¶1dissenting: A reduction in the tax liability of a corporation may constitute a legitimate business purpose of a reorganization under the statute. Clarence J. Schoo, 47 B. T. A. 459. See also C. A. Monroe, 39 B. T. A. 685; Tower v. Commissioner, 148 Fed. (2d) 388. A reduction in the corporation’s liability for dividends or interest also constitutes a legitimate business purpose. Annis Furs, Inc., 2 T. C. 1096. However, the majority opinion holds that, where the reduction in the corporation’s tax liability is accompanied by an increase in liability for interest in an equal or greater amount, the reduction in tax liability can not be said to be a legitimate business purpose.
¶2With this I am unable to agree. A realistic view of the ultimate purpose of a private corporation is that it is to make money for the investors who have contributed their capital to it, and to distribute to them as much as possible and practical out of its gross income. Under the facts of the instant case, it is apparent that after the recapitalization in question, petitioner, as an investor of the corporation, would receive a greater distribution of money in the form of dividends and interest than he received as dividends before the recapitalization. Therefore, the recapitalization contributed to the business purpose of the corporation and must be considered as a legitimate business purpose.
¶3Since, in my opinion, the adjustments made by the corporation in its capital structure were for the purpose of accomplishing a legitimate business purpose, I am unable to conclude that the transaction was also a distribution equivalent to a dividend. See Jacob Fisher, 46 B. T. A. 1011.
¶4dissenting: It was my understanding that the so-called corporate reorganization provisions of the revenue acts were designed to permit some flexibility in the financial set-up of corporations without the present imposition of a tax due to such changes. It was recognized that our capitalistic economy could not properly function if it was kept in a strait jacket, as it most surely would be if a tax consequence resulted with every change in the financial structure. Thus, recapitalizations were permitted without the present recognition of tax, leaving the imposition of the tax to the time when the exchanged security should be finally disposed of. No one contends that if the recapitalization is, in fact, a fraud or a sham it is to be recognized, but I do not understand the majority would characterize what has taken place as falling within either category. Debenture bonds have taken the place of common stock and that change in capitalization was what the directors desired and that is what they accomplished. There has been a permanent change in the capital structure, and it is the receipt of these very debentures by a stockholder which, the majority hold, constitutes a taxable dividend.
¶5But, it is said that there was no “legitimate” reason for this recapitalization. Certainly what was done was legitimate in the sense that it was lawful. Many corporations are originally organized in the same way that this corporation was “reorganized”; and, if it had been initially capitalized in the identical way that it is today, it would be subject to no criticism. Surely it was never intended that the tax collector or, indeed, a member of this Court should pass on the wisdom or desirability of a corporate recapitalization. If what was done here was genuine and was not a sham, the test of the statute has been met. I think Bass v. Commissioner, 129 Fed. (2d) 300, supports the view here expressed.