IVAN H. GREER, TRANSFEREE, BRAZORIA INVESTMENT CORPORATION, LITA GREER, IVAN H. GREER, PETITIONERS,

v.

COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

“(B) as paid-in surplus or as a contribution to capital, then the basis. shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. * * * ” Title 26 U.S.C. A. § 113, 1952 Ed.

Ҥ 115. Distributions by corporations

**

~ “(c) Distributions in liquidation. Amounts distributed in complete liquidation of a corporation shall be treated as in. full payment in exchange for the stock * * 26 U.S.C.A., 1952 Ed., § 115.

: Treasury Regulations 111, pro-(iriulgated under, the Internal Revenue Code of 1939:

“§ 29.22(a) — 13. Cancellation of Indebtedness.—

“(a) In general. — The cancellation of indebtedness, in whole or in part, may result in the realization of - income. If, for example, an individual pei'forms services for a creditor, who in consideration thereof cancels the debt, income in the amount of thé debt is realized by the debtor as compensation for his services. A taxpayer realizes income by the payment or purchase of his obligation at less than their face value. [See § 29.22(a) — 17] In general, if a shareholder in a corporation which is in debted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt. * * * ” (Emphasis supplied.)

The parties are in agreement to the effect that the forgiveness of the debt amounted to a contribution to the capital of Brazoria.

The Tax Court held that the rationale of the Brown Shoe Company case2 “requires relation of Brazoria’s forgiven debt to the property for which the debt was incurred in the determination of the basis of the property under Section 113 (a) (8) (B), I.R.C.”, and that such relation is also sustained by Detroit Edison Co. v. Commissioner, 319 U.S. 98, 63 S.Ct. 902, 87 L.Ed. 1286. With deference, we disagree.

Neither of those cases involved a fact situation similar to that here pre-' sented, where, at the time of the sale of materials by the partnership to Brazoria, the partners owned only 1% of Brazoria’s stock, while at the time of the forgiveness of the debt they owned over 90% thereof. The partnership did not contribute, it sold the materials to Brazoria. Later, under a changed situation, the partnership gratuitously cancelled the debt. In the Brown Shoe Company case, supra, the contributed money was related to the property purchased with the money. In the present case, to relate the contributed debt back to the purchase of the materials going into the construction of the houses we would have to overlook all of the very material changes that occurred in the interim between the two transactions, including the necessity of the gift of the debt to keep Brazoria solvent, and the acquisition by the partners, of the great majority of Brazoria’s stock. The solution more consistent with the realities of the transactions is, we think, to hold that Brazoria’s basis of the houses is the cost thereof, including the $52,506.54 indebtedness for building materials, while the subsequent cancellation of that debt amounted to a contribution to the capital of Brazoria “to the extent of the principal of the debt,” but not related back to the building materials and the houses.

What has been said has application also to the second issue, the amount of gain realized by Ivan H. Greer upon his liquidating dividend from Brazoria. In calculating the amount distributed in liquidation of Brazoria, the debt contributed to its capital must be taken into consideration.

Further, the Tax Court found that “Brazoria’s obligation to Providence Mutual to make monthly payments on each house continued until the full amount of the down payment was paid.” The amounts distributed to the stockholders in liquidation of Brazoria were necessarily burdened with that continuing obligation.

The respondent makes what seems to us to be an equitable argument that,

“Since, taxwise, he (Ivan H. Greer) had already, qua partner, had full recoupment for his outlay made for the materials supplied to Brazoria, to accord him now an increased basis in his stock, measured by the value of those same materials, would realistically result in permitting him to recover twice, for tax purposes, his total outlay originally made and recouped in 1943 and 1944 by reason of the charge-off to the partnership’s cost of goods sold.”

If, prior to liquidation of Brazoria, Ivan had transferred his stock to a third person, it would be obvious to all that the treatment of the amount distributed to such third person in liquidation of Bra-zoria could not be affected by Ivan’s pri-or conduct as partner. It seems almost as clear to us that § 115(c), supra, permits no consideration of that conduct in the treatment of the distribution to Ivan. We think that the tax statutes and regulations must be applied as written and without any equitable consideration of the desirability of offsetting prior tax benefits.3

For the reasons stated, the decision of the Tax Court is

Reversed.

. Reported in 20 T.C. 690.

. Brown Shoe Co. v. Commissioner, 339 U.S. 583, 70 S.Ct. 820, 94 L.Ed. 1081.

. See the discussion by the Eighth Circuit in Reynolds v. Boos, 188 F. 2d 322, 325, 326.