1. A transaction whereby one corporation transfers all of its
property to another corporation for cash and bonds of the
transferee, retaining no other stake in the enterprise, is not a
tax-free "reorganization" within the meaning of § 112(i) of the
Revenue Act of 1928, but is a sale or exchange. P.
308 U. S.
419.
2. A respondent or an appellee may urge any matter appearing in
the record in support of a judgment, but he may not attack it, even
on grounds asserted in the court below, in an effort to have this
Court reverse it, when he himself has not sought review of the
whole judgment, or of that portion which is adverse to him. P.
308 U. S.
421.
103 F.2d 20 affirmed.
Certiorari,
post, p. 531, to review the reversal of a
judgment against the Collector for taxes unlawfully collected. The
plaintiff sued individually and as executor of his wife's will and
as her representative in the community property. The actions were
consolidated and tried without a jury.
Page 308 U. S. 416
MR. JUSTICE ROBERTS delivered the opinion of the Court.
We took this case because the petition for certiorari alleged
that the Circuit Court of Appeals had based its decision on a point
not presented or argued by the litigants, which the petitioner had
never had an opportunity to meet by the production of evidence.
The Gulf Coast Irrigation Company was the owner of irrigation
properties. Petitioner was its sole stockholder. He personally
owned certain lands and other irrigation properties. November 4,
1931, the Irrigation Company, the Gulf Coast Water Company, and the
petitioner, entered into an agreement which recited that the
petitioner owned all of the stock of the Irrigation Company,
described the company's properties, and stated that, prior to
conveyance to be made pursuant to the contract, the Irrigation
Company would be the owner of certain other lands and irrigation
properties. These other lands and properties were those which the
petitioner individually owned. The contract called for a conveyance
of all the properties owned, and to be owned, by the Irrigation
Company for $50,000 in cash and $750,000 in bonds of the Water
Company, payable serially over the period January 1, 1933, to
January 1, 1944. The petitioner joined in this agreement as a
guarantor of the title of the Irrigation Company and for the
purpose of covenanting that he would not personally enter into the
irrigation business within a fixed area during a specified period
after the execution of the contract. Three days later, at a special
meeting of stockholders of the Irrigation Company, the proposed
reorganization was approved, the minutes stating that the taxpayer,
"desiring also to reorganize his interest in the properties," had
consented to be a party to the reorganization. The capital stock of
the Irrigation Company was
Page 308 U. S. 417
increased, and thereupon the taxpayer subscribed for the new
stock and paid for it by conveyance of his individual
properties.
The contract between the two corporations was carried out
November 18, with the result that the Water Company became owner of
all the properties then owned by the Irrigation Company, including
the property theretofore owned by the petitioner individually.
Subsequently, all of its assets, including the bonds received from
the Water Company, were distributed to the petitioner. The company
was then dissolved. The petitioner and his wife filed a tax return
as members of a community in which they reported no gain as a
result of the receipt of the liquidating dividend from the
Irrigation Company. The latter reported no gain for the taxable
year in virtue of its receipt of bonds and cash from the Water
Company. The Commissioner of Internal Revenue assessed additional
taxes against the community, as individual taxpayers, by reason of
the receipt of the liquidating dividend, and against the petitioner
as transferee of the Irrigation Company's assets in virtue of the
gain realized by the company on the sale of its property. The tax
was paid, and claims for refund were filed. Petitioner's wife
having died, he brought suit individually and as her executor and
representative in the community property against the respondent to
recover the amount of the additional taxes so assessed. He alleged
that the transaction constituted a tax-exempt reorganization as
defined by the Revenue Act. [
Footnote 1] The respondent traversed the allegations of
the complaints, and the causes were consolidated and tried by the
District Court without a jury. The respondent's contention that the
transaction amounted merely to a sale of assets by the petitioner
and the Irrigation Company and did not fall within the
statutory
Page 308 U. S. 418
definition of a tax-free reorganization was overruled by the
District Court, and judgment was entered for the petitioner.
