Gregory v. Helvering (1935)

GREGORY v. HELVERING, COMMISSIONER OF INTERNAL REVENUE

No. 127

SUPREME COURT OF THE UNITED STATES

293 U.S. 465; 55 S. Ct. 266; 79 L. Ed.

596; 35-1 U.S. Tax Cas. (CCH) P9043; 14 A.F.T.R. (P-H) 1191;

97 A.L.R. 1355; 1935 P.H. P687

December 4, 5, 1934, Argued

January 7, 1935, Decided

PRIOR HISTORY: CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE

SECOND CIRCUIT.

CERTIORARI * to review a judgment reversing a decision of the Board of Tax

Appeals, 27 B. T. A. 223, which set aside an order of the Commissioner

determining a deficiency in income tax.

* See Table of Cases Reported in this volume.

DISPOSITION: 69 F.2d 809, affirmed.

SYLLABUS: 1. A corporation wholly owned by a taxpayer transferred 1000 shares of

stock in another corporation held by it among its assets to a new corporation,

which thereupon issued all of its shares to the taxpayer. Within a few days the

new corporation was dissolved and was liquidated by the distribution of the 1000

shares to the taxpayer, who immediately sold them for her individual profit. No

other business was transacted, or intended to be transacted, by the new

corporation. The whole plan was designed to conform to @ 112 of the Revenue Act

of 1928 as a "reorganization," but for the sole purpose of transferring the

shares in question to the taxpayer, with a resulting tax liability less than

that which would have ensued from a direct transfer by way of dividend. Held:

while the plan conformed to the terms of the statute, there was no

reorganization within the intent of the statute. P. 468.

2. By means which the law permits, a taxpayer has the right to decrease the

amount of what otherwise would be his taxes, or altogether to avoid them. P.

469.

3.The rule which excludes from consideration the motive of tax

avoidance is not pertinent to the situation here, because the transaction upon

its face lies outside the plain intent of the statute. P. 470.

COUNSEL: Mr. Hugh Satterlee, with whom Messrs. George W. Saam, Rollin Browne,

and Charles A. Roberts were on the brief, for petitioner.

Solicitor General Biggs, with whom Assistant Attorney General Wideman and

Messrs. Sewall Key and Norman D. Keller were on the brief, for respondent.

By leave of Court, briefs of amici curiae were filed by Messrs. Ellsworth C.

Alvord and Edward H. McDermott, and by Messrs. Albert E. James, A. Calder

Mackay, George M. Morris, Willis D. Nance, Charles B. Rugg, Whitney North

Seymour, and Harry N. Wyatt, in support of petitioner's contentions.

JUDGES: Hughes, Van Devanter, McReynolds, Brandeis, Sutherland, Butler, Stone,

Roberts, Cardozo

OPINIONBY: SUTHERLAND

OPINION: MR. JUSTICE SUTHERLAND delivered the opinion of

the Court.

Petitioner in 1928 was the owner of all the stock of United Mortgage

Corporation. That corporation held among its assets 1,000 shares of the Monitor

Securities Corporation. For the sole purpose of procuring a transfer of these

shares to herself in order to sell them for her individual profit, and, at the

same time, diminish the amount of income tax which would result from a direct

transfer by way of dividend, she sought to bring about a "reorganization" under

@ 112 (g) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 818, set forth later

in this opinion. To that end, she caused the Averill Corporation to be

organized under the laws of Delaware on September 18, 1928. Three days later,

the United Mortgage Corporation transferred to the Averill Corporation the 1,000

shares of Monitor stock, for which all the shares of the Averill Corporation

were issued to the petitioner. On September 24, the Averill

Corporation was dissolved, and liquidated by distributing all its assets,

namely, the Monitor shares, to the petitioner. No other business was ever

transacted, or intended to be transacted, by that company. Petitioner

immediately sold the Monitor shares for $ 133,333.33. She returned

for taxation as capital net gain the sum of $ 76,007.88, based upon an

apportioned cost of $ 57,325.45. Further details are unnecessary. It is not

disputed that if the interposition of the so-called reorganization was

ineffective, petitioner became liable for a much larger tax as a result of the

transaction.

