Court Opinion

ID: 8594751
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:01:49.161277+00
Date Added: 2024-06-11T16:54:50.431137
License: Public Domain

Skelton, Judge,
dissenting:
I do not 'agree with the decision of the court. The facts are stipulated and involve the merger of Union Oil Company of California (Union) and Pure Oil Company, 'a corporation, of Ohio ¡(Pure). Pure was merged or absorbed into Union. Thus, 'Union became the “acquiring” corporation and Pure became the “absorbed” corporation. The parties agree that the merger was governed by the laws of Ohio.
After the merger, Union issued stock in the new corporation on a pro rata basis previously agreed upon to its old stockholders and to the old stockholders of Pure. Union paid *125documentary stamp taxes in the sum of $564,780.80 on the issuance of such stock. The Internal (Revenue Service (IKS) required Union to pay an additional $238,912.34 as a documentary stamp tax for an alleged and theoretical transfer by Pure of the new shares of the new Union corporation, or the right to receive such shares, to the former owners of Pure common stock. Union contends that the collection of said $233,912.34 by the IBS was illegal and sues for its recovery. The Government says the tax is legal under 26 U.S.O. § 4321 and Treasury Regulation § 47.4321-2.1 do not agree.
The court relies heavily on the case of Raybestos-Manhattan,, Inc. v. United States, 296 U.S. 60 (1935), which held that where the acquiring corporation issued new shares directly to the former stockholders of the absorbed corporation, there was in substance a transfer for tax purposes of the new shares by the absorbed corporation to its old stockholders 'because it had a right to receive the new shares which it passed on to its old stockholders. This resulted in a “two step” or a “two-transfer” transaction. The Raybestos-Mmhattan decision is correct in a state (New Jersey) where the 'law of the state allows the absorbed corporation to own or possess the stock of the acquiring corporation. However, the converse is true where the law of the state governing the merger does not permit the absorbed corporation to own or possess stock of the acquiring corporation. In the latter case, no transfer of the stock of the acquiring corporation can be made to the absorbed corporation nor by the absorbed corporation to its former stockholders, and consequently, no stamp tax is due. That is the situation in this case.
The parties agree, and the court holds, that the stamp tax is imposed on the basis of state created relationships. See Fidelity-Baltimore Nat'l Bank v. United States, 328 F. 2d 953, 957 (4th Cir. 1964), cert. denied, 379 U.S. 823. In other words, if the state law prohibits or does not authorize or permit an absorbed corporation to hold or possess stock of an acquiring corporation with which it has been merged, it cannot transfer any of such stock to its former stockholders and, consequently, no stamp tax is due. This was the express holding of the court in Union Bankers Ins. Co. v. United States, 317 F. 2d 598 (5th Cir. 1963), which involved the merger of *126two insurance companies under Texas law, which prohibited an insurance company from owning stock in another insurance company. There, the acquiring corporation issued its new stock directly to the former stockholders of the absorbed corporation. Nevertheless, the IES assessed a transfer stamp tax on the issuance of the stock to the former stockholders of the absorbed corporation, as it has done in this case, on the theory expressed in Raybestos-Manhattan, supra. The Fifth Circuit Court held the assessment to be illegal, saying:
* * * [I] t is within the competence of the local law alone to determine the circumstances under which assets of incorporated entities may be transferred and how and in what manner the consideration therefore is to, or may, be paid. In every case so far * * * the Court in finding a taxable transfer was justified in holding on the basis of the pertinent local law that the Absorbed Company had the right to receive and hence the right to direct the disposition of stock issued in payment for assets. [Footnotes omitted.] [Id. at 601-02.]
* *• * # *
* * * [T]here is a transfer subject to the stamp tax only if, under the law of Texas, in the execution of that corporate devised plan for exchange of assets for stock, the Absorbed Company had the right to acquire such shares of stock and, having such right, it chose to direct their disposition of stock to others.
'Since under Texas law the Absorbed Company had no such right * * * the transaction may not * * * be viewed as though the stock was first received and then redistributed. [Footnote omitted.] [Id. at 603-04.]
The laws of Ohio which govern the present case are not as explicit as were the laws of Texas in the Union Bankers Ins. Co. case, because of the absence of a similar statute, but the effect is the same. Pertinent sections of the Ohio Revised Code provide as follows:
§ 1701.78 Merger and consolidation procedure.
