Gregory v. Helvering, 293 U.S. 465 (1935)

293 U.S.
465
55 S.Ct. 266
79 L.Ed. 596
GREGORY
v.
HELVERING, Commissioner of Internal Revenue.
No. 127.
Argued Dec. 4, 5, 1934.
Decided Jan. 7, 1935.
[Syllabus from 466 intentionally omitted]

Mr. Hugh Satterlee, of Washington, D.C., for petitioner.
The Attorney General and Mr. J. Crawford Biggs, Sol. Gen., of
Washington, D.C., for respondent.
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
section 112(g) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 816, 818, 26
USCA 2112(g), 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.
2
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, 55 S.Ct. 82, 79 L.Ed. -.
Section 112 of the Revenue Act of 1928 (26 USCA 2112) 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 of 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. * * *' 26 USCA 2112(g), (i) (1).
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,
21 L.Ed. 728; Superior Oil Co. v. Mississippi, 280 U.S. 390, 395, 396, 50 S.Ct.
169, 74 L.Ed. 504; 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.
8
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'
(section 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 purposea 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.
10
Judgment affirmed.

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293 U.S.

[Syllabus from 466 intentionally omitted]

The Commissioner of Internal Revenue, being of opinion that the

'Sec. 112. * * * (g) Distribution of Stock on Reorganization. If there is

'(i) Definition of Reorganization. As used in this section * * *

'(1) The term 'reorganization' means * * * (B) a transfer by a corporation of all

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

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

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