## Facts

- E.E. Bruce & Co. had 2,380 outstanding shares; the taxpayer owned 700 shares and her sister owned 700 shares.
- The taxpayer and her sister wanted to sell part of their holdings to reduce their investment.
- Churchill Drug Co. resolved to acquire all of Bruce’s stock and authorized officers to purchase shares on terms they deemed advisable.
- Churchill agreed to buy 400 Bruce shares (200 from each sister) for $96,000 cash, and the parties agreed to that sale.
- After the cash sale was agreed to, Churchill informed the sisters it intended to acquire all Bruce stock to merge the companies and offered to exchange 2,400 shares of Churchill preferred stock for the sisters’ remaining 1,000 Bruce shares.
- The sisters, previously unaware of Churchill’s plan, accepted after considering the offer; the stock exchange was completed within days, around the same time the cash was paid for the 400 shares.
- By April 18, 1928, Churchill had acquired all Bruce shares; Bruce transferred all assets to Churchill and then dissolved.
- The taxpayer reported her exchange of 500 Bruce shares for 1,200 shares of Churchill preferred as a nonrecognition reorganization exchange under Revenue Act of 1928 § 112(b)(3).
- The Commissioner treated the cash sale and exchange as one integrated taxable sale, increasing the taxpayer’s 1928 liability; the Board of Tax Appeals largely sustained the Commissioner.

## Issues

1. Whether the cash sale of 400 shares and the later stock-for-stock exchange of the remaining shares were separate transactions, permitting nonrecognition under Revenue Act of 1928 § 112(b)(3).
2. Whether the Commissioner could treat the steps as one integrated transaction and tax the exchange portion as part of a sale for cash or its equivalent.

## Decision

- The court reversed the Board of Tax Appeals to the extent it treated the exchange as taxable.
- The court held the cash sale and the later exchange were distinct and independent transactions.
- The court held the stock-for-stock exchange qualified for nonrecognition under § 112(b)(3) and ordered recomputation of the tax consistent with that treatment.

## Legal Principles

- A stock-for-stock exchange in a qualifying reorganization falls within § 112(b)(3) nonrecognition when the exchange is solely for stock of a corporation that is a party to the reorganization.
- Whether multiple steps should be treated as one transaction depends on timing, taxpayer intent, and whether there was a prior arrangement or binding plan linking the steps.
- Even when historical facts are accepted as found by the tax tribunal, the legal characterization of those facts (single integrated transaction versus separate transactions) is subject to judicial review.
- An acquisition plan of the buyer does not by itself justify collapsing a taxpayer’s independent, earlier cash sale into a later reorganization exchange when the taxpayer did not participate in a preexisting unified plan.

## Conclusion

The court treated the taxpayer’s earlier cash sale and later stock-for-stock exchange as separate dealings, allowing nonrecognition for the exchange portion under § 112(b)(3) and rejecting the Commissioner’s attempt to tax it by collapsing the steps into a single sale.


Bruce v. Helvering, 76 F.2d 442 (D.C. Cir. 1935)