Petition for a Writ of Certiorari — Niagara Hudson Power Corp. v. Hoey

- Susreme Court, U. $.

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b. a : J —

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led

IN THE

CHARLES ELMORE CROPLEY

j.c. - CLERK

Supreme Court of the United States

October Term, 1940

© i

No. § 71

Niscara Hupson Power Corporation,

Petitioner,

against

James J. Horny, Collector of Internal Revenue,

Respondent.

Petition for Writ of Certiorari to the Circuit Court

of Appeals for the Second Circuit.

Horace R. Lams

Attorney for Petitioner

YDALL J. Lz Borvr, JR.,

RAIGH LEONARD,

of counsel.

TOPICAL INDEX.

PAGE

Summary Statement of the Matter Involved................ 2

SurinGictiomnl Bimterneaat ness sescs sec sncpeccses icaseceavintiaions 7

Questions. PRGGUNUN icici cis 8

The Reasons Relied on For the Allowance of the Writ

OT CRPGIIIRIS oct a 9

PROVO \antaistinmnticceanbiendeteccisseiabiaet incense 25

Opinion .. s pbnakiteoninseieanibiaciainimanaaeas 26

PD PIOONIIE, © ieiicnticeccasusipcicrns cs af ‘ fs 30

Table of Authorities Cited.

CasEs.

Burnet v. Harmel, 287 U.S. 108 .. 17, 24

Electric Bond & Share Co. v. State of New York, 249

App. Div. 371, aff’d 274 N. Y. 625... 16, 19, 23

Founders General Co. v. Hoey, 300 U. 8S. 268...................- 9,19

Helvering v. Metropolitan Edison Company, 306 U. 8S.

522 11, 20, 22

Koppers Coal & Transportation Company v. U. S., 107

F. (2d) 706 11, 18, 20

Lang v. Commissioner, 304 U. S. 264.. 15

Lyeth v. Hoey, 305 U. 8S. 188 15, 17, 24

Minerv.N. Y.C. @ H.R. R. R. Co., 123 N. Y. 242............ 19

Peoplev.N. Y.,C.@8.L. R. R. Co., 129 N. Y. 474............ 19

People ex rel. New York Phonograph Co. v. Rice, 57

Hun 486 aff’d on opinion below 128 N. Y. 591................ 19

Phelps-Stokes Estates v. Nixon, 222 N. Y. 93............-.--- 16

Raybestos-Manhattan Co. v. U. S., 296 U.S. 60........ 9, 10, 11,

16, 18, 19, 20

Rockefeller Foundation v. State of New York, 144 Mise.

460 16

United States v. Merchants Nat. Trust & Savings

Bank, 101 F. (2d) 399 14, 17, 18, 19, 24

Weil v. U. S., 115 F. (2d) 999 17,18

il INDEX

PAGE

STATUTES.

Delaware General Corporation Law, Section 59............ 11

Judicial Code, as amended by the Act of February 13,

1025. Gestion Peek) oe 7

Laws of 1933, Chapter 745, -.......-..-----....---.csec-o--secseeeessereeeees 18

Maryland Code, Sections 33 and 3314 of Article 23,

Rdition of 1924, as amended... 11

Maryland Laws of 1935, Chapter 551 -.........-.---..------------- 11

New Jersey General Corporation Act, Section 105........ 11

New Jersey Revised Statutes, Section 14:12-2........ 11

New York Tax Law, Section 270.................-----.-..-c.-c-esse-+ 16

Revenue Act of 1926

Section 800, Schedule A-3 of Title VIII, as

amended by Section 723(a) of the Revenue Act

TS eR ROT ete ett Grameen AUN eaer ate eel mene: 4, 8, 30

Schedule A-8 of Title VIII, as amended by Sec-

tion 725 of the Revenue Act of 1932 ll

Section 800, Schedule A-9 of Title VIL as

amended by Section 724(a) of the Revenue Act

of 1932 17

Stock Corporation Law of New York

ESSE | geeSicaarca ety arene manne a ote toe eee ROE 12, 32

Section 86 3, 8, 12, 35

Seles 3, 19, 39

Section 89 .. 3, 8, 19, 23, 24, 3

ESN Re ease ocak Atererarniee at inakeecminen vr amass

MISCELLANEOUS.

