Court Opinion

ID: 4631425
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:09:37.527016+00
Date Added: 2024-06-11T07:57:43.426124
License: Public Domain

Mark E. DeGroff and Loveta S. DeGroff, Petitioners v. Commissioner of Internal Revenue, RespondentDe Groff v. CommissionerDocket No. 2260-68United States Tax Court54 T.C. 59; 1970 U.S. Tax Ct. LEXIS 228; January 26, 1970, Filed 1970 U.S. Tax Ct. LEXIS 228">*228 Decision will be entered for the respondent.  Petitioners (T and his wife) were the sole and equal stockholders in three corporations, M, P, and E. M manufactured therapeutic devices invented or developed by T, and P and E marketed such devices.  As a result of an informal arrangement the entire business operation of E was taken over by P as of the close of their fiscal year ending Nov. 30, 1963.  Thereafter all selling was carried on by P.  In connection with the unification, some $ 120,000 was distributed to T and his wife.  Held: In the circumstances of this case there was a reorganization under sec. 368(a)(1)(D), and the distributions were taxable to T and his wife as dividends under sec. 356(a)(2) rather than as capital gain realized on the liquidation of E under secs. 331(a) and 346.  There was a transfer, albeit an informal one, of "substantially all" the assets of E to P, thereby satisfying the requirement of sec. 354(b)(1)(A), which was necessary for the transaction to qualify as a reorganization under sec. 368(a)(1)(D).  Lowry McKee, for the petitioners.Harold Friedman, for the respondent.  1970 U.S. Tax Ct. LEXIS 228">*231 Raum, Judge.  RAUM54 T.C. 59">*59  The Commissioner determined a deficiency of $ 48,372.16 in petitioners' income tax for 1964.  The only issue is whether distributions by Medco Electronics Co., Inc., to its shareholders were liquidating distributions under sections 331 and 346, I.R.C. 1954, or whether such distributions were incident to a corporate reorganization and were taxable as dividends under section 356(a)(2).FINDINGS OF FACTThe parties have stipulated certain facts, which, together with the attached exhibits, are incorporated herein by this reference.Petitioners, Mark E. and Loveta S. DeGroff, are husband and wife; they were married in 1949.  They filed a joint Federal income tax return for the calendar year 1964 with the district director of internal revenue in Oklahoma City, Okla., and resided in Tulsa, Okla., at the time the petition was filed in this case.54 T.C. 59">*60  For a number of years Mr. DeGroff has been engaged in various activities relating to the invention, promotion, and exploitation of various therapeutic devices.  Mrs. DeGroff has been active in such enterprises, in control of office management, bookkeeping, sales records, billing, and the like.  In 1949, Mr. 1970 U.S. Tax Ct. LEXIS 228">*232  DeGroff invented a device known as the Medcolator.  The Medcolator is an electrical muscle stimulator.  It is designed to perform electrodiagnosis, stimulation of innervated and denervated muscles, ion transfer, and medical galvanism.  Between 1949 and April 1, 1955, the Medcolator was marketed by a partnership formed by the DeGroffs.On April 1, 1955, petitioners incorporated Medco Products Co., Inc. (Medco Products), under the laws of the State of Oklahoma for the purpose of marketing electrical therapeutic equipment.  At that time Medco Products assumed the task of marketing the Medcolator.  On the same date, petitioners also incorporated Medco Products Mfg. Corp. (Medco Mfg.) under the laws of the State of Oklahoma for the purpose of manufacturing the equipment sold by Medco Products.  Initially, the Medcolator was the only product handled by either corporation.  Mr. and Mrs. DeGroff each owned 50 percent of the capital stock of both Medco Products and Medco Mfg., and served, respectively, as president and vice president of both corporations.  Mr. DeGroff's principal efforts on behalf of Medco Products were devoted to product development, promotion, and sales, while his wife's 1970 U.S. Tax Ct. LEXIS 228">*233  duties were primarily related to running Medco Products' business office.Medco Products established a network of exclusive distributorships to market the Medcolator.  Each distributor was given a portion of the United States throughout which he had the exclusive right to sell the Medcolator.  The distributors themselves purchased the Medcolator units from Medco Products and then sold the units to physicians, hospitals, and clinics.  The distributors earned a 50-percent "commission" or profit on each sale.By 1955, the Medcolator was threatened by competition from therapeutic devices which used "ultrasound" 1 rather than electrical stimulation.  In an effort to meet this competition, Mr. DeGroff developed a unit which combined the therapies of ultrasound and electrical stimulation.  On November 16, 1955, petitioners incorporated Medco Electronics Co., Inc. (Medco Electronics), under the laws of the State of Oklahoma for the purpose of marketing the combination unit under the trade name "Medco-sonlator." The DeGroffs each owned 50 percent of its outstanding capital stock and served respectively as its president and vice president.  Like the Medcolator, the Medco-sonlator was manufactured1970 U.S. Tax Ct. LEXIS 228">*234  by Medco Mfg.54 T.C. 59">*61  During Medco Electronics' first few years, Mr. DeGroff devoted a major portion of his time toward making the Medco-sonlator a commercially acceptable product.  