The respondent appealed, asserting error on the part of the
District Court in matters not now material and also assigning as
error the court's holding that the transaction constituted a
nontaxable reorganization.
The Circuit Court of Appeals concluded that, as the Water
Company acquired substantially all the properties of the Irrigation
Company, there was a merger of the latter within the literal
language of the statute, but held that, in the light of the
construction this Court has put upon the statute, the transaction
would not be a reorganization unless the transferor retained a
definite and substantial interest in the affairs of the transferee.
It thought this requirement was satisfied by the taking of the
bonds of the Water Company, and therefore agreed with the District
Court that a reorganization had been consummated. It added,
however, "We find a reason for reversing the judgment which has not
been argued." Adverting to the fact that the transfer of the
petitioner's individual properties to the Irrigation Company was
for the purpose of including them in the latter's assets to be
transferred in the proposed reorganization, the court said the
statute did not extend to the reorganization of an individual's
business or affairs, and the transaction was a reorganization
within the meaning of the Revenue Act as respects the corporation's
assets owned on November 4, 1931, but not as respects the
petitioner's individual properties included in the sale. It
concluded:
"Only so much of the consideration as represents the price of
the properties and business of the Irrigation Company is entitled
to be protected from taxation as arising from a reorganization. It
does not appear what the proper apportionment is. The Burden was
upon LeTulle to show not only that he had been illegally taxed, but
how much
Page 308 U. S. 419
of what was collected from him was illegal. The latter, he did
not do. The evidence does not support the judgment for the full
amount paid by him. It is accordingly reversed, that further
proceedings may be had consistent herewith. [
Footnote 2]"
The petitioner sought certiorari, asserting that the Circuit
Court of Appeals had departed from the usual and accepted course of
judicial proceedings by deciding the cause upon a ground not
presented or argued, and hence had deprived the petitioner of his
day in court. The respondent, though he had contended below that
the transaction in question did not amount to a tax-free statutory
reorganization, did not file a cross-petition asking for a review
of that part of the judgment exempting from taxation gain to the
Irrigation Company arising from the transfer of its assets owned by
it on and prior to November 4, 1931, and the part of the
liquidating dividend attributable thereto.
We find it unnecessary to consider petitioner's contention that
the Circuit Court of Appeals erred in deciding the case on a ground
not raised by the pleadings, not before the trial court, not
suggested or argued in the Circuit Court of Appeals, and one as to
which the petitioner had never had the opportunity to present his
evidence, since we are of opinion that the transaction did not
amount to a reorganization, and that therefore the petitioner
cannot complain, as the judgment must be affirmed on the ground
that no tax-free reorganization was effected within the meaning of
the statute.
Section 112[i] provides, so far as material:
"(1) The term 'reorganization' means (A) a merger or
consolidation (including the acquisition by one corporation of at
least a majority of the voting stock and at least a majority of the
total number of shares of all other
Page 308 U. S. 420
classes of stock of another corporation, or substantially all
the properties of another corporation). . . ."
As the court below properly stated, the section is not to be
read literally, as denominating the transfer of all the assets of
one company for what amounts to a cash consideration given by the
other a reorganization. We have held that, where the consideration
consists of cash and short-term notes, the transfer does not amount
to a reorganization within the true meaning of the statute, but is
a sale upon which gain or loss must be reckoned. [
Footnote 3] We have said that the statute was
not satisfied unless the transferor retained a substantial stake in
the enterprise and such a stake was thought to be retained where a
large proportion of the consideration was in common stock of the
transferee, [
Footnote 4] or
where the transferor took cash and the entire issue of preferred
stock of the transferee corporation. [
Footnote 5] And, where the consideration is represented by
a substantial proportion of stock and the balance in bonds, the
total consideration received is exempt from tax under §§ 112(b)(4)
and 112(g). [
Footnote 6]
In applying our decision in the
Pinellas case,
supra, the courts have generally held that receipt of
long-term bonds, as distinguished from short-term notes,
constitutes the retention of an interest in the purchasing
corporation. There has naturally been some difficulty in
classifying the securities involved in various cases. [
Footnote 7]
We are of opinion that the term of the obligations is not
material. Where the consideration is wholly in the
Page 308 U. S. 421
transferee's bonds, or part cash and part such bonds, we think
it cannot be said that the transferor retains any proprietary
interest in the enterprise. On the contrary, he becomes a creditor
of the transferee, and we do not think that the fact referred to by
the Circuit Court of Appeals, that the bonds were secured solely by
the assets transferred and that, upon default, the bondholder would
retake only the property sold, changes his status from that of a
creditor to one having a proprietary stake within the purview of
the statute.
