#### CHARLES W. PHELLIS v. THE UNITED STATES.1

[No. 34554.

Decided March 14, 1921.]

*On the Proofs.*

*Income taxes, refund of; reorganisation of stock company; no gain to stockholders.*— Where a stock company reorganizes its business by the formation of another company, and the stockholders in the original company, while retaining all their shares therein, receive additional shares in the new company, but the value of their shares in both companies is the same as the value of their original shares in the old company before its reorganization, there is no gain and their shares in the new company are not taxable as income to the stockholders.

*The, Reporter’s*statement of the case:

Messrs. *Frank S. Bright*and *William A.*Glasgow, *jr.,*for the plaintiff. *Messrs. J. F. Laffey*and *G. R. Mudge*were on the briefs.

*Mr. Assistant Attorney General Frank Davis, jr.,*and *Mr. John M. Stemhagen*for the defendant. *Mr. Jacob R. Marvin*was on the briefs.

Since the creation of the Delaware corporation, the New Jersey corporation has been related to it only as a stockholder. For a short time it was the sole stockholder, but except for this short period in October, 1915, it has been but one of many stockholders. Like the plaintiff, the New Jersey corporation merely owned a portion of the Delaware stock. There should therefore be no confusion of the two corporations. The one is a creature of New Jersey, with specific powers of its New Jersey charter; the other was created in Delaware by a charter of wider powers. It is not claimed that there was any merger of the two.

It can no longer be questioned that the separate legal status of a corporation and its stockholders will not be disregarded, regardless of the extent of stock ownership. Their contract obligations are separate and distinct. *Pullman Co.*v. *Missouri*Pacific, 115 U. S. 587. Service of process upon one will not be valid in an action against the other. *Peterson*v. <7., *158*R.*/. *db P.,*205 U. S. 364; *At. d> S. F.*v. *Weeks,*248 Fed. 970. A bill in equity can not be maintained by one in behalf of the other. *Bradley*v. *Richardson,*3 Fed. Cas. 1786. One may be a creditor of the other in bankruptcy, notwithstanding a merger of accounts. *In re Watertown Paper Go.,*169 Fed. 252.

In several cases involving taxation, courts have persistently refused to disregard the principle of corporate entity. In *United States*v. *Nipissing Mines Go.,*206 Fed. 431, the defendant sought exemption from the excise tax imposed by the Federal corporation tax law of 1909 upon the ground that it was not doing business. It owned all the capital stock of a foreign corporation and its only activity was to collect and distribute to its own stockholders the dividends received from its subsidiary corporation.

It was held that the defendant was not doing business and was, therefore, not taxable, and the court said:

“We are unable to see that it was engaged in any other business than that of owning property — shares in another corporation — collecting dividends, and distributing its income among the stockholders. That is what the record shows, and, as already stated, we see nothing to justify disregarding the distinct corporate existences. Nothing fraudulent is claimed and we see no distinction — so far as the purposes of this tax statute are concerned — between holding all the shares of one corporation and fewer shares of different corporations or between holding corporate shares and owning other personal property.”

This case was followed in *Butterieh Go.*v. *United States,*240 Fed. 539.

In *Houston Belt <& Terminal Ry. Go.*v. *United States,*250 Fed. 1, involved the consideration of the corporation excise tax law of 1909. The Terminal Company was separately incorporated, all of its stock being owned in equal shares by four tenant railway companies. A loan was made to the Terminal Company upon its mortgage. The interest upon the loan was paid directly by the tenant companies to the mortgagee. The amount of this interest exceeded the amount of the interest upon the Terminal Campany’s capital stock. It was held that the interest paid was the debt of the Terminal Company and not of the tenant lines, and the court said:

*159“ It may be that the tenant companies organized the terminal company to provide a convenient joint agency for the performance of certain of their duties as carriers, and with no view to profit to be derived from its organization. It was, however, legally organized as a corporation, capable of earning and paying dividends to its stockholders, and the fact that it has not done so does not make it the less a corporation engaged in business and organized for profit, within the meaning of the corporation tax law. Profit from its organization and operation could result to its stockholders in other ways than in dividends. If the tenant companies chose to avail themselves of an agency, owned by them, which did business in a corporate capacity, then under the act of August 5, 1909, they became liable through it for the payment of an excise tax for this privilege.”

In the recent case of *Eisner*v. Macomber, 252 U. S. 189, the Supreme Court has expressly stated that a. court should not disregard the separate legal existence of a corporation. It said, p. 214:

“ We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact but because it is only by recognizing such separateness that any dividend — even one paid in money or property — can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be regarded as receiving anything from it any more than if one’s money were to be removed from one pocket to another.”

