# Respondents Brief — Paulsen v. Commissioner > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0028%3A08 ## Record - **Collection:** Supreme Court brief - **Document type:** Respondents Brief - **Published:** January 1, 1985 - **Citation:** 469 U.S. 131 ## Text | Supreme Court, U.S. FILED OCTOBER TERM, 1984 HAROLD T. PAULSEN, ET UX., PETITIONERS Vv. COMMISSIONER OF INTERNAL REVENUE ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT BRIEF FOR THE RESPONDENT Rex E. LZe Solicitor General RoGER M. OLSEN Acting Assistant Attorney General ALBERT G. LAUBER, JR. Assistant to the Solicitor General ERNEST J. BROWN KENNETH L. GREENE Attorneys Department of Justice Washington, D.C. 20530 (202) 633-2217 BEST AVAILABLE COPY QUESTION PRESENTED Whether a taxpayer qualifies for nonrecognition of realized gain under Section 354(a)(1) of the Inter- nal Revenue Code when, upon the merger of a stock savings and loan association into a mutual savings and loan association, he surrenders his stock in the former and receives a passbook savings account and short-term certificates of deposit in the latter. (1) TABLE OF CONTENTS Page es seemsnrenesnnenoneoensnenses 1 TE 1 a. sesssusneserannsccsoree 2 A 2 Summary of argument 2... ................220.0-0ccccccceeeeeeees 7 Argument: The court of appeals correctly held that the gain petitioners realized was to be currently recognized in their 1976 taxable year 0... 11 A. The transaction in which petitioners surren- dered stock in Commerce and received a pass- book savings account and certificates of deposit in Citizens was not a reorganization, but a sale.. 13 B. Even if the merger of Commerce into Citizens was a “reorganization,” petitioners must recog- nize gain up to the fair market value of the non-equity interests that they received .......... 36 C. Denial of “reorganization” treatment in this case is supported by sound considerations of tax policy, and there are no countervailing factors in petitioners’ favor 42 ET 47 LL la TABLE OF AUTHORITIES Cases: Capital Savings & Loan Ass’n v. United States, Sr 5-6, 33, 36, 38, 42, 44 Civic Center Finance Co. v. Kuhl, 83 F. Supp. 251, Ee 28 Commissioner V. Gilmore’s Estate, 130 F.2d 791... 12 (1m) IV Cases—Continued : Page Cortland Specialty Co. v. Commissioner, 60 F.2d TIT. snsicesincietihniniemieniadtiimres i euiiadieeiaenataltainaaannenetins ipiibeiodaal 18, 14 Everett v. United States, 448 F.2d 357 ................... 6 Gregory V. Helvering, 293 U.S. 465 ............... 24 Helvering Vv. Minnesota Tea Co., 296 U.S. 378 ...... passim Home Savings & Loan Ass’n V. United States, 514 F.2d 1199, cert. denied, 423 U.S. 1015 6, 45 John A. Nelson Co. Vv. Helvering, 296 U.S. 374... 16, 34 Kass v. Commissioner, 60 T.C. 218 16 LeTulle v. Scofield, 308 U.S. 415 ..........................5, 14, 15 Pinellas Ice & Cold Storage Co. Vv. Commissioner, -£. FF eee eee 5, 14, 15, 16, 44 Porter v. Aetna Casualty Co., 370 U.S. 159 eon 18 Roebling v. Commissioner, 148 F.2d 810, cert. de- la APPENDIX (Statutes as effective in 1976) INTERNAL REVENUE CODE OF 1954 (26 U.S.C.): Sec. 116. Partial exclusion of dividends received by individuals. (a) Exclusion from gross income. Gross income does not include amounts received by an individual as dividends from domestic corpora- tions, to the extent that the dividends do not exceed $100. If the dividends received in a taxable year exceed $100, the exclusion provided by the preceding sentence shall apply to the dividends first received in such year. * * * * * (c) Special rules for certain distributions. For purposes for subsection (a)— (1) Any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not be treated as a dividend. * * * * * Sec. 354. Exchanges of stock and securities in cer- tain reorganizations. (a) General rule. (1) In general No gain or loss shall be recognized if stock or securities in a corporation a party to a reorgan- ization are, in pursuance of the plan of reorgan- ization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. (2) Limitation Paragraph (1) shall not apply if— (A) the principal amount of any such securities received exceeds the principal amount of any such securities surrendered, or (B) any such securities are received and no such securities are surrendered. * * * * * See. 356. Receipt of additional consideration. (a) Gain on exchanges. (1) Recognition of gain If— (A) section 354 or 355 would apply to an exchange but for the fact that (B) the property received in the ex- change consists not only of property per- mitted by section 354 or 355 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. » * = * > (d) Securities as other property. For purposes of this section— (1) In general Except as provided in paragraph (2), the term “other property” includes securities. 