MEMORANDUM OPINION
DAWSON, Judge: Respondent determined the following deficiencies in petitioner's Federal income taxes:
| Year | Deficiency |
| 1972 | $ 5,953 |
| 1973 | 6,927 |
| 1974 | 17,009 |
| 1975 | 5,932 |
The only issue presented is whether a transaction in which petitioner as mortgagee received half of the outstanding balance of a mortgage constituted a compromise of a debt resulting in an ordinary loss or constituted a sale or exchange resulting in a capital loss.
All of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference. The pertinent facts are summarized below.
Yates Holding Corporation (hereinafter petitioner) is a holding corporation organized under the laws of the State of New York. At the time petitioner filed its petition in this case its office and principal place of business were located in Buffalo, New York. Petitioner filed its 1972, 1973, 1974, and 1975 corporate income tax returns with the North Atlantic Service Center, Andover, Massachusetts.
Prior to September 11, 1962, the Lafayette Hotel, a commercial hotel located in downtown Buffalo, New York, was owned by the Lafayette Hotel Corporation. On September 11, 1962, the hotel was sold by the Lafayette Hotel Corporation to King Hotels, Inc. (hereinafter King) for consideration consisting in part of a purchase money second mortgage in the amount of $340,500. In 1963, the assets of the Lafayette Hotel Corporation, including the purchase money second mortgage, were transferred to petitioner under the provisions of section 351, Internal Revenue Code of 1954. 1
Starting in 1971, King began encountering financial difficulties and sustained large operating losses from 1971 through 1974. During 1974, King found it necessary to make extensive renovations to the Lafayette Hotel. However, because of its prior financial losses King found that it could not pay for the renovations and remain current with its payments of principal and interest on the purchase money mortgage held by petitioner. Accordingly, at the request of King, Marvin S. Lynn (hereinafter Lynn), a vice president of King Hotels, Inc., met with petitioner's representative, Richard Brennan, and entered into negotiations which resulted on March 6, 1975 in the signing of a Modification and Extension Agreement.
This agreement relieved King from the obligation to make the then delinquent payments and any other payments of principal until May 31, 1976, and from the obligation to make one-half of the payments of interest for the period from December 1, 1974, to February 28, 1976, until November 30, 1977.
Subsequent to the execution of the Modification and Extension Agreement, and in view of a further deterioration in its financial condition, King again approached petitioner and offered to compromise the mortgage for a payment of $134,000, half the amount of the principal balance still owing as of December, 1974. Petitioner agreed in principle to accept King's offer. King made no payments in accordance with the Modification and Extension Agreement.
On May 29, 1975, petitioner's board of directors held a special meeting to consider King's offer. 2 At the special meeting, a majority of the Board passed a resolution accepting the offer in compromise. 3 A mortgage discharge was thereafter prepared in accordance with King's terms, but was never executed on behalf of petitioner, never delivered to King and never filed.
Prior to the consummation of the anticipated compromise, several stockholders of King formed an independent partnership, known as AMHO Associates (hereinafter AMHO). Subsequent to the May 29, 1975, stockholders' meeting, and prior to June 3, 1975, Lynn requested that petitioner assign the mortgage to AMHO for $134,000, the amount for which petitioner and King had previously agreed to compromise the mortgage.
On June 3, 1975, AMHO, trading as Hotel Empire, tendered to petitioner a check signed by Lynn and another person for $134,000. Petitioner, at that time, executed and delivered to AMHO an assignment of mortgage which was duly filed by AMHO in the proper county land records office. 4
We must decide whether this transaction was a compromise of the mortgagor's debt resulting in an ordinary loss under section 165(a) or was a sale or exchange resulting in a capital loss under section 165(f).
The compromise of a debt for less than its face value does not constitute a sale or exchange of capital assets. Hale v. Helvering,85 F.2d 819 (D.C. Cir. 1936); Bingham v. Commissioner,105 F.2d 971 (2d Cir. 1939); West Coast Securities Co. v. Commissioner,14 T.C. 947 (1950). A compromise of a debt for less than the value outstanding will generally give rise to an ordinary loss deductible under section 165(a) by a corporate mortgagee. The sale or assignment of a debt or mortgage which is a capital asset in the hands of the holder for less than the value outstanding gives rise to a capital loss in accordance with the provisions of sections 1001 and 165(f). See West Coast Securities Co. v. Commissioner,supra at 961.
Petitioner argues that its negotiations with King to secure some payment on the mortgage it held, its resolution accepting the terms of discharge proposed by King, and the final realization of the $134,000 should be viewed in their entirety as the compromise of debt. In this regard the petitioner asserts that its subsequent assignment of the mortgage to AMHO for $134,000 rather than a discharge of King for that amount should not change the substance of the earlier planned transaction. Petitioner's contention that we ignore the fact of its assignment to AMHO stems from its belief that AMHO was in effect the same entity as King and thus the "sale" to AMHO was in reality a discharge of King. Petitioner also maintains that the substance of the assignment must remain as a compromise of debt since petitioner was allegedly in an unfavorable bargaining position with the defaulting King. Because of this, petitioner asserts the assignment was but a step in a series of transactions designed and executed as a part of a unitary plan to achieve the intended result of a compromise of the debt. See Kanawha Gas & Utilities Co. v. Commissioner,214 F.2d 685, 691 (5th Cir. 1954).