In cases similar to the one now before this court, courts have refused to recognize the new corporation as a reorganization of the old corporation, and the claimant can not contend that the Delaware corporation is merely a reorganization of the New Jersey corporation. *Clough*v. *Otis,*25 Colo. 520; 55 Pac. 809.

The dividend in question was not a true stock dividend; it was a distribution by the New Jersey corporation in specie •of its corporate property consisting of stock in the Delaware corporation, and constituted taxable income to the plaintiff.

*160The plaintiff contends that the stock of the Delaware corporation which he received as a dividend on his stock in the New Jersey corporation constituted a true stock dividend,, and, therefore, was. not income to him. He bases this contention on the cases of *Tovme*v. Eisner, 245 U. S. 418, and *Eisner*v. Macomber, 252 U. S. 189. The' Macomber case extended the principle previously laid down in the Towne case, and a discussion of the more recent case will- explain that principle and will suffice to show the fallacy of the plaintiff’s contention. It should be noted, however, that in both these cases the dividends were paid by the corporations *in their own stock.*

The court in the Macomber case states that the salient characteristic of a stock dividend is that it “ takes nothing from the property of the corporation and adds nothing to-the interests of the shareholders. Its property is not diminished and their interests are not increased.

The Supreme Court has held that where a corporation pays a dividend in the stock of a second corporation, that dividend is not a stock dividend but is a “ distribution in specie of a portion of the assets ” of the first corporation. *Peabody*v. Eisner, 247 U. S. 347; *Eisner*v. *Macomber,*252 U. S. 189. It constitutes a property dividend which “ diminishes by just so much the assets of a corporation and in a theoretical sense reduces the intrinsic value of the stock.’* *Lynch*v. Hornby, 247 XT. S. 339.

*Mr. William, A.*Glasgow, *jr.,*by leave of court, filed a brief as *amicus curiae.*

The following are the facts of the case as found by the court:

I. Plaintiff, Charles W. Phellis, is a citizen of the United States and a resident of the city of Wilmington, State of Delaware.

II. On and prior to September 1, 1915, the plaintiff was the owner of 250 shares of the common stock of the E. I. du Pont de Nemours Powder Co., a corporation organized and existing under the laws of the State of New Jersey, hereinafter called the New Jersey corporation.

III. On the 19th day of August, 1915, the following letter was sent to the stockholders of the said. New Jersey corpora*161tion, and the proposal therein made was very shortly thereafter assented to by 89.7 per cent of the holders of the stock of said company:

WlLMINGTON, DELAWARE, *August*19th, *1915.*

*To the stockholders of E. I. du Pont de Nemours Powder Company:*

The business of our company has greatly increased in volume so that it has become necessary to materially increase our capital to provide for proper and economical operation. Your officers have given the problem long and serious consideration with the result that the board of directors have approved a plan for the readjustment of its financial affairs,, which plan may be briefly summarized as follows:

A new corporation to be known as E. I. du Pont de Nemours & Company will be incorporated under the laws of the State of Delaware, which company will have three classes of stock, viz, 6 per cent cumulative *nowvoting*debenture" stock, 6 per cent cumulative *voting*debenture stock, and common stock.

Except as to voting powers the rights of both voting and nonvotmg debenture stocks shall be identical and the charter will provide:

Debenture shares shall bear cumulative dividends at the rate of 6 per cent per annum.

Debenture shares may be called for payment at $125 per share.

No mortgage or other specific lien may be placed upon the whole or any part of the property of the company without the consent of 75 per cent in amount of the total debenture stock outstanding except that this provision shall not apply to purchase money mortgages or to the assumption of mortgages or liens upon property purchased, nor shall it prevent the pledge for the purpose of securing cash to be used in the ordinary course of the business of the company of securities at any time held and owned by the company,, provided such cash advances are secured on obligations of the company with maturities not more than three years from date hereof.

In case of dissolution (whether voluntary or involuntary) debenture shares shall have preference over the common, stock on distribution of assets to the par amount thereof,, plus accumulated dividends.

The voting debenture stock shall have equal voting rights with the common stock.

The nonvoting debenture stock shall have no voting privileges except *(a)*in the event the company shall fail to pay any dividend thereon and such default shall continue *162for a period of six months, in which event the voting and nonvoting debenture stockholders shall have the sole right of voting to the exclusion of the common stockholders for the ensuing year and for each year thereafter until the company shall pay all accrued dividends on said debénture stock; and *(b)*in the event of the net earnings of the company in any calendar year amounting to less than 9 per cent on the amount of debenture stock issued and outstanding during such calendar year then the nonvoting debenture stockholders shall have equal voting rights with the voting debenture stockholders and with the common stockholders, which voting rights shall continue until the net earnings of the company for some future calendar year shall equal 9 per cent on the amount of debenture stock issued and outstanding in such future year.

