1) The petitioner transferred stock shares between corporations solely to reduce tax liability in a way that conformed with the letter of the tax law but violated its intent. 2) The Supreme Court ruled the transaction was not a legitimate corporate reorganization and instead was an elaborate scheme to avoid taxes through legal artifice rather than a valid business purpose. 3) The Court affirmed the transaction was an abuse of the tax law and petitioner was liable for the full amount of taxes as if a direct dividend had been paid.
1) The petitioner transferred stock shares between corporations solely to reduce tax liability in a way that conformed with the letter of the tax law but violated its intent. 2) The Supreme Court ruled the transaction was not a legitimate corporate reorganization and instead was an elaborate scheme to avoid taxes through legal artifice rather than a valid business purpose. 3) The Court affirmed the transaction was an abuse of the tax law and petitioner was liable for the full amount of taxes as if a direct dividend had been paid.
1) The petitioner transferred stock shares between corporations solely to reduce tax liability in a way that conformed with the letter of the tax law but violated its intent. 2) The Supreme Court ruled the transaction was not a legitimate corporate reorganization and instead was an elaborate scheme to avoid taxes through legal artifice rather than a valid business purpose. 3) The Court affirmed the transaction was an abuse of the tax law and petitioner was liable for the full amount of taxes as if a direct dividend had been paid.
1) The petitioner transferred stock shares between corporations solely to reduce tax liability in a way that conformed with the letter of the tax law but violated its intent. 2) The Supreme Court ruled the transaction was not a legitimate corporate reorganization and instead was an elaborate scheme to avoid taxes through legal artifice rather than a valid business purpose. 3) The Court affirmed the transaction was an abuse of the tax law and petitioner was liable for the full amount of taxes as if a direct dividend had been paid.
By means which the law permits, a taxpayer has the
Gregory v. Helvering right to decrease the amount of what otherwise would be his taxes, or altogether to avoid them. 293 U.S. 465 (1935) 3. The rule which excludes from consideration the motive of tax avoidance is not pertinent to the situation here, U.S. Supreme Court because the transaction upon its face lies outside the plain intent of the statute. CERTIORARI TO THE CIRCUIT COURT OF APPEALS 69 F.2d 809 affirmed. FOR THE SECOND CIRCUIT Certiorari to review a judgment reversing a decision of Syllabus the Board of Tax Appeals, 27 B.T.A. 223, which set aside an order of the Commissioner determining a deficiency 1. A corporation wholly owned by a taxpayer transferred in income tax. 1000 shares of stock in another corporation held by it among its assets to a new corporation, which thereupon MR. JUSTICE SUTHERLAND delivered the opinion of the issued all of its shares to the taxpayer. Within a few days, Court. the new corporation was dissolved and was liquidated by the distribution of the 1000 shares to the taxpayer, Petitioner, in 1928, was the owner of all the stock of who immediately sold them for her individual profit. No United Mortgage Corporation. That corporation held other business was transacted, or intended to be among its assets 1,000 shares of the Monitor Securities transacted, by the new corporation. The whole plan was Corporation. For the sole purpose of procuring a transfer designed to conform to 112 of the Revenue Act of 1928 of these shares to herself in order to sell them for her as a "reorganization," but for the sole purpose of individual profit, and at the same time, diminish the transferring the shares in question to the taxpayer, with a amount of income tax which would result from a direct resulting tax liability less than that which would have transfer by way of dividend, she sought to bring about a ensued from a direct transfer by way of "reorganization" under 112(g) of the Revenue Act of dividend. Held: while the plan conformed to the terms of 1928, c. 852, 45 Stat. 791, 816, 818, set forth later in this the statute, there was no reorganization within the intent opinion. To that end, she caused the Averill Corporation of the statute. 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 computing the tax, except as provided in that section. petitioner. On September 24, the Averill Corporation was The provisions of the section, so far as they are pertinent dissolved, and liquidated by distributing all its assets, to the question here presented, follow: namely, the Monitor shares, to the petitioner. No other business was ever transacted, or intended to be "Sec. 112. (g) Distribution of Stock on Reorganization. If transacted, by that company. Petitioner immediately there is distributed, in pursuance of a plan of sold the Monitor shares for $133,333.33. She returned for reorganization, to a shareholder in a corporation a party taxation, as capital net gain, the sum of $76,007.88, to the reorganization, stock or securities in such based upon an apportioned cost of $57,325.45. Further corporation or in another corporation a party to the details are unnecessary. It is not disputed that, if the reorganization, without the surrender by such shareholder interposition of the so-called reorganization was of stock or securities in such a corporation, no gain to the ineffective, petitioner became liable for a much larger distributee from the receipt of such stock of securities tax as a result of the transaction. shall be recognized. . . ."
