Spheeris v. Commissioner

Andrew M. Spheeris and Ismene A. Spheeris, Petitioners v. Commissioner of Internal Revenue, Respondent Spheeris v. Commissioner Docket No. 7183-65 United States Tax Court 54 T.C. 1353; 1970 U.S. Tax Ct. LEXIS 107; June 23, 1970, Filed *107 Decision will be entered under Rule 50. The S corporation had been engaged in the business of owning and operating commercial rental properties since 1945. In February 1960, one of its properties was destroyed by fire. Thereafter, various activities were engaged in on behalf of S corporation directed toward returning such property to income-producing status. Because of a disagreement among the shareholders with regard to how such property should be rehabilitated, the property was transferred to A corporation whose stock was distributed to petitioner and another in exchange for their stock of S corporation. Thereafter, activities were engaged in on behalf of A corporation directed toward returning the property to income-producing status. Held: That the property in question, together with the activities in connection therewith, were not sufficient to constitute the active conduct of a trade or business within the meaning of sec. 355(b), I.R.C. 1954; that A corporation, therefore, was not engaged in the active conduct of a trade or business immediately following the distribution of its stock to petitioner in exchange for this stock in S corporation; and, accordingly, petitioner*108 is not entitled to nonrecognition of gain on such exchange, under sec. 355 of the Code. The amount of gain realized on such exchange determined. Maurice Weinstein, for petitioners. Robert M. Burns, for respondent. Atkins, Judge. ATKINS *1353 The respondent determined deficiencies in income tax for the taxable years 1960, 1961, and 1962 in the respective amounts *1354 of $ 1,232.87, $ 1,769.08, and $ 37,680.18. Certain issues having been conceded by the parties, the issues remaining for decision are whether the transaction whereby Andrew M. Spheeris exchanged his stock in Spheeris Realty Co. for stock in Anmarcon, Inc., met the nonrecognition of gain or loss provisions of section 355 of the Internal Revenue *109 Code of 1954 and, if not, the amount of gain realized by him on such exchange. FINDINGS OF FACT Some of the facts have been stipulated and are incorporated herein by this reference. Andrew M. and Ismene A. Spheeris are husband and wife and resided in Milwaukee, Wis., at the time they filed their petition herein. They filed joint Federal income tax returns for the taxable years 1960, 1961, and 1962 with the district director of internal revenue, Milwaukee, Wis. Since Ismene Spheeris is a party hereto only because joint returns were filed for the years in question, Andrew M. Spheeris will hereinafter be referred to as the petitioner. The Spheeris Realty Co., hereinafter referred to as the company, was incorporated under the laws of Wisconsin in October 1945. Upon its incorporation the following rental properties, located in Milwaukee, were transferred to it: 1130-38 West State Street, 1212-22 West State Street, 817-19 North Fifth Street, 525 West Wells Street. At that time, 1,000 shares of the company's common stock were issued at $ 1 per share as follows: Michael Spheeris, 500 shares; John Spheeris, 499 shares; George J. Spheeris, 1 share, Michael Spheeris is the father of the petitioner. *110 John Spheeris is the petitioner's uncle and the father of Paul, Andrew J., and George J. Spheeris. At the beginning of 1960, the 1,000 issued and outstanding shares of the company's stock were held as follows: Shares Petitioner [450] Peter Samster [50] Paul Spheeris [166] Andrew J. Spheeris [166] George J. Spheeris [166] John Spheeris [2] The petitioner had acquired his stock in part by purchase and in part by gift from his father. He was an officer and director of the company. Peter Samster, a cousin of the petitioner, had purchased his shares from the petitioner. Since its incorporation, the company has engaged in the business of operating, leasing, and collecting rent on the above properties. Sometime prior to 1960, the property located at 817-819 North Fifth Street was sold by the company. Thereafter, the company owned and operated the two State Street properties and the Wells Street property. The Wells Street property was located in the downtown area of *1355 Milwaukee. The building situated thereon was a two-story commercial building of brick and wood-frame construction. The premises were leased to a number of small business concerns. The principal lessee, *111 Spheeris Bros. Merchandising, was engaged in the wholesale tobacco business and utilized a substantial part of the premises for warehousing purposes. 