* * * * *
(B) To effect such merger or consolidation, the directors of each constituent corporation shall approve an agreement * * *, which agreement shall set forth:
*127(10) * * * [T]be maimer and basis of making distribution to shareholders of the constituent corporations, which distribution to shareholders of any of the constituent corporations, in extinguishment of or in substitution for shares of such constituent corporations, may be by way of shares * * * of the surviving or new corporation * * *.
# & :>* ❖ ❖
§ 1701.81 Effect of merger.
(A) When such merger or consolidation becomes effective:
(1) The separate existence of all the constituent corporations, except the surviving or new corporation, shall cease * * *.
In accordance with these statutes, the shares of the acquiring corporation must be issued directly to the former stockholders of the absorbed corporation, because they are the only ones entitled to receive the stock. Furthermore, the absorbed corporation no longer exists after the merger and cannot receive the stock nor transfer it to its former stockholders. The law of Ohio was interpreted in this fashion in the case of Robison v. Cleveland City Ry. Co., 13 Ohio Dec. (10 Nisi Prius Rep.) 1 (Cuyahoga Common Pleas 1902). That case involved the merger of two Ohio corporations. The court held that upon the merger, the absorbed corporation ceased to exist and stock of the new acquiring corporation could not be delivered to the absorbed defunct corporation but had to be delivered directly to its former stockholders. There, the court said:
Next, as to paragraph 7 of the consolidated agreement, it contemplates the delivery of the stock of the consolidated company to the constituent companies as such. This is impracticable because the constituent companies after the consolidation went into effect, did not remain in existence for any such purpose, and the companies, as such, could not surrender the old stock, certainly not without the consent of the holders nor were they authorized to receive the new stock. And I am of the opinion that the statute contemplates the surrender of the old stock by individual holders and the issue of new stock to them, and that the new stock could be delivered only to individual holders or to their authorized agents. * * * [Id. at 17.]
*128Tbe same interpretation of the Ohio law is found in 13 Ohio Jur. 2d, Corporations § 810 (1955), in pertinent part as follows:
* * * The shares of the new company must be delivered or distributed di/rectly to the shareholders of the constituent corporations or their authorized agents. A delivery of the shares to the constituent corporations cairmot be made * * *. [Emphasis supplied.]
See also, Compton v. Wabash, St. Louis & Pacific Ry., 16 N.E. 110 (Ohio 1888).
Under these authorities, it appears clear that the absorbed corporation had no right to receive the shares of the acquiring corporation, and, in fact, could not do so since it no longer existed, and, consequently, could not transfer any such shares, nor any right to them to its former stockholders. Therefore, it made no transfer and no tax was due. This principle is not only in accordance with Ohio law, but also complies with the merger agreement of Union and Pure which is a part of the stipulation in this case. That agreement provides in pertinent part as follows:
ARTICLE II.
*****
2.4 As promptly as practicable after the effective date of the merger, each holder of an outstanding certificate or certificates theretofore representing shares of common capital stock of Pure may surrender the same to a transfer agent or agents designated by the 'Surviving Corporation, and such holder shall be entitled upon such surrender to receive in exchange therefor a certificate or certificates representing the number of Preferred Shares of the Surviving Corporation into which the shares of common stock of Pure theretofore represented by the certificate or certificates so surrendered shall have been converted as aforesaid. Until so surrendered, each outstanding certificate which, prior to the effective date of the merger, represented common stock of Pure, shall be deemed for all corporate purposes to evidence ownership of the number of Preferred ¡Shares of the Surviving Corporation into which the shares, of common stock of Pure (which, prior to such effective date, were represented thereby) have been so converted.
*1292:5 Upon tbe effective date of the merger, it shall be deemed that the stock transfer books of Pure are closed and no transfer of shares of Pure shall thereafter be made or consummated. * * *
ARTICLE III.
3.1 Upon the effective date of the merger provided for in this Agreement, the separate existence of Pure, except to the extent, if any, continued by statute, shall cease, * * *.
