American Mail Line v. United States

• Decision Date: 04 December 1951
• Docket Number: No. 49020.,49020.
• Citation: 101 F. Supp. 364
• Parties: AMERICAN MAIL LINE, Limited, v. UNITED STATES.
• Court: U.S. Claims Court

101 F. Supp. 364

AMERICAN MAIL LINE, Limited, v. UNITED STATES.

No. 49020.

United States Court of Claims.

Decided December 4, 1951.

James A. Cosgrove, Washington, D. C., for plaintiff.

H. S. Fessenden, Washington, D. C., with whom was Asst. Atty. Gen. Theron Lamar Caudle, for defendant. Andrew D. Sharpe and Lee A. Jackson, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

LITTLETON, Judge.

The American Mail Line Ltd., a steamship company, hereinafter referred to as the Nevada corporation, was incorporated under the laws of the State of Nevada on October 17, 1930, with an authorized capital consisting of 200,000 shares of no par value stock, of which 152,939 shares were outstanding on November 11, 1947, the date concerned in this proceeding.

In June of 1947 the officers of the Nevada corporation decided that it would be advantageous to transfer the corporate domicile from the State of Nevada to the State of Delaware. As a result, the officers of the Nevada corporation on June 25, 1947, organized and incorporated under Delaware law a new corporation also known as American Mail Line Ltd., hereinafter referred to as the Delaware corporation, solely to effect this change in domicile. The Delaware corporation had the same authorized capital as the Nevada corporation, 200,000 shares of no par value stock, but only 60 qualifying shares were issued, and all of these were owned by the Nevada corporation. The officers and directors of both corporations were identical.

In order to carry out the change of domicile, the respective boards of directors of both corporations, on July 23, 1947, entered into a Merger Agreement which became effective on November 11, 1947. This agreement, which fulfilled the requirements of the Nevada and Delaware corporation laws, provided that all the property, real, personal, and mixed, of both corporations, and all the debts and liabilities of both corporations, were to be vested in the Delaware corporation by operation of law. Also, the agreement directed the shareholders of the Nevada corporation to surrender their Nevada stock certificates representing the 152,939 shares outstanding directly to the Delaware corporation, and in return the Delaware corporation was to issue directly to the shareholders of the Nevada corporation, on a share for share basis, stock certificates of the Delaware corporation. The agreement further provided that the 60 shares of the Delaware corporation stock held by the Nevada corporation were to be surrendered to the Delaware corporation for cancellation and reissuance. After the merger became effective, the books and records of the Nevada corporation were continued as the books and records of the Delaware corporation.

On October 31, 1947, the Delaware corporation, plaintiff in this action, requested of the Commissioner of Internal Revenue a ruling concerning the applicability of the stamp tax provisions contained in sections 1802 (a) and (b) of the Internal Revenue Code to the stock transactions which arose out of the merger. The Commissioner found, by a ruling dated November 20, 1947, that plaintiff must pay both the stamp tax of three cents a share on the original issue of 152,939 shares of stock by the Delaware corporation, and the stamp tax of five cents a share on an implied transfer of these 152,939 shares of the Delaware corporation stock by the Nevada corporation to its shareholders. By a letter dated June 23, 1948, the Seattle, Washington, Revenue Agent established plaintiff's stamp tax liability in the amount of $12,235.12, of which $4,588.17 represented the tax on the original issuance of the Delaware corporation stock, and $7,646.95 represented the tax on the implied transfer of these shares. On the same day, June 23, plaintiff purchased and had cancelled documentary tax stamps in the amount of $12,235.12.

Plaintiff, on July 21, 1948, filed in the office of the Collector for the District of Washington a claim for refund of the $7,646.95 paid as a tax on the implied transfer of the Delaware corporation shares by the Nevada corporation to its shareholders, but plaintiff did not at that time, nor does plaintiff now, dispute the imposition of the three-cent stamp tax on the original issuance of these shares. This claim was rejected by the Commissioner of Internal Revenue on October 29, 1948, on the ground that in a merger the transfer by the merged corporation to its shareholders of the right to receive shares in the surviving corporation is an implied transfer and as such, subject to the stock transfer tax.

