
    378 F. 2d 686
    NORTHERN PACIFIC RAILWAY COMPANY, TRANSFEREE OF NORTHWESTERN IMPROVEMENT COMPANY v. THE UNITED STATES
    [No. 261-63.
    Decided June 9, 1967]
    
      
      Quinn O’Connell for plaintiff; Robert T. Molloy, attorney of record. Gerald J. O’Rourke, Jr. and Robert E. Simpson, of counsel.
    
      Richard J. Boyle, with whom was Assistant Attorney General Mitchell Rogovin, for defendant. Philip R. Miller, of counsel.
    Before Cowen, Chief Judge, Laramore, Dureee, Davis, Collins, Skelton and Nichols, Judges.
    
   Davis, Judge,

delivered the opinion of the court :

Northern Pacific Railway Company brought this suit to recover federal income taxes of $74,608.32 and deficiency interest of $19,631.18, which it paid as transferee of Northwestern Improvement Company (“Northwestern” or “NWI”), for the final taxable year of NWI commencing January 1, 1957, plus statutory interest.

At issue in the case is whether plaintiff, as transferee and successor to its wholly owned subsidiary, NWI, is entitled under the Internal Revenue Code of 1954 to a deduction for a capital loss incurred by the transfer on December 3, 1957 of 15,000 shares of Northern Pacific stock from NWI to Cuyuna Realty Company, then a wholly owned subsidiary of NWI.

Plaintiff is a Wisconsin corporation with principal offices in St. Paul, Minnesota. It is in the business of operating as a common carrier by rail in interstate and foreign commerce, subject to the jurisdiction of the Interstate Commerce Commission. On December 20, 1957, plaintiff acquired 'all of the then existing assets and liabilities of NWI, a Delaware corporation, pursuant to a duly authorized plan for a tax-free liquidation of NWI which had been adopted on October 25, 1956, and carried out under the provisions of sections 332 and 334(b) of the Internal Revenue Code of 1954 (26 U.S.C. §§332 and 334(b) (1) (1958)). On December 18, 1956, NWI filed a certificate of dissolution with the State of Delaware which the Secretary of State of that state approved on December 21, 1956.

Cuyuna was a wholly owned subsidiary of NWI until the latter corporation was dissolved. After the dissolution of NWI, Cuyuna became a wholly owned subsidiary of Northern Pacific. The president, vice presidents, secretary, treasurer, and comptroller of Northern Pacific held the same offices in NWI and Cuyuna and were directors of 'all three of these corporations. Other directors of NWI and Cuymia were also directors 'and/or employees of Northern Pacific. It cannot be seriously questioned on the basis of the evidence in the record that Northern Pacific had full control over the affairs of NWI and Cuyuna, and that Mr. R. S. Macfarlane, President of Northern Pacific, dominated the other officers and members of the boards of directors for the three corporations, particularly NWI and Cuyuna because some of Northern Pacific’s directors did not serve as directors of these two subsidiaries.

On November 29, 1956, the Board of Directors of NWI adopted a plan of recapitalization for Cuyuna, and on the same day, Cuyuna’s Board of Directors approved and accepted the plan adopted by its parent. Pursuant to this plan, NWI transferred to Cuyuna on December 21,1956, inter alia, certain real property and $200,000 in cash in exchange for new stock certificates and evidences of indebtedness, plus the cancellation of old notes, stock certificates, and other evidence of indebtedness of Cuyuna.

Commencing in 1957, during the course of dissolution of NWI, Cuyuna undertook NWI’s construction 'activities and was used ’as the railroad car-building subsidiary for Northern Pacific. NWI had previously been used for that purpose. One particular activity which NWI transferred to Cuyuna as a capital contribution was Program “U”. This program involved the construction of '500 railroad cars, and Cuyuna acquired the project when it was 'approximately one-half completed. From Cuyuna’s standpoint, Program “U” produced neither a profit nor a loss — it was a cost program. By a conditional sales contract dated September 1, 1957, Cuyuna sold the cars constructed under Program “U” to Northern Pacific.

During the period from 1906 through 1955, NWI acquired a total of 30,666 shares of Northern Pacific stock for cash. These shares were purchased at their fair market value as of the time of their acquisition. NWI did not acquire additional shares of Northern Pacific stock after 1955.

On November 7th and 14th, 1956, NWI sold a total of 1,000 shares of its Northern Pacific stock with a tax basis of $69,874.80 in the open market at losses totaling $31,223.89.

On November 20, 1956, the Board of Directors of NWI adopted a resolution authorizing the president or vice president of NWI “to sell at the best prices obtainable all or any part of the capital stock of Northern Pacific Bailway Company registered in the name of Northwestern Improvement Co.; * * In conformity with this resolution, NWI sold a total of 9,600 shares of its Northern Pacific stock in 1956 and 1957, at their fair market value on the dates of the respective sales. Out of the 9,600 shares, 4,200 shares, with a tax basis of $293,704.75, were sold at various times during 1956, for losses totaling $132,079.13, and 5,400 shares, with a tax basis of $361,030.08, were sold at various times during 1957, for losses of $130,722.28.

