¶1dissenting: The petitioner claims that no gain is to be recognized from the distribution of all of the Coady corporation stock in exchange for all of his Christopher corporation stock. In order to obtain such tax-free treatment of the exchange, he relies upon the provisions of section 355 of the 1954 Code. The provisions of section 355 provide exceptions to the rule recognizing gain or loss. In considering whether the transaction in dispute is entitled to the nonrecognition provisions of section 355, we must inquire whether the transaction before us is the kind of transaction that Congress intended to relieve of tax. Cf. Commissioner v. Gregory, 69 F. 2d 809, affd. 293 U.S. 465; and Bazley v. Commissioner, 331 U.S. 737.
¶2The question whether the Congress intended that section 355 should apply to the kind of transaction involved here is of particular importance in this case because of the evident desire of the petitioner to_narrow the_issue to the question of whether section 355 applies to the division of a “single business,” i.e., whether section 355 applies to the division of a corporation which carried on a single business. Such narrow approach then leads to a related question, whether the Commissioner’s regulations are invalid, the point of reference being the statement in section 1.355-1 of the regulations that “[s]ection 355 does not apply to the division of a single business.” It is, in my opinion, not advisable to restrict the consideration of whether the petitioner did not realize taxable gain from the transaction to the suggested, confined proposition. Eather, I believe the inquiry should be directed first to the transaction and to all of the surrounding facts and circumstances. This approach is made difficult because the parties themselves have seen fit to adopt a narrow ground. Btit since this is a cáie of first impression, and since an issue is raised relating to the validity of the regulations, it is incumbent upon us to carefully examine all of the facts and circumstances so as to determine whether the disputed transaction meets the intendment of section 355, not whether the respondent’s efforts in his regulations to state a logical inference from the statutory provisions in general terms, which is a difficult matter, is or is not correct. I believe that a wrong conclusion is reached because of acceptance without question of the narrow and, I think, incorrect postulate upon which the petitioner’s argument is based.
¶3The Problem of Construction of Section 855(b).
¶4Section 355 requires that two tests shall be met to obtain tax-free treatment: (1) The transaction must not be “principally … a device for the distribution of the earnings and profits of the distributing corporation.” (2) The transaction must satisfy “the requirements of subsection (b) (relating to active businesses).” (Emphasis added.) Subsection (b) states the requirements as to “active businesses.” It is required by (b) (1) (A) that subsection (a) shall apply only if the distributing corporation, and the controlled corporation, are engaged immediately after the distribution “in the Active conduct of a trade or business.” That is to say, immediately after the distribution, both the distributing corporation and the controlled corporation must be engaged in the active conduct of a trade or business. The punctuation of (b) (1) (A) has meaning. The words, “and the controlled corporation” are set off by commas; the verb, “is engaged,” has two singular subjects, “the distributing corporation,” and “the controlled corporation.” The statute then defines the phrase “active conduct of a trade or business” (subsec. (b)(2)). The definition specifies that the trade or business which is actively conducted immediately after the distribution (referred to in subsection (a) and subsection (b) (1)) must be a trade or business which has been actively conducted throughout a 5-year period ending on the date of distribution. I believe there can be no doubt that since it is required by subsection (b) (1) (A) that both the distributing corporation and the controlled corporation must be engaged immediately after the distribution in the active conduct of a trade or business, the meaning of subsection (b) (2) (B) is that both the distributing corporation and the controlled corporation must actively conduct a business, respectively, which had been conducted for 5 years prior to 'the date of the distribution; each corporation must carry on a business after the distribution which had been carried on for 5 years before the distribution. I disagree with the conclusion that the statute does not so require.
¶5It seems to me that the view adopted here involves an inconsistency in the construction of the statute because it admits that subsection (b) requires that the business actively conducted after the distribution must “have had a 5-year active history prior to the distribution.” It is difficult to understand the process by which it is concluded that although section 355 requires that the business of the distributing corporation must have been actively carried on for 5 years prior to the distribution, it does not require that the business of the controlled corporation carried on after the distribution must have been actively carried on for 5 years prior to the distribution. However, the error in the construction of subsection (b) can be identified, as is shown hereinafter.
¶6I think that it only begs the question in this case, and does not squarely deal with the facts, to say, as the majority does, that “section 355 … reveals no language, express or implied, denying tax-free treatment at the shareholder level to a transaction … on the grounds that it represents the division or separation of a ‘single’ trade or business.” Furthermore, I strongly disagree with the view that the purpose of the active business requirements of section 355 (b) (1) is limited to the prohibition of a tax-free separation of a corporation into active and inactive entities, and to the prevention of “the tax-free separation of active and inactive assets into active and inactive corporate entities.” Of course, such results are not allowed by section 355, but that kind of separation is not involved here and the point is not relevant to the issue in this case.
