                         T.C. Memo. 1997-79



                       UNITED STATES TAX COURT



         DENNIS A. AND TAI K. PRAEGITZER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

                KATHLEEN M. DAWES, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 719-95, 1344-95.         Filed February 13, 1997.



     Paul D. Sheldon, for petitioners in docket No. 719-95.

     James G. Roberts, for petitioner in docket No. 1344-95.

     Robert E. Cudlip, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION

     VASQUEZ, Judge:    Respondent determined the following

deficiencies in and additions to petitioners' Federal income

taxes for the taxable year 1990:
                                 - 2 -

                                                      Additions to Tax
Petitioner                          Deficiency          Sec. 6662(a)

Dennis A. & Tai K. Praegitzer1           $33,425           $6,685
Kathleen M. Dawes                         37,293            7,458

     All section references are to the Internal Revenue Code in

effect for the year in issue.    All Rule references are to the Tax

Court Rules of Practice and Procedure.

     Petitioner Praegitzer and petitioner Dawes are former

spouses.   Prior to and during their marriage, Mr. Praegitzer and

Ms. Dawes, along with Ms. Dawes' brother, owned a corporation

(Ameritech).   Incident to Mr. Praegitzer's and Ms. Dawes'

divorce, Ameritech spun off one of its businesses (the 303

products business) to petitioner Praegitzer.        This business

became petitioner Praegitzer's wholly owned corporation (303

Products, Inc., hereinafter 303 Products).         Respondent contends

that petitioner Praegitzer received dividend income from 303

Products when it distributed cash to, and forgave a debt owed it

by, petitioner Praegitzer.2   Petitioner Praegitzer argues that

the cash and relief from indebtedness were received incident to a

divorce and thus were tax free under section 1041.        Respondent

alternatively argues that if petitioner Praegitzer is not taxable


     1
        Tai K. Praegitzer is a party to this action solely
because she filed a joint Federal income tax return with Dennis
A. Praegitzer for the taxable year 1990. Any reference to
petitioner Praegitzer herein is to Dennis A. Praegitzer.
     2
        Respondent further contends that this adjustment to
adjusted gross income reduces the amount of medical deductions
that Praegitzer was entitled to claim. This is a computational
matter that will be addressed, if necessary, under Rule 155.
                               - 3 -

on the transaction, petitioner Dawes received a constructive

dividend from Ameritech when it distributed assets to Mr.

Praegitzer.   After concessions,3 the issues for decision are

whether petitioner Praegitzer has unreported dividend income4

and, alternatively, whether petitioner Dawes has unreported

income from a constructive dividend.

                         FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts, supplemental stipulation of facts, and

attached exhibits are incorporated herein by this reference.

Petitioners Praegitzer resided in Palo Cedro, California, and

petitioner Dawes resided in Shasta County, California, at the

time they filed their respective petitions.

     In 1976, Kerry Dawes, the brother of petitioner Dawes, and

petitioner Praegitzer began an aircraft propeller repair and

maintenance business (propeller business) as a partnership in

Redding, California.   Kathleen Dawes began working in the

propeller business within 1 year of its inception.




     3
        Respondent conceded that neither petitioner is liable for
the accuracy-related penalty pursuant to sec. 6662(a).
Respondent asserts the deficiencies against petitioners in the
alternative. If we sustain respondent's determination as to
petitioners Praegitzer, the issue as to petitioner Dawes would be
moot.
     4
        There is no suggestion by any of the parties that
petitioner Praegitzer did not have a dividend because 303
Products' earnings and profits were inadequate.
                               - 4 -

     Kerry Dawes and petitioner Praegitzer subsequently formed

Ameritech Industries, Inc. (Ameritech), a California corporation,

on October 1, 1982, under its original name of American Propeller

Service, Inc.   Kerry Dawes and petitioner Praegitzer each

initially contributed $5,000 to Ameritech, and each received

5,000 shares of Ameritech common stock.    Petitioner Praegitzer

was president and treasurer of Ameritech, Kerry Dawes was vice

president and secretary, and petitioner Dawes was controller from

1982 until October 3, 1989.

