TAXATION - FEDERAL INCOME TAX - EVASION THROUGH USE OF THE CORPORATE ENTITY

The taxpayer purchased A Company stock from X for $100,000 and later sold it for $7,500, deducting the loss in his tax return for that year. Following the discovery of fraud on the part of X he reacquired the stock for $8,000 and then negotiated a settlement with X providing for a resale to X for $100,000. To avoid high taxes on the resulting profit, the taxpayer organized B corporation and purchased all its stock. He then sold to it the A Company stock and all his claims against X in return for its promise to pay back the $100,000 in forty annual installments.

On the following day the taxpayer, acting as the agent of B corporation, sold the A Company stock and released the tort claim to X for $100,000. The B corporation remained in existence, making the installment payments and engaging in investment transactions. Contending that the entire gain from the sale was income to the taxpayer, the commissioner determined a deficiency which was not sustained by the board of tax appeals. The circuit court of appeals reversed, and on certiorari to United States Supreme Court, held, the sale should be considered as the taxpayer's and hence the gain should be taxable to him.

Griffiths v. Helvering, 308 U.S. 355, 60 S. Ct. 277 (1939).