## Facts

- An Illinois corporation and related parties arranged a 1930 transaction intended to qualify as a type “C” corporate reorganization.
- A newly organized corporation (the petitioner) acquired substantially all operating assets of the Illinois predecessor pursuant to the plan.
- The transaction was structured so that the predecessor’s shareholders recognized taxable gain on their exchange of stock.
- The petitioner reported depreciation/asset basis using an amount that effectively incorporated the shareholders’ recognized gain, producing a higher basis than a statutory carryover or reorganization cost basis.
- The Commissioner determined a deficiency, rejecting any basis “step-up” tied to shareholder-level gain and applying the reorganization basis rules.
- The petitioner sought redetermination before the Board of Tax Appeals.

## Issues

1. In a type “C” reorganization where the transferor’s shareholders recognize gain, may the acquiring corporation increase its basis in the acquired assets by the amount of that shareholder-level recognized gain?
2. Does shareholder-level gain recognition affect the acquiring corporation’s asset basis under the reorganization provisions?

## Decision

- The Board of Tax Appeals held for the Commissioner.
- The petitioner could not increase its asset basis by the amount of gain recognized by the predecessor’s shareholders.
- The deficiency determination was sustained.

## Legal Principles

- In a statutory reorganization, the acquiring corporation’s basis in acquired property is determined exclusively by the reorganization basis provisions (generally carryover or substituted basis as specified by statute).
- Gain recognized by shareholders on an exchange of their stock is a shareholder-level tax event and is not a corporate cost of acquiring assets.
- Absent express statutory authorization, shareholder-level gain recognition cannot be treated as additional consideration paid by the acquiring corporation or used to “step up” asset basis.

## Conclusion

The Board sustained the Commissioner’s determination that an acquiring corporation in a type “C” reorganization must compute its basis in acquired assets under the applicable reorganization basis rules and may not increase that basis by the amount of taxable gain recognized by the transferor’s shareholders.


Schweitzer & Conrad, Inc. v. Commissioner, 41 B.T.A. 533 (1940)