, to accept the latest Minute Maid proposal. He gave his views that Tenco had reached its peak, would in the future be subject to greater competition, and was suffering from dissension, so that Minute Maid's proposal offered the Tenco shareholders the opportunity to diversify their investment and share in the ownership of the world's largest manufacturer of concentrated citrus juices. President Aborn assured them he was still going to run Tenco.

23. President Aborn testified that he had been advised by Tenco's legal counsel, Cahill, Gordon, Reindel and Ohl, and his own lawyers, Burke & Burke, that the proposed transaction was fully taxable as a sale. There was a question whether it was an installment sale so that the proceeds could be reported when received. When President Aborn met with petitioner's directors, the Federal tax consequences of the proposed transaction were discussed in a general way, but particular discussion was had on the possibility of reporting the proceeds of the exchange on the installment basis. The details of the discussion are not reliably reflected in the record.

24. On August 25, 1959, the board of directors of both petitioner and Tenco approved Minute Maid's proposal, and, on September 3, 1959, petitioner and the other Tenco shareholders signed an agreement entitled "Purchase and Sale Agreement".

25. The Purchase and Sale Agreement:

(a) Refers to Minute Maid as the "Buyer" and the several holders of the Tenco stock, including the petitioner, as the "Sellers";

(b) Provides for the sale and delivery by each of the Sellers, for the consideration set forth in the agreement, the shares owned by each of the Sellers, and the purchase of these shares by the Buyer;

(c) Recites a total consideration and terms of payment for the shares being sold of $ 3,000,000 cash at closing, of $ 2,550,000 in the Buyer's 5 percent promissory notes to be due on November 1, 1960 and November 1, 1961 (each of the Sellers was to be given two promissory notes); and on or before April 1, 1960, of 299,996 shares of Minute Maid stock, subject to the approval of the Securities and Exchange Commission, or an equivalent amount in cash if this approval was not obtained;

(d) Stipulates that the closing of the sale and purchase would be on September 18, 1959, at which time the Sellers were to deliver to the Buyer certificates for the shares of stock in Tenco "free and clear of all liens and encumbrances" in negotiable form with the requisite Federal stock transfer stamps attached, and the Buyer, subject to the terms and conditions of the agreement, was to deliver the checks and notes provided for;

(e) In addition to other representations and warranties, contains the Seller's representation and warranty that they were the owners of shares to be delivered at the closing free and clear of liens and encumbrances and had full power and capacity to transfer good title to the shares to the Buyer;

(f) Contains a covenant on the part of the Sellers not to compete in the business of manufacturing soluble coffee or tea in the United States with Tenco or the Buyer for a period of five years;

(g) Contains a representation by the Sellers of their intention to continue purchasing from Tenco or the Buyer as and if they had been purchasing from Tenco, subject to the Sellers being satisfied with quality, price and other terms of the sales; and

(h) In addition to other representations and warranties, contains an agreement by the Sellers to elect Edward Aborn, one of the Sellers, and Harold F. Reindel, a partner in the law firm representing Tenco, to the Minute Maid board of directors.

26. Mr. Oehmig, vice president of the plaintiff, forwarded a letter dated August 31, 1959, to Mr. Aborn, president of Tenco, stating that it was Fleetwood's present intention to continue purchasing its requirements of soluble coffee from the Tenco Division of Minute Maid, subject to Fleetwood's continued satisfaction with the quality, the prices and other terms of sale of such soluble coffee and the services rendered in connection therewith. In the letter reference is made to the fact that Aborn would serve in a new capacity as Chief Executive Officer of the Tenco or Soluble Coffee Division of Minute Maid and that the plaintiff would exert its influence to encourage Minute Maid to maintain the policies that had been Tenco's in the past. In this letter Oehmig stressed that Fleetwood's interest was that the quality of the soluble coffee manufactured by Minute Maid and that their sales and product improvement policies be the same as those of Tenco. Similar letters were received by Aborn from the other Tenco stockholders. The letters were drafted by the attorneys for Tenco.

27. On September 4, 1959, the day after the Purchase and Sale Agreement was signed, Minute Maid announced in a press release that it had acquired Tenco and that Tenco would become a "division" of Minute Maid. It is unclear, however, whether the term "division" was intended by Minute Maid's Management to convey the meaning that Tenco would be merged into Minute Maid, or that Tenco would be operated as a subsidiary of Minute Maid.

