This case involves and turns on the proper interpretation and interaction of §§ 112(g)(1)(B), 112(b)(3) and 112(c)(1) of the Internal Revenue Code of 1939. Specifically the question presented is whether, in the absence of a 'reorganization,' as that term is defined in § 112(g)(1)(B) and used in § 112(b)(3), the gain on an exchange of stock for stock plus cash is to be recognized in full, or, because of the provisions of § 112(c)(1), is to be recognized only to the extent of the cash.
The facts are simple and undisputed. Petitioner owned all of the 5,000 shares of outstanding stock of International Dairy Supply Company ('International'), a Nevada corporation. In 1952, petitioner transferred all of the International stock to Foremost Dairies, Inc. ('Foremost'), a New York corporation, in exchange for 82,375 shares (a minor percentage) of Foremost's common (voting) stock of the fair market value of $15 per share or $1,235,625 plus cash in the amount of $3,000,000. Petitioner's basis in the International stock was $50,000, and his expenses in connection with the transfer were $21,933.06. Petitioner therefore received for his International stock property and money of a value exceeding his basis and expenses by $4,163,691.94.
In his income tax return for 1952, petitioner treated his gain as recognizable only to the extent of the cash he received. The Commissioner concluded that the whole of the gain was recognizable and accordingly proposed a deficiency. On the Taxpayer's petition for redetermination, the Tax Court, following its earlier decision in Bonham v. Commissioner, 33 B.T.A. 1100, 1104, and the opinion of the Seventh Circuit in Howard v. Commissioner of Internal Revenue, 238 F.2d 943, 948, held that the gain was recognizable only to the extent of the cash. 32 T.C. 646. On the Commissioner's appeal, the Ninth Circuit disagreed with the Tax Court and with the Seventh Circuit's decision in the Howard case, supra, and reversed. 286 F.2d 669. To resolve this conflict, on a matter of importance to the proper interpretation and uniform application of the Internal Revenue laws, we granted certiorari. 366 U.S. 923, 81 S.Ct. 1349, 6 L.Ed.2d 383.
Because of the arbitrary and technical character, and of the somewhat 'hodgepodge' form, of the statutes involved, the interpretation problem prosented is highly complicated; and although both parties rely upon the 'plain words' of these statutes, they arrive at diametrically opposed conclusions. That plausible arguments can be and have been made in support of each conclusion must be admitted; and, as might be expected, they have hardly lightened our inescapable burden of decision.
The starting point of our analysis must be the 'General rule' stated in § 112(a). It provides: 'General rule. Upon the sale or exchange of property the entire amount of the gain or loss * * * shall be recognized, except as hereinafter provided in this section.'
Various exceptions, deaing with exchanges solely in kind, are stated in subsections (b)(1) through (b)(6). The exception claimed to be relevant here is contained in subsection (b)(3). It provides:
'Stock for stock on reorganization. No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.'
By definition, contained in § 112(g)(1)(B), the term 'reorganization' means 'the acquisition by one corporation, in exchange solely for all or a part of its voting stock, of at least 80 per centum of the * * * stock of another corporation.' (Emphasis added.) This type of reorganization is commonly called a '(B) reorganization.'
There is no dispute between the parties about the fact that the transaction involved was not a 'reorganization,' as defined in § 112(g)(1)(B), because 'the acquisition by' Foremost was not 'in exchange solely for * * * its voting stock,' but was partly for such stock and partly for cash. Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 62 S.Ct. 546, 86 L.Ed. 789. Nor is there any dispute that the transaction was not actually within the terms of § 112(b)(3), because the exchange was not of 'stock * * * in * * * a party to a reorganization,' 'in pursuance of (a) plan of reorganization,' nor 'for stock * * * in another corporation (which was) a party to the reorganization.'