Much of his effort was devoted to exhibiting and demonstrating the Medco-sonlator at medical meetings and conventions throughout the country.In marketing the Medco-sonlator, Medco Electronics used the same network of independent distributors employed by Medco Products; however, at least in some situations, a portion of an existing territory was carved out and assigned to a "division manager." The independent distributors continued to receive a 50-percent commission or profit, as in the case of the Medcolator, but the division managers, or salesmen, received a commission of only 33 1/3 percent.  Thus the distribution network, as modified for Medco Electronics, enabled the DeGroffs to market the Medco-sonlator through an expanded sales force and at partly reduced commission rates when sales were made 1970 U.S. Tax Ct. LEXIS 228">*235  by employees rather than independent distributors. The Medcolator, however, continued to be marketed by Medco Products exclusively through the old distributors. The parties have stipulated that a total of 966 Medco-sonlators were sold during Medco Electronics' fiscal year ended November 30, 1963, as follows:UnitssoldBy 42 independent distributors939By salaried employees of Medco Products Co., Inc17As a result of direct inquiry10966A certain amount of training was necessary before the distributors and division managers were able to demonstrate the Medco-sonlator to prospective customers.  Thus, as Mr. DeGroff developed the distribution network, he instructed the distributors and division managers in the operation of the machine.  As a result he was gradually able to shift the burden of displaying the machines throughout the country to the distributors and division managers.On January 31, 1957, Mr. DeGroff filed an application for a patent covering the Medco-sonlator, patent No. 2,830,578, entitled "Electro-Sonic Apparatus," was issued to him on April 15, 1958.  On May 1, 1958, he granted to Medco Electronics an exclusive license to "make and sell" and 1970 U.S. Tax Ct. LEXIS 228">*236  a nonexclusive license to "use" devices embodying the patented invention.  The license agreement gave Medco Electronics the right to sublicense under the agreement.  With respect to assignability, it provided:54 T.C. 59">*62  VI. ASSIGNABILITY:This agreement and the license granted hereunder are personal to the parties.  This agreement shall be binding upon and inure to the benefit of the parties and to their successors in interest, heirs, assigns and transferees.Furthermore, Medco Electronics was given the right to bring suit and recover damages on the patent covering the Medco-sonlator.The agreement contained no requirement for the payment of royalties, and in respect of "consideration," it provided simply that --LICENSEE agrees to pay LICENSOR Ten Dollars ($ 10.00) and other valuable consideration for the rights granted herein, and said other consideration being in part that it will provide an extensive commercial promulgation of the apparatus embodied in said Patent aforesaid, and will exercise its best endeavors to continually market and sell the apparatus under the Patent aforesaid.The license agreement also declared that it would remain in effect for the life of the patent, 1970 U.S. Tax Ct. LEXIS 228">*237  but that in the event of Medco Electronics' failure to comply with its covenant to market the Medco-sonlator, DeGroff was given the right to cancel the agreement on 60 days' written notice.Despite the exclusive nature of the agreement, Medco Mfg. rather than Medco Electronics made or assembled the Medco-sonlator and continued to do so at the time of the trial herein.  No evidence of a sublicense agreement between Medco Electronics and Medco Mfg. was offered at the trial herein.During the years following the organization of Medco Electronics, DeGroff developed a number of other therapeutic devices.  Each was assembled or manufactured by Medco Mfg. and marketed by Medco Products.  2 Medco Products also marketed two therapeutic devices manufactured by another enterprise and an aviation fuel gauge which DeGroff developed in 1968.  All of the independent distributors selling the Medco-sonlator also sold at least some of these devices on behalf of Medco Products.1970 U.S. Tax Ct. LEXIS 228">*238  Medco Products and Medco Electronics shared the same general business office and the same office employees.  Under Mrs. DeGroff's direction the office handled the standard "home office" operations of both corporations, such as correspondence, processing of orders, purchasing, billing, bookkeeping, and banking.  Separate books, bank accounts, invoices, bills, and stationery were used in the operations of each corporation.  However, orders written or telephoned in to the office for either corporation's products were all handled identically, except that the office workers used the invoices, bills, and stationery of the corporation marketing the product ordered.54 T.C. 59">*63  With the exception of officers' salaries, payroll taxes, and sales commissions, Medco Products paid all salary and office expenses on behalf of both corporations.  At the end of each month, Medco Products billed Medco Electronics for its prorata share of these expenses, based upon its percentage of total sales for that month.Neither Medco Products nor Medco Electronics carried any inventory.  