author: Justice Blackmun Justice Scalia,

text:
    SCHMUCK v. UNITED STATES
    No. 87-6431.
    Argued November 30, 1988
    Decided March 22, 1989

      Blackmun, J., delivered the opinion of the Court, in which Rehnquist, C. J., and White, Stevens, and Kennedy, JJ., joined. Scalia, J., filed a dissenting opinion, in which Brennan, Marshall, and O’Connor, JJ., joined, post, p. 722.

      Peter L. Steinberg by appointment of the Court, 486 U. S. 1041, argued the cause and filed briefs for petitioner.

      Brian J. Martin argued the cause for the United States. With him on the brief were Solicitor General Fried, Acting Assistant Attorney General Dennis, Deputy Solicitor General Bryson, and Louis M. Fischer.

   Justice Blackmun

delivered the opinion of the Court.

r-H

In August 1983, petitioner Wayne T. Schmuck, a used-car distributor, was indicted in the United States District Court for the Western District of Wisconsin on 12 counts of mail fraud, in violation of 18 U. S. C. §§ 1341 and 1342. App. 3.

The alleged fraud was a common and straightforward one. Schmuck purchased used cars, rolled back their odometers, and then sold the automobiles to Wisconsin retail dealers for prices artificially inflated because of the low-mileage readings. These unwitting car dealers, relying on the altered odometer figures, then resold the cars to customers, who in turn paid prices reflecting Schmuck’s fraud. To complete the resale of each automobile, the dealer who purchased it from Schmuck would submit a title-application form to the Wisconsin Department of Transportation on behalf of his retail customer. The receipt of a Wisconsin title was a prerequisite for completing the resale; without it, the dealer could not transfer title to the customer and the customer could not obtain Wisconsin tags. The submission of the title-application form supplied the mailing element of each of the alleged mail frauds.

Before trial, Schmuck moved to dismiss the indictment on the ground that the mailings at issue — the submissions of the title-application forms by the automobile dealers — were not in furtherance of the fraudulent scheme and, thus, did not satisfy the mailing element of the crime of mail fraud. Schmuck also moved under Federal Rule of Criminal Procedure 31(c) for a jury instruction on the then misdemeanor offense of tampering with an odometer, 15 U. S. C. §§ 1984 and 1990c(a) (1982 ed.). The District Court denied both motions. After trial, the jury returned guilty verdicts on all 12 counts.

A divided panel of the United States Court of Appeals for the Seventh Circuit reversed and remanded the case for a new trial. 776 F. 2d 1368 (1985). Although the panel rejected Schmuck’s claim that he was entitled to a judgment of acquittal because the mailings were not made in furtherance of his scheme, it ruled that under Rule 31(c) the District Court should have instructed the jury on the lesser offense of odometer tampering. The panel applied the so-called “inherent relationship” test for determining what constitutes a lesser included offense for the purpose of Rule 31(c). See, e. g., United States v. Whitaker, 144 U. S. App. D. C. 344, 349, 447 F. 2d 314, 319 (1971). Under that test, one offense is included in another when the facts as alleged in the indictment and proved at trial support the inference that the defendant committed the less serious offense, and an “inherent relationship” exists between the two offenses. This relationship arises when the two offenses relate to the protection of the same interests and the proof of the greater offense can generally be expected to require proof of the lesser offense. Ibid. Applying this test, the court concluded that both the mail fraud and odometer tampering statutes protect against fraud, and that the proof of mail fraud generally entails proving the underlying fraudulent conduct. The panel then held that Schmuck was entitled to the lesser offense instruction because a rational jury could have found him guilty of odometer tampering, yet acquitted him of mail fraud on the ground that the mailings were too tangential to the fraudulent scheme to satisfy the requirements of mail fraud.

The Court of Appeals vacated the panel decision and ordered the case to be reheard en banc. 784 F. 2d 846 (1986). On rehearing, by a divided vote, 840 F. 2d 384 (1988), the en banc court rejected the “inherent relationship” test for defining lesser included offenses, and adopted instead the “elements test” whereby one offense is necessarily included within another only when the elements of the lesser offense form a subset of the elements of the offense charged. Id., at 387. The Court of Appeals found that the elements test “is grounded in the terms and history of Rule 31(c), comports with the constitutional requirement of notice to defendant of the potential for conviction of an offense not separately charged, permits a greater degree of certainty in the application of Rule 31(c), and harmonizes the concept of ‘necessarily included’ under Rule 31(c) with that of a lesser included offense where the issue is double jeopardy.” Id., at 388. Applying the elements test, the Court of Appeals held that Schmuck was not entitled to a jury instruction on the offense of odometer tampering because he could have been convicted of mail fraud without a showing that he actually altered the odometers, but could not have been convicted of odometer tampering absent such a showing. Since the elements of odometer tampering are not a subset of the elements of mail fraud, odometer tampering did not qualify as a lesser included offense of mail fraud and, accordingly, the District Court was not required under Rule 31(c) to instruct the jury on the odometer-tampering offense.

We granted certiorari, 486 U. S. 1004 (1988), to define further the scope of the mail fraud statute and to resolve a conflict among the Circuits over which test to apply in determining what constitutes a lesser included offense for the purposes of Rule 31(c).

II

“The federal mail fraud statute does not purport to reach all frauds, but only those limited instances in which the use of the mails is a part of the execution of the fraud, leaving all other cases to be dealt with by appropriate state law.” Kann v. United States, 323 U. S. 88, 95 (1944). To be part of the execution of the fraud, however, the use of the mails need not be an essential element of the scheme. Pereira v. United States, 347 U. S. 1, 8 (1954). It is sufficient for the mailing to be “incident to an essential part of the scheme,” ibid., or “a step in [the] plot,” Badders v. United States, 240 U. S. 391, 394 (1916).

Schmuck, relying principally on this Court's decisions in Kann, supra, Parr v. United States, 363 U. S. 370 (1960), and United States v. Maze, 414 U. S. 395 (1974), argues that mail fraud can be predicated only on a mailing that affirmatively assists the perpetrator in carrying out his fraudulent scheme. The mailing element of the offense, he contends, cannot be satisfied by a mailing, such as those at issue here, that is routine and innocent in and of itself, and that, far from furthering the execution of the fraud, occurs after the fraud has come to fruition, is merely tangentially related to the fraud, and is counterproductive in that it creates a “paper trail” from which the fraud may be discovered. Brief for Petitioner 20-24. We disagree both with this characterization of the mailings in the present case and with this description of the applicable law.

We begin by considering the scope of Schmuck’s fraudulent scheme. Schmuck was charged with devising and executing a scheme to defraud Wisconsin retail automobile customers who based their decisions to purchase certain automobiles at least in part on the low-mileage readings provided by the tampered odometers. This was a fairly large-scale operation. Evidence at trial indicated that Schmuck had employed a man known only as “Fred” to turn back the odometers on about 150 different cars. Tr. 102-103. Schmuck then marketed these cars to a number of dealers, several of whom he dealt with on a consistent basis over a period of about 15 years. Id., at 33-34, 53. Indeed, of the 12 automobiles that are the subject of the counts of the indictment, 5 were sold to “P and A Sales,” and 4 to “Southside Auto.” App. 6-7. Thus, Schmuck’s was not a “one-shot” operation in which he sold a single car to an isolated dealer. His was an ongoing fraudulent venture. A rational jury could have concluded that the success of Schmuck’s venture depended upon his continued harmonious relations with, and good reputation among, retail dealers, which in turn required the smooth flow of cars from the dealers to their Wisconsin customers.

Under these circumstances, we believe that a rational jury could have found that the title-registration mailings were part of the execution of the fraudulent scheme, a scheme which did not reach fruition until the retail dealers resold the cars and effected transfers of title. Schmuck’s scheme would have come to an abrupt halt if the dealers either had lost faith in Schmuck or had not been able to resell the cars obtained from him. These resales and Schmuck’s relationships with the retail dealers naturally depended on the successful passage of title among the various parties. Thus, although the registration-form mailings may not have contributed directly to the duping of either the retail dealers or the customers, they were necessary to the passage of title, which in turn was essential to the perpetuation of Schmuck’s scheme. As noted earlier, a mailing that is “incident to an essential part of the scheme,” Pereira, 347 U. S'., at 8, satisfies the mailing element of the mail fraud offense. The mailings here fit this description. See, e. g., United States v. Locklear, 829 F. 2d 1314, 1318-1319 (CA4 1987) (retail customers obtaining title documents through the mail furthers execution of wholesaler’s odometer tampering scheme); United States v. Galloway, 664 F. 2d 161, 163-165 (CA7 1981) (same), cert. denied, 456 U. S. 1006 (1982); cf. United States v. Shryock, 537 F. 2d 207, 208-209 (CA5 1976) (local motor vehicle department’s mailing of title applications to state headquarters furthers retailer’s odometer-tampering scheme), cert. denied, 429 U. S. 1100 (1977).