3a (2) Exceptions (A) Securities with respect to which nonrecognition of gain would be permitted The term “other property” does not in- clude securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recog- nition of gain. (B) Greater principal amount in section 354 exchange If— (i) in an exchange described in sec- tion 354 (other than subsection (c) or (d) thereof), securities of a corpora- tion a party to the reorganization are surrendered and securities of any cor- poration a party to the reorganization are received, and (ii) the principal amount of such securities received exceeds the principal amount of such securities surrendered, then, with respect to such securities re- ceived, the term “other property” means only the fair market value of such excess. For purposes of this subparagraph and sub- paragraph (c) if no securities are surren- dered, the excess shall be the entire princi- pal amount of the securities received. da See. 368. Definitions relating to corporate reor- ganizations. (a) Reorganization. (1) In general For purposes of parts T and I and this part, the term “reorganization” means— (A) a statutory merger or consolidation ; * * * * * See. 581. Definition of bank. For purposes of sections 582 and 584, the term “bank” means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Co- lumbia) or of any State, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduci- ary powers similar to those permitted to national banks under authority of the Comptroller of the Cur- reney. and which is subject by law to supervision and examination by State, Territorial, or Federal au- thority having supervision over banking institutions. Such term also means a domestic building and loan association. Sec. 591. Deduction for dividends paid on deposits. In the case of mutual savings banks, cooperative banks. and domestic building and loan associations and other savings institutions chartered and super- vised as savings and loan or similar associations un- der Federal or State law, there shall be allowed as deductions in computing taxable income amounts paid to. or credited to the accounts of, depositors or hold- ers of accounts as dividends or interest on their de- ade a 5a posits or withdrawable accounts, if such amounts paid or credited are withdrawable on demand sub- ject only to customary notice of intention to with- draw. Sec. 593. Reserves for losses on loans. * * * * * (e) Distribution to shareholders. (1) Jn general For purposes of this chapter, any distribution of property (as defined in section 317(a)) by a domestic building and loan association to a shareholder with respect to its stock, if such dis- tribution is not allowable as a deduction under section 591, shall be treated as made— (A) first out of its earnings and profits accumulated in taxable years beginning after December 31, 1951, to the extent thereof, (B) then out of the reserve for losses on qualifying rea! property loans, to the ex- tent additions to such reserve exceed the additions which would have been allowed under subsection (b) (4), (C) then out of the supplemental reserve for losses on loans, to the extent thereof, (D) then out of such other accounts as may be proper. This paragraph shall apply in the case of any distribution in redemption of stock or in partial or complete liquidation of the association, except that any such distribution shall be treated as made first out of the amount referred to in sub- paragraph (B), second out of the amount re- 6a ferred to in subparagraph (C), third out of the amount referred to in subparagraph (A), and then out of such other accounts as may be 7a (C) at least 60 percent of the amount of the total assets of which (at the close of the taxable year) consists of— proper. This paragraph shall not apply to any transaction to which section 38) (relating to carryovers in certain corporates acquisitions ) applies. * * * * * Sec, 1002. Recognition of gain or loss. Except as otherwise provided in this subtitle, on the sale or exchange of property the entire amount of the gain or loss, determined under section 1001, shall be recognized. See. 7701. Definitions. (a) When used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof— * * * * * (19) Domestic building and loan association The term “domestic building and loan asso- ciation” means a domestic building and loan as- sociation, a domestic savings and loan associa- tion, and a Federal savings and loan associa- tion— (A) which either (i) is an insured in- stitution within the meaning of section 401(a) of the National Housing Act (12 U.S.C., sec. 1724(a)), or (ii) is subject by law to supervision and examination by State or Federal authority having supervision over such associations ; (B) the business of which consists prin- cipally of acquiring the savings of the public and investing in loans; and (i) cash, (ii) obligations of the United States or of a State or political subdivision thereof, and stock or obligations of a corporation which is an instrumentality of the United States or of a State or political subdivision thereof, but not in- cluding obligations the interest of which is excludable from gross income under section 103, (iii) certificates of deposit in, or ob- ligations of, a corporation organized under a State law which specifically au- thorizes such corporation to insure the deposits or share accounts of member associations, (iv) loans secured by a deposit or share of a member, (v) loans (including redeemable ground rents, as defined in section 1055) secured by an interest in real property which is (or, from the pro- ceeds of the loan, will become) resi- dential real property or real property used primarily for church purposes, loans made for the improvement of resi- dential real property or real property used primarily for church purposes, provided that for purposes of this clause, residential real property shall include single or multifamily dwellings, facilities in residential developments 8a dedicated to public use or property used on a nonprofit basis for residents, and mobile homes not used on a transient basis, (vi) loans secured by an interest in real property located within an urban renewal area to be developed for pre- dominantly residential use