JOHN A. NELSON CO.
v.
HELVERING, COMMISSIONER OF INTERNAL REVENUE
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In 1926, John A. Nelson Co. transferred substantially all of its assets to a newly organized corporation in exchange for cash and preferred stock, retaining its corporate existence and a small portion of assets while the Elliott-Fisher Corporation controlled the new corporation through ownership of common stock. The Supreme Court reversed lower court decisions holding that this transaction was not a tax-free reorganization under the Revenue Act of 1926, ruling that a reorganization does not require the selling corporation to dissolve, acquire controlling interest in the purchaser, or participate in management, and that the seller's acquisition of a definite and substantial interest (including preferred stock without voting rights) in the purchasing corporation constitutes a reorganization within the statute's meaning.
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Mr. Justice McReynolds delivered the opinion of the Court.
The petitioner contests a deficiency income assessment made on account of alleged gains during 1926. It claims that the transaction out of which the assessment arose was reorganization within the statute. Section 203, Revenue Act, 1926, c. 27, 44 Stat. 9, 11, is relied upon. The pertinent parts are in the margin of the opinion in Helvering v. Minnesota Tea Co., post, p. 378.
In 1926, under an agreement with petitioner, the Elliott-Fisher Corporation organized a new corporation with 12,500 shares non-voting preferred stock and 30,000 shares of common stock. It purchased the latter for $2,000,000 cash. This new corporation then acquired substantially all of petitioner’s property, except $100,000, in return for $2,000,000 cash and the entire issue of preferred stock. Part of this cash was used to retire petitioner’s own preferred shares, and the remainder and the preferred stock of the new company went to its stockholders. It retained its franchise and $100,000, and continued to be liable for certain obligations. The preferred stock so distributed, except in case of default, had no voice in the control of the issuing corporation.
The Commissioner, Board of Tax Appeals and the court all concluded there was no reorganization. This, we think, was error. The court below thought the facts showed “ that the transaction essentially constituted a sale of the greater part of petitioner’s assets for cash and the preferred stock in the new corporation, leaving the Elliott-Fisher Company in entire control of the new corporation by virtue of its ownership of the common stock.”
“The controlling facts leading to this conclusion are that petitioner continued its corporate existence and its franchise and retained a portion of its assets; that it acquired no controlling interest in the corporation to which it delivered the greater portion of its assets; that there was no continuity of interest from the old corporation to the new; that the control of the property conveyed passed to a stranger, in the management of which petitioner retained no voice. “It follows that the transaction was not part of a strict merger or consolidation or part of something that partakes of the nature of a merger or consolidation and has a real semblance to a merger or consolidation involving a continuance of essentially the same interests through a new modified corporate structure. Mere acquisition by one corporation of a majority of the stock or all the assets of another corporation does not of itself constitute a reorganization, where such acquisition takes the form of a purchase and sale and does not result in or bear some material resemblance to a merger or consolidation.”
True, the mere acquisition of the assets of one corporation by another does not amount to reorganization within the statutory definition. Pinellas Ice Co. v. Commissioner, 287 U. S. 462, so affirmed. But where, as here, the seller acquires a definite and substantial interest in the affairs of the purchasing corporation, a wholly different situation arises. The owner of-preferred stock is not without substantial interest in the affairs of the issuing corporation, although denied voting rights. The statute does not require participation in the management of the purchaser; nor does it demand that the conveying corporation be dissolved. A controlling interest in the transferee corporation is not made a requisite by § 203 (h) (1) (A). This must not be confused with par. (h) (2).
Finally, as has been pointed out in the Minnesota Tea case, supra, par. (h) (1) (B) was not intended to modify the provisions of par. (h) (1) (A). It describes a class. Whether some overlapping is possible is not presently important.
The judgment below must be
Reversed.
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Cited By (35 total)
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LeTULLE v. Scofield, 308 U.S. 415 (U.S. 1940)…t Court of Appeals. Affirmed. § 112 (i) of the Revenue Act of 1928, c. 852, 45 Stat. 791, 818. 103 F. 2d 20. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U S. 462. Helvering v. Minnesota Tea Co., 296 U. S. 378. Nelson Co. v. Helvering, 296 U. S. 374. 45 Stat. 816, 818. See Helvering v. Watts, 296 U. S. 387. Worcester Salt Co. v. Commissioner, 75 F. 2d 251; Lilienthal v. Commissioner, 80 F. 2d 411, 413; Burnham v. Commissioner, 86 F. 2d 776; Commissioner v. Kitselman, 89 F. 2d 458; Commissione…
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Groman v. Commissioner of Internal Revenue, 302 U.S. 82 (U.S. 1937)…U. S. 387. Compare Helvering v. Minnesota Tea Co., 296 U. S. 378; G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389. Section 112, Subsections (i) (1) (B) and (j). Pinellas Ice Co. v. Commissioner, 287 U. S. 462, 470; Nelson Co. v. Helvering, 296 U. S. 374, 377; Helvering v. Minnesota Tea Co., 296 U. S. 378, 385; G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389, 391.…
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Starr v. Commissioner of Internal Revenue, 82 F.2d 964 (4th Cir. 1936)…be no doubt but that the facts present a clear case of reorganization within the meaning of section 112 (i) (1) of the Revenue Act of 1928, 45 Stat. 816, 818. Helvering v. Minnesota Tea Co., 56 S.Ct. 269, 80 L.Ed. —; John A. Nelson Co. v. Helvering, 56 S.Ct. 273, 80 L.Ed. —; Helvering v. Watts, 56 S.Ct. 275, 80 L.Ed. —; G. & K. Mfg. Co. v. Helvering, 56 S.Ct. 276, 80 L.Ed. —. Counsel for the Commissioner contend, however, that, in reversing the Board on the question of reorganization, we should sustain the…
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- Pinellas ICE & Cold Storage Co. v. Commissioner of Internal Revenue, 287 U.S. 462 (U.S. 1933)