Frank Trust of 1927 v. Commissioner

ISAAC W. FRANK TRUST OF 1927, WM. K. FRANK, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Frank Trust of 1927 v. Commissioner Docket No. 98274. United States Board of Tax Appeals 44 B.T.A. 934; 1941 BTA LEXIS 1252; July 9, 1941, Promulgated *1252 1. In May 1927 Isaac W. Frank, and in 1930 he and his wife each, created irrevocable trusts with securities as corpus. Each was a family trust with provisions for payment of the income for life to the grantors or their children, or surviving spouse of any child, or grandchildren of the grantors, and the distribution of corpus to the children and their children, subject to other testamentary disposition by the grantor's children of the principal in one trust, and power given the trustees in the other two trusts to distribute corpus to themselves after the death of the grantors. The son-in-law and two sons of the grantors were at all times after 1930 the trustees of the trusts and directors of the corporation which subsequently acquired the assets of the trusts for stock. In 1930 the corpus of the petitioner was exchanged for stock of Isaac W. Frank, Inc. The remainder of the stock in that company was issued, for cash and other securities, to Isaac W. Frank and Tinnie K. Frank, who placed it in the two trusts above mentioned. A short time thereafter the corporation transferred the assets to the Frank Securities Corporation in exchange for stock. The first corporation then liquidated*1253 by distributing its holdings of stock of the Frank Securities Corporation to the three trusts. In October 1935 the three trusts formed a partnership, known as the Frandel Partnership, under the laws of Delaware, contributing thereto as capital all of the stock they held of the Frank Securities Corporation. Promptly thereafter the corporation, for the purpose of placing in the hands of its sole stockholder assets with which to actively conduct a business, distributed to the partnership a portion of its securities. Another distribution was made in 1936. Held: (a) The Frandel Partnership is a partnership within the meaning of section 1001(a)(3) of the Revenue Act of 1936. (b) The distributions were not liquidating dividends and the gain of the partnership should be computed under section 115(d), using, as a basis for the stock contributed by each partner, the basis the stock had in its hands, and not the aggregate of the bases of the partners, as contended by petitioner. 2. The fair market value of the securities distributed in 1935 and 1936 determined for the purpose of computing gain. S. Leo Ruslander, Esq., Samuel Kaufman, Esq., and Louis Caplan, Esq.*1254 , for the petitioner. Orris Bennett, Esq., Frank Donohoe, Esq., and J. Harrison Miller, Esq., for the respondent. DISNEY *934 This proceeding involves the redetermination of a deficiency of $333,710.75 in income tax for 1936. The stipulation of facts is incorporated herein by reference as part of our findings of fact. Pertinent *935 parts of the stipulation will be set forth in the findings of fact to be made from other evidence of record. The general issue is whether the respondent erred in including in gross income the amount of $542,802.07 as gain alleged to have been realized from the liquidation of the Frank Securities Corporation, all of the stock of which was held by a partnership having as its members petitioner and two other trusts. Collateral questions are (1) whether the partnership should be recognized as a tax computing unit, and, if so, (2) whether gain should be computed on an aggregate of all of the bases of the partners or only the basis of petitioner, (3) whether the distribution was a liquidating dividend, and (4) the fair market value of the securities received in the distribution. FINDINGS OF FACT. The petitioner, *1255 an irrevocable trust created by Isaac W. Frank on January 3, 1927, with securities as corpus, filed its return for 1936 with the collector for the twenty-third district of Pennsylvania. The trust provided for the distribution of not to exceed $60,000 annually to the grantor for life and for the accumulation, as principal, of any income in excess thereof. Upon the death of the grantor the income of the trust was distributable in equal shares to his daughter and two sons for life and, after the death of any child, to his or her surviving spouse or issue, if any, under certain contingencies. Upon the termination of the trust the corpus was to be divided into three equal shares and each share distributed among the children of each child of the grantor in accordance with the last will of the parent, unless a majority of the grandchildren elected to continue the trust. The grantor and a bank were named trustees of the trust. I. W. Frank, Inc., was organized April 28, 1930, under the laws of Delaware by Isaac W. Frank and his wife, Tinnie K. Frank, to whom the corporation issued three shares of its 1,000 shares of stock, par value $100 per share, for $300 cash. Of the remaining 997*1256 shares of the corporation's stock, 648 and 349 were issued on May 20, 1930, to Isaac W. Frank and his wife, respectively, for all of the corpus of petitioner, and securities removed by the individuals from revocable trusts created by them on May 4, 1928. Petitioner's share of the stock was issued to Isaac W. Frank by mistake. Decedent's son, William K. Frank, was president of the corporation. On May 21, 1930, Isaac W. Frank and his wife each created irrevocable trusts, the corpora of which consisted of all of the stock of I. W. Frank, Inc., 650 shares held by the former and 350 shares held by the latter. A bank and the grantor's two sons and his son-in-law were named cotrustees of the trusts. The trustees of the husband's trust were directed to pay annually to the grantor's *936 wife $50,000 during his life and $75,000 