181 F.2d 413

U. S. INDUSTRIAL CHEMICALS, Inc. v. JOHNSON.

No. 177, Docket 21576.

United States Court of Appeals Second Circuit.

Argued Feb. 28, 1950.

Decided April 6, 1950.

*414Shearman & Sterling & Wright, New York City, Charles Goodwin, Brooklyn, N. Y., argued for appellant.

Irving H. Saypol, U. S. Atty., New York City, James A.- Devlin, New York City, argued for appellee.

Before L. HAND, Chief Judge, and GOODRICH and FRANK, Circuit Judges.

GOODRICH, Circuit Judge.

This appeal involves the applicability of the federal stock transfer tax imposed by Section 1802(b) of the Internal Revenue Code, 26 U.S.C.A. § 1802(b), to the merger of a parent corporation into its subsidiary. The taxpayer appeals from an adverse decision of the District Court, S.D.N.Y.1949, 85 F.Supp. 639.

These are the facts: U. S. Industrial Alcohol Co., a West Virginia corporation, owned all the stock (100 shares) of U. S. Industrial'Chemicals, Inc., a Delaware corporation. On July 16, 1943, the two corporations were merged in accordance with terms previously agreed upon. Upon consummation of the merger, the entire capital stock of Chemical was extinguished. The holders of the capital stock of Alcohol were treated as shareholders of Chemical, were allowed to vote their stock and to receive dividends. They were authorized, but not required, to exchange their old certificates for certificates of the continuing corporation. The stamp tax imposed by Section 1802(a) on the original issue of shares of stock was paid' at the time of merger. In October, 1943, and January, 1944, the Commissioner assessed a transfer tax under Section 1802(b) on the number of shares of the stock of Chemical represented by the certificates which, by those respective dates, had been physically exchanged for shares of Alcohol.1 2Chemical paid the assessments and sued for a refund. The court below upheld the assessment and denied a refund.

It should be noted at the outset that Code Section 1802(a) taxes the original issue of stock and Section 1802(b) the transfer of stock or the right to receive it.2 *415The District Judge discussed the point fully and understandingly. We can add little to his opinion, which concludes, “The two taxes attach to two different events. One does not preclude the other, even if they occur simultaneously.” 85 F.Supp. at page 642.

The Government’s point is that the merging corporation (Alcohol) as a result of the conveyance of its assets to the appellant (Chemical), which was the surviving corporation pursuant to the agreement, acquired a right to receive the stock of the surviving corporation and transferred this right to its shareholders. If it did there was a tax due under Section 1802(b) and if it did not there is nothing to the taxpayer’s contention that it is being taxed twice for the same thing.

There was such a transfer here. Prior to July 15, 1943, Alcohol owned all the stock of Chemical. After that date, as a result of the merger, the people who had been stockholders of Alcohol owned all the stock of Chemical and Alcohol had disappeared. This change of ownership came, we think, by a transfer from Alcohol to its shareholders of the right to receive the Chemical stock. This is a necessary consequence of the merger transaction even though done in one step instead of two.

The taxpayer asks how one is to determine which entity survives the merger and which, if either, disappeared. The charter, it urges, “was merely the cloak worn by the consolidated business. Regardless of the result * * * the stockholders had only that which they had before.”

The argument poses nice questions in legal metaphysics. We find no comfort in answering the questions by talk which appears in some of the decisions about this tax being applied to the reality of things instead of their form. We think the concepts we deal with here are artificial, as artificial as some of the law of contingent remainders.

The trouble comes in piling artificial concepts upon other artificial concepts. Thus a group of people engaged in a business enterprise incorporate themselves and create a new legal person. This is done for their own business convenience and is perfectly legitimate, but it creates some problems they would not have had if they had continued to conduct their business as individuals. Then, also for business reasons of their own, they set up another artificial corporate entity which, in turn, the first entity owns. When the tax gatherer comes around following dealings with these artificial creations the people who have set them up for their own convenience can hardly say that it was all just for fun and the dealings should not subject them to taxation. If there are to be dealings in these multiple forms of incorporation the tax consequences will have to follow.

There are two decisions which mark the path here. One is Raybestos-Manhattan, Inc. v. United States, 1935, 296 U.S. 60, 56 S.Ct. 63, 80 L.Ed. 44, 102 A.L.R. 111. In that case two independent corporations, pursuant to a plan, transferred their assets to a third and the latter issued its stock directly to the shareholders of the former. *416The Supreme Court found a taxable transfer of this stock from the merging corporations to their shareholders. Likewise on the point is a decision of the Seventh Circuit in American Processing and Sales Co. v. Campbell, 1947, 164 F.2d 918, certiorari denied, 1948, 333 U.S. 844, 68 S.Ct. 661, 92 L.Ed. 1127.3

The taxpayer urges that the Seventh Circuit case is wrong and urges also a distinction between “vertical” and “horizontal” mergers. We think there is nothing to the distinction, taxwise at any rate. The substance of the transaction here is the same as in the cases just cited. Those decisions also dispose of any possible question of the effect of local corporation law upon the federal tax problem.

Affirmed.

U. S. Industrial Chemicals, Inc. v. Johnson
181 F.2d 413

Case Details

Name
U. S. Industrial Chemicals, Inc. v. Johnson
Decision Date
Apr 6, 1950
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181 F.2d 413

Jurisdiction
United States

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