Pierson v. United States

Decision Date24 April 1979
Docket NumberCiv. A. No. 75-218.
Citation472 F. Supp. 957
PartiesJohn Lewis PIERSON, Plaintiff, v. UNITED STATES of America, Defendant.
CourtU.S. District Court — District of Delaware

Charles S. Crompton, Jr., Potter, Anderson & Corroon, Wilmington, Del., James S. Eustice, Stephen D. Gardner and Max Folkenflik, Kronish, Lieb, Shainswit, Weiner & Hellman, New York City, John H. Schafer and Charles Lister, Covington & Burling, Washington, D. C., for plaintiff.

James W. Garvin, Jr., U. S. Atty., and John H. McDonald, Asst. U. S. Atty., Dept. of Justice, Wilmington, Del., Carr M. Ferguson, Asst. Atty. Gen., John J. McCarthy and D. Patrick Mullarkey, Dept. of Justice, Gerald Backer, Hu S. Vandervort, Theodore J. Kletnick and Michael J. Cooper, Internal Revenue Service, Washington, D. C., for defendant.

OPINION

MURRAY M. SCHWARTZ, District Judge.

The plaintiff in this action, John Lewis Pierson, is one of over 17,000 former shareholders of the Hartford Insurance Company ("Hartford") who exchanged their Hartford stock for shares of the International Telephone and Telegraph Corporation ("ITT") Series N voting convertible preferred stock, pursuant to an exchange offer made by ITT in 1970. Mr. Pierson contends that this exchange offer qualified as a tax-free reorganization under Sections 354(a)(1) and 368(a)(1)(B) of the Internal Revenue Code of 1954.1 Having determined that the exchange offer did not so qualify, the Internal Revenue Service treated the exchange as a taxable event, and it assessed and collected from the plaintiff for the year 1970 $3,683 in taxes and interest attributable to the Hartford-ITT exchange. The plaintiff presently seeks a refund of that amount. The matter is now before the Court on plaintiff's motion for summary judgment, which for the reasons articulated in this opinion will be granted.

I. FACTUAL BACKGROUND

The tax liability of the shareholder who exchanges his stock in one corporation for that of another must be determined with reference to a statutory scheme that looks to the conduct of the two corporations in deciding whether the exchange of shares is a taxable event upon which the taxpayer must recognize gain or loss. Therefore, the facts relevant to plaintiff's motion involve the dealings between Hartford and ITT that ultimately led to the May, 1970 exchange offer.

ITT first expressed an interest in merging with or acquiring Hartford Insurance Company in 1968, by initiating a series of meetings to discuss these possibilities and by contemporaneously entering negotiations to acquire an available six-percent block of Hartford stock. Although Hartford rejected the proposal of an immediate merger in favor of pursuing its own plan for corporate acquisition and expansion, it was apparently agreed that the way would be left open for a future merger, and the possibility of interim joint ventures was discussed.

Subsequently, on November 19, 1968, ITT consummated the purchase of the six-percent block of Hartford voting stock (1,282,948 shares) from a mutual fund managed by Insurance Securities Inc. ITT also made open market purchases of 458,000 shares of Hartford stock between November 12, 1968 and January 10, 1969, and it purchased 400 Hartford shares on March 13, 1969 from an ITT subsidiary. Through these purchases, all made for cash, ITT succeeded in acquiring approximately eight percent of Hartford's voting stock.

In December, 1968, ITT formally expressed its interest in affiliating with Hartford by proposing merger terms that called for the exchange of one share of ITT's $2 Cumulative Convertible Preferred Stock for each outstanding share of Hartford's stock. Although this initial proposal was rejected, on April 9, 1969, the two companies provisionally entered into a plan and agreement of merger providing for the merger of Hartford into a wholly owned subsidiary of ITT. The merger was subject to the approval of the shareholders of both companies and to that of the Connecticut Insurance Commissioner as required by state law, and it reserved to Hartford the absolute right to terminate the agreement in the event that it viewed as imminent any action by the Antitrust Division of the Department of Justice to enjoin the proposed merger. Although such litigation was in fact commenced in August, 1969, Hartford's board of directors decided to proceed with the merger, and in October, 1969 the Antitrust Division's motion for a preliminary injunction was denied by the United States District Court for the District of Connecticut.

On October 13, 1969, in response to a request for a private letter ruling, the Internal Revenue Service ruled that the proposed merger of Hartford and ITT would be a tax-free reorganization within the meaning of Section 368(a)(1)(B)2 provided only that ITT make an unconditional disposition of the Hartford stock it had previously acquired for cash. On October 21, 1969, the Commissioner ruled that a proposed sale of the stock to Mediobanca, an Italian bank, would constitute such an unconditional disposition, and this sale was ultimately consummated.

On November 10, 1969, after termination of the antitrust litigation and after the Internal Revenue Service had assured tax-free treatment of the merger, the Hartford shareholders approved the transaction, which previously had been approved by the ITT shareholders on June 26, 1969. The one remaining approval necessary to the merger, however, was not to be forthcoming. On December 13, 1969, the Connecticut Insurance Commission withheld its imprimatur, apparently out of concern that dissenting Hartford shareholders would have only limited rights under the proposed plan of merger.

