Source: https://supreme.justia.com/cases/federal/us/302/82/
Timestamp: 2019-04-24 12:10:37+00:00

Document:
1. Section 112(i)(2) of the Revenue Act of 1928 declaring that the term party to a reorganization "includes" a corporation resulting from a reorganization, and both corporations when one acquires specified proportions of stock of another, is not an exclusive definition, but rather is intended to enlarge the meaning of the term beyond its ordinary connotation. P. 302 U. S. 85.
2. Pursuant to an agreement between a corporation (G) and shareholders of another corporation (I): -- G formed a new corporation (O), subscribing for its common stock and paying for it with cash and G's own preference shares; I's shareholders sold their shares to O and received from O a consideration made up of preference shares of G, and of O and cash; I then transferred its assets to O, and was dissolved. Held that G was not "a party" to the reorganization, and that the shares of G's preference stock received by I shareholders from O were a basis for computing taxable gain. Revenue Act of 1928, § 112. P. 302 U. S. 88.
Certiorari, 301 U.S. 677, to review a judgment overruling an order of the Board of Tax Appeals and sustaining an income tax deficiency assessment.
January 29, 1929, the petitioner, and all other shareholders of Metals Refining Company, an Indiana corporation, hereinafter designated Indiana, entered into a contract with the Glidden Company, an Ohio corporation, reciting that the shareholders of Indiana were desirous of merging and consolidating the properties of their company with Glidden and with a corporation Gildden was to organize under the laws of Ohio, which corporation we shall call Ohio. The shareholders covenanted that they would assign their shares to Ohio, which was to have a specified capital structure divided into preferred and common shares, and Gildden covenanted that it would issue and deliver, or cause to be issued and delivered, to the shareholders a stated number of shares of its own prior preference stock at an agreed valuation, a stated number of shares of the preferred stock of Ohio, also at an agreed valuation, and sufficient cash to equal the appraised value of Indiana's assets as of March 1, 1929, and that, after the exchange of stock, Gildden would cause Indiana to transfer its assets to Ohio.
stock of Ohio valued at $500,000, and $153,036 in cash. Indiana then transferred its assets to Ohio, and was dissolved.
"No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization."
If the transaction involves the receipt of such stock or securities and "also of other property or money," then the gain, if any, is to be recognized in an amount not in excess of the sum of such money and the fair market value of such other property. Section 112(c)(1).
voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (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, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected."
"The term 'a party to a reorganization' includes a corporation resulting from a reorganization, and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation."
It is agreed that, under the plain terms of the statute, the cash received by the petitioner was income, and that, as the stock of Ohio was obtained in part payment for that of Indiana, the exchange, to that extent, did not give rise to income to be included in the computation of petitioner's tax.
The question is whether that portion of the consideration consisting of prior preference shares of Glidden should be recognized in determining petitioner's taxable gain. The decision of this question depends upon whether Glidden's stock was that of a party to the reorganization, for, if so, the statute declares gain or loss due to its receipt shall not be included in the taxpayer's computation of income for the year in which the exchange was made.
it did not acquire a majority of the shares of voting stock and a majority of the shares of all other classes of stock of any other corporation in the reorganization. The Circuit Court of Appeals thought the section was intended as a definition of the term party as used in the act, and excluded all corporations not specifically described. It therefore held Glidden could not be considered a party to the reorganization.
"The terms 'includes' and 'including,' when used in a definition contained in this Act, shall not be deemed to exclude other things otherwise within the meaning of the term defined."
Plainly, however, there may be corporate parties to reorganizations, within the meaning of the statute, other than those enumerated in § 112(i)(2). Thus, if corporations A and B transfer all their assets to C, a new corporation, in exchange for all C's stock, the stock received is not a basis for calculation of gain on the exchange. [Footnote 7] A and B are so evidently parties to the reorganization that we do not need § 112(i)(2) to inform us of the fact.
will own 80 percent of every class of B's outstanding stock, the consummation of the agreement will be a reorganization under the act. [Footnote 8] Unquestionably the gain ensuing upon the exchange of stock by A's shareholders will not be taxable, since the stock received by them is that of B, a party to the reorganization, though B is not described as such in § 112(i)(2). We must, therefore, irrespective of Glidden's failure to qualify as a party under that section, determine whether its relation to the reorganization is that of a party within the ordinary connotation of the term.
"other property" mentioned in § 112(c)(1), and must be reckoned in computing gain or loss to the recipient. Glidden was, in the transaction in question, no more than the efficient agent in bringing about a reorganization. It was not, in the natural meaning of the term, a party to the reorganization.
It is argued, however, that Ohio was the alter ego of Glidden; that, in truth, Glidden was the principal, and Ohio its agent; that we should look at the realities of the situation, disregard the corporate entity of Ohio, and treat it as Glidden. But to do so would be to ignore the purpose of the reorganization sections of the statute, which, as we have said, is that, 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. [Footnote 9] If cash or "other property" -- that is, property other than stock or securities of the reorganized corporations -- is received, present gain of loss must be recognized. Was not Glidden's prior preference stock "other property" in the sense that its ownership represented a participation in assets in which Ohio, and its shareholders through it, had no proprietorship? Was it not "other property" in the sense that, qua that stock, the shareholders of Indiana assumed a relation toward the conveyed assets not measured by a continued substantial interest in those assets in the ownership of Ohio, but an interest in the assets of Glidden a part of which was the common stock of Ohio? These questions, we think, must be answered in the affirmative. To reject the plain meaning of the term "party,"
and to attribute that relation to Glidden, would be not only to disregard the letter, but also to violate the spirit, of the Revenue Act.
We hold that Glidden was not a party to the reorganization, and the receipt of its stock by Indiana's shareholders in exchange, in part, for their stock was the basis for computation of taxable gain to them in the year 1929.
Ch. 852, 45 Stat. 791, 816.
See Sage v. Commissioner, 83 F.2d 221; Commissioner v. Fifth Avenue Bank, 84 F.2d 787; Commissioner v. Bashford, 87 F.2d 827.
"The term 'a party to a reorganization' . . . includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation. This definition is not an all-inclusive one, but simply enumerates certain cases with respect to which doubt might arise."
Regulations 65, art. 1577, applicable to § 203(h)(2) of the Revenue Act of 1924; Regulations 69, art. 1577, applicable to § 203(h)(2) of the Revenue Act of 1926.
Compare Helvering v. Watts, 296 U. S. 387.
Compare Helvering v. Minnesota Tea Co., 296 U. S. 378; G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389.
Section 112, subsections (i)(1)(B) and (j).
Pinellas Ice Co. v. Commissioner, 287 U. S. 462, 287 U. S. 470; Nelson Co. v. Helvering, 296 U. S. 374, 296 U. S. 377; Helvering v. Minnesota Tea Co., 296 U. S. 378, 296 U. S. 385; G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389, 296 U. S. 391.

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