     Kerry Dawes and petitioner Praegitzer transferred the

propeller business to Ameritech in 1982.    Concurrently, Ameritech

developed and began marketing and selling a line of chemicals for

the protective coating of equipment, including a product known as

303 (the 303 products business).

     Petitioner Praegitzer and petitioner Dawes were married in

1984, and they permanently separated on or about July 6, 1987.

Following the separation, petitioner Praegitzer, petitioner

Dawes, and Kerry Dawes could no longer agree on how to operate

Ameritech.

     On July 29, 1987, petitioner Praegitzer filed an action for

the dissolution of his marriage to petitioner Dawes.    Petitioner

Dawes filed a cross-complaint in the action.    In the action,

petitioner Dawes contended that, by virtue of an implied

agreement between the parties, she owned one-half of the 5,000

shares of Ameritech held in petitioner Praegitzer's name.    The
                               - 5 -

trial of the marital dissolution action took place October 11-13,

1988.   A judgment of dissolution (the judgment) was entered on

June 9, 1989.   The judgment ordered the division of certain

community property and other jointly owned property, but did not

include the Ameritech stock.   The judgment provided, inter alia,

that in order to equalize the division of community liabilities

and property set forth in the judgment, petitioner Praegitzer was

to pay petitioner Dawes the sum of $30,683 either in the form of

a 3-year promissory note in the amount of $36,097.65 or by

transferring 403 shares of Ameritech stock to petitioner Dawes at

a stipulated value of $76 per share.   The judgment made no other

mention of the Ameritech stock.   The judgment did not purport to

resolve any other community property issues with regard to stock

held in Ameritech.

     Also on June 9, 1989, a judgment was entered on petitioner

Dawes' first amended cross-complaint, ordering that petitioner

Praegitzer and petitioner Dawes were each owners of 2,500 shares

of the 5,000 shares of Ameritech stock issued in the name of

petitioner Praegitzer and further ordering petitioner Praegitzer

to transfer 2,500 of his shares to petitioner Dawes.   Petitioner

Praegitzer appealed this judgment.

     An Ameritech shareholders' meeting was held on October 3,

1989.   Kerry Dawes, petitioner Praegitzer, and petitioner Dawes

were present at the meeting.   Also present at the meeting were

Lee Lopez, counsel for petitioner Dawes, Steven Small, counsel
                                - 6 -

for petitioner Praegitzer, and Richard Bates, counsel for

Ameritech.    At the meeting, petitioner Praegitzer, as corporate

president, refused to sign newly issued stock certificates to

divide the stock between himself and petitioner Dawes.

     At the October 3, 1989, meeting, based on an opinion by Mr.

Bates, petitioner Dawes was allowed to vote 2,500 shares of the

5,000 shares held in petitioner Praegitzer's name.    By a vote of

7,500 in favor to 2,500 opposed, the shareholders amended the

corporate by-laws to provide for three directors.    Immediately

following the amendment, petitioner Dawes was elected to the

board of directors by a vote of 7,500 shares in favor and 2,500

shares opposed.

     An Ameritech directors' meeting was also held on October 3,

1989.    Kerry Dawes, petitioner Praegitzer, and petitioner Dawes

were present as directors.    Also present were Mr. Lopez, Mr.

Small, and Mr. Bates.    By a vote of 2 to 1, Kerry Dawes was

elected president and treasurer, and petitioner Dawes was elected

vice president and secretary.

     In November 1989, settlement negotiations occurred between

counsel for petitioner Praegitzer and counsel for petitioner

Dawes.    Under the circumstances, a 25-percent minority interest

was of diminished value to petitioner Praegitzer as it offered no

control of Ameritech; the negotiations therefore were designed to

restructure the judgment so that either petitioner Praegitzer or
                               - 7 -

 petitioner Dawes and Kerry Dawes would obtain 100-percent

ownership of Ameritech.

