Helvering v. Watts

In 1924, Watts (plaintiff) and two others were the only stockholders of the United States Ferro Alloys Corporation (Ferro Alloys). The three owners of Ferro Alloys exchanged their stock in Ferro Alloys for shares in Vanadium Corporation of America and over $1.1 million of mortgage bonds of Ferro Alloys, guaranteed by Vanadium. Ferro Alloys continued to operate until the company dissolved in 1928. After the transaction, Watts filed federal income taxes without recognizing a taxable gain on the exchange of his Ferro Alloys shares for both the Vanadium shares and the Ferro Alloys mortgage bonds. The Commissioner of Internal Revenue (the commissioner) (defendant) issued a notice of deficiency and argued that the inclusion of the mortgage bonds in the exchange disqualified the transaction from being considered a reorganization for which no gain or loss must be recognized. The commissioner argued that the transaction that involved both stock and mortgage bonds was not a corporate reorganization but instead was the sale of Ferro Alloys stock from which a taxable gain must be recognized. The Board of Tax Appeals (the board) affirmed the commissioner’s deficiency assessment. Watts filed a lawsuit in the United States Court of Appeals for the Second Circuit seeking to overturn the deficiency. The circuit court reversed the board’s decision, determining that the transaction did not realize a taxable gain. The commissioner appealed to the United States Supreme Court.