UNION OIL COMPANY OF CALIFORNIA v. United States

• Citation: 480 F.2d 807
• Decision Date: 20 June 1973
• Docket Number: No. 700-71.,700-71.
• Parties: UNION OIL COMPANY OF CALIFORNIA v. The UNITED STATES.
• Court: Court of Federal Claims

480 F.2d 807 (1973)

UNION OIL COMPANY OF CALIFORNIA v. The UNITED STATES.

No. 700-71.

United States Court of Claims.

June 20, 1973.

Carl Estes, II, Houston, Tex., for plaintiff. Marvin K. Collie, Houston, Tex., attorney of record. Thomas P. Marinis, Jr., and Vinson, Elkins, Searls, Connally & Smith, Houston, Tex., of counsel.

Allan C. Lewis, Washington, D. C., with whom was Asst. Atty. Gen., Scott P. Crampton, Washington, D. C., for defendant. Gilbert E. Andrews and Joseph Kovner, Washington, D. C., of counsel.

Before COWEN, Chief Judge, and DAVIS, SKELTON, NICHOLS, KASHIWA, KUNZIG, and BENNETT, Judges.

OPINION

COWEN, Chief Judge:

In this tax refund suit, which is before the court on a stipulation of facts by the parties for a decision on an issue of law, plaintiff seeks to recover $233,912.32 in Federal Documentary Stamp Taxes collected under Section 4321 of the Internal Revenue Code of 1954. We have concluded that the plaintiff is not entitled to recover.

The basic facts material to the resolution of the issue before the court may be briefly summarized. On April 29, 1965, plaintiff Union Oil Company of California (Union), a California corporation, entered into an Agreement of Merger with the Pure Oil Company (Pure, a corporation organized under the laws of the State of Ohio. Under the terms of the Agreement, which was written in conformance with the applicable statutory provisions of California and Ohio, Pure was to be merged into Union by a transfer of all of Pure's corporate assets to Union, subject to the approval of the stockholders of each corporation as required by local state law. The Agreement further provided that each outstanding share of Pure's common stock was to be converted into one share of the cumulative convertible preferred voting stock of Union on the effective date of the merger. The shareholders of the two corporations duly approved the Agreement of Merger. On July 16, 1965, in accordance with the Agreement, Pure merged into Union, and Union issued 9,953,715 shares of its cumulative convertible preferred voting stock directly to the former shareholders of Pure.

It is the position of the Government that the merger of the two corporations involved two transactions subject to the imposition of Federal Documentary Stamp Taxes. The first such transaction, the issuance by Union of 9,953,715 shares of its capital stock, required payment of $584,780.80 of original issue stamp taxes under Section 4301 of the 1954 Code. Plaintiff concedes that the latter tax was properly assessed. The Government further asserts that plaintiff was liable for an additional $233,912.32 of transfer stamp taxes imposed by Section 4321 of the 1954 Code,¹ based on the implied transfer by Pure to its own shareholders of the right to receive 9,953,715 shares of Union stock issued in exchange for the assets of Pure. It is the assessment of the Section 4321 transfer stamp tax that plaintiff challenges here. Defendant asserts that Treasury Regulation (26 C.F.R.) Section 47.4321-2(a)(9) is controlling. That regulation provides:

§ 47.4321-2 Illustrations.

(a) Sales and transfers subject to tax. The following transfers of stock are illustrations of transactions which are taxable, unless exempt from tax under a specific provision of the Internal Revenue Code * * *:

* * * * * *

(9) In addition to the tax on the issuance of stock in connection with a merger or consolidation, where such stock is issued directly to the stockholders of the merging or consolidating corporations by the continuing or consolidated corporation * * *, there is also a transfer tax imposed at the time of the issuance of such stock. The transfer tax is applicable to such a transaction inasmuch as there is involved the transfer to the stockholders of the merging or consolidating corporations of such corporations\' right to receive the stock of the continuing or consolidated corporation. * * * Emphasis added.