¶7The error which I believe is made here in the construction of subsection (b) of section 355 is found in the failure to agree that the definition of the phrase “active conduct of a trade or business” contained in (b) (2) has reference to “a corporation”; that by reference to (b) (1), “a corporation” must refer to both the distributing corporation and the controlled corporation; and that the first sentence of (b) (2) deals with “a corporation” as a matter of convenience in drafting the definition so as not to engage in repetitions of the words “the distributing corporation” and “the controlled corporation.” In this context, I think it is entirely clear that the word “such” in (b) (2) (B) refers back to the active conduct of a trade or business by “a corporation,” be the corporation either the distributing corporation or the controlled corporation. For the purpose of (b)(1), “a corporation” is either the distributing corporation or the controlled corporation;, both “shall be treated as engaged in the active conduct of a trade or business [for the purpose of (b) (1)] if and only if … (B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution.” See 3 Mertens, Law of Federal Income Taxation, par. 20.103, ch. 20, p. 449, where the following is stated:
The distributing corporation and the controlled corporation … must have been engaged in “the active conduct of á trade or business” for at least a five-year period ending on the date of distribution of the stock or securities of the controlled corporation, and they must be so engaged immediately after the distribution. These requirements apply whether the controlled corporation is formed as part of the divisive transaction, or whether it is a pre-existing subsidiary. …
¶8The above statement in Mertens cites as its authority section 355 (b) (1) (A) and (b) (2) (B); it does not rely upon section 1.355-l(a) of the Commissioner’s regulations.
¶9The above construction of section 855(b) finds support in the report of the Senate Committee on Finance, S. Bept. No. 1622, 83d Cong., 2d Sess. (1954), p. 51 (quoted in the Opinion), where it is stated:
Tour committee requires that both the business retained by the distributing company and the business of .the corporation the stock of which is distributed must have been actively conducted for the 5 years preceding the distribution, a safeguard against avoidance not contained in existing law.
¶101 do not understand that the statements in the report of the Finance Committee which precede the above sentence detract at all from the meaning of the above quotation which gives a clear statement of the intention of the Congress in enacting section 355 of the 1954 Code, which is an entirely different provision than appeared in the original bill introduced in the House of Representatives, H.R. 8300, as section 353 which was deleted in toto when the Committee on Finance reported amendments to the bill. In the report of the Committee on Finance, supra, that which preceded the above-quoted sentence, starting on page 50 of the report, referred to proposed section 353 in the House bill which was eventually deleted entirely, whereas the above-quoted sentence refers to section 355 which was substituted for proposed section 353.
¶11The Facts and Circumstances in This Case.
¶12Although the parties have limited the issue to the question whether the requirements of subsection (b) of section 355 “(relating to active businesses)” are satisfied, it is necessary to give consideration to additional facts which are included in the stipulation of facts. One reason for this is that the distributing corporation, Christopher, had assets other than the stock of the controlled corporation, Coady. Another reason is that to refer to the business of Christopher simply as a “construction business” is to overlook the implicit facts that an individual construction contract represents a unit of business activity which is carried on independently of other individual construction contracts, that ordinarily accounting records must be kept for an individual construction contract, and that an individual construction contract yields gross and net income after expenses incident thereto. It is an oversimplification to describe the business which Christopher had conducted during 5 years prior to the distribution involved here in such general terms as a “construction business.” Furthei’more, it is admitted by the petitioner that performance under any construction contract of Christopher did not last for more than 2 years. At the outset, therefore, the facts in this case make it one which, very well may not come within the scope and intendment of section 355 (b). At the least, the question here is difficult.
¶13The fair market value of the stock of Coady and Co. received by petitioner was $140,000, which value is explained by the values of assets which were transferred from Christopher Company to Coady and Co. on November 14, 1954, as follows:
1. Cash from Christopher Co. (out of accumulated earnings)_$50,072.04
2. Share of profits in Columbus contract_ 27,342.39
3. Insurance, life of E. P. Coady_ 10,418.99
4. Account receivable owed by E. P. Coady_ 722.99
5. Miscellaneous cash items of expense_ 677.50
Subtotal_ 89,233.91
6. Capital account of Christopher in Columbus contract_ 20,000.00
7. Account receivable of Christopher in Columbus contract_ 22,919.89
8. Construction equipment_ 8,373.70
Total_ 140,527.50
¶14Included in the assets of Christopher which were transferred to the Coady corporation were $50,072.04 in cash out of the accumulated earnings of Christopher; profits from a construction contract dated June 1, 1954, with the City of Columbus, Ohio, in the amount of $27,342.39; an account receivable owed by E. P. Coady of $722.99; miscellaneous cash items of $677.50, which apparently were to reimburse E. P. Coady for traveling expenses; and an insurance policy on the life of E. P. Coady valued at $10,418.99. These items total $89,233.91. Whether or not the transfer of the above items involved a distribution of earnings and profits of the Christopher Company is not a question before us. Nevertheless, reference is made to these facts in connection with consideration of the business actively carried on by the controlled corporation, Coady.