Once the full flavor of Schmuck’s scheme is appreciated, the critical distinctions between this case and the three cases in which this Court has delimited the reach of the mail fraud statute — Kann, Parr, and Maze — are readily apparent. The defendants in Kann were corporate officers and directors accused of setting up a dummy corporation through which to divert profits into their own pockets. As part of this fraudulent scheme, the defendants caused the corporation to issue two checks payable to them. The defendants cashed these checks at local banks, which then mailed the checks to the drawee banks for collection. This Court held that the mailing of the cashed checks to the drawee banks could not supply the mailing element of the mail fraud charges. The defendants’ fraudulent scheme had reached fruition. “It was immaterial to them, or to any consummation of the scheme, how the bank which paid or credited the check would collect from the drawee bank.” 323 U. S., at 94.

In Parr, several defendants were charged, inter alia, with having fraudulently obtained gasoline and a variety of other products and services through the unauthorized use of a credit card issued to the school district which employed them. The mailing element of the mail fraud charges in Parr was purportedly satisfied when the oil company which issued the credit card mailed invoices to the school district for payment, and when the district mailed payment in the form of a check. Relying on Kann, this Court held that these mailings were not in execution of the scheme as required by the statute because it was immaterial to the defendants how the oil company went about collecting its payment. 363 U. S., at 393.

Later, in Maze, the defendant allegedly stole his roommate’s credit card, headed south on a winter jaunt, and obtained food and lodging at motels along the route by placing the charges on the stolen card. The mailing element of the mail fraud charge was supplied by the fact that the defendant knew that each motel proprietor would mail an invoice to the bank that had issued the credit card, which in turn would mail a bill to the card owner for payment. The Court found that these mailings could not support mail fraud charges because the defendant’s scheme had reached fruition when he checked out of each motel. The success of his scheme in no way depended on the mailings; they merely determined which of his victims would ultimately bear the loss. 414 U. S., at 402.

The title-registration mailings at issue here served a function different from the mailings in Kann, Parr, and Maze. The intrabank mailings in Kann and the credit card invoice mailings in Parr and Maze involved little more than post-fraud accounting among the potential victims of the various schemes, and the long-term success of the fraud did not turn on which of the potential victims bore the ultimate loss. Here, in contrast, a jury rationally could have found that Schmuck by no means was indifferent to the fact of who bore the loss. The mailing of the title-registration forms was an essential step in the successful passage of title to the retail purchasers. Moreover, a failure of this passage of title would have jeopardized Schmuck’s relationship of trust and goodwill with the retail dealers upon whose unwitting cooperation his scheme depended. Schmuck’s reliance on our prior cases limiting the reach of the mail fraud statute is simply misplaced.

To the extent that Schmuck would draw from these previous cases a general rule that routine mailings that are innocent in themselves cannot supply the mailing element of the mail fraud offense, he misapprehends this Court’s precedents. In Parr the Court specifically acknowledged that “innocent” mailings — ones that contain no false information— may supply the mailing element. 363 U. S., at 390. In other cases, the Court has found the elements of mail fraud to be satisfied where the mailings have been routine. See, e. g., Carpenter v. United States, 484 U. S. 19, 28 (1987) (mailing newspapers).

We also reject Schmuck’s contention that mailings that someday may contribute to the uncovering of a fraudulent scheme cannot supply the mailing element of the mail fraud offense. The relevant question at all times is whether the mailing is part of the execution of the scheme as conceived by the perpetrator at the time, regardless of whether the mailing later, through hindsight, may prove to have been counterproductive and return to haunt the perpetrator of the fraud. The mail fraud statute includes no guarantee that the use of the mails for the purpose of executing a fraudulent scheme will be risk free. Those who use the mails to defraud proceed at their peril.

For these reasons, we agree with the Court of Appeals that the mailings in this case satisfy the mailing element of the mail fraud offenses.

Ill

Federal Rule of Criminal Procedure 31(c) provides in relevant part: “The defendant may be found guilty of an offense necessarily included in the offense charged.” As noted above, the Courts of Appeals have adopted different tests to determine when, under this Rule, a defendant is entitled to a lesser included offense instruction. The Seventh Circuit’s original panel opinion applied the “inherent relationship” approach formulated in United States v. Whitaker, 144 U. S. App. D. C. 344, 447 F. 2d 314 (1971):

“[DJefendant is entitled to invoke Rule 31(c) when a lesser offense is established by the evidence adduced at trial in proof of the greater offense, with the caveat that there must also be an ‘inherent’ relationship between the greater and lesser offenses, i. e., they must relate to the protection of the same interests, and must be so related that in the general nature of these crimes, though not necessarily invariably, proof of the lesser offense is necessarily presented as part of the showing of the commission of the greater offense.” Id., at 349, 447 F. 2d, at 319.

The en banc Seventh Circuit rejected this approach in favor of the “traditional,” or “elements” test. Under this test, one offense is not “necessarily included” in another unless the elements of the lesser offense are a subset of the elements of the charged offense. Where the lesser offense requires an element not required for the greater offense, no instruction is to be given under Rule 31(c).

We now adopt the elements approach to Rule 31(c). As the Court of Appeals noted, this approach is grounded in the language and history of the Rule and provides for greater certainty in its application. It, moreover, is consistent with past decisions of this Court which, though not specifically endorsing a particular test, employed the elements approach in cases involving lesser included offense instructions.

First, the wording of Rule 31(c), although not conclusive, supports the application of the elements approach. The Rule speaks in terms of an offense that is “necessarily included in the offense charged.” This language suggests that the comparison to be drawn is between offenses. Since offenses are statutorily defined, that comparison is appropriately conducted by reference to the statutory elements of the offenses in question, and not, as the inherent relationship approach would mandate, by reference to conduct proved at trial regardless of the statutory definitions. Furthermore, the language of Rule 31(c) speaks of the necessary inclusion of the lesser offense in the greater. While the elements test is true to this requirement, the inherent relationship approach dispenses with the required relationship of necessary inclusion: the inherent relationship approach permits a lesser included offense instruction even if the proof of one offense does not invariably require proof of the other as long as the two offenses serve the same legislative goals.

In addition, the inherent relationship approach, in practice, would require that Rule 31(c) be applied in a manner inconsistent with its language. The Rule provides that a defendant “may be found guilty” of a lesser included offense, without distinguishing between a request for jury instructions made by the Government and one made by the defendant. In other words, the language of the Rule suggests that a lesser included offense instruction is available in equal measure to the defense and to the prosecution. Yet, under the inherent relationship approach, such mutuality is impossible.

It is ancient doctrine of both the common law and of our Constitution that a defendant cannot be held to answer a charge not contained in the indictment brought against him. See Ex parte Bain, 121 U. S. 1, 10 (1887); Stirone v. United States, 361 U. S. 212, 215-217 (1960); United States v. Miller, 471 U. S. 130, 140, 142-143 (1985). This stricture is based at least in part on the right of the defendant to notice of the charge brought against him. United States v. Whitaker, 144 U. S. App. D. C., at 350-351, 447 F. 2d, at 320-321. Were the prosecutor able to request an instruction on an offense whose elements were not charged in the indictment, this right to notice would be placed in jeopardy. Specifically, if, as mandated under the inherent relationship approach, the determination whether the offenses are sufficiently related to permit an instruction is delayed until all the evidence is developed at trial, the defendant may not have constitutionally sufficient notice to support a lesser included offense instruction requested by the prosecutor if the elements of that lesser offense are not part of the indictment. Accordingly, under the inherent relationship approach, the defendant, by in effect waiving his right to notice, may obtain a lesser offense instruction in circumstances where the constitutional restraint of notice to the defendant would prevent the prosecutor from seeking an identical instruction. The elements test, in contrast, permits lesser offense instructions only in those cases where the indictment contains the elements of both offenses and thereby gives notice to the defendant that he may be convicted on either charge. This approach preserves the mutuality implicit in the language of Rule 31(c).

