Manhattan Gen. Equipment Company v. Commissioner

Supreme Court of the United States · 1936 · Corporations

297 U.S. 129 (1936)

Updated August 22, 2026

CorporationsTaxAdministrative lawReorganizationtax basisstock distributionapportionmentTreasury regulations

Facts

United Brokerage Company bought all outstanding stock of Artemas Ward, Inc. (New York) for $3,414,345.63. In a reorganization, the New York corporation transferred assets worth $961,952.86 to a Delaware corporation in exchange for 100 shares of Delaware stock, which it then distributed to United Brokerage along with accounts receivable; the New York corporation retained only about $50,000 in cash behind its 4,964 shares. United Brokerage later sold the 4,964 New York shares for $49,640, and the dispute concerned how to apportion the original stock basis between the old New York shares and the newly distributed Delaware shares in computing the loss. The taxpayers relied on the original Treasury regulation, while the Commissioner applied an amended version that removed a cap tying attributed basis to the fair market value of the new shares.

Issue

When a statute requires the basis of old stock to be apportioned between old stock and stock distributed in a reorganization, should the taxpayer’s loss be computed under the original Treasury regulation or under a later amended regulation where the original regulation produced an inequitable allocation? More specifically, may the amended regulation be applied without being treated as impermissibly retroactive?

Rule

Where a federal statute requires basis to be apportioned, the apportionment must be a fair and just division consistent with the statute’s purpose. An administrative regulation is valid only if it carries into effect the will of Congress as expressed by the statute and is reasonable; if it is inconsistent with the statute or unreasonable, it is a nullity. Application of a corrective regulation to govern a case is not impermissibly retroactive when the earlier regulation was invalid and the statute itself defines the taxpayer’s rights.

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In Seattle, Orion Holdings bought all the shares of Cascadia Printworks for $8 million. In a later reorganization, Cascadia transferred nearly all of its operating assets to a new affiliate and distributed the affiliate's stock to Orion, leaving the old corporation with only a small cash balance; a Treasury rule would allocate so much basis to the old shares that Orion could claim an enormous loss when it later sold those old shares for their tiny residual value.

If the governing tax statute requires the basis of the original shares to be apportioned between the old shares and the newly distributed shares, which is the strongest argument against using that Treasury rule?

Explanation. Where the statute requires basis to be apportioned, apportionment means a just proportion, not an allocation that yields a grossly disproportionate loss. A regulation inconsistent with that statutory command, or unreasonable as applied, is a nullity and cannot control the tax result. (Derived from Manhattan Gen. Equipment Company v. Commissioner (1936).)