     George Murphy represented petitioner Praegitzer during his

divorce.   Mr. Murphy's associate, Debora Dragland, represented

petitioner Praegitzer during the negotiations with petitioner

Dawes' counsel, Mr. Lopez.   In a November 14, 1989, letter from

Ms. Dragland to Mr. Lopez, petitioner Praegitzer offered

petitioner Dawes $160,000 to settle his appeal of the divorce

court's award to petitioner Dawes of 2,500 shares in Ameritech,

contingent on his first obtaining Kerry Dawes' 5,000 shares.    In

a November 22, 1989, letter from Mr. Lopez' law firm to Ms.

Dragland, petitioner Dawes rejected petitioner Praegitzer's offer

and counter offered $160,000 for his 2,500 shares.

     On December 1, 1989, petitioner Praegitzer filed an

injunction (the injunction action) against Ameritech, Kerry

Dawes, and petitioner Dawes to prevent petitioner Dawes from

exercising her rights to the 2,500 shares of stock and also to

prevent Ameritech from transferring the 2,500 shares to

petitioner Dawes.

     On December 12, 1989, a judicially supervised settlement

conference on petitioner Praegitzer's appeal of the judgment was

held before retired associate Justice Bertram D. Janes of the

California Court of Appeal for the Third Appellate District.    At

the December 12, 1989, settlement conference, both parties were

represented by counsel.   Mr. Lopez represented petitioner Dawes,
                                - 8 -

and Mr. Murphy and Ms. Dragland represented petitioner

Praegitzer.    After discussions between Mr. Lopez, Mr. Murphy, and

Justice Janes, a memorandum of agreement (the 12/12 agreement)

was typed at the urging of Justice Janes and was signed by Mr.

Lopez and Mr. Murphy.   The 12/12 agreement was not signed by

petitioner Dawes or by petitioner Praegitzer.   Justice Janes

signed the 12/12 agreement approving it “as a judicial

settlement.”   Justice Janes stated to the attorneys that if they

encountered any problems, they were to come back to see him to

resolve the matter.

     The memorandum of agreement, dated December 12, 1989,

provided as follows:

     This appeal is settled this date upon the following
     conditions:

     1. The Respondent [petitioner Dawes] will pay in cash
     $103,000 to Appellant [petitioner Praegitzer].

     2. The Corporation will transfer rights to products
     known as “303" and “306" including inventory and
     equipment, the equipment determined as a forklift and a
     binding machine, to the extent inventory is less than
     $59,000, it will be made up by Respondent.

     3. No royalties on products sold by Appellant after
     this date (ok Lopez; ? George).

     4. A three and a half year covenant not to compete in
     the propellor shop business in Washington, Oregon,
     California and Nevada.

     5. Kathy Dawes to forgive judgments and cancelled
     notes in the amount of $36,097.65 (method of
     forgiveness to be determined jointly by counsels' tax
     counsel.)

     6. Corporation to forgive debt owed by Appellant in
     the amount of $21,000.
                              - 9 -

     7. Corporation will assume, by novation if possible,
     SBA loan in the amount of $58,000 (if novation not
     possible, Kathy and Kerry Dawes will hold Appellant
     harmless by appropriate agreement.)

     8. Appellant will transfer all shares of stock in the
     corporation to the corporation or Kerry Dawes.

     9. The formal agreement to be structured to result in
     the least amount of tax liability legally possible for
     the Appellant; to the extent that the settlement
     agreement reached does result in tax liability to the
     Appellant, the agreement will be structured, if
     possible, to the Respondent's tax benefit. For
     example, in the event the sums being paid would result
     in Appellant paying taxes on $60,000, then the
     Respondent would have the right to place in the
     agreement a covenant not to compete to that extent.

     10. Appellant agrees to dismiss the Shasta County
     action in which an OSC is pending, and this appeal,
     when a final settlement agreement is executed; each
     side to pay its own costs and the remittitur to go down
     forthwith.

