Document: 469 U.S. 131 105 S.Ct. 627 83 L.Ed.2d 540 Harold T. PAULSEN et ux., Petitionersv.COMMISSIONER OF INTERNAL REVENUE. No. 83-832. Argued Oct. 29, 1984. Decided Jan. 8, 1985. Syllabus Pursuant to a merger plan whereby Commerce Savings and Loan Association, state-chartered stock savings loan association, was merged in 1976 into Citizens Federal federally chartered mutual petitioners, husband wife, exchanged their "guaranty stock" for passbook accounts time certificates of deposit representing share interests Citizens. Relying on §§ 354(a)(1) 368(a)(1)(A) the Internal Revenue Code, which provide an exception recognizing gain sale or exchange property corporate reorganizations, petitioners did not report income tax return they realized because considered be tax-free reorganization. The Commissioner Revenue, however, issued notice deficiency found liable entire gain. Petitioners then sought redetermination Tax Court, rendered decision petitioners' favor. court reasoned that were only forms equity Citizens, held requisite continuity interest existed under rule even though literal terms reorganization provisions statute are satisfied, also requires taxpayer's ownership prior organization must continue meaningful fashion reorganized enterprise retained represent substantial part value thing transferred, Helvering v. Minnesota Tea Co., 296 378, 56 269, 80 L.Ed. 284. Court Appeals reversed, holding despite certain characteristics indistinguishable from ordinary essentially equivalent cash. Held: entitled treat Commerce-Citizens as 368(a)(1)(A), thus taxable question. Pp. 137-143. (a) Petitioners' cash equivalents. debt Citizens' shares (the subordinated creditors' claims, deposits permanent contributions capital, shareholders have right withdraw face amount cash, practice pays fixed, preannounced rate all accounts) greatly outweigh instruments vote, receive dividends rather than pro rata distribution assets event solvent dissolution). 137-140. (b) failed satisfy required qualify same value; no one would pay more this shares, incremental attributable features was, practically, zero. Thus, "substantial" given up. 140-142. (c) To characterize does conflict with Tcherepnin Knight, 389 332, 88 548, 19 564. P. 143. 716 F.2d 563 (9th Cir., 1983), affirmed. William R. Nicholas, Los Angeles, Cal., petitioners. Albert G. Lauber, Jr., Washington, D.C., respondent. Justice REHNQUIST delivered opinion Court. 1 Association Tacoma, Wash., Seattle July 1976. Marie Paulsen 26 U.S.C. 368(a)(1)(A). Ninth Circuit, disagreeing Claims other Courts Appeals,** reversed favor (1983). We granted certiorari, 465 1021, 104 1271, 79 676 (1984), resolve these conflicting interpretations important provision Code. 2 At merger, petitioner president director Commerce. He his B. Paulsen, community 17,459 In received federal 3 Before it ceased exist, association incorporated operated Washington State law. It authorized issue stock," offer various classes accounts, make loans. Each stockholder, account holder, borrower member association. every $100, fraction thereof, carried vote. had 4 normally associated common by corporation. Under bylaws, guaranty maintained fixed nonwithdrawable capital accordance Wash.Rev.Code Ann. § 33.48.080 (Supp.1981), holders stock, but members, proportionate proprietary its net earnings, subordinate claims creditors. Dividends could declared paid unless reserves been accumulated withdrawable accounts. 5 is jurisdiction Home Bank Board. 12 1461 seq. offers makes loans, has stock. Its members depositors borrowers. holder vote each withdrawal up maximum 400 votes. 6 owned depositors. Twice year earnings any surplus distributed amounts deposit. similarly if liquidation dissolution should occur. obligated written requests within 30 days, may redeem at paying value. 7 effected pursuant "Plan Merger," Commerce's stockholders designed conform requirements 33.40.010 (1983), provides mergers between business entities, plan, $12 account, subject restriction such withdrawn year. They alternative receiving maturities ranging 10 years $12-per-share rate. further provided former borrow against resulting 1.5% above opposed 2% differential Following exchange, entity continued operate name. 8 cost basis $56,802; worth $209,508. 1976, 1002 (1970 ed.) "on loss . shall recognized." Accordingly, declare $152,706 profit exceptions reference applied. 9 Included among set out 354 368. As already noted, attempted rely 354(a)(1), provides: "No recognized securities corporation party are, pursuance reorganization, solely another reorganization." 