Second, the history of Rule 31(c) supports the adoption of the elements approach. The Rule, which has not been amended since its adoption in 1944, is the most recent derivative of the common-law practice that permitted a jury to find a defendant “guilty of any lesser offense necessarily included in the offense charged.” Beck v. Alabama, 447 U. S. 625, 633 (1980). Over a century ago, Congress codified the common law for federal criminal trials, providing in the Act of June 1, 1872, ch. 255, '§ 9, 17 Stat. 198, that “in all criminal causes the defendant may be found guilty of any offence the commission of which is necessarily included in that with which he is charged in the indictment.” Rule 31(c) was intended to be a restatement of this “pre-existing law.” See Keeble v. United States, 412 U. S. 205, 208, n. 6 (1973). Accordingly, prevailing practice at the time of the Rule’s promulgation informs our understanding of its terms, and, specifically, its limitation of lesser included offenses to those “necessarily included in the offense charged.”

The nature of that prevailing practice is clear. In Giles v. United States, 144 F. 2d 860 (1944), decided just three months before the adoption of Rule 31(c), the Court of Appeals for the Ninth Circuit unequivocably applied the elements test to determine the propriety of a lesser included offense instruction: “ ‘To be necessarily included in the greater offense the lesser must be such that it is impossible to commit the greater without first having committed the lesser.’” Id., at 861, quoting House v. State, 186 Ind. 593, 595-596, 117 N. E. 647, 648 (1917). This approach, moreover, was applied consistently by state courts. Indeed, in State v. Henry, 98 Me. 561, 564, 57 A. 891, 892 (1904), the Supreme Judicial Court of Maine concluded that “a practically universal rule prevails, that the verdict may be for a lesser crime which is included in a greater charged in the indictment, the test being that the evidence required to establish the greater would prove the lesser offense as a necessary element.” The California Supreme Court in People v. Kerrick, 144 Cal. 46, 47, 77 P. 711, 712 (1904), stated: “To be ‘necessarily included’ in the offense charged, the lesser offense must not only be part of the greater in fact, but it must be embraced within the legal definition of the greater as a part thereof.” See also State v. Marshall, 206 Iowa 373, 375, 220 N. W. 106 (1928); People ex rel. Wachowicz v. Martin, 293 N. Y. 361, 364, 57 N. E. 2d 53, 54-55 (1944). This Court’s decision in Stevenson v. United States, 162 U. S. 313 (1896), reflects the “practically universal” practice. There, in holding that the defendant in a murder charge was entitled to a lesser included offense instruction on manslaughter under the statutory predecessor to Rule 31(c), the Court engaged in a careful comparison of the statutory elements of murder and manslaughter to determine if the latter was a lesser included offense of the former. Id., at 320. In short, the elements approach was settled doctrine at the time of the Rule’s promulgation and for more than two decades thereafter. In its restatement of “pre-existing law,” Keeble v. United States, 412 U. S., at 208, n. 6, Rule 31(c) incorporated this established practice.

Third, the elements test is far more certain and predictable in its application than the inherent relationship approach. Because the elements approach involves a textual comparison of criminal statutes and does not depend on inferences that may be drawn from evidence introduced at trial, the elements approach permits both sides to know in advance what jury instructions will be available and to plan their trial strategies accordingly. The objective elements approach, moreover, promotes judicial economy by providing a clearer rule of decision and by permitting appellate courts to decide whether jury instructions were wrongly refused without reviewing the entire evidentiary record for nuances of inference.

The inherent relationship approach, in contrast, is rife with the potential for confusion. Finding an inherent relationship between offenses requires a determination that the offenses protect the same interests and that “in general” proof of the lesser “necessarily” involves proof of the greater. In the present case, the Court of Appeals appropriately noted: “These new layers of analysis add to the uncertainty of the propriety of an instruction in a particular case: not only are there more issues to be resolved, but correct resolution involves questions of degree and judgment, with the attendant probability that the trial and appellate courts may differ.” 840 F. 2d, at 389-390. This uncertainty was illustrated here. The three judges of the original appellate panel split in their application of the inherent relationship test to the offenses of mail fraud and odometer tampering. 776 F. 2d, at 1373-1375 (opinion concurring in part and dissenting in part). In the context of rules of criminal procedure, where certainty and predictability are desired, we prefer the clearer standard for applying Rule 31(c).

IV

Turning to the facts of this case, we agree with the Court of Appeals that the elements of the offense of odometer tampering are not a subset of the elements of the crime of mail fraud. 840 F. 2d, at 386. There are two elements in mail fraud: (1) having devised or intending to devise a scheme to defraud (or to perform specified fraudulent acts), and (2) use of the mail for the purpose of executing, or attempting to execute, the scheme (or specified fraudulent acts). The offense of odometer tampering includes the element of knowingly and willfully causing an odometer to be altered. This element is not a subset of any element of mail fraud. Knowingly and willfully tampering with an odometer is not identical to devising or intending to devise a fraudulent scheme. Compare 18 U. S. C. § 1341 with 15 U. S. C. §§ 1984 and 1990c(a).

V

We conclude that Schmuck’s conviction was consistent with the statutory definition of mail fraud and that he was not entitled to a lesser included offense instruction on odometer tampering. The judgment of the Court of Appeals, accordingly, is affirmed.

It is so ordered.

Justice Scalia,

with whom Justice Brennan, Justice Marshall, and Justice O’Connor join, dissenting.

The Court today affirms petitioner’s mail fraud conviction under 18 U. S. C. § 1341. A jury found that petitioner had defrauded retail automobile purchasers by altering odometer readings on used cars and then selling the cars to unwitting dealers for resale. The scheme was a continuing one, and some dealers bought a number of the cars from petitioner over a period of time. When the dealers sold the cars, state law required them to submit title application forms to the appropriate state agency. The Court concludes that the dealers’ compliance with this requirement by mail caused the scheme to constitute mail fraud, because “a failure of this passage of title would have jeopardized Schmuck’s relationship of trust and goodwill with the retail dealers upon whose unwitting cooperation his scheme depended.” Ante, at 714. In my view this is inconsistent with our prior cases’ application of the statutory requirement that mailings be “for the purpose of executing” a fraudulent scheme. 18 U. S. C. § 1341.

The purpose of the mail fraud statute is “to prevent the post office from being used to carry [fraudulent schemes] into effect.” Durland v. United States, 161 U. S. 306, 314 (1896); Parr v. United States, 363 U. S. 370, 389 (1960). The law does not establish a general federal remedy against fraudulent conduct, with use of the mails as the jurisdictional hook, but reaches only “those limited instances in which the use of the mails is a part of the execution of the fraud, leaving all other cases to be dealt with by appropriate state law.” Kann v. United States, 323 U. S. 88, 95 (1944) (emphasis added). In other words, it is mail fraud, not mail and fraud, that incurs liability. This federal statute is not violated by a fraudulent scheme in which, at some point, a mailing happens to occur — nor even by one in which a mailing predictably and necessarily occurs. The mailing must be in furtherance of the fraud.

In Kann v. United States, we concluded that even though defendants who cashed checks obtained as part of a fraudulent scheme knew that the bank cashing the checks would send them by mail to a drawee bank for collection, they did not thereby violate the mail fraud statute, because upon their receipt of the cash “[t]he scheme . . . had reached fruition,” and the mailing was “immaterial... to any consummation of the scheme.” Id., at 94. We held to the same effect in United States v. Maze, 414 U. S. 395, 400-402 (1974), declining to find that credit card fraud was converted into mail fraud by the certainty that, after the wrongdoer had fraudulently received his goods and services from the merchants, they would forward the credit charges by mail for payment. These cases are squarely in point here. For though the Government chose to charge a defrauding of retail customers (to whom the innocent dealers resold the cars), it is obvious that, regardless of who the ultimate victim of the fraud may have been, the fraud was complete with respect to each car when petitioner pocketed the dealer’s money. As far as each particular transaction was concerned, it was as inconsequential to him whether the dealer resold the car as it was inconsequential to the defendant in Maze whether the defrauded merchant ever forwarded the charges to the credit card company.

Nor can the force of our cases be avoided by combining all of the individual transactions into a single scheme, and saying, as the Court does, that if the dealers’ mailings obtaining title for each retail purchaser had not occurred then the dealers would have stopped trusting petitioner for future transactions. (That conclusion seems to me a non sequitur, but I accept it for the sake of argument.) This establishes, at most, that the scheme could not technically have been consummated if the mechanical step of the mailings to obtain conveyance of title had not occurred. But we have held that the indispensability of such mechanical mailings, not strictly in furtherance of the fraud, is not enough to invoke the statute. For example, when officials of a school district embezzled tax funds over the course of several years, we held that no mail fraud had occurred even though the success of the scheme plainly depended on the officials’ causing tax bills to be sent by mail (and thus tax payments to be received) every year. Parr v. United States, 363 U. S., at 388-392. Similarly, when those officials caused the school district to pay by mail credit card bills — a step plainly necessary to enable their continued fraudulent use of the credit card — we concluded that no mail fraud had occurred. Id., at 392-393.