     11. Corporation or Dawes to retain all rights pursuant
     to two assigned agreements dated November 12, 1980.


Subsequent to December 12, 1989, there were additional

negotiations concerning the terms and structure that the eventual

settlement agreement would take.   Subsequent to the December 12,

1989, settlement conference, Mr. Lopez, as counsel for petitioner

Dawes, and Mr. Murphy, as counsel for petitioner Praegitzer,

engaged separate tax counsel for advice on how to structure an

agreement pursuant to the 12/12 agreement.   Mr. Lopez consulted

Howard Schweitzer, and Mr. Murphy consulted Kevin Schoneman.

     Mr. Schoneman proposed a structure involving payment of

$103,000 by petitioner Dawes and transfer of Ameritech assets

from Ameritech to petitioner Praegitzer, as outlined in a
                               - 10 -

December 26, 1989, letter from Mr. Schoneman to Mr. Lopez.      In

early January 1990, Mr. Schweitzer informed Mr. Schoneman that he

did not think petitioner Dawes had $103,000.    They discussed how

to get around that problem.    Mr. Schweitzer suggested that

Ameritech could pay the money.    The idea of a tax-free

reorganization came up during their conversation.

     Mr. Schweitzer and Mr. Schoneman agreed upon a tax-free

reorganization to distribute the 303 products business assets to

a new corporation to be owned by petitioner Praegitzer.    On

January 10, 1990, Mr. Schoneman sent Mr. Schweitzer a letter

stating that a tax-free reorganization, whereby petitioner Dawes

and Kerry Dawes would operate the propeller business and

petitioner Praegitzer the 303 products business, was acceptable

to petitioner Praegitzer.

     Ultimately, the parties signed two agreements on January 30,

1990:    (1) The Marital Settlement Agreement (MSA), executed by

petitioner Dawes and petitioner Praegitzer, and (2) the Agreement

and Plan of Corporate Separation and Reorganization (the

reorganization agreement).    The MSA provided that “This Agreement

controls over the Judgments dated June 9, 1989 and the Memorandum

of Agreement dated December 11, 1989.”5   Under the MSA,

petitioner Dawes and petitioner Praegitzer divided all of their

community property and jointly owned property and liabilities,


     5
        The parties stipulated that the reference to Dec. 11,
1989, was a typographical error that was intended to refer to the
Dec. 12, 1989, agreement.
                              - 11 -

with the exception of clothing, jewelry, furniture, and

furnishings previously divided.   Of the 5,000 shares of Ameritech

stock held in petitioner Praegitzer's name, one-half were

allocated to petitioner Dawes as her separate property, and one-

half were allocated to petitioner Praegitzer as his separate

property.   In the MSA, the parties expressed their intention that

the MSA “be subject to the rules of IRC Section 1041, where

applicable.”   The MSA further provided that “The Parties have

made the transfers set forth in this paragraph with the intent

that such transfers constitute equitable division of their

community and jointly-owned property.”   In the MSA, the parties

intended that the agreement be a final and complete settlement of

all rights and obligations between them, including property

rights and property claims and the right of either petitioner

Dawes or petitioner Praegitzer to spousal support.

     The reorganization agreement was executed by Ameritech,

petitioner Praegitzer, petitioner Dawes, and Kerry Dawes.    The

reorganization agreement provided that the 303 products business

would be placed in a new corporation to be owned solely by

petitioner Praegitzer and that the propeller business would

remain in Ameritech which would be owned solely by petitioner

Dawes and Kerry Dawes.   The reorganization agreement provided

that Ameritech would cause the formation of a new subsidiary

known as 303 Products, Inc. (303 Products), with an initial stock

issue of 1,000 shares of common stock, to which Ameritech would
                              - 12 -

transfer all of the assets of its 303 products business, in

exchange for the 1,000 shares of 303 Products.   The assets

included, in part, $103,000 in cash and an obligation of

petitioner Praegitzer to Ameritech in the approximate amount of

$21,000 (the Praegitzer debt).   The reorganization agreement

provided that petitioner Praegitzer would transfer his 2,500

shares of Ameritech to Ameritech in exchange for the transfer by

Ameritech to petitioner Praegitzer of 1,000 shares of 303

Products.