Equipment was obtained from Medco Mfg. only as it was sold.The same advertising agency was employed by both corporations.  It1970 U.S. Tax Ct. LEXIS 228">*239  billed them jointly, and the bill was paid by Medco Products.  Although the Medco-sonlator was not always advertised together with Medco Products' wares, Medco Products billed Medco Electronics for the advertising according to its percentage of their joint sales.By 1963, the Medco-sonlator had received FCC approval and had become successfully established both medically and commercially.  The absence of these considerations had theretofore been thought to justify the marketing of this device through a separate corporation.  In these circumstances and in view of the fact that the continued existence of Medco Electronics required them to maintain separate records and to print separate bills, invoices, and stationery on its behalf, the DeGroffs decided that Medco Electronics should cease to do business and that Medco Products should market the Medco-sonlator thereafter.  The corporate affairs of Medco Electronics were ordinarily conducted loosely on an informal basis, and there are no minutes reflecting the DeGroffs' decision.On November 30, 1963, at the close of its fiscal year, Medco Electronics ceased marketing the Medco-sonlator.  On that date it had accumulated earnings and profits1970 U.S. Tax Ct. LEXIS 228">*240  of $ 124,030.  Its balance sheet, as reflected by its books, was as follows:AssetsCash (cash in bank and certificates of deposit)$ 70,653.74Accounts receivable:Trade$ 32,592.91Medco Products Mfg. Corp60,137.9992,730.90Due from shareholders64,636.51Deposit -- payroll taxes601.20Total228,622.35LiabilitiesAccount payable -- Medco Products Co., Inc$ 99,236.91Taxes payable4,855.44CapitalCapital stock$ 500.00Retained earnings124,030.00124,530.00Total228,622.3554 T.C. 59">*64  Thus, on November 30, 1963, Medco Electronics held accounts receivable totaling $ 92,730.90 and an account payable to Medco Products of $ 99,236.91.  In order to satisfy part of its debt to Medco Products it transferred all of its accounts receivable to Medco Products.  The remaining $ 6,506.01 debt was satisfied by a $ 30,000 "advance" to Medco Mfg. and a transfer to Medco Products of Medco Mfg.'s resulting obligation in return for cash and elimination of the remaining debt.More specifically, the parties have stipulated that the cash balance of $ 70,653.74 was reduced to $ 59,893.49 as follows:Cash balance Nov. 30, 1963$ 70,653.74Add:  Receipt of cash from Medco Products Co., Inc.  (from "sale" of accounts receivable to it)23,505.92Total94,159.66Deduct:Advances to Medco Products Mfg. Corp$ 30,000.00Payment of various taxes as shown onthe balance sheet of Nov. 30, 1963($ 4,855.44 less applicationof $ 601.20 deposit)4,254.24Interest paid11.93Total34,266.17Cash distributed to shareholders59,893.491970 U.S. Tax Ct. LEXIS 228">*241  The accounts receivable of $ 92,730.90 were disposed of as follows:Accounts receivable balance Nov. 30, 1963$ 92,730.90Add:Advances to Medco Products Mfg. Corp.:Dec. 26, 1963$ 10,000.00Jan. 3, 19645,000.00Jan. 10, 196415,000.0030,000.00Interest paid, charged to Medco Products Co., Inc11.93Total122,742.83Disposition: Used to "pay" or "offset" the account payable to Medco Products Co., Inc., as shown on the balancesheet dated Nov. 30, 1963$ 99,236.91"Sold" to Medco Products Co., Inc., for cash23,505.92Total122,742.83During 1964, the DeGroffs received distributions totaling $ 124,530 from Medco Electronics, consisting of $ 59,893.49 in cash and cancellation of the $ 64,636.51 debt due from shareholders, as reflected 54 T.C. 59">*65  on the balance sheet of November 30, 1963.  The cash distributions were made as follows:DateAmountFeb. 14, 1964$ 22,447.33Mar. 23, 1964464.85Apr. 24, 196410,000.00July 19, 196415,000.00Aug. 6, 19641,200.00Aug. 28, 196410,781.31Total59,893.49The amount due from the DeGroffs was canceled on an unspecified date in 1964.Medco Electronics was not1970 U.S. Tax Ct. LEXIS 228">*242  formally dissolved.  Rather, its charter was simply allowed to lapse by nonpayment of the State franchise tax.In addition to assets appearing on its balance sheet as of November 30, 1963, Medco Electronics had a valuable intangible asset, a going-concern value, in the successful operation of the business of selling a product which enjoyed public acceptance through an established sales distribution network. Its sales record for its fiscal years 1956-63 is shown in the following table:MEDCO ELECTRONICS CO., INC.Sales Broken Down By Sales of the Medco-sonlator and Minor AccessoriesFor the year ended Nov. 30 --Medco-sonlatorsMinorTotalaccessories1956$ 357,082.64$ 16,464.40$ 373,547.041957380,443.4518,780.24399,223.691958494,002.6537,049.58531,052.231959590,560.2949,906.45640,466.741960478,494.2945,882.65524,376.941961537,204.8049,046.00586,250.801962479,643.2742,284.31521,927.581963526,529.2938,911.95565,441.24Total3,843,960.68298,325.584,142,286.26At the time its business was transferred to Medco Products, Medco Electronics made no attempt to assign its license agreement or 1970 U.S. Tax Ct. LEXIS 228">*243  to grant any sublicense under it.  Neither DeGroff alone nor the DeGroffs together ever formally granted Medco Products any rights under it.After November 30, 1963, the Medco-sonlator was marketed solely by Medco Products.  However, there was no substantial change in the daily operations of the business.  