thereafter. The balance of the income during the life of the wife, and after her death all of the income, was to go in equal shares to the three children for their respective lives. Upon the death of any child the share of income he or she would have received, if living, was to go to his or her surviving spouse and issue, if any. Other provisions were*1257 made for distribution of income among children and grandchildren under specified conditions. Upon the termination of the trust the corpus was to go to the issue of each child, provided, however, that the children of the grantor could, by their last will, change the distribution of their share of the income and principal and the trustees could, after the death of the grantor and his wife, distribute the corpus to the three children in the event all of them agreed thereto. The income of the trust of Tinnie K. Frank was payable in equal shares to the three children for life. Other provisions of the trust were similar to the trust of Isaac W. Frank. On May 22, 1930, the Frank Securities Corporation, a Delaware corporation organized May 9, 1930, with an authorized capital stock of 20,000 shares without par value, issued 1,449 and 722 shares of its stock to Isaac W. Frank and his wife, respectively, for cash. Four days later 7,829 shares of the stock were issued to I. W. Frank, Inc., in exchange for the securities which the latter had acquired on May 20, 1930. I. W. Frank, Inc., distributed, in liquidation proceedings, the 7,829 shares of stock, its sole asset, to its stockholders, *1258 5,089 shares to the Isaac W. Frank trust of 1930 and 2,740 shares to Tinnie K. Frank's trust. Of the shares issued to the former, 3,261 should have been issued to petitioner. The error was corrected in September 1930. I. W. Frank, Inc., was dissolved July 12, 1930. The Frank Securities Corporation was a personal holding corporation as defined in section 351 of the Revenue Acts of 1934 and 1936. On June 23, 1930, Isaac W. Frank and his wife transferred to the trusts created by them on May 21, 1930, the shares of stock they acquired from the Frank Securities Corporation for cash. The petitioner in December 1931 acquired 260 shares of stock of the Frank Securities Corporation for cash. Thereafter and on October 4, 1935, 3,521 shares of the 10,260 shares of outstanding stock of the Frank Securities Corporation were held by petitioner and the trusts executed by Isaac W. Frank and his wife in 1930 held 3,315 and 3,424 shares, respectively. Isaac W. Frank died December 1, 1930. At all times important after September 21, 1931, his two sons and his son-in-law were cotrustees of the three trusts and directors of the Frank Securities Corporation. From the date of its organization*1259 to October 4, 1935, the Frank Securities Corporation distributed to its stockholders $459,519.52 in *937 excess of its earnings and profits. In 1931 the corporation had income of $183,000 from dividends and interest and distributed $160,000 to the trusts as dividends. In 1932 it distributed $141,000 and had like income of $126,000. In 1933 it had income, exclusive of capital losses, of $114,000 and distributed $123,120. A like amount of dividends was paid in 1934, when the income of the corporation, exclusive of capital losses, was $122,000. In and after 1931 the trustees had doubt about their power to distribute to life beneficiaries of the trusts dividends paid by the Frank Securities Corporation out of capital. On October 4, 1935, the petitioner and the trusts created by Isaac W. Frank and his wife in 1930 formed a partnership known as the Frandel Partnership, and contributed thereto the shares of stock they held in the Frank Securities Corporation. The articles of copartnership provided, among other things, that title to any securities might be taken in the name of some one of the trustees of the trusts or some other person or other partnership; that the profits*1260 and losses of the partnership would be shared in proportion to the capital contributions of the partners; that the partnership would continue until December 31, 1935, and thereafter from year to year unless written notice was given at least 30 days prior to the expiration of any year of a desire to terminate the partnership; and that the partnership was formed in the State of Delaware for the purpose of transacting its affairs in that state and that the articles of copartnership should be construed under the laws of Delaware. On the same day the certificates evidencing the stock contributed by the partners were surrendered to the corporation and reissued in one certificate in the name of the partnership. The shares of stock contributed to the capital of the partnership had the following adjusted bases in the hands of the respective contributors on the date of contribution: Contributor Shares of stock Basis Petitioner 3,521 $570,388.99 Isaac W. Frank Trust of 1930 3,315 1,561,093.57 Tinnie K. Frank Trust of 1930 3,424 1,304,088.65 Total 3,435,571.21 The business of the Frank Securities Corporation, including the securities owned by it, was transferred*1261 from Pennsylvania to Delaware in October 1935. This transfer of location of the corporation and its assets was made for the purpose of avoiding new personal property and income tax laws enacted prior thereto in 1935 by the State of Pennsylvania. *938 On October 5, 1935, the Frank Securities Corporation, pursuant to a resolution adopted by its board of directors on that date, distributed shares of stock of eight corporations, including 7,200 shares of stock of the General Motors Corporation, to the Frandel Partnership. At that time there was no plan to make further distributions to the partnership. This distribution was made for the purpose of placing in the hands of the partnership assets with which to conduct business, and with