Turnbow v. Commissioner of Internal Revenue

RESPONDENT: Commissioner of Internal Revenue
LOCATION: Florida General Assembly

DECIDED BY: Warren Court (1958-1962)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 368 US 337 (1961)
ARGUED: Nov 15, 1961 / Nov 16, 1961
DECIDED: Dec 18, 1961

Facts of the case


Media for Turnbow v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - November 15, 1961 in Turnbow v. Commissioner of Internal Revenue

Audio Transcription for Oral Argument - November 16, 1961 in Turnbow v. Commissioner of Internal Revenue

Earl Warren:

Grover D. Turnbow et al., Petitioner, versus Commissioner of Internal Revenue.

Mr. Barnett you may continue with your argument.

Wayne G. Barnett:

Mr. Chief Justice, may it please the Court.

Yesterday, I tried to show that the very function of the reorganization definition was to trigger the operation of the nonrecognition provisions.

And as to the petitioner's argument, the boot provision permits the nonrecognition of gain whether or not there's reorganization, would deprive the definitions of the only function they have.

I'd like to turn the now to what started yesterday to the history of the solely for voting stock limitation of the B and C definitions.

Those were added in 1934.

Before that, the definitions were as they are set forth at page 61 of our brief and you will see that, what is now the A, B and C definitions were lumped together in a single clause, that defined as a reorganization, a merger or consolidation and then (including the acquisition by one corporation of at least a majority of the stock or substantially all the assets of another).

Now that parenthetical clause did not impose any limitation upon the property given in exchange for the acquisition.

However, because it modified the merger or consolidation, the Government argued that it was meant to include only those transactions that were in practical effect essentially of the same nature as a merger or consolidation, and therefore, if any substantial part of the consideration was cash or short-term notes instead of the continuing interest, that was in practical effect a sale rather than a merger or consolidation and not covered.

Now, that argument was successful only in part and in a line of cases which culminated in a group of decisions by this Court in 296 U.S. the leading one which is Helvering against Minnesota Tea.

It was held that it was sufficient to qualify as reorganization if a substantial and material part of the consideration was voting stock or common stock, a continuing interest of the enterprise, even though the rest of the consideration in the very large part was cash and in fact, the Minnesota Tea that was held to be a reorganization even though almost 50% of the consideration was cash and therefore, the consequence was that the gain was recognizable only to the extent of the cash rather than as the Government argued the whole gain being recognized.

Now, this case, the transaction in this case is a blood-brother to Minnesota, the transaction in Minnesota Tea.

It's in fact a little more extreme because here, over 70% of the consideration was cash.

Nevertheless, under the pre-1934 Act under the rationale of Minnesota Tea, the transaction here would have qualified as a reorganization with the consequence that the gain would have been recognized only to the extent of the cash.

Now, it was against the background of that litigation and the asserted sale reorganization dichotomy that the 1934 Act was inactive.

The House Committee about the prude of decisions holding the transactions to be reorganizations where no money passes said that when it called the stoop lawyers had been successful in arranging what were in fact sales in the form of reorganizations and to present that, it recommended eliminating entirely whether or not the B and C definitions and restricting the statute to statutory mergers and consolidations.

The Senate Committee, although agreeing with the purposes of the House and the need to prevent sales from qualifying as reorganizations, pointed out that a lot of states did not have statutory provisions permitting mergers and consolidations and that no states, it was necessary to have some other mechanism to achieve necessary business readjustments without the incident attacks.

Accordingly, to permit that while at the same time preventing sales from qualifying as reorganizations, it recommended putting back the B and C definitions, but limiting them to transactions in exchange solely for voting stock.

In the Senate Committee's view, if it was solely for voting stock, it should be like in the mergers and consolidations.

If, however, there was anything but voting stock, it should be classified as a sale and for the very purpose of requiring that the entire gain not simply the cash which is always taxable to require the entire gain be taxable.

Now, this transaction which would've been a reorganization before the 1934 Act and therefore, taxable only to the extent (Inaudible), admittedly which it has to admit is no longer a reorganization because of that change.

The anomaly is that he goes on to argue that it makes no difference and that his gain is taxable precisely as it would've been before Congress added that limitation and he argues that, even though this transaction in an aggravated form is the very kind of transaction, the Congress, both the House and Senate agree to not be entire to the benefits of nonrecognition even in part.

Now, there's also one subsequent that -- of legislative history after the years in question here that I would like to call the Court's attention.

Under the 1939 Code, Assets and Acquisitions, noted under the C definition, had to be solely for voting stock to qualify as a reorganization.

John M. Harlan II:


Wayne G. Barnett:

When C would cover?

I mean B or C definitions?

John M. Harlan II:


Wayne G. Barnett:

It would cover -- it would've covered this case if all that he had received have been voting stock and that's all that it does cover.