On December 2, 1957, the Board of Directors of Cuyuna authorized its officers to submit and offer to NWI to purchase 15,000 shares of Northern Pacific stock then held by NWI at $35.00 per share. NWI accepted this offer on December 3, 1957, pursuant to the resolution of November 20, 1956, and then on the same day, NWI transferred 15,000 shares of Northern Pacific stock, with an adjusted tax basis of $823,433.30, to Cuyuna in exchange for $525,000, i.e., 15,000 shares at $35.00 per share — -which was $298,433.30 less than NWI’s adjusted tax basis. The parties stipulated that this sum of $525,000 represented the fair market value of the 15,000 shares on the date they were transí erred to Cuyuna, as established by price quotations of the New York Stock Exchange.

Basically, the decision by Cuyuna to purchase 15,000 shares of Northern Pacific stock was dictated by Mr. Mac-farlane, President of Northern Pacific, who, as previously noted, also was President of NWI and Cuyuna. He did not testify at the trial; however, his executive assistant, Mr. Koerper, who was a director of both NWI and Cuyima, was present at the time the decision was made to purchase the stock and he presented testimony to the effect that he approved of Mr. Macfarlane’s plan for several “business reasons.” Koerper stated that the principal reason was that he felt that Cuyuna needed the shares as earning assets in its financial structure in order to build up much needed working capital. Also, he believed that it would be undesirable to permit the shares to be placed in Northern Pacific’s treasury because, in the first place, the Interstate Commerce Commission could then prevent Northern Pacific from disposing of them; second, the shares could not be voted while they were treasury stock, and third, treasury shares would be subject to “after-acquired” property clauses in Northern Pacific’s prior lien mortgage and general lien mortgage. Another reason given by him was that Cuyuna still owns the stock in question. It should also be noted that Mr. Koerper acknowledged that members of the board received advice from their tax counsel -and it may be reasonably assumed that, in addition to the reasons outlined above, consideration was given to the possible income tax advantages which would inure as a consequence of the proposed stock purchase.

None of the 15,000 shares of Northern Pacific stock transferred by NWI to Cuyuna on December 3, 1957, was repurchased by plaintiff, and Cuyuna was still the owner at the time of the trial on August 16, 1965. As of that date, Cuyuna had received a total of $227,100 in cash dividends on these shares, as well as stock dividends amounting to 3,000 shares, since acquisition of the shares on December 3, 1957, Cuyuna reported all such, cash dividend income in its Federal income tax returns for the applicable years.

The remaining 5,066 shares of the 30,666 shares of Northern Pacific stock held by NWI as of January 1, 1956, were included among other assets and liabilities of NWI, which were transferred by it to Northern Pacific as distributions in liquidation of NWT for the years 1956 and 1957. The record is not entirely clear, but as best it can be determined, the transfer of these remaining shares occurred on December 20, 1957, and at that time they were valued on the books of NWI at $31,789.30.

NWI kept its books on the accrual method of accounting and filed its federal income tax returns for a tax year commencing on January 1. In its income tax return for the period of January 1, 1956, through December 31, 1956, NWI treated the losses resulting from the sales of its Northern Pacific stock in the open market during that year, which totaled $163,303.02, as long-term capital losses. In its return for the period of January 1, 1957, through December 20, 1957, NWI treated its transactions in Northern Pacific stock during that period in a similar manner, and reported long-term capital losses of $429,155.58.

Upon audit, the Commissioner of Internal Revenue allowed the deductions claimed by the taxpayer in its returns for the years 1956 and 1957, for losses resulting from sales of Northern Pacific stock on the open market during those years. However, the Commissioner disallowed the deduction claimed in the amount of $298,433.30, as a net long-term capital loss resulting from the transaction involving the 15,000 shares of Northern Pacific stock which NWI had transferred to Cuyuna on December 3,1957.

Northern Pacific, as transferee of the liquidated NWI, paid the income tax deficiency of $74,608.32 and deficiency interest of $19,631.18, which the Commissioner assessed as a result of his disallowance of NWI’s treatment of its reported loss in 1957 on the stock transaction between NWI and Cuyuna. Plaintiff filed a timely claim for refund with the District Director of Internal Revenue, St. Paul, Minnesota, for $94,239.50, which claim was rejected and disallowed by the Commissioner.

The Internal Bevenne Code allows tbe deduction of “any loss sustained during tbe taxable year and not compensated for by insurance or otherwise.” Section 165(a). Tbe Treasury Department has filled out the standard by a regulation (Treasury Begulations on Income Tax, Section 1.165-1 (b)) which states (in part):

Natwre of loss allowable. — To be allowable as a deduction under section 165(a), a loss must be evidenced by closed and completed transactions, fixed by identifiable events, and, except as otherwise provided in section 165 (h) and § 1.165-11, relating to disaster losses, actually sustained during the taxable year. Only a bona fide loss is allowable. Substance and not mere form shall govern in determining a deductible loss.

