Gregory v. Helvering

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Gregory v. Helvering, 293 U.S. 465 (1935), is a leading case concerned with U.S. income tax law. The case is cited as part of the basis for two legal doctrines: the business purpose doctrine and the doctrine of substance over form.

Contents 1 Business purpose doctrine 2 Substance over form 3 Facts of the case 4 Procedural history 5 The ruling 6 External links

[edit] Business purpose doctrine

The business purpose doctrine is essentially that where a transaction has no substantial business purpose other than the avoidance or reduction of Federal tax, the tax law will not regard the transaction.

[edit] Substance over form

The doctrine of substance over form is essentially that, for Federal tax purposes, a taxpayer is bound by the economic substance of a transaction where the economic substance varies from its legal form.

[edit] 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 shares of stock of a company called Monitor Securities Corporation (“Monitor”).

In September of 1928, Mrs. Gregory created new company called Averill Corporation (“Averill”). Two 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 and 100% of Averill. Averill in turn owned 100% of Monitor.

Four days after Averill was created, Mrs. Gregory dissolved Averill and acquired the Monitor shares. On the same day, she sold the Monitor shares to a third party.

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.

[edit] Procedural history

In the ensuing litigation, the Board of Tax Appeals (a predecessor to today’s United States Tax Court) ruled in favor of the taxpayer. See Gregory v. Commissioner, 27 B.T.A. 223 (1932). However, on appeal the United States Court of Appeals for the Second Circuit reversed the Board of Tax Appeals, ruling in favor of the Commissioner. See Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934).

[edit] The ruling

Finally, the United States Supreme Court also ruled in favor of the Commissioner. The Court stated:

It is earnestly contended on behalf of the taxpayer that since every element required by [the statute] is to be found in what was done, a statutory reorganization was effected; and that the motive of the taxpayer thereby to escape payment of a tax will not alter the result or make unlawful what the statute allows. It is quite true that if a reorganization in reality was effected within the meaning of [the statute], the ulterior purpose mentioned will be disregarded. The legal right of a taxpayer to decrease the amount of what otherwise would be his [or her] taxes, or altogether avoid them, by means which the law permits, cannot be doubted. [ . . . ] But the question for determination is whether what was done, apart from the tax motive, was the thing which the statute intended. The reasoning of the court below [i.e., the reasoning of the Court of Appeals] in justification of a negative answer leaves little to be said.

When [the statute] speaks of a transfer of assets by one corporation to another, it means a transfer made 'in pursuance of a plan of reorganization' [ . . . ] of corporate business; and not a transfer of assets by one corporation to another in pursuance of a plan having no relation to the business of either, as plainly is the case here. Putting aside, then, the question of motive in respect of taxation altogether, and fixing the character of the proceeding by what actually occurred, what do we find? Simply an operation having no business or corporate purpose-a mere device which put on the form of a corporate reorganization as a disguise for concealing its real character, and the sole object and accomplishment of which was the consummation of a preconceived plan, not to reorganize a business or any part of a business, but to transfer a parcel of corporate shares to the petitioner. No doubt, a new and valid corporation was created. But that corporation was nothing more than a contrivance to the end last described. It was brought into existence for no other purpose; it performed, as it was intended from the beginning it should perform, no other function. When that limited function had been exercised, it immediately was put to death.

In these circumstances, the facts speak for themselves and are susceptible of but one interpretation. The whole undertaking, though conducted according to the terms of [the statute], was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else. [ . . . T]he transaction upon its face lies outside the plain intent of the statute. To hold otherwise would be to exalt artifice above reality and to deprive the statutory provision in question of all serious purpose.

Gregory v. Helvering, 293 U.S. at 468-470 (citation omitted; emphasis added).

[edit] External links

293 U.S. 465 (1935) Full text of case at Findlaw.com