     The parties intended that the transactions under the

reorganization agreement would qualify as a tax-free

reorganization.   In the reorganization agreement, petitioner

Praegitzer agreed to dismiss his appeal of the dissolution action

and also to dismiss the injunction action.

     Petitioner Praegitzer and petitioner Dawes agreed that the

reorganization agreement depended, for its legal effect, upon the

execution by petitioner Praegitzer and petitioner Dawes of the

MSA entered into contemporaneously.    The reorganization agreement

contained an integration clause.   Petitioner Praegitzer and

petitioner Dawes agreed that the reorganization agreement was the

entire agreement between them pertaining to the subject matter

thereof and that it superseded all prior and contemporaneous

agreements, except those contemplated thereunder or not

inconsistent therewith.

     A meeting of the board of directors of Ameritech was held on

January 25, 1990.   On January 30, 1990, Ameritech borrowed
                              - 13 -

$103,000 from an unrelated party; petitioner Dawes and Kerry

Dawes guaranteed Ameritech's promissory note.    A meeting of the

board of directors of Ameritech was held on January 30, 1990.

Also present at the meeting were Mr. Lopez and Mr. Small.      The

board of directors unanimously approved the reorganization

agreement and related documents.   Kerry Dawes, corporate

president, announced that a new corporation, 303 Products, had

been formed on January 16, 1990.   Kerry Dawes also announced that

certain assets should be transferred to the new corporation to

capitalize it.   The directors voted unanimously to transfer the

assets to 303 Products in consideration for 303 Products' issuing

1,000 shares of stock to Ameritech.    The assets included $103,000

and the Praegitzer debt of $21,254.    All of the directors,

including petitioner Praegitzer, voted that it was in the best

interests of Ameritech to acquire or redeem petitioner

Praegitzer's 2,500 shares of Ameritech in exchange for the 1,000

shares of 303 Products owned by Ameritech.    Further, it was

resolved unanimously that the president and secretary of

Ameritech were authorized to consummate the transaction as set

forth in the reorganization agreement.    The board of directors

unanimously approved the reorganization and acquisition of

petitioner Praegitzer's 2,500 shares.

     A closing under the reorganization agreement was held on

January 30, 1990.   Ameritech conveyed the assets of the 303

products business to 303 Products by an assignment of assets

dated January 30, 1990, executed by Kerry Dawes as president of
                              - 14 -

Ameritech and by delivery of Ameritech's check in the amount of

$103,000 payable to 303 Products to petitioner Praegitzer.     The

assets transferred from Ameritech to 303 Products also included

$59,000 worth of inventory and equipment.    The total value of the

assets transferred was approximately $183,000.

     Petitioner Praegitzer transferred his remaining 2,500 shares

of Ameritech to Ameritech, and Ameritech assigned its 1,000

shares of 303 Products to petitioner Praegitzer on January 30,

1990.   Petitioner Praegitzer resigned as an officer and director

of Ameritech on January 30, 1990.   On that same day, petitioner

Praegitzer, Kerry Dawes, and Ameritech executed a mutual release.

     Petitioner Praegitzer was concerned when he received the

$103,000 check payable to 303 Products.    His accountant, Dave

Scott, told petitioner Praegitzer that since he was the sole

owner of 303 Products it would be alright for him to go ahead and

cash the check.   On February 2, 1990, petitioner Praegitzer went

to the bank with the $103,000 check, converted it into a

cashier's check payable to 303 Products, and then deposited the

cashier's check into the corporate checking account of 303

Products.   Also on February 2, 1990, petitioner Praegitzer caused

303 Products to issue him a check for $103,000 which he deposited

into his personal checking account.