Various tests have been suggested for gauging the reality of a loss said to have been suffered in a transaction by one corporation with its wholly-owned subsidiary. Some of these have been challenged as incorrect, but everyone agrees that, at the least, the transaction must have been motivated by a “business purpose” before the loss can be accepted as substantive and bona fide. See Higgins v. Smith, 308 U.S. 473, 476 (1940); Moline Properties, Inc. v. Commissioner, 319 U.S. 436, 439 (1943); National Carbide Corp. v. Commissioner, 336 U.S. 422, 437, n. 20 (1949); National Investors Corp. v. Hoey, 144 F. 2d 466, 468 (C. A. 2, 1944); Long Corp. v. United States, 156 Ct. Cl. 197, 203, 298 F. 2d 450, 453 (1962).

We do not view the several non-tax reasons now given (see finding 19 (c)) for the sale by NWI to Cuyuna as proper and substantial business purposes which the Internal Bevenue Service and the court would have to recognize. The first is said to be the desire to place in Cuyuna’s financial structure an earning asset as an investment which would produce income and build up its working capital over the years, in order to enable the company to finance its railroad car building program. This ground can be given very little weight as a motivating force. Cuyuna did not have the money to pay for the stock; it had to receive an advance of $500,000 from Northern Pacific (or some other source) before it could pay NWT $525,000 for the shares in December 1957. In return for this payment (which it had to obtain from outside its own coffers) it received only $227,100 in cash dividends by August 1965, and probably had to pay some income tax on those dividends. Plainly, Cuyuna would have been better off or at least as well off (tax considerations aside) if the stock had been contributed to it by NWT or Northern Pacific.

The other three reasons stated — to keep the shares out of Northern Pacific’s treasury so that the ICC would not have to approve a later disposition; to allow the shares to be voted; and to keep the shares free of the lien imposed by Northern Pacific’s general mortgage — all add up, when analyzed, to the prime objective of keeping control of the voting of these shares in the hands of Northern Pacific’s management. The ICC regulations (I.C.C. Regulations on Transportation, 49 C.F.R. § 56.4) did not require ICC approval but merely provided for notification to the Commission of any sale; there was no external restriction on disposition. The genuineness of this “business purpose” is therefore most suspect. As for the claim that the general mortgage would impose a lien on the stock if it came into Northern Pacific’s hands, there is no showing that this would be so, and it seems unlikely; in any event, the ensuing restriction on disposition approval by the mortgage trustee) would be minimal and cannot have been a serious consideration. It was true, though, that stock in Northern Pacific’s treasury could not be voted, and we judge that this was the substantial non-tax factor in the decision to transfer the shares from NWT to Cuyuna rather than to allow them to fall back into tbe Northern Pacific treasury upon NWT’s liquidation.

Tbe difficulty is that we cannot regard this aim — the desire of Northern Pacific’s management to be able to continue to vote these 15,000 shares — as an acceptable “business purpose” for the NWI-Cuyuna transaction. Neither the seller, NWi, which was in process of liquidation, nor the buyer, Cuyuna, would have any business interest of its own in keeping voting control of those shares in the management of the parent, Northern Pacific. If that was the latter’s (and not just the management’s) purpose, it cannot be attributed to the subsidiaries which were the only parties to the sale. Cf. Crown Cork Int'l Corp. v. Commissioner, 4 T.C. 19, 26 (1944). They are left without any non-tax objective of their own.

Moreover, to take account, in considering a claimed loss, of such an intra-corporate goal would be to extend too far the tax concept of “business purpose.” That notion was developed primarily to assure that a transaction sought to be recognized for tax purpose would have some substantial basis other than a hoped-for tax saving. But it is not every non-tax use of a subsidiary (or related corporation) which can properly be called a “business purpose”. Some non-tax aims, though they are present, must be disregarded. See Jackson v. Commissioner, 233 F. 2d 289, 290-91 (C.A. 2, 1956); Paymer v. Commissioner, 150 F. 2d 334, 337 (C.A. 2, 1945); Dudley v. Commissioner, 32 T.C. 564, 587-88 (1959), aff'd on opinion below, 279 F. 2d 219 (C.A. 2, 1960); Watts, “Tax Problems of Regard for the Corporate Entity”, N.T.U. 20th Inst, on Fed. Tax, 867, 877 (1962). Management’s desire to continue its power to vote the Northern Pacific stock seems to us to fall into this excluded category. That special purpose would not involve any real business activity on the part of Cuyuna itself, but simply the use of a passive Cuyuna to fulfill the Northern Pacific management’s own plans and desires. In Jackson, supra, the Second Circuit put the standard thus (233 F. 2d at 290) : “The intended or actual business functioning of the corporation itself, not the taxpayer’s aim to be accomplished via the corporation, is the test.” The only non-tax aims to be accomplished through .Cuyuna’s holding of the stock would be the top managements purposes. To acknowledge a tax loss in these circumstances would not only conflict with the principle that it is the receiving company’s functioning which is important; it could also foster manipulation and lead to use of the tax laws to sharpen a potent weapon in an internal struggle for power within the corporate system.

