American Processing & Sales Co. v. Campbell

MINTON, Circuit Judge.

The plaintiff-appellee, hereinafter refeN red to as the taxpayer, is a corporation organized and existing under the laws of Illinois. It is the surviving corporation in a merger of the Rapid Roller Company, an Illinois corporation and the merging corporation, with the Hawthorn-Mellody Farms Dairy, Inc., the surviving corporation whose corporate name was changed to American Processing & Sales Company. The Rapid Roller Company went out of existence upon the merger. The merger took place in accordance with the procedure prescribed by Illinois law¹ and pursüant to a plan which both corporations had adopted and which was approved by their stockholders. The essential terms of the merger were'as follows:

“(a) The surviving corporation shall possess all the rights, privileges, immunities, and franchises (but not including stock in the surviving corporation) heretofore possessed by the merging corporation. All property, real, personal, and mixed, all receivables of whatever kind, all choses in action, and all and every other interest of or belonging or due to the merging corporation shall be taken and deemed to have been transferred to and vested in the surviving corporation without further act or deed, although the merging corporation shall execute such confirmatory deeds or other instruments as may be deemed appropriate. .

. ‘.‘(b).The surviving corporation shall become and be responsible and liable for all obligations and liabilities of the merging corporation..

* * * * *

“The conversion of the presently outstanding 5405 shares of stock of the merging corporation into stock of the surviving corporation shall be accomplished as follows:

“There shall be issued to the present holders of shares of stock in the merging corporation, pro-rata, upon the surrender and cancellation of the certificates therefor, certificates representing 1500 shares of the preferred stock and 3800 shares of the common stock of the surviving corporation, said 5405 shares of stock of the merging corporation being changed into said 1500 shares of the preferred stock and 3800 shares of common stock of the surviving corporation.”

Fifteen hundred shares of preferred and 3,800 shares of common stock of the taxpayer were issued by the taxpayer directly to the stockholders of the merging or non-surviving corporation in proportion to their holdings in that corporation. Upon the issuance of this stock, pursuant to Sec. 1802(b) of the Internal Revenue Code² the Commissioner assessed a documentary stamp tax against the taxpayer in the amount of $265 on the ground that in substance the statutory merger gave the merging corporation the right to receive stock in the surviving corporation, which right the merging corporation had in substance transferred to its stockholders. '

The taxpayer paid the tax and sued for refund. The District Court gave judgment for the taxpayer for the amount paid plus interest, holding that a taxable transfer by the merging corporation had not occurred. The Government has appealed.

The question presented to us is whether the issue by the taxpayer of its stock to the former stockholders of the merging corporation, pursuant to a merger plan adopted by the corporations and approved by the stockholders of both, all in accordance with the procedure prescribed by the Illinois statutes, involved a transfer by the merging corporation of the right to receive stock, within the meaning of the statute.

We think this case is ruled by the case of Raybestos-Manhattan, Inc., v. United States, 296 U.S. 60, 56 S.Ct. 63, 80 L.Ed. 44, 102 A.L.R. 111. In fundamentals, we are unable to distinguish the law of that case. There are distinctions, but without a difference. There were two aspects in the Raybestos-Manhattan case. In the first, Corporation M by a statutory procedure was merged into the Raybestos-Manhattan Corporation, the latter corporation issuing its stock to the stockholders of the merged Corporation M. In the second aspect, Corporations R and U conveyed and transferred to the Raybestos-Manhattan Corporation all their assets in return for the issuance of the latter’s stock to their stockholders. This second aspect of the case was taxed, and this was upheld by the Supreme Court. The Commissioner made no attempt to tax the first aspect. Therefore, that phase of the case was not before the Supreme Court. The case did not hold that the first, the merger, aspect was free from tax. That was left open.

