Taxation- Federal Income Tax-Status of Stock-For-Stock Exchange Where Boot is Involved

Taxpayer was the sole stockholder of International Dairy Supply Company. In 1952, Foremost Dairies, Inc. acquired from taxpayer all his stock in Supply Company in exchange for 82,375 shares of Foremast’s common stock and 3,000,000 dollars cash. Taxpayer reported as gain from the transaction only the 3,000,000 dollars “boot” received, less allowable expenses. The Commissioner determined a deficiency of 278,823 dollars, asserting that the nonrecognition provision of the 1939 Code counterpart of section 356 (a) (1) was inapplicable and therefore taxpayer’s entire gain realized on the disposition must be recognized. The Tax Court upheld taxpayer’s contention that by virtue of section 356 (a) (1), which provides that if the exchange would otherwise have been within the scope of section 354 (a) (1)-providing that no gain or loss shall be recognized in a stock-for-stock reorganization exchange but for the receipt of “boot,” the transaction is taxable only to the extent of the cash received. On appeal, held, reversed. The applicability of section 354 (a) (1) in this case is predicated upon two “solely-for-stock” requirements. First, this transaction must meet the definitional “solely-for-stock” requirement of section 368 (a) (1) (B) to receive the status of a “reorganization.” Second, if the transaction is in fact a “reorganization,” section 354 provides nonrecognition of gain if the exchange of stock is made “solely-for-stock.” If section 354 “would apply to an exchange but for” the failure to meet the “solely-for-stock” test of that section, the operative saving provision of section 356-which limits the tax to the gain not in excess of the boot-will apply. However, since this transaction does not, in the first instance, meet the definitional “solely for- stock” requirement of section 368, section 354 can never apply. Therefore, section 356 is likewise not available to the taxpayer and he must recognize his entire gain. Commissioner v. Turnbow, 286 F.2d 669 (9th Cir. 1960), cert. granted, 366 U.S. 923 (1961) (No. 60).