11 Section defines "reorganization" include "a statutory consolidation," 7701(a)(3), 7701(a)(7), 7701(a)(8) define "corporation" "associations," "stock" "shares association," "shareholder" "member association." There dispute qualified associations, shareholders, Code transaction taxes paid. Satisfying provisions, sufficient nonrecognition loss. purpose " 'to free imposition purely "paper profits losses" wherein there realization sense merely recasting different form.' Southwest Natural Gas Co. Commissioner, 189 334 (CA5), cert. denied, 342 860, 72 88, 96 647 (1951) (quoting Gilmore's Estate, 130 791, 794 (CA3 1942)). See Treas.Reg. 1.368-1(b), CFR 1.368-1(b) (1984). order exclude sales structured purpose, construed require enterprise. Pinellas Ice & Cold Storage 287 462, 468-470, 53 257, 259-260, 77 428 (1933). case we "the seller acquire affairs purchasing company definite incident short-term purchase-money notes." Id., 470, S.Ct., 260. soon added requirement "this material; transferred." 385, 272, 284 (1935). Compare LeTulle Scofield, 308 415, 420-421, 60 313, 315-316, 84 355 (1940) (no where transferor transferee's bonds), John A. Nelson Helvering, 374, 377, 273, 274, 281 (1935) (continuity satisfied nonvoting preferred received). Known "continuity-of-interest" doctrine, codified Treas.Regs. 1.368-2(a). 13 present turns whether satisfies continuity-of-interest requirement. More generally, decide qualifies ruling Rev.Rul. 69-6, 1969-1 Cum.Bull. 104, itself apparently odds earlier policy expressed 54-624, 1954-2 16, rejected treatment finding 14 Commissioner's position uniformly courts. Capital Assn. United States, 221 Ct.Cl. 557, 607 970 (1979); West Side 494 404 (CA6 1974); Everett 448 357 (CA10 1971), existed. 78 T.C. 291 (1982). 15 appealed declined follow cases cited reversed. "despite formal characteristics" "are reality cash." 569. For reasons affirm Appeals. 16 organized Charter K (Rev.), 544.1(b) (as 1, 1976), raising "by accepting payments These association's means capital. Here divided reality, hybrid having both characteristics. combine instrument separate associations like 17 several most fact carries addition bricks mortar, goodwill, Another characteristic matters management obtain shareholder approval. accounts; legal dividend investment. remaining after dissolution. 18 characteristics, appear surface. Unlike concentrated stockholders, here spread over relation total share, therefore, much smaller very significant. A limited votes; funds deposited excess $40,000 do confer additional diluted made, asserts, contest, practice, when open usually sign proxies giving controlling. disputed assertion observed, able compete commercial banks practice. Potential motivated security deposits. latter respect, insured Insurance Corporation (FSLIC), now $100,000. 1728(a). treats just bank deductible 591, exclusion 116. 20 participate proceeds significant shares. Referring possibility observed: "It stretches imagination far attribute real remote contingency, coupled represents nothing depositor can readily transfer, theoretical reduces almost vanishing point." Society Bowers, 349 143, 150, 75 607, 611, 99 950 (1955). 21 contrast, predominate. creditors, Shareholders days' deposits, respect. While unable following viewed akin delayed payment material alteration nature payment. immediately favorable generally. noted above, effect guaranteed competitive banks. 22 our view, $210,000. stipulated demand stated intervals thereafter. Their investment virtually risk prevailing rates types institutions. value, $210,000; hold 23 Commerce, insubstantial interest. U.S., 272. Assuming arm's-length what gave worth, $210,000 unquantifiably small This enterprise, agree attached too significantly notes mere "equivalent cash" 468-469, 259-260. closer secured bondholders 274. involved classic instrument—preferred carrying voting rights default—which corporation." Ibid. 24 argue below erroneously turned relative change extent interest, contrary relationship taxpayer conveyed [could] substantially chang[e]," "material transferred assets" need 386, case, taxpayers trust $540,000 $425,000 cash; 56% transferee. supra, consideration consisting 38% 62% Here, part" formerly F.2d, 335 (insufficient represented less 1% consideration). 25 complaint seems willingness consider aspects separately. Clearly, pieces paper—savings hand some kind other—the so find "to exalt artifice deprive question serious purpose," Gregory 293 465, 469-470, 55 266, 267-268, 596 (1935), necessary single 69-265, 109, 109-110, conversion convertible "property purposes 368(a)(1)(C). complain result reached inconsistent institution still Rev.R. 69-3, 103. If test received, two instant case. 27 indicated, predominant cash-equivalent component component. When merge, identical long side same, received—though small—is Therefore, reflects requirement, defined kind. affect aspect exchange. clearly exchanging before enhanced. 