Fidelity-Baltimore National Bank v. United States

• Decision Date: 06 February 1963
• Docket Number: Civ. No. 11498.
• Citation: 213 F. Supp. 631
• Parties: FIDELITY-BALTIMORE NATIONAL BANK, a body corporate, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Maryland

213 F. Supp. 631

FIDELITY-BALTIMORE NATIONAL BANK, a body corporate, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. No. 11498.

United States District Court D. Maryland.

February 6, 1963.

George D. Hubbard, Semmes, Bowen & Semmes, Baltimore, Md., for plaintiff.

Bernard J. Schoenberg, Atty., Dept. of Justice (Louis F. Oberdorfer, Asst. Atty. Gen., Edward S. Smith, David A. Wilson, Jr., Attys., Dept. of Justice, Washington, D. C., and Joseph D. Tydings, U. S. Atty., Baltimore, Md.), on the brief, for defendant.

WINTER, District Judge.

As an incident to the corporate marriage of Baltimore National Bank, a national banking association (hereafter called "Baltimore"), and The Fidelity Trust Company, a Maryland chartered state bank (hereafter called "Fidelity"), the Commissioner of Internal Revenue determined that the resulting Fidelity-Baltimore National Bank & Trust Company (hereafter called "Fidelity-Baltimore"), was liable for original issue and documentary stamp tax for shares of Fidelity-Baltimore issued to shareholders of Baltimore and Fidelity. Fidelity-Baltimore paid the taxes, filed timely claims for refund, and, when these were disallowed, instituted this action.

FACTS:

Prior to July 16, 1954, Baltimore had issued and outstanding 125,000 shares of common stock, having a par value of $10.00 per share, a total capitalization of $1,250,000.00, and Fidelity had issued and outstanding 97,600 shares of common stock, having a par value of $25.00 per share, a total capitalization of $2,440,000.00.

By agreement dated April 30, 1954, subject to the approval of the stockholders of both institutions and the Comptroller of the Currency (all of which approvals were forthcoming, so that the agreement became effective on July 16, 1954), Baltimore and Fidelity agreed that they should be "consolidated under the charter of Baltimore National Bank," the name of the consolidated association to be known as Fidelity-Baltimore National Bank & Trust Company. The capital structure of Fidelity-Baltimore was established in the aggregate amount of not less than $14,111,806.00, consisting of capital stock of $3,000,000.00, divided into 300,000 shares of the par value of $10.00 each, surplus of $10,000,000.00, and undivided profits of not less than $1,111,806.00.

After providing for the contribution of Baltimore and Fidelity to Fidelity-Baltimore, which in the case of Fidelity required it, inter alia, to transfer its portfolio of securities, the agreement specified that the 300,000 shares of $10.00 common stock of Fidelity-Baltimore should be distributed as follows: The shareholders of Baltimore received in exchange for their old shares 143,750 shares of new common stock. Thus, for each share of old $10.00 common stock, 1.15 shares of the new $10.00 common stock was issued and distributed. The shareholders of Fidelity received in exchange for their Fidelity shares 156,160 shares of new common stock. Thus, for each share of the $25.00 par value common stock of Fidelity, 1.6 shares of the new $10.00 par value common stock was issued and distributed. Distribution to shareholders of Fidelity was made directly in exchange for their old Fidelity stock. In this fashion, 299,910 shares of the 300,000 shares of new common stock were allocated and distributed. The balance of 90 shares was sold to the public.

Fidelity-Baltimore voluntarily paid documentary stamp tax on these 90 shares. The Commissioner determined that Fidelity-Baltimore owed additional tax as follows:

                                        Amount of Tax
                (a)  Original issue tax based
                     on the par value of the
                     156,160 shares issued to
                     shareholders of Fidelity;       $1,833.26
                (b)  Original issue tax on the
                     143,750 shares, to the extent
                     they represented newly
                     dedicated capital, issued
                     to shareholders of
                     Baltimore;1                   208.29
                (c)  Transfer tax based on the
                     transfer by Fidelity to its
                     old shareholders of its
                     right to receive 156,160
                     shares of Fidelity-Baltimore
                     and                                802.30
                (d)  Transfer tax on securities
                     in Fidelity portfolio              862.35
                                   Total........     $3,706.20
                

Additionally, the Commissioner assessed interest in the amount of $903.50, so that the total paid by Fidelity-Baltimore, and sought to be recovered in this action, is $4,609.70, with interest at the rate of 6% per annum from August 15, 1958.