     The $103,000 was recorded on the accounting books of 303

Products as received by the corporation.    At the time that

petitioner Dawes signed the MSA and the reorganization agreement,
                              - 15 -

she did not know that petitioner Praegitzer would withdraw the

$103,000 from 303 Products.

     The Praegitzer debt was recorded in the accounting books and

records of 303 Products as received on or about January 30, 1990.

On the 303 Products financial statements for the year ended June

30, 1991, the Praegitzer debt was removed from the balance sheet

of 303 Products by the corporation's C.P.A. on the ground that

the Praegitzer debt should have been taken off the books of

Ameritech as of December 12, 1989.     At no time on or after

January 30, 1990, did 303 Products exercise any rights to collect

on any debt owed to it by petitioner Praegitzer.

                              OPINION

     Although respondent's role in these two cases is that of a

stakeholder, she nonetheless concedes that the steps of the

reorganization, up to and including the exchange of stock, were

tax free under sections 355 and 368(a)(1)(D) and argues that

petitioner Praegitzer received a dividend from 303 Products when

it distributed cash to, and canceled indebtedness6 owed to it by,

Mr. Praegitzer.   Petitioner Praegitzer argues that the cash and

cancellation of indebtedness were received incident to his

divorce from petitioner Dawes, and thus, are tax free pursuant to

section 1041.   Section 1041(a) provides:




     6
        Cancellation of a shareholder's indebtedness owed to his
corporation generally is treated as a distribution of property
within the meaning of sec. 301. Sec. 1.301-1(m), Income Tax
Regs.
                              - 16 -

          (a) GENERAL RULE.--No gain or loss shall be
     recognized on a transfer of property from an individual
     to * * *

                (1) a spouse, or

                (2) a former spouse, but only if the transfer
           is incident to a divorce.

Although his transfer of stock was to a third party, Ameritech,

petitioner Praegitzer contends that it still qualifies as a

transfer under section 1041 pursuant to section 1.1041-1T(c), Q&A

9, Temporary Income Tax Regs., 49 Fed. Reg. 34453 (Aug. 31, 1984)

(Q&A 9).   Q&A 9 provides:

     Q-9. May transfers of property to third parties on
     behalf of a spouse (or former spouse) qualify under
     section 1041?

     A-9. Yes. There are three situations in which a
     transfer of property to a third party on behalf of a
     spouse (or former spouse) will qualify under section
     1041, provided all other requirements of the section
     are satisfied. * * * In the three situations, * * *
     the transfer of property will be treated as made
     directly to the nontransferring spouse (or former
     spouse) and the nontransferring spouse will be treated
     as immediately transferring the property to the third
     party. The deemed transfer from the nontransferring
     spouse (or former spouse) to the third party is not a
     transaction that qualifies for nonrecognition of gain
     under section 1041.

     Id.

     In support of his argument, petitioner Praegitzer relies on

Arnes v. United States, 981 F.2d 456 (9th Cir. 1992).   In Arnes,

Joann and John Arnes formed a corporation, “Moriah”, to operate a

McDonald's franchise.   Joann and John were joint owners of 100

percent of Moriah.   When the couple divorced, they were required
                               - 17 -

 by the McDonald's franchise agreement to terminate their joint

ownership of Moriah.

     Joann and John Arnes entered into an agreement to have

Moriah redeem Joann's 50-percent interest for $450,000.     Joann

reported the gain from the redemption on her Federal income tax

return.    Subsequently, Joann filed a claim for refund, contending

that the transfer of her stock to Moriah was made pursuant to a

divorce instrument, and therefore she was not required to

recognize any gain on the transfer of her stock in accordance

with section 1041.    The Internal Revenue Service (IRS) disallowed

the claim for refund, and Joann filed suit in District Court.

