## Facts

- Evelyn Gregory owned all stock of United Mortgage Corporation, which held 1,000 shares of Monitor Securities Corporation.
- To obtain the Monitor shares personally while reducing tax relative to a direct dividend, Gregory caused a new corporation (Averill Corporation) to be formed.
- United Mortgage transferred the Monitor shares to Averill in exchange for Averill stock, which was issued to Gregory.
- Within days, Averill was dissolved and liquidated, distributing the Monitor shares to Gregory; Averill conducted no other business and was not intended to.
- Gregory immediately sold the Monitor shares for $133,333.33 and reported the gain as capital gain on the theory that the steps constituted a tax-free reorganization under the Revenue Act of 1928.
- The Commissioner treated the arrangement as lacking substance, disregarded the purported reorganization, and assessed tax as though United Mortgage had paid Gregory a dividend equal to the value realized from the Monitor shares.
- The Board of Tax Appeals sided with Gregory; the Court of Appeals for the Second Circuit reversed and sustained the Commissioner.

## Issues

1. Whether the creation of Averill, transfer of Monitor shares to it, and its immediate liquidation qualified as a “reorganization” under § 112(g) of the Revenue Act of 1928, allowing nonrecognition of gain.
2. Whether a transaction that follows the literal statutory steps must be respected for tax purposes when it has no corporate or business purpose and no economic substance beyond tax avoidance.

## Decision

- The Supreme Court affirmed the Second Circuit and sustained the Commissioner’s deficiency determination.
- The Court held that, although the plan tracked the statutory words, it was not a “reorganization” within the statute’s intent because it was a contrivance without business or corporate purpose.
- The Court treated the intermediary corporation as ineffective for tax purposes and characterized the net effect as a taxable distribution to the shareholder followed by sale.

## Legal Principles

- Reorganization provisions apply only to transactions that effect a genuine corporate or business readjustment; formal compliance is insufficient when the arrangement lacks economic substance.
- Courts may disregard steps or entities interposed solely to obtain tax benefits when they serve no non-tax business purpose and do not change the taxpayer’s economic position in a meaningful way.
- The tax consequences of a transaction depend on its substance rather than its form when form is used to disguise the transaction’s real character.
- A taxpayer may arrange affairs to reduce taxes by means the law permits, but a tax-avoidance motive does not save a transaction that falls outside the statute’s intended scope.

## Conclusion

The Court held that a purported reorganization that existed only as a short-lived conduit to transfer stock to a shareholder, with no business purpose or economic substance, is not a reorganization for tax purposes and may be taxed according to the transaction’s real effect.


Gregory v. Helvering, 293 U.S. 465 (1935)