The Commissioner of Internal Revenue, being of opinion "(i) Definition of Reorganization. -- As used in this section . 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 "(1) The term 'reorganization' means . . . (B) a transfer by a paid her a dividend consisting of the amount realized corporation of all or a part of its assets to another from the sale of the Monitor shares. In a proceeding corporation if immediately after the transfer the transferor before the Board of Tax Appeals, that body rejected the or its stockholders or both are in control of the commissioner's view and upheld that of petitioner. 27 corporation to which the assets are transferred. . . ." B.T.A. 223. Upon a review of the latter decision, the Circuit Court of Appeals sustained the commissioner and It is earnestly contended on behalf of the taxpayer that, reversed the board, holding that there had been no since every element required by the foregoing "reorganization" within the meaning of the statute. 69 subdivision (B) is to be found in what was done, a F.2d 809. Petitioner applied to this Court for a writ of statutory reorganization was effected, and that the certiorari, which the government, considering the motive of the taxpayer thereby to escape payment of a question one of importance, did not oppose. We tax will not alter the result or make unlawful what the granted the writ. statute allows. It is quite true that, if a reorganization in reality was effected within the meaning of subdivision (B), Section 112 of the Revenue Act of 1928 deals with the the ulterior purpose mentioned will be disregarded. The subject of gain or loss resulting from the sale or exchange legal right of a taxpayer to decrease the amount of what of property. Such gain or loss is to be recognized in otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be When that limited function had been exercised, it doubted. United States v. Isham, 17 Wall. 496, 84 U. S. immediately was put to death. 506; Superior Oil Co. v. Mississippi, 280 U. S. 390, 280 U. S. 395-396; Jones v. Helvering, 63 App.D.C. 204, 71 F.2d 214, In these circumstances, the facts speak for themselves, 217. But the question for determination is whether what and are susceptible of but one interpretation. The whole was done, apart from the tax motive, was the thing undertaking, though conducted according to the terms which the statute intended. The reasoning of the court of subdivision (B), was in fact an elaborate and devious below in justification of a negative answer leaves little to form of conveyance masquerading as a corporate be said. reorganization, and nothing else. The rule which excludes from consideration the motive of tax avoidance is not When subdivision (B) speaks of a transfer of assets by one pertinent to the situation, because the transaction, upon corporation to another, it means a transfer made "in its face, lies outside the plain intent of the statute. To hold pursuance of a plan of reorganization" [ 112(g)] of otherwise would be to exalt artifice above reality and to corporate business, and not a transfer of assets by one deprive the statutory provision in question of all serious corporation to another in pursuance of a plan having no purpose. relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in Judgment affirmed. respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do Disclaimer: Official Supreme Court case law is only found we find? Simply an operation having no business or in the print version of the United States Reports. Justia corporate purpose -- a mere device which put on the case law is provided for general informational purposes form of a corporate reorganization as a disguise for only, and may not reflect current legal developments, concealing its real character, and the sole object and verdicts or settlements. We make no warranties or accomplishment of which was the consummation of a guarantees about the accuracy, completeness, or preconceived plan, not to reorganize a business or any adequacy of the information contained on this site or part of a business, but to transfer a parcel of corporate information linked to from this site. Please check official shares to the petitioner. No doubt, a new and valid sources. 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.
Rosamond Underwood Smith Wilson, Thomas W. Smith and Frank Stapleton, As Executors of The Estate of Cothran P. Smith v. United States, 257 F.2d 534, 2d Cir. (1958)
Carl E. Weller and Emily I. Weller v. Commissioner of Internal Revenue, W. Stuart Emmons v. Commissioner of Internal Revenue, 270 F.2d 294, 3rd Cir. (1959)
