## Facts

- Marr and his wife bought 339 shares of preferred and 425 shares of common stock of General Motors Co. of New Jersey before March 1, 1913, for $76,400.
- In 1916, General Motors Corp. of Delaware was organized with a different capital structure, including 6% nonvoting preferred stock and a larger common authorization than the New Jersey corporation.
- The Delaware corporation offered an exchange: for each New Jersey common share, five Delaware common shares; for each New Jersey preferred share, one and one-third Delaware preferred shares, with cash paid in lieu of fractional shares.
- Marr and his wife exchanged their New Jersey shares and received 451 shares of Delaware preferred and 2,125 shares of Delaware common, plus a small cash payment.
- The market value of the property received was $400,866.57, exceeding their original cost by $324,466.57.
- The Treasury treated the $324,466.57 as taxable gain for 1916 under the Act of September 8, 1916, and assessed additional tax and interest totaling $24,944.12.

## Issues

1. Whether the 1916 exchange of New Jersey corporation stock for Delaware corporation stock was the equivalent of a nontaxable stock dividend or similar recapitalization.
2. Whether the excess of the market value of the Delaware shares received over the taxpayers’ cost basis in the New Jersey shares constituted taxable “income” under the 1916 federal income tax.
3. Whether Congress had constitutional authority to tax the gain realized from the exchange.

## Decision

- The Supreme Court affirmed judgment for the United States.
- The Court held the securities received in the exchange were not “in effect, a stock dividend.”
- The Court held the value received above the taxpayers’ cost basis was taxable income under the 1916 Act and within Congress’s power to tax.

## Legal Principles

- A stock-for-stock exchange may produce taxable realized gain when the taxpayer receives an interest that is materially different in legal and economic characteristics from the interest surrendered.
- An exchange is not treated as a nontaxable stock dividend when it involves a different corporate entity and substantially different shareholder rights or priorities.
- Differences in corporate organization and in security features (including voting rights and dividend and priority structure) can be sufficient to treat an exchange as a realization event for income-tax purposes.

## Conclusion

Because the exchange converted the taxpayers’ holdings into securities of a different corporation with materially different rights and priorities, the increase in value over their cost basis was realized and taxable as income under the 1916 federal income tax.


Marr v. United States, 268 U.S. 536 (1925)