1 The rental from the building varied from $ 1,400 to $ 1,500 per month. On February 14, 1960, a fire occurred in the Wells Street building which destroyed most of the building and forced the tenants to vacate. Thereafter, the company continued to lease only the two State Street properties. Shortly after the fire the company engaged an appraisal company to make an appraisal of the property for insurance purposes. The company also obtained from the appraisal company an estimate of the cost that would be incurred to rebuild the building to its former condition as a two-story building as well *112 as the cost of increasing the building to five or six stories. The shareholders disagreed as to what should be done with the property. John Spheeris and his sons wanted to restore the property to its former state so that they could continue to use it for warehousing in connection with their tobacco business. The petitioner, however, was of the opinion that the property, considering its location, was too valuable to be restored to its former use, and wanted to improve it with a building commensurate with its maximum value. Sometime before April 1960 the petitioner learned that the City of Milwaukee was contemplating the redevelopment of an area of Milwaukee which included the Wells Street property. In early May of 1960, he discussed the matter with the mayor of the City and learned that a redevelopment authority had been established to consider a redevelopment plan. In June 1960 he conferred with a representative of the redevelopment authority with respect to the proposed redevelopment. Under the proposed redevelopment plan, the City would purchase property and then resell it to the highest bidder who presented the most appropriate project. Under such a procedure the City would*113 attempt to favor the former owners of the property, although no assurance was given that the former owners would be the successful bidders. On December 15, 1960, the City Council formally passed a resolution which approved the preparation of surveys and plans for an urban-renewal project encompassing a portion of the block in which *1356 the Wells Street property was located. This project was thereafter known as Kilbourntown No. 1. Petitioner continued to confer with City officials and by letter dated October 24, 1961, from the housing authority of the City, he was formally advised that the redevelopment plans for Kilbourntown No. 1 were to be completed shortly and that in view of possible action by the redevelopment authority in such area alterations or other construction would not be advisable. After first learning in the spring of 1960 about the proposed redevelopment program, the petitioner began to investigate various projects for which the Wells Street property might be utilized under such program, including the construction of a downtown motor hotel or an office building. Over a period extending into about the middle of 1963, he discussed those possibilities with various*114 architects, builders, city planners, and financial institutions. None of the financial institutions contacted by petitioner was willing to commit itself to finance any project prior to the acquisition of land by the redevelopment authority, and its resale for use in an approved redevelopment project. The petitioner realized that the size of the Wells Street property was inadequate for the construction of a downtown motor hotel or office building and that to be successful in presenting a project acceptable for redevelopment purposes it would be necessary to acquire some additional adjacent property in Kilbourntown No. 1 area. In July 1960 he made inquiry as to the possibility of purchasing the corner property which adjoined the Wells Street property and was owned by a brewing company, but learned that the owner had no intention of selling. In December 1960 petitioner began discussions with Ray Smith, an officer of a motor hotel chain, with regard to the possibility of constructing a downtown motor hotel in the Kilbourntown No. 1 area. Thereafter the petition and Smith carried on discussions with Time Insurance Co. which owned a building (not scheduled for redevelopment) in the redevelopment*115 area with regard to joint action in buying enough land to accommodate such a project. Time Insurance Co. was interested in securing additional space for its own expansion. The understanding among the petitioner, Smith, and Time Insurance Co. was that such insurance company would purchase some of the adjacent property which, together with the Wells Street property, would provide sufficient land upon which a combination motor hotel and office building could be built. At this time the brewing company, although unwilling to sell its corner property, was agreeable to entering into a long-term lease thereof for purposes of the proposed redevelopment. The motor hotel chain of which Smith was an officer was willing to lease the motor hotel if and when it was constructed, and another insurance company expressed willingness to provide financing in the event the project was approved for redevelopment purposes, the land *1357 was reacquired from the redevelopment authority, and the motor hotel chain would agree to lease the motor hotel. The stockholders of the company met periodically at which times petitioner submitted his ideas with regard to the use to which the Wells Street property*116 should be put. John Spheeris and his sons refused to adopt his views, not wishing the company to incur any additional indebtedness. Finally, on July 18, 1962, in order to resolve the conflict among the shareholders, the board of directors of the company authorized the transfer of the Wells Street property to a new corporation, the stock of which was to be exchanged for petitioner's and Samster's stock in the company. On July 31, 1962, Anmarcon, Inc., hereinafter referred to as Anmarcon, was formed. On August 14, 1962, the company, in exchange for all of Anmarcon's stock, transferred to Anmarcon the Wells Street property and