It is provided in 44 Stat. 101 (1926), as amended, 26 U.S.C. (Supp. IV) § 1800 et seq., as follows:

"§ 1800. Imposition of tax

"There shall be levied, collected, and paid, for and in respect of the several bonds, debentures, or certificates of stock and of indebtedness, and other documents, instruments, matters, and things mentioned and described in sections 1801 to 1807, inclusive, or for or in respect of the vallum, parchment, or paper upon which such instruments, matters, or things, or any of them, are written or printed, the several taxes specified in such sections.

* * * * * *

"§ 1802. * * * (b) Sales and transfers. On all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to any of the shares or certificates mentioned or described in subsection (a), or to rights to subscribe for or to receive such shares or certificates, whether made upon or shown by the books of the corporation or other organization, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale (whether entitling the holder in any manner to the benefit of such share, certificate, interest, or rights, or not), on each $100 of par or face value or fraction thereof of the certificates of such corporation or other organization (or of the shares where no certificates were issued) 5 cents and where such shares or certificates are without par or face value, the tax shall be 5 cents on the transfer or sale or agreement to sell on each share (corporate share, or investment trust or other organization share, as the case may be): * * *."

It is plaintiff's position that the surrender by the stockholders of the Nevada corporation of their stock certificates directly to the Delaware corporation in exchange for certificates of the Delaware corporation, on a share-for-share basis, when done pursuant to a statutory merger having as its sole purpose a change of corporate domicile, is not a taxable transfer within the meaning and intent of § 1802 (b). Plaintiff maintains that the terms "transfer," "sale," and "delivery," all presuppose a transaction between two or more parties, yet in a merger only one party exists, the shareholder, who merely surrenders, rather than transfers, his stock certificate for the sole purpose of having it corrected to reflect the result of the merger.

To support this position plaintiff relies upon the case of Shreveport-El Dorado Pipe Line Co. v. McGrawl, 5 Cir., 63 F.2d 202. In addition, plaintiff urges that the decision in Raybestos-Manhattan, Inc., v. United States, 10 F.Supp. 130, 80 Ct.Cl. 809, affirmed 296 U.S. 60, 61, 56 S.Ct. 63, 80 L.Ed. 44, is not binding as to this case because of the difference in the factual situations. On the other hand defendant relies upon the Raybestos decision and upon the Bureau of Internal Revenue's ruling in M. T. 3, 1942-2 Cum.Bull. 257, as establishing the taxability of a merger transaction. The problem posed by these two cases, by the instant case, and by others to which we will refer, is whether in the case of a merger, reorganization, or consolidation of two or more corporations, the transfer of capital stock of the surviving corporation to the shareholders of the merged corporation involves one nontaxable transfer of stock, or two transfers, the second being taxable. In transactions of these types the substantial factor involved, from the shareholder's point of view, is the right to receive stock, Tubize Chatillon Corp. v. United States, 23 F.Supp. 454, 87 Ct.Cl. 390, 402; and although certain factual and technical differences do exist between mergers, consolidations, and reorganizations of corporations, they all present the common problem as to whether the shareholder's right to receive involves a taxable transfer. Therefore, in determining the issue of taxability, we will disregard attempts to create artificial distinctions between transfers arising out of reorganizations, mergers, and even attempts to distinguish various types of mergers, such as horizontal mergers of stranger corporations from vertical mergers of parent and subsidiary corporations.

In the Shreveport-El Dorado case, supra, a Delaware corporation with an authorized and issued capital stock of 1,000,000 shares of $10 par value each, doing business in Louisiana, decided to change its corporate domicile to Louisiana. A Louisiana corporation was organized with an authorized capital of 1,000,000 no par value shares. Then, by a resolution of its shareholders, the Delaware corporation was authorized to exchange its assets and liabilities for the entire issue of capital stock of the Louisiana corporation. The resolution further provided that the Louisiana corporation's stock when issued should be issued share for share directly to the stockholders of the Delaware corporation. In this case, and in the similar case of Westmoreland Coal Co. v. McLaughlin, D.C., 8 F.Supp. 963, affirmed, 3 Cir., 73 F.2d 1004, the courts regarded the transfer of the stock of the surviving corporation to the shareholders of the merged corporation as involving only one step or transfer, which step was not taxable. These decisions are based on the reasoning that it is competent for a merging or retiring corporation, upon obtaining the consent of its shareholders to deliver its assets to...