TAXATION - INCOME TAX - EXEMPT REORGANIZATIONS - WHEN IS A REORGANIZATION BONA FIDE UNDER THE RULE OF GREGORY v. HELVERING

An individual wished to buy certain patents from a corporation, and at his instigation, the corporation transferred them to a newly-organized patent holding company, which issued its shares directly to the stockholders of the transferor corporation. On discovery of disadvantages from this scheme, the buyer requested that the new corporation be dissolved and that the patents be assigned by the original patentee individually. Petitioner and all other shareholders sold their stock in the new corporation to the patentee in exchange for his notes, and he dissolved the corporation, receiving the patents on liquidation. The patents were then sold for cash, which was used to pay off the notes.

Petitioner returned as capital gain her profit from the sale of the stock. The commissioner, who was upheld by the Board of Tax Appeals, contended that the organization and dissolution of the patent holding company should be ignored and that the distribution of patents be taxed as an ordinary dividend. Held, the transaction was a "reorganization" within the meaning of section 112 (i) (1) (B) of the Revenue Act of 1928 so that no gain was recognized on distribution to her of the stock of the new corporation in pursuance of the plan of reorganization. Lea v. Commissioner of Internal Revenue, (C. C. A. 2d, 1938) 96 F. (2d) 55, reversing 35 B. T. A. 243 (1937).