the view of reducing potential liability of the trustees of the trusts to remaindermen thereof on account of distributions made to beneficiaries in excess of earnings of the Frank Securities Corporation. The trustees had received releases from some of the remaindermen, but were unable to obtain releases from the remaindermen who were under age. After the distribution the partnership collected income on its investments, sold and purchased securities, *1262 and in other respects conducted a general business of management of investments, and the Frank Securities Corporation continued to carry on its usual business activities. On December 31, 1935, the Frank Securities Corporation filed a certificate with the State of Delaware to reduce its capital from $7,826,126.78 to $10,260. Appropriate entries made thereafter on the same day eliminated deficits in the corporation's earned surplus and capital surplus accounts and created a capital surplus of $2,802,223.48. The capital of the corporation was reduced to comply with a request made by the General Motors Corporation in connection with a transfer of stock certificates distributed by the corporation to the partnership on October 5, 1935. During the early part of 1936 counsel advised petitioner that the partnership's basis in stock of the Frank Securities Corporation was the aggregate of the bases of the stock in the hands of the contributing partners and that further distribution by the Frank Securities Corporation to the partnership would not result in taxable gain until the amount thereof, with prior distributions, exceeded such aggregate basis. In April 1936 he advised a distribution*1263 by the corporation to its stockholders to avoid additional potential liability of the trustees to remaindermen of the trusts and to place a larger amount of assets of the corporation in the hands of the partnership. On April 23, 1936, the Frank Securities Corporation changed its authorized capital stock of 20,000 shares to a par value of $1 per share. The stock was changed from a no par value to a par value of $1 per share for the purpose of reducing capital stock taxes to the State of Delaware. The amendment to the corporation's charter had no connection with the distributions made to its stockholder. On April 30, 1936, the Frank Securities Corporation, pursuant to action taken at meetings of its directors and stockholders on April *939 24, 1936, distributed certain stocks and bonds to the Frandel Partnership. The distribution was reflected on the books of the corporation by a charge to capital surplus in the amount of $1,517,365.40. Counsel advised the Frank Securities Corporation to confine the distributions to an amount less than the aggregate basis of its stock in the hands of the partnership. The trustees concluded after this distribution that the partnership*1264 had recovered its basis and decided against further distribution by the corporation. At the close of business on October 4, 1935, and April 29, 1936, the net assets of the Frank Securities Corporation at market or quoted prices without regard to blockage were $4,438,497.43 and $3,105,165.57, respectively. From December 31, 1936, to December 1, 1938, the Frank Securities Corporation distributed $1,919.27 in excess of its earnings and profits. On December 12, 1938, the Frank Securities Corporation transferred all of its assets to the Frandel Partnership, its sole stockholder, in complete liquidation. Liquidation was made at that time in order to take advantage of favorable liquidation provisions of the Revenue Act of 1938. There was not at any time prior to the enactment of the Revenue Act of 1938 any intention or plan to liquidate the Frank Securities Corporation in whole or in part. Counsel had advised against liquidation under prior revenue acts on account of their unfavorable terms. The Frandel Partnership did not distribute to petitioner or its other members any of the distributions in kind received by it from the Frank Securities Corporation on October 5, 1935, April 30, 1936, and*1265 after December 31, 1936. It has, however, distributed all of its income, including all of the income of the Frank Securities Corporation, to its members, which have in turn distributed it to their beneficiaries. The respondent determined that distributions made by the Frank Securities Corporation at the times indicated had the following values, based upon market or quoted prices without regard to blockage: Date of distribution Value October 5, 1935 $1,539,178.63 April 30, 1936 n1 1,661,852.67 Total 3,201,031.30 October 4, 1935, to December 31, 1936 n2 58,103.47 Total 3,259,134.77 [1] The fair market values of the securities on the dates of distribution were in the amounts determined by the respondent. *940 In his determination of the deficiency the respondent allocated to petitioner a pro rata share, based on its 34.78 percent interest in the partnership, of the $3,201,031.30 distributed in 1935 and 1936. No part of the $58,103.47 was allocated to petitioner, since the amount was distributed*1266 by the partnership to the two other partners on November 3, 1935. From the amount of $1,113,191.06 so allocated the respondent deducted petitioner's adjusted basis of $570,388.99 in the 3,521 shares of stock distributed to the partnership, and arrived at taxable gain of $542,802.07 to petitioner in 1936. By a similar method the respondent determined that the other partners had not recovered their bases in the stock contributed by them to the partnership and had realized no gain. In 1940 the respondent, in order to protect his statutory rights, allocated to the other two members of the partnership pro rata portions of the gain based upon their partnership interests, and determined deficiencies against them. OPINION. DISNEY: The respondent contends upon brief that the Frandel Partnership should be disregarded upon the ground that its sole purpose was tax avoidance and therefore it had no business purpose; that the trust agreements do not authorize the trusts to become members of a partnership; and that the Revenue Act of 1936 does not recognize partnerships composed of trusts. 