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Gregory v. Helvering - 293 U.S. 465, 55 S. Ct. 266 (1935)

Rule:

Section 112 of the Revenue Act of 1928, 45 Stat. 791, 818, 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. Section 112(g) provides as to distribution of stock on reorganization that 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. Reorganization means 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.

Facts:

Helvering, a stockholder, organized a new corporation, transferred 1000 shares of stock to the new corporation. No other business was ever transacted by the new corporation. She then dissolved the new corporation and distributed all its assets, namely the shares, to herself. She immediately sold the shares and claimed a sum for taxation as capital net gain. The Tax Commissioner determined that it should have been treated as a dividend. The Board of Tax Appeals set aside the order of the Commissioner who had determined a deficiency in income tax against the stockholder, but the Court of Appeals for the Second Circuit reversed, finding no corporate reorganization had occurred. The United States Supreme Court granted certiorari review.

Issue:

Had no corporate reorganization within the meaning of § 112 of the Revenue Act of 1928, 45 Stat. 791, 818, occurred, thus, rendering a deficiency in income tax against the stockholder?

Answer:

Yes

Conclusion:

The United States Supreme Court found that the transaction that had occurred was not the kind intended under § 112 of the Revenue Act of 1928, 45 Stat. 791, 818. When § 112(B) spoke of a transfer of assets by one corporation to another, it meant a transfer made in pursuance of a plan of reorganization 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. Although a new and valid corporation was created, that corporation was nothing more than a contrivance to the stockholder's end.

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