This new corporation, E. I. du Pont de Nemours & Company of Delaware, will purchase all the assets and assume all the liabilities of our company and will pay therefor the sum of $120,000,000, as follows: $1,484,100 m cash; $59,-661,T00 par value in debenture stock;'$58,854,200 par value in common stock. This will be all the stock that will be issued by E. L. du Pont de Nemours & Company at this time. - ■

Upon the consummation of said sale and when our company has received the stock of E. I. du. Pont de Nemours & Company an offer will be made to purchase the outstanding bonds and preferred stock of our company as follows:

*(a)*5 per cent bonds (outstanding $1,230,000). This issue will be called for redemption under the provisions of the mortgage and paid for in cash.

*(b)*4£ . per cent bonds (outstanding $14,166,000). An offer wil lpe made to purchase these bonds at parf, payable in 6 per -cent nonvoting debenture stock of E. I. du Pont de Nemours & Company at par. Thus, a person holding $1,000 par value 4-J- per cent bonds will receive in payment therefor $1,000 par value 6 per cent debenture stock.

*(o)*Preferred stock (outstanding $16,068,600). .Our 5 per cent preferred stockholders will he given opportunity to accept either of the following offers:

For each $100 par value of our 5 per cent cumulative preferred stock there will be offered $100 par value 6 per cent cumulative *nonvoting*debenture stock of E. I. du Pont de Nemours *&*Company. Thus, a person holding one share of preferred stock may exchange it for one share of debenture stock which, will result in a 20 per cent increase in annual income; or

For each $100 par value of our 5 per cent cumulative preferred stock there will be offered $83-J- par value 6 per cent *163cumulative *voting*debenture stock of E. I. du Pont de Nem-ours & Company with the privilege to the holder of this voting debenture stock of exchanging for nonvoting debenture stock at any time prior to April 25th, 1916, receiving therefor $100 par value nonvoting debenture stock for each $83£ of voting debenture stock.

*(d)*Common stock (outstanding $29,427,100). All of the common stock of E, I. du Pont de Nemours & Company, of Delaware, will be distributed to the common stockholders of our company as a dividend. In other words, a person holding one share of common stock in our company will continue to hold it and in addition will receive two shares of the common stock of E. I. du Pont de Nemours & Company.

The above plan has.been worked out as the result of the most mature deliberation and we are confident that it will appeal to our security holders as most desirable.

We, therefore, request you to sign the attached form of assent to the carrying out of this plan and return it to us at your earliest convenience, being careful to sign exactly as your name appears on your stock certificate.

Any information in connection with the matters herein referred to will be cheerfully furnished upon request.

Kespectfully submitted.

PieRbe S. du Pont,

*President.*

ASSENT OE STOCKHOLDERS.

(To be signed and returned to P. S. du Pont, president.)

Whereas the board of directors of E. I. du Pont de Nem-ours Powder Company have approved a plan for readjusting the financial affairs of that company, which plan may be summarized as follows:

*(a)*A new corporation to be known as E. I. du Pont de Nemours & Company will be incorporated under the laws of the State of Delaware, which company will have three classes' of stock, viz, 6 per cent cumulative *voting*debenture stock, 6 per cent cumulative nonvoting debenture stock, and common stock. Except as to voting powers, the rights of each class of debenture stock shall be identical and shall be as follows: Cumulative six per cent dividends payable quarterly, with preference upon any distribution of assets to the extent of $100 per share and accumulated dividends in case of dissolution (whether voluntary or involuntary); the nonvoting debenture stock to have voting rights in common with the voting debenture stock, arid to the exclusion of the common stock in case the company sh'all fail to pay any *164quarterly dividend thereon, for a period of six months and to have equal voting rights with the voting debenture stock and common stock in case the earnings in any year shall amount to less than nine per cent of the amount of debenture stock issued and outstanding ; both classes of debenture stock to be redeemable at any dividend date at $125 per share; no prior lien *to*be placed upon any of the property of the corporation without the censent of three-fourths of the combined debenture stock, but this shall not apply to current obligations for the procurement of working capital, which obligations shall not run for more than three years from the date thereof.

*(i)*To sell, assign, convey, de Nemours & Company all the assets of every nature of E. I. du Pont de Nemours Powder Company, subject to all the liabilities of that corporation, including its bonds issues,, and subject to any lien or charge securing any of said obligations, all of which obligations shall be assumed by E; I. du Pont Neinours & Company.

In consideration therefor the pay $1,484,100.00 in cash, 588,542 shares of the common stock,, and 596,617 shares of the debenture stock of E. I. du Pont de Nemours & Company.

