## Facts

- Elkhorn Coal & Coke Company (the “old company”) and Mill Creek Coal & Coke Company (Mill Creek) had substantially the same officers and shareholders and operated coal properties in West Virginia.
- The common management wanted to place certain mines in a particular West Virginia area under Mill Creek’s ownership and management.
- Before transferring the target mine, plant, and equipment to Mill Creek, the officers caused a new corporation, Elkhorn Coal Company (Elkhorn), to be organized.
- The old company then transferred to Elkhorn all of the old company’s property *except* the mine, mining plant, and equipment that were intended to go to Mill Creek.
- The assets transferred to Elkhorn constituted a majority of the old company’s total assets.
- Elkhorn issued 6,100 shares of its stock as consideration for the assets it received, and that stock was distributed to the old company’s shareholders as a dividend.
- A few days later, the old company transferred its remaining mine, plant, and equipment to Mill Creek, receiving 1,000 shares of Mill Creek stock in exchange.
- The Commissioner of Internal Revenue determined that the transfer to Mill Creek produced taxable gain (and sought to impose the resulting liability notwithstanding the internal reshuffling of assets among related corporations).
- Elkhorn challenged the Commissioner’s determination in the United States Board of Tax Appeals, which ruled for Elkhorn on the theory that the Mill Creek exchange was within the statutory “reorganization” nonrecognition provisions.
- The Commissioner petitioned the United States Court of Appeals for the Fourth Circuit for review.

## Issues

1. Whether the old company’s transfer of its remaining mine, plant, and equipment to Mill Creek for Mill Creek stock qualified as a tax-free “reorganization” under the Revenue Act of 1926 when, as part of the overall plan, the old company first moved most of its assets to a newly created corporation.
2. Whether the court should treat the preliminary transfer to the new corporation and the subsequent transfer to Mill Creek as integrated steps when deciding if Mill Creek acquired “substantially all” of the old company’s properties.

## Decision

- The Fourth Circuit reversed the Board of Tax Appeals.
- The court held that the Mill Creek exchange did not qualify as a tax-free reorganization when the related preliminary transfer to the newly formed Elkhorn was considered as part of the same overall plan.
- The court directed that the tax consequences be determined on the basis of the substance of the arrangement rather than the formal sequencing of the transfers.

## Legal Principles

- Reorganization nonrecognition provisions apply to transactions that, in substance, fall within the type of corporate combinations Congress described; a formal match to statutory words is not enough when the form is used to produce a result outside the statute’s purpose.
- In determining whether an acquiring corporation obtained “substantially all” of a transferor’s properties for reorganization purposes, a court may consider the entire planned series of transfers rather than isolating one step.
- A newly created corporation inserted into a transaction shortly before an asset exchange may be disregarded for reorganization characterization when it functions mainly to shift assets and change the measurement of what was transferred.
- When multiple steps are part of one prearranged plan and are interdependent, tax results may be based on the combined effect of those steps.

## Conclusion

Helvering v. Elkhorn Coal Co. treated the old company’s creation of a new corporation and its prior transfer of most assets to that entity as part of a single plan culminating in the exchange with Mill Creek. Because Mill Creek’s acquisition, viewed in context, was not an acquisition of “substantially all” the old company’s properties within the meaning of the 1926 reorganization provisions, the Fourth Circuit rejected nonrecognition and reversed the Board of Tax Appeals.


Helvering v. Elkhorn Coal Co., 95 F.2d 732 (1938)