## Facts

- Atlas Powder Company sought to eliminate competition from Peerless Explosives Company, Union Explosives Company, and Black Diamond Powder Company.
- Atlas arranged for the three competitors to consolidate into a newly formed corporation that acquired their assets and business.
- Under the plan, Atlas acquired all preferred shares and 57% of the common shares of the new corporation.
- Shareholders of the three old companies received (1) shares of the new corporation, (2) shares of Atlas, and (3) cash supplied by Atlas.
- Bashford, a Peerless shareholder, exchanged his Peerless shares for shares of the new corporation, Atlas preferred and common stock, and cash.
- Bashford reported no gain on receipt of either the new corporation’s stock or Atlas stock, treating the transaction as a nonrecognition reorganization exchange.
- The Commissioner conceded nonrecognition for the new corporation’s stock but assessed a deficiency on the ground that the Atlas stock was taxable “other property” because Atlas was not “a party to the reorganization.”
- The Board of Tax Appeals and the Third Circuit held for Bashford, concluding Atlas was a party to the reorganization.

## Issues

1. Whether Atlas Powder Company was “a party to the reorganization” within § 112(i)(2) of the Revenue Act of 1928 so that Atlas stock received by Bashford qualified for nonrecognition under § 112(b)(3).
2. If Atlas was not a party to the reorganization, whether Atlas stock received in the exchange was taxable “other property” under § 112(c)(1) to the extent of its fair market value.

## Decision

- The Supreme Court reversed the Third Circuit.
- Atlas Powder Company was not “a party to the reorganization” within the meaning of § 112(i)(2).
- The Atlas shares received by Bashford constituted “other property” under § 112(c)(1).
- Gain attributable to the receipt of Atlas stock was required to be recognized to the extent provided by § 112(c)(1).

## Legal Principles

- Nonrecognition under § 112(b)(3) applies only to exchanges of stock or securities in corporations that qualify as parties to the reorganization.
- A corporation that engineers, finances, and acquires control of a newly formed transferee corporation is not, on that basis alone, a statutory “party to the reorganization.”
- Where a taxpayer receives stock of a corporation that is not a party to the reorganization, that stock is treated as “other property” (boot) under § 112(c)(1), and gain is recognized up to its fair market value (and any cash received).
- The statutory definition of “party to a reorganization” is construed to cover the corporations directly involved as transferors or transferees in the reorganization transaction, not outside participants receiving benefits or control.
- The Court applied the interpretive approach of Groman v. Commissioner to limit reorganization nonrecognition to continuity of interest in the reorganized enterprise.

## Conclusion

The Court held that Atlas’s role as sponsor, cash provider, and controlling shareholder of the new consolidated corporation did not make it a “party to the reorganization” under the Revenue Act of 1928; therefore, Atlas stock received by Bashford in the exchange was taxable boot, and gain had to be recognized to the extent of its value.


Helvering v. Bashford, 302 U.S. 454 (1938)