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partnership, which sold the shares to the corporate buyer upon
the latter’s exercise of the option and continued to hold and
reinvest the proceeds of sale on behalf of its partners. Writing
for the court, Judge Learned Hand noted that the case was “on all
fours” with a previous decision of the court, Helvering v.
Walbridge, 70 F.2d 683 (2d Cir. 1934) (holding that, when
partners transfer property to a partnership that then sells the
property, taxation of any pretransfer appreciation in the
property’s value must await dissolution of the partnership)
except for the fact that, in Chisholm, the partnership “was
formed confessedly to escape taxation.” Chisholm v.
Commissioner, supra at 15. Citing Gregory v. Helvering, 293 U.S.
465 (1935), Judge Hand observed that the Supreme Court “was
solicitous to reaffirm the doctrine that a man’s motive to avoid
taxation will not establish his liability if the transaction does
not do so without it”, and he concluded: “The question always is
whether the transaction under scrutiny is in fact what it appears
to be in form”. Id. He further stated that “purpose may be the
touchstone, but the purpose which counts is one which defeats or
contradicts the apparent transaction, not the purpose to escape
taxation which the apparent, but not the whole, transaction would
realize.” Id. He determined that the taxpayer’s purpose, “to
form an enduring firm which should continue to hold the joint
principal and * * * invest and reinvest it”, was a legitimate
business purpose. Id. The court held for the taxpayer.
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