The Commissioner of Internal Revenue, being of opinion that the

reorganization attempted was without substance and must be disregarded, held

that petitioner was liable for a tax as though the United corporation had paid

her a dividend consisting of the amount realized from the sale of the Monitor

shares. In a proceeding before the [*468] Board of Tax Appeals, that body

rejected the commissioner's view and upheld that of petitioner. 27 B. T. A.

223. Upon a review of the latter decision, the circuit court of appeals

sustained the commissioner and reversed the board, holding that there had been

no "reorganization" within the meaning of the statute. 69 F.2d 809. Petitioner

applied to this court for a writ of certiorari, which the government,

considering the question one of importance, did not oppose. We granted the

writ.

Section 112 of the Revenue Act of 1928 deals with the subject of

gain or loss resulting from the sale or exchange of property. Such gain or loss

is to be recognized in computing the tax, except as provided in that section.

The provisions of the section, so far as they are pertinent to the question here

presented, follow:

"Sec. 112. (g) Distribution of stock on reorganization. -- If there is

distributed, in pursuance of a plan of reorganization, to a shareholder in a

corporation a party to the reorganization, stock or securities in such

corporation or in another corporation a party to the reorganization, without the

surrender by such shareholder of stock or securities in such a corporation, no

gain to the distributee from the receipt of such stock or securities shall be

recognized. . . .

"(i) Definition of reorganization. -- As used in this section . . .

"(1) The term 'reorganization' means . . . (B) a transfer by a corporation of

all or a part of its assets to another corporation if immediately after the

transfer the transferor or its stockholders or both are in control of the

corporation to which the assets are transferred, . . ."

It is earnestly contended on behalf of the taxpayer that since every element

required by the foregoing subdivision (B) is to be found in what was

done, a statutory reorganization was effected; and that the motive of the

taxpayer thereby to escape payment of a tax will not alter the result

or make unlawful what the statute allows. It is quite true that if a

reorganization in reality was effected within the meaning of subdivision (B),

the ulterior purpose mentioned will be disregarded. The legal right of a

taxpayer to decrease the amount of what otherwise would be his taxes, or

altogether avoid them, by means which the law permits, cannot be doubted.

United States v. Isham, 17 Wall. 496, 506; Superior Oil Co. v. Mississippi, 280

U.S. 390, 395-6; Jones v. Helvering, 63 App. D. C. 204; 71 F.2d 214, 217. But

the question for determination is whether what was done, apart from the tax

motive, was the thing which the statute intended. The reasoning of the court

below in justification of a negative answer leaves little to be said.

When subdivision (B) speaks of a transfer of assets by one corporation to

another, it means a transfer made "in pursuance of a plan of reorganization" [@

112(g)] of corporate business; and not a transfer of assets by one

corporation to another in pursuance of a plan having no relation to the business

of either, as plainly is the case here. Putting aside, then, the question of

motive in respect of taxation altogether, and fixing the character of the

proceeding by what actually occurred, what do we find? Simply an operation

having no business or corporate purpose -- a mere device which put on the form

of a corporate reorganization as a disguise for concealing its real character,

and the sole object and accomplishment of which was the consummation of a

preconceived plan, not to reorganize a business or any part of a business, but

to transfer a parcel of corporate shares to the petitioner. No doubt, a new and

valid corporation was created. But that corporation was nothing more than a

contrivance to the end last described. It was brought into

existence for no other purpose; it performed, as it was intended from the

beginning it should perform, no other function. When that limited

function had been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of

but one interpretation. The whole undertaking, though conducted

according to the terms of subdivision (B), was in fact an elaborate and devious

form of conveyance masquerading as a corporate reorganization, and nothing else.

The rule which excludes from consideration the motive of tax avoidance is not

pertinent to the situation, because the transaction upon its face lies outside

the plain intent of the statute. To hold otherwise would be to exalt artifice

above reality and to deprive the statutory provision in question of all serious

purpose.

Judgment affirmed.