Although the independent distributors were not contractually obligated to continue to sell the Medco-sonlator, the distributors and other sales personnel who had marketed the Medco-sonlator on behalf of Medco Electronics continued to sell it on Medco Products' behalf.  The office employees who had previously processed orders for the Medco-sonlator continued to do so just as they had before.  The only change was that the invoicing, billing, correspondence, and advertising was performed in the name of Medco 54 T.C. 59">*66  Products rather than Medco Electronics.  Moreover, since advertising circulars for the Medco-sonlator both before and after November 30, 1963, featured the trade name, "Medco-sonlator," rather than the name of Medco Electronics or Medco Products, it appears that the transfer had little, if any, effect on the promotion of the Medco-sonlator.  In fact, a 1964 advertising 1970 U.S. Tax Ct. LEXIS 228">*244  circular with respect to the Medco-sonlator and other products erroneously referred to them merely as "Manufactured by Medco Products Co., Inc.," and an earlier circular with respect to another product was issued in the name of "Medco Electronics Company, Inc., Division/Medco Products Co., Inc.," an erroneous designation.  The corporate names were used loosely and the identity of the particular corporate entity promoting the sale of the Medco-sonlator does not appear to have played any significant role in its success.During 1964 DeGroff devoted 10 to 15 percent of his time to promotion of the Medco-sonlator.  Between 1964 and 1968 the Medco-sonlator accounted for over 60 percent of Medco Products' dollar sales.  Its sales of each of its products for each year of its existence through the year ended November 30, 1968, were as follows: 54 T.C. 59">*67 MEDCO PRODUCTS CO., INC.Sales -- Broken Down by Products SoldFor the yearAccessoriesMedcoended Nov. 30 --Medcolatorand othersKolthermlotion1955$ 187,953.79$ 682.61195678,079.317,274.11195741,714.076,689.15195836,520.8811,577.41195929,003.139,474.73196037,447.4215,897.43$ 77,362.50196129,772.7320,481.3834,336.97196222,725.9515,429.4010,935.83$ 11,660.57196338,109.2517,863.0611,264.5016,131.36196436,773.7460,155.378,321.2517,816.02196554,274.4093,408.845,015.0023,213.96196661,763.13112,745.48850.0026,871.75196757,972.5386,827.11425.0030,039.10196869,913.04100,204.15435.0033,913.61Total782,023.37558,710.23148,946.05159,646.371970 U.S. Tax Ct. LEXIS 228">*245 MEDCO PRODUCTS CO., INC.Sales -- Broken Down by Products SoldFor the yearKinemometerCardi-O-MiteAchilleometerMedcosonlatorended Nov. 30 --19551956195719581959196019611962$ 29,996.00$ 14,082.00196319,920.5024,707.0019645,234.00$ 158,179.80$ 544,552.521965158,305.15614,657.49196649,984.62582,246.60196740,499.00509,283.90196812,055.00526,254.59Total49,916.5044,023.00419,023.572,776,995.10MEDCO PRODUCTS CO., INC.Sales -- Broken Down by Products SoldFor the yearMedcothermFuelended Nov. 30 --alertTotal1955$ 188,636.40195685,353.42195748,403.22195848,098.29195938,477.861960130,707.35196184,591.081962104,829.751963127,995.671964831,032.701965948,874.841966$ 29,176.50863,638.08196760,420.00785,466.64196851,768.00$ 6,225.25800,768.64Total141,364.506,225.255,086,873.9454 T.C. 59">*68  On their joint Federal income tax return for the calendar year 1964, the DeGroffs reported $ 122,296.58 as long-term capital gain from the "liquidation of Medco 1970 U.S. Tax Ct. LEXIS 228">*246  Electronics Co., Inc." That amount consisted of the $ 124,530 received from Electronics, less $ 500, the basis of their capital stock, and less $ 1,733.42 additional income taxes assessed against Medco Electronics after November 30, 1963, and paid personally by the DeGroffs.In his notice of deficiency, the Commissioner determined that the transfer of assets from Medco Electronics to Medco Products constituted a reorganization of the two corporations and that therefore the net distribution of $ 122,296.58 was taxable to the DeGroffs as ordinary income rather than capital gain.OPINIONPetitioner Mark E. DeGroff is an inventor who has been engaged in the development and exploitation of therapeutic devices.  The first such device of any consequence was the so-called Medcolator, which was marketed by a partnership in which DeGroff and his wife each had a 50-percent interest.  In 1955 he invented another device named the Medco-sonlator, and in that year three corporations were organized, the stock in each of which was owned equally by both spouses.  One was a manufacturing corporation (Medco Mfg.) which produced the Medcolator, the Medco-sonlator, and various other devices invented by 1970 U.S. Tax Ct. LEXIS 228">*247  DeGroff.  The second was a selling corporation (Medco Products), which promoted and sold the Medcolator and other products invented by DeGroff, except the Medco-sonlator.  The third was also a selling corporation (Medco Electronics), which promoted and sold the Medco-sonlator.  Although separate records were kept for each corporation, their affairs in respect of one another appear to have been conducted in an informal and rather loose manner.  The term "Medco" was the unifying descriptive word that characterized the entire enterprise, and the great bulk of the gross receipts was attributable to products which embodied that term in their names.  The Medco-sonlator turned out to be the most profitable product, and the DeGroffs decided informally to combine the activities of both selling corporations in a single corporation as of the close of November 30, 1963, the end of the fiscal year of both Medco Products and Medco Electronics.  