Treasury Regulations 71

Astle BOe). oo ec 6, 10, 12

Astle Fey Gin 5, 6, 8, 13

Opinion of Deputy Commissioner of Internal Revenue 11

Pe

IN THE

Supreme Court of the United States

October Term, 1940

No.

RETIRE mm

Niacara Hupson Power CorporaTIon,

Petitioner,

against

James J. Hory, Collector of Internal Revenue,

Respondent.

a

Petition for Writ of Certiorari to the Circuit Court

of Appeals for the Second Circuit.

To THE HonoraB_Le THE CHIEF JUSTICE AND THE ASSOCIATE

JUSTICES OF THE SUPREME CouRT OF THE UNrtep States:

Petitioner Niagara Hudson Power Corporation re-

spectfully petitions for a writ of certiorari of this Court

to review a decision of the United States Circuit Court

of Appeals for the Second Circuit, rendered on February

3, 1941, which affirmed a decision of the District Court of

the United States for the Southern District of New York,

rendered on July 11, 1940, dismissing petitioner’s suit

for a refund of documentary stamp taxes in the amount

of $260,969.04 paid under protest to the respondent, as

Collector of Internal Revenue for the Second District of

New York.

Summary Statement of the Matter Involved.

Petitioner is a corporation of the State of New York,

formed February 1, 1937 by the consolidation, pursuant

to the provisions of the Stock Corporation Law of New

York,* of two existing or constituent New York corpora-

tions, Mohawk Hudson Power Corporation and Niagara

Hudson Power Corporation (constituent). (R. 53**)

Prior to the consolidation to form petitioner, Niagara

Hudson (constituent) owned 99% of the common stock

and a substantial amount of the two classes of preferred

stock of Mohawk Hudson. The latter also owned a sub-

stantial (although a minority) interest in the common

stock of Niagara Hudson (constituent). Mohawk Hud-

s0n was operated as a subsidiary of Niagara Hudson

(constituent). (R. 54-58)

Included in the business, properties and assets of

each of the constituent corporations at the time of the

consolidation were various shares of stock in other cor-

porations, principally public utility operating corpora-

tions organized under the laws of the State of New York.

Niagara Hudson (constituent) owned a_ substantially

larger number of shares and in many more such cor-

porations than were owned by Mohawk Hudson. (R. 59)

The separate proposals to consolidate the constituent

corporations into a single consolidated corporation were

voted upon at separate meetings of the stockholders of

* The pertinent sections of the Stock Corporation Law of New

York, as in effect on February 1, 1937, are printed in the Appendix,

beginning on page 32.

** The Record references are to the folio numbers of the Record

in the Circuit Court of Appeals.

do

cor

rat

80]

or

to

mo

the constituent corporations. The filing of the certificate

of incorporation creating petitioner as a consolidated cor-

poration was authorized by the vote of the holders of more

than two-thirds of the voting stocks of each of the con-

stituent corporations. (R. 64-66, 74-78)

Upon the filing of the certificate of consolidation in

the office of the Secretary of State of the State of New

York, under the New York law, the corporate powers of

the constituent corporation became the corporate powers

of the petitioner, the respective stockholders of the con-

stituent corporations thereupon became stockholders of

petitioner, and the separate corporate entities of the con-

stituent corporation terminated (Sections 86 and 88,

Stock Corporation Law of New York). Petitioner, as the

consolidated corporation created out of the constituent

corporations, became vested with all of the rights, powers,

privileges, franchises, businesses and assets of the two

constituent corporations of every character, including the

shares of stock in other corporations then owned by each

of the constituent corporations, and the petitioner be-

came liable for all of the liabilities and obligations of

each of the constituent corporations (Section 89, Stock

Corporation Law of New York).