an account receivable in the amount of $ 18,998.36 owed to the company by petitioner. On August 15, 1962, the petitioner and Samster surrendered their stock in the company in exchange for which the company canceled its shares of Anmarcon stock and caused Anmarcon to issue 450 shares of stock to petitioner and 50 shares to Samster. The above-described activities of petitioner with regard to the development of a motor hotel and office building were carried on both before and after the exchange by petitioner and Samster of their stock of the company for the Anmarcon*117 stock. In the latter part of 1963, the proposed redevelopment program was abandoned by the City. On September 27, 1963, the petitioner was served with an official notice by the City to either raze or rebuild the fire-gutted building on the Wells Street property. Either course of action would have required a permit from the City. No permits were applied for by the petitioner or Anmarcon. Sometime after the abandonment by the City of the proposed redevelopment program the petitioner approached Time Insurance Co. and tried unsuccessfully to reach an agreement to carry out the motor hotel project. Such company offered to purchase the Wells Street property, but the petitioner was unwilling to agree to a sale. Finally, after the petitioner had become convinced that it would be impossible for Anmarcon to develop the property itself, he agreed to an exchange of the Wells Street property for certain properties owned by Time Insurance Co. In June 1964 Anmarcon transferred the Wells Street property to Time Insurance Co. in exchange for the following commercial rental properties: 4465 North Oakland Drive; 4447 North Oakland Drive; 1410 East Capitol Drive. Anmarcon did not have any receipts*118 or disbursements and did not *1358 maintain any formal books until June 1964. The first Federal income tax return filed by Anmarcon was filed for its taxable year 1964. Prior to June 1964, property taxes on the Wells Street property of $ 4,000 to $ 5,000 per year were paid by petitioner on behalf of Anmarcon. During the years 1959 through 1962, the real estate tax assessment value of the Wells Street property together with the percentage ratio which such assessment value bore to full value was as follows: ASSESSMENT Year Land Improvement Total Ratio Percent [1959] $ 55,000 $ 44,000 $ 99,000 53.02 [1960] 55,000 3,000 58,000 52.40 [1961] 66,550 3,000 69,550 52.80 [1962] 66,550 3,000 69,550 53.06 The taxes on the property were paid without protest after an adjustment was made on account of the fire in the Wells Street building. In an appraisal of the Wells Street property made for the redevelopment authority of the City, it was determined that the fair market value of the property was $ 130,000 as of July 1, 1961. In conjunction with an action brought by petitioner seeking a temporary restraining order against the City with respect to its*119 notice to raze or rebuild the Wells Street property, the petitioner executed an affidavit, under oath, dated October 24, 1963, in which he expressed his opinion that the Wells Street property was worth $ 125,000. On August 15, 1962, the fair market value of the Wells Street property owned by Anmarcon was $ 130,000. On such date, the fair market value of the account receivable owed by the petitioner to Anmarcon was $ 18,998.36. On such date, the fair market value of the 500 shares of Anmarcon's stock issued to the petitioner and Samster was $ 148,998.36. Neither the petitioner nor Samster regarded the transactions by which he exchanged his stock of the company for stock of Anmarcon as taxable and neither reported any gain or loss on the exchange for this taxable year 1962. In the notice of deficiency, the respondent determined that the petitioner realized a long-term capital gain in the amount of $ 148,498.36 in 1962 on such exchange. OPINION The primary question presented is whether the exchange by the petitioner of his stock of the company for stock of Anmarcon constituted *1359 a nontaxable exchange under section 355 of the Internal Revenue Code of 1954. 2 *120 The respondent does not question that the transaction meets all the requirements of section 355, except the requirement that immediately after the distribution each corporation be engaged in the active conduct of a trade or business which has been actively conducted throughout the 5-year period ending on the date of the distribution. He further concedes that the company had been engaged in the active conduct of the trade or business of operating rental properties since 1945, and that it continued to be so engaged immediately after the distribution of the Anmarcon stock to the petitioner. However, he contends that Anmarcon was not, immediately after the distribution, engaged in the active conduct of a trade or business. He points out that from the date of distribution, August 15, 1962, until June 1964, the only *1360 asset which Anmarcon owned (other than an account receivable due from the petitioner) was the Wells Street property consisting of real estate upon which stood only the shell of a building which had burned down on February 14, 1960; that such property at the time of acquisition by Anmarcon was not producing any income; and that it was not until June 1964 when the*121 Wells Street property was exchanged for three commercial buildings that Anmarcon owned any income-producing property. It is his contention that the Wells Street property was held by Anmarcon with the intention of selling it to the redevelopment authority of the City of Milwaukee, that the only activities engaged in on behalf of Anmarcon were activities by petitioner relating to the potential investment of proceeds from such a sale, and that these activities cannot be considered as constituting the active conduct of a trade or business within the meaning of the statute and the regulations thereunder. 