I find it impossible to escape these precedents in the present case. Assuming the Court to be correct in concluding that failure to pass title to the cars would have threatened the success of the scheme, the same could have been said of failure to collect taxes or to pay the credit card bills in Parr. And I think it particularly significant that in Kann the Government proposed a theory identical to that which the Court today uses. Since the scheme was ongoing, the Government urged, the fact that the mailing of the two checks had occurred after the defendants had pocketed the fraudulently obtained cash made no difference. “[T]he defendants expected to receive further bonuses and profits,” and therefore “the clearing of these checks in the ordinary course was essential to [the scheme’s] further prosecution.” 323 U. S., at 95. The dissenters in Kann agreed. “[T]his,” they said, “was not the last step in the fraudulent scheme. It was a continuing venture. Smooth clearances of the checks were essential lest these intermediate dividends be interrupted and the conspirators be called upon to disgorge.” Id., at 96 (Douglas, J., dissenting). The Court rejected this argument, concluding that “the subsequent banking transactions between the banks concerned were merely incidental and collateral to the scheme and not a part of it.” Id., at 95; I think the mailing of the title application forms equivalently incidental here.

What Justice Frankfurter observed almost three decades ago remains true: “The adequate degree of relationship between a mailing which occurs during the life of a scheme and the scheme is . . . not a matter susceptible of geometric determination.” Parr v. United States, supra, at 397 (dissenting opinion). All the more reason to adhere as closely as possible to past cases. I think we have not done that today, and thus create problems for tomorrow.

       Rule 31(c) provides in relevant part: “The defendant may be found guilty of an offense necessarily included in the offense charged.”

       In 1986, Congress made odometer tampering a felony. Pub. L. 99-579, § 3(b), 100 Stat. 3311, 15 U. S. C. § 1990c(a) (1982 ed., Supp. V).

       The District Court concluded that whether the mailings alleged in the indictment furthered the fraudulent scheme was a “matter to be determined at trial.” App. 12. The court concluded that Schmuck was not entitled to the lesser offense instruction because odometer tampering was not a necessarily included offense of mail fraud. Id., at 28. Schmuck raised these objections again in support of a motion for acquittal at the close of the Government’s case. Id., at 55-59. That motion was denied. 7<i.,at60.
      The District Court instructed the jury that in order to find Schmuck guilty of mail fraud the jury had to find beyond a reasonable doubt that he knowingly devised a scheme to defraud, and that he caused matter to be sent in the mail for the purpose of executing that scheme. Tr. 189. The court also told the jury that it could find Schmuck guilty if the use of the mails was reasonably foreseeable. Id., at 191.

         One judge, concurring in part and dissenting in part, agreed with the panel’s application of the inherent relationship test, but found no such relationship between mail fraud and odometer tampering. 776 F. 2d, at 1373.

       Compare, e. g., United States v. Whitaker, 144 U. S. App. D. C. 344, 349, 447 F. 2d 314, 319 (1971) (inherent relationship test), and United States v. Martin, 783 F. 2d 1449, 1451 (CA9 1986) (same), with United States v. Campbell, 652 F. 2d 760, 761-762 (CA8 1981) (elements test), and Government of Virgin Islands v. Joseph, 765 F. 2d 394, 396 (CA3 1985) (same).

       The statute provides in relevant part:
      “Whoever, having devised or intending to devise any scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises ... for the purpose of executing such scheme or artifice or attempting so to do . . . knowingly causes to be delivered by mail according to the direction thereon, or at the place at which it is directed to be delivered by the person to whom it is addressed, any such matter or thing, shall be fined not more than $1,000 or imprisoned not more than five years, or both.” 18 U. S. C. § 1341.

         Parr also involved a second fraudulent scheme through which the defendant school board members misappropriated school district tax revenues. The Government argued that the mailing element of the mail fraud charges was supplied by the mailing of tax statements, checks, and receipts. This Court held, however, that in the absence of any evidence that the tax levy was increased as part of the fraud, the mailing element of the offense could not be supplied by mailings “made or caused to be made under the imperative command of duty imposed by state law.” 363 U. S., at 391. No such legal duty is at issue here. Whereas the mailings of the tax documents in Parr were the direct product of the school district’s state constitutional duty to levy taxes, id., at 387, and would have been made regardless of the defendants’ fraudulent scheme, the mailings in the present case, though in compliance with Wisconsin’s ear-registration procedure, were derivative of Schmuck’s scheme to sell “doctored” cars and would not have occurred but for that scheme.

       Our decision in no way alters the independent prerequisite for a lesser included offense instruction that the evidence at trial must be such that a jury could rationally find the defendant guilty of the lesser offense, yet acquit him of the greater. Keeble v. United States, 412 U. S. 205, 208 (1973).

       This reading of the Rule is consistent with its origins. The Rule “developed as an aid to the prosecution in cases in which the proof failed to establish some element of the crime charged.” Beck v. Alabama, 447 U. S. 625, 633 (1980).
      Of course, it is now firmly established that Rule 31(c)’s provision for lesser offense instructions benefits the defendant as well. The Court recognized in Keeble v. United States, supra, that where the jury suspects that the defendant is plainly guilty of some offense, but one of the elements of the charged offense remains in doubt, in the absence of a lesser offense instruction, the jury will likely fail to give full effect to the reasonable-doubt standard, resolving its doubts in favor of conviction. Id., at 212-213. The availability of a lesser included offense instruction protects the defendant from such improper conviction.

       In Keeble, 412 U. S., at 214, n. 14, we acknowledged that the inherent relationship approach abandoned mutuality in the application of Rule 31(c), but we had no occasion to address the merits of the approach or to discuss whether mutuality was implicit in the language of the Rule.

       This Court’s decisions after the adoption of Rule 31(c), while not formally adopting the elements approach, reflect adherence to it. Those decisions have focused on the statutory elements of individual offenses when considering the propriety of lesser included offense instructions. In Keeble, for example, we held that the defendant was entitled to an instruction on the lesser offense of simple assault:
      “[A]n intent to commit serious bodily injury is a necessary element of the crime with which petitioner was charged, but not of the crime of simple assault. Since the nature of petitioner’s intent was very much in dispute at trial, the jury could rationally have convicted him of simple assault if that option had been presented.” 412 U. S., at 213.
      See also Sansone v. United States, 380 U. S. 343, 352 (1965) (analyzing the elements involved in 26 U. S. C. § 7207, and finding that they are a subset of the elements in 26 U. S. C. § 7201).


source: Caselaw Access Project

author: Justice Stevens Justice White,

license: Public Domain

text:
    COMMISSIONER OF INTERNAL REVENUE v. CLARK et ux.
    No. 87-1168.
    Argued November 7, 1988
    Decided March 22, 1989

      Stevens, J., delivered the opinion of the Court, in which Rehnquist, C. J., and Brennan, Marshall, Blackmun, O’Connor, and Kennedy, JJ., joined, and in all but Part III of which Scalia, J., joined. White, J., filed a dissenting opinion, post, p. 745.

      Alan I. Horowitz argued the cause for petitioner. With him on the briefs were Solicitor General Fried, Assistant Attorney General Rose, Deputy Solicitor General Wallace, and Ernest J. Brown.

      Walter B. Slocombe argued the cause for respondents. With him on the brief was Daniel B. Rosenbaum.

   Justice Stevens

delivered the opinion of the Court.

This is the third case in which the Government has asked us to decide that a shareholder’s receipt of a cash payment in exchange for a portion of his stock was taxable as a dividend. In the two earlier cases, Commissioner v. Estate of Bedford, 325 U. S. 283 (1945), and United States v. Davis, 397 U. S. 301 (1970), we agreed with the Government largely because the transactions involved redemptions of stock by single corporations that did not “result in a meaningful reduction of the shareholder’s proportionate interest in the corporation.” Id., at 313. In the case we decide today, however, the taxpayer in an arm’s-length transaction exchanged his interest in the acquired corporation for less than 1% of the stock of the acquiring corporation and a substantial cash payment. The taxpayer held no interest in the acquiring corporation prior to the reorganization. Viewing the exchange as a whole, we conclude that the cash payment is not appropriately characterized as a dividend. We accordingly agree with the Tax Court and with the Court of Appeals that the taxpayer is entitled to capital gains treatment of the cash payment.