Above all, this non-tax goal is hard to reconcile with the requirement that, to be recognized for tax purposes, a loss must be suffered, actually and in fact, by the taxpayer. Where management’s desire to retain the power to vote a bloc of shares is the sole “business purpose” for a sale to a subsidiary, there is no such actual loss to the selling corporation. We do not consider, in this case, the broader proposition that a sale to a wholly-owned subsidiary can never lead to a loss for the parent, regardless of the transaction’s business purpose, because of the parent’s continuing power to dominate and control. See Higgins v. Smith, supra, 308 U.S. at 476. But a sale of stock for the very end of preserving the voting power of the parent’s management is clearly one transaction in which there is no lessening in domination and control, but an effort to maintain it intact, precisely as it was. Nor, as we have seen, was there any real alteration in the corporations’ economic status. On the contrary, the design was to have everything remain as before. Despite the form of a loss-sale, that is the actuality and the substance. For this specific situation, therefore, there can be no loss, under the terms of the internal revenue statute and the Treasury regulation.

The plaintiff is not entitled to recover and its petition is dismissed.

FINDINGS OF FACT

Tbe court, having considered the evidence, the report of Trial Commissioner Franklin M. Stone, and the briefs and argument of counsel, makes the following findings of fact:

1. Northern Pacific Railway Company (hereinafter sometimes referred to as “Northern Pacific” or “plaintiff”) is a corporation organized and existing under the laws of the State of Wisconsin, and has its principal offices at 176 East Fifth Street, St. Paul, Minnesota. Plaintiff is at present, and has been at all times here material, engaged in the business of operating as a common carrier by rail in interstate and foreign commerce, subject to the jurisdiction of the Interstate Commerce Commission.

2. Northwestern Improvement Company (hereinafter sometimes referred to as “NWI”), a wholly owned subsidiary of Northern Pacific, was incorporated under the laws of the State of Delaware, and at all times here material main-tamed its principal offices at 176 East Fifth Street, St. Paul, Minnesota. Pursuant to a duly authorized plan for a tax-free liquidation of NWI carried out pursuant to Sections 332 and 334(b) (1) of the Internal Revenue Code of 1954 (26 U.S.C. §§ 332 and 334 (1958)), which plan was adopted on October 25, 1956, plaintiff, on December 20, 1957, acquired all of the then existing assets and liabilities of NWI. On December 18, 1956, NWI filed a certificate of dissolution with the State of Delaware, and, on December 21, 1956, the Secretary of the State of Delaware certified said dissolution.

3. At all times material hereto, Cuyuna Realty Company (hereinafter sometimes referred to as “Cuyuna”) was a wholly owned subsidiary of NWI until the dissolution of NWI. After the dissolution of NWI, Cuyuna became a wholly owned subsidiary of Northern Pacific.

4. (a) During the years 1956-1957, the following were officers and directors of Northern Pacific, NWI, and Cuyuna, respectively:

NORTHERN PACIFIC RAILWAY COMPANY
President, R. S. Macfarlane
Vice President-Executive, E. B. Stanton
Vice President-Oil Development, George M. Washington
Vice President, General Counsel-Legal, M. L. Countryman, Jr.
Secretary, A. M. Gottschald
Treasurer, H. S. Latham
Comptroller, R. L. Fulton
NORTHWESTERN IMPROVEMENT COMPANY
President, R. S. Macfarlane
Vice President, J. H. Poore (Retired April 11,1956)
Vice President, E. B. Stanton (Elected April 11,1956)
Vice President-Oil Development, George M. Washington
Secretary, A. M. Gottschald
Treasurer, H. S. Latham
Comptroller, R. L. Fulton
Directors
M. L. Countryman, Jr.
R. S. Macfarlane
J. H. Poore (Retired April 11,1956)
L. L. Schwarm E. B. Stanton
R. L. Koerper (Elected April 11,1956)
CUYTJNA REALTY COMPANY
President, R. S. Macfarlane
Vice President, J. H. Poore (Retired April 11,1956)
Vice President, E. B. Stanton (Elected April 11,1956)
Secretary, A. M. Gottschald
Treasurer, H. S. Latham
Comptroller, R. L. Fulton (As of November 29,1956)
Directors
R. S. Macfarlane
J. H. Poore (Retired April 11,1956)
E. B. Stanton
R. L. Koerper (Elected April 11,1956)

(b) It is apparent from the above that Northern Pacific had full control over the affairs of both NWI and Cuyuna. The President and one of the Vice Presidents of Northern Pacific field tfie same offices in both. NWI and Cuyuna, and both of these officers were also directors of tfie latter corporations. In addition, the Secretary, tfie Treasurer, and tfie Comptroller of Northern Pacific field tfie same positions with. NWI and Cuyuna, and all of tfie directors of Cuyuna and NWI were Northern Pacific employees.

5. (a) On November 29, 1956, tfie Board of Directors of NWI adopted a plan of recapitalization for its wholly owned subsidiary, Cuyuna, stating:

* * * it is advisable and for tfie best interests of this Company and Cuyuna Realty Company that in exchange for new stock and new long-term obligations of Cuyuna Realty Company, this Company transfer to said Company adequate working cash and certain income producing properties * * *.

On the same day, the Board of Directors of Cuyuna approved and accepted tfie plan of recapitalization adopted by its parent, NWI.

