TAX COURT CASES

Court Case 1: Gregory v. Helvering, 293 US 465.
Facts
Evelyn Gregory was the owner of United Mortgage Company, which also owned another
company, Monitor Securities Corporation, 1,000 shares of stock. On September 18, 1928, Evelyn
created a Averill Corp. After three days of the new company’s existence, and she transferred the
1000 shares of stock from Monitor Securities Corporation to Averill. On September 24, exactly
six days, the new company was dissolved. It was liquated, and Evelyn allocated all the assets to
herself. Gregory then earned $133,333.33 through the sale of the 1,000 stock shares. The newly
formed corporation had only one transaction, the transfer and sale of shares. Until its dissolution,
it had not conducted or transacted any other business.
Issues/ laws at hand
Gregory’s creation of Averill Corporation was intended to meet the requirements of §
112 of the Revenue Act of 1928. The Act holds that profits made or losses incurred through
reorganization will not be recognized. The implication is that if securities or stock in a
corporation, which is a party to a reorganization, are exchanged to another corporation that is
also party to the reorganization then gains or losses made are not recognized (Revenue Act of
1928, 2020). The law permits a taxpayer to reduce his/her rightfully owned taxes after a
reorganization. The taxpayer, in this case Evelyn Gregory, has a right to also avoid them
altogether. However, according to Guy T. Helvering, the Commissioner of Internal Revenue,
there was no corporate reorganization. Helvering argued in economic substance and said that all
the three companies were owned by the same person. Therefore, Gregory was only disguising the

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transaction and making it look like a reorganization so that she could avoid paying any
substantial income tax after disposing her shares. Further, Helvering stated that Gregory
understated her liability by $ 10,000. Besides, Gregory used the provisions of the Act for
purposes of tax avoidance. However, the Act was not created with the intent of allowing
reorganizations that would aid in tax avoidance.
Conclusion of the Court
The Supreme Court found that the creation od Averill Corporation was not to serve any
business purpose. The Court argued that the main intent of creating the new company was for it
to masquerade as a corporate reorganization, while in real sense it was not. Although the process
followed the provisions of the statue, the entire undertaking was devious. The Court ruled in
favour of the Commissioner.
Analysis of the Findings
The petitioner, Evelyn Gregory, created Averill Corporation to aid her in tax avoidance.
The reorganization, in this case, lacked economic substance as the taxpayer transferred stock and
immediately liquated the new corporation. She then sold the stock for personal gains. She formed
the corporation as a temporary legal device, to help her fulfil the requirements of reorganization,
and thus ought to have been ignored legally. The transaction is structured as a reorganization but
is not a reorganization. The position of the Commissioner that the attempt for a reorganization
ought to have been disregarded implied that Gregory was liable to pay tax.
Court Case 2: Welch v. Helvering, 290 US 111.
Facts

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Thomas Welch and his father owned a business in Minnesota. In 1922, the grain
brokerage business was adjudged an involuntary bankrupt (Justia US Supreme Court, 2020). The
business was yet to settle some of its debts. Welch, the petitioner, later on, entered into a contract
with a company called Kellogg, to buy grains on its behalf for pay or on a commission. Welch
decided to solidify his credit and standing. The petitioner made a decision to settle the debts that
the business owned suppliers and try to reestablish relations with his previous customers. The
petitioner managed to pay the debts as deductions from his income and managed to do so for five
years successively. However, Guy T. Helvering, the Commissioner of the Internal Revenue
Service, did not permit the petitioner to continue with this arrangement. Helvering was opposed
to the petitioner’s move of making the deductions as ordinary and necessary expenses. He ruled
that the payments should take the form of capital expenditures. The Board of Tax Appeals
sustained the commissioner’s actions and the decision was then affirmed by the Court of Appeals
for the Eighth Circuit.
Issues/laws at hand
The issue at hand is whether payments made by Welch should have taken the nature of
capital expenditures, or they could be deducted as ordinary and necessary expenses. Under
section 162(a) of the Internal Revenue Code, a deduction claim can only be made if it is an
expense, is ordinary and necessary for the company (Justia US Supreme Court, 2020).
Conclusion of the Court
The Supreme Court upheld the decision that the payments made by the petitioner were
not deductible from ordinary and necessary expenses. However, the payments made by the

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petitioner were capital expenditures. The ruling of the Court was founded on the provisions of
Section 162 of the Internal Revenue Code.
Analysis of the Findings
The expenses were too personal to be ordinary. These were capital expenditures.
Payments made by the petitioner were not ordinary because they were made under the
circumstances outside the norms of conduct. Payments were aimed at helping the petitioner
develop his new role, and reinstate business relations previously enjoyed before the company
went into bankruptcy.
Court Case 3: Quail Corporation v. North Dakota, 504 US 298.
Facts
The petitioner, in this case, is Quill Corporation, and the respondent is North Dakota by
and through its tax Commissioner, Heitkamp (Legal Information Institute, 2020). Heitkamp filed
an action in Court in the State of Dakota, to be allowed to collect use taxes from Quill, which is a
mail-order house in Delaware. The company has warehouses in three other states but does not
have any representatives or outlets in the State of North Dakota.
Issues/Laws at hand
The North Dakota Tax Commissioner wanted to impose sales tax on Quill Corporation,
yet the company was not physically present in North Dakota. The Commissioner wanted to
charge tax for use, storage, and consumption of products offered by the company in the State.
None of Quill’s employees or tangible property existed in North Dakota. Quill’s position is that
it should not be forced by the State to collect use taxes from its consumers. A state cannot tax a

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business whose main contact with consumers is via mail or common carrier. In such a case, a
state lacks substantial nexus, which is a requirement in the Dormant Commerce Clause.
Conclusion of the Court
The trial court ruled in favour of the petitioner. However, the Supreme Court in favour of
Quill Corporation Legal Information Institute, 2020). The ruling was found on the argument that
the petitioner needed to be physically present, by either having a store, or employees in a state
for it to make a demand to collect and use tax made by in-state customers.
Analysis of the Findings
The Court determined that the decision by North Dakota to impose use tax by was not a
breach of the Due Process Clause. The petitioner was in contact with the residents of North
Dakota and benefited directly from tax revenue collected by the state. However, the use tax, in
this case, did not meet the constitutional threshold because it went against interstate commerce.
Consequently, use tax was a violation of the Commerce Clause. The presence of customers alone
was not sufficient ground for the imposition of a sales tax collection obligation on the petitioner.
However, it is possible for such a decision to be overruled by Congress through legislation.

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References

Justia US Supreme Court. (2020). Welch v. Helvering, 290 U.S. 111 (1933). Retrieved April 8
2020, from https://supreme.justia.com/cases/federal/us/290/111/
Legal Information Institute. (2020). Quill Corp. v. North Dakota, 504 U.S. 298 (1992). Retrieved
April 8 2020, from https://www.law.cornell.edu/supct/html/91-0194.ZO.html
Revenue Act of 1928. (2020). An Act To reduce and equalize taxation, provide revenue, and for
other purposes. Retrieved April 8 2020, from https://www.loc.gov/law/help/statutes-at-
large/70th-congress/session-1/c70s1ch852.pdf