United States v. Hendler, Transferee
303 U.S. 564 (1938)
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Rule of Law:
In a corporate reorganization, an acquiring corporation's assumption and payment of a target corporation's liabilities constitutes taxable income to the target, as it is considered "other property or money" that is not distributed to the target's stockholders under the relevant statute.
Facts:
- Hendler Creamery Co., Inc. ('Hendler') had a bonded indebtedness of $534,297.40.
- The Borden Company ('Borden') and Hendler entered into a plan of corporate reorganization, which was effectively a merger.
- Pursuant to the reorganization plan, Borden acquired all of Hendler's assets.
- In exchange for the assets, Borden not only provided stock but also assumed and paid off Hendler's $534,297.40 bonded indebtedness.
- The funds used by Borden to satisfy Hendler's debt were paid to Hendler's creditors, not distributed to Hendler's stockholders.
Procedural Posture:
- The Commissioner of Internal Revenue assessed a tax deficiency against Hendler Creamery Co., Inc., treating the assumption of its debt as taxable gain.
- The respondent, as transferee of Hendler, challenged the tax assessment in the U.S. District Court.
- The District Court, a court of first instance, ruled in favor of the respondent, holding that the gain was not taxable.
- The United States government, as appellant, appealed the decision to the U.S. Court of Appeals.
- The Court of Appeals, an intermediate appellate court, affirmed the District Court's judgment, agreeing that the gain was exempt from taxation.
- The United States government petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
In a corporate reorganization, does an acquiring corporation's assumption and payment of the target corporation's liabilities constitute taxable gain to the target corporation under the Revenue Act of 1928?
Opinions:
Majority - Justice Black
Yes. An acquiring corporation's assumption and payment of a target corporation's debt is taxable gain to the target. The court reasoned that the transaction is substantively equivalent to the acquiring corporation paying cash directly to the target, which then uses the cash to pay its creditors. The discharge of a liability is a real and substantial gain, constituting income. Under Section 112 of the Revenue Act of 1928, this gain is considered 'other property or money,' not 'stock or securities.' To be exempt from taxation, such 'other property or money' must be distributed to the target corporation's stockholders pursuant to the reorganization plan. Because the payment went to Hendler's creditors rather than its stockholders, the statutory exemption does not apply, and the gain is taxable.
Analysis:
The Supreme Court's decision in Hendler established that the assumption of liabilities in a corporate reorganization constitutes taxable 'boot' (a term for other property or money). This holding created significant practical and economic problems for routine business reorganizations, as nearly all such transactions involve the assumption of the target's liabilities. The decision was so disruptive to normal business practices that Congress acted swiftly to legislatively overrule it, enacting a statutory provision (now § 357 of the Internal Revenue Code) that generally permits the assumption of liabilities in a reorganization without triggering immediate tax, absent a tax-avoidance purpose. Thus, while Hendler's specific holding is no longer good law, it remains a landmark case for understanding the statutory development of tax-free reorganizations and the fundamental concept of what constitutes a taxable gain.
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