I

In determining tax liability under the Internal Revenue Code of 1954, gain resulting from the sale or exchange of property is generally treated as capital gain, whereas the receipt of cash dividends is treated as ordinary income. The Code, however, imposes no current tax on certain stock-for-stock exchanges. In particular, § 354(a)(1) provides, subject to various limitations, for nonrecognition of gain resulting from the exchange of stock or securities solely for other stock or securities, provided that the exchange is pursuant to a plan of corporate reorganization and that the stock or securities are those of a party to the reorganization. 26 U. S. C. § 354(a)(1).

Under § 356(a)(1) of the Code, if such a stock-for-stock exchange is accompanied by additional consideration in the form of a cash payment or other property — something that tax practitioners refer to as “boot” — “then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.” 26 u! S. C. §356(a)(1). That is, if the shareholder receives boot, he or she must recognize the gain on the exchange up to the value of the boot. Boot is accordingly generally treated as a gain from the sale or exchange of property and is recognized in the current tax year.

Section 356(a)(2), which controls the decision in this case, creates an exception to that general rule. It provided in 1979:

“If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property.” 26 U. S. C. § 356 (a)(2) (1976 ed.).

Thus, if the “exchange . . . has the effect of the distribution of a dividend,” the boot must be treated as a dividend and is therefore appropriately taxed as ordinary income to the extent that gain is realized. In contrast, if the exchange does not have “the effect of the distribution of a dividend,” the boot must be treated as a payment in exchange for property and, insofar as gain is realized, accorded capital gains treatment. The question in this case is thus whether the exchange between the taxpayer and the acquiring corporation had “the effect of the distribution of a dividend” within the meaning of § 356(a)(2).

The relevant facts are easily summarized. For approximately 15 years prior to April 1979, the taxpayer was the president of Basin Surveys, Inc. (Basin). In January 1978, he became sole shareholder in Basin, a company in which he had invested approximately $85,000. The corporation operated a successful business providing various technical services to the petroleum industry. In 1978, N. L. Industries, Inc. (NL), a publicly owned corporation engaged in the manufacture and supply of petroleum equipment and services, initiated negotiations with the taxpayer regarding the possible acquisition of Basin. On April 3, 1979, after months of negotiations, the taxpayer and NL entered into a contract.

The agreement provided for a “triangular merger,” whereby Basin was merged into a wholly owned subsidiary of NL. In exchange for transferring all of the outstanding shares in Basin to NL’s subsidiary, the taxpayer elected to receive 300,000 shares of NL common stock and cash boot of $3,250,000, passing up an alternative offer of 425,000 shares of NL common stock. The 300,000 shares of NL issued to the taxpayer amounted to approximately 0.92% of the outstanding common shares of NL. If the taxpayer had instead accepted the pure stock-for-stock offer, he would have held approximately 1.3% of the outstanding common shares. The Commissioner and the taxpayer agree that the merger at issue qualifies as a reorganization under §§ 368(a)(1)(A) and (a)(2)(D).

Respondents filed a joint federal income tax return for 1979. As required by § 356(a)(1), they reported the cash boot as taxable gain. In calculating the tax owed, respondents characterized the payment as long-term capital gain. The Commissioner on audit disagreed with this characterization. In his view, the payment had “the effect of the distribution of a dividend” and was thus taxable as ordinary income up to $2,319,611, the amount of Basin’s accumulated earnings and profits at the time of the merger. The Commissioner assessed a deficiency of $972,504.74.

Respondents petitioned for review in the Tax Court, which, in a reviewed decision, held in their favor. 86 T. C. 138 (1986). The court started from the premise that the question whether the boot payment had “the effect of the distribution of a dividend” turns on the choice between “two judicially articulated tests.” Id., at 140. Under the test advocated by the Commissioner and given voice in Shimberg v. United States, 577 F. 2d 283 (CA5 1978), cert. denied, 439 U. S. 1115 (1979), the boot payment is treated as though it were made in a hypothetical redemption by the acquired corporation (Basin) immediately prior to the reorganization. Under this test, the cash payment received by the taxpayer indisputably would have been treated as a dividend. The second test, urged by the taxpayer and finding support in Wright v. United States, 482 F. 2d 600 (CA8 1973), proposes an alternative hypothetical redemption. Rather than concentrating on the taxpayer’s prereorganization interest in the acquired corporation, this test requires that one imagine a pure stock-for-stoek exchange, followed im'mediately by a postreorganization redemption of a portion of the taxpayer’s shares in the acquiring corporation (NL) in return for a payment in an amount equal to the boot. Under §302 of the Code, which defines when a redemption of stock should be treated as a distribution of dividend, NL’s redemption of 125,000 shares of its stock from the taxpayer in exchange for the $3,250,000 boot payment would have been treated as capital gain.

The Tax Court rejected the prereorganization test favored by the Commissioner because it considered it improper “to view the cash payment as an isolated event totally separate from the reorganization.” 86 T. C., at 151. Indeed, it suggested that this test requires that courts make the “determination of dividend equivalency fantasizing that the reorganization does not exist.” Id., at 150 (footnote omitted). The court then acknowledged that a similar criticism could be made of the taxpayer’s contention that the cash payment should be viewed as a postreorganization redemption. It concluded, however, that since it was perfectly clear that the cash payment would not have taken place without the reorganization, it was better to treat the boot “as the equivalent of a redemption in the course of implementing the reorganization,” than “as having occurred prior to and separate from the reorganization” Id., at 152 (emphasis in original).

The Court of Appeals for the Fourth Circuit affirmed. 828 F. 2d 221 (1987). Like the Tax Court, it concluded that although “[s]ection 302 does not explicitly apply in the reorganization context,” id., at 223, and although §302 differs from §356 in important respects, id., at 224, it nonetheless provides “the appropriate test for determining whether boot is ordinary income or a capital gain,” id., at 223. Thus, as explicated in § 302(b)(2), if the taxpayer relinquished more than 20% of his corporate control and retained less than 50% of the voting shares after the distribution, the boot would be treated as capital gain. However, as the Court of Appeals recognized, “[bjecause § 302 was designed to deal with a stock redemption by a single corporation, rather than a reorganization involving two companies, the section does not indicate which corporation [the taxpayer] lost interest in.” Id., at 224. Thus, like the Tax Court, the Court of Appeals was left to consider whether the hypothetical redemption should be treated as a prereorganization distribution coming from the acquired corporation or as a postreorganization distribution coming from the acquiring corporation. It concluded:

“Based on the language and legislative history of § 356, the change-in-ownership principle of § 302, and the need to review the reorganization as an integrated transaction, we conclude that the boot should be characterized as a post-reorganization stock redemption by N. L. that affected [the taxpayer’s] interest in the new corporation. Because this redemption reduced [the taxpayer’s] N. L. holdings by more than 20%, the boot should be taxed as a capital gain.” Id., at 224-225.

This decision by the Court of Appeals for the Fourth Circuit is in conflict with the decision of the Fifth Circuit in Shimberg v. United States, 577 F. 2d 283 (1978), in two important respects. In Shimberg, the court concluded that it was inappropriate to apply stock redemption principles in reorganization cases “on a wholesale basis.” Id., at 287; see also ibid., n. 13. In addition, the court adopted the pre-reorganization test, holding that “§ 356(a)(2) requires a determination of whether the distribution would have been taxed as a dividend if made prior to the reorganization or if no reorganization had occurred.” Id., at 288.

To resolve this conflict on a question of importance to the administration of the federal tax laws, we granted certiorari. 485 U. S. 933 (1988).

II

We agree with the Tax Court and the Court of Appeals for the Fourth Circuit that the question under § 356(a)(2) whether an “exchange . . . has the effect of the distribution of a dividend” should be answered by examining the effect of the exchange as a whole. We think the language and history of the statute, as well as a commonsense understanding of the economic substance of the transaction at issue, support this approach.

The language of § 356(a) strongly supports our understanding that the transaction should be treated as an integrated whole. Section 356(a)(2) asks whether “an exchange is described in paragraph (1)” that “has the effect of the distribution of a dividend.” (Emphasis supplied.) The statute does not provide that boot shall be treated as a dividend if its payment has the effect of the distribution of a dividend. Rather, the inquiry turns on whether the “exchange” has that effect. Moreover, paragraph (1), in turn, looks to whether “the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money.” (Emphasis supplied.) Again, the statute plainly refers to one integrated transaction and, again, makes clear that we are to look to the character of the exchange as a whole and not simply its component parts. Finally, it is significant that §356 expressly limits the extent to which boot may be taxed to the amount of gain realized in the reorganization. This limitation suggests that Congress intended that boot not be treated in isolation from the overall reorganization. See Levin, Adess, & McGaffey, Boot Distributions in Corporate Reorganizations — Determination of Dividend Equivalency, 30 Tax Lawyer 287, 303 (1977).