(b) Tfie plan of recapitalization of Cuyuna provided that:

(1) Cuyuna would issue new stock to NWI;

(2) Cuyuna would execute and deliver to NWI promissory notes in tfie aggregate principal amount of $1.5 million;

(3) Cuyuna would amend its articles of incorporation to enlarge the nature of its business to include (1) purchase and sale of corporate stocks, bonds, securities and notes; (2) ownership and operations of water, light, heat or power public utilities; (3) mining; and (4) tfie construction, ownership, sale or lease of transportation equipment;

(4) NWI would transfer $200,000 of cash and $1,462,543.17 of Cuyuna’s notes to Cuyuna, and would cancel indebtedness from Cuyuna to NWI on open account totaling $2,073,332.11;

(5) NWI would transfer certain real property to Cuy-una; and

(6) NWI would surrender for cancellation tfie old Cuy-una stock.

6. (a) On December 21, 1956, pursuant to the plan of recapitalization of Cuyuna, NWI transferred to Cuyuna, inter alia, certain real property and $200,000 in cash in exchange for new stock certificates and evidences of indebtedness, and in cancellation of the old notes, stock certificates, and other indebtedness of Cuyuna. • The balance sheets of Cuyuna on December 21, 1956, both prior and subsequent to the beginning of the recapitalization read as follows:

CUYUNA REALTY COMPANY
Balance Sheet — December 21, 1956
Prior to Recapitalization
ASSETS
Property
Iron ore lands_ $1, 584, 785. 71
Less reserve for depletion— 47, 957. 88
- $1,536,827.83
Bonus-Whiteside Lease-___ 8, 687.15
Advance royalties-Whiteside Lease_ _ 33, 090. 05
Total Assets_ $1, 578, 605. 03
LIABILITIES AND NET WORTH
Liabilities
Accrued interest payable-11, 816.99
Bills payable_ 1, 462, 543.17
Advances payable_ 2, 071, 099. 34
Total liabilities_ 3, 545, 459. 50
Net Worth
Capital stock-Common, 100 shares $100.00 par value issued and outstanding_ 10, 000. 00
Paid-in surplus_ 3, 648, 819. 58
Earned surplus--(5, 625, 674. 05)
Total capital stock and surplus.. _ (1,966,854.47)
Total liabilities and net worth. $1, 578, 605. 03
CUYUNA REALTY COMPANY
Balance Sheet — December 21, 1956 After Recapitalization
ASSETS
Cash_ $200, 000. 00
Property
Iron ore lands_ $1, 584, 785. 71
Less reserve for depletion_ 47, 957.88
- $1,536,827.83
Bonus — Whiteside Lease_ 8, 687.15
Advance royalties — Whiteside Lease. _ 33, 090. 05
Associated Grocers Coop. — Building. 675, 001. 25
Less reserve for depreciation_ 38, 783. 93
- 636, 217. 32
Super Value warehouse_ 643, 612. 96
Total property. 2, 858, 435. 31
Total assets_ 3, 058, 435. 31
LIABILITIES AND NET WORTH
Liabilities
Accounts payable. 59, 984. 30
Accrued interest payable_ 11, 816. 99
Notes payable_ 1, 500, 000. 00
Total liabilities_ 1, 571, 801. 29
Net Worth
Capital stock — Common, 100 shares no par issued and outstanding_ 1, 350, 000. 00
Paid-in surplus_ 136, 634. 02
Earned surplus — -Since December
21, 1956_ _
Total capital stock and surplus 1, 486, 634. 02
Total liabilities and net worth. $3, 058, 435. 31

(b) As -part of tbe recapitalization of Cuyuna, NWI contributed, in addition to tbe $200,000 cash transferred on December 21, 1956, (see (a) above) a total of $2,071,099 through the medium of forgiveness of advances made prior to December 12,1956.

7.(a) During 1957, NWI contributed the following assets to the capital of Cuyuna:

March
Land in North Dakota-!- $59, 693. 04
Balance of land contract of sale_ 38,107. 71
April
U.S. Treasury bills due May 23, 1957_ 796,800. 00
U.S. Treasury bills due June 27, 1957_ 744, 812. 50
U.S. certificates of indebtedness_ 310,000. 00
Accrued interest on certificates of indebtedness _ 110.11
Program “U”_ 2,482,259. 09
Cash_ 166, 018.30

(b) No other direct capital contributions were recorded on Cuyuna’s books during 1957. However, Northern Pacific advanced to Cuyuna $750,000 in October 1957, $250,000 in November 1957, and $750,000 in December 1957. The December advances were as follows: On December 3 (when Cuyuna’s cash balance was $188,065.03), $500,000, and on December 16, $250,000. On December 23,1957, Cuyuna repaid to Northern Pacific all of its outstanding advances totaling $1,750,000.

8. The parties stipulated that an undated document entitled “Income Statement” (Defendant’s Exhibit No. 1), which shows, among other figures, that Cuyuna’s net income for the twelve months ended December 31, 1957, after provision for Federal and State income taxes, totaled $102,376.57, accurately reflects what is contained in Cuyuna’s books and records. While said document is undated, it obviously was prepared subsequent to December 31,1957. The record does not disclose by whom or for what purpose the document was prepared, nor whether the net income tax figure shown therein was used in preparing Cuyuna’s income tax returns covering the period indicated.

