Carlberg v. United States

• Decision Date: 12 August 1960
• Docket Number: No. 16423.,16423.
• Citation: 281 F.2d 507
• Parties: June M. CARLBERG, by Vida M. Frick, Guardian, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

281 F.2d 507 (1960)

June M. CARLBERG, by Vida M. Frick, Guardian, Appellant, v. UNITED STATES of America, Appellee.

No. 16423.

United States Court of Appeals Eighth Circuit.

August 12, 1960.

Homer Bruce, Houston, Tex., made oral argument for appellant.

Crombie J. D. Garrett, Atty., Dept. of Justice, Washington, D. C., made oral argument for appellee.

Before SANBORN, MATTHES and BLACKMUN, Circuit Judges.

BLACKMUN, Circuit Judge.

This case, genuine but admittedly test litigation, involves the federal income tax consequences of one aspect of the statutory merger, effected in November 1956, of The Long-Bell Lumber Corporation, a Maryland corporation, and The Long-Bell Lumber Company, a Missouri corporation, into International Paper Company, a New York corporation, the survivor. These corporate entities will be referred to as "Maryland", "Missouri", and "International", respectively.¹

The statutes in question are § 368(a) (1) (A), § 354(a) and § 356(a) of the Internal Revenue Code of 1954, 26 U.S. C.A. § 368(a) (1) (A), § 354(a) and § 356(a).²

The government raises no question as to the bona fide business purposes of the merger. The sole issue is whether the "Certificates of Contingent Interest" (as well as the certificates for whole shares and rights in fractional shares of International), received by shareholders of Maryland and Missouri upon the merger, qualify as "stock", within the meaning of § 354(a),³ or, instead, as "other property", within the meaning of § 356(a) (1).

The litigation takes the form of a suit for refund of income taxes paid by the plaintiff-appellant, hereinafter called the taxpayer, for the calendar year 1956. The government counterclaimed as permitted by § 7422(e) of the 1954 Code. The parties agree that if the sole issue is decided in the taxpayer's favor she is entitled to judgment in the amount of her claim, but that if the issue is decided in the government's favor it is entitled to judgment in the amount of its counterclaim. The case was submitted to the trial court upon the pleadings, a stipulation, and briefs. The government prevailed below.

We endeavor to recite only those factual details which focus attention upon the narrow but neatly precise question now before us.

In 1956, prior to the merger, there were outstanding Class A and Class B common stock of Maryland, capital stock of Missouri, and preferred and common stock of International. Under the plan of merger each stockholder of Maryland and each stockholder of Missouri received, in exchange for his shares in those corporations,⁴ a certificate for whole shares of common of International and a right to a fractional share of the same common (these whole and fractional shares in the aggregate totalling 849,997) and, as the government in its brief has described it, "a contingent interest in certain reserved shares of such common stock" of International. Specifically, each share, whether Class A common or Class B common of Maryland or capital of Missouri, was converted by the merger into (1) a fractional share of International common and (2), as the government has again described it, a "contingent interest in a fractional share" of International common represented by a "Certificate of Contingent Interest."⁵

The Certificates of Contingent Interest came about in this manner: At the time of the merger Missouri possessed two unresolved but potentially substantial liabilities. One was its possible obligation for unsettled federal income and excess profits taxes for certain past taxable years. The other was litigation pending against Missouri in federal court in the State of Washington. International lacked complete knowledge concerning these matters in controversy and it was therefore agreed that under the plan of merger, in order to protect International, 49,997 shares of its common, which would otherwise then also have been issued to the shareholders of Maryland and Missouri, would be set aside as "Reserved Shares" pending the determination of these liabilities of Missouri and that Certificates of Contingent Interest would issue with respect to them. As the liabilities would become resolved and as expenses with respect to them would be incurred, the Reserved Shares were to be reduced monthly by charges computed according to a formula based upon quoted values of International common. After all deductions of this kind had been made any remaining Reserved Shares were to be distributed to the then holders of the Certificates.

