Evelyn F. Gregory, Petitioner, v. Guy T. Helvering, Commissioner of
Internal Revenue, (Jan. 07, 1935)
Supreme Court of the United States, No. 127. October Term, 1934, 293 US 465, 55 SCt 266,
Decided January 7, 1935
On writ of certiorari to the United States Circuit Court of Appeals for the Second Circuit.No
reorganization was effected within the provisions of Section 112 of the 1928 Act. Taxpayer
owned all the stock of a corporation, which owned 1000 shares of stock in another corporation.
In order for taxpayer to get these shares for herself, a new corporation was organized to which
the old corporation transferred the 1000 shares of stock, and all the stock of the new corporation
was transferred to the taxpayer directly. Three days later the new corporation was dissolved and
the 1000 shares, being all its assets, were distributed to the taxpayer who sold them immediately,
and reported the profit as capital gain. The Commissioner, holding that there was no
reorganization, held taxpayer liable as the recipient of a dividend of the 1000 shares. The Court
sustains this view. "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, * * *." Putting aside the question of tax motive the Court
holds that this was, "Simply an operation having no business or corporate purpose * * * 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." Affirming Circuit Court of Appeals decision, 69 Fed. (2d) 809, which reversed Board
of Tax Appeals decision, 27 BTA 223, Dec. 7841.
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 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. 293 U. S. 538.
Sec. 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, 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 or 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.