Following the consolidation, no physical delivery, en-

dorsement or assignment of the shares of stock in other

corporations, previously owned by the constituent corpo-

rations, was made; and, except for the certificate of con-

solidation, no memorandum, agreement, paper, document

or instrument of any character was executed or delivered

to vest in petitioner ownership of the stock. Further-

more, none of the certificates for such shares of stock were

presented to the issuing corporations for transfer into the

name of petitioner; and no such transfers were registered

upon the stock ledgers or registers of such issuing corpo-

rations. No Federal documentary stamps were affixed to

the certificate of consolidation or to any of the certificates

for shares of stock in other corporations, the ownership

of which vested in the consolidated corporation upon its

coming into existence. (R. 86)

In October 1938, more than a year and one-half after

the consolidation became effective, the Commissioner of

Internal Revenue assessed a documentary stamp tax against

petitioner in the amount of $260,969.04 and (on October

14, 1938) delivered to petitioner a notice and demand for

the tax, describing the same as a documentary stamp tax.

On October 21, 1938 the petitioner paid the tax under

protest and immediately brought this action to recover

the amount thereof. (R. 87-89)

The Federal documentary stamp tax statute, as in effect

February 1, 1937, included a provision which imposes a tax:

‘On all sales, or agreements to sell, or memorandum

of sales or deliveries of, or transfers of legal title

to any of the shares or certificates mentioned or de-

scribed in subdivision 2, 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).”’

(Section 800, Schedule A-3 of Title VIII of the Rev-

enue Act of 1926, c. 27, 44 Stat. 9, 99, 101, as amended

by Section 723(a) of the Revenue Act of 1932, ec. 209,

T

—

47 Stat. 169, 272; 26 U. S. C. A. Internal Revenue

Acts, page 290).!

5

In Treasury Regulations 71 (1932 Ed.), entitled ‘*Regu-

lations 71 Relating to Stamp Taxes’’, issued with the

approval of the Secretary of the Treasury pursuant to

statute, there is a provision in Article 35(r) which reads:

‘“‘Transfers of shares or certificates of stock which

result wholly by operation of law are not subject to

the tax. Transfers of this character are those which

the law itself will effect without any voluntary act of

the parties, such as transfers of stock from decedent

to executor.’’

Petitioner contends that when the ownership of the

shares of stock, along with all of the other powers, rights,

interests, franchises, businesses, properties and assets of

the constituent corporations, vested in the petitioner upon

its creation as a consolidated corporation, in accordance

with the statutory proceedings, such a vesting of owner-

ship in petitioner was not a ‘‘sale, agreement to sell, memo-

randum of sale, or delivery of, or transfer of legal title

to’’ the shares of stock in other corporations within the

provisions of the Federal taxing statute; that in the cir-

cumstances here presented the Federal taxing statute

necessarily depends for its operation upon the law of the

State of New York and that, as a matter of such state

law, whatever ‘‘transfer of legal title’? which may be said.

to have occurred, as an incident to the organization of

petitioner and the vesting of the ownership of its prop-

erties, including the shares of stock in other corporations,

es

’ Printed in full in the Appendix at p. 30.

was a transfer ‘‘wholly by operation of law’’ and was

thus expressly exempt from tax under the provisions of

Article 35(r) of Treasury Regulations 71.

The respondent Commissioner asserts, on the other

hand, that the vesting in petitioner of the ownership of

shares of stock theretofore owned by the constituent cor-

porations should not be considered as ‘‘wholly by oper-

ation of law’’, because in the proceedings preliminary to

the filing of the certificate of incorporation in the office

of the Secretary of State of the State of New York, creat-

ing petitioner as a consolidated corporation, there were

voluntary acts, such as the votes of the respective stock-

holders of the constituent corporations.

Respondent relies upon Article 34(r) of Treasury Regu-

lations 71, wherein there is stated as an ‘‘example”’ of a

transaction subject to a tax, ‘‘Upon a merger, the transfer

of stock owned by a corporation which is merged into an-

other corporation, from the name of the first to the name

of the second corporation, is a transfer effected by the

action of the parties and not wholly by operation of law’’.