*(o)*The E. I. du redeem its five per cent bonds at 105 per cent in cash; to offer to the holders.of its 4£ per cent debenture bonds ten shares of said nonvoting debenture stock for each $1,000 of said bonds; to offer to the holders of its preferred stock at their option either one share of said nonvoting debenture stock for each share of said preferred stock, 7>r $83¿ par value of said voting debenture stock for each share of said preferred stock, and in case the latter option is exercised will further, at any time prior to April 25th, 1916, exchange any such voting debenture stock for nonvoting debenture stock by giving therefor one share of nonvoting debenture stock for each $83£ par value of said voting debenture stock;

And, whereas, under the Nemours Powder Company, the written assent of two-thirds, in amount of the stockholders of said company is necessary to said sale, conveyance, assignment, and transfer of its; property, assets, rights, and privileges as an entirety;

Now therefore we, du Pont de Nemours Powder Company, hereby assent, for and on behalf of all the stock in said corporation held by us,, respectively, to the sale, conveyance, assignment, and transfer of all the property, assets, rights, and privileges of said corporation as an entirety to E. I. du Pont de Nemours <& Company hereinbefore referred to and for the consideration *165hereinbefore mentioned; and we further authorize the directors of said corporation to take such steps as may be necessary to carry out the same.

This assent, however, shall not become effective until such time as E. I. du Pont de Nemours & Company shall have been organized, and the board of directors of said E. I. du Pont de Nemours Powder Company shall have passed resolutions authorizing said sale, conveyance, assignment, and transfer, as above provided, for the consideration above mentioned, and further shall have authorized the offers of exchange of the said securities of the said E. I. du Pont de Nemours & Company to the 4J per cent bondholders and the preferred stockholders of said New Jersey corporation, and shall have authorized the redemption of said five per cent bonds of said corporation.

This assent may be executed upon separate forms with the same force and effect as though executed upon one instrument.

(Sign here.)

In presence of—

——*

Dated the-day of August, 1915.

IV. As a result of said proposal and the assent thereto of said stockholders the plan set out in said proposal was carried out. The E. I. du Pont de Nemours & Co., a corporation, was organized under the laws of the State of Delaware (hereinafter called the Delaware corporation) and the following agreement between the New Jersey corporation and the Delaware corporation was entered into on the 16th day of September, 1915:

An agreement made this 16th day of September, A. D. 1915. by and between E. I. du Pont de Nemours Powder Company, a corporation organized and existing under the laws of the State of New Jersey, hereinafter called the *“*vendor,” of the first part, and E. I. du Pont de Nemours and Company, a corporation organized and existing under the laws of the State of Delaware, hereinafter called the “ company,” of the second *part;*

Whereas the vendor is the owner of the real, personal, and mixed property hereinafter described, which property the board of directors of the vendor, with the written assent of the holders of more than two-thirds of the capital stock of the vendor issued and outstanding, has offered to sell and convey to this company, as an entirety and as a going concern, for one hundred and twenty million dollars ($120,-*166000,000), payable in cask and in the capital stock of this company as follows: One million four hundred and eighty-four thousand one hundred dollars ($1,484,100) in cash; fifty-eight million eight hundred and fifty-four thousand two hundred dollars ($58,854,200) in the common stock of the company at par, and fifty-nine million six hundred and sixty-one thousand seven hundred dollars ($59,661,700) in debenture stock of the company, of. which debenture stock one hundred thousand (100,000) shares or any part thereof shall be voting debenture stock if demanded by the vendor; and

.Whereas the company has been duly organized with an authorized capital stock of two hundred and forty million dollars ($240,000,000) divided into one million five hundred thousand (1,500,000) sharés of nonvoting debenture stock; one hundred thousand (100,000) .shares of voting debenture stock, and eight hundred thousand (800,000) shares of common stock of the par value of one hundred dollars' ($100) each; and

Whereas the board of directors of the company have ascertained, adjudged, and declared that the real, personal, and mixed property aforesaid are of the fair value of one hundred, and twenty million dollars ($120,000,000), and that the acquisition thereof is necessary for the business of the company and to carry out its contemplated objects;

Now, thérefore, this agreement witnesseth:

1. That the vendor hereby agrees to sell, assign, transfer, and set over to the company, its successors and assigns^ all its right, title, and interest in and to the following described property, to wit:. All of the vendor’s real, personal, and mixed property of every kind, nature, and description on the date of transfer and wheresoever situate, including water rights and all fixtures and appurtenances to real estate and easements therein; all manufacturing plants and machinery, tools, and appliances used in connection therewith; all raw materials, manufactured, product, and partially manufactured product wheresoever situated; all accounts and bills receivable; all stocks and bonds and all claims, demands, judgments, and choses in action of every kind, nature, and description;, all patents, applications for patents, trademarks, trade names, trade secrets, brands, and copyrights; all cash on hand and moneys in bank and all personal property of every kind, nature, and description.

