TAXATION-INCOME TAX-EXEMPT REORGANIZATIONS-RECAPITALIZATION AS DEVICE FOR DISTRIBUTING EARNINGS

Petitioner owned more than three-fourths of the stock in a corporation whose shares had a par value of $100. Except for one share, his wife owned the remainder. Under a plan of recapitalization the stockholders received in exchange for each old share, five shares of no par stock with a stated value of $60 per share plus a portion of $400,000 worth of callable debentures issued by the corporation. At the time of this exchange the earned surplus of the corporation exceeded $850,000. The commissioner held that the full value of the debentures received was chargeable to the taxpayer as income. The Tax Court agreed, although the corporation had complied with the literal terms of the statute, something more, a legitimate corporate purpose, was needed before the transaction could qualify as a tax exempt reorganization. The circuit court of appeals affirmed the decision and the Supreme Court granted certiorari. Held, affirmed, two justices dissenting. The reorganization was not one which obtained the privileges afforded by section 112 (g). Bazley v. Commissioner of Internal Revenue, (U.S. 1947) 67 S. Ct. 1489