Helvering v. Bashford

                  SUPREME COURT OF THE UNITED STATES

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 Section 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 received some 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 Section 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 with Commissioner v. Groman, 86 F.2d 670, we granted certiorari in both cases.

In Groman v. 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," although 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 the Groman case which should lead to a different conclusion here. The differences mainly relied upon are these:

     1. In the Groman case, the court found that Glidden did

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.