## Facts

- Grover D. Turnbow owned all 5,000 outstanding shares of International Dairy Supply Co., a Nevada corporation.
- In 1952, Turnbow transferred all International stock to Foremost Dairies, Inc., a New York corporation.
- In exchange, Turnbow received 82,375 shares of Foremost voting stock (valued at $15 per share, totaling $1,235,625) plus $3,000,000 in cash.
- Turnbow’s basis in the International stock was $50,000, and transaction expenses were $21,933.06.
- The total consideration exceeded basis and expenses by $4,163,691.94.
- Turnbow reported gain as recognizable only to the extent of the $3,000,000 cash received.
- The Commissioner asserted a deficiency on the theory that the entire gain was recognizable; the Tax Court limited recognition to the cash; the Ninth Circuit reversed; the Supreme Court reviewed to resolve a circuit conflict.

## Issues

1. Whether, when a stock-for-stock-plus-cash transaction does not qualify as a “reorganization” under Internal Revenue Code of 1939 § 112(g)(1)(B), the taxpayer must recognize the full gain.
2. Whether § 112(c)(1) permits recognizing gain only to the extent of cash received even if the exchange is not within § 112(b)(3)’s reorganization nonrecognition rule.

## Decision

- The Supreme Court affirmed the Ninth Circuit.
- Because the exchange was not a qualifying § 112(g)(1)(B) reorganization, the entire gain was recognizable.
- Section 112(c)(1) did not limit recognition to the cash portion absent an underlying nonrecognition exchange under § 112(b)(3).

## Legal Principles

- Section 112(c)(1) is a limiting rule that operates only when a transaction otherwise qualifies for nonrecognition under the reorganization provisions; it does not independently confer partial nonrecognition.
- A § 112(g)(1)(B) reorganization requires an acquisition “solely” for voting stock; additional cash consideration prevents qualification.
- When an exchange falls outside the statutory reorganization categories, the general rule applies and gain is recognized in full.

## Conclusion

The Court held that a stock-for-stock-plus-cash exchange that does not meet the statutory definition of a § 112(g)(1)(B) reorganization triggers full gain recognition, and the boot provision in § 112(c)(1) cannot be used to limit recognition to the cash received unless the exchange first qualifies under the reorganization nonrecognition rule.


Turnbow v. Commissioner, 368 U.S. 337 (1961)