9. (a) Commencing in 1957, during the course of dissolution of NWI, Cuyuna undertook NWI’s construction activities and was used as the railroad car-building subsidiary for Northern Pacific. NWI had previously been used for that purpose. Program “U”, which, is shown in finding 7, swpra, as a capital contribution to Cuyuna by NWT, involved the construction of 500 railroad cars and this project was transferred to Cuyuna when it was approximately one-half completed. From Cuyuna’s standpoint, Program “U” produced neither a profit nor a loss, i.e., it was a cost program.

(■b) By a conditional sale agreement dated as of September 1,1957, Cuyuna sold the cars constructed under Program “U” to Northern Pacific. The agreement provided that payment would 'be made in the following manner: $3,600,000 of the total purchase price was to be payable in quarterly installments, plus interest, over a period of 8 years beginning March 15, 1958; the remaining portion of the purchase price was to be paid in cash, the amount to be the difference between Cuyuna’s cost for building the oars and $3,600,000. Cuyuna assigned its interest in the conditional sales contract to the First National Bank of Seattle, Washington, for $3,600,000, which amount it received on December 23, 1957. The remaining portion of the purchase price totaled $883,201.88, which sum was paid by Northern Pacific to Cuyuna on December 23, 1957.

10. As of January 1, 1956, NWT was the owner of 30,666 shares of Northern Pacific stock, which it had acquired for cash from time to time during the period from 1906 to 1965, at the fair market value of such shares 'as of the time of their acquisition. NWI did not acquire any additional shares of Northern Pacific stock subsequent to the latter year.

11. (a) On November 7 and 14,1956, NWT sold a total of 1,000 shares of its Northern Pacific stock with a tax basis of $69,874.80 in the open market at losses totaling $31,223.89.

(b) On November 20,1956, the Board of Directors of NWI adopted a resolution authorizing the President or Vice President of NWI “to sell at the best prices obtainable all or any part of the capital stock of Northern Pacific Railway Company registered in the name of the Northwestern Improvement Co.; * * Subsequent and pursuant to said resolution, NWI, in 1956 and 1957, sold an additional 9,600 shares of its Northern Pacific stock at the fair market value as established by the New York Stock Exchange price quotations on the dates of the respective sales. Out of the 9,600 shares, 4,200 shares, with 'a tax basis of $293,704/75, were sold at various times during 1956 for losses totaling $132,079.13, and 5,400 shares, with a tax basis of $361,030.08, were sold at various times during 1957, for losses totaling $130,722.28.

(c) On December 2, 1957, the Board of Directors of Cu-yuna Realty Company 'adopted a resolution authorizing the company to submit to NWI an offer to purchase from the latter company 15,000 shares of the capital stock of Northern Pacific Railway Company at a price of $35.00 per share. The resolution provided that if said offer was accepted, the proper officers of Cuyuna were authorized to consummate the purchase of the number of shares indicated.

(d) Pursuant to the resolution adopted by its Board of Directors on November 20, 1956, NWI accepted Cuyuna’s offer and on December 3, 1957, transferred 15,000 shares of the Northern Pacific stock then held by NWI to Cuyuna, which shares had an adjusted tax basis in the hands of NWT of $823,433.30. In exchange for these shares, Cuyuna, pursuant to the resolution adopted by its Board of Directors on December 2,1957, issued a voucher and check on December 3, 1957, drawn to the order of NWI in the amount of $525,000, i.e., 15,000 shares at $35.00 per share, which was $298,433.30 less than NWI’s above-mentioned adjusted tax basis. Said check was honored upon presentation to the First National Bank, St. Paul, Minn., and bears the stamped notation “Paid Dec-4 1957 Treasurer’s Office Cuyuna Realty Co.”

(e) The dates and amounts of the 25,600 shares of Northern Pacific stock “sold” (see footnote 1) by NWI and “losses” allegedly sustained as a result thereof, including the 1,000 shares it sold prior to November 20,1956, and the 15,000 shares “transferred” ibid, by NWI to Cuyuna on December 3,1957, as summarized in (a), (b) and (d), aboye, are set forth in the following schedule:

•This transaction is the one referred to in finding 11(d), and defendant does not concede that it was a “sale,” nor, as indicated in footnote 1, that NWI suffered a “loss” that is properly deductible by plaintiff.

12. The remaining 5,066 shares of the 30,666 shares of Northern Pacific stock held by NWI as of January 1, 1956, were included among other assets and liabilities of NWI which were transferred by it to Northern Pacific as distributions in liquidation of NWI for the years 1956 and 1957. While the record is not entirely clear, as best it can be determined therefrom, these shares were transferred to Northern Pacific on December 20,1957, at which time they were valued on the books of NWI at $31,789.30.

13. NWI timely filed its final federal income tax return for the taxable year commencing January 1, 1957, which covered the period from that date to December 20, 1957, inclusive, in accordance with the accrual method of accounting, with the District Director of Internal Revenue, ¡St. Paul, Minnesota.

