Source: http://www.chanrobles.com/usa/us_supremecourt/331/737/case.php
Timestamp: 2017-10-23 11:29:07
Document Index: 488239494

Matched Legal Cases: ['§ 112', '§ 22', '§ 112', '§ 112', '§ 112', '§ 202', '§ 19', '§ 112', '§ 112', '§ 112', '§ 112']

The proper construction of provisions of the Internal Revenue Code relating to corporate reorganizations is involved in both these cases. Their importance to the Treasury, as well as to corporate enterprise, led us to grant certiorari, 329 U.S. 695. While there are differences in detail to which we shall refer, the two cases may be disposed of in one opinion. chanroblesvirtualawlibrary
The Commissioner charged to the taxpayer as income the full value of the debentures. The Tax Court affirmed the Commissioner's determination, against the taxpayer's contention that, as a "recapitalization," the transaction was a tax-free "reorganization," and that the debentures were "securities in a corporation a party to a reorganization," "exchanged solely for stock or securities in such corporation" "in pursuance of a plan of reorganization," and, as such, no gain is recognized for income tax purposes. Internal Revenue Code, §§ 112(g)(1)(E) and 112(b)(3). The Tax Court found that the recapitalization had "no legitimate corporate business purpose," and was therefore not a "reorganization" within the statute. The distribution of debentures, it concluded, was a disguised dividend, taxable as earned income under §§ 22(a) and 115(a) and (g). 4 T.C. 897. The Circuit Court of Appeals for the Third Circuit, sitting en banc, affirmed, two judges dissenting. 155 F.2d 237. chanroblesvirtualawlibrary
Unless a transaction is a reorganization contemplated by § 112(g), any exchange of "stock or securities" in connection with such transaction, cannot be "in pursuance of the plan of reorganization" under § 112(b)(3). While § 112(g) informs us that "reorganization" means, among other things, "a recapitalization," it does not inform us what "recapitalization" means. "Recapitalization," in connection with the income tax, has been part of the revenue laws since 1921. 42 Stat. 227, 230, § 202(c)(2). Congress has never defined it, and the Treasury Regulations shed only limited light. Treas.Reg. 103, § 19.112(g). One thing is certain. Congress did not incorporate some technical concept, whether that of accountants or of other specialists, into § 112(g), assuming that there is agreement among specialists as to the meaning of recapitalization. And so recapitalization, as used in § 112(g), must draw its meaning from its function in that section. It is one of the forms of reorganization which obtains the privileges afforded by § 112(g). Therefore, "recapitalization" must be construed with reference to the presuppositions and purpose of § 112(g). It was not the purpose of the reorganization provision to exempt from payment of a tax what, as a practical matter, is realized gain. Normally, a distribution by a corporation, whatever form it takes, is a definite and rather unambiguous event. It furnishes the proper occasion for the determination and taxation of gain. But there are circumstances where a formal distribution, directly or through exchange of securities, represents merely a new form of the previous participation in an enterprise, involving no change of substance in the rights and relations of the interested parties one to another or to the corporate assets. As to these, Congress has said that they are not to be deemed significant occasions for determining taxable gain. chanroblesvirtualawlibrary
No doubt there was a recapitalization of the Bazley corporation in the sense that the symbols that represented its capital were changed, so that the fiscal basis of its operations would appear very differently on its books. But the form of a transaction as reflected by correct corporate accounting opens questions as to the proper application of a taxing statute; it does not close them. Corporate accounting may represent that correspondence between change in the form of capital structure and essential identity in fact which is of the essence of a transaction chanroblesvirtualawlibrary
What have we here? No doubt, if the Bazley corporation had issued the debentures to Bazley and his wife without any recapitalization, it would have made a taxable distribution. Instead, these debentures were issued as part of a family arrangement, the only additional ingredient being an unrelated modification of the capital account. The debentures were found to be worth at least their principal amount, and they were virtually cash, because they were callable at the will of the corporation, which, in this case, was the will of the taxpayer. One does not have to pursue the motives behind actions, even in the more ascertainable forms of purpose, to find, as did the Tax Court, that the whole arrangement took this form, instead of an outright distribution of cash or debentures, chanroblesvirtualawlibrary
In the Adams case, No. 209, the taxpayer owned all but a few of the 5914 shares of stock outstanding out of an authorized 6000, par value $100. By a plan of reorganization, the authorized capital was reduced by half, to $295,700, divided into 5914 shares of no par value but having a stated value of $50 per share. The 5914 old shares were cancelled, and the corporation issued in exchange therefor 5914 shares of the new no-par common stock and 6 percent 20-year debenture bonds in the principal amount of $295,700. The exchange was made on the basis of one new share of stock and one $50 bond for each old share. The old capital account was debited in the sum of $591,400, a new no-par capital account was credited with $295,700, and the balance of $295,700 was chanroblesvirtualawlibrary