28. Plaintiff received from Minute Maid in exchange for its 1,260 shares of stock in Tenco, the following:

 On September 18, 1959:

 On September 18, 1959:

 November 1, 1960                         $ 1,275,000

31. In accordance with the agreement providing for the exchange of Tenco stock for Minute Maid stock, cash and promissory notes, the same amount of Minute Maid stock, cash and notes was to be received for each share of Tenco stock.

32. In addition to the consideration received by the plaintiff and the other stockholders of Tenco for their Tenco stock, Minute Maid agreed that, as soon as practicable after the acquisition of the Tenco stock by it, Edward Aborn and Harold F. Reindel would be elected to the board of directors of Minute Maid and that Minute Maid would use its best efforts to have such persons reelected to its board of directors by the stockholders at their next annual meeting. Edward Aborn was president of Tenco when Tenco was operated as a separate corporation and he was president of the Tenco Division of Minute Maid after Tenco was subsequently merged into Minute Maid.

33. After the exchange of stock, the terms of the agreement which provided that Edward Aborn and Harold Reindel serve on the board of directors of Minute Maid were carried out. The former Tenco stockholders eventually exerted pressure to replace Harold Reindel with Jack Durland on the Minute Maid board of directors.

34. There is no provision in the agreement providing for the former Tenco stockholders to have representation on the Tenco board of directors after the exchange.

35. L. W. Oehmig was vice president and a director of the plaintiff and also a director of Tenco at the time of the exchange in question. J. Overton Dickinson, who was president of the plaintiff at the time of the transaction had been in and out of the hospital throughout 1959, the year of the exchange. The transfer by plaintiff of its Tenco stock for Minute Maid stock, cash and promissory notes was approved by the board of directors of plaintiff at a meeting held on August 25, 1959, at which Oehmig presided in the absence of the president. Prior to the exchange of Tenco stock by plaintiff for Minute Maid stock, cash and promissory notes, Oehmig assumed, but did not know, that Tenco would be operated as a division of Minute Maid rather than as a separate corporation. This assumption is based on Oehmig's testimony of his recollection, and not upon any contemporaneous document supporting that conclusion. Oehmig was not actually aware that Minute Maid would merge Tenco into Minute Maid until he received a proxy notice sent afterwards to Minute Maid's shareholders.

36. The soluble coffee business operated by Tenco before the merger with Minute Maid was operated by Minute Maid after the merger of Tenco into Minute Maid.

37. The plaintiff continued to purchase its soluble coffee requirements from Tenco after it disposed of its Tenco stock. The agreement providing for the exchange of Tenco stock for Minute Maid stock, notes and cash provided that two representatives of the former stockholders of Tenco would serve on the board of directors of Minute Maid. The reason plaintiff demanded representation on the Minute Maid board of directors was that the plaintiff acquired a very large block of Minute Maid stock for its Tenco stock. Furthermore, the plaintiff wanted to assure that the policies which had been established before the sale regarding the pricing and sale of coffee by Tenco would be followed by Minute Maid.

38. In October 1959, Minute Maid had acquired complete ownership of Golden Citrus Juices, Inc., in which it had owned a substantial interest since 1953. Golden Citrus Juices, Inc., produced most of the lemonade sold under Minute Maid and Snow Crop labels. By November 1959, therefore, Minute Maid had, in addition to Tenco, three other subsidiaries: Golden Citrus Juices, Inc.; Minute Maid Groves Corporation; and Carney Groves, Inc. On reviewing Minute Maid's corporate structure with other corporate advisors, Mr. William Speeler, Minute Maid's vice president and general counsel, recommended to President Fox on November 24, 1959, that the four subsidiaries be merged into the parent Minute Maid for the following reasons:

(a) To avoid the additional income tax Minute Maid would have to pay on the receipt of intercorporate dividends paid by the subsidiaries;

(b) To save duplicate bookkeeping, franchise tax, and other similar "housekeeping" costs in the approximate amount of $ 50,000;

(c) To acquire an increased tax basis of approximately $ 750,000 for stock in foreign corporations owned by Tenco "by a merger or other liquidation of Tenco within two years from date of acquisition * * *" of the Tenco stock. The advantage of the writeup was that Minute Maid would have less gain from the sale on which to pay tax. Mr. Speeler forecast that in a statutory merger Minute Maid "probably could write up these [foreign] investments and possibly, but to a much lesser extent, some of the other assets to a higher figure they now carry [on Tenco's books] without recognizing any gain or loss on the writeup. The advantages of writing up the assets would be a lower tax after assets were subsequently sold at a profit and reduced in the amount otherwise chargeable to good will, and possibly some gain in depreciation charges." Although the amount of the step-up in the Tenco assets which were acquired cannot be ascertained with any degree of accuracy, the amount was at least several million dollars and probably sufficient as a justification for the acquisition independent of other assigned reasons; and

(d) Mr. Speeler also considered the negative aspects of the merger including increased local tax liability, the difficulties in obtaining the consent of the Minute Maid Groves preferred stockholders to the merger, and the consent of the insurance companies which had loaned Minute Maid money since one of them, as a condition of its consent to the Tenco acquisition, had specified that Minute Maid should not become liable for the debts of Tenco.