$ $ 3$ ‡ $
3.3 The “effective date of the merger” shall be (and such phrase as used herein shall mean) the time at which this Agreement is filed by Union in the office of the Secretary of State of the State of California. * * *
It is clear from this agreement that the merger was to be effective when the agreement was filed in the office of the Secretary of State of the State of California, and on that date Pure would cease to exist and its stock transfer books were closed and “no transfer of shares of Pure shall thereafter be made or consummated.” After the merger, the former stockholders of Pure could surrender their stock to a transfer agent of Union (the surviving or acquiring corporation) and receive shares directly from the acquiring corporation. Until so surrendered, the old shares of Pure were evidence of ownership of the number of shares in Union into which the shares of Pure had been converted. Thus, this agreement shows that after the merger Pure was a dead corporation and did not have and could not have anything to do with the issuance or transfer of stock in the acquiring corporation to Pure’s former stockholders. This agreement fully complied with 'Ohio law, and, together with such law, should be dispositive of this case.
In the present case, the court points out that in the Robison case, supra, the court held that under the Ohio statute “the new stock could be delivered only to individual holders or their authorized agents.” (Emphasis supplied.) The opinion of our court then states that the Supreme Court of Ohio holds directly to the contrary in the case of Cleveland City Ry. Co. v. First Nat’l Bank of New York, 68 Ohio State *130582, 67 N.E. 1075 (1903). The court seems to rely on that case in deciding in favor of the Government in this case. The reliance by the court on the Cleveland City By. case is misplaced. I do not read that case the same way the court does. In the first place, the case is clearly distinguishable from the Bobison case on both the law and the facts. In the second place, the court in the Cleveland City By. case never considered nor addressed itself to the problem decided in Bobison and which is involved here. A careful reading of the Cleveland City Ry. case shows that it does not overrule nor contradict the decision in Bobison on the problem we have before us. (Actually, it does not even mention the Bobison case.) The two cases are compatible in this regard. In fact, in my opinion, the Cleveland City By. case actually supports the position of the plaintiff in the instant case. This is shown by the following facts in that case, together with the decision of the court. In the Cleveland City By. case there was a merger of two corporations under Ohio law. Prior to the merger, the stockholders of the absorbed corporation signed a written instrument naming and appointing one Eobison and one Shipherd as their agents and proxies to deliver their stock in the absorbed corporation to the acquiring corporation and to receive for them and in their behalf the new stock in the acquiring corporation. The new stock was delivered to said agents by the acquiring corporation for the stockholders of the absorbed corporation after the merger. The stock was issued to them as trustees.
It should be kept in mind that the Bobison case and the Cleveland City By. case both arose out of the merger of the same two corporations, but the issues in the two cases are different.
Also, it should be noted that Eobison and Shipherd were president, vice president, and treasurer, respectively, of the absorbed corporation, and were made directors, vice-president, treasurer, and transfer agent of the acquiring corporation after the merger. However, it should be emphasized that when the acquiring corporation issued the stock to Eobison and Shipherd it was issued to them as agents, proxies and trustees of the former stockholders of the ab*131sorbed corporation and not as officers of tbe absorbed corporation. This is shown by the decision of the court in Robison when it said:
* * * [T] he delivery of stock of the new company could not be made to the president and treasurer [Eobison and Shipherd] of the cable company ‘[the absorbed corporation] as such, because when the consolidated company [the acquiring corporation] went into effect, they ceased to have any official relations to the old compa/ny except so far as necessary for the protection of creditors. [Emphasis supplied.] [Id. at 18.]
