Turnbow v. Commissioner

Background

A taxpayer owned all 5,000 shares of a small Nevada dairy supply company and, in 1952, sent that stock to a larger New York dairy company in exchange for a small block of the larger company's common stock and $3,000,000 in cash. The taxpayer's cost in the old stock was about $50,000 and his total gain from the exchange exceeded $4.16 million. He reported tax only on the cash, the IRS said the whole gain should be taxed, the Tax Court sided with the taxpayer, and the Ninth Circuit reversed.

Reasoning

The Court's key question was whether a tax rule that protects stock-for-stock exchanges in a qualifying corporate reorganization can be applied by pretending the deal was all stock when it actually included cash. The Court held it cannot. The statute that defines a qualifying reorganization requires that the acquiring company give only its voting stock, and that requirement must actually be met. Section 112(c)(1) only limits immediate tax when part of what is received actually qualifies as tax-free property; it does not let courts assume away the cash. Therefore the exchange was not a statutory reorganization and the full gain is recognized for tax purposes.

Real world impact

Shareholders who get both stock and cash in an acquisition cannot avoid immediate tax simply by treating the stock piece as if it stood alone; the deal must meet the statute's strict reorganization definition in reality. The decision enforces uniform application of the tax code's reorganization rules and resolves a circuit split about these exchanges.

Dissents or concurrances

Justice Harlan agreed with the judgment but wrote separately only to note his concurrence in the result.