The unification was achieved by having Medco Products take over all of the activities and functions of Medco Electronics as of December 1, 1963.  No formal transfer was made, but all the functions and activities of Medco Electronics were continued without1970 U.S. Tax Ct. LEXIS 228">*248  a break by Medco Products in an identical manner with the same personnel.  The only change was a purely formal one in that invoices and other 54 T.C. 59">*69  records were issued in the name of Medco Products, and bank accounts and other records were maintained in the name of but a single corporation, Medco Products.At the time of the combination of both these corporations Medco Electronics had accumulated earnings and profits in the amount of $ 124,030, and, in connection with the merger of their activities, the DeGroffs received distributions in the full amount of such surplus.  Had there been no transfer of Medco Electronics' functions to Medco Products, there is no serious question that such distributions would have been treated as dividends to the DeGroffs, taxable as ordinary income.  Is a different result called for merely because such earnings and profits were siphoned out of the enterprise in the manner described above?  We hold that the answer must be in the negative and that the determination of deficiency must be sustained.Petitioners' contention is that there was a liquidation of Medco Electronics and that the amount received by them represents merely payment for their Medco1970 U.S. Tax Ct. LEXIS 228">*249  Electronics stock, with the consequence that the net profit reflected therein is taxable only at the more favorable capital gains rates.  They rely upon sections 331(a) and 346(a)(1) of the 1954 Code.  3 If the transaction herein were indeed simply a liquidation of Medco Electronics their position would be impregnable.  But this case involves much more than a mere "liquidation." For, simultaneously with the "liquidation," the entire business of Medco Electronics was transferred to Medco Products, a corporation in which the stock was owned in the same proportions by the same persons who owned the stock of Medco Electronics, and the entire corporate business of Medco Electronics was thereafter carried on by Medco Products without interruption in an identical manner.  In the light of the facts appearing in this record we agree with the Government that there was here a corporate reorganization rather than a mere liquidation and that the distributions to the stockholders in connection therewith must be treated as taxable dividends where such distributions are 54 T.C. 59">*70  supported by accumulated corporate earnings and profits.  Cf. John G. Moffatt, 42 T.C. 558">42 T.C. 558,1970 U.S. Tax Ct. LEXIS 228">*250  affirmed 363 F.2d 262 (C.A. 9), certiorari denied 386 U.S. 1016">386 U.S. 1016; Davant v. Commissioner, 366 F.2d 874 (C.A. 5), affirming in this respect 43 T.C. 540">43 T.C. 540, 43 T.C. 540">568-572, certiorari denied 386 U.S. 1022">386 U.S. 1022, rehearing denied 389 U.S. 893">389 U.S. 893; James Armour, Inc., 43 T.C. 295">43 T.C. 295.1970 U.S. Tax Ct. LEXIS 228">*251  The statute is complicated, but a careful study thereof leads to the foregoing conclusion.  The critical provisions are set forth in sections 354(a) and (b), 356(a)(1) and (2), and 368(a)(1) of the Code.  Section 368(a)(1) 41970 U.S. Tax Ct. LEXIS 228">*252  contains the definition of a reorganization, and sections 354 and 356, 5 to the extent relevant here, spell out the operative 54 T.C. 59">*71  consequences of a reorganization. In terms of the present case, the Government contends, and we hold, that there was a "reorganization" under section 368(a)(1)(D), with the result that under section 356(a)(2), an exchange in a reorganization having the effect of the distribution of a dividend must be treated as a dividend to the extent recognized and to the extent that it is supported by undistributed corporate earnings and profits.1970 U.S. Tax Ct. LEXIS 228">*253 If there were a reorganization as defined in section 368(a)(1)(D), as contended by the Government, we have no doubt that the distributions before us must be treated as a dividend under section 356(a)(2), and we reject petitioners' suggestion that Moffatt, Davant, and Armour6 may not represent sound law in this connection.  We accept these cases on this issue and proceed to consider petitioners' principal contention herein that there was no reorganization under section 368(a)(1)(D).Section 368(a)(1)(D) provides:SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.(a) Reorganization. -- (1) In general.  -- For purposes of parts I and II and this part, the term "reorganization" means -- * * * *(D) a transfer by a corporation of1970 U.S. Tax Ct. LEXIS 228">*254  all or a part of its assets to another corporation if immediately after the transfer the transferor or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356; * * *There was here a transfer of assets by Medco Electronics to Medco Products -- albeit an informal one -- and immediately after the transfer the two sole stockholders were in complete control of the transferee.  