The delivery of the stock to Eobison and Shipherd, as agents and trustees of Pure’s former stockholders was in accord with the decision in Robison when the court in that case held that “the new stock could be delivered only to individual stockholders or their authorized agents.” After the new stock was delivered to Eobison and Shipherd as trustees, agents, and proxies for the stockholders of the absorbed corporation by the acquiring corporation, the said Shipherd converted to his own use a great number of the new shares delivered to him for the shareholders of the absorbed corporation. Prior to the merger a stockholder, who had signed the instrument authorizing Eobison and Shipherd to receive the new stock for the stockholders, had pledged his stock in the absorbed corporation to the First National Bank of New York as security for a loan. After the merger and the delivery of the new stock to Eobison and Shipherd as trustees and agents for the stockholders of the absorbed corporation, and after the conversion of the stock by Shipherd, said stockholder assigned his claim of loss, due to Shipherd’s conversion of the stock, to said bank. The bank then sued the new acquiring corporation for the stockholder’s loss. The court held that the acquiring corporation was not liable, saying that when it delivered the new stock to Eobison and Shipherd as trustees and agents for the old stockholders of the absorbed corporation it had complied with the authorization signed by such stockholders and had done all it was required to do. Thus, it is clear that no new stock was delivered to the absorbed corporation and none of such stock was distributed by it to its former stockholders. The court did not even mention or dis*132cuss whether this could or could not be done after the merger. The delivery of the stock of the acquiring corporation to the trustees and agents of the former stockholders of the absorbed corporation was the same as delivering the stock to the stockholders themselves. This was in complete accord with the requirements of the Ohio law as interpreted in Robison, supra, and other cited authorities above, to the effect that after the merger the absorbed corporation ceased to exist and could not receive nor transfer shares of the new acquiring corporation to its former stockholders and that such new shares were required to be issued by the acquiring corporation directly to the former shareholders of the absorbed corporation or their authorized agents. For all of these reasons, in my opinion, the Cleveland City By. case does not support the defendant in the present case, but on the other hand is authority for the plaintiff. The court errs in relying on it in deciding for the defendant.
The court cites the Raybestos case and American Processing & Sales Co. v. Campbell, 164 F. 2d 918 (7th Cir. 1947), cert. denied, 333 U.S. 844 (1948), American Mail Line Ltd. v. United States, 121 Ct. Cl. 63, 101 F. Supp. 364 (1951); and U.S. Industrial Chemicals, Inc. v. Johnson, 181 F. 2d 413 (2d Cir. 1950), in support of its decision. These cases, though valid under the laws of the states where they arose, are not apposite here because they involved the laws of states other than Ohio (New Jersey, Illinois, Nevada-Delaware, and West Virginia-Delaware) with reference to the merger of corporations. The laws of such states are different to the laws of Ohio with which we are concerned in this case. Consequently, such cases should be disregarded in deciding our case.
The parties agree, and the court concedes, that in the case before us, no stock of Union, the acquiring corporation, was actually issued to Pure, the absorbed corporation, after the merger, and that Pure never admally transferred any stock of the new acquiring corporation nor any right to receive such stock to its former stockholders after the merger. Furthermore, in my opinion, neither transfer could be made under Ohio law. Under these circumstances, no stamp tax is due and the plaintiff is entitled to judgment. But the court *133gets around these ‘fatal defects in the Government’s case by applying the theory of Baybestos and the other cases it cites, saying that there was an implied issuance of the new stock by Union to the defunct and expired Pure corporation, and that, in turn, there was an implied transfer of such stock by Pure, ■which no longer existed, to its former stockholders. I cannot agree to the imposition of a tax on a taxpayer, especially of the magnitude of that involved here, based on the hypothetical fiction and supposition that two transfers prohibited by Ohio law had taken place. It amounts to allowing the IES to assess and collect a tax based on speculation, supposition, and implication on top of implication that the transfers had been made contrary to Ohio law. Everyone will agree that every responsible citizen should pay taxes imposed upon him by the plain and unambiguous provisions of laws enacted by Congress. On the other hand, a taxpayer should not be required to pay a Federal stamp tax imposed upon 'him on the theory that by inference, speculation, or implication on top of implication two stock transfers had taken place contrary to governing state law. In my opinion, that is what has happened here, where two transfers are held to have occurred by implication when the evidence shows that neither of the transfers actually occurred, nor could occur. The tax imposed on the taxpayer in this case is wrongful, illegal, and confiscatory, for all of the reasons set forth above.
The decision of the court that the tax was validly imposed would be correct on the basis of Baybestos and other cases cited by the court if Ohio laws authorized the alleged transfers of the stock from Union to Pure and from Pure to its former stockholders after the merger. I do not believe such authorization can be .found in Ohio laws. No Ohio case to that effect has been cited. On the other hand, Ohio laws and the cited Ohio cases make it impossible for such transfers to be legally accomplished. Consequently, no transfer tax is due.
I would enter judgment for the plaintiff for $233,912.32, plus interest.