The above enumeration is not to be taken as excluding any property or property rights not specifically mentioned in the above enumeration, but all the vendor’s property, assets, rights, and privileges, including the good will of the business, is intended to be included in said sale. The real, personal, and mixed property above described to be sold and *167conveyed subject to the lien or charge imposed by that certain indenture made and executed June 1, 1906, between the vendor and the Guaranty Trust Company, of New York, as trustees, to secure the payment of an issue of sixteen million dollars ($16,000,000), par value of four and one-half per cent (4-| per cent) thirty-year gold bonds issued by the vendor, of which issue fourteen million one hundred and sixty-six thousand dollars ($14,166,000) par value are now outstanding and unpaid and subject to any and all other liens, mortgages, charges, or encumbrances of whatsoever kind and nature existing on the date of said sale. The consideration for said sale to be paid by the company shall be one million four hundred and eighty-four thousand one hundred dollars ($1,484,100) in cash; fifty-eight million eight hundred and fifty-four thousand two hundred dollars ($58,-854,200) in the common stock of the company at par; and fifty-nine million six hundred and sixty-one thousand seven hundred dollars ($59,661,700) in ' debenture stock of the company, of which debenture stock one hundred thousand (100;000’)~sEares or any part thereof shall be voting “debenture stock if demanded by the vendor; nonvoting debenture stock to be accepted in payment of the. purchase price at par and voting debenture stock at one hundred and twenty dollars ($120) per share, with the option in the vendor at any time prior to April 25, 19Í6, to exchange voting debenture stock Tor~no^oti5g"debefitufNstdck ontKe same basis; i. eT, this company shall be entitled to receive one hundred" shares of nonvoting debenture stock for each eighty-three and one-third shares of voting debenture stock surrendered on or before April 25, 1916.1 The company shall also, as a part of the consideration for the property and business so sold, assume all the liabilities, debts, and obligations, contractual or otherwise, of every kind, nature, and description, due or to become due, of the vendor existing on the date of said transfer, except capital-stock liability and the funded; debt of the vendor, consisting of one million two hundred and thirty thousand dollars ($1,230,000) of the five per cent (5 per cent) first mortgage and collateral trust gold bonds of the vendor now outstanding and unpaid, and fourteen million one hundred and sixty-six thousand dollars ($14,-166,000) of the four and one-half per cent thirty-year gold bonds of the vendor now outstanding and unpaid.

2. The company hereby agrees, in consideration of said sale and upon the execution by the vendor of this agreement and the delivery to it of a good and sufficient bill of sale assigning, transferring, and conveying all of the personal property and personal property rights aforesaid, to pay to the vendor the sum of one million four hundred and eighty-*168four thousand one hundred dollars ($1,484,100) and to issue to the vendor or to such nominees as the vendor shall in writing hereafter direct, at such times and in such amounts as the vendor directs, certificates of stock of the' company as follows: Five hundred and eighty-eight thousand five hundred and forty-two (588,542) shares of the common stock of the company and five hundred and ninety-six thousand six hundred and seventeen (596,617) shares of the debenture stock of the company, of which debenture stock one hundred thousand (100,000) shares or any part thereof shall be voting debenture stock is demanded by the vendor, said voting debenture stock to be exchanged' for nonvoting debenture stock at any time prior to April 25, 1916, at the option of the vendor upon the basis of exchange hereinbefore set forth. All shares of the capital stock of the company so issued in payment for the property aforesaid shall be deemed to be and are hereby declared to be full-paid shares and not liable to any further call, and the holders of such stock shall not be liable to any further payment thereon.

The company hereby agrees, as a part for the sale of the property and business so sold, to assume and discharge all the liabilities, debts, and obligations, contractual or otherwise, of every kind, nature, and description, due or to become due, of the vendor existing on the date oi said transfer, except capital-stock liability and the funded debt of the vendor hereinbefore specifically mentioned; and the vendor hereby agrees to hold the company harmless from the lien or charge on the property sold to secure the payment of the funded debt aforesaid.

3. It is agreed that any contract of the vendor existing on the date of said transfer that is not legally assignable without the consent of the other party or parties thereto shall be assigned subject to .the assent to such assignment of such other 'party or parties thereto and,'in the event any such other party or parties shall not assenl to the assignment of any such contract, the vendor shall perform or cause to be performed the said contract for the use and benefit of E. I. du Pont de Nemours and Company and at its sole expense, and all moneys due or thereafter becoming due thereon shall belong to the company.

4. The vendor hereby covenants agrees company, upon the request and at the cost of the company, to execute and to do all such further assurances and things as shall reasonably be required by the company for vesting in it the property and rights agreed to be hereby sold, and giving to it the full benefit of this agreement.

In witness agreement to be signed in their respective corporate names *169by officers duly authorized so to do and their respective corporate seals to be affixed on the day and year first above written.