1. Was the formation of the partnership for the sole purpose of avoiding taxes?*1267 - It is apparent from the evidence of record that tax consciousness prompted some of the transactions preceding the 1936 distribution. The reports contain numerous cases in which the object of the transaction in controversy was tax reduction or complete avoidance within the limits of law. The right of a taxpayer to take advantage of lawful means to reduce the amount of his taxes or avoid them altogether is well recognized. Gregory v. Helvering,293 U.S. 465, in which the Court said: * * * It is quite true that if a reorganization in reality was effected within the meaning of subdivision (b), the ulterior purpose mentioned [motive of taxpayer to escape tax] will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted. * * * The creation of trusts for tax-saving purposes is not fatal, Elizabeth K. Lamont,43 B.T.A. 61, and it is proper for trustees to perform their duties in such a way as to save taxes. *1268 John D. McKee et al., Trustees,35 B.T.A. 239. The doctrine applies to partnerships. Chisholm v. Commissioner, 79 Fed.(2d) 14; certiorari denied, 296 U.S. 641. Higgins v. Smith,308 U.S. 473, involving the deductibility of a loss on a sale of securities by Smith to a wholly owned corporation whose transactions were restricted largely to dealings with its stockholder, *941 proceeds from the theory that substance may be followed by the Government in instances where the method adopted to carry the plan into effect was unreal or a sham. A similar case is Griffiths v. Helvering,308 U.S. 355. The case of Campana Corporation v. Harrison, 114 Fed.(2d) 400, involved excise taxes and turned upon the fact that the sales to a corporation having the same stockholders were not arm's length transactions. A like case is Continental Oil Co. v. Jones, 113 Fed.(2d) 557. The record discloses that the Frandel Partnership was not an organization created with tax avoidance as its primary or sole object. 2. Was it formed for a business purpose? - We think*1269 it was created for such a purpose and to relieve, in the opinion of the trustees, the situation that had developed on account of distributions of capital to beneficiaries of the trust. The respondent argues, however, that the trustees could have solved the difficulties by obtaining releases from all of the parties in interest. The trustees decided upon the formation of a Delaware partnership as the best means of solving the problem. That a different course of procedure would have been just as effective, or simpler, is not controlling. Our decision must proceed from the facts as they exist, not from what might have been done. 3. Did the trustees have power to organize the partnership? - The trustees of petitioner had power to invest and reinvest the principal of the trust "in the discretion of the trustees, in stocks, interest-bearing securities and/or first mortgages upon improved real estate," without limitation to securities designated under Pennsylvania laws as trust investments. The other trusts, in addition to like authority, empowered the trustees "to do all things and make any and all contracts concerning this trust estate that I could do or make if I continued*1270 to own the same." During the lifetime of the grantor the corpus of petitioner was transferred to I. W. Frank, Inc., for stock of the corporation and thereafter the assets, together with the corpus of the two trusts created by Isaac W. Frank and his wife on May 21, 1930, were exchanged for stock of the Frank Securities Corporation. The corporation at all times thereafter during the lifetime of the grantor held the original assets not only of petitioner, but of the other two trusts. This discloses intent on the part of the grantor to pool the corpus of his trusts with other assets in a single enterprise. The plan was in effect until the formation of the partnership in 1935, when the administration of the original assets was divided between the partnership and the corporation. There was not at any time any actual delegation of power by the trustees. The grantor's two sons and his son-in-law were throughout 1935 and 1936 the directors of the Frank Securities Corporation and trustees of the trusts, and consequently there was not any relinquishment or delegation of power in favor of other persons. Any delegation *942 was to themselves serving in a like capacity in other trusts. *1271 The assets of petitioner were subject to losses sustained in the administration of the assets of the other trusts. Each trust, however, received the benefit of gains realized by the other trusts, and the pooling arrangement had been in force since 1930, partly during the lifetime of the decedent. The intervention of the partnership created no substantial change in the real nature of the pooling venture. The segregation of the assets in common enterprises was regarded for the best interests of the beneficial owners of the trust property, and we can not say that this was an abuse of discretion, or that the act was unreasonable. Cooperation with others is not a breach of a trustee's duty to the beneficiary. Sec. 171, Restatement of Trusts. It does not appear that the beneficiaries of the trusts ever questioned the power of the trustees to invest corpus in capital of a partnership. The respondent has recognized the Frandel Partnership as a partnership for purposes other than the distribution in question here. If the trustees had no authority to form the partnership, the respondent, not being a party in interest, is in no position to question it. See *1272 Joseph F. Hindes, Trustee,29 B.T.A. 498; Francis M. Camp,21 B.T.A. 962; Lewis E. Smoot,25 B.T.A. 1038; Joseph S. Finch & Co.,23 B.T.A. 1153; Alfred T. Wagner,17 B.T.A. 1030; Albert G. Dickinson,23 B.T.A. 1212. 