3 *122 The petitioner, on the other hand, contends that the Wells Street property was a part of the rental business actively carried on by the company from 1945 until the time of its transfer to Anmarcon; that the company had collected rents therefrom until it was gutted by fire in 1960; that thereafter the company continued to hold the property with the intention of rehabilitating it; that the only reason such property was transferred to Anmarcon was because of the dispute between the petitioner who controlled 50 percent of the stock and the other stockholders controlling 50 percent of the stock; that Anmarcon was organized for the purpose of acquiring the property and erecting thereon an appropriate building from which rental income would be derived *1361 (and not to hold an inactive parcel of real estate for investment or speculative purposes); that from the moment Anmarcon acquired the property, petitioner, as president and owner of 90 percent of the stock, carried on activities directed toward the accomplishment of this purpose; and that therefore Anmarcon was engaged in the active conduct of a trade or business immediately following distribution of its stock to the petitioner, *123 within the meaning of the statute. It is now well established that the division of a single business may satisfy the requirements as to active business under section 355(b) and therefore qualify under the tax-free provisions of section 355. Edmund P. Coady, 33 T.C. 771, affd. (C.A. 6) 289 F. 2d 490; and United States v. Marett, (C.A. 5) 325 F. 2d 28. However, whether a transaction constitutes the division of a single business or the separation of two distinct businesses, section 355(b) requires that after the separation each entity be engaged in the active conduct of a trade or business. In the Coady case, we stated in part: In order to insure that a tax-free separation will involve the separation only of those assets attributable to the carrying on of an active trade or business, and further to prevent the tax-free division of an active corporation into active and inactive entities, (b)(1) further provides that each of the surviving corporations must be engaged in the active conduct of a trade or business. * * * * As long as the trade or business which has been divided*124 has been actively conducted for 5 years preceding the distribution, and the resulting businesses (each of which in this case, happens to be half of the original whole) are actively conducted after the division, we are of the opinion that the active business requirements of the statute have been complied with. [Emphasis supplied.] In the instant case, after the building situated on the Wells Street property was destroyed by fire and its tenants were forced to vacate, the petitioner engaged in numerous activities, first on behalf of the company and then on behalf of Anmarcon, which were directed toward ultimately returning the property to an income-producing status. We do not, therefore, think the Wells Street property was abandoned as a business asset by the company prior to August 14, 1962, the date upon which such property was transferred to Anmarcon, nor do we think the record supports the view that the property was thereafter held by Anmarcon for investment purposes. It seems clear, therefore, that the transfer of the Wells Street property to Anmarcon and the distribution of Anmarcon's stock to petitioner and Samster in exchange for their stock of the company did not result*125 in the separation of a corporation's business and investment assets. This, however, does not establish that what was transferred by the company to Anmarcon constituted a business (either as the result of *1362 the division of a single business operated by the company or as the result of the separation of two or more distinct businesses operated by the company), and that Anmarcon was engaged in the active conduct of a trade or business immediately after the distribution. Section 355(b) requires not only that the assets involved in a corporate separation be business assets, but that the assets so separated, together with the activities in connection therewith, constitute operating businesses immediately after such separation. In this respect section 1.355-1(c) of the Income Tax Regulations provides that "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." We think such regulation constitutes a reasonable interpretation of the statute and reflects the congressional intent. 