THURBER v. COMMISSIONER OF INTERNAL REVENUE, 84 F.2d 815

MORTON, Circuit Judge. This case involves personal income taxes assessed for the year 1930 under the Revenue Act of 1928 (45 Stat. 791). The first point in controversy is whether the combination of the old Guaranty Savings Bank of Nashua, N. H., with the Second National Bank of that city, was “a merger or consolidation” within the meaning of

section 112 of the act referred to (26 U.S.C.A. § 112 and note), ¿o that no taxable gain or loss arose from the exchange of shares. The Commissioner held that the combination was not a merger or consolidation, but was a sale of the assets of the Savings Bank to the National Bank. He accordingly imposed a tax on the gain accruing to the stockholders in the Savings Bank from the exchange of shares. His action was affirmed by the Board of Tax Appeals, four members dissenting; and the taxpayer has appealed. The banks in question were independent institutions which had been in business many years.

In the fall of 1929 committees appointed by each agreed in recommending to the stockholders a merger of the two institutions. The National Bank had at that time capital stock of $150,000.

The plan of merger as outlined by the committees was that the National Bank should continue in business, should double its capital stock by the issue of 1,500 new shares for distribution to the stockholders of the Savings Bank, and should take over the business, good will, assets, deposits, and liabilities of the Savings Bank; that the Savings Bank should reduce its assets before merging by distributing to its shareholders by way of a special dividend certain shares of stock which it owned in the Pullman Company and the Nashua Manufacturing Company and also $1.33 per share in cash representing the accrued dividend at the usual rate on its shares to the' date when the combination became effective; that all the stock of the Savings Bank should be turned over to the National Bank and be paid for by it at the rate of three shares of its own stock for four shares of the Savings Bank’s stock; that the National Bank on taking over the assets of the Savings Bank should assume all the latter’s liabilities; and that the Savings Bank should thereupon be dissolved.

Before this plan was voted upon by the stockholders it was discovered that the law required new stock of a National Bank to be paid for in cash.

The plan was therefore .modified so that the National Bank on receiving transfers of all the stock of the Savings Bank should give to the trustees, who acted for the stockholders in the Savings Bank and by whom the shares were actually surrendered, its cashier’s check for the agreed price of the shares, viz., $467,947.74, and that the recipients of the check should immediately endorse it back to the National Bank in return for . 1500 shares of the capital stock of the National Bank which they would distribute to the former stockholders of the Savings Bank, in the ratio stated.

The plan as modified was duly approved by the stockholders in both institutions, and was carried out. All the assets of the Savings Bank, including real estate, cash, securities, etc., were transferred to the National Bank; and the National Bank duly assumed all the liabilities of the Savings Bank to its depositors and all other persons, and took over its business. • In the formal notices to and votes of the stockholders the transaction is referred to as a “sale” of the assets of the Savings Bank to the National Bank.

But in a letter accompanying the formal notices it was said that the meeting was called “for the purpose of authorizing and approving the consolidation of this bank with the Second National Bank”; and the expression “consolidated bank” is used, referring to the continuing institution. (Italics supplied.) In another letter to the stockholders in which the transaction was also referred to as a sale, it was said to be, “in connection with the proposed consolidation of this bank with the Second National Bank.” (Italics supplied.) In letters accompanying the formal notices to the stockholders of the National Bank the same idea is repeatedly expressed, viz., that the transaction was a "consolidation” of the two banks.

The Comptroller of the Currency appears to have been fully informed about the whole transaction and it was arranged and carried out with his knowledge and approval. There is no controversy about the facts. They are covered by stipulation and by undisputed testimony. That there was a definite plan by all párties in interest to merge or consolidate the two banks, and that the plan was in substance carried out, seems to us too clear for further discussion.

T.he government contends that the decision by the Board of Tax Appeals that the combination of the two banks was not a merger or consolidation, but a sale, was a finding of fact and therefore is not reviewable. But as all the material facts are agreed to or are undisputed, the legal effect of them, whether sale or merger, is a question of law, or a mixed question of law and fact, on which the decision by the Board is subject to review. Helvering v. Rankin, 295 U.S. 123, at page 131, 55 S.Ct. 732, 79 L.Ed. 1343. See, too, Starr v. Commissioner (C.C.A.4) 82 F.(2d) 964, April 6, 1936; General Utilities Co. v.

Helvering, 296 U.S. 200, at page 207, 56 S.Ct. 185, 80 L.Ed. 154. The government also contends that there was no merger or consolidation because all the assets of the Savings Bank were not transferred to the National Bank, as required by the statutes; and the Board of Tax Appeals so found and ruled. The Board of Tax Appeals said: “If a given transaction in strictness can be designated as either a merger or a consolidation, it is a reorganization within the meaning of the definition, and the words in parenthesis are unimportant.

If, however, a particular transaction, which in strictness cannot be designated as either a merger or consolidation, nevertheless partakes of the nature of a merger or consolidation, it must be tested by the words in the parenthesis to see whether or not it is a reorganization within the meaning of the statute.” “The National Bank did not acquire ‘substantially all the properties’ of the State Bank.” “Since the National Bank did not acquire substantially all of the. properties of the State Bank, the transaction was not a ‘reorganization’ within the meaning of the parenthetical part of the definition.