So much is not disputed, and the requirements set forth in section 368(a)(1)(D) appear to have been met.  7 However, section 368(a)(1)(D) 54 T.C. 59">*72  incorporates section 354 by reference, and the critical disagreement between the parties is whether Medco Products acquired "substantially all" of the assets of Medco Electronics so as to satisfy the requirement of section 354(b)(1)(A).1970 U.S. Tax Ct. LEXIS 228">*255 In several recent cases we have considered the meaning of "substantially all" of the assets as used in section 354(b)(1)(A).  In John G. Moffatt, 42 T.C. 558">42 T.C. 558, 42 T.C. 558">578, affirmed 363 F.2d 262 (C.A.9), certiorari denied 386 U.S. 1016">386 U.S. 1016, we noted that "it must be remembered that the 'substantially all' requirement 'has been subjected to [a] construction which in effect applies a continuity test rather than mere blind percentages.'" In holding that section 354(b)(1)(A) had been satisfied notwithstanding that certain nonoperating assets had been distributed to the stockholders, we found --[that] the necessary continuity was present here * * *.  The * * * [transferor corporation's] business was transferred to the new company, bearing a similar name and controlled by the same persons.  It employed the same personnel, used the same facilities, had the same address, and dealt with the same clients as though nothing had occurred apart from the minor change in name of the business.  There was here the most complete continuity of enterprise -- the very kind of continuity that is basic to a corporate reorganization1970 U.S. Tax Ct. LEXIS 228">*256  with its concomitant nonrecognition of gain or loss except for the distribution of "boot."See also Werner Abegg, 50 T.C. 145">50 T.C. 145, 50 T.C. 145">157; Ralph C. Wilson, Sr., 46 T.C. 334">46 T.C. 334, 46 T.C. 334">345-348; James Armour, Inc., 43 T.C. 295">43 T.C. 295, 43 T.C. 295">308-310.In the case before us, it is perfectly clear that as a practical matter the business of Medco Electronics was completely taken over by Medco Products.  Prior to November 30, 1963, Medco Products and Medco Electronics had conducted their businesses jointly; they had marketed their products through an overlapping sales network and had distributed them through the same office staff.  The transfer of the Medco-sonlator sales operation to Medco Products merely allowed the corporate structure of the DeGroffs' enterprise to conform to the way in which its daily operations were already organized.  Thus, the transfer had not one significant effect upon the daily activities of the DeGroffs' enterprise.  The sale and distribution of the Medco-sonlator continued to be handled by the same personnel, at the same location, and in the same manner as they had been before the transfer.  Furthermore, 1970 U.S. Tax Ct. LEXIS 228">*257  the similarity of the names of the two corporations and the fact that the trade name, "Medco-sonlator," rather than the name of the corporation selling it, was featured on the DeGroffs' advertising circulars enabled Medco Products to continue to benefit from whatever reputation the Medco-sonlator previously enjoyed.However, petitioners contend that the "substantially all" requirement has not been satisfied since Medco Electronics' most valuable assets, its rights under its exclusive license agreement with DeGroff, 54 T.C. 59">*73  its sales network, and the availability of DeGroffs' services, were not "transferred" to Medco Products.  Although none of these assets appeared on Medco Electronics' balance sheet, it is conceded by both parties, and we agree, that intangible assets not appearing on the transferor corporation's balance sheet may properly be considered in determining whether "substantially all" of its assets have been transferred. Ralph C. Wilson, Sr., 46 T.C. 334">46 T.C. 345-348; John G. Moffatt, 42 T.C. 558">42 T.C. 579. Nevertheless, to the extent that Medco Electronics had any rights in these intangibles it is our conclusion on this1970 U.S. Tax Ct. LEXIS 228">*258  record that Medco Products succeeded to such rights in full.Petitioners' principal contention is that Medco Electronics' exclusive license agreement with Mr. DeGroff in respect of the Medco-sonlator was nonassignable, that it was of substantial value, and that it was not in fact transferred to Medco Products.  We think that this argument paints a false picture of the situation.By May 1958, when the license agreement was signed, the right to sell the Medco-sonlator had already become a valuable commercial asset.  During the fiscal years ending November 30, 1956, 1957, and 1958, Medco Electronics' sales of the Medco-sonlator totaled $ 357,082.64, $ 380,443.45, and $ 494,002.65, respectively.  Yet under the terms of the license agreement, DeGroff granted Medco Electronics the exclusive right to manufacture and to sell the Medco-sonlator without reserving to himself the right to receive royalty payments in return.  8 We simply cannot take at face value an instrument which purports to grant the exclusive rights to such a valuable commercial asset in return for a payment of a stated consideration of only $ 10.  9 Moreover, despite the exclusive nature of the agreement, Medco Mfg. continued1970 U.S. Tax Ct. LEXIS 228">*259  to make or assemble the Medco-sonlator just as it had for the past few years and just as it continued to do at the time of the trial herein.  Nothing in the record even suggests that there was a sublicense to Medco Mfg.  The license agreement was obviously not entered into at arm's length and clearly did not in fact govern and was not intended to govern the business relationships between Medco Electronics and DeGroff.  