4 *126 The Wells Street building was completely gutted by fire in February 1960 and its tenants forced to vacate. Thereafter, the company had appraisals made to ascertain the costs necessary to restore the property to income-producing status. Shortly after the fire, the company learned that the City was considering the redevelopment of the area in which the Wells Street property was located. Under the proposed redevelopment procedures the City would purchase the property in the redevelopment area and resell such property to the highest bidder who presented the most favorable redevelopment project, and it was the understanding that the City would try to favor the former owners of such property when it was resold. In view of the pending redevelopment program, it appeared unwise to attempt to rehabilitate the property at that time and the company was so advised by the City. The petitioner investigated projects for which the Wells Street property might be utilized under the pending redevelopment program, including the construction of a downtown motor hotel or office building. It was apparent that the size of the Wells Street property was inadequate for the projects contemplated by petitioner. *127 He, therefore, sought to *1363 acquire sufficient adjoining property on behalf of the company, or in conjunction with others, to assure the success of such a project. Thus, sometime in 1960, the prospects were that the Wells Street property would be taken over by the City and that to return it to an income-producing status would entail a further investment in additional land and the formulation of a proposal for redevelopment which would meet the approval of the redevelopment authority and permit the repurchase of the land from the redevelopment authority for such purpose. Half of the stockholders were unwilling to have the company incur any additional indebtedness. Rather, they had contemplated restoring the property to its former state. Therefore, to resolve this disagreement, the Wells Street property was transferred by the company to Anmarcon and Anmarcon's stock distributed to petitioner and Samster in exchange for their stock of the company. Thereafter, the petitioner continued his endeavors on behalf of Anmarcon. Finally, after the proposed redevelopment program was abandoned by the City, and after the petitioner had become convinced that it was impossible for Anmarcon*128 to continue with the project, Anmarcon exchanged the Wells Street property for three commercial rental properties. It is our opinion that, although the Wells Street property remained a business asset subsequent to the fire in February 1960, the activities carried on thereafter in connection with such property were not sufficient to constitute the conduct of an operating business. Such activities consisted in large part of the petitioner's endeavors to utilize the Wells Street property in the development of a downtown motor hotel or office building. These projects would have required the acquisition of additional adjacent property and were contingent upon the City's plans for redeveloping the area in which the property was located. Such activities, in themselves, would not result in income or profit. Rather, such activities were, at most, no more than preliminary to actually engaging in a business. We realize that the reason the Wells Street property was not restored to income-producing property was largely because of the uncertainty created by the proposed redevelopment program of the City. Nevertheless, whatever the reason, the fact remains that such property and the activities*129 in regard thereto did not constitute the active conduct of a trade or business. We, of course, are governed by the specific provisions of the statute. As stated in Commissioner v. Gordon, 391 U.S. 83, "the requirements of the section [sec. 355] are detailed and specific, and must be applied with precision." It is our conclusion that Anmarcon was not engaged in the active conduct of a trade or business immediately following the distribution of its stock to petitioner in exchange for his stock of the company, and that, therefore, the petitioner is not entitled, under section 355, to nonrecognition of gain. *1364 We turn, then, to the issue presented with regard to the amount of gain realized by the petitioner on the exchange. The respondent's determination is presumed to be correct and the petitioner has the burden of proving it to be wrong. Welch v. Helvering, 290 U.S. 111. In the notice of deficiency, the respondent determined that the petitioner realized a long-term capital gain in the amount of $ 148,498.36 on the exchange. In reaching this determination, the respondent apparently determined that the*130 basis of the petitioner's stock of the company was $ 500 and that the value of the Anmarcon stock received was $ 148,998.36, represented by $ 130,000 as the value of the Wells Street property and $ 18,998.36 as the value of the account receivable owed Anmarcon by petitioner. The respondent's determination, in effect, treated the petitioner as owning 500 shares of the company's stock prior to the exchange and all (500 shares) of Anmarcon's stock thereafter. This was corrected at the trial by stipulation of the parties to reflect Samster's ownership of 50 shares of the company's stock prior to the exchange and 50 shares of Anmarcon's stock thereafter. At the trial the petitioner did not prove error in the respondent's determination with respect to the value of the Anmarcon stock or the basis of petitioner's stock of the company. Indeed, it is our opinion, and we have so found as a fact, that the fair market value of the Anmarcon stock was $ 148,998.36 at the time of the exchange. On brief the petitioner requests