E. I. du PoNT Nemours Powder Company,

By Pierre S. du PoNt, *President.*

Attest:

L. R. Beardslee, *Asst. Secretary.*

E. I. du PoNt de Nemours AND Company,

By IreNee du PoNt, *President.*

Attest:

Alexis I. du PoNt, *Secretary.*

I, Alexis I. du Pont, secretary of E. I. du Pont de Nemours and Company, hereby certify that the foregoing is a full and true copy of an agreement between E. I. du Pont de Nemours Pow'der Company and E. I. du Pont de Nemours and Company, dated the 3.6th day of September, 1915, as taken from and compared with the original agreement on record in my possession.

Witness my hand and the seal of the company this 14th day of May, 1920,

[seal.] Alexis I. du Pont.

V. On October 1, 1915, said New Jersey corporation, by bill of sale, in pursuance of said proposal of August 19, and said agreement of September 16, transferred to the Delaware corporation all its assets of every description, said bill of sale reading as follows:

*Know all men by these 'presents:*

That E. I. du Pont de Nemours Powder Company, a corporation organized and existing under the laws of the State of New Jersey, of the first part (hereinafter referred to as “ vendor ”), in consideration of the sum of one million four hundred eighty-four thousand one hundred dollars ($1,-484,100) cash, and other valuable consideration to it in hand paid by E. I. du Pont de Nemours and Company, a corporation organized and existing under-.the laws of the State of Delaware, of the second part (hereinafter referred to as the “ vendee ”), receipt whereof is hereby acknowledged, has bargained, sold, conveyed, transferred, assigned, and delivered, and by these presents does bargain, sell, convey, transfer, assign, and deliver unto the said vendee all of the vendor’s property and assets,- and all of the vendor’s personal property and personal property rights of whatsoever kind, nature, and description, and wheresoever situate, including the good will of its business, and all its trade-marks, trade names, trade secrets, brands, and copyrights; and all *170its machinery, tools, and appliances, in and in connection with its manufacturing plants and otherwise; and all its raw materials, manufactured product and partially manufactured product, wheresoever situate; and all accounts and bills receivable; and all its stocks and bonds; and all its claims,_ demands,, judgments, choses in action, matured or otherwise, of every kind, nature, and description; all its patents and applications, for patents; and all cash on hand and money in bank; and also all horses, mules, and live stock of every kind, nature, and description, wheresoever situate; and all transportation fixtures and equipment of every kind, nature, and description, including all locomotives, freight cars, tank cars, and track material; and all ships, boats, tugs, barges, and vessels of every kind, nature, and description, and wheresoever situate, including chartered or rented vessels. The foregoing enumeration is not to be taken as excluding any personal property or personal property rights not specifically mentioned in the above and foregoing enumeration, but all the vendor’s personal property, personal assets, and personal rights and privileges is intended to be included in said sale: Provided, *how'ever,*That all the above-described and intended property is sold and conveyed subject to the lien or charge imposed by that certain indenture made and executed June 1, 1906, between the vendor and the Guaranty Trust Company of New York, as trustee, to secure the payment of an issue of sixteen million ($16,-000,000) , par value of four and one-half per cent (4¿ per cent) thirty-year gold bonds issued by the vendor, of which issue fourteen million one hundred sixty-six thousand dollars ($14,166,000) par value are now outstanding and unpaid, and subject to any and all other liens, charges, and encumbrances of whatsoever kind and nature existing on the first day of October, 1915.

To have and to hold all and singular the said property and property rights unto the said vendee, its successors and assign absolutely, to its and their own use and behoof forever.

It is understood that any contract of the now ing that is not legally assignable without the consent of the other party or parties thereto is hereby sold and assigned subject to the assent of such other party or parties to such assignment, and in the event that any such other party or parties shall not assent to the sale and assignment of any such contract, the vendor shall and does hereby agree to perform or cause to be performed the said contract for the use and benefit of the vendee, but at the sole cost and expense of the vendee, and all moneys due or thereafter becoming due thereon shall belong to said vendee.

*171The vendee hereby agrees as a part of the consideration for the sale of the property and rights so sold to assume and discharge all the liabilities, debts, and obligations, contractual or otherwise, of every kind, nature, and description, of the vendor, existing on the first day or October, 1915, whether due or to become due, excepting capital stock and funded debt liability of the vendor.

The vendor hereby agrees to hold the vendee harmless from any lien or charge on the property hereby sold to secure the payment of the said funded debt of the vendee.

The vendor for itself, its successors, and assigns, hereby covenants and agrees with the vendee, its successors, and assigns, that upon the request but at the cost of the vendee it will execute any and all such further assurances as shall reasonably be required for vesting in the vendee, its successors, and assigns, the property and rights hereby sold, and giving to it and them the full benefit of this conveyance.