Our reading of the statute as requiring that the transaction be treated as a unified whole is reinforced by the well-established “step-transaction” doctrine, a doctrine that the Government has applied in related contexts, see, e. g., Rev. Rul. 75-447, 1975-2 Cum. Bull. 113, and that we have expressly sanctioned, see Minnesota Tea Co. v. Helvering, 302 U. S. 609, 613 (1938); Commissioner v. Court Holding Co., 324 U. S. 331, 334 (1945). Under this doctrine, interrelated yet formally distinct steps in an integrated transaction may not be considered independently of the overall transaction. By thus “linking together all interdependent steps with legal or business significance, rather than taking them in isolation,” federal tax liability may be based “on a realistic view of the entire transaction.” 1 B. Bittker, Federal Taxation of Income, Estates and Gifts ¶4.3.5, p. 4-52 (1981).

Viewing the exchange in this case as an integrated whole, we are unable to accept the Commissioner’s prereorganization analogy. The analogy severs the payment of boot from the context of the reorganization. Indeed, only by straining to abstract the payment of boot from the context of the overall exchange, and thus imagining that Basin made a distribution to the taxpayer independently of NL’s planned acquisition, can we reach the rather counterintuitive conclusion urged by the Commissioner — that the taxpayer suffered no meaningful reduction in his ownership interest as a result of the cash payment. We conclude that such a limited view of the transaction is plainly inconsistent with the statute’s direction that we look to the effect of the entire exchange.

The prereorganization analogy is further flawed in that it adopts an overly expansive reading of § 356(a)(2). As the Court of Appeals recognized, adoption of the prereorganization approach would “result in ordinary income treatment in most reorganizations because corporate boot is usually distributed pro rata to the shareholders of the target corporation.” 828 F. 2d, at 227; see also Golub, “Boot” in Reorganizations — The Dividend Equivalency Test of Section 356(a) (2), 58 Taxes 904, 911 (1980); Note, 20 Boston College L. Rev. 601, 612 (1979). Such a reading of the statute would not simply constitute a return to the widely criticized “automatic dividend rule” (at least as to cases involving a pro rata payment to the shareholders of the acquired corporation), see n. 8, supra, but also would be contrary to our standard approach to construing such provisions. The requirement of § 356(a)(2) that boot be treated as dividend in some circumstances is an exception from the general rule authorizing capital gains treatment for boot. In construing provisions such as § 356, in which a general statement of policy is qualified by an exception, we usually read the exception narrowly in order to preserve the primary operation of the provision. See Phillips, Inc. v. Walling, 324 U. S. 490, 493 (1945) (“To extend an exemption to other than those plainly and unmistakably within its terms and spirit is to abuse the interpretative process and to frustrate the announced will of the people”). Given that Congress has enacted a general rule that treats boot as capital gain, we should not eviscerate that legislative judgment through an expansive reading of a somewhat ambiguous exception.

The postreorganization approach adopted by the Tax Court and the Court of Appeals is, in our view, preferable to the Commissioner’s approach. Most significantly, this approach does a far better job of treating the payment of boot as a component of the overall exchange. Unlike the prereorganization view, this approach acknowledges that there would have been no cash payment absent the exchange and also that, by accepting the cash payment, the taxpayer experienced a meaningful reduction in his potential ownership interest.

Once the postreorganization approach is adopted, the result in this case is pellucidly clear. Section 302(a) of the Code provides that if a redemption fits within any one of the four categories set out in § 302(b), the redemption “shall be treated as a distribution in part or full payment in exchange for the stock,” and thus not regarded as a dividend. As the Tax Court and the Court of Appeals correctly determined, the hypothetical postreorganization redemption by NL of a portion of the taxpayer’s shares satisfies at least one of the subsections of § 302(b). In particular, the safe harbor provisions of subsection (b)(2) provide that redemptions in which the taxpayer relinquishes more than 20% of his or her share of the corporation’s voting stock and retains less than 50% of the voting stock after the redemption shall not be treated as distributions of a dividend. See n. 6, supra. Here, we treat the transaction as though NL redeemed 125,000 shares of its common stock (i. e., the number of shares of NL common stock forgone in favor of the boot) in return for a cash payment to the taxpayer of $3,250,000 (i. e., the amount of the boot). As a result of this redemption, the taxpayer’s interest in NL was reduced from 1.3% of the outstanding common stock to 0.9%. See 86 T. C., at 153. Thus, the taxpayer relinquished approximately 29% of his interest in NL and retained less than a 1% voting interest in the corporation after the transaction, easily satisfying the “substantially disproportionate” standards of § 302(b)(2). We accordingly conclude that the boot payment did not have the effect of a dividend and that the payment was properly treated as capital gain.

Ill

The Commissioner objects to this “recasting [of] the merger transaction into a form different from that entered into by the parties,” Brief for Petitioner 11, and argues that the Court of Appeals’ formal adherence to the principles embodied in §302 forced the court to stretch to “find a redemption to which to apply them, since the merger transaction entered into by the parties did not involve a redemption,” id., at 28. There are a number of sufficient responses to this argument. We think it first worth emphasizing that the Commissioner overstates the extent to which the redemption is imagined. As the Court of Appeals for the Fifth Circuit noted in Shimberg, “[t]he theory behind tax-free corporate reorganizations is that the transaction is merely ‘a continuance of the proprietary interests in the continuing enterprise under modified corporate form.’ Lewis v. Commissioner of Internal Revenue, 176 F. 2d 646, 648 (CA1 1949); Treas. Reg. § 1.368-l(b). See generally Cohen, Conglomerate Mergers and Taxation, 55 A. B. A. J. 40 (1969).” 577 F. 2d, at 288. As a result, the boot-for-stock transaction can be viewed as a partial repurchase of stock by the continuing corporate enterprise — i. e., as a redemption. It is, of course, true that both the prereorganization and postreorganization analogies are somewhat artificial in that they imagine that the redemption occurred outside the confines of the actual reorganization. However, if forced to choose between the two analogies, the postreorganization view is the less artificial. Although both analogies “recast the merger transaction,” the postreorganization view recognizes that a reorganization has taken place, while the prereorganization approach recasts the transaction to the exclusion of the overall exchange.

Moreover, we doubt that abandoning the prereorganization and postreorganization analogies and the principles of § 302 in favor of a less artificial understanding of the transaction would lead to a result different from that reached by the Court of Appeals. Although the statute is admittedly ambiguous and the legislative history sparse, we are persuaded — even without relying on §302 — that Congress did not intend to except reorganizations such as that at issue here from the general rule allowing capital gains treatment for cash boot. 26 U. S. C. § 356(a)(1). The legislative history of § 356(a)(2), although perhaps generally “not illuminating,” Estate of Bedford, 325 U. S., at 290, suggests that Congress was primarily concerned with preventing corporations from “siphon[ing] off” accumulated earnings and profits at a capital gains rate through the ruse of a reorganization. See Golub, 58 Taxes, at 905. This purpose is not served by denying capital gains treatment in a case such as this in which the taxpayer entered into an arm’s-length transaction with a corporation in which he had no prior interest, exchanging his stock in the acquired corporation for less than a 1% interest in the acquiring corporation and a substantial cash boot.

Section 356(a)(2) finds its genesis in § 203(d)(2) of the Revenue Act of 1924. See 43 Stat. 257. Although modified slightly over the years, the provisions are in relevant substance identical. The accompanying House Report asserts that §203(d)(2) was designed to “preven[t] evasion.” H. R. Rep. No. 179, 68th Cong., 1st Sess., 15 (1924). Without further explication, both the House and Senate Reports simply rely on an example to explain, in the words of both Reports, “[t]he necessity for this provision.” Ibid.; S. Rep. No. 398, 68th Cong., 1st Sess., 16 (1924). Significantly, the example describes a situation in which there was no change in the stockholders’ relative ownership interests, but merely the creation of a wholly owned subsidiary as a mechanism for making a cash distribution to the shareholders:

“Corporation A has capital stock of $100,000, and earnings and profits accumulated since March 1, 1913, of $50,000. If it distributes the $50,000 as a dividend to its stockholders, the amount distributed will be taxed at the full surtax rates.
“On the other hand, Corporation A may organize Corporation B, to which it transfers all its assets, the consideration for the transfer being the issuance by B of all its stock and $50,000 in cash to the stockholders of Corporation A in exchange for their stock in Corporation A. Under the existing law, the $50,000 distributed with the stock of Corporation B would be taxed, not as a dividend, but as a capital gain, subject only to the 1214 per cent rate. The effect of such a distribution is obviously the same as if the corporation had declared out as a dividend its $50,000 earnings and profits. If dividends are to be subject to the full surtax rates, then such an amount so distributed should also be subject to the surtax rates and not to the 1214 per cent rate on capital gain.” Ibid.; H. R. Rep. No. 179, at 15.