28 Finally, characterization conflicts Court's 564 (1967), "security" meaning 3(a)(10) Securities Exchange Act 1934. Cf. Marine Weaver, 455 551, 102 1220, 1224, 71 409 (1982) (distinguishing "were 'the concept security' certificate deposit" [in bank] ); Wisconsin Bankers Robertson, 111 U.S.App.D.C. 85, 294 714, 717 (Burger, J., concurring), 368 938, 82 381, 338 (1961). Acts focus character specifically SEC W.J. Howey 328 293, 301, 66 1100, 1104, 90 1244 (1946), contract, namely "investment money come efforts others." investors Moreover, disregarded looked economic substance. Any tension Weaver explained liberally definition Acts, while liberality warranted construing scope provisions. judgment 29 Affirmed. POWELL took 31 O'CONNOR, whom THE CHIEF JUSTICE joins, dissenting. 32 Today holds tax-deferred Although meets requirements, although courts similar transactions see ante, 132-133, nevertheless concludes fails refined interpretation judicially imposed doctrine. introduces unfortunate unnecessary element uncertainty area laws clear consistent precedent particularly helpful collectors. Because I unwise matter unwarranted law, respectfully dissent. 33 concedes Wash. (Commerce), (Citizens) met Ante, 135. Indeed, meet 7701(a)(7). Nevertheless, refuses accord benefits currently 1.368-2(a), 1.368-2(a) 136. Treasury Regulations, codifying decisions (1933), status acquiring continues acquired utilizes assets. (d)(2), (d)(2) Similarly, recognize retain continuing surviving 34 concede merger. sole not. 35 continuity-of-proprietary-interest doctrine "was born judicial effort confine proper function." Bittker J. Eustice, Income Taxation Corporations ¶ 14.11 (4th ed. 1979). establish owners transferred. first relevant authority established receipt promissory notes" Three Terms later, upheld transfer plus equal said: 36 "[The] 37 * "The sale, partook purchaser. "True changed, inhibited statute. Also, large This, think, permissible transferee assets." 385-386, 272-273. 38 percent redeemable 62 But wholly bonds creditors business. (1940). 39 Against background, who "hybrid instruments" 138. finds 140, 40 security, opportunity cloaks attributes creditor, debt. believe substantial, 41 them previously interval recognizes, equitable corporation's earnings. 133-134. became owners, stockholders: liquidation, obtained weighty nonvoting, supra: possess primary existence 42 insubstantial, today looks power determine actually exercised. values separately support action valuing 109. Apparently ever relied distinction respect instrument. 4.02, pp. 4-7 1979) ("in litigated cases, classification treated all-or-nothing question, fragmented debt"). Nor approach today. 43 flaw evident majority's attempt explain why whereas heavily capitalized thinly will reduced. valuation approach, point reduced defeat maintained. avoids noting up." 142. true complete 44 denigration troubling. "spread depositors" "is vote." confined Dilution corporations frequently occur new class Yet threat dilution never divested often voted proxy result: voting, all, well. Such factors determination continuing-proprietary-interest met. 45 through undistributed majority downplays shareholders' profits, ownership. analogous purposes. 138-139. dividends, cannot properly equated enforceable compel dividends. That suggested many corporations, correctly deductibility expenses purposes, I.R.C. reason unrelated equity. Prior 1951, exempt tax. 101 (1946 ed.). 65 Stat. 452, removed exemption deduction prevent accumulation associations. Note, Reorganization Treatment Acquisitions Stock Institutions Mutual Associations, 52 Ford.L.Rev. 1282 simply irrelevant determining 46 "not shares" remote. 139. task classify account; market remoteness contingency reasonably dispositive shareholders. likelihood vary particular climate, change. liabilities, those liquidation. 47 Having unpersuasively away concluding "practically, zero." 140. reasoning suggests that, how possesses, preordained unsupported "nonequity" account. By definition, left allocate features. realistic analysis acknowledge interwined valued isolation. 48 accorded survivor. (merger assets), 103 reorganization), 69-646, 1969-2 54 reorganization). And level level, 361 discourage legitimate without regard desirability standpoint. directly intent Congress. "Congress adopted exempting exchanges made connection [would] prevented law." S.Rep. 398, 68th Cong., 1st Sess., (1924). 49 ramifications beyond presents use reorganizations. Previously, common, preferred, test. examine actual exercise conferred inevitably reach results cases. Predicting consequences reorganizations undertaken valid become increasingly difficult. adhere principal whole my view I, ** 1971).

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