In witness whereof the parties hereto have caused these presents to be executed in triplicate by their respective officers thereunto duly authorized, and their respective corporate seals to be hereto affixed and attested as of the first day of October, A. D. 1915.

E. I. du PoNt de Nemours Powder Company,

By Pierre S. du PoNt, *President.*

Attest:

Alexis I. du Pont, *Secretary.*

E. I. du Pont de Nemours and Company,

By H. M. Barksdale, *Vice President.*

Attest:

L. R. Beahdslee, *Asst. Secretary.*

I, Alexis I. du Pont, secretary of E. I. du Pont Nemours Powder Company, hereby certify that the foregoing is a full and true copy of a bill of sale conveying all of the personal property and personal property rights of E. I. du Pont de Nemours Powder Company to E. I. du Pont de Nemours and Company, which bill of sale is dated the 1st day of October, 1915, as taken from and compared with the original bill of sale on record in my possession.

Witness my hand and the seal of the company, this 14th day of May, 1920.

[seal.] Alexis I. du Pont, *Secretary.*

Pursuant to said agreement of September 16, 1915, and upon the execution and delivery of said bill of sale from the New Jersey corporation to the Delaware corporation, and to carry out the terms of said agreement, the Delaware cor*172poration delivered to the New Jersey corporation 588J342 shares of its common stock of the par value of $100 per share and 596,617 shares of its debenture stock of the par values of $100 per share and of the accepted value of $59,661,700, and said New Jersey corporation retained $1,484,400 in cash with which to redeem its outstanding 5 per cent debenture bonds.

VI. In addition to said debenture stock of said Delaware corporation said New Jersey corporation then held cash in the sum of $1,484,400 sufficient to pay its outstanding 5 per cent bonds to the amount of $1,230,000. It also held debenture stock of the Delaware corporation to exchange for the outstanding preferred stock of the New Jersey corporation to the amount of $16,068,801.34 and to exchange for the outstanding 4£ per cent bonds of said New Jersey corporation to the amount of $14,166,000, and further, said New Jersey corporation held the debenture stock of the Delaware corporation equal in amount to the outstanding common stock of the Nov Jersey corporation, and it also held two shares of the common stock of the Delaware corporation for each share of its, the New Jersey corporation, common stock outstanding.

VII. Upon the execution of said transfers, in pursuance of said proposal of August 19 and said agreement of September 16, the New Jersey corporation distributed as of October 1, 1915, to each holder of its common stock two shares of the common stock of the Delaware corporation, and the original holders of the common stock of the New Jersey corporation continued each to hold his original shares of said stock, and as of October 1, 1915, the Delaware corporation took over all the assets' (excepting the aforesaid $1,484,100) theretofore held by the New Jersey corporation, and the New Jersey corporation thereafter held the cash and the debenture stock above described. .Plaintiff received his 500 shares of the common stock of the Delaware corporation and continued to hold his original 250 shares of the common stock of the New Jersey corporation.

VIII. The personnel of stockholders and officers of the two corporations was, on October 1, 1915, identical, the Delaware corporation having elected the same officers as *173the New Jersey corporation, and said holders of common stock of said corporations had each the same proportionate stock holding in both corporations; that is to say, on October 1 each owner of one share of stock of the New Jersey corporation was also the owner of two shares of stock of the Delaware corporation.

IX. The New Jersey corporation has received as income upon the debenture stock of the Delaware corporation held by it against its capital stock dividends to the amount of 6 per cent per annum, which it has paid out to its preferred and common stockholders including plaintiff.

X. The New Jersey corporation, after the distribution of the stock of the Delaware corporation, continued as a going concern and is still in existence, but, except for the collection and payment of said dividends and the redemption of its outstanding bonds, and the exchange of debenture stock for its preferred stock and the holding of the debenture stock of the Delaware corporation to an amount equal to the outstanding common stock of the New Jersey corporation, said New Jersey corporation has done no business and is not in process of liquidation.

XI. The fair market value of the stock of the New Jersey corporation on the 30th day of September, 1915, was $795 per share, and the fair market value of the stock of said New Jersey corporation, after the execution of the contracts between two corporations, was, on October 1, 1915, $100. The fair market value of the stock of the Delaware corporation, distributed as aforesaid, was, on October 1, 1915, $347.50 per share.

XII. In making his income-tax return for the year 1915, plaintiff, upon the advice of counsel, did not include as income the 500 shares of stock o'f the Delaware corporation received by him as aforesaid, but attached a statement as to the receipt of said stock to his income-tax return stating he did not regard it as taxable income.