4. Statutory authority for partnership. - The respondent cites sections 181 and 1001(a)(1) to support his contention that a partnership which has trusts as partners is not recognized by the Revenue Act of 1936. The petitioner refers us to sections 161 and 162. The respondent has recognized the estate of a decedent as a partner under sections 1 and 218(a) of the Revenue Act of 1918, which read the same as sections 181 and 1001(a)(1), supra. .i.T. 2026, C.B. III-1, p. 213. He has also held a corporation to be liable under the same act on its share of the profits of a foreign partnership of which it was a member. O.D. 230, C.B. No. 1, p. 212. We have heretofore recognized New York partnerships having a trust as a member. *1273 M. A. Reeb,8 B.T.A. 759; Charles E. Ives,29 B.T.A. 822. None of the revenue acts prior to the Revenue Act of 1932 contained a definition of the term partnership. Section 1111(a)(3) of the 1932 Act reads as follows: (a) When used in this Act - * * * (3) The term "partnership" includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate, group, pool, joint venture, or organization. *943 The definition was continued in subsequent acts. Sec. 801(a)(3), Revenue Act of 1934; sec. 1001(a)(3), Revenue Act of 1936; sec. 901(a)(3), Revenue Act of 1938; sec. 3797(a)(2), Internal Revenue Code. Any doubt as to the meaning of sections 181 and 1001(a)(1), supra, is dispelled by the statutory definition of the term partnership as used in revenue acts commencing with the 1932 Act. The provision does not require the members of the organization to be individuals. If the Frandel Partnership*1274 is not an ordinary partnership, it is a partnership within the statutory definition. Joseph L. Selling,22 B.T.A. 920; affd., 64 Fed.(2d) 712, relied upon by respondent, involved the Revenue Act of 1921, and Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110, cited therein, related to tax liability under the Revenue Act of 1918. We think the Frandel Partnership is a partnership within the meaning of the Revenue Act of 1936. Dolores Crabb,41 B.T.A. 686. 5. Basis for computing gain or loss. - The contention of the petitioner is that, since the combined basis of the stock of the Frank Securities Corporation contributed by the three trusts to the partnership is in excess of the value of the property distributed by the corporation to the partnership in 1935 and 1936, as determined by the respondent, no gain was realized. In his determination of the deficiency the respondent computed gain of $542,802.07 by allocating to petitioner a pro rata share of the distribution of securities in 1935 and 1936 based upon its 34.78 percent interest in the partnership, the amount being $1,113,191.06, and deducting therefrom*1275 petitioner's adjusted basis of $570,388.99. The point of difference between the parties is whether gain or loss to the partnership on the distributions should be computed on an aggregate basis of all of the stock or the separate basis of each partner. No cases are cited by either party in which the precise question was presented for decision. Petitioner argues that, while section 113(a)(13) of the Revenue Act of 1936 1 requires a partnership to use the transferor's basis, it is silent as to situations such as in the instant case, where *944 there were simultaneous contributions in kind by several partners of identical property, and, since section 183 requires that the net income of a partnership be computed in the same manner and on the same basis as an individual, the rules applicable to individuals would apply to partnerships. The cases of Standard Fuel & Material Co.,29 B.T.A. 51; Cyrus S. Eaton,37 B.T.A. 715; and Raoul H. Fleischmann,40 B.T.A. 672, cited by petitioner, involved different facts and are not decisive of the question. *1276 Prior to the Revenue Act of 1934 there was no statutory provision specifying the basis to be used by a partnership for a computation of gain or loss on the sale of property contributed by a partner. The Commissioner contended that the basis should be cost to the partner. G.C.M. 10092, C.B.X-1, p. 114. This Board and the courts declined to adopt the view of the Commissioner and held that the basis was the value of the property at the time of its contribution to the partnership. Edward B. Archbald,27 B.T.A. 837; affd., 70 Fed.(2d) 720; certiorari denied, 293 U.S. 594; Helvering v. Walbridge, 70 Fed.(2d) 683; certiorari denied, 293 U.S. 594; Chisholm v. Commissioner, 79 Fed.(2d) 14; certiorari denied, 296 U.S. 641; United States v. Flannery, 106 Fed.(2d) 315; Carroll E. Donner et al., Guardians,32 B.T.A. 364. The Commissioner adhered to the rule set forth in G.C.M. 10092 pending the outcome of further litigation of the question. Mim. 4311, C.B. XIV-1, p. 208. This Board continued to follow the Archbald,*1277 Walbridge, and Chisholm decisions. Cyrus S. Eaton, supra. While this conflict existed between decisions of the Board and the courts, and rulings of the Commissioner, changes in the partnership provisions of the existing revenue law were being considered by the Treasury Department and committees of Congress to prevent evasion of tax by the use of the partnership form of doing business. Hearings before the Committee on Ways and Means, Revenue Revision, 1934. The consideration resulted in the enactment of section 113(a)(13), supra. The new provision in question provides in unambiguous language that, upon the sale of property contributed by a member of a partnership, gain or loss shall be determined not upon the basis of the fair market value