under an urban renewal plan approved by the Secretary of Housing and Urban De- velopment under part A or part B of title I of the Housing Act of 1949, as amended, or located within any area covered by a program eligible for as- sistance under section 103 of the Dem- onstration Cities and Metropolitan De- velopment Act of 1966, as amended, and loans made for the improvement of any such real property, (vii) ioans secured by an interest in educational, health, ov welfare institu- tions or facilities, including structures designed or used primarily for resi- dential purposes for students, residents, and persons under care, employees, or members of the staff of such institu- tions or facilities, (viii) property acquired through the liquidation of defaulted loans described in clause (v), (vi), or (vii), (ix) loans made for the payment of expenses of college or university educa- tion or vocational training, in accord- ance with such regulations as may be prescribed by the Secretary, and —— eee: — 9a (x) property used by the association in the conduct of the business describea in subparagraph (B). At the election of the taxpayer, the percent- age specified in this subparagraph shall be applied on the basis of the average assets outstanding during the taxable year, in lieu of the close of the taxable year, computed under regulations prescribed by the Secre- tary. For purposes of clause (v), if a multi- family structure securing a loan is used in part for nonresidential purposes, the entire loan is deemed a residentia! real property loan if the planned residential use exceeds 80 percent of the property’s planned use (determined as of the time the loan is made). For purposes of clause (v), loans made to finance the acquisition or develop- ment cf land shall be deemed to be loans secured by an interest in residential real property if, under regulations prescribed by the Secretary, there is reasonable assurance that the property will become residential real property within a period of 3 years from the date of acquisition of such land; but this sentence shall not apply for any taxable year unless, within such 3-year period, such land becomes residential real property. * * x * x 10a 12 U.S.C. (1976 ed.) : Sec, 1464. Federal Savings and Loan Associations. (a) Organization authorized. In order to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes, the Board is authorized, under such rules and regulations as it may prescribe, to provide for the organization, in- corporation, examination, operation, and regulation of associations to be known as “Federal Savings and Loan Associations,” and to issue charters therefor, giving primary consideration to the best practices of local mutual thrift and home-financing institutions in the United States. (b) Capital; members of the association; voting rights; payment of savings accounts and withdrawals ; nontransferable order or authorizations; authoriza- tion to borrow, give security, act as surety, and issue notes, bonds, debentures, or other obligations. (1) An association may raise capital in the form of such savings deposits, shares, or other accounts, for fixed, minimum, or indefinite pe- riods of time (all of which are referred to in this section as savings accounts and all of which shall have the same priority upon liquidation) as are authorized by its charter or by regulations of the Board, and may issue such passbooks, time cer- tificates of deposit, or other evidence of savings accounts as are so authorized. Holders of sav- ings accounts and obligors of an association shall, to such extent as may be provided by its charter or by regulations of the Board, be members of the association, and shall have such voting rights and such other rights as are thereby provided. Except as may be otherwise authorized by the lla association’s charter or regulation of the Board in the case of savings accounts for fixed or mini- mum terms of not less than thirty days, the payment of any savings account shall be subject to the right of the association to require such advance notice, not less than thirty days, as shall be provided for by the charter of the association or the regulations of the Board. The payment of withdrawals from savings accounts in the event an association does not pay all withdrawals in full (subject to the right of the association to require notice) shall be subject to such rules and procedures as may be prescribed by the associa- tion’s charter or by regulation of the Board, but any association which, except as authorized in writing by the Board, fails to make full payment of any withdrawal when due shall be deemed to be in an unsafe or unsound condition to transact business within the meaning of subsection (d) of this section. Savings accounts shall not be sub- ject to check or to withdrawal or transfer on negotiable or transferable order or authorization to the association, but the Board may by regula- tion provide for withdrawal or transfer of savings accounts upon nontransferable order or authorization. (2) To such extent as the Board may authorize by regulation or advice in writing, an association may borrow, may give security, may be surety as defined by the Board and may issue such notes, bonds, debentures, or other obligations, or other securities (except capital stock) as the Board may so authorize. * - * * * ® wv. S. Government printing orice; 1964 421823 10021 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385012_0028%3A08. Public record. Not legal advice.