Catterall v. Comm'r of Internal Revenue

Decision Date22 June 1977
Docket Number6488—74.,Docket Nos. 5817—74,6457—74
Citation68 T.C. 413
PartiesALFRED H. CATTERALL, SR., AND DOROTHY CATTERALL, ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Petitioners exchanged their stock in Berwick for voting stock of Whittaker in 1968 in a tax-free reorganization under sec. 354(a)(1) and 368(a)(1)(B), I.R.C. 1954. The reorganization agreement provided for the delivery of additional shares based upon the future profits of Berwick and the future fair market value of the stock of Whittaker. No provision was made for the payment of interest on the additional shares. The Commissioner imputed interest income to petitioners pursuant to sec. 483 on the receipt of additional shares in 1971 under the terms of the reorganization agreement. Held, the shares received in 1971 constitute ‘payments' subject to the imputed interest provisions of sec. 483. Solomon v. Commissioner, 67 T.C. 379 (1976), and Jeffers v. United States, F.2d (Ct. Cl. 1977), followed. David E. Wasserstrom and Michael A. Bloom, for the petitioners.

Paul J. Sude, for the respondent.

OPINION

GOFFE, Judge:

The Commissioner determined deficiencies in petitioners' Federal income taxes for the taxable year 1971 as follows:

+--------------------------------------------------------------+
                ¦Docket No.  ¦Petitioners                         ¦Deficiency  ¦
                +------------+------------------------------------+------------¦
                ¦            ¦                                    ¦            ¦
                +------------+------------------------------------+------------¦
                ¦5817-74     ¦Alfred H. and Dorothy Catterall, Sr.¦$28,989.97  ¦
                +------------+------------------------------------+------------¦
                ¦6457-74     ¦Ray P. and Edna K. McBride          ¦31,917.74   ¦
                +------------+------------------------------------+------------¦
                ¦6488-74     ¦Walter F. and Florence Vorbleski    ¦29,228.56   ¦
                +--------------------------------------------------------------+
                

The cases were consolidated for purposes of trial, briefing, and opinion. Concessions having been made, the sole issue for decision is whether the imputed interest provisions of section 483,2 I.R.C. 1954, apply to the deferred receipt of stock, the receipt of which was contingent under the terms of an agreement for exchange qualifying as a reorganization under the provisions of sections 354(a)(1) and 368(a)(1)(B).

The consolidated cases were submitted under Rule 122, Tax Court Rules of Practice and Procedure. All of the facts have been stipulated. The stipulation of facts and the exhibits attached thereto are incorporated by this reference. Only the facts necessary for an understanding of our opinion will be summarized below.

Petitioners Alfred H. Catterall, Sr., and Dorothy Catterall, husband and wife, resided in Conyngham, Pa., at the time they filed their petition in this proceeding. Petitioners Ray P. and Edna K. McBride, husband and wife, and Walter F. and Florence Vorbleski, husband and wife, resided in Berwick, Pa., at the time they filed their petitions herein. Petitioners filed their joint Federal income tax returns with the District Director of Internal Revenue, Philadelphia, Pa. For convenience, the husbands will be collectively referred to as petitioners.

Prior to April 15, 1968, Berwick Forge & Fabricating Corp., a Pennsylvania corporation (hereinafter referred to as Berwick), had outstanding common stock consisting of 3,200 shares, par value $25 per share, owned equally by each of the petitioners herein. On or about April 15, 1968, petitioners entered into an acquisition agreement and plan of reorganization (hereinafter referred to as the agreement) with Whittaker Corp. (hereinafter referred to as Whittaker), a California corporation having its principal office in Los Angeles, Calif. The agreement provided for the acquisition of all of the stock of Berwick owned by petitioners solely in exchange for voting stock of Whittaker.

Pursuant to the terms of the agreement, petitioners were to receive and did receive 115,000 shares of Whittaker common stock, par value $1 per share, divided equally among them, in exchange for their transfer to Whittaker of all of their exchange for their transfer common stock had a fair market value of $78.25 per share on April 15, 1968.

