Opinion · Supreme Court of the United States

Helvering v. Bashford

302 U.S. 454

Type
Opinion
Court
Supreme Court of the United States
Jurisdiction
Federal
Date
1938-01-03
Topic
general

Mr. Justice Brandéis delivered the opinion of the Court. Whether Bashford is liable for a deficiency in the income taxes assessed’ for the year 1930 depends upon whether Atlas Powder Company was, as defined by § 112 (i) (2) of the Revenue Act of 1928, 45 Stat. 818, “a party to the reorganization” of the Peerless Explosives Company. Atlas Powder Company desired to eliminate the competition of three concerns — Peerless Explosives Company, Union Explosives Company and Black Diamond Powder Company. Deeming it unwise to do so by buying either their stock or their assets, Atlas conceived and consummated a plan for consolidating the three competitors into a new corporation, with Atlas to get a majority of its stock.

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Headnotes

  1. Tax Law — Corporate Reorganizations Where, pursuant to a plan of reorganization, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different corporation, the exchange is treated as one not giving rise to present gain or loss only to the extent of that continuity of interest; nonrecognition is not extended beyond the extent of that continuity. 302 U.S. at 457 (quoting Groman v. Commissioner, ante, p. 82, at 89)
  2. Tax Law — Corporate Reorganizations A corporation that, pursuant to a plan, causes a competitor to be consolidated into a new corporation and acquires a majority of the new corporation's stock is not a "party to the reorganization" merely because it participated in and facilitated the transaction; stock of that corporation received by the former stockholders of the consolidated companies is "other property" on which gain is taxable. 302 U.S. at 458
  3. Tax Law — Corporate Reorganizations Differences in the degree of a parent company's stock control over its subsidiary, and in the method or means by which that control was secured, are not material to whether the parent is a "party to the reorganization"; nor is it material that the parent directly acquired, transitorily, substantially all the shares of the consolidated companies in exchanges with their stockholders, where the plan contemplated immediate transfer of those shares to the new subsidiary. 302 U.S. at 458
HELVERINGv. BASHFORD,302 U.S. 454(1938)
58 S.Ct. 307
HELVERING, COMMISSIONER OF INTERNAL REVENUE,v. BASHFORD.
CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.
No. 33.
Argued October 21, 1937.
Reargued December 15, 1937.
Decided January 3, 1938.
The A corporation brought about a consolidation of three of its competitors into a new corporation, of which it became the owner of all the preferred shares and 57% of the common shares. Stockholders of the consolidated companies received in exchange for their shares: shares of the new corporation, shares of the A corporation, and cash which the A corporation supplied.Held, the A corporation was not a "party to a reorganization" under § 112(b)(3) of the Revenue Act of 1928; its shares received by stockholders of the consolidated companies were "other property" under § 112(c)(1), and gain thereon was taxable. FollowingGromanv.Commissioner,ante, p. 82. P. 458.87 F.2d 827, reversed.
CERTIORARI,301 U.S. 678, to review a judgment affirming a
decision of the Board of Tax Appeals,33 B.T.A. 10,
Page 455
which reversed an order of the Commissioner assessing a
deficiency in income tax.
Mr. J. Louis Monarch, with whomSolicitor General Reed,Assistant Attorney General Morris, andMessrs. Sewall KeyandMaurice J. Mahoneywere on the brief, for petitioner.Mr. Walter G. Moyle, with whomMessrs. Charles C. GammonsandErnest L. Wilkinsonwere on the brief, for respondent.
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
Whether Bashford is liable for a deficiency in the income taxes assessed for the year 1930 depends upon whether Atlas Powder Company was, as defined by § 112(i)(2) of the Revenue Act of 1928,45 Stat. 818, "a party to the reorganization" of the Peerless Explosives Company.

Atlas Powder Company desired to eliminate the competition of three concerns — Peerless Explosives Company, Union Explosives Company and Black Diamond Powder Company. Deeming it unwise to do so by buying either their stock or their assets, Atlas conceived and consummated a plan for consolidating the three competitors into a new corporation, with Atlas to get a majority of its stock. To this end holders of the stock of the three companies were duly approached by individuals who represented Atlas; their agreements to carry out the plan were obtained; the new corporation was formed and became the owner practically of all the stock, and all the assets, of the three competitors; Atlas became the owner of all the preferred stock and 57% of the common stock of the new corporation; and in exchange for the stock in the three companies each of the former stockholders receivedPage 456some common stock in the new company, some Atlas stock, and some cash which Atlas supplied.

