## Facts

- Evelyn Gregory owned all shares of United Mortgage Corporation, which held appreciated shares of Monitor Securities Corporation.
- A direct sale of the Monitor shares by United would have generated corporate-level tax, and extracting the value to Gregory would have required a dividend subject to surtax.
- To reduce tax, Gregory caused a new Delaware corporation, Averill Corporation, to be formed for the transaction.
- United transferred the Monitor shares to Averill, and Averill issued all of its shares to Gregory.
- Three days later, Gregory liquidated Averill, received the Monitor shares as a liquidating distribution, and then sold the Monitor shares.
- Averill conducted no business and was intended to conduct none other than serving as a conduit for transferring the Monitor shares.
- Gregory reported the steps as a tax-free “reorganization” under § 112 of the Revenue Act of 1928 and treated the ultimate sale as generating a smaller taxable gain.
- The Commissioner determined a deficiency; the Board of Tax Appeals ruled for Gregory; the Commissioner petitioned for review.

## Issues

1. Whether the formation and rapid liquidation of Averill, used only to pass Monitor shares to the taxpayer, qualified as a “reorganization” under § 112 of the Revenue Act of 1928.
2. Whether a transaction that fits the statute’s literal mechanics can be disregarded for federal income tax purposes when it lacks genuine corporate or business significance and serves only tax avoidance.

## Decision

- The Second Circuit reversed the Board of Tax Appeals and sustained the Commissioner’s deficiency determination.
- The court held the transaction was not a “reorganization” within § 112 despite arguable literal compliance with the statutory definition.
- The court treated the steps as a single integrated plan and concluded the Averill corporation’s role had no real corporate purpose beyond tax reduction.

## Legal Principles

- Statutory nonrecognition for corporate “reorganizations” does not apply to transactions that merely mimic the statutory form without genuine corporate restructuring or business purpose.
- Tax consequences turn on the transaction’s substance and function, not solely on compliance with formal steps that create only a temporary conduit.
- A taxpayer may minimize taxes through lawful means, but cannot obtain reorganization nonrecognition where the arrangement falls outside the intended scope of the statute.

## Conclusion

The court denied § 112 reorganization treatment because the newly formed corporation had no business function and existed only briefly to route appreciated stock to the taxpayer; the Commissioner could therefore impose tax consistent with the transaction’s economic reality rather than its engineered form.


Helvering v. Gregory, 69 F.2d 809 (2d Cir. 1934)