The Petitioner was the owner of all the stock of United Mortgage Corporation. This petitioner wanted just one thing and that was creating a means of selling these shares for her individual profit at the same time diminish the amount of income tax which would result from a direct transfer by way of dividend.
She later concluded that she had to bring about a reorganization of the system according to section 112 of the Revenue Act of 1928. Later on, the shares were issued to the petitioner and delivered to the Averill corporation. No transactions occured after that and immediately, the petitioner sold the shares and recognized a capital net gain of $76,007.88 when she returned for taxation, based on an apportioned value of $57,325.45 (Chirelstein, 1968). Even when the reorganization was ineffective, she was liable to pay a more considerable amount of tax from the transaction values. The Internal Revenue Commissioner was of the opinion that the attempted reorganization had no substance and that the petitioner was liable for tax payment.
In deciding the case, the judge used section 112 of the Revenue Act of 1928 that dealt with gains or losses from property sale or exchange. The law states that “in the event of stock distribution upon reorganization to a shareholder or party to the company with no surrender by the shareholder, no gains received from the stock shall be acknowledged” (Chirelstein, 1968). The judge in the case defined reorganization according to the Act as the transfer of assets by a corporation to another corporation immediately after the transferor is in control of the company of transfer. On the taxpayer’s behalf, a statutory reorganization was accomplished, and the motive to evade tax payment would not alter the statute’s allowance. The effected change within the meaning defined would render the disregard of the motive. A taxpayer’s legal right to decrease or avoid tax payments within the law permits is undoubted.
The finding of the judge was that the operation had no purpose of business but a means of concealing the real goal to transfer corporate shares to the petitioner. With unreasonable doubt, there was the creation of a valid corporation but was nothing short of a contrivance. Besides, the bringing of its existence was for the initially intended purpose and no other, and after exercising the function, it was ended. The judge affirmed the case by using “res ipsa loquitur,” meaning facts speak for themselves (Chirelstein, 1968). He decided that the overall undertaking was nothing more than a scheming form of transference concealed as a corporate restructuring. The rule which excluded the tax evasion motive was irrelevant to the position. Therefore, the case was ruled in favor of Gregory, the taxpayer.
In the appeal, the tax liability would be present as if the United Corporation had made a dividend payment to her comprising of the realized amount from the shares sale. In a Board of Tax Appeals proceeding, the body repealed the view of the commissioner and upheld that of the petitioner. The Circuit Court of Appeals reviewed the decision and overturned the board’s opinion. The court sustained that of the commissioner giving a reason that no reorganization occurred within the statute’s definition.
Chirelstein, M. (1968). Learned Hand’s Contribution to the Law of Tax Avoidance. The Yale Law Journal, 77(3), 440. From http://dx.doi.org/10.2307/794940
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