## Facts

- William H. Bateman, a Wayne Pump Company shareholder, filed a joint 1958 federal income tax return with his wife.
- In March 1958, Wayne Pump shareholders exchanged their Wayne Pump stock in a corporate reorganization for (1) Symington Wayne Corporation common stock and (2) Symington Wayne common stock purchase warrants.
- The warrants entitled holders to buy Symington common stock only upon payment of an exercise price; until exercise, holders had no dividend, voting, or other stockholder rights.
- Later in 1958, Bateman sold 4,000 of the Symington warrants.
- On his return, Bateman treated the exchange as entirely tax-free under reorganization nonrecognition rules and reported long-term capital gain on the warrant sale.
- The Commissioner determined an income tax deficiency for 1958, asserting that the warrants were taxable “other property” received in the exchange and, alternatively, that their value was essentially equivalent to a dividend taxable as ordinary income.

## Issues

1. Whether stock purchase warrants received in a corporate reorganization are “stock or securities” for purposes of nonrecognition under the Internal Revenue Code.
2. If the warrants are not “stock or securities,” whether the taxable amount attributable to the warrants is treated as dividend income or as gain recognized from receiving boot.
3. How the gain attributable to the warrants (including gain associated with their later sale) should be characterized under the Code once the warrants are treated as nonqualifying property.

## Decision

- The Tax Court sustained the Commissioner’s deficiency determination.
- The court held the Symington stock purchase warrants were not “stock or securities” within the meaning of the reorganization nonrecognition provisions.
- The warrants were “other property” received in the exchange, requiring recognition of gain to the extent of their fair market value under the boot rules.
- The court rejected Bateman’s position that warrants should be treated like stock based on their economic similarity or potential convertibility.

## Legal Principles

- Reorganization nonrecognition under the Code applies to exchanges of “stock or securities,” but receipt of “other property or money” triggers gain recognition to the extent of the value of such property (boot).
- Stock purchase warrants that confer no present shareholder rights and require additional payment to obtain stock may be treated as “other property,” not as “stock or securities,” in a reorganization exchange.
- The classification of an instrument for reorganization nonrecognition turns on its legal rights and characteristics at receipt, not merely its economic resemblance to stock.

## Conclusion

Because the warrants received in the reorganization did not constitute “stock or securities” and conferred no present shareholder rights, they were taxable boot, and Bateman was required to recognize gain measured by the warrants’ fair market value, with the resulting deficiency upheld.


Bateman v. Commissioner, 40 T.C. 408 (1963)