Helvering v. Gregory

• Decision Date: 19 March 1934
• Docket Number: No. 324.,324.
• Citation: 69 F.2d 809
• Parties: HELVERING, Com'r of Internal Revenue, v. GREGORY.
• Court: U.S. Court of Appeals — Second Circuit

69 F.2d 809 (1934)

HELVERING, Com'r of Internal Revenue, v. GREGORY.

No. 324.

Circuit Court of Appeals, Second Circuit.

March 19, 1934.

Frank J. Wideman, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen. (E. Barrett Prettyman, General Counsel, Bureau of Internal Revenue, and Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., of counsel), for appellant.

Hugh Satterlee, of Washington, D. C., for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

L. HAND, Circuit Judge.

This is an appeal (petition to review), by the Commissioner of Internal Revenue from an order of the Board of Tax Appeals expunging a deficiency in income taxes for the year 1928. The facts were as follows: The taxpayer owned all the shares of the United Mortgage Corporation, among whose assets were some of the shares of another company, the Monitor Securities Corporation. In 1928 it became possible to sell the Monitor shares at a large profit, but if this had been done directly, the United Mortgage Corporation would have been obliged to pay a normal tax on the resulting gain, and the taxpayer, if she wished to touch her profit, must do so in the form of a dividend, on which a surtax would have been assessed against her personally. To reduce these taxes as much as possible, the following plan was conceived and put through: The taxpayer incorporated in Delaware a new company, organized ad hoc, and called the Averill Corporation, to which the United Mortgage Corporation transferred all its shares in the Monitor Securities Corporation, under an agreement by which the Averill Corporation issued all its shares to the taxpayer. Being so possessed of all the Averill shares, she wound up the Averill company three days later, receiving as a liquidating dividend the Monitor shares, which she thereupon sold. It is not disputed that all these steps were part of one purpose to reduce taxes, and that the Averill Corporation, which was in existence for only a few days, conducted no business and was intended to conduct none, except to act as conduit for the Monitor shares in the way we have described. The taxpayer's return for the year 1928 was made on the theory that the transfer of the Monitor shares to the Averill Corporation was a "reorganization" under section 112 (i) (1) (B) of the Revenue Act of 1928 (26 USCA § 2112 (i) (1) (B), being "a transfer by a corporation of * * * a part of its assets to another corporation" in such circumstances that immediately thereafter "the transferor or its stockholders or both are in control of the corporation to which the assets are transferred." Since the transfer was a reorganization, she claimed to come within section 112 (g) of that act, 26 USCA § 2112 (g), and that her "gain" should not be "recognized," because the Averill shares were "distributed, in pursuance of a plan of reorganization." The Monitor shares she asserted to have been received as a single liquidating dividend of the Averill Corporation, and that as such she was only taxable for them under section 115 (c), 26 USCA § 2115 (c) and upon their value less the cost properly allocated to the Averill shares. That cost she determined as that proportion of the original cost of her shares in the United Mortgage Corporation, which the Monitor shares bore to the whole assets of the United Mortgage Corporation. This difference she returned, and paid the tax calculated upon it. The Commissioner assessed a deficiency taxed upon the theory that the transfer of the Monitor shares to the Averill Corporation was not a true "reorganization" within section 112 (i) (1) (B), 26 USCA § 2112 (i) (1) (B), being intended only to avoid taxes. He treated as nullities that transfer, the transfer of the Averill shares to the taxpayer, and the winding up of the Averill Corporation ending in the receipt by her of the Monitor shares; and he ruled that the whole transaction was merely the declaration of a dividend by the United Mortgage Corporation consisting of the Monitor shares in specie, on which the taxpayer must pay a surtax calculated at their full value. The taxpayer appealed and the Board held that the Averill Corporation had been in fact organized and was indubitably a corporation, that the United Mortgage Corporation had with equal certainty transferred to it the Monitor shares, and that the taxpayer had got the Averill shares as part of the transaction. All these transactions being real, their purpose was irrelevant, and section 112 (i) (1) (B) was applicable, especially since it was part of a statute of such small mesh as the Revenue Act of 1928; the finer the reticulation, the less room for inference. The Board therefore expunged the deficiency, and the Commissioner appealed.

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes. U. S. v. Isham, 17 Wall. 496, 506, 21 L. Ed. 728; Bullen v. Wisconsin, 240 U. S. 625, 630, 36 S. Ct. 473, 60 L. Ed. 830. Therefore, if what was done here, was what was intended by section 112 (i) (1) (B), it is of no consequence that it was all an elaborate scheme to get rid of income taxes, as it certainly was. Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. It is quite true, as the Board has very well said, that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that...