Vorbleski v. C. I. R.

• Decision Date: 01 December 1978
• Docket Number: No. 78-1154,78-1154
• Citation: 589 F.2d 123
• Parties: 78-2 USTC P 9839 Walter F. VORBLESKI and Florence Vorbleski, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Third Circuit

Page 123

589 F.2d 123

78-2 USTC P 9839

Walter F. VORBLESKI and Florence Vorbleski, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 78-1154.

United States Court of Appeals Third Circuit.

Argued Sept. 7, 1978.

Decided Dec. 1, 1978.

David E. Wasserstrom, Michael A. Bloom, Wasserstrom & Chucas, Philadelphia, Pa., for appellants.

M. Carr Ferguson, Gilbert E. Andrews, Gary R. Allen, Thomas M. Walsh, Jonathan S. Cohen, Tax Div., Dept. of Justice, Washington, D. C., for appellee.

Before GIBBONS, HUNTER and GARTH, Circuit Judges.

OPINION OF THE COURT

JAMES HUNTER, III, Circuit Judge:

Section 483 of the Internal Revenue Code of 1954 is a general provision which treats as interest a certain part of "any payment" due more than six months after, and which is made on account of, the sale or exchange of property. In Fox v. United States, 510 F.2d 1330 (3d Cir. 1975), this Court held that section 483, despite its seemingly long reach, nevertheless does not apply to deferred payments made in satisfaction of a divorce property settlement because Congress intended the tax treatment of such payments to be governed exclusively by two other sections of the Code. Primarily relying on the rationale of Fox, appellants in this case ask us to rule that section 483 is also inapplicable to deferred payments of stock received pursuant to a stock for stock corporate reorganization.

FACTS

Appellants Walter F. and Florence Vorbleski owned one-third of the stock of Berwick Forge and Fabricating Corporation (Berwick). On April 15, 1968, the stockholders of Berwick entered into an Acquisition Agreement and Plan of Reorganization (Agreement) with Whittaker Corporation (Whittaker). The Agreement called for the acquisition of all Berwick stock by Whittaker solely in exchange for Whittaker voting common stock. Under the terms of the Agreement, the Berwick shareholders immediately received 115,000 shares of Whittaker $1.00 par value common stock.

The Agreement also required Whittaker to reserve for possible future delivery to the Berwick shareholders 113,300 additional shares. These reserve shares were divided into two equal accounts, reserve A and reserve B. The reserve A shares were to be distributed, if at all, over the first three adjustment years after the acquisition; whether the stock was to be delivered, and the amount to be delivered, was to depend on the extent of Berwick's profits in the years ending October 31, 1968, October 31, 1969, and October 31, 1970. In addition, if at least 100 reserve A shares were delivered to the Berwick shareholders, and if the total market value of all the Whittaker common stock received by the Berwick shareholders, including the reserve A stock distributed, was less than 41/2 times the average annual Berwick profits for the three adjustment years ending October 31, 1970, then Whittaker was required to deliver a certain number of reserve B shares. The amount of reserve B shares to be distributed was to be the amount necessary to make the total market value of all shares delivered by Whittaker, including those A and B shares distributed, equal to 41/2 times the average annual Berwick profits for the three adjustment years.

By 1971, the extent of Berwick's profits and the deteriorating market value of Whittaker common stock caused Whittaker to deliver all of the reserve A and B shares to the Berwick shareholders. On February 17, 1971, appellants and the other Berwick owners each received 48,625 shares of Whittaker common stock from the A and B reserves, the amount to which they were entitled under the Agreement, as adjusted by stock splits and stock dividends. The shares had a per share value of $9.625 on that date.

The Berwick-Whittaker reorganization qualified as a "Type B" reorganization pursuant to section 368(a)(1)(B). ¹ As a result, under section 354(a)(1), ² no gain was recognized with respect to any of the exchanges of stock, including the distribution of the reserve stock, made in connection with the reorganization. Assuming that section 354(a)(1) thus meant that the reorganization was entirely non-taxable, appellants did not pay any federal income tax with respect to the Whittaker stock they received in the reorganization.

The Commissioner of Internal Revenue did not dispute that Whittaker's acquisition of Berwick constituted a "Type B" reorganization, or that gain from the reorganization could not be recognized. Nor did he contest the fact that the Agreement did not provide for the payment of interest by Whittaker on the reserve shares. Nevertheless, the Commissioner concluded that a part of the reserved shares received by appellants in 1971 constituted unstated interest, which is taxable as ordinary income under section 483 of the Code. ³ The Commissioner then determined a deficiency of $29,228.56 in appellants' 1971 taxable year federal income tax payment.