¶15Christopher also transferred to the controlled corporation various items of equipment having a total value of $8,373.70. It appears that such equipment could be used in construction work.
¶16After Coady was organized, it carried on work under the contract of June 1, 1954, for the construction of a sewage disposal plant for the City of Columbus. Such business was the only business actively conducted by the Coady corporation with which the Christopher corporation had had any connection. Christopher had had an interest in that contract as a joint venturer with another firm, and work under the contract had started on July 1, 1954. Christopher’s capital account in the joint venture contract was $20,000, and in connection therewith it held an account receivable, as of November 15, 1954, in the amount of $22,919.89. Also, there had accrued to Christopher under the contract a share in profits in the amount of $27,342.39. Under the considerations ordinarily given to such transaction as is here involved, it would be said that Christopher assigned to the Coady corporation all of its interest in the construction contract with Columbus, plus other assets, in exchange for all of the stock of Coady, and that Coady, in the place of Christopher, continued Christopher’s participation in the contract.
¶17Under these facts, I am unable to conclude that the requirements of subsection (b) of section 355 were satisfied. Coady, the controlled corporation, carried on a business after November 15, 1954, which included a particular group of activities carried on for the purpose of earning income, but those particular activities related to a particular contract dated June 1, 1954. Clearly, the business carried on by Coady after it was organized and received assets from Christopher was not a business which had been “actively conducted throughout the 5-year period ending on the date of the distribution.”
¶18It seems to be clear that the Coady corporation, a new corporation, carried on a new venture and a new business, and that the transaction involving the distribution of the stock of the Coady corporation does not meet the requirements of section 355(b), and does not come within the intendment of section 355. Accordingly, the distribution to the petitioner of the stock of Coady corporation should not be held to be one with respect to which no gain shall be recognized. The Coady corporation was not a “controlled corporation” within the scope of section 355. Furthermore, the regulations are not invalid. From the conclusions reached here to the contrary, I respectfully dissent.
¶19dissenting: I think the majority opinion errs in holding that section 1.355-1 of the Income Tax Regulations under the Internal Revenue Code of 1954 is invalid in providing that section 355 does not apply to the division of a single business.
¶20The Supreme Court has many times held that Treasury regulations must be sustained unless unreasonable and plainly inconsistent with the revenue statutes, and that they constitute contemporaneous constructions by those charged with administration of these statutes which should not be overruled except for weighty reasons. Commissioner v. South Texas Lumber Co., 333 U.S. 496. It has also been stated by the Supreme Court that the practical interpretation of an ambiguous or doubtful statute that has been acted upon by officials charged with its administration will not be disturbed except for weighty reasons. Brewster v. Cage, 280 U.S. 327, and cases therein cited.
¶21Section 355 is not clear. It might be susceptible to different interpretations. However, it seems that the interpretation adopted in the regulations is not unreasonable and plainly inconsistent with the statute, specifically section 355(b) (2) (B). This is particularly true if the legislative history of the statutory provision is taken into consideration. See section 353 of the House bill (H.E. 8300), which required that a corporation would be treated as an “inactive corporation” unless separate books and records had been maintained for the business transferred to it. This clearly contemplated the separation of distinct businesses. See H. Eept. No. 1337, 83d Cong., 2d Sess., p. A124. The law as finally adopted did not incorporate this particular requirement that separate books should be kept, but in S. Eept. No. 1622, 83d Cong., 2d Sess., p. 50, it is stated that the changes made by the Senate in existing law correspond substantially to those made in the House bill and, as shown in the quotation from the Senate report, contained in the majority opinion, it was the intention that “both the business retained by the distributing company and the business of the corporation the stock of which is distributed must have been actively conducted for the 5 years preceding the distribution, a safeguard against avoidance not contained in existing law.”
¶22Section 1.355-1 (c) of the regulations defines a trade or business as follows:
for purposes of section 355, a trade or business consists of a specific existing group of activities being carried on for the purpose of earning income or profit from only such group of activities, and the activities included in such group must include every operation which forms, a part of, or a step in, the process of earning income or profit from such group. Such group of activities ordinarily must include the collection of income and the payment of expenses. It does not include—
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(3) A group of activities which, while a part of a business operated for profit, are not themselves independently producing income even though such activities would produce income with the addition of other activities or with large increases in activities previously incidental or insubstantial.
¶23Sixteen examples are set forth in the regulations to illustrate these provisions.
¶24It seems clear that the activities of the Christopher Construction Company cannot be considered as the carrying on of anything but a single business, and hence it cannot be considered that the business carried on by the Coady Company immediately after the date of distribution had been actively conducted over a 5-year period prior to the distribution, within the meaning of section 355 (b) (2) (B) of the Code.