The “effect” of the transaction in this example is to transfer accumulated earnings and profits to the shareholders without altering their respective ownership interests in the continuing enterprise.

Of course, this example should not be understood as exhaustive of the proper applications of § 356(a)(2). It is nonetheless noteworthy that neither the example, nor any other legislative source, evinces a congressional intent to tax boot accompanying a transaction that involves a bona fide exchange between unrelated parties in the context of a reorganization as though the payment was in fact a dividend. To the contrary, the purpose of avoiding tax evasion suggests that Congress did not intend to impose an ordinary income tax in such cases. Moreover, the legislative history of § 302 supports this reading of § 356(a)(2) as well. In explaining the “essentially equivalent to a dividend” language of §302 (b)(1) — language that is certainly similar to the “has the effect ... of a dividend” language of § 356(a)(2) — the Senate Finance Committee made clear that the relevant inquiry is “whether or not the transaction by its nature may properly be characterized as a sale of stock . . . .” S. Rep. No. 1622, 83d Cong., 2d Sess., 234 (1954); cf. United States v. Davis, 397 U. S., at 311.

Examining the instant transaction in light of the purpose of § 356(a)(2), the boot-for-stock exchange in this case “may properly be characterized as a sale of stock.” Significantly, unlike traditional single corporation redemptions and unlike reorganizations involving commonly owned corporations, there is little risk that the reorganization at issue was used as a ruse to distribute a dividend. Rather, the transaction appears in all respects relevant to the narrow issue before us to have been comparable to an arm’s-length sale by the taxpayer to NL. This conclusion, moreover, is supported by the findings of the Tax Court. The court found that “[t]here is not the slightest evidence that the cash payment was a concealed distribution from BASIN.” 86 T. C., at 155. As the Tax Court further noted, Basin lacked the funds to make such a distribution:

“Indeed, it is hard to conceive that such a possibility could even have been considered, for a distribution of that amount was not only far in excess of the accumulated earnings and profits ($2,319,611), but also of the total assets of BASIN ($2,758,069). In fact, only if one takes into account unrealized appreciation in the value of BASIN’s assets, including good will and/or going-concern value, can one possibly arrive at $3,250,000. Such a distribution could only be considered as the equivalent of a complete liquidation of BASIN . . . .” Ibid,

In this context, even without relying on § 302 and the post-reorganization analogy, we conclude that the boot is better characterized as a part of the proceeds of a sale of stock than as a proxy for a dividend. As such, the payment qualifies for capital gains treatment.

The judgment of the Court of Appeals is accordingly

Affirmed.

Justice White,

dissenting.

The question in this case is whether the cash payment of $3,250,000 by N. L. Industries, Inc. (NL) to Donald Clark, which he received in the April 18, 1979, merger of Basin Surveys, Inc. (Basin), into N. L. Acquisition Corporation (NLAC), had the effect of a distribution of a dividend under the Internal Revenue Code of 1954, 26 U. S. C. § 356(a)(2) (1976 ed.), to the extent of Basin’s accumulated undistributed earnings and profits. Petitioner, the Commissioner of Internal Revenue (Commissioner), made this determination, taxing the sum as ordinary income, to find a 1979 tax deficiency of $972,504.74. The Court of Appeals disagreed, stating that because the cash payment resembles a hypothetical stock redemption from NL to Clark, the amount is taxable as capital gain. 828 F. 2d 221 (CA4 1987). Because the majority today agrees with that characterization, in spite of Clark’s explicit refusal of the stock-for-stock exchange imagined by the Court of Appeals and the majority, and because the record demonstrates, instead, that the transaction before us involved a boot distribution that had “the effect of the distribution of a dividend” under § 356(a)(2) — and hence properly alerted the Commissioner to Clark’s tax deficiency — I dissent.

The facts are stipulated. Basin, Clark, NL, and NLAC executed an Agreement and Plan of Merger dated April 3, 1979, which provided that on April 18, 1979, Basin would merge with NLAC. The statutory merger, which occurred pursuant to §§ 368(a)(1)(A) and (a)(2)(D) of the Code, and therefore qualified for tax-free reorganization status under § 354(a)(1), involved the following terms: Each outstanding share of NLAC stock remained outstanding; each outstanding share of Basin common stock was exchanged for $56,034,482 cash and 5,172.4137 shares of NL common stock; and each share of Basin common stock held by Basin was canceled. NLAC’s name was amended to Basin Surveys, Inc. The Secretary of State of West Virginia certified that the merger complied with West Virginia law. Clark, the owner of all 58 outstanding shares of Basin, received $3,250,000 in cash and 300,000 shares of NL stock. He expressly refused NL’s alternative of 425,000 shares of NL common stock without cash. See App. 56-59.

Congress enacted § 354(a)(1) to grant favorable tax treatment to specific corporate transactions (reorganizations) that involve the exchange of stock or securities solely for other stock or securities. See Paulsen v. Commissioner, 469 U. S. 131, 136 (1985) (citing Treas. Reg. § 1.368-l(b), 26 CFR § 1.368-l(b) (1984), and noting the distinctive feature of such reorganizations, namely, continuity of interests). Clark’s “triangular merger” of Basin into NL’s subsidiary NLAC qualified as one such tax-free reorganization, pursuant to § 368(a)(2)(D). Because the stock-for-stock exchange was supplemented with a cash payment, however, § 356(a)(1) requires that “the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.” Because this provision permitted taxpayers to withdraw profits during corporate reorganizations without declaring a dividend, Congress enacted § 356(a)(2), which states that when an exchange has “the effect of the distribution of a dividend,” boot must be treated as a dividend, and taxed as ordinary income, to the extent of the distributee’s “ratable share of the undistributed earnings and profits of the corporation. ...” Ibid,.; see also H. R. Rep. No. 179, 68th Cong., 1st Sess., 15 (1924) (illustration of §356(a)(2)’s purpose to frustrate evasion of dividend taxation through corporate reorganization distributions); S. Rep. No. 398, 68th Cong., 1st Sess., 16 (1924) (same).

Thus the question today is whether the cash payment to Clark had the effect of a distribution of a dividend. We supplied the straightforward answer in United States v. Davis, 397 U. S. 301, 306, 312 (1970), when we explained that a pro rata redemption of stock by a corporation is “essentially equivalent” to a dividend. A pro rata distribution of stock, with no alteration of basic shareholder relationships, is the hallmark of a dividend. This was precisely Clark’s gain. As sole shareholder of Basin, Clark necessarily received a pro rata distribution of moneys that exceeded Basin’s undistributed earnings and profits of $2,319,611. Because the merger and cash obligation occurred simultaneously on April 18, 1979, and because the statutory merger approved here assumes that Clark’s proprietary interests continue in the restructured NLAC, the exact source of the pro rata boot payment is immaterial, which truth Congress acknowledged by requiring only that an exchange have the effect of a dividend distribution.

To avoid this conclusion, the Court of Appeals — approved by the majority today — recast the transaction as though the relevant distribution involved a single corporation’s (NL’s) stock redemption, which dividend equivalency is determined according to §302 of the Code. Section 302 shields distributions from dividend taxation if the cash redemption is accompanied by sufficient loss of a shareholder’s percentage interest in the corporation. The Court of Appeals hypothesized that Clark completed a pure stock-for-stock reorganization, receiving 426,000 NL shares, and thereafter redeemed 125,000 of these shares for his cash earnings of $3,250,000. The sum escapes dividend taxation because Clark’s interest in NL theoretically declined from 1.3% to 0.92%, adequate to trigger § 302(b)(2) protection. Transporting §302 from its purpose to frustrate shareholder sales of equity back to their own corporation, to § 356(a)(2)’s reorganization context, however, is problematic. Neither the majority nor the Court of Appeals explains why § 302 should obscure the core attribute of a dividend as a pro rata distribution to a corporation’s shareholders; nor offers insight into the mechanics of valuing hypothetical stock transfers and equity reductions; nor answers the Commissioner’s observations that the sole shareholder of an acquired corporation will always have a smaller interest in the continuing enterprise when cash payments combine with a stock exchange. Last, the majority and the Court of Appeals’ recharacterization of market happenings describes the exact stock-for-stock exchange, without a cash supplement, that Clark refused when he agreed to the merger.