39. Since its bad year in 1957, Minute Maid was looking for ways to save money, in addition to acquiring new businesses. The merger of subsidiaries as a money-saving device was Mr. Speeler's pet idea which he discussed with President Fox even before Minute Maid acquired the Tenco stock.

40. The Minute Maid board of directors agreed that the merger plans Mr. Speeler proposed in his November 24th memorandum were desirable in their meeting on December 10, 1959. The board authorized the management to take necessary and appropriate action to submit the proposed merger to the stockholders at the next annual meeting, scheduled for the fourth Thursday in February.

41. On December 10, 1959, the Tenco board of directors authorized the merger of Tenco's wholly owned subsidiary, ibenco, Inc. The board, in addition, authorized the sale of Tenco's stock in the Mexican corporations. The decision to merge ibenco into Tenco was because ibenco's original purpose no longer existed and the sales arrangement was satisfactory and was not related to the proposed merger of Tenco into Minute Maid.

42. In its 1959 Annual Report to Stockholders, issued sometime after December 3, 1959, Minute Maid announced: "In September, 1959, Minute Maid purchased all the outstanding capital stock of Tenco, Inc." It reported also that the board of directors was studying the advisability of merging some or all of the more important Minute Maid subsidiaries into the parent corporation.

43. In the registration statements Minute Maid submitted to the Securities and Exchange Commission on December 23, 1959, in connection with the proposed issue of Minute Maid stock to the Tenco shareholders, Minute Maid reported that the transaction in which it acquired the outstanding Tenco stock was a purchase and sale.

44. On January 5, 1960, the certified public accounting firm of Lybrand, Ross Bros. & Montgomery, filed with the Commissioner of Internal Revenue, Washington, D.C., an "Application for Ruling on Behalf of Minute Maid Corporation, 1200 West Colonial Drive, Orlando, Florida". Therein a ruling was requested to the effect that, "if Tenco, Inc., is so liquidated or merged into Minute Maid Corporation the basis of the assets of Tenco, Inc. in the hands of Minute Maid Corporation will be determined under section 334(b) (2) of the Internal Revenue Code of 1954".

45. On January 14, 1960, the Minute Maid board of directors adopted a Plan of Reorganization providing for the merger of Carney Groves, Inc., Golden Citrus Juices, Inc., and Tenco, Inc., into their common parent Minute Maid, subject to the approval of the shareholder's meeting which was moved to March 24, 1960. Also on January 14, 1960, the boards of directors of Carney Groves, Golden Citrus Juices, and Tenco authorized the execution of an agreement of merger.

46. On May 9, 1960, Tenco sold stock in the Mexican corporation for $ 225,000, pursuant to an agreement of February 9, 1960. On the same date Minute Maid delivered 311,996 shares of stock to the Tenco shareholders, after SEC approval, in accordance with the agreement dated September 3, 1959. The plaintiff received 29,282 of the shares so issued. Thus, as of that date, the former Tenco shareholders owned 15.62 percent of the total outstanding Minute Maid shares.

47. On February 16, 1960, the agreement of merger was executed, subject to the approval of the constituent corporations, to become effective at midnight on the day it was filed with the Secretary of the State of Florida.

48. On February 25, 1960, a ruling was issued by the Internal Revenue Service to Minute Maid which in part stated: "Under the provisions of section 334(b) (2) that basis of the property received by Minute Maid upon the complete liquidation of Tenco will be determined by reference to the adjusted basis of the Tenco stock in the hands of Minute Maid."

49. The agreement of merger was approved by the shareholders of Carney Groves on March 17, of Tenco on March 23, and of Golden Citrus Juices and Minute Maid on March 24, 1960. On April 11, 1960, the president or vice presidents of the constituent corporations executed certificates of shareholder adoption of the agreement of merger.