Simply stated, the Government's theory is that the nonsurviving corporation, here Pure, initially had the right to receive the capital stock of Union issued in exchange for the assets of Pure. This is because the corporation, rather than its individual stockholders, is the owner of the corporate assets. See H. Henn, Law of Corporations § 79 (2d Ed. 1970). Consequently, when Union and Pure agreed that incident to their merger Union would issue its capital stock directly to the shareholders of Pure, the merging corporation, there was an implied transfer by Pure to its own stockholders of the right to receive the Union capital stock. Defendant finds support for its position and for the above-quoted regulation, in the decision of the Supreme Court in Raybestos-Manhattan, Inc. v. United States, 296 U.S. 60, 56 S. Ct. 63, 80 L.Ed. 44 (1935). In that case the corporate taxpayer was organized under the laws of New Jersey as part of a plan of consolidation. Pursuant to the consolidation agreement, two preexisting corporations transferred their assets to the taxpayer and in return the taxpayer issued its capital stock directly to the shareholders of the two consolidating corporations. The Internal Revenue Service assessed both original issue and transfer stamp taxes on the transactions. The transfer tax was assessed, as here, on the implied transfer by the consolidating corporations to their stockholders of the right to receive the stock of the new corporation. In construing the transfer stamp tax statute, similar to Section 4321, the Court held that when the act referred to transfers, it did not mean exclusively an actual transfer from the hand of the transferor to that of the transferee. The statute also referred to the relinquishment of a right by one party and the vesting of the same right in another. The Court stated:

* * * In the present case the generating source of the right to receive the newly issued shares of petitioner was the conveyance to it of the property of each of the corporations to be consolidated. The new shares could not lawfully be issued to any other than the grantor corporation without its authority, and that authority could not be exercised for the benefit of third persons other than its own assenting stockholders. The consolidation agreement thus imposed the duty on petitioner to issue the new shares upon receipt of the property, and at the same time made disposition to the stockholders of the two corporations of the correlative right to receive the stock. 296 U.S. at 63, 56 S.Ct. at 65; emphasis added.

The Court concluded that there was not "even a technical difference of any significance" for Federal tax purposes whether the shares were issued first to the consolidating corporations and later transferred to their stockholders, or whether the initial issuance of the stock and the transfer thereof to the shareholders of the consolidating corporations were effected in the single consolidation agreement. Although the Raybestos-Manhattan case arose in the context of a corporate consolidation, its principles have been applied in the traditional merger situation. U.S. Industrial Chemicals, Inc. v. Johnson, 181 F.2d 413 (2d Cir. 1950); American Processing & Sales Co. v. Campbell, 164 F.2d 918 (7th Cir. 1947), cert. denied, 333 U.S. 844, 68 S.Ct. 661, 92 L.Ed. 1127 (1948); American Mail Line, Ltd. v. United States, 101 F.Supp. 364, 121 Ct.Cl. 63 (1951); Western Massachusetts Elec. Co. v. United States, 101 F.Supp. 544 (D.Mass.1951).

Plaintiff recognizes that Raybestos-Manhattan and the cases following it are controlling as to the applicability of the transfer stamp tax in the usual merger situation. However, plaintiff asserts that the critical factor in each of those cases was that under the applicable state laws respecting mergers and consolidations, the nonsurviving corporation in a merger or consolidation had the right to receive and the correlative right to control the disposition of the stock issued in exchange for its assets by the continuing corporation. Thus, plaintiff contends that, while the application of the transfer stamp tax to a particular transaction is a question of Federal law, the form of the transaction is controlled by state law and the tax is assessed on the basis of state-created relationships. Plaintiff also maintains that the law of Ohio with respect to mergers and consolidations, which was applicable to the merger of Pure into Union, prohibits the merging or nonsurviving corporation from receiving or controlling the disposition of the shares issued by the continuing corporation. Consequently, says plaintiff, the shareholders of the merging corporation have the exclusive right to receive such stock. The law of Ohio, plaintiff argues, precludes the possibility of any actual or implied transfer by the merging corporation to its stockholders of the right to receive the shares of the continuing corporation, and the transfer stamp tax of Section 4321 cannot be imposed.

Plaintiff claims support for its basic position in the decision of the United States Court of Appeals for the Fifth Circuit in Union Bankers Insur. Co. v. United States, 317 F.2d 598 (5th Cir. 1963). That case concerned the merger, in accordance with the law of the State of Texas, of two Texas insurance corporations. The agreement of merger directed the issuance of the stock of the continuing corporation directly to the shareholders of the merging corporation in exchange for the assets of the latter. The Internal Revenue Service assessed the Section 4321 transfer stamp tax on the basis of the implied transfer by the merging corporation to its shareholders of the right to receive the capital stock of the continuing corporation. The court of appeals reversed the decision of the district court in favor of the Government. The court noted that Texas, like most other jurisdictions, stringently regulates by statute the activities of insurance companies doing business in the state. The court then concluded that the provisions of the Texas Insurance...