In summary, then, and to repeat: Each holder of shares in Maryland or Missouri received upon the 1956 merger, in place of those shares, common of International and a Certificate of Contingent Interest. To the extent that his prior holdings in Maryland or Missouri entitled him to whole shares of International common, he received a formal certificate for those shares. He received no certificate for any additional fractional share of International common to which he was entitled but, instead, had a "right" thereto. His Certificate of Contingent Interest was formally issued, was registered, and was transferable.

This particular taxpayer at the time of the merger was the owner of 504 shares of Class A common of Maryland and of 200 shares of capital of Missouri. Upon the merger she received for these stocks certificates for 413 shares of International common, the right to a fractional interest of 3124/100,000 of one share of such common, and Certificates of Contingent Interest for 24.31416 units of contingent interest.

The then value of what the taxpayer received upon the merger exceeded her income tax basis in her Maryland and Missouri shares. The government concedes, however, that the merger was a "statutory merger" under § 368(a) (1) (A) and that the certificates for the 413 whole shares of International common and the right in the fractional share were "stock" which came to her under § 354(a) (1) without recognition of gain. This leaves in controversy only the Certificates of Contingent Interest and the treatment to be accorded them for income tax purposes.

The government's position is that the Certificates constitute a different kind of property than the International common (whole shares and fractional share); that they were, in effect, "boot"; that they do not qualify for the tax free treatment enjoyed by the stock under § 354 (a) (1); and that they are to be treated, instead, under § 356(a) as dividends. The taxpayer contends that the Certificates represent and are nothing other than International common; that while the exact number of shares of that stock ultimately to be forthcoming to the taxpayer was not known in 1956 and could not then be known, because Missouri's potential liabilities were unresolved, that fact cannot and does not negative the Certificates' character as stock; and that, like the whole shares and the fractional share, they were received under § 354(a) (1) without recognition of gain.⁶

The merger agreement is detailed. It recites generally the pertinent background facts of the 3 corporations and the purposes of International as the surviving corporation; describes International's authorized preferred and common stock; contains the customary information as to principal office, duration, directors and agents for service of process; provides for dissenting shareholders, for capital of Missouri held by Maryland and for shares of Maryland Class B common held by Missouri; and recites facts as to the approval of the merger by the 3 groups of stockholders. It also contains matter of particular concern here:

1. Paragraph IX provides, in each of 3 separate subparagraphs (i, ii, iii) dealing respectively with Maryland's Class A common, Maryland's Class B common, and Missouri's capital stock, that each of these shares outstanding "shall, upon this certificate and these articles becoming effective, automatically and without any action on the part of the holder thereof be converted into and be deemed to be" the stated fraction of a share of International common and "a Contingent Interest in" a stated fraction "of one share of said Common Stock of International Paper Company, to be represented by a `Certificate of Contingent Interest' in the form annexed hereto * * *," and that each Maryland (or Missouri) certificate "shall thereupon be deemed for all corporate purposes (other than the voting of fractional shares and subject, as regards payment of dividends, to the provisions of clause (v) below and, as to Contingent Interests, subject to the provisions of said Certificate of Contingent Interest) to evidence ownership of the number of fully paid, non-assessable shares of Common Stock and of the Contingent Interests in shares of Common Stock of International Paper Company into which such shares * * * shall have been so converted."

2. Paragraph IX (v) provides that "after this certificate and these articles shall become effective, each holder" of a certificate representing stock of Maryland (or Missouri) "shall surrender the same" to a designated agent of International and be entitled to receive a certificate for whole shares of International common and a Certificate of Contingent Interest; that until that surrender no dividends upon International common shall be paid to the holder, but upon the surrender "the amount of dividends which have theretofore become payable" shall be paid to the person in whose name the certificate of International common is issued; and that "No cash dividends will be paid on the Certificates of Contingent Interest or upon the shares of Common Stock of International Paper Company reserved in respect thereof but certain cash payments in lieu of dividends will be made upon the distribution, if any, of such reserved shares, but only to the extent provided in said Certificates."

3. Paragraph IX (vi) provides that no certificates for fractional shares of International common will be issued on the merger but that Maryland and Missouri shareholders shall have...