It is intended that a genuine contraction of the business as under present law will result in partial liquidation. See, for example, Joseph Imler ( 11 T.C. 836) . However, a distribution of a reserve for expansion is not a partial liquidation.

There is no showing that payment of the 5 percent dividends was a significant drain on the corporation's resources or that it unduly affected the corporation's credit. Cf. Bona Allen, Jr., 41 B.T.A. 206; Joseph W. Imler, 11 T.C. 836. Petitioners' contentions with respect to hidden goodwill among the partnership assets transferred to the corporation are not material or relevant for these purposes as there is no showing that the goodwill was capitalized or that the redemptions had any relation thereto or constituted any contraction thereof.

Moreover, it may be noted that those cases which have considered the resultant scope of corporate activity following a transfer of stock from shareholders to the corporation as bearing on dividend equivalency have universally stressed the narrowing of the corporate activity or a contraction of the business rather than an expansion. See, e.g., Commissioner of Internal Revenue v. Champion, 78 F.2d 513 (6 Cir. 1935); Commissioner of Internal Revenue v. Babson, 70 F.2d 304 (7 Cir. 1934); Joseph W. Imler, 11 T.C. 836 (1948). A further factor discussed by the district court in its application of the "net effect" test was the question of whether the transfer from Permar to the Collins Company was actuated by a legitimate business purpose.

Had this been done, it seems improbable that any claim would be advanced now that § 267 of the Code, involving related taxpayers, did not apply to any capital losses sustained yet substantially the same effect was accomplished here, unless the facts can substantiate a real contraction of the corporate business. Northup v. United States, 240 F.2d 304, 307 (2d Cir. 1957); Joseph Imler v. Commissioner, 11 T.C. 836 (1948).          When a portion of these negotiable securities held by the corporation were sold, to provide cash with which to purchase the stock of Lora R. McCarthy, what affect if any, did this have upon the Oyster Company at the corporate level?

No hard and fast rule for determining when payments received by shareholders on the retirement of preferred stock must be treated as a dividend for income tax purposes can be gathered from the cases. Elements which must be weighed are (1) whether the payments are pro rata with corporate ownership, Keefe v. Cote, 1 Cir., 213 F.2d 651, — here they are not, which favors the taxpayers' position, (2) whether the stock was issued with the purpose of tax avoidance by later redemption — here the issue was before the law provided any tax incentive for such issue and redemption, negativing any such motive, (3) whether the corporation is closely held — here the ownership is in a fairly small group, but not concentrated in one family, (4) whether the stock retirement coincided with a contraction of corporate business, Imler v. C.I.R., 11 T.C. 836, — not present here, which favors the government's position, (5) whether all taxpayer's shares were redeemed, Zenz v. Quinlivan, 6 Cir., 213 F.2d 914, ending all his interest in the corporation — here common stock interests, though disproportionate, still existed, (6) whether the payments are made from current earnings or surplus — here from current earnings, which favors the government's position, (7) whether there is a compelling business reason for the retirement. This last is perhaps the most weighty element when the other elements are in fairly even balance.

It therefore follows that a distribution not amounting to a partial liquidation under prior law can be a corporate contraction under section 382(e)(2). The term “corporate contraction” has been used to describe the “contraction of business operations” test of Imler v. Commissioner, 11 T.C. 836, 841 (1948). S. Rept. 1622, 83d Cong., 2d Sess. 49, 262 (1954); Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 9.07[2][b], at 9-52 (6th ed. 1994); see also Chommie, “Section 346(a)(2): The Contraction Theory”, 11 Tax L. Rev. 407 (1956).

These elements include, ‘the presence or absence of a real business purpose, the motives of the corporation at the time of the distribution, the size of the corporate surplus, the past dividend policy, and the presence of special circumstances relating to the distribution.’ Joseph W. Imler, 11 T.C. 836, 840 (1948). Respondent argues that in the light of these criteria, petitioner's adoption in 1955 of the contract providing for the sale of its assets to Fowler of Canada and the related agreement that it would not engage in business activity of a nature similar to that in which it was previously engaged and would encourage its employees to become employees of the purchasing corporation and turn over to that corporation all information with respect to its operation, was, in effect, the adoption of a plan of liquidation.

Petitioner has not redeemed the shares of any other minority shareholders since the transaction with the Kings and has continued to hold the balance of the Sterling Drug stock as an asset. Respondent argues that there could not have been a partial liquidation since there was no genuine contraction of petitioner's business, citing Joseph W. Imler, 11 T.C. 836 (1948). This argument is without merit.

That factor is to be considered. Joseph W. Imler, 11 T.C. 836. The argument is that the dealer contract executed by the manufacturer with J. R. Holsey Sales Co. was its most important asset, and the Oldsmobile Division of General Motors Corporation was unhappy about one of its stockholders (Greenville), owning one-half its stock, being a holder of the Chevrolet franchise.

Regs. 111, sec. 29.115-9; Jones v. Griffin, (C.A. 10, 1954) 216 F.2d 885. Certain recognized criteria have been developed by the courts and include the following: The presence or absence of a real business purpose; whether the action was initiated by the corporation or by the shareholders; the amount of earnings and profits available for the declaration of a regular dividend, and the corporation's past record with respect to the payment of dividends; whether the distribution resulted in any substantial change in ownership and control, or in a contraction of corporate operations; continued profitable operations; the effect of the distribution as compared with the declaration of a regular dividend; any special circumstances existing at the time of a distribution; Jones v. Griffin, supra; Joseph W. Imler, 11 T.C. 836. No one factor is controlling and all relevant factors must be considered.