Gregory v. Helvering, 293 U.S. 465

Case citation

Case citation is the system used in many countries to identify the decisions in past court cases, either in special series of books called reporters or law reports, or in a 'neutral' form which will identify a decision wherever it was reported...

 (1935), was a landmark decision

Landmark decision

Landmark court decisions establish new precedents that establish a significant new legal principle or concept, or otherwise substantially change the interpretation of existing law...

 by the United States Supreme Court concerned with U.S. income tax law

Income tax in the United States

In the United States, a tax is imposed on income by the Federal, most states, and many local governments. The income tax is determined by applying a tax rate, which may increase as income increases, to taxable income as defined. Individuals and corporations are directly taxable, and estates and...

. The case is cited as part of the basis for two legal doctrines: the business purpose doctrine and the doctrine of substance over form.

Business purpose doctrine

The business purpose doctrine is essentially that where a transaction has no substantial business purpose other than the avoidance or reduction

Tax avoidance and tax evasion

Tax noncompliance describes a range of activities that are unfavorable to a state's tax system. These include tax avoidance, which refers to reducing taxes by legal means, and tax evasion which refers to the criminal non-payment of tax liabilities....

 of Federal tax, the tax law will not regard the transaction.

Substance over form

The doctrine of substance over form

Substance over form

Substance over form is an accounting principle used "to ensure that financial statements give a complete, relevant and accurate picture of transactions and events"...

 is essentially that, for Federal tax purposes, a taxpayer is bound by the economic substance

Economic substance

Economic substance is a doctrine in the tax law of the United States under which a transaction must have an economic purpose aside from reduction of tax liability in order to be considered valid...

 of a transaction where the economic substance varies from its legal form.

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

Revenue Act of 1928

The Revenue Act of 1928 , formerly codified in part at 26 U.S.C. sec. 22, is a statute enacted by the 70th United States Congress in 1928 regarding tax policy....

, 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

Commissioner of Internal Revenue

The Commissioner of Internal Revenue is the head of the Internal Revenue Service , a bureau within the United States Department of the Treasury.The office of Commissioner was created by Congress by the Revenue Act of 1862...

 (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.

Procedural history

In the ensuing litigation, the Board of Tax Appeals (a predecessor to today’s United States Tax Court

United States Tax Court

The United States Tax Court is a federal trial court of record established by Congress under Article I of the U.S. Constitution, section 8 of which provides that the Congress has the power to "constitute Tribunals inferior to the supreme 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

United States Court of Appeals for the Second Circuit

The United States Court of Appeals for the Second Circuit is one of the thirteen United States Courts of Appeals...

 reversed the Board of Tax Appeals, ruling in favor of the Commissioner. See Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934).

The ruling

Finally, the Supreme Court of the United States

Supreme Court of the United States

The Supreme Court of the United States is the highest court in the United States. It has ultimate appellate jurisdiction over all state and federal courts, and original jurisdiction over a small range of cases...

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).