Bashford, one of the stockholders in Peerless, received in exchange for his stock 2,720.08 shares of the common stock of the new corporation, $25,306.67 in cash, 625 shares of Atlas preferred, and 1344 shares of Atlas common. In his income tax return for the year 1930 he included all the cash, but did not include the gain on stock of either the new corporation or Atlas. The Commissioner concedes that gain on the stock in the new corporation was properly omitted, since the new company was a "reorganization" of Peerless. He insists that the Atlas stock should have been included, as it was "other property" on which gain was taxable under § 112(c)(1) of the Revenue Act of 1928, since Atlas was not "a party to the reorganization." The Board of Tax Appeals,33 B.T.A. 10, held that Atlas was "a party to the reorganization," and hence that gain on its stock was properly omitted by Bashford. The Circuit Court of Appeals for the Third Circuit affirmed that judgment.87 F.2d 827. Because of alleged conflict of the decision withCommissionerv.Groman,86 F.2d 670, we granted certiorari in both cases.

InGromanv.Commissioner, ante, p. 82, we gave the following construction to the reorganization sections here involved:

". . . where, pursuant to a plan, the interest of the stockholders of a corporation continues to be definitely represented in substantial measure in a new or different one, then to the extent, but only to the extent, of that continuity of interest, the exchange is to be treated as one not giving rise to present gain or loss." P. 89.

Applying the rule, we held there that the Glidden stock received by Groman was "other property" and he, therefore, liable on the deficiency assessment; because the Glidden Company was not "a party to the reorganization,"Page 457although it had, pursuant to agreement with the stockholders of the Indiana corporation, caused it to be reorganized as an Ohio corporation; had taken for itself all the common stock of Ohio; and had distributed among the former stockholders of Indiana the Ohio preferred stock and some Glidden stock, as well as cash, which it supplied. Applying the rule here, we hold likewise that the Atlas stock was "other property" and Bashford, therefore, liable on the deficiency assessment; because the Atlas Powder Company was not "a party to the reorganization."

Bashford contends that there is a clear distinction in the facts between the case at bar and theGromancase which should lead to a different conclusion here. The differences mainly relied upon are these:

1. In theGromancase, the court found that Glidden did not acquire a majority of the shares of the voting stock and a majority of the shares of all other classes of stock involved, whereas here the facts were as follows: Atlas acquired "not only a majority of the voting stock and a majority of the stock of all other classes of another corporation (the new company)in thereorganization, but of all the other corporations (Peerless and Union)in the reorganization."

2. "Atlas actually acquired, as part of the plan . . . substantially all of the shares of Peerless and Union in direct exchanges with the taxpayer and the other stockholders of those companies in part consideration for which it delivered to the shareholders 6,318 shares of Atlas preferred stock and 8712 1/2 shares of common."

3. "Atlas, unlike Glidden was a party to all the exchanges, while the new company was a party only to exchanges with Atlas."

4. "The stockholders of Peerless and Union did not participate in the contract or exchange between Atlas and the new company."Page 458

Any direct ownership by Atlas of Peerless, Black Diamond, and Union was transitory and without real substance; it was part of a plan which contemplated the immediate transfer of the stock or the assets or both of the three reorganized companies to the new Atlas subsidiary. Hence, under the rule stated, the above distinctions are not of legal significance. The difference in the degree of stock control by the parent company of its subsidiary and the difference in the method or means by which that control was secured are not material. The participation of Atlas in the reorganization of its competitors into a new company which became a subsidiary did not make Atlas "a party to the reorganization." The continuity of interest required by the rule is lacking.Reversed.

MR. JUSTICE ROBERTS took no part in the consideration or decision of the case.

MR. JUSTICE McREYNOLDS, MR. JUSTICE SUTHERLAND and MR. JUSTICE BUTLER are of opinion that the Board of Tax Appeals and the Circuit Court of Appeals reached the right conclusion, and that the judgment below should be affirmed.