Facts of The Case
Mrs. Evelyn Gregory was the owner of all the shares of a company called United Mortgage Company (“United”). United Mortgage in turn owned 1,000 shares of stock of a company called Monitor Securities Corporation (“Monitor”).
On September 18, 1928, Mrs. Gregory created a new company called Averill Corporation (“Averill”). Three days after she created Averill, she had United transfer its Monitor stock to Averill and she had Averill issue all Averill shares to herself (not to United).
Mrs. Gregory now owned 100% of United, which no longer owned Monitor shares, and 100% of Averill, which only owned 1,000 shares of Monitor.
On September 24, Mrs. Gregory dissolved Averill and had all its assets — the 1,000 Monitor shares — distributed to herself. On the same day, she sold the Monitor shares to a third party for $133,333.33, but claiming cost of $57,325.45, she claimed that she should be taxed on a capital net gain on $76,007.88.
On her 1928 Federal income tax return, Mrs. Gregory treated the transaction as a tax-free corporate reorganization under section 112 of the Revenue Act of 1928, the tax statute applicable at that time. Indeed, the legal form of this convoluted set of transactions arguably appeared to qualify under the literal language of the statute.
However, the Commissioner of Internal Revenue (Mr. Guy Helvering) argued that in terms of economic substance there really was no “business reorganization” — that Mrs. Gregory, who controlled all three corporations, was simply following a legal form to make it appear to be a reorganization — so that she could dispose of the Monitor shares without having to pay a substantial income tax on the gain that otherwise would have been deemed to have been realized. The Commissioner determined that Mrs. Gregory had understated her 1928 income tax by over $10,000.
Read more about this topic: Gregory V. Helvering
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