Gregory v. Helvering

Background

A woman who owned all the stock of a mortgage company sought to move 1,000 shares of another company into her own hands without treating the transfer as a dividend. To do this she created a new corporation, had the mortgage company transfer the 1,000 shares to that new firm in exchange for all its stock, then dissolved the new firm and received the shares back, which she sold and reported as a capital gain. The tax commissioner treated the sequence as a taxable dividend; the Board of Tax Appeals sided with the shareholder, but a federal appeals court reversed.

Reasoning

The Court considered whether this sequence qualified as a statutory “reorganization” under the Revenue Act of 1928, which covers transfers of assets from one corporation to another when control conditions are met. The Court said the statute requires a transfer made in pursuit of reorganizing corporate business, not a transfer whose only purpose is to shift property and lower taxes. Because the newly created corporation had no independent business purpose and existed only to move the shares and then die, the Court treated the operation as a sham and not a true reorganization.

Real world impact

The ruling means tax officials can look beyond formal steps to the real character of transactions and will not honor one-time, purposeless corporate creations as reorganizations. Taxpayers who create short-lived companies only to shift assets will face dividend treatment and related taxes. This decision affirmed the appeals court judgment and is a final ruling on the case.