The case of Howard v. Commissioner (C.C.A.) 56 F.(2d) 781, affirming 20 B.T.A. 207, is not in point, since in that case substantially all the properties were acquired.” “However, the fact that the National Bank did not acquire substantially all of the properties of the State Bank would be immaterial if the transaction was one which in strictness could be designated as either a merger or a consolidation.” The assets, the omission of which was held by the Board of Tax Appeals to have prevented a merger, are the shares in the Pullman Company and the Nashua Manufacturing Company and the $1.33 accrued dividend.

The special dividend by which these were distributed was voted on May 20, 1930. The combination of the banks became effective on June 2, 1930. This objection to the merger view seems to us entirely unfounded. We do not doubt that the assets of a corporation which is to be merged may, by agreement of the persons concerned, be reduced by distribution to its stockholders before the merger takes place, so that the stock at the time when the merger is consummated will have the value which the merger contemplates. There is an explicit finding that this was the purpose of the special dividend just referred to.

The statute means that all free assets of the corporation at the time of the actual merger shall be transferred to the new corporation; and this was done in the present case. The Board erred in its understanding of the statute. The case comes within it. The Board of Tax Appeals in reaching its conclusion that “in strictness” (as it says) there was no merger disregarded the obvious understanding of the parties that a merger or consolidation was being effected and did -not consider the transaction as a whole.

In effect the Board picked out a single step in á transaction involving a series of steps and, without looking at anything else, held that the entire transaction was a sale. This method of dealing with the question was inconsistent with previous decisions by the Board and by the courts and seems to us to be clearly wrong. Prairie Oil & Gas Co. v. Motter, 66 F.(2d) 309, 311 (C.C.A.10); Howard v. Commissioner (C.C.A.) 56 F.(2d) 781; George Woodward v. Commissioner, 23 B.T.A. 1259.

The transaction should have been viewed as a whole, as the Commissioner himself had insisted and the Board .of Tax Appeals had held in the Howard Case. Helvering v. Minnesota Tea Co., 296 U.S. 378, 56 S.Ct. 269, 80 L.Ed. 284. In Irving v. United States, 44 F.(2d) 246 (Ct.Cl.) the court looked through an issue and exchange of checks very similar to what took place here and held that the transaction constituted “a stock dividend” for purposes of tax liability. The characteristics of mergers or consolidations are clearly stated in Cortland Specialty Co. v.

Commissioner (C.C.A.) 60 F.(2d) 937 (referred to and approved in Pinellas Ice Co. v. Commissioner, 287 U.S. 462, at page 470, 53 S.Ct. 257, 77 L.Ed. 428) and need not be repeated. The test is whether there was “some continuity of interest on the part of the transferor corporation or its stockholders.” A. N. Hand, J., 60 F.(2d) 937, 940. Whether “the seller acquired a definite and substantial interest in the purchaser.” McReynolds, J., Helvering v. Minnesota Tea Co., 296 U.S. 378, at page 386, 56 S.Ct. 269, 272, 80 L.Ed. 284. See, too, Sage v. Commissioner (C.C.A.2) 83 F.(2d) 221, April 6, 1936.

The present case is precisely within these statements. The upshot of what was done was that the National Bank took over the business assets and liabilities of the Savings Bank together with all its capital stock and paid for them with 1,500 shares of its own new stock which was' distributed to the former stockholders in the Savings Bank, and gave them a 50 per cent, interest in the National Bank. The stockholders in the dissolved corporation became owners of one-half the stock in the consolidated company continuing the business.

If this was not a merger or consolidation “in strictness,” it is not easy to imagine what would be one. For purposes of taxation mergers meeting the requirements of the revenue acts will be recognized as such whether they are made under the provisions of the banking law, or not. Pinellas Ice Co. v. Commissioner, 287 U.S. 462, 53 S.Ct. 257, 77 L.Ed. 428.

As to the taxability of the special dividend of Pullman Company and Nashua Manufacturing Company and $1.33 in cash : This dividend was declared in connection with the merger as a liquidation pro tanto of the assets of the Savings Bank and it should be taxed on that basis. The decision of the Board of Tax Appeals is vacated, and the case is remanded to the Board for further proceedings not inconsistent with this opinion. Revenue Act of 1928, c. 852, 45 Stat. 791: “§ 112. Recognition of gain or loss “(

a) General rule. Upon the sale or exchange of property the entire amount of the gain or loss determined under

section 111, shall be recognized, except as hereinafter provided in this section. “(

b) Exchanges solely in kind— * * “

(3) Stock for Stock on Reorganization. “No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. * * a= “(

c) Gain from exchanges not solely in kind— “

(1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this

section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. “

(2) If a distribution made in pursuance of a plan of reorganization is within the provisions of paragraph (1) of this subsection but has the effect of the distribution of a taxable dividend, then there shall be taxed as a dividend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undistributed earnings and profits of the corporation accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be taxed as a gain from the exchange of property. * * * “(

i) Definition of Reorganization. As used in this

section and sections 113 and 115— “

(1) The term ‘reorganization’ means (

A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation).” 26 U.S.C.A. § 112 and note. “§ 115. Distributions by Corporations— * * “(

e) Distributions in liquidation. “Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under

section 111, but shall be recognized only to the extent provided in

section 112.” 26 U.S.C.A. § 115 note.