14. NWI, in its federal income tax return for the period January 1 through December 31, 1956, treated the losses, totaling $163,303.02, resulting from the sales of its Northern Pacific stock in the open market during that year, as long-term capital losses offsetting otherwise taxable capital gains realized by NWI in 1956. In its return for the period January 1 through December 20,1957, NWI treated its transactions in Northern Pacific stock during that period in 'a similar manner and reported long-term capital losses, totaling $429,155.58, as a result thereof. Upon audit, the Commissioner of Internal Revenue (hereinafter referred to as the “Commissioner”) allowed the deductions claimed by the taxpayer in its income tax returns for the years 1956 and 1967, for losses resulting from sales of Northern Pacific stock on the open market during those years. However, the Commissioner disallowed the deduction claimed in the amount of $298,433.30, as a net long-term capital loss resulting from the transaction involving the 15,000 shares of Northern Pacific stock, which NWI transferred to Cuyuna on December 3, 1957.

15. Plaintiff, i.e., Northern Pacific, as transferee of the liquidated NWI, assumed and, on August 8, 1962, paid the income tax deficiency of $74,608.32 and deficiency interest of $19,631.18, which the Commissioner assessed as a result of his disallowance of NWI’s treatment of its reported loss in 1957 on the stock transaction in question between NWI and Cuyuna. On November 7, 1962, plaintiff timely filed with the District Director of Internal Revenue, St. Paul, Minnesota, a claim for refund in the amount of $94,239.50, based upon the Commissioner’s disallowance of NWI’s treatment of the loss on the reported sale by NWI to Cuyuna. Thereafter, plaintiff’s claim was formally rejected by the Commissioner who issued a statutory notice of disallowance, which was duly mailed to plaintiff under date of March 18, 1963.

16. This suit to recover federal income taxes in the amomit of $74,608.32, paid on August 8, 1962, by plaintiff as transferee of NWI into the Treasury of the United States for NWI’s taxable year commencing January 1, 1957, plus deficiency interest of $19,631.18, together with statutory interest on those respective sums from date of payment as provided by law, was timely brought by plaintiff, i.e., more than sis months after plaintiff filed its refund claim and within two years of the date of the mailing by the Commissioner of his statutory notice of rejection of said claim.

17. Plaintiff is the sole owner of the claim here relied upon, and no assignment or transfer thereof, or any part thereof, or interest therein, has been made by plaintiff.

18. No action on this claim has been taken by the Congress of the United States, or by any department of Government, except as hereinbefore indicated.

19. (a) As disclosed by finding 4, supra, at the time the Board of Directors of Cuyuna adopted the resolution of December 2, 1957, authorizing Cuyuna to purchase 15,000 shares of Northern Pacific stock from NWI (see finding 11(c), supra), Messrs. E. S. Macfarlane and E. B. Stanton were the President and Vice President, respectively, and members of the Board of Directors, of Northern Pacific, NWI and Cuyuna. The other one of the three persons comprising the entire membership of the Board of Directors of Cuyuna was Mr. E. L. Koerper, Executive Assistant to the President of Northern Pacific, who also was a member of the Board of Directors of NWI.

(b) Mr. Koerper testified at the trial that he participated in the discussions leading up to the decision to purchase said stock, but that the decision was made 'by Mr. Macfarlane. While Mr. Koerper stated that as a member of the Board of Directors he was in favor of the decision to purchase the stock and the evidence shows that the Board of Directors adopted the resolution, it is clear that the Board’s action was dictated by Mr. Macfarlane.

(c) According to Mr. Koerper, he was in favor of the decision made by Mr. Macfarlane and the resolution to purchase the stock for certain reasons which are summarized below:

(1) To place in the financial structure of Ouyuna an earning asset as an investment which would produce income and build up its working capital over the years to enable the company to finance a railroad car building program. Mr. Koer-per considered the foregoing reason was the most persuasive of the several ones he had for 'favoring the decision made for Cuyuna to purchase the Northern Pacific stock from NWI.

(2) To keep tbe Northern Pacific shares of stock from being placed in Northern Pacific’s treasury because it was his (Mr. Koerper’s) understanding that once this was done, the shares could not be disposed of without approval of the Interstate Commerce Commission.

(3) To enable the shares of stock to be voted, it being Mr. Koerper’s understanding that this was possible so long as the shares were in a subsidiary company, but not if they were in Northern Pacific’s treasury.

(4) To keep the shares of stock free of liens imposed by “after-acquired” property clauses in Northern Pacific’s prior lien mortgage and general lien mortgage, it being Mr. Koer-per’s understanding that if the shares were in Northern Pacific’s treasury, they would be subject to those mortgage liens and the -trustee would have to approve the releases of the shares therefrom.

(d) Mr. Koerper further testified that federal income tax aspects also were considered and that “we” had the advice of “our” tax counsel at the time.

(e) The record does not disclose whether Mr. Macfarlane’s reasons for making the decision, adopted by the December 2, 1957 resolution of the Cuyuna Board of Directors, for Cuyuna to purchase the 15,000 shares of Northern Pacific stock from NWI were the same as those given by Mr. Koerper.