50. On April 29, 1960, ibenco, Inc., was formally merged into Tenco. Thereafter, on the filing of the agreement of merger with the Secretaries of the States of Florida and New Jersey on April 30 and May 2, respectively, Tenco, Golden Citrus and Carney Groves were merged into Minute Maid.

51. On September 13, 1960, Fleetwood Coffee Company filed a Federal income tax return for its fiscal year ended June 30, 1960, with the District Director of Internal Revenue, Nashville, Tennessee, and paid income taxes on account of such return in the amount of $ 56,850.74. In this Federal income tax return, Fleetwood treated the total cash and notes received from Minute Maid (see finding 28, supra), $ 520,893.65 less 85 percent dividends received deduction multiplied by 52 percent, the corporate tax rate). The value of the Minute Maid stock received in exchange for the Tenco stock was not reported, since it was Fleetwood's position that the exchange of Tenco stock for Minute Maid stock was nontaxable.

52. Upon audit, the Internal Revenue Service determined that the total gain realized, $ 1,027,610.65 (the total cash, notes, and Minute Maid stock received, $ 1,062,610.65 (see finding 30, supra), less Fleetwood's cost basis for its Tenco stock, $ 35,000), constituted capital gains. The audit deficiency was computed as follows:

 Gain realized                                          $ 1,027,610.65

54. On December 27, 1963, the petitioner filed with the District Director of Internal Revenue, Nashville, Tennessee, a claim for refund, seeking a refund in the amount of $ 262,668.68 with interest. The petitioner waived the statutory notice of claim disallowances on April 16, 1964.

55. On May 15, 1964, the District Director refunded $ 24,248.73 (the tax of $ 21,628.44 assessed on September 20, 1963, and interest of $ 2,620.29), which had been paid on October 9, 1963.

56. This suit for refund was timely filed by the petitioner on April 11, 1966, before the expiration of two years from the date of filing of the waiver of notice of claim disallowance.

57. The amount of accumulated earnings and profits of Tenco available for the distribution of a dividend to the Tenco stockholders in 1959 is a factor in determining the amount of the distribution taxable as a dividend to the plaintiff. However, this question has been deferred for determination at a later date at the request of the defendant.

58. The sole issue before this court is the Federal income tax treatment by the plaintiff of the Minute Maid common stock, cash and notes received by it during the taxable year ended June 30, 1960.

Conclusion of Law

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to judgment in an amount to be determined by further proceedings under Rule 131(c).

² Sec. 1001. Determination of Amount of and Recognition of Gain or Loss.

     (a) Computation of Gain or Loss. -- The gain from the

⁴ In partial relaxation of this restrictive rule, section 356(a) (1) provides:

     (A) section 354 * * * would apply to an exchange but for the fact

⁵ InRev. Rul. 66-224, 1966-2 C.B. 114, the Internal Revenue Service ruled that the continuity of interest requirement of section 1.368-1(b) is satisfied when, pursuant to a statutory merger, 50 percent of the consideration received by stockholders of the dissolved corporation is comprised of stock of the surviving corporation.

⁶ In coping with this and related problems, courts have enunciated a variety of doctrines, such as step transaction, business purpose, and substance over form. Although the various doctrines overlap and it is not always clear in a particular case which one is most appropriate, their common premise is that the substantive realities of a transaction determine its tax consequences.

⁷ Herwitz, Business Planning, p. 804 (1966). See also, Helvering v. Alabama Asphaltic Limestone, supra; Anheuser-Busch, v. Helvering, supra; South Bay Corp v. Commissioner, supra.

⁸ See Mintz and Plumb, supra, at 285, where in regard to the similarly restrictive interdependence test it is concluded:

     [The interdependence test] applies * * * in cases * * * where the

¹⁰ Petitioner asserts that the potential step-up in basis of Tenco assets is approximately $ 5,525,000. There is also evidence that Minute Maid believed such step-up to be approximately $ 5,950,000. The actual step-up, though undisclosed by the available facts, is probably at least several million dollars.

¹¹ A formal plan or reorganization is not necessary if the facts of the case show a plan to have existed. See William H. Redfield, 34 B.T.A. 967 (1936).

¹² Section 356(a) (2) of the 1954 Code is identical in substance with its predecessor, section 112(c) (2) of the 1939 Code. See S. Rep. No. 1622, 83d Cong., 2d Sess., 269 (1954).

¹³ The determination of the amount of Tenco's accumulated earnings and profits available in 1959 for the distribution of a dividend to the Tenco stockholders has been deferred at defendant's request to a later date.

¹ In effect, Arnold & Aborn, Inc.