OPINION.
Van Fossan, Judge:
Respondent determined deficiencies in petitioners’ income taxes for the taxable years ended December 31, 1944, 1945, and 1947, as follows:
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Petitioner Herbert A. Nieman claimed overpayment for the year 1945 in the amount of $6,083.11.
Several questions have been resolved by stipulation of the parties. The stipulation will be given effect under Rule 50.
Two issues remain for our consideration: First, whether petitioners are entitled to a net operating loss carryback from 1947 to 1945 and, if so, the amount; and second, whether a loss incurred by petitioner Herbert A. Nieman in 1947 is deductible in that year.
All of the facts are stipulated and are so found.
Petitioner Herbert A. Nieman is an individual residing at Thiensville, Wisconsin. Petitioners Arnold F. Nieman and Roland J. Nieman are individuals residing at Cedarburg, Wisconsin. Each of the petitioners filed his returns for the years here involved with the collector of internal revenue at Milwaukee, Wisconsin.
Nieman Fur Farms Co., a copartnership conducting a fox fur farm at Thiensville, Wisconsin, was formed on October 1, 1941. The shares of partnership profits and capital applicable to 1947 were as follows:
Per cent
Herbert A. Nieman-50
Orlando Nieman_20
Arnold F. Nieman_15
Roland J. Nieman-15
On November 29, 1947, the Nieman Fur Farms Co. copartnership entered into a bill of sale with Herbert A. Nieman & Co. The pertinent provisions of the bill of sale are set forth below:
BIEL OF SALE
HERBERT A. NIEMAN, ORLANDO J. NIEMAN, ARNOLD F. NIEMAN, and ROLAND J. NIEMAN, as Partners of Nieman Fur Farms Co., a co-partnership operating a silver fox fur farm in Ozaukee County, Wisconsin,
Sellers
to
HERBERT A. NIEMAN & 00., (a Wisconsin corporation)
Buyer.
This Bill of Sale and Conveyance, made in the Village of Thiensville, State of Wisconsin, on November 29, 1947, between Herbert A. Nieman, et al., partners of Nieman Fur Farms Co., a fur farm located in Ozaukee County, Wisconsin, (herein called the Sellers), and Herbert A. Nieman & Co., a Wisconsin corporation, (herein called the Buyer), being made in accordance with an Offer of Sale made and accepted this day,
WITNESSETH
That the Sellers, in part consideration of the issuance to the partnership of Twelve Hundred Seventy (1270) shares of the capital stock of the Buyer, and in part the assumption of certain obligations of the Sellers, as partners, by the Buyer, and of other valuable considerations, the receipt and sufficiency of which are hereby acknowledged, and of the covenants and agreements of the Buyer hereinafter contained, do hereby sell, grant, convey, assign, transfer and set over to the Buyer,
All the property and assets, real, personal and mixed, both tangible and intangible, of whatsoever nature and description, and wheresoever situated, and all the rights, franchises and privileges of the Sellers in the fur farm heretofore conducted by the Sellers as partners in the County of Ozaukee, Wisconsin, and conducted under the name of Nieman Fur Farms Co., including, without limitation of the foregoing, all real estate, leases, choses in action, shares of stock, bank accounts, trade acceptances, bills of exchange, checks, drafts, notes, accounts receivable, both current and those that have heretofore been written off from the books of said partnership business, causes of action, judgments, debts, bonds, contracts, insurance policies of every kind, and obligations of every value and description, trade-marks, trade names, copyrights, patents, applications for patents, patent rights, licenses and. rights analagous thereto, trade secrets and formulas and processes of manufacture, inventories, goods, material and supplies, cash and other assets, property and estate of every kind as of the close of business this [left blank]
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2. In consideration of the premises, the Buyer, for itself, its successors and assigns, hereby assumes and covenants,
(a) To pay fully and discharge completely, in due course, to the acquittal of the Sellers, all debts and liabilities of said partnership business of every kind and nature and to assume, perform and liquidate all of the outstanding contracts of said business of whatsoever nature and kind;
(b) To indemnify and hold the Sellers harmless from and against all claims, demands, liabilities, costs and expenses, now existing, or that may hereafter arise, in connection with any such debts.
* * * * * * *
5. There is attached and made a part hereof a schedule of the assets to be transferred and the liabilities to be assumed as of the close of business November 29, 1947. The assets are stated at their cost basis.
6. The Buyer agrees to issue the shares of its capital stock as hereinabove provided in the name of Nieman Fur Farms Co., a co-partnership, the Sellers.
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In Witness Whereof, the Sellers and the Buyer have hereunto set their hands and seals, the day and year first above written. Executed in duplicate.
NIEMAN FUR FARMS CO., a co-partnership
In the presence of:
By /s/ Herbert A. Nieman
Herbert A. Nieman,
Partner
/s/ Edna Rowe
By /s/ Orlando J. Nieman
Orlando J. Nieman,
Partner
/s/ Bernard C. Kurth
By /s/ Arnold F. Nieman
Arnold F. Nieman,
Partner
Witness as to all partners.