no findings and presents no argument with regard to this issue. However, the respondent, on brief, concedes that the petitioner's gain on the exchange of his stock of the*131 company for stock of Anmarcon should be reduced to $ 133,648.52 to reflect the petitioner's ownership of only 450 shares of the company's stock prior to the exchange and 450 shares of Anmarcon's stock thereafter. In view of the above, it is our conclusion that the petitioner realized a long-term capital gain in the amount of $ 133,648.52 in his taxable year 1962 on the exchange of his stock of the company for stock of Anmarcon. Decision will be entered under Rule 50. Footnotes 1. Throughout the years in question, Spheeris Bros. Merchandising was owned and operated by the petitioner's uncle, John Spheeris, and members of his family. The petitioner was not connected with the business of Spheeris Bros. Merchandising, nor did he own any interest therein.↩ 2. Sec. 355 of the Code provides in part as follows: SEC. 355. DISTRIBUTION OF STOCK AND SECURITIES OF A CONTROLLED CORPORATION. (a) Effect on Distributees. -- (1) General rule. -- If -- (A) a corporation (referred to in this section as the "distributing corporation") -- (i) distributes to a shareholder, with respect to its stock, or (ii) distributes to a security holder, in exchange for its securities, solely stock or securities of a corporation (referred to in this section as "controlled corporation") which it controls immediately before the distribution, (B) the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both * * * (C) the requirements of subsection (b) (relating to active businesses) are satisfied, and (D) as part of the distribution, the distributing corporation distributes -- (i) all of the stock and securities in the controlled corporation held by it immediately before the distribution, * * * * * * * then no gain or less shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securities. (2) Non pro rata distributions, etc. -- Paragraph (1) shall be applied without regard to the following: (A) whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation, (B) whether or not the shareholder surrenders stock in the distributing corporation, * * * * * * * (b) Requirement as to Active Business. -- (1) In general. -- Subsection (a) shall apply only if either -- (A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, * * * * * * * (2) Definition. -- For purposes of paragraph (1), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if -- (A) it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged, (B) such trade or business has been actively conducted throughout the 5-year period ending on the date of the distribution,↩ 3. Sec. 1.355-1, Income Tax Regs., provides in part as follows: (c) Active business. -- Section 355 is not applicable unless the controlled corporation and the distributing corporation are each engaged in the active conduct of a trade or business. For specific rules in this connection see section 355(b)(1) and (2). Without regard to such rules, 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 -- (1) The holding for investment purposes of stock, securities, land or other property, including casual sales thereof (whether or not the proceeds of such sales are reinvested). * * * * (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. (d) The following examples illustrate the application of the rules described in pargraph (c) of this section: * * * * Example↩ (6). Corporation F owns and rents an office building and owns vacant land. It proposes to transfer the vacant land to a new corporation and distribute the stock of such new corporation to its shareholders. The holding of the vacant land does not constitute a trade or business. 4. See S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 50-51. See also H. Rept. No. 1337, 83d Cong., 2d Sess., pp. A123-124, under sec. 353(c) of the earlier House bill which related to inactive corporations and contained provisions substantially similar to the provisions as to active business proposed by the Senate and subsequently incorporated in sec. 355(b) of the Code. Therein it was provided in part as follows: Subsection (c) of section 353 defines the term "inactive corporation" for the purpose of section 353. As defined, such term means any corporation, unless for a 5-year period the conditions set forth in paragraphs (1), (2), and (3) are met, or unless the corporation qualifies for the exception set forth in the remaining portion of subsection (c). Paragraph (1) of subsection (c) requires that the business of the corporation must have been held directly or indirectly by the distributing corporation (referred to in subsection (a)) for (or subsequent to the distribution by the corporation the stock of which was distributed) for such 5-year period. Thus, the transfer to a newly created subsidiary of a portion of its business and the distribution of such stock of such subsidiary to the shareholders of the parent corporation would not qualify under paragraph (1) unless such assets constitute an operating business↩ held by the distributor for 5 years preceding the distribution or, if the business was not so held, unless the subsidiary corporation was held by the distributees for a period which, when aggregated with the period the business was held by the distributor, equals 5 years. [Emphasis supplied.]