Respondent, on the other hand, contends that petitioner and its mortgagor, King, negotiated over a lengthy period for a compromise of a $268,000 mortgage and ultimately agreed to compromise it for $134,000. However, prior to the execution of the discharge, some of King's shareholders formed AMHO, a partnership, and requested petitioner to assign the mortgage to the partnership for $134,000. Petitioner acceded to the request. In respondent's view this assignment constitutes a sale or exchange resulting in a $134,000 capital loss. Respondent contends that the earlier planned discharge does not change the form and substance of the assignment, especially where petitioner did not offer any evidence or testimony from representatives of King and AMHO as to their intent in restructuring the originally contemplated discharge of the corporate mortgagor into an assignment to a partnership comprised of some of the mortgagor's shareholders.
We agree with respondent. Although we concur in petitioner's statement that in tax matters substance should take precedence over form, Commissioner v. Court Holding Co.,324 U.S. 331 (1945), Helvering v. Clifford,309 U.S. 331 (1940),Higgins v. Smith,308 U.S. 473 (1940), Gregory v. Helvering,293 U.S. 465 (1935), we are unable to interpret the facts presented to us in a manner that comports with its views. Essentially, petitioner views the substance of the transaction as the compromise of debt, asserting that AMHO was in effect the same entity as King since (1) some of King's shareholders were partners in AMHO and (2) the same individual who negotiated on behalf of King negotiated on behalf of AMHO.
We are unable to conclude that the partnership was the same entity as the corporation. The stipulation of facts submitted in this case offers only the barest information concerning the relationship between the AMHO and King. It discloses merely that "several stockholders of King formed an independent partnership known as AMHO Associates," and that Marvin Lynn negotiated the prospective compromise in his capacity as Vice-President of King Hotels, Inc. and, then later, negotiated the actual assignment in his capacity as a representative of AMHO Associates. The fact that some of the shareholders of King Hotel, Inc. may also be partners in AMHO Associates, trading as Hotel Empire, does not mean the two entities should be disregarded and treated as one for tax purposes. Ross v. Commissioner,129 F.2d 310 (5th Cir. 1942). Nor does the fact that an individual may wear two hats in two different organizations mean the entities should be combined for tax purposes. Seminole Flavor Co. v. Commissioner,4 T.C. 1215 (1945). Petitioner was aware that it was dealing with a different entity from its mortgagor when it executed the assignment to AMHO rather than the discharge of the mortgage to King Hotels, Inc.
Petitioner adduced no evidence at trial to demonstrate that the partnership was merely a conduit or straw for King. Nor did it present any evidence concerning the business purpose of AMHO in its relationship with King. Petitioner has not persuaded us that AMHO is the same entity as King. In this regard we note that case law traditionally recognizes the separateness of a business enterprise where there is a substantial business or economic purpose behind its formation and operation. Ross v. Commissioner,supra.This is true whether the business enterprise is a corporation or a partnership. Seminole Flavor Co. v. Commissioner,supra at 1234.Accord, Meldrum & Fewsmith, Inc. v. Commissioner,20 T.C. 790 (1953), affd. 230 F.2d 283 (6th Cir. 1956); Campbell County State Bank, Inc. v. Commissioner,37 T.C. 430 (1961), revd. on other grounds, 311 F.2d 374 (8th Cir. 1963); Miles-Conley Co. v. Commissioner,10 T.C. 754 (1948), affd. 173 F.2d 958 (4th Cir. 1949).
Petitioner also contends that it should not be penalized because it sought to protect what it could of the debt by the only means offered to it by Lynn. This contention appears inconsistent with its earlier argument that the assignment should be viewed as only a step in a series of transactions designed and executed to compromise the debt. It is true that petitioner received $134,000, the amount it had bargained for with King, but it was received from AMHO in consideration for an assignment of the King mortgage and not from King for a discharge of its own mortgage. Petitioner has provided us no evidence as to any master plan. The protestations of one of the parties to a transaction as to its bargaining position cannot ordinarily change the determination of whether a sale occurred, especially in the face of a stipulated fact that the other party tendered a check to petitioner at which time it executed and delivered an assignment of mortgage to the other party.
In advancing a substance over form argument, petitioner bears the burden of proving by a preponderance of the evidence that the transaction was in reality something else than what it appears to be in form. Welch v. Helvering,290 U.S. 111 (1933); Rule 142(a), Tax Court Rules of Practice and Procedure.
Petitioner has failed to show that the sale of the mortgage to the AMHO partnership was anything other than a sale or exchange within the meaning of section 1001. "Substance over form" is not a talismanic incantation that will transform or recast an event. Rather, it is a doctrine which depends upon the presentation of facts sufficient in quantity and quality to establish the "true nature of a transaction" and strip away the disguise of "mere formalisms, which exist solely to alter tax liabilities." Commissioner v. Court Holding Co.,324 U.S. 331 (1945).
We hold that the transaction was a sale by petitioner to Amho/, a separate and independent partnership, and was not a compromise of debt between petitioner and King Hotels, Inc., its mortgagor. Therefore, the loss attributable to the sale was a capital loss.
Decision will be entered under Rule 155.