## Facts

- Groman was a shareholder of Metals Refining Company, an Indiana corporation (“Indiana”).
- Indiana’s shareholders contracted with The Glidden Company, an Ohio corporation (“Glidden”), for a transaction involving a new Ohio corporation to be formed by Glidden (“Ohio”).
- Glidden organized Ohio with preferred and common stock; Glidden owned all of Ohio’s common stock and none of its preferred stock.
- Indiana shareholders transferred their Indiana stock to Ohio in exchange for a package of consideration delivered by Ohio: Glidden prior preference stock, Ohio preferred stock, and cash.
- The total consideration to all Indiana shareholders included Glidden prior preference stock (valued at $533,980), Ohio preferred stock (valued at $500,000), and $153,036 in cash; Groman received Glidden stock, Ohio stock, and $17,293 in cash.
- After Ohio acquired Indiana’s stock, Indiana transferred its assets to Ohio and dissolved.
- Groman reported the cash as income but treated the stock received as nonrecognition property received in a tax-free reorganization under § 112 of the Revenue Act of 1928.
- The Commissioner determined a deficiency on the ground that Glidden was not “a party to a reorganization,” making the Glidden stock (and cash) taxable consideration.
- The Board of Tax Appeals ruled for Groman; the Seventh Circuit reversed and sustained the deficiency; the Supreme Court affirmed.

## Issues

1. Whether Glidden, which formed and capitalized a subsidiary that acquired Indiana’s stock and assets, was “a party to a reorganization” under § 112 of the Revenue Act of 1928.
2. If Glidden was not a party, whether Glidden stock received by Indiana shareholders constituted taxable consideration in computing gain.

## Decision

- The Supreme Court affirmed the Seventh Circuit and sustained the deficiency assessment.
- Glidden was not “a party to the reorganization” for purposes of § 112.
- The Glidden preference stock received by Indiana shareholders was a basis for computing taxable gain (i.e., taxable consideration rather than nonrecognition stock).

## Legal Principles

- The statutory statement that “party to a reorganization” “includes” specified corporations enlarges the term beyond its ordinary meaning but does not eliminate limits on who qualifies as a party.
- A corporation does not become a reorganization “party” merely because its stock is used as part of the consideration in a transaction carried out by another corporation.
- In determining reorganization-party status, the relevant inquiry focuses on which corporation directly acquires the target’s stock or assets in the reorganization structure.
- When stock received is not stock of “a corporation a party to a reorganization,” the nonrecognition rules do not apply to that stock; it is treated as taxable consideration in computing recognized gain.

## Conclusion

The Court held that a parent corporation that forms and funds a subsidiary’s acquisition, and whose shares are used as part of the consideration, is not necessarily a “party to a reorganization” under § 112; therefore, the parent’s stock received by target shareholders is taxable consideration.


Groman v. Commissioner, 302 U.S. 82 (1937)