The A corporation brought about a consolidation of three of its
competitors into a new corporation, of which it became the owner of
all the preferred shares and 57% of the common shares. Stockholders
of the consolidated companies received, in exchange for their
shares, shares of the new corporation, shares of the A corporation,
and cash which the A corporation supplied. Held,
corporation was not a "party to a reorganization" under § 112(b)(3)
of the Revenue Act of 1928; its shares received by stockholders of
the consolidated companies were "other property" under § 112(c)(1),
and gain thereon was taxable. Following Groman v. Commissioner,
p. 302 U. S. 82
302 U. S. 458
87 F.2d 827 reversed.
Certiorari, 301 U. S. 78
review a judgment affirming a decision of the Board of Tax Appeals,
33 B.T.A. 10,
Page 302 U. S. 455
which reversed an order of the Commissioner assessing a
deficiency in income tax.
MR. JUSTICE BRANDEIS delivered the opinion of the Court.
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, "a party to the reorganization" of the Peerless Explosives
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 percent. of the common stock of the new
corporation, and, in exchange for the stock in the three companies,
each of the former stockholders received
Page 302 U. S. 456
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 1,344 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 § 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
86 F.2d 670, we granted certiorari in both
In Groman v. Commissioner, ante,
p. 302 U. S. 82
gave the following construction to the reorganization sections here
". . . 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."
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,"
Page 302 U. S. 457
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
not acquire a majority of the shares of the voting stock and a
majority of the shares of all other classes of stock involved,
whereas here the facts were as follows: Atlas acquired
"not only a majority of the voting stock and a majority of the
stock of all other classes of another corporation (the new company)
in the reorganization,
but of all the other corporations
(Peerless and Union) in the reorganization.
"Atlas acquired as part of the plan, substantially all of the
shares of Peerless and Union in direct exchanges with the taxpayers
and the other stockholders of those companies in part consideration
for which it delivered to the shareholders 6,318 shares of Atlas
preferred stock and 8,712 1/2 shares of common."
3. "Atlas, unlike Glidden was a party to all the exchanges,
while the new company was a party only to exchanges with
4. "The stockholders of Peerless and Union did not participate
in the contract or exchange between Atlas and the new company."
Page 302 U. S. 458
Any direct ownership by Atlas of Peerless, Black Diamond, and
Union was transitory, and without real substance; it was part of a
plan which contemplated the immediate transfer of the stock or the
assets or both of the three reorganized companies to the new Atlas
subsidiary. Hence, under the rule stated, the above distinctions
are not of legal significance. The difference in the degree of
stock control by the parent company of its subsidiary, and the
difference in the method or means by which that control was
secured, are not material. The participation of Atlas in the
reorganization of its competitors into a new company which became a
subsidiary did not make Atlas "a party to the reorganization." The
continuity of interest required by the rule is lacking.
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 Appeal, reached the right conclusion, and that the
judgment below should be affirmed.