Hartford and ITT then proposed to accomplish the amalgamation by means of an exchange offer to the Hartford shareholders on essentially the same terms that they would have received if the merger had been effected. The principal difference between the two arrangements was that under the exchange offer, a stock-for-stock exchange was substituted for the merger, which had the effect of affording those Hartford shareholders who objected to the amalgamation or to owning ITT shares the right to withhold tender of their Hartford stock. The withheld shares would not be subject to automatic conversion into ITT stock as anticipated by the original merger agreement. After three days of hearings before the Connecticut Insurance Commission in March, 1970, in which ITT made certain commitments concerning the post-acquisition operation of Hartford, the Insurance Commissioner approved the proposed plan, and on May 26, 1970, ITT submitted the exchange offer to all Hartford shareholders. By June 8, 1970, over ninety-five percent of the Hartford shares had been tendered, including those held by the Italian bank, as well as those owned by the plaintiff in this action.

In March of 1974, the Internal Revenue Service retroactively revoked its ruling that had approved ITT's sale of those Hartford shares previously acquired for cash. The Service based its revocation on the grounds that the request upon which the private letter ruling was premised had misrepresented the actual nature of the sale to Mediobanca. As a consequence, the Service concluded that the entire transaction no longer fell within Section 368(a)(1)(B), and it assessed tax deficiencies against the former Hartford shareholders (including the plaintiff) who had accepted the exchange offer and filed returns treating the transaction as a tax-free reorganization.

II. CONTENTIONS OF THE PARTIES

In this suit for refund of the additional taxes paid after the Internal Revenue Service revoked its prior ruling, the plaintiff proposes to challenge (if necessary) both the substantive and procedural propriety of that revocation. For the purposes of this motion for summary judgment, however, the plaintiff asks the Court to assume that the Hartford shares previously acquired for cash were never sold to Mediobanca, and he contends that he is nevertheless entitled to judgment under two separate and independent theories. Plaintiff first urges that the "reorganization" relevant to determining whether his exchange of stock requires the present recognition of gain or loss is the "reorganization" accomplished pursuant to the exchange offer plan that was developed in 1970 after the Connecticut Insurance Commissioner disapproved the proposed merger. Under this view of the transaction, the requirements of Section 354(a)(1) and Section 368(a)(1)(B) are fully satisfied,3 because there were no cash purchases in the 1970 exchange offer to "taint" that transaction and to violate the "solely" requirement of Section 368(a)(1)(B). The Commissioner, on the other hand, contends that the plan of reorganization includes all of ITT's acquisitions of Hartford stock undertaken with the intent of acquiring Hartford, and that therefore the cash purchases in 1968 and 1969 were part of the plan and disqualify it from tax-free status under the Code. It is unnecessary to resolve the parties' dispute concerning what events constituted the "plan of reorganization," because the Court is convinced that the plaintiff is entitled to recover on the strength of his alternative argument.

In his second theory plaintiff concedes, solely for the purposes of this motion, that ITT's cash purchases of stock in 1968 and 1969, along with the 1970 exchange offer, may be viewed as a single transaction, but argues that such a view does not defeat his claim for tax-free status under Section 354(a)(1). Plaintiff urges that at least where eighty percent of the stock of the acquired corporation is exchanged for voting stock in the acquiring corporation, the literal requirements of Section 368(a)(1)(B) are met and the presence of nonstock consideration (or "boot") in the same transaction will not preclude its qualifying as a reorganization. In the ITT-Hartford transaction, it is undisputed that over eighty percent of the Hartford stock was acquired by ITT pursuant to the exchange...

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5 cases
  • Heverly v. C. I. R.
    • United States
    • U.S. Court of Appeals — Third Circuit
    • March 25, 1980
    ...The facts have been detailed in the trial court opinions, Reeves v. Commissioner, 71 T.C. 727, 728-31 (1979), and Pierson v. United States, 472 F.Supp. 957, 958-60 (D.Del.1979), so we need not elaborate them at length. The transaction at issue involved the acquisition of stock in Hartford I......
  • Chapman v. C. I. R.
    • United States
    • U.S. Court of Appeals — First Circuit
    • March 31, 1980
    ...Our role is emphatically not to read into the tax law our own notions of "a well-ordered universe." Compare Pierson v. United States, 472 F.Supp. 957, 974 (D.Del.1979). Our reading of the statute is reinforced by another more recent circuit decision as well. In Mills v. Commissioner, 331 F.......
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    • United States
    • U.S. District Court — District of Massachusetts
    • March 28, 1989
    ...is "to permit changes in corporate structure that are primarily changes in form similar to statutory mergers." Pierson v. United States, 472 F.Supp. 957, 968 (D.Del.1979) (footnote omitted) (discussing the stock-for-stock provision of 368a1B), rev'd on other grounds, Heverly v. Comm'r, 621 ......
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    ...requirement of section 368(a)(1)(B), (see Heverly v. Commissioner, 621 F.2d 1227 (3d Cir. 1980), revg. and remanding Pierson v. United States, 472 F.Supp. 957 (D. Del. 1979) and Reeves v. Commissioner, 71 T.C. 727 (1979); and Chapman v. Commissioner, 618 F.2d 856 (lst Cir. 1980), revg. and ......
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