## Facts

- General Geophysical Company (GGC) was a corporation that owned depreciable business assets.
- Several GGC shareholders wanted to dispose of (have the company redeem) their stock.
- Acting on legal advice, the parties structured the redemption so the departing shareholders would receive specific corporate depreciable assets in exchange for their shares.
- Shortly after the redemption (within a few hours), the former shareholders sold the same assets back to GGC.
- GGC paid for the repurchase by issuing its promissory notes to the former shareholders.
- At the time the redemption was arranged, the later resale to GGC was not a legally binding obligation, even though it occurred soon afterward.
- GGC claimed depreciation deductions on the reacquired assets using a basis equal to the assets’ fair market value at the time of the repurchase (treating the repurchase as a new “cost” purchase).
- The Commissioner (United States) disallowed the depreciation deductions, arguing that the steps should be treated in substance as one transaction: a redemption of stock for GGC notes, with no new cost basis created by the circular transfer of assets.
- The Tax Court ruled for GGC, reasoning that the shareholders held ownership of the assets between the distribution and the repurchase and that the arrangement was not fraudulent.
- The United States appealed to the United States Court of Appeals for the Fifth Circuit.

## Issues

1. Whether GGC could treat the asset distribution in redemption and the near-immediate repurchase for GGC notes as separate transactions that gave GGC a new, fair-market-value basis for depreciation.
2. Whether the series of steps should be treated as a single stock-for-notes redemption in substance, preventing a stepped-up depreciation basis.

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court held that GGC was not entitled to depreciate the property using a stepped-up basis measured by the assets’ fair market value at the time of the repurchase.
- Treating the steps as an integrated transaction, the court characterized the arrangement as, in substance, an exchange of the shareholders’ stock for GGC’s promissory notes, with the asset transfers serving as a temporary conduit rather than a true purchase that created new corporate “cost.”

## Legal Principles

- Federal income tax consequences depend on the substance of a transaction rather than the formal sequence of steps when the steps function as parts of one plan.
- Closely timed, interrelated steps may be collapsed and treated as a single transaction when separating them would produce tax results not tied to what actually occurred in practical terms.
- For depreciation and basis purposes, “cost” turns on when the taxpayer truly acquired the property and what it truly paid; a rapid, circular transfer that leaves the taxpayer in essentially the same position does not necessarily create a new cost basis.
- The absence of a legally enforceable obligation to complete a later step is not controlling if the record shows the steps were intended and carried out as parts of a single arrangement.

## Conclusion

The Fifth Circuit held that GGC could not obtain a higher depreciation basis by redeeming stock with depreciable corporate assets and then reacquiring those same assets a few hours later for corporate notes; viewed as a whole, the arrangement was treated as a stock-for-notes redemption, so the Commissioner properly disallowed depreciation computed on a fair-market-value repurchase basis.


United States v. General Geophysical Co., 296 F.2d 86 (1961)