DISCUSSION AND OPINION:

The taxes asserted by the Commissioner were prescribed by the Internal Revenue Act of 1939, as amended, in effect on July 16, 1954, because the transactions allegedly giving rise to liability for the taxes were all concluded before the effective date of the Internal Revenue Act of 1954, which was January 1, 1955. Section 1800 of the Internal Revenue Act of 1939, 26 U.S.C. (Internal Revenue Code, 1939, as amended), § 1800, provides that "There shall be levied, collected, and paid * * * the several taxes specified * * *" in §§ 1800 to 1807, inclusive. Thus included is § 1802, which deals with capital stock and similar interests, and its pertinent provisions are set forth below.²

It seems clear that, except for the fact that Baltimore (and, as it was subsequently known, Fidelity-Baltimore) is a national banking association, the significance of which is hereafter discussed, the taxes levied and collected by the Commissioner were properly levied and collected, and taxpayer would be entitled to no refund. The application of the taxes to the transaction previously described, if both of the participating corporations were ordinary business corporations chartered under state law, is readily apparent from brief reference to the Treasury Regulations in force and effect on January 1, 1954 relative to documentary stamp taxes, and the statute itself. Section 113.24 of those Regulations states, with regard to the original issue tax:

"The following are examples of issues subject to the taxes:

"(g) Stock issued by a consolidated corporation in exchange for stock of the consolidating corporation.

"(h) Stock issued in connection with a merger by the continuing corporation to the stockholders of the merging corporation; and, under certain circumstances, stock issued to the stockholders of the continuing corporation."³

Insofar as the transfer tax is concerned, § 113.33 renders the following transactions, whether effected by means of certificates, or other instruments, or by entries on the books of the issuing corporation, or other entity, or otherwise, taxable:

"(h) Transfer upon a merger from the name of a merging corporation of stock owned by it to the name of the continuing corporation, since such a transfer arises by action of the parties and not wholly by operation of law. Similarly, upon a consolidation, a transfer from any of the consolidating corporations to the new or consolidated corporation."⁴

Thus, § 1802(a) of the Act taxes original issues of stock whether or not made in connection with a reorganization or recapitalization, and § 113.24(g) and (h) of the Regulations specifically state that stock issued to the stockholders of a consolidating corporation in connection with a consolidation, and stock issued to the stockholders of the merging corporation, in connection with a merger, are subject to the original issue tax. If Baltimore and Fidelity were ordinary business corporations, there could be no question but that the stock of Fidelity-Baltimore issued to stockholders of Baltimore, at least to the extent that it represented a dedication of new capital, was subject to the original issue tax, and the stock issued to stockholders of Fidelity was also subject to the original issue tax, since Fidelity either merged into or consolidated with Baltimore. The stock of Fidelity-Baltimore issued to stockholders of Fidelity would also be subject to the transfer tax by virtue of the provisions of § 1802 (b) and § 113.33(i) of the Regulations, because Fidelity would have the right to receive, as consideration for the transfer of its assets to Fidelity-Baltimore, 156,160 shares of Fidelity-Baltimore stock, and if the latter were then transferred by Fidelity to its shareholders a transfer tax would be due. Although the Fidelity-Baltimore stock went directly to Fidelity's stockholders, the legal effect, for purposes of taxation, is the same, Raybestos-Manhattan Co. v. United States, 296 U.S. 60, 56 S.Ct. 63, 80 L.Ed. 44 (1935); United States Industrial Chemicals, Inc. v. Johnson, 181 F.2d 413 (2 Cir., 1950); and American Processing & Sales Co. v. Campbell, 164 F.2d 918 (7 Cir., 1947). Also without question would be the application of the tax to the transfer by Fidelity of its portfolio of securities by virtue of the provisions of § 1802(b) of the statute and § 113.33 (h) of the Regulations, when read in conjunction with § 1802(c) of the statute, which was enacted to overcome the result in United States v. Seattle-First Nat. Bank, 321 U.S. 583, 64 S.Ct. 713, 88 L.Ed. 944 (1944).

But the taxpayer urges most strongly that the rules applicable to ordinary business corporations are inapplicable to it, since Baltimore and Fidelity-Baltimore are national banking associations, and the corporate marriage between Baltimore and Fidelity was solemnized under the provisions of § 34a of the National Banking Act, previously codified as 12 U.S.C.A. § 34a, and now codified, in amended form, as 12 U.S.C.A. § 215a. Insofar as pertinent, that section, after authorizing a bank incorporated under state law to consolidate with a national bank, and providing the mechanics whereby that result may be obtained, provides:

"* * * Upon such a consolidation, or upon a consolidation of two or more national banking associations under section 33 of this title, the corporate existence of each of the constituent banks and national banking associations participating in such consolidation shall be merged into and continued in the consolidated national banking

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