Because the parties chose to structure the exchange as a tax-free reorganization under § 354(a)(1), and because the pro rata distribution to Clark of $3,250,000 during this reorganization had the effect of a dividend under § 356(a)(2), I dissent.

       Justice Scalia joins all but Part III of this opinion.

       Respondent Peggy S. Clark is a party to this action solely because she filed a joint federal income tax return for the year in question with her husband, Donald E. Clark. References to “taxpayer” are to Donald E. Clark.

       In 1979, the tax year in question, the distinction between long-term capital gain and ordinary income was of considerable importance. Most significantly, § 1202(a) of the Code, 26 U. S. C. § 1202(a) (1976 ed., Supp. Ill), allowed individual taxpayers to deduct 609h of their net capital gain from gross income. Although the importance of the distinction declined dramatically in 1986 with the repeal of § 1202(a), see Tax Reform Act of 1986, Pub. L. 99-514, § 301(a), 100 Stat. 2216, the distinction is still significant in a number of respects. For example, 26 U. S. C. § 1211(b) (1982 ed., Supp. IV) allows individual taxpayers to deduct capital losses to the full extent of their capital gains, but only allows them to offset up to $3,000 of ordinary income insofar as their capital losses exceed their capital gains.

       Title 26 U. S. C. § 368(a)(1) defines several basic types of corporate reorganizations. They include, in part:
      “(A) a statutory merger or consolidation;
      “(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356;
      “(E) a recapitalization;
      “(F) a mere change in identity, form, or place of organization of one corporation, however effected . . . .”

         Section 368(a)(2)(D) provided in 1979:
      “The acquisition by one corporation, in exchange for stock of a corporation (referred to in this subparagraph as ‘controlling corporation’) which is in control of the acquiring corporation, of substantially all of the properties of another corporation which in the transaction is merged into the acquiring corporation shall not disqualify a transaction under paragraph (1)(A) if (1) such transaction would have qualified under paragraph (1)(A) if the merger had been into the controlling corporation, and (ii) no stock of the acquiring corporation is used in the transaction.” 26 U. S. C. §368(a) (2)(D) (1976 ed.).

       The parties do not agree as to whether dividend equivalence for the purposes of § 356(a)(2) should be determined with reference to § 302 of the Code, which concerns dividend treatment of redemptions of stock by a single corporation outside the context of a reorganization. Compare Brief for Petitioner 28-30 with Brief for Respondents 18-24. They are in essential agreement, however, about the characteristics of a dividend. Thus, the Commissioner correctly argues that the “basic attribute of a dividend, derived from Sections 301 and 316 of the Code, is a pro rata distribution to shareholders out of corporate earnings and profits. When a distribution is made that is not a formal dividend, ‘the fundamental test of dividend equivalency’ is whether the distribution is proportionate to the shareholders’ stock interests (United States v. Davis, 397 U. S. 301, 306 (1970)).” Brief for Petitioner 7. Citing the same authority, but with different emphasis, the taxpayer argues that “the hallmark of a non-dividend distribution is a ‘meaningful reduction of the shareholder’s proportionate interest in the corporation.’ United States v. Davis, 397 U. S. 301, 313 (1970).’’ Brief for Respondents 5.
      Under either test, a prereorganization distribution by Basin to the taxpayer would have qualified as a dividend. Because the taxpayer was Basin’s sole shareholder, any distribution necessarily would have been pro rata and would not have resulted in a “meaningful reduction of the [taxpayer’s] proportionate interest in [Basin].”

       Section 302 provides in relevant part:

        “(a) General rule
      “If a corporation redeems its stock (within the meaning of section 317 (b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock.
      “(b) Redemptions treated as exchanges
      “(2) Substantially disproportionate redemption of stock
      “(A) In general
      “Subsection (a) shall apply if the distribution is substantially disproportionate with respect to the shareholder.
      “(B) Limitation
      “This paragraph shall not apply unless immediately after the redemption the shareholder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote.
      “(C) Definitions
      “For purposes of this paragraph, the distribution is substantially disproportionate if—
      “(i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corporation at such time,
      “is less than 80 percent of—
      “(ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corporation at such time.
      “For purposes of this paragraph, no distribution shall be treated as substantially disproportionate unless the shareholder’s ownership of the common stock of the corporation (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sentence. ...”
      As the Tax Court explained, receipt of the cash boot reduced the taxpayer’s potential holdings in NL from 1.3% to 0.92%. 86 T. C. 138, 153 (1986). The taxpayer’s holdings were thus approximately 71% of what they would have been absent the payment. Ibid. This fact, combined with the fact that the taxpayer held less than 50% of the voting stock of NL after the hypothetical redemption, would have qualified the “distribution” as “substantially disproportionate” under § 302(b)(2).

       The Tax Court stressed that to adopt the prereorganization view “would in effect resurrect the now discredited ‘automatic dividend rule’ ... , at least with respect to pro rata distributions made to an acquired corporation’s shareholders pursuant to a plan of reorganization.” 86 T. C., at 152. On appeal, the Court of Appeals agreed. 828 F. 2d 221, 226-227 (CA4 1987).
      The “automatic dividend rule” developed as a result of some imprecise language in our decision in Commissioner v. Estate of Bedford, 325 U. S. 283 (1945). Although Estate of Bedford involved the recapitalization of a single corporation, the opinion employed broad language, asserting that “a distribution, pursuant to a reorganization, of earnings and profits ‘has the effect of a distribution of a taxable dividend’ within [§ 356(a)(2)].” Id., at 292. The Commissioner read this language as establishing as a matter of law that all payments of boot are to be treated as dividends to the extent of undistributed earnings and profits. See Rev. Rui. 56-220, 1956-1 Cum. Bull. 191. Commentators, see, e. g., Darrel, The Scope of Commissioner v. Bedford Estate, 24 Taxes 266 (1946); Shoulson, Boot Taxation: The Blunt Toe of the Automatic Rule, 20 Tax L. Rev. 573 (1965), and courts, see, e. g., Hawkinson v. Commissioner, 235 F. 2d 747 (CA2 1956), however, soon came to criticize this rule. The courts have long since retreated from the “automatic dividend rule,” see, e. g., Idaho Power Co. v. United States, 161 F. Supp. 807 (Ct. Cl.), cert. denied, 358 U. S. 832 (1958), and the Commissioner has followed suit, see Rev. Rui. 74-515, 1974-2 Cum. Bull. 1'18. As our decision in this case makes plain, we agree that Estate of Bedford should not be read to require that all payments of boot be treated as dividends.

       Because the mechanical requirements of subsection (b)(2) are met, we need not decide whether the hypothetical redemption might also qualify for capital gains treatment under the general “not essentially equivalent to a dividend” language of subsection (b)(1). Subsections (b)(3) and (b)(4), which deal with redemptions of all of the shareholder’s stock and with partial liquidations, respectively, are not at issue in this case.

       The Commissioner maintains that Basin “could have distributed a dividend in the form of its own obligation (see, e. g., I. R. C. § 312(a)(2)) or it could have borrowed funds to distribute a dividend. ” Reply Brief for Petitioner 7. Basin’s financial status, however, is nonetheless strong support for the Tax Court’s conclusion that the cash payment was not a concealed dividend.

       The Court of Appeals’ zeal to excoriate the “automatic dividend rule” leads to an opposite rigidity — an automatic nondividend rule, even for pro rata boot payments. Any significant cash payment in a stock-for-stock exchange distributed to a sole shareholder of an acquired corporation will automatically receive capital gains treatment. Section 356(a)(2)’s exception for such payments that have attributes of a dividend disappears. Congress did not intend to handicap the Commissioner and courts with either absolute; instead, § 356(a)(1) instructs courts to make fact-specific inquiries into whether boot distributions accompanying corporate reorganizations occur on a pro rata basis to shareholders of the acquired corporation, and thus threaten a bailout of the transferor corporation’s earnings and profits escaping a proper dividend tax treatment.

       The majority’s alternative holding that no statutory merger occurred at all — rather a taxable sale — is difficult to understand: All parties stipulate to the merger, which, in turn, was approved under West Virginia law; and Congress endorsed exactly such tax-free corporate transactions pursuant to its § 368(a)(1) reorganization regime. However apt the speculated sale analogy may be, if the April 3 Merger Agreement amounts to a sale of Clark’s stock to NL, and not the intended merger, Clark would be subject to taxation on his full gain of over $10 million. The fracas over tax treatment of the cash boot would be irrelevant.