No. The court said the whole plan was a sham designed to avoid taxes, not a real business reorganization. The temporary company, Averill, didn't conduct any actual business; it was just a tool created for a few days to pass the stock to Mrs. Gregory. The law providing tax breaks for reorganizations is meant for real business deals that change how a company operates, not for elaborate schemes that are just for tax dodging. The court decided to look at the substance of what happened, not just the form.

No, it wasn't a real reorganization. The whole setup was just to move shares around and save on taxes, not to do any real business. The new company didn't do anything else and was shut down right after. The law allows people to arrange their affairs to lower taxes, but this doesn't work when the actions don't match the law's requirements. The law looks at the true nature of what was done, not just the appearance. So, the decision that she has to pay taxes like she got a regular payment is correct.

<?xml version="1.0" encoding="utf-8"?> <opinion type="majority"> <author id="b533-3"> *467 Mr. Justice Sutherland </author> 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 § 112 (g) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 818, set forth later in this opinion. To that end, she caused the Averill Corporation to be organized under the laws of Delaware oh 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. 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 *468 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. Section 112 of the Revenue Act of 1928 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: <blockquote id="b534-6"> “ Sec. 112. (g) Distribution of stock on reorganizes tion. — 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 or securities shall be recognized. . . . </blockquote> <blockquote id="b534-7"> “(i) Definition of reorganization. — As used in this section . . . </blockquote> <blockquote id="b534-8"> “(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, . . .” </blockquote> 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 *469 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; Superior Oil Co. v. Mississippi, 280 U. S. 390, 395-6; 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. 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” [§ 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 purpose — a 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. *470 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. Judgment affirmed. </opinion>

"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."

The analysis revealed a transaction which the Court characterized as "an operation having no business or corporate purpose—a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character," id., and as "an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else."

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes".

—"the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended."

It determined that the Parallel C structures violated rules for accrual of fees for services, see 26 USC § 461 (h), requirements for the deduction of ordinary and necessary business expenses, see 26 USC § 162 (a), and the principle that structures creating tax benefits must have economic substance.

—the Supreme Court affirmed the denial of claimed deductions for losses and expenses incurred in a corporate reorganization.

—holding that if the transaction "in reality was effected" in substance as well as in form, "the ulterior [tax avoidance] purposes... will be disregarded

Although it is true that taxpayers have the right to organize their business affairs so as to minimize taxation

"*** 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."

It is well established that, for Federal tax purposes, the substance of the transaction, rather than the form in which the transaction is cast, governs its tax consequences.

No. A corporate transaction will not be treated as a statutory reorganization for tax purposes if it lacks any genuine business or corporate purpose. The court reasoned that the statutory definition of reorganization implies a continuation of business in a modified corporate form. Here, the creation and immediate dissolution of Averill Corporation was not a reorganization of a business but merely a 'devious form of conveyance' disguised as one. The transaction was a 'mere device' with the sole object of transferring corporate shares to the petitioner while avoiding the tax liability that would have resulted from a direct dividend. Because the transaction on its face lay 'outside the plain intent of the statute,' the motive of tax avoidance becomes irrelevant, as the transaction itself was a sham without substance.

No, the transaction was not a 'reorganization' within the meaning of the statute because it lacked a legitimate business purpose and was merely a device to transfer shares and avoid taxes. The creation of Averill Corporation served no business function and was immediately dissolved after the transfer. While taxpayers have the right to decrease their taxes by lawful means, the motive for tax avoidance is irrelevant when the transaction itself falls outside the intent of the statute. The substance over form principle dictates that the transaction's real character, being devoid of any genuine business purpose, cannot be disguised as a corporate reorganization to exploit tax benefits. Therefore, I affirm the judgment of the lower court.

Gregory v. Helvering

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