Helvering v. Salvage

Background

A taxpayer named Salvage bought shares of a company called Viscose Company and later acquired many additional shares in 1922 for $100 each, agreeing not to compete and giving the company an option to repurchase portions of those shares at par in later years. The old shares were exchanged for preferred and common stock in a new corporation, and Salvage did not report any gain for 1922. In 1929 the new company redeemed the preferred shares, Salvage reported a gain and paid tax, and the Commissioner audited, apportioned the original cost between preferred and common stock, and asserted a deficiency.

Reasoning

The Court considered whether the taxpayer was barred from claiming a different basis because he failed to report a 1922 gain, and whether the repurchase option affected the fair market value used to measure gain in 1929. The Court noted that the government had not raised estoppel before the tax board and that the record did not support estoppel in any event. The Court agreed with the appeals court that where an option to repurchase at par existed in 1922, the market value of the optioned shares could not properly be found to exceed $100 per share, and that the appeals court’s allocation and conclusions were correct. The case was sent back to determine how much overpayment, if any, the taxpayer had made.

Real world impact

The decision means that a company’s contractual buyback right can limit the 1922 market value used to set tax basis, and a tax agency’s estoppel claim must be timely presented. The ruling requires further proceedings to calculate any refund or overpayment owed to the taxpayer.