of the asset at the time of its contribution, as had been held by the Board and the courts, but upon the basis of cost or other basis of the contributing partner, adjusted for gain or loss to the contributor at the time of transfer, in accordance with the method outlined in G.C.M. 10092, supra. The object was to prevent stepped-up basis resulting for contributions of property which had appreciated*1278 in value. The intent of section 113(a)(13), aside from its clear language, is *945 shown by reports of committees of Congress. In Report No. 704, on the Revenue Act of 1934, the Committee on Ways and Means said: The subcommittee and the committee have made a careful study of the taxation of partnerships. It has been strongly contended that many large partnerships, particularly those engaged in the banking and security business, have been the vehicle of wide-spread tax avoidance. It has been pointed out that wealthy partners have applied partnership losses against their individual incomes, with the result that in some of the past few years they have paid no individual income taxes. If any avenue of escape from the income tax through the use of the partnership provisions has been left open in the past, it is important that it should be completely closed at this time. * * * The committee also proposes two important changes in connection with the basis provisions, for the purpose of making it entirely certain that there can be no use of the partnership as a medium of tax avoidance in cases of sales of property, which has appreciated in value. The result of the provisions*1279 of section 113(a)(13) is that if property is purchased by a partnership the basis of such property to the partnership shall be its cost; but if the property is paid in by a partner then the basis to the partnership shall be the cost or other basis to the partner. The committee believes that this provision simply makes specific the correct interpretation of the general provisions of the present law. * * * Identical language appears in the report of the Finance Committee of the Senate. Rept. No. 558, p. 18. If a partnership sold the specific asset contributed by one of its members, there can be no doubt that the gain or loss to the partnership under section 113(a)(13) would be measured by the difference between the selling price and the basis the property had in the hands of the transferor. Accordingly a sale by the partnership of the shares of stock contributed by petitioner would have resulted in gain or loss to the firm computed on the basis of the stock in the hands of petitioner. We fail to see how the result could be different under the circumstances herein, where there were simultaneous contributions of like property. The formation of partnerships generally involves*1280 concurrent transfers of assets by the members and the property of the firm is frequently of a like kind. There is no indication that Congress intended to exclude such transactions from the general terms of the provision in question. The regulations under the provision 2 recognize no basis other than the one to the contributing partner. This obviously excludes a basis *946 representing the combined bases of all the contributing partners, as contended by the petitioner. Subsequent revenue acts and regulations promulgated thereunder contain like provisions. Sec. 113(a)(13), Revenue Acts of 1936 and 1938, and Internal Revenue Code; article 113(a)(13) - 1, Regulations 94, 101, 103. *1281 It seems clear that Congress intended that no contribution of property to a partnership by a member of the firm should result in a change of basis of the asset in the hands of the partnership. Combining the bases of the partners would work such a change. The reenactment by Congress of section 113(a)(13) in subsequent revenue acts without change discloses legislative approval of the regulations. Brewster v. Gage,280 U.S. 327. We do not regard as important the consolidation on the date of receipt by the partnership of the six stock certificates, two from each partner, into one certificate for 10,260 shares. The purpose of the statute to continue in the hands of the partnership the basis of the contributing partner may not be defeated by a simple transaction of that nature having no substance. The respondent committed no error in using as a basis for the computation of gain the basis the stock had in the hands of the transferor, the petitioner. He did err, however, in the method he used to allocate the distribution against such transferor's base. He allocated thereto 34.78 percent of the distribution, because 34.78 percent was petitioner's distributive*1282 share of the partnership income. The distributions were made pro rata on all of the 10,260 shares of outstanding stock. He should have allocated to the base of the 3,521 shares 3521/10260 of the distribution, i.e., in proportion to the transferor's contribution of 3,521 shares to total partnership capital of 10,260 shares of stock in the Frank Securities Corporation. The petitioner's distributive share of partnership income does not determine allocation of distribution to base. It does, under section 182, Revenue Act of 1936, 3 determine the amount of the partnership net income arising from profit in the distribution which should be included in petitioner's income. Therefore, 34.78 percent of the partnership profit from the distribution, which the parties seem to agree is the same as its net income, should be included in computing petitioner's net income. 6. Character of the distributions. - In view of our holding on the issue as to the proper basis, it*1283 will be necessary to decide the alternative question raised by the petitioner concerning the character of the distribution. *947 The petitioner contends that the property received by the partnership was not a liquidating dividend and that section 115(d) 4 applies. The respondent contends that the distributions were made under section 115(c). 