     The District Court concluded that the redemption was

required by a divorce instrument, and that John had benefited

from the transaction because it was part of the marital property

settlement, which limited future community property claims by

Joann.    The court, applying Q&A 9, determined that, although

Joann transferred her stock directly to Moriah, the transfer was

made on behalf of John and should be treated as having been made

to John.    Accordingly, the transfer qualified for nonrecognition

of gain pursuant to section 1041 and summary judgment was granted

in favor of Joann.     Id.

     The Court of Appeals for the Ninth Circuit affirmed the

judgment of the District Court.    The Court of Appeals observed

that the transfer would be tax free to Joann pursuant to section

1041 if the transfer were “on behalf of” John as required by Q&A

9.   The court reasoned that a transfer is “on behalf of” another
                               - 18 -

if it satisfies an obligation or liability of that person.

Applying Washington State law, the Court of Appeals concluded

that the obligation to purchase Joann's stock was John's and not

Moriah's.   Thus, the court held that “Joann's transfer to Moriah

did relieve John of an obligation, and therefore constituted a

benefit to John.”   Id. at 459.

     Even if we assume, arguendo, that the stock for stock

exchange was “on behalf of” petitioner Dawes, petitioner

Praegitzer is not necessarily insulated from tax.    Respondent is

not seeking to tax petitioner Praegitzer on that exchange itself,

which is tax free to him under section 355 regardless of the

application of section 1041.    Rather, respondent is seeking to

include in his income, as dividends received by petitioner

Praegitzer from 303 Products, $103,000 of cash and $21,000 in

forgiveness of indebtedness, a total of $124,000.

     The MSA and the reorganization agreement resolved any

marital claims between petitioner Praegitzer and petitioner

Dawes.   The agreements provided for the resolution of petitioner

Dawes' marital claims to petitioner Praegitzer's stock in

Ameritech, and for the concurrent severance of petitioner

Praegitzer's interest in that corporation, through a divisive

reorganization, culminating in the stock for stock exchange that

left petitioner Praegitzer with no ownership of Ameritech and as

sole owner of 303 Products.    When 303 Products distributed

$103,000 of cash to petitioner Praegitzer and forgave his $21,000

debt, it was done at his own behest, as sole shareholder of that
                              - 19 -

corporation.   The agreements did not obligate him to do it, and

moreover it was probably a matter of indifference to petitioner

Dawes, and to Ameritech, whether he did it, his stock in

Ameritech having been relinquished in the previous exchange.

     Absent sham or agency principles, the corporations involved

are considered separate taxable entities.     Moline Properties,

Inc. v. Commissioner, 319 U.S. 436 (1943).     There is no

indication that this was a sham or that either corporation was

petitioner Dawes' agent.   Therefore, once the reorganization,

which was incident to the divorce, was completed, any further

transactions between petitioner Praegitzer and 303 Products, his

solely owned corporation, would be taxed according to general

principles of taxation.

     This situation is distinguishable from Arnes v. United

States, where the taxpayer received assets of a corporation in

redemption of her stock.   In that case the receipt of such assets

was part and parcel of resolving community property claims to the

stock in the context of a divorce.     Here, by contrast, the stock

in Ameritech was relinquished and a severance of the community

interest was accomplished through transactions that may be

separated from petitioner Praegitzer's receipt of the dividend.

Petitioner Praegitzer did not get the dividend as an integral or

necessary step in the marital property settlement; rather it was

a bailout of corporate assets, which was carried out at his own

instance, and on which he may properly be taxed.    We conclude,

therefore, that the distribution of cash and cancellation of
                              - 20 -

indebtedness were not exempted from tax by section 1041, but were

dividends under sections 301, 312, and 316, to petitioner

Praegitzer.   Accordingly, under respondent's concession, our

resolution of the dividend issue in petitioner Praegitzer's case

renders the constructive dividend issue in petitioner Dawes' case

moot.

     To reflect the foregoing as well as concessions by the

parties,

                                              Decision will be

                                         entered under Rule 155

                                         in docket No. 719-95.

                                              Decision will be

                                         entered for petitioner

                                         in docket No. 1344-95.