By /s/ Roland J. Nieman
Roland J. Nieman,
Partner
THE SELLERS
(corporate seal) HERBERT A. NIEMAN & CO.
By /s/ Herbert A. Nieman
Herbert A. Nieman,
President
THE BUYER
Attest:
/s/ Elmer J. Pipkorn
Secretary
¡The balance sheet of the partnership as of November 29, 1947, and jnst prior to the sale to Herbert A. Nieman & Co., was as follows:
Current ALsseis
Cash_ $9, 507. 20
Accounts receivable_ 24. 23
Inventory___ 180, 611. 43
Total___ $190,142. 86
Fixed Assets
Land_ $17, 700. 00
Farm buildings_ 12, 537. 41
Residence_ 4, 811. 19
Yards and kennels_ 121, 416. 31
Machinery_ 3, 552. 44
Tools and equipment_ 3, 990. 05
Trucks_ 1, 693. 59
Office furniture and fixtures_ 37. 57
Total_ $165, 738. 56
Depreciation reserve 88, 824. 05
-■- 76, 914. 51
-$267, 057. 37
Current Liabilities
Accounts payable_ $8, 747. 35
Capital_ 258, 310. 02*
- 267, 057. 37
♦Capital___ $258,310.02
Less — 1270 shares of stock received on sale_ 127, 000. 00
Loss on sale of assets_ $131, 310. 02
The partnership valued its inventories for book and tax-reporting purposes at lower of cost or market.
Included in the assets of November 29,1947, and among the assets sold to Herbert A. Nieman & Co. were inventories having a book value of $180,159.79. This figure was composed of the following categories:
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The pelts mentioned above in the amount of $33,785.29 represented 2,233 pelts located at New York City. Of these, 2,210 had been sold on November 13, 1947, by the New York Fur Auction Com-party for a net selling price of $32,990.45, and that amount was, in fact, an account receivable on the date the assets of the partnership were sold.
After November 29, 1947, the only asset of the partnership was the 1,270 shares of capital stock of Herbert A. Nieman & Co. received as consideration by the partnership under the bill of sale. The stock was valued at $127,000 for purposes of book and tax reporting. This figure was computed by recognizing the fair market value at $100 per share.
Eespondent determined that as of November 29, 1947, the partnership owed a liability totaling $32,064.07. The amount of $31,895.07 was attributable to the ranching of the partnership’s 1947 foxes which were shipped to Hiawatha Fur Farm Co. for ranching and pelting. This expense was a normal cost of production, and entered into the determination of profit and loss from the operations of the business in all years prior to 1947.
The young foxes sold to Herbert A. Nieman & Co. on November 29, 1947, when pelted, would produce pelts of a quality equivalent to that of the 2,210 pelts sold by the New York Fur Auction Company at New York City on November 13, 1947.
The partnership income tax return for the calendar year 1947 was filed in February 1948. The net profit or loss reported by the partnership on the return and the adjustments made thereto by respondent were as follows:
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The following schedule shows the stockholders of Herbert A. Nieman & Co. as of November 29, 1947, with their respective shareholdings and relationships to the partners of the Nieman Fur Farms Co. partnership:
Name Shares Relation to Partners
Herbert A. Nieman_ 4,825 Partner in Nieman Fur Farms Co.
Alice Nieman Stephenson.. 920 Sister of Herbert A. Nieman.
John W. Nieman_ 760 Brother of Herbert A. Nieman.
Edwin J. Nieman_ 570 Brother of Herbert A. Nieman.
Estate of Martha Nieman. 421 Mother of Herbert A. Nieman (Herbert A. Nieman, his brother and sister are sole heirs of Martha Nieman).
Gertrude Mildred Nieman. 84 Wife of Herbert A. Nieman.
Minnie Nieman_ 111 Mother of Orlando, Arnold, and Roland Nieman.
Orlando Nieman. 84 Partner in Nieman Fur Farms Co.
Mrs. Orlando Nieman. 54 Wife of Orlando Nieman.
Arnold Nieman_ 54 Partner in Nieman Fur Farms Co.
Mrs. Arnold Nieman. 54 Wife of Arnold Nieman.
Roland Nieman_ 54 Partner in Nieman Fur Farm Co.
Mrs. Roland Nieman... 54 Wife of Roland Nieman.
Nieman Fur Farms Co. 1, 270 Owned by partnership.
Other stockholders_ 3, 665
Total after 11/29/47.
12, 980
Less: Stock issued to stockholders of Hiawatha Fur Farms Co. in
merger 11/29/47:
Herbert-A. Nieman_ (720)
John W. Nieman_ (50)
Alice Nieman Stephenson_ (50)
Orlando Nieman_ (20)
Other stockholders_ (870)
Total before 11/29/47_ 10, 000
The first question is whether a contract of sale, entered into between petitioners and one other as partners of Nieman Fur Farms Co. (sellers) and Herbert A. Nieman & Co. (buyer), was a contract for the sale of partnership assets, or for the sale of the partners’ interests in the partnership.
