Turnbow v. Commissioner
7 L. Ed. 2d 326, 368 U.S. 337, 1961 U.S. LEXIS 1 (1961)
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Rule of Law:
For a stock-for-stock exchange to qualify for tax deferral as a Type B reorganization under § 112(g)(1)(B) of the Internal Revenue Code of 1939, the consideration provided by the acquiring corporation must be solely voting stock. The 'boot' provision of § 112(c)(1), which limits gain recognition to the amount of cash received, cannot be applied to save a transaction that fails to meet this strict 'solely for voting stock' requirement.
Facts:
- Grover D. Turnbow owned all 5,000 shares of International Dairy Supply Company ('International').
- In 1952, Turnbow transferred all of his International stock to Foremost Dairies, Inc. ('Foremost').
- In exchange for his stock, Turnbow received 82,375 shares of Foremost's common voting stock and $3,000,000 in cash.
- The Foremost stock received had a fair market value of $1,235,625.
- Turnbow's basis in the International stock he transferred was $50,000.
- The total value of the stock and cash Turnbow received exceeded his basis by over $4.1 million, resulting in a substantial gain.
Procedural Posture:
- Grover D. Turnbow filed his 1952 income tax return, treating the gain from the transaction as recognizable only to the extent of the cash received.
- The Commissioner of Internal Revenue determined that the entire gain was recognizable and proposed a tax deficiency.
- Turnbow, the petitioner, filed a petition in the Tax Court of the United States for a redetermination of the deficiency.
- The Tax Court, as the court of first instance, held in favor of Turnbow.
- The Commissioner, as appellant, appealed the Tax Court's decision to the U.S. Court of Appeals for the Ninth Circuit.
- The Ninth Circuit, an intermediate appellate court, reversed the decision of the Tax Court.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the issue.
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Issue:
Does the 'boot' provision of § 112(c)(1) of the Internal Revenue Code of 1939 apply to limit the recognition of gain to the extent of cash received in a stock-for-stock-and-cash exchange that does not independently qualify as a 'reorganization' under the strict 'solely for voting stock' definition in § 112(g)(1)(B)?
Opinions:
Majority - Mr. Justice Whittaker
No. The boot provision of § 112(c)(1) does not apply because an actual, qualifying 'reorganization' must exist before that section can become operative. The general rule under § 112(a) is that the entire amount of gain from a sale or exchange of property is recognized for tax purposes. An exception for non-recognition of gain exists under § 112(b)(3) for exchanges of stock pursuant to a 'reorganization.' The definition of a Type B reorganization in § 112(g)(1)(B) explicitly requires the acquisition of another corporation's stock 'in exchange solely for all or a part of its voting stock.' Because Foremost's acquisition of International was for both stock and cash, it was not 'solely for voting stock' and therefore failed to qualify as a reorganization. The petitioner's argument that § 112(c)(1) allows a court to disregard the cash to find a hypothetical reorganization is incorrect. That provision only applies if an exchange would be a valid reorganization but for the fact that the recipient also received 'other property or money' (boot). Since this transaction was never a reorganization to begin with, § 112(c)(1) is inapplicable, and the entire gain must be recognized under the general rule.
Concurring - Mr. Justice Harlan
Mr. Justice Harlan concurred in the result without a written opinion.
Analysis:
This decision solidifies the 'solely for voting stock' requirement as a rigid, bright-line rule for Type B reorganizations, severely limiting transactional flexibility. The Court's holding clarifies that the boot-relaxation rule of § 112(c)(1) is not a curative provision; it cannot save a transaction that fails the fundamental definitional requirements of a reorganization. This established a sequential analysis where the existence of a valid reorganization is a gateway prerequisite to considering the tax treatment of boot. The ruling effectively prevents taxpayers from structuring transactions with mixed consideration (stock and cash from the acquirer) while still benefiting from the partial tax deferral intended for pure reorganizations, thereby forcing a choice between a fully taxable sale or a strict, stock-only reorganization.