The DeGroffs conducted their enterprise in a loose and informal manner, and it is all too clear to us that Medco Products succeeded 54 T.C. 59">*74  to whatever rights Medco Electronics may have had in respect of the Medco-sonlator.  Certainly, Medco Products continued to sell the Medco-sonlator in the same manner that it had previously been marketed. DeGroff's testimony suggested that Medco Products was an infringer in this respect and that he merely permitted it to infringe.  We heard that testimony, and the short answer is that we don't believe it.  The simple truth lies in the informal manner in which the entire enterprise was conducted, and the fact that Medco Products was assigned the task of selling the Medco-sonlator after November 30, 1963, just as Medco Electronics1970 U.S. Tax Ct. LEXIS 228">*260  had carried on before.1970 U.S. Tax Ct. LEXIS 228">*261  Moreover, even if the license agreement were to be taken at face, it is highly questionable whether it was nonassignable.  To be sure, it provided that it was "personal to the parties," but it also stated that it would be "binding and inure to the benefit of the parties and to their successors in interest, assigns and transferees." Obviously, as the corporate life of the Medco Electronics was allowed to be extinguished by petitioners, they, as sole stockholders of Medco Electronics at the very least became "successors in interest" to the license agreement, and, to the extent that it had any vitality it is clear to us that they made it available informally to Medco Products.  10 We reject as incredible the notion that Medco Products was an "infringer."1970 U.S. Tax Ct. LEXIS 228">*262  Similarly, to the extent that Medco Electronics may have had any other intangible property rights that were not formally transferred, we are of the opinion that Medco Products succeeded thereto in the same kind of informal manner.  Certainly, petitioners who have the burden of proof, have not convincingly shown otherwise.  If such assets were not transferred, where did they go, and where are they now?  Thus far, no answer has been suggested.We hold that the "substantially all" requirement has been satisfied.  The only assets which did not go over to Medco Products were distributions to petitioners that must be charged to them as dividends under section 356(a)(2).54 T.C. 59">*75 The foregoing discussion has been predicated upon the assumption that the transfer of Medco Electronics' business to Medco Products must qualify as a reorganization under section 368(a)(1)(D) in order to bring 356(a)(2) into play.  But we take note of another possibility, namely, that if the transfer was a reorganization under section 368(a)(1)(F), fn. 4, supra, the provisions of section 356(a)(2) would similarly be triggered, and under (F) there is no "substantially all" requirement.  Moreover, the decisions1970 U.S. Tax Ct. LEXIS 228">*263  of two Courts of Appeals strongly support the conclusion that there was an (F) reorganization here.  Davant v. Commissioner, 366 F.2d 874, 883-884 (C.A. 5); Estate of Stauffer v. Commissioner, 403 F.2d 611 (C.A. 9), reversing 48 T.C. 277">48 T.C. 277; Associated Machine v. Commissioner, 403 F.2d 622 (C.A. 9), reversing 48 T.C. 318">48 T.C. 318. To be sure, the Government has not contended that there was an (F) reorganization here, but it would nevertheless be open to us to apply (F), 11 for, as stated in Wilkes-Barre Carriage Co., 39 T.C. 839">39 T.C. 839, 39 T.C. 839">845-846, affirmed 332 F.2d 421 (C.A. 2), "the rule is well established that a deficiency may be approved on the basis of reasons other than those relied upon by the Commissioner or even where his reasons may be incorrect. Blansett v. United States, 283 F.2d 474, 478-479 (C.A. 8); Bernstein v. Commissioner, 267 F.2d 879, 881-882 (C.A. 5); Acer Realty Co. v. Commissioner, 132 F.2d 512, 514-5151970 U.S. Tax Ct. LEXIS 228">*264  (C.A. 8); Alexander Sprunt & Son v. Commissioner, 64 F.2d 424, 427 (C.A. 4); Crowell v. Commissioner, 62 F.2d 51, 53 (C.A. 6); J. & O. Altschul Tobacco Co. v. Commissioner, 42 F.2d 609, 610 (C.A. 5); Hughes v. Commissioner, 38 F.2d 755, 757 (C.A. 10); John L. Chipley, 25 B.T.A. 1103">25 B.T.A. 1103, 25 B.T.A. 1103">1106; Edgar M. Carnrick, 21 B.T.A. 12">21 B.T.A. 12, 21 B.T.A. 12">21; cf. Helvering v. Rankin, 295 U.S. 123">295 U.S. 123, 295 U.S. 123">132-133."However, when Stauffer and Associated Machine were before us we construed (F) differently, and since we have concluded that (D) is applicable, we find it unnecessary now to reexamine1970 U.S. Tax Ct. LEXIS 228">*265  our views as to (F).  In the circumstances we do not pass upon this point.Decision will be entered for the respondent.  Footnotes1. From 750,000 to 1 million cycles.↩2. The parties have stipulated that the Medco-sonlator was the only product ever marketed by Medco Electronics.  However, an advertising leaflet for the "Kol-Therm," a device invented by DeGroff for applying moist cold and moist heat therapy, lists Medco Electronics as the sales corporation.  The leaflet was submitted as a joint exhibit, and the discrepancy is unexplained.↩3. SEC. 331. GAIN OR LOSS TO SHAREHOLDERS IN CORPORATE LIQUIDATIONS.(a) General Rule.  -- (1) Complete liquidations. -- Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock.