## Facts

- General Utilities & Operating Company, a Delaware corporation, bought 20,000 shares of Islands Edison Company common stock in 1927 for $2,000.
- By 1928, the shares had appreciated substantially, with total value exceeding $1 million.
- Southern Cities Utilities Company sought to acquire all 40,000 outstanding Islands Edison shares, including General Utilities’ 20,000 shares and 20,000 shares held by Gillet & Co.
- Gillet & Co. agreed to sell its shares directly; General Utilities was advised that a direct sale would trigger corporate-level tax on the built-in gain.
- General Utilities declared a dividend payable in Islands Edison stock and distributed 19,090 shares in kind to its shareholders, retaining 910 shares.
- General Utilities’ shareholders then transferred the 19,090 shares to Southern Cities Utilities as individuals.
- General Utilities sold its remaining 910 shares to Southern Cities Utilities and reported gain only on that sale.
- The Commissioner assessed a deficiency on the theory that General Utilities also realized taxable gain upon distributing the 19,090 appreciated shares as a dividend.

## Issues

1. Whether a corporation realizes taxable gain when it declares and pays a dividend by distributing appreciated stock in kind to its shareholders.
2. Whether a court of appeals reviewing a Board of Tax Appeals decision may sustain a deficiency on a ground not presented to the Board or clearly raised in the petition for review.

## Decision

- The Supreme Court reversed the court of appeals and reinstated the Board of Tax Appeals decision setting aside the deficiency.
- The Court held that no taxable gain is realized by the corporation when it distributes appreciated stock in kind as a dividend.
- The Court held that an appellate court may not uphold an assessment on a theory not presented to the Board of Tax Appeals or raised in the petition for review.

## Legal Principles

- A corporation does not realize taxable gain merely by distributing appreciated property (here, stock) to shareholders as an in-kind dividend paid from surplus reflecting appreciation.
- Such a dividend distribution is not treated as a corporate sale to shareholders or as a use of assets to discharge indebtedness.
- Corporate-level taxable income generally requires a realization event; appreciation alone is not taxable to the corporation absent realization.
- In reviewing Board of Tax Appeals decisions, courts of appeals may not affirm deficiencies on new grounds not presented to the Board or identified with fair certainty in the petition for review; the taxpayer must have notice of the basis of the claim.
- An appellate court errs by drawing factual inferences inconsistent with stipulated facts and Board findings when unsupported by the record.

## Conclusion

The Court held that a corporation does not recognize gain when it distributes appreciated stock as an in-kind dividend to shareholders, and it limited appellate review by barring courts from sustaining tax assessments on theories not raised before the Board of Tax Appeals or properly preserved for review.


General Utils. & Operating Co. v. Helvering, 296 U.S. 200 (1935)