Under the terms of the agreement Whittaker agreed to reserve for possible future delivery to petitioners $113,300 shares of its common stock which for convenience were referred to in the agreement as ‘reserve shares.’ The reserve shares were divided into two equal accounts, reserve A and reserve B, each consisting of 56,650 shares, to be delivered to petitioners based upon the ascertainment of future profits of Berwick and the market value as of October 31, 1970, of all shares of Whittaker issued pursuant to the agreement. The reserve A shares were to be issued to petitioners in various amounts over the first three ‘adjustment’ years following the acquisition. The number of shares to be issued was to be computed pursuant to a formula contained in the agreement which was based upon the profits of Berwick for its taxable and ‘adjustment’ years ended October 31, 1968, October 31, 1969, and October 31, 1970. The agreement further provided that in the event Whittaker was required to deliver at least 100 shares of the reserve A shares to petitioners, and if the total market value of all the Whittaker common stock received by them at the closing and out of the future reserve A shares issued with respect to the ‘adjustment’ years was less than 4 1/2 times the average annual Berwick profits for the ‘adjustment’ years as of October 31, 1970, Whittaker was obligated to deliver such number of reserve B shares so as to make the total market value of all shares received by petitioners equal to 4 1/2 times the average annual Berwick profits for the 3 ‘adjustment’ years. No provision was made for the payment of interest on the reserve shares.

In 1971 the net profits of Berwick and the market value of Whittaker stock were such as to require the delivery of the reserve A and B shares to petitioners. On February 17, 1971, petitioners each received 48,625 shares of common stock of Whittaker representing the reserve A and B shares to which each was entitled under the agreement, such shares having been adjusted and increased by virtue of stock dividends and stock splits of Whittaker. The additional shares of Whittaker so delivered had a value of $9.625 per share on February 17, 1971. Under the agreement the common shares of Whittaker received by petitioners were subject to substantial restrictions on transferability.

The exchanges of stock between petitioners and Whittaker, including the reserve shares delivered on February 17, 1971, qualified as a tax-free reorganization under sections 354(a)(1)3 and 368(a)(1)(B). 4

The Commissioner, in his statutory notice of deficiency, determined that petitioners received interest income pursuant to section 483 on the receipt of the additional Whittaker shares in 1971.

Section 4835 was added to the Internal Revenue Code in 1964 to correct a practice whereby a seller of property on the installment basis was able to convert what would otherwise constitute interest income into capital gain by inflating the purchase price and not providing for the payment of interest on the deferred payments. H.Rept. 749, 88th Cong., 1st Sess. (1963), 1964—1 C.B. (Part 2) 128. In general, section 483 requires that in the case of a contract for the sale or exchange of property under which deferred payments are due more than 1 year from the date of such sale or exchange and which provides for either no interest or interest payments at a rate below that specified in the Treasury regulations, a portion of each payment received more than 6 months after the date of sale or exchange be treated as interest.

Petitioners contend that the imputed interest provisions of section 483 are not applicable to the receipt of the Whittaker shares in 1971 for the following reasons: (1) The delivery of the shares did not constitute a ‘payment’ within the meaning of section 483; (2) the specific provisions of the reorganization sections take precedence over the general provisions of section 483; and (3) Congress did not intend to change the longstanding pattern of tax treatment of ‘B’ reorganizations by the passage of section 483. In so contending, petitioners request that we reconsider our decision in Solomon v. Commissioner, 67 T.C. 379 (1976), in which we held that the receipt of shares of the acquiring corporation after the initial exchange in a nontaxable ‘B’ reorganization is subject to the imputed interest provisions of section 483.

At the outset, we note that although petitioners do not specifically challenge the validity of section 1.483—2(b)(3), Income Tax Regs., which provides that section 483 applies to deferred payments of stock in nontaxable reorganizations, their position is tantamount to contending that the above paragraph of the regulations is invalid. It is well settled that the Treasury regulations constitute ‘contemporaneous constructions by those charged with the administration of’ the tax laws and ‘must be sustained unless unreasonable and plainly inconsistent with the revenue statutes.’ Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948); Bingler v. Johnson, 394 U.S. 741, 749—750 (1969).

Petitioners first contend that the delivery of the shares in 1971 did not constitute a ‘payment’ within the meaning of section 483. Petitioners' contention is based primarily upon the fact that the contractual rights to additional shares constitute ‘stock’ within the meaning of section 354(a)(1), not ‘other property’ under section 356(a)(1), Carlberg v. United States, 281 F.2d 507 (8th Cir. 1960), and that the delivery of the additional shares is entitled to the same treatment under the reorganization provisions as the stock initially received. However, the classification of the contractual...

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