We conclude that the Circuit Court of Appeals was in error in
holding that, as respects any of the property transferred to the
Water Company, the transaction was other than a sale or exchange
upon which gain or loss must be reckoned in accordance with the
provisions of the revenue act dealing with the recognition of gain
or loss upon a sale or exchange.
Had the respondent sought and been granted certiorari, the
petitioner's tax liability would, in the view we have expressed, be
substantially increased over the amount found due by the Circuit
Court of Appeals. Since the respondent has not drawn into question
so much of the judgment as exempts from taxation gain to the
Irrigation Company arising from transfer of its assets owned by it
on and prior to November 4, 1931, and the part of the liquidating
dividend attributable thereto, we cannot afford him relief from
that portion of the judgment which was adverse to him.
A respondent or an appellee may urge any matter appearing in the
record in support of a judgment, [
Footnote 8] but he may not attack it, even on grounds
asserted in the court below, in an effort to have this Court
reverse it when
Page 308 U. S. 422
he himself has not sought review of the whole judgment, or of
that portion which is adverse to him. [
Footnote 9]
The judgment of the Circuit Court of Appeals is affirmed, and
the cause is remanded to the District Court with directions to
proceed in accordance with the opinion and mandate of the Circuit
Court of Appeals.
Affirmed.
[
Footnote 1]
Sec. 112(i) of the Revenue Act of 1928, c. 852, 45 Stat. 791,
818.
[
Footnote 2]
103 F.2d 20, 22.
[
Footnote 3]
Pinellas Ice & Cold Storage Co. v. Commissioner,
287 U. S. 462.
[
Footnote 4]
Helvering v. Minnesota Tea Co., 296 U.
S. 378.
[
Footnote 5]
Nelson Co. v. Helvering, 296 U.
S. 374.
[
Footnote 6]
45 Stat. 816, 818.
See Helvering v. Watts, 296 U.
S. 387.
[
Footnote 7]
Worcester Salt Co. v. Commissioner, 75 F.2d 251;
Lilienthal v. Commissioner, 80 F.2d 411, 413;
Burnham
v. Commissioner, 86 F.2d 776;
Commissioner v.
Kitselman, 89 F.2d 458;
Commissioner v. Freund, 98
F.2d 201;
Commissioner v. Tyng, 106 F.2d 55;
L. &
E. Stirn v. Commissioner, 107 F.2d 390.
[
Footnote 8]
Langnes v. Green, 282 U. S. 531,
282 U. S.
535-537;
Helvering v. Gowran, 302 U.
S. 238,
302 U. S. 245;
Ticonic Bank v. Sprague, 303 U. S. 406,
303 U. S. 410,
note 3.
[
Footnote 9]
The Stephen Morgan, 94 U. S. 599;
Mount Pleasant v. Beckwith, 100 U.
S. 514,
100 U. S. 527;
United States v. Blackfeather, 155 U.
S. 180,
155 U. S. 186;
Landram v. Jordan, 203 U. S. 56,
203 U. S. 62;
Bothwell v. United States, 254 U.
S. 231,
254 U. S. 233;
United States v. American Railway Express Co.,
265 U. S. 425,
265 U. S. 435;
Morley Construction Co. v. Maryland Casualty Co.,
300 U. S. 185,
300 U. S.
191.