Respondent contends that the ‘‘example’’ so described

should be interpreted by the court so that it shall be

extended to include the corporate proceedings under the

New York law applicable to a consolidation. In support

of that contention respondent asserts (erroneously, we be-

lieve) that in determining liability for the Federal docu-

mentary stamp tax the distinction made in the New York

law between the separate statutory proceedings to effect

the merger of one New York corporation into another

corporation and to consolidate two or more constituent

corporations to form a new, consolidated corporation should

be ignored.

Jurisdictional Statement.

The jurisdiction of this Court arises by virtue of the

provisions of Section 240(a), Judicial Code, as amended

by the Act of February 13, 1925.

In the District Court petitioner moved for summary

judgment, pursuant to Rule 56 of the Rules of Civil Pro-

cedure, upon the complaint, the answer and the stipulated

facts. The Commissioner thereupon filed a cross-motion

for summary judgment. (R. 43-48)

The opinion of the District Court was filed July 11,

1940, and the order and judgment of the District Court

denying petitioner’s motion and granting respondent’s

cross-motion was filed in the office of the Clerk of the

District Court July 31, 1940. (R. 247-264)

Petitioner duly perfected an appeal to the Circuit Court

of Appeals for the Second Cireuit, and on February 23,

1941 that Court filed an opinion affirming the decision of

the Distriet Court.*

The mandate of the Circuit Court of Appeals for the

Second Circuit, dated February 19, 1941, was filed with

the clerk of the United States District Court for the South-

ern District of New York on February 20, 1941.

This petition is presented by petitioner for a writ

of certiorari to review the said decision of the Circuit Court

ot Appeals for the Second Circuit.

* The opinion is printed in full infra at page 26.

8

Questions Presented.

Did the vesting, pursuant to the provisions of Section

89 of the New York Stock Corporation Law, in petitioner,

as a consolidated corporation, of the ownership of shares of

stock issued by other corporations, owned by the two

constituent corporations which were consolidated pur-

suant to proceedings taken under Section 86 of the Stock

Corporation Law of the State of New York, constitute

a ‘‘sale of’’, or ‘‘agreement to sell’’, or a ‘‘memorandum

of sale’’ or a ‘‘transfer of legal title to’’ such shares of

stock, which is taxable under Section 800, Schedule A-3 of

Title VIII of the Revenue Act of 1926 (44 Stat. 101), as

amended by Section 723(a) of the Revenue Act of 1932

(47 Stat. 272), as it read on February 1, 1937?

Was the vesting in petitioner, as a consolidated corpo-

ration, of the ownership of shares of stock in other corpo-

rations, owned by the constituent corporations, as afore-

said, a transfer of legal title to such shares of stock

which resulted ‘‘wholly by operation of law’’ and thus

not subject to tax, as provided in Article 35(r) of

Treasury Regulations 71?

Since the vesting in petitioner, as a consolidated cor-

poration, of the ownership of the rights, powers, interests,

franchises and properties of the constituent corporations

was effected by the provisions of the laws of the State

of New York, particularly Section 89 of the Stock Corpo-

ration Law of New York, in the situation here presented,

does the Federal documentary stamp tax statute here

involved, by necessary implication make its operation

dependent upon the law of the State of New York; and,

if so, does the state law prevent the transaction from

falling within the reach of the Federal taxing statute?

9

The Reasons Relied on For the Allowance of the

Writ of Certiorari.

1. The Circuit Court of Appeals for the Second Circuit,

in deciding this case, has decided an important question

of Federal law which has not been, but should be, settled

by this Court.

So far as we know, the applicability of the Federal

documentary stamp tax statute to the vesting of the

ownership of shares of stock which occurs as an incident

to the statutory proceedings to form a consolidated cor-

poration has not been determined by this Court.

As appears from its opinion, the court below purported

to apply a dictum in the opinion of this Court in Raypbestos-

Manhattan Inc. v. United States, 296 U. S. 60. But the

only question considered and decided in that case (and

in the case of Founders General Co. v. Hoey, 300 U. S.

268, which followed the Raybestos-Manhattan case) was

whether the carrying out of a plan of reorganization of

a corporation whereby certificates for