(2) Partial liquidations. -- Amounts distributed in partial liquidation of a corporation (as defined in section 346) shall be treated as in part or full payment in exchange for the stock.(b) Nonapplication of Section 301.  -- Section 301 (relating to effects on shareholder of distributions of property) shall not apply to any distribution of property in partial or complete liquidation.SEC. 346. PARTIAL LIQUIDATION DEFINED.(a) In General.  -- For purposes of this subchapter, a distribution shall be treated as in partial liquidation of a corporation if -- (1) the distribution is one of a series of distributions in redemption of all of the stock of the corporation pursuant to a plan * * *↩4. SEC. 368. DEFINITIONS RELATING TO CORPORATE REORGANIZATIONS.(a) Reorganization. -- (1) In General.  -- For purposes of parts I and II and this part, the term "reorganization" means -- * * * *(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;* * * *(F) a mere change in identity, form, or place of organization, however effected.↩5. SEC. 354. EXCHANGES OF STOCK AND SECURITIES IN CERTAIN REORGANIZATIONS.(a) General Rule.  -- (1) In general.  -- No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.* * * *(b) Exception.  -- (1) In general.  -- Subsection (a) shall not apply to an exchange in pursuance of a plan of reorganization within the meaning of section 368(a)(1)(D), unless -- (A) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and(B) the stock, securities, and other properties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reorganization.SEC. 356. RECEIPT OF ADDITIONAL CONSIDERATION.(a) Gain on Exchanges.  -- (1) Recognition of gain.  -- If -- (A) section 354 or 355 would apply to an exchange but for the fact that(B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money,then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.(2) Treatment as dividend. -- If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913.  The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.↩6. Petitioners place considerable reliance in this respect upon Commissioner v. Gordon, 391 U.S. 83">391 U.S. 83↩, a case dealing with an entirely different problem and different statutory provisions.  We think it has no controlling effect here.7. To be sure, there was no distribution of stock or securities in exchange for the interests transferred; however, since the DeGroffs already owned all of the stock in Medco Products any issuance of additional stock would have been meaningless, and they do not contend that the failure to issue any such additional stock would render sec. 368(a)(1)(D) inapplicable.  Indeed it has already been well established that no such exchange for their interest is required in such circumstances.  See Ralph C. Wilson, Sr., 46 T.C. 334">46 T.C. 334, 46 T.C. 334">342-344; South Texas Rice Warehouse Co., 43 T.C. 540">43 T.C. 540, 43 T.C. 540">568-570, affirmed 366 F.2d 890 (C.A. 5); James Armour, Inc., 43 T.C. 295">43 T.C. 295, 43 T.C. 295">307; Commissioner v. Morgan, 288 F.2d 676, 679-680 (C.A. 3), certiorari denied 368 U.S. 836">368 U.S. 836↩.8. As a 50-percent owner of Medco Mfg., Mr. DeGroff was benefitted by Medco Electronics' efforts to market a product which the manufacturing corporation produced.  But since the agreement granted Medco Electronics the exclusive right to manufacture the Medco-sonlator, the terms of the license agreement did not assure him of such a benefit.↩9. The only other consideration set forth was the undertaking by Medco Electronics to use its best efforts in the commercial exploitation of the device.  But since DeGroff had theoretically parted with all interest in the patent and had reserved no royalty it is difficult to see how this undertaking was of any practical value to him.  Of course, he would benefit from the success of the Medco-sonlator as a 50-percent stockholder of Medco Electronics.  But it was obviously to the advantage of both DeGroffs as stockholders to exploit the Medco-sonlator through Medco Electronics, and the agreement thus gave Mr. DeGroff nothing of consequence in this connection that he did not already have.↩10. At the trial herein, Mr. DeGroff suggested that he deliberately refrained from making a formal assignment of the right to market the Medco-sonlator because he wanted to remain free to assign rights under the Medco-sonlator patent in the event that differences arose between him and his wife.  This explanation strikes us as spurious.  The record contains not the slightest suggestion of marital or business differences between the DeGroffs or any anticipation of such differences in the future.  Furthermore, if significant difficulties between the DeGroffs had been regarded as a possibility at the time when the Medco-sonlator was transferred to Medco Products, Mrs. DeGroff, a 50-percent stockholder of Medco Electronics, would hardly have been willing to go along with her husband's plan.  Moreover, Mr. DeGroff's purported plan could not have achieved its alleged objective in any event.  As coowner of Medco Electronics, Mrs. DeGroff, along with her husband, succeeded to whatever rights Medco Electronics had under the license agreement and would have been in a position to halt Mr. DeGroff's independent activities.↩11. We note that in Davant↩ the Court of Appeals decided that (F) was applicable, although the point was not urged in that court by the Government, and this Court carefully avoided passing upon it when the case was here.