Commissioner of Internal Revenue v. Gordon

PETITIONER: Commissioner of Internal Revenue
LOCATION: United States District Court of Maryland

DECIDED BY: Warren Court (1967-1969)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 391 US 83 (1968)
ARGUED: Apr 04, 1968
DECIDED: May 20, 1968

Facts of the case


Media for Commissioner of Internal Revenue v. Gordon

Audio Transcription for Oral Argument - April 04, 1968 in Commissioner of Internal Revenue v. Gordon

Earl Warren:

Number 760, Commissioner of Internal Revenue, petitioner versus Irving Gordon et al. and number 781 Oscar E. Bann, et al. petitioners versus Commissioner of Internal Revenue.

Mr. Solicitor General.

Erwin N. Griswold:

May it please the Court.

This is a technical tax case, about as technical as they come and I think I ought to make a confession.

I used it as an examination question two years ago and thus had the benefit of reading the reactions to 200 young minds and I don’t think I learned a great deal.

Abe Fortas:

Who won, Mr. Solicitor General?

Erwin N. Griswold:

It was a tie.

William J. Brennan, Jr.:

How badly did they divide --

Erwin N. Griswold:

How --

William J. Brennan, Jr.:

How badly did they divide -- on the result.

Erwin N. Griswold:

That, I do not (Voice Overlap) [Laughter]

I did not review the record.

The case involves the construction of Section 355 of the Internal Revenue Code.

This is a provision which deals with what are called divisive reorganizations.

Some reorganizations put corporations together and Section 355 deals with situations where they're taken apart.

In the jargon of the trade, Section 355 includes such things as split-ups, split-offs, and spin-offs.

And the transaction involved here is or may be or maybe is not a spin-off.

Now the question is whether it comes within the terms of the statute which provides that there is no income on the receipt of stock or securities on a spin-off when the requirements of the statute are met.

A spin-off arises in a situation where a corporation has a subsidiary and distributes the stock or securities in the subsidiary to its shareholders without the shareholders giving up anything.

There is no exchange.

The general theory is that the shareholders have two pieces of paper representing the same interests which they had before.

Now where the terms of the statute are complied with, it is provided that no gain or loss will be recognized on the receipt of securities in a spin-off.

The problem here arises on these facts.

Pacific Telephone and Telegraph Company, which we will call Pacific, for many years has operated telephone service in California, Oregon, Washington and Idaho, and through a subsidiary in Nevada.

Since 1907, more than 80% of the voting stock of Pacific has been held by American Telephone and Telegraph Company.

And in 1961, which is the year and the only year before the Court, AT&T owned about 90% of Pacific's common stock, about 78% of Pacific's preferred stock, and had nearly 90% of the voting power in Pacific.

During the late 1950s and in 1960, Pacific in the process of evolving its management of this great enterprise developed a plan to decentralize its operations by separating out its business in Oregon, Washington and Idaho.

It organized a new corporation called Pacific Northwest Bell Telephone Company and which we refer to as Northwest in this case.

In creating a new corporation, it transferred a small amount of cash to Northwest for stock and then it transferred all of its assets in Oregon, Washington and Idaho to Northwest in exchange for the balance of its stock and debentures.

At this point, July 1, 1961, Northwest exists as a complete operating corporation wholly owned by Pacific Telephone and Telegraph Company.