Before BIGGS, MARIS, GOODRICH, MCLAUGHLIN, and O'CONNELL, Circuit Judges.
O'CONNELL, Circuit Judge.
This is a petition to review the decision of the Tax Court sustaining an income tax deficiency assessed against J. Robert Bazley.*fn1
Mr. and Mrs. J. Robert Bazley owned all but one share of J. Robert Bazley, Inc. As of February 1, 1939, the corporation had accumulated an earned surplus of $855,783.82. On March 16, 1939, the corporation distributed to Mr. and Mrs. Bazley and the one qualifying shareholder in amounts proportionate to their shareholdings, $400,000 in twenty year debenture bonds.*fn2 A corresponding reduction in earned surplus was made on the books of the corporation. Is this $400,000 in twenty year debenture bonds, callable at the option of the obligor, freely marketable and admittedly worth their face value, taxable as ordinary income to the distributees? The Commissioner assessed a deficiency against the Bazleys for the year 1939 on the ground that the $400,000 in bonds represented taxable income in the hands of the recipients. The Tax Court upheld the Commissioner, concluding that the distribution of the bonds was "essentially equivalent to the distribution of a taxable dividend." Internal Revenue Code, Section 115(g).*fn3 We are asked to reverse the Tax Court, chiefly on the assertion that the $400,000 in bonds are exempt from taxation because they were distributed in pursuance of a plan of reorganization of J. Robert Bazley, Inc., within the meaning of Section 112 of the Code.
Shortly prior to February 1, 1939, J. Robert Bazley, Inc., was engaged in general heavy contracting business with most of its operations consisting of coal mining by the open-pit method. As previously indicated, the corporation's stock was owned by J. Robert Bazley, Alice H. Bazley, his wife, and Alfred Day, all of whom constituted the board of directors. On February 16, 1939, these three people as owners of the outstanding capital stock of the corporation held a special meeting pursuant to resolutions adopted by themselves as the board of directors on February 6, 1939, and formally approved a proposed plan of reorganization. Resolutions authorizing the necessary corporate action for consummation of this plan were passed. On March 6, 1939, the Commonwealth of Pennsylvania approved the amendments to the company's Articles of Incorporation increasing the authorized common stock.
The reorganization is reflected in the table set forth below which indicates stock ownership and capitalization of the corporation before and after the occurrence of the transaction under scrutiny here.
Name Old Number New Number Debenture Principal
of Shares of Shares Amount
J. Robert Bazley 798 3,990 $319,200.00
Alice H. Bazley 201 1,005 80,400.00
Total 1,000 5,000 400,000.00
Capital Structure Of Corporation
February 1, 1939 (Before proposed ...