As we understand the taxpayer, when the merger took place in the instant case in accordance with the Illinois statute, the merged corporation went out of existence and had no right to receive any stock from the surviving corporation and therefore had nothing to be transferred to its former stockholders. By this same operation, it is claimed, its old stockholders became, ipso facto, stockholders of the taxpayer. It was all accomplished by the alchemy of corporate fictions. Tax statutes are brutally realistic. They are rarely, if ever, thwarted by fiction.

Before the merger was approved by the Secretary of State and while the merging corporation was still in existence, the merging Corporation agreed by adopting and approving the plan of merger that in return for the surrender of its corporate assets to the surviving corporation, the quid pro quo was the issuance by the taxpayer of its stock to the then stockholders of the merging corporation. This effected the transmutation of the two corporations into one and effected at the same time the crea7 tion of but one group of stockholders.

If the merging corporation had no right to receive the stock, it seems clear that its former stockholders did, and they received the stock, all by virtue of and in accordance with a plan approved by the merging corporation and its stockholders. Since the statute is not to be read narrowly, this seems to us a “transfer” within the meaning thereof.

Whether the metamorphosis of these two corporations into one survivor holding all the assets of the former corporations and issuing its stock representing these assets to the stockholders of the non-surviving corporation, is in accordance with a private agreement, as in the second aspect of the Raybestos-Manhattan case, or whether such metamorphosis is by means of a merger procedure prescribed by statute, as in our case, the result is the same. Forms are not important. It is the end result that counts. The end result is the same in both cases. The one corporation winds up with all the assets, and the old stockholders of the other corporations wind up with the stock of this surviving corporation. We cannot believe that Congress intended to tax one result and not the other. The whole rationale of the RaybestosManhattan case is at war with such distinctions.

The words of Justice Stone in the Raybestos-Manhattan case are applicable here: “The reach of a taxing act whose purpose is as obvious as. the present is not to be restricted by technical refinements. But we do not discern even a technical difference of any significance between such a transaction and that now before us, where the same duty to issue the stock is created and the same shift of the beneficiaries of it is effected simultaneously in a single document. No convincing reason is suggested why the act should be thought to tax the one and not the other.” 296 U.S. at page 63, 56 S.Ct. at page 65, 80 L. Ed. 44, 102 A.L.R. 111.

At the time the Raybestos-Manhattan decision was handed down, the regulations of the Internal Revenue Bureau left open, as did that case, the question of whether the merger situation was within Sec. 1802 (b). Congress re-enacted Sec. 1802(b) several times thereafter while the Bureau’s regulations were in that posture. Later, the Bureau decided that the statute authorized the taxation of the merger situation and amended its regulations³ accordingly. This case arose after the last amendment.

The taxpayer contends that since Congress had acted while the regulations left opei) the question of taxing mergers, the Bureau could not thereafter change its regulations so as to include them; it contends that only Congress could do that. This contention has been clearly and conclusively answered to the contrary by the Supreme Court in Helvering, Commissioner of Internal Revenue, v. Wilshire Oil Co., Inc., 308 U.S. 90, 100, 60 S.Ct. 18, 84 L.Ed. 101.

The District Court’s conclusion that there was no taxable transfer in this case within the meaning of Sec. 1802(b) was error. The judgment of the District Court is reversed and the cause remanded, with directions to proceed in accordance with this opinion.

1 Ch. 32, §§ 157.61-157.69a, Ill.Rev. Stat.1947.

2 26 U.S.C.A. Int.Rev.Code, § 1802(b): “ * * * On all sales, or agreements to sell, or memoranda of sales or deliveries of, or transfers of legal title to any of the shares or certificates mentioned or described in subsection (a), or to rights to subscribe for or to receive such shares or certificates, whether made upon or shown by the books of the corporation or other organization, or by any assignment in blank, or by any delivery, or by any paper or agreement or memorandum or other evidence of transfer or sale (whether entitling the holder in any manner to the benefit of such share, certificate, interest, or rights, or not), * * *»

3 26 Code Fed.Regs., Secs. 113.30, 113.33, 113.34. (Cum.Supp.1943).