## Facts

- V. L. LeTulle was the sole shareholder of Gulf Coast Irrigation Co. and also personally owned certain lands and irrigation properties.
- Under a November 4, 1931 agreement, Gulf Coast Irrigation Co. was to convey its properties (including certain assets LeTulle would first contribute) to Gulf Coast Water Co. for $50,000 cash and $750,000 of Water Co. bonds payable serially from 1933 to 1944.
- LeTulle joined the agreement as a title guarantor for the Irrigation Co. and agreed to a noncompetition covenant in a defined area for a specified period.
- The Irrigation Co. increased its capital stock; LeTulle subscribed to the new stock and paid by transferring his individually owned properties to the Irrigation Co.
- On November 18, 1931, the Irrigation Co. transferred all its assets to the Water Co. for the agreed cash and bonds.
- The Irrigation Co. later distributed all its assets, including the Water Co. bonds, to LeTulle in liquidation and then dissolved.
- LeTulle and his wife filed a community property return reporting no gain from the liquidating distribution; the Commissioner assessed tax on gain at the corporate level and on the liquidating dividends.
- LeTulle paid the taxes and sued the Collector for a refund; the district court found a nontaxable reorganization, the Fifth Circuit reversed, and the Supreme Court granted certiorari and reviewed.

## Issues

1. Whether a transfer of all assets to another corporation for cash and the transferee’s bonds, followed by liquidation and no retained equity stake, qualifies as a nonrecognition “reorganization” under § 112(i) of the Revenue Act of 1928 or is a taxable sale or exchange.
2. Whether a respondent who did not seek review may attack an adverse portion of a judgment in the Supreme Court, as opposed to defending the judgment on any ground supported by the record.

## Decision

- The Supreme Court affirmed the Fifth Circuit.
- The Court held the transaction was not a tax-free reorganization because the transferor and shareholder retained no proprietary interest in the transferee; receipt of cash and bonds left them only creditor rights.
- The resulting corporate gain and the liquidating distribution were taxable.
- The Court also held a respondent may support a judgment on any ground in the record but may not seek reversal or modification of an adverse portion without seeking review (e.g., by cross-petition/cross-appeal).

## Legal Principles

- A purported corporate “reorganization” requires a continuing proprietary interest in the enterprise after the exchange; debt instruments such as bonds, without equity participation, are creditor interests insufficient for nonrecognition.
- When a corporation transfers all assets to another corporation for cash and the transferee’s bonds and then liquidates, the transaction is treated as a sale or exchange with recognized gain.
- Tax nonrecognition provisions operate as exceptions to the general rule of gain recognition and are construed to require the taxpayer to fit the transaction within the statutory terms.
- In appellate practice, an appellee may defend the judgment on any basis supported by the record but cannot attack the judgment to obtain greater relief without independently seeking review of the adverse portion.

## Conclusion

The Court treated the asset transfer for cash and transferee bonds, followed by liquidation, as a taxable sale rather than a reorganization because the former owners retained no equity interest in the continuing business, and it reaffirmed that an appellee cannot seek to overturn an adverse part of a judgment without filing for review.


LeTulle v. Scofield, 308 U.S. 415 (1940)