5 *1284 In T. T. Word Supply Co.,41 B.T.A. 965 (980), we said: * * * The liquidation of a corporation is the process of winding up its affairs by realizing upon its assets, paying its debts, and appropriating the amount of its profit and loss. It differs from normal operation for current profit in that it ordinarily results in the winding up of the corporation's affairs, and there must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. A mere declaration is not enough, and the question whether a corporation is in liquidation is one of fact. W. E. Guild,19 B.T.A. 1186; Fred T. Wood,27 B.T.A. 162. * * * The decisive factor has been said to be "whether the distribution was made with the intent to maintain the corporation as a going concern or with the intent to liquidate the business." Horn & Hardart Baking Co. v. United States,34 Fed.Supp. 89. The respondent contends that the intent during and after 1935 was to liquidate the corporation, and that, accordingly, the 1935 and 1936 distributions*1285 were two of a series of distributions in liquidation. The evidence here does not support such a finding. The uncontradicted evidence of petitioner's witnesses is that the 1935 distribution was not part of a plan to liquidate the corporation at that time or in the future, but for the purpose of giving the partnership assets of a character to enable it to actively engage in *948 business and earn income available for distribution to life beneficiaries without incurring additional liability of the trustees for distributions out of capital. Thereafter the partnership carried on a business of dealing in investments and the corporation continued its usual business affairs with less assets. A further distribution was made in 1936 for similar reasons. Some consideration was given to liquidation under provisions of the Revenue Act of 1936, but they were not regarded as favorable, from a tax viewpoint, and no action to that end was taken. No plan of liquidation was adopted until the passage of the Revenue Act of 1938, and the decision was made at that time because of beneficial provisions of the statute. We find no connection, direct or indirect, between the distribution in 1938*1286 and the distributions made in 1935 and 1936. A partial liquidation is defined as "a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock." Sec. 115(i). 6 There was no cancellation or redemption of a part of the corporation's stock in 1935 or 1936. The one certificate held by the partnership for all of the corporation's stock remained outstanding until the dissolution of the corporation in 1938. The reduction of capital at the close of 1935, resulting in the conversion of a deficit into surplus, and the change made in 1936 in the face value of the corporation's stock from no par value to a value of $1 per share, are not decisive. Neither had any connection with a plan of liquidation or in any wise*1287 altered the investment of petitioner. The partnership continued to be the holder of all of the corporation's stock. Hellman v. Helvering, 68 Fed.(2d) 763; Rheinstrom v. Conner,33 Fed.Supp. 917; John B. Stewart,29 B.T.A. 809; W. & K. Holding Corporation,38 B.T.A. 830. In Tecla M. Straub,29 B.T.A. 216; affd., 76 Fed.(2d) 388, there was proof that the corporation had been winding up its affairs for four years and in Dill Manufacturing Co.,39 B.T.A. 1023, there was a retirement of stock. Such facts are not present here. We conclude that the distribution made in 1936 was not a liquidating dividend and that it is taxable under section 115(d). 7. Fair market value of the distributions. - The valuations determined by the respondent for the securities distributed by the corporation to the partnership in 1935 and 1936 are based upon market or quoted prices without regard to blockage. The 1935 distribution consisted of about 35,000 shares of stock of eight corporations, not *949 less than 1,000 shares of any corporation. The distribution in 1936*1288 consisted of about 26,000 shares of stock of 36 corporations in blocks of from 25 to about 2,500 shares, and bonds of a face value of about $500,000, of which $450,000 were real estate bonds and the remainder were bonds of the New York Central & Hudson Railroad. The railroad bonds and most of the stocks were listed on the New York Stock Exchange and some of these were also traded in on other exchanges. The real estate bonds were unlisted securities. The values found by the respondent are, in general, the mean between the high and low selling prices on the basic dates or the bid and asked prices on unlisted securities. The petitioner offered testmony of three witnesses to establish lower valuations. In some instances the valuations of these witnesses agree with the values determined by the respondent. Their aggregate value for the stocks and railroad bonds is only about $190,000 less than the total value determined by the respondent. Only one of the witnesses testified on the value of the real estate bonds and his valuation is about $13,000 lower than the total value found by the respondent. All of them valued the securities at a discount on account of the volume involved. *1289 The two witnesses who testified concerning the stocks admitted that their values were speculative and conjectural. Many of the stocks discounted by the witnesses on account of the number of shares involved were bought and sold in large volume. The effect on an active market of an offering of a large block of stock is a matter of proof, not of assumption. Safe Deposit & Trust Co. of Baltimore, Executor,35 B.T.A. 259. The proof is lacking here. Market prices are the best evidence of the value of the stock. Estate of Leonard B. McKitterick,42 B.T.A. 130. The evidence