20. The only substantial non-tax purpose for the sale of the Northern Pacific stock by NWI to Cuyuna was to enable the management of Northern Pacific to continue to vote the shares. At the annual stockholders’ meeting held in March 1961, the Northern Pacific stock -then held by Cuyuna was voted, consistent with the view of Northern Pacific’s management, in favor of a proposed merger involving the Great Northern, the Burlington, and the Northern Pacific Railways.

21. None of the 15,000 shares of Northern Pacific stock transferred by NWI to Cuyuna on December 3, 1957, were repurchased by plaintiff, and Cuyuna was still the owner of all of these shares as of the time of the trial on August 16, 1965. As of the date of the trial, Cuyuna had received a total of $227,100 in cash dividends on such shares, as well as stock dividends amounting to 3,000 shares, since acquisition of the shares on December 3, 1957. Cuyuna has reported all such cash dividend income in its federal income tax returns for the applicable years.

22.(a) An exhibit entitled “Principal cash transactions during December 1957” (Plaintiff’s Exhibit No. 5), which shows, inter alia, Cuyuna’s cash balance on December 1 and December 31, 1957, is quoted below:

Debit Credit
12/1 Cash Balance_ 188, 065. 03
12/3 Working fund advance from N.P- 5.00, 000. 00
12/4 Purchase N.P. capital stock- - 525, 000. 00
12/16 Working fund advance from N.P- 250, 000. 00
12/23 N.P. payment for Program “U” equipment _ 883, 201. 88
12/23 Seattle-lst National Bank, sale of conditional sale contract_ 3, 600, 000. 00
12/23 Replayment to N.P. Ry. of all outstanding advances- - 1, 750, 000. 00
12/26 Investment in U.S. Treasury bills dated 12/26/57, due 3/27/58_ _ 2, 479, 925. 00
12/31 Cash balance- 135, 636. 25

(b) It is apparent from the above that if Cuyuna had not received an advance of $500,000 from Northern Pacific on December 3,1957, or from some other source, Cuyuna would not have had sufficient cash on hand to enable it to transfer $525,000 to NWI on December 4,1957.

23. During the period April 1, 1957 through September 1960, Northern Pacific made numerous cash advances to Cuy-una. (See Plaintiff’s Exhibit No. 8.) While Northern Pacific did not make any cash advances to Cuyuna subsequent to the latter date, the record does not disclose whether Cuyuna required further advances or received advances from other sources, after that time.

24. The transfer of 15,000 shares of Northern Pacific stock from NWI to Cuyuna on December 3,1957, in exchange for cash constituted a sale of the stock.

25. The sale of 15,000 shares of Northern Pacific stock by NWI to Cuyuna on December 3,1957, did not give rise to a capital loss deduction which is allowable under section 165 (a) of the Internal Revenue Code of 1954.

Conclusion of Law

Upon the foregoing findings of fact and opinion, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover and its petition is dismissed. 
      
      We are Indebted to Commissioner Franklin M. Stone from whose statement of the facts we have borrowed wholesale. Our result is the same as his, but we place it on a different ground.
     
      
      The restrictions on loss deductions are not pertinent to this case. The Government does not dispute that the Northern Pacific stock was an asset in the hands of NWI or that the stock was held for a period exceeding six months.
     
      
       Por instance, there have been attacks on the position that the claimed loss must be disallowed — even though the transaction is substantial, real, and supported by an adequate business purpose — if the taxpayer controlled and dominated the corporation which was the other party to the transaction. Mintz, “Recent Developments in Allowance of Loss on Sales Between Controlled Companies”, N.Y.U. 8th Inst, on Ped. Tax., 29, 42-44 (1950) ; Watts, “Tax Problems of Regard for the Corporate Entity”, N.Y.U. 20th Inst, on Ped. Tax. 867, 892 (1962).
     
      
       In March 1961, at the annual stockholders’ meeting of Northern Pacific, this stock was voted, at management’s direction, in favor of a proposed merger involving the Northern Pacific, Great Northern, and Burlington railways.
     
      
      
         Watts, supra, says: “ ‘Business purpose’ refers to an intention that the corporation engage in business function or activity and is not satisfied merely by a non-tax use of the taxpayer, such as concealment of property from creditors [the situation in the Jackson case], that does not involve corporate activity.”
     
      
       While it appears from a stipulation of the parties that they agreed the sum of $5S5,000 represented the fair market value of these 15,000 shares on the date they were transferred by NWI to Cuyuna, defendant does not concede that this transaction was a bona fide “sale” which resulted in an actual long-term capital loss to NWI that was properly deductible by Northern Pacific for Federal income tax purposes. As indicated by the findings of fact, infra, the present controversy between the parties stems from this particular transaction and the sole issue presented for resolution arises therefrom. No inference should be drawn from the use of the words “transfer”, “transferred”, “sell”, “sold”, or “sale” in these findings of fact (except the ultimate findings, i.e. findings 24 and 25).
     
      
       These mortgages were not offered in evidence and included in the record of this case.
     