XIII. After an investigation of his books the Commissioner of Internal Revenue, holding that the 500 shares of stock of the Delaware corporation was income, and that its market value when acquired by claimant, October 1, 1915, was $347.50, per share, assessed an additional tax against *174claimant upon the 31st day of December, 1919, for income' claimed by him to be due from plaintiff for the year 1915' because of the receipt by him of said stock, said assessment being in the sum of $5,657.97. Plaintiff first filed a claim for the abatement of said assessment, but thereafter withdrew his said claim for abatement, and on February 20.,. 1920, paid to the collector of internal revenue at Wilmington, Del., under protest, the amount of said assessment, to-wit, $5,657.97, and upon the same day filed with the collector his claim for refund, which was denied by the Commissioner of Internal Bevenue, whereupon plaintiff brought this suit.

1

 Reversed, 257 U. S., —.

■Booth, Judge,

delivered the opinion of the court:

The plaintiff was the owner of 250 shares of the E. I. du Pont de Nemours Powder Co., a New Jersey corporation. In September, 1915, a complete reorganization of the business of the company took place, and as the result of the same the plaintiff found himself the owner of his original shares in the New Jersey corporation and 500 shares in the new Delaware corporation. The defendant treated the new 5001 shares of stock in the Delaware corporation as income, and assessed against them at their fair market value an income tax of $5,657.97, which plaintiff paid under protest. The facts are in no wise controverted and the findings disclose the exact situation.

In *Eisner*v. Macomber, 252 U. S., 189, 207, the Supreme-Court, speaking of income, said:

> “ The gain derived from capital, from labor, or from both combined * * * profit gained through a sale or conversion of capital assets, * * * not a gain accruing to-capital, not a growth or increment of value in the investment, but a gain, a profit, something of exchangeable value proceeding from the property, sever^l/from the capital, however invested or employed, and coming in, being ‘ derived,r that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit and disposal — that is income derived from property. Nothing else answers the description.”

Again, in the same case the Supreme Court used the following language (p. 206):

> *175“ In order, therefore, that the clauses cited from Article I of the Constitution may have proper force and effect, save only as modified by the Amendment, and that the latter also may have proper effect, it becomes essential to distinguish between what is and what is not *1*income,’ as the term is there used; and to apply the distinction, as cases arise, according to truth and substance, without regard to form. Congress can not by any definition it may adopt conclude the matter, since it can not by legislation alter the Constitution, from which alone it derives its power to legislate, and within whose limitations alone that power can be lawfully exercised.”

Subjecting the facts herein to the rule announced, we find as the admitted status the following situation, viz: On September 30, 1915, the plaintiff’s 250 shares in the New Jersey corporation were worth on the market $795 each, of the total sum of $198,750. On October 1, 1915, the day he received his 500 shares additional in the new Delaware corporation, his 250 shares in the New Jersey corporation decreased in value $695 a share, and were then marketable at $100 per share, while the 500 new shares he received were worth in the open market $347.50 each, or a total value of $173,750. Addling this amount to. the decreased value of his New Jersey corporation stock, we find the plaintiff in exactly the same situation as to the value of his holdings in both corporations that Ke was prior to the reorganization. The figures indisputably demonstrate that by the transaction the plaintiff ■did not gain or lose a penny, as will with more precision appear from, the following tabulation:

> ■Sept. 30, 1915, 250 shares of stock of the New Jersey Corporation, at $795 each_$198,750

> Total value Oct. 1,1915_'_ 198, 750

> Oct. 1,1915, 500 shares of stock of the Delaware corporation, at $347.50- 173,750

> Oct. 1, 1915, 250 shares of stock of the New Jersey corporation, at $100_’_ 25,000

> Total value of the 750 shares in both_ 198,750

As a matter of fact if the position of the defendant is to be .sustained the plaintiff herein instead of receiving an income from the transaction loses $5,657.97 which he must pay from *176gains derived from a source other than the one in controversy or out of his original investment.

The defendant contends that the New Jersey and Delaware corporations must be regarded as “separate and distinct legal entities ” and that the case is within the rule of *Peabody*v. Eisner, 247 U. S., 347. We think the whole transaction is to be regarded as merely a financial reorganization of the business of the company and that this view is justified by the power and duty of the court to look through the form of the transaction to its substance. In *Eisner*v. McComber, 252 U. S., 189 at 213, it is said:

“We have no doubt of the power or duty of a court to look through the form of the corporation and determine the question of the stockholder’s right, in order to ascertain whether he has received income taxable without apportionment.”

It seems incredible that Congress intended to tax as income a business transaction which admittedly produced no gain, no profit, and hence no income. If any income had accrued to the plaintiff by reason of the sale and exchange made it would doubtless be taxable.

Judgment will be awarded plaintiff in the sum of $5,657.97. It is so ordered.

Graham, *Judge;*Hay, *Judge;*DowNey, *Judge;*and Campbell, *Chief*Justice, concur.