Petitioners contend that the sale was of the partnership assets. Respondent, on the other hand, has determined the sale to have been of the partners’ partnership interests. We are of the opinion that respondent’s view must be upheld.
In applying tax statutes, matters of substance are of first importance. Kaiser v. Glenn, 216 F. 2d 551 (C.A. 6, 1954).
Tlie contract of sale entered into between the parties provided, inter alia, that the sellers, as partners, sold, granted, conveyed, assigned, transferred, and set over to the buyer—
All tlie property and assets, real, personal and mixed, both tangible and intangible, of whatsoever nature and description, and wheresoever situated, and all the rights, franchises and privileges of the Sellers in the fur farm heretofore conducted by the Sellers as partners in the County of Ozaukee, Wisconsin, and conducted under the name of Nieman Fur Farms Co., including, without limitation of the foregoing, all real estate, leases, choses in action, shares of stock, bank accounts, trade acceptances, bills of exchange, checks, drafts, notes, accounts receivable, both current and those that have heretofore been written off from the books of said partnership business, causes of action, judgments, debts, bonds, contracts, insurance policies of every kind, and obligations of every value and description, trade-marks, trade names, copyrights, patents, applications for patents, patent rights, licenses and rights analagous thereto, trade secrets and formulas and processes of manufacture, inventories, goods, material and supplies, cash and other assets, property and estate of every kind as of the close of business this [left blank].
In consideration the buyer agreed to issue to the partnership 1,270 shares of its own capital stock and further agreed- to pay all debts and liabilities of the partnership business, perform .'arid liquidate all the outstanding contracts of the business, and to hold the sellers harmless against all claims, demands, liabilities, costs, and expenses then existing or which might thereafter arise.
It is clear that what the sellers conveyed and the purchaser acquired was the going business formerly carried on by the partnership, and not merely the physical assets of the partnership. More comprehensive language can scarcely be imagined. We conclude that the sale resulted in a disposal by petitioners of their partnership interests. Kaiser v. Glenn, supra; W. Ferd Dahlen, 24 T.C. 159 (1955). It follows that the loss realized by the petitioners on the sale was a capital loss. Cf. G.C.M. 26379, 1950-1 C.B. 58.
Section 122(d) (4) of the Internal Revenue Code of 1939 provides that losses from sales or exchanges of capital assets may not be used in the computation of a net operating loss carryback, except to the extent of net gains from sales or exchanges of capital assets within the same year.2 Butler Consolidated Coal Co., 6 T.C. 183, 190 (1946). Accordingly, we bold that petitioners are not entitled to a net operating loss carryback to 1945.
Petitioners would have us believe that the partnership remained in existence after the sale and that consequently the sale must have been only of the assets and not of the respective partnership interests. The record does not support this conclusion. The fact that the shares of Plerbert A. Nieman & Co. received by the partnership in the sale may have been held by it for a time after the sale is of no consequence. Nor is it meaningful that a partnership return for the calendar year 1947 was filed in February 1948. W. Ferd Dahlen, supra. There is nothing in the record to indicate that the partnership carried on any activities following the sale.
The second question is whether any portion of the loss incurred by petitioner Plerbert A. Nieman on the sale is deductible in 1947.
Pn his notice of deficiency respondent determined that petitioner Plerbert A. Nieman actually or constructively owned more than 50 per cent of the outstanding stock of Herbert A. Nieman & Co. and that under the provisions of section 24(b) of the Internal Revenue Code of 1939, no loss on the transaction in issue was recognizable to him.
The pertinent provisions of section 24(b) state that in computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly, between, an individual and a corporation more than 50 per cent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual. For the purposes of section 24(b) an individual is considered as owning the stock owned, directly or indirectly, by or for his partners, brothers and sisters, spouse, ancestors, and lineal descendants.
Considering only the stock held by him, his brothers, sister, wife, and partners, Herbert A. Nieman owned actually or constructively at least 6,511 of the 10,000 shares of Herbert A. Nieman & Co. stock outstanding prior to November 29, 1947. Similarly, considering only the shares of stock held by him, his brothers, sister, and wife, Herbert A. Nieman owned actually or constructively at least 7,159 of the 12,980 shares of Herbert A. Nieman & Co. stock outstanding after November 29, 1947.
We have held that the sale entered into by petitioners was a sale of their partnership interests. It is clear that the sale by Herbert A. Nieman of his partnership interest in Nieman Fur Farms Co. to Herbert A. Nieman & Co. was the sale of property by an individual to a corporation, more than 50 per centum of the stock of which was owned by the individual. Nathan Blum, 5 T.C. 702, 711 (1945). Consequently, no loss on the sale is deductible by petitioner Herbert A. Nieman. It does, not matter that the sale was a bona fide arm’s-length transaction. Frank C. Engelhart, 30 T.C. 1013 (1958), and cases cited therein.
Decisions will be entered wnder Bule 50.