Appellants challenged the Commissioner's ruling in the United States Tax Court, contending that section 483 did not apply to deferred payments made in the course of corporate reorganizations governed by sections 354(a)(1) and 368(a)(1)(B) of the Code. The Tax Court rejected appellants' argument and affirmed the Commissioner's ruling. ⁴ Appellants bring this appeal to challenge the Tax Court's decision.

I

Section 483 is an apparently far-reaching provision which applies, with certain specific exceptions not relevant here, See § 483(f), "to Any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange." § 483(c)(1) (emphasis added). Once it is determined that a "payment" is covered by section 483, a specified part of that payment is treated as interest, § 483(a), which is taxable as ordinary income to the recipient of the payment.

In considering appellants' request that we hold section 483 inapplicable to deferred payments received in the course of a corporate reorganization controlled by sections 354(a)(1) and 368(a)(1)(B) of the Code, despite the broad language of section 483, we are mindful that precisely this question has been resolved in the Commissioner's favor in numerous other forums. The Treasury Department's Regulation 1.483-2(b)(3)(i) ⁵ states that "the provisions of section 483 apply to deferred payments of stock or securities by a corporation which is a party to a reorganization, Notwithstanding that under section 354(a) no gain or loss is recognized on the transaction " (emphasis added). Treasury Regulations are "contemporaneous constructions by those charged with administration of" the tax laws and are to be "sustained unless unreasonable and plainly inconsistent with the revenue statutes." Bingler v. Johnson, 394 U.S. 741, 749-50, 89 S.Ct. 1439, 1445, 22 L.Ed.2d 695 (1969); Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501, 68 S.Ct. 695, 92 L.Ed. 831 (1948). Moreover, the Second and Sixth Circuits and the Court of Claims have considered cases factually indistinguishable from this one and have held that section 483 applies to deferred payments made pursuant to reorganizations in which gain is not recognized. See Katkin v. Commissioner, 570 F.2d 139 (6th Cir. 1978); Solomon v. Commissioner, 570 F.2d 28 (2d Cir. 1977); Jeffers v. United States, 556 F.2d 986 (Ct.Cl.1977).

Appellants admit that if we are to find in their favor, we must invalidate Treasury Regulation 1.483-2(b)(3)(i) and reject the rationale of Katkin, Solomon, and Jeffers. Appellants nevertheless advance several related contentions which they assert compel us to take those steps. First, they argue that there was no "payment" due more than six months after a sale or exchange, as required by section 483, because appellants' "payment" was received at the time of the initial stock for stock exchange in 1968. Second, they claim that section 483 is inconsistent with Code sections 354(a)(1), 358(a)(1), 368(a)(1)(B), and 1223(1). Because section 483 is a general provision and the other provisions are more specific, they reason that the other provisions must take precedence under the doctrine of Bulova Watch Co. v. United States, 365 U.S. 753, 758, 81 S.Ct. 864, 6 L.Ed.2d 72 (1961), and Fox v. United States, 510 F.2d 1330 (3d Cir. 1975). Third, they maintain that application of section 483 to the reserved share payments received by appellants is inconsistent with the intent of Congress in extending the benefits of non-recognition of gain treatment to contingent stock reorganizations.

None of these arguments persuades us that Treasury Regulation 1.483-2(b)(3)(i) and the Commissioner's resulting notice of deficiency to appellants are "unreasonable and plainly inconsistent" with the intent of Congress in enacting section 483. Bingler, 394 U.S. at 749-50, 89 S.Ct. 1439; South Texas Lumber Co., 333 U.S. at 501, 68 S.Ct. 695. Therefore, we affirm.

II

Appellants first contend that the reserved shares are not within the reach of section 483 because no "payment . . . due more than 6 months after the date of (a) sale or exchange" of property took place as required by section 483(c) (1). Appellants' version of the 1968 Agreement with Whittaker is that appellants exchanged their equity interest in Berwick for an equity interest in Whittaker equal in value to the interest they surrendered. Because the parties were unable to agree on the specific dollar value of Berwick, part of appellants' equity interest in Whittaker was to be represented by Whittaker common stock and part was to consist of a non-assignable right to receive additional Whittaker common stock, the amount of which depended on the occurrence of certain circumstances beyond appellants' control. Appellants assert that the contingent right to equity ownership in Whittaker granted them by the 1968 Agreement served the same function as actual possession of the reserved shares, in that both represented ownership by appellants of part of Whittaker. Thus, appellants...