here as to value does not overcome, in our opinion, the prima facie presumption existing in favor of the respondent's valuations, and we have, accordingly, found values for the securities in accordance with his determination. Reviewed by the Board. Decision will be entered under Rule 50. MELLOTT MELLOTT, dissenting: I respectfully dissent from the holding of the majority to the effect that the Frandel Partnership is a partnership within the meaning of the Revenue Act of 1936. In the trust agreement the settlor granted, bargained, sold, transferred and*1290 set over unto the Bank of Pittsburgh National Association and to Isaac W. Frank, as joint trustees, certain securities "to have and to hold the said moneys and securities and the investments into which the same *950 may be hereafter converted and to invest and reinvest the same from time to time, in the discretion of the trustees, in stocks, interest bearing securities and/or first mortgages upon improved real estate * * *." They were to "collect, recover and receive, the interest, income and dividends upon said securities, money and investments, when due and payable" and to pay over not to exceed the sum of $60,000 annually to the donor. After the death of the donor "the trust shall continue as theretofore" and all of the net income is to be paid to the donor's sons and daughter. The trust is to end when the last surviving child of the donor is deceased and the donor's daughters-in-law and son-in-law shall have died or remarried. Any funds held by the trustees "arising from the sale or maturity of securities, or otherwise, shall be invested pursuant to the terms hereof in such securities as the trustee shall deem wise, such investments not being limited to such securities*1291 as are designated under the laws of Pennsylvania as 'trust investments'." In my judgment the trustees had no power or authority to enter into such a partnership agreement as that shown in the findings or to "contribute" to the partnership the shares of stock held by them in trust. This would be a delegation of their trustee powers and duties to the other partners and subject the assets of the trust to the payment of partnership debts, contrary to the clear intent of the grantor. Moreover, an examination of the record indicates quite clearly not only "that tax consciousness prompted some of the transactions", as set out in the majority opinion, but that the sole purpose of the organization of the partnership was to minimize or altogether avoid Federal income taxes. Under such circumstances, even if the partnership were a valid entity, which I do not concede, it should be disregarded under the rationale of such cases as Higgins v. Smith,308 U.S. 473; Gregory v. Helvering,293 U.S. 465; and *1292 Griffiths v. Helvering,308 U.S. 355. Footnotes 1. Securities $1,669,544.16 less $7,691.49 for current earnings included therein. 2↩ Cash distributions in excess of earnings and profits. 1. SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS. (a) BASIS (UNADJUSTED) OF PROPERTY. - The basis of property shall be the cost of such property; except that - * * * (13) PARTNERSHIPS. - If the property was acquired, after February 28, 1913, by a partnership and the basis is not otherwise determined under any of the paragraphs (1) to (12), inclusive, of this subsection, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. If the property was distributed in kind by a partnership to any partner, the basis of such property in the hands of the partner shall be such part of the basis in his hands of his partnership interest as is properly allocable to such property. ↩ 3. SEC. 182. TAX OF PARTNERS. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. ↩ 4. SEC. 115. DISTRIBUTIONS BY CORPORATIONS. * * * (d) OTHER DISTRIBUTIONS FROM CAPITAL. - If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not a dividend, then the amount of such distribution shall be applied against and reduce the adjusted basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. ↩ 5. (c) DISTRIBUTIONS IN LIQUIDATION. - Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117(a), 100 per centum of the gain so recognized shall be taken into account in computing net income, except in the case of amounts distributed in complete liquidation of a corporation. For the purpose of the preceding sentence, "complete liquidation" includes any one of a series of distributions made by a corporation in complete cancellation or redemption of all of its stock in accordance with a bona fide plan of liquidation and under which the transfer of the property under the liquidation is to be completed within a time specified in the plan, not exceeding two years from the close of the taxable year during which is made the first of the series of distributions under the plan. In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation (other than a distribution within the provisions of subsection (h) of this section of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits. ↩ 6. (i) DEFINITION OF PARTIAL LIQUIDATION. - As used in this section the term "amounts distributed in partial liquidation" means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. ↩ Footnotes [_fnote3] ART. 113(a)(13)-1. [Regulations 86.] Property contributed in kind by a partner to a partnership. - The basis of property contributed in kind by a partner to partnership capital after February 28, 1913, is the cost or other basis thereof to the contributing partner. * * * On the sale or other disposition of such contributed property by the partnership the gain or loss, determined on such transferred basis, adjusted as required by section 113(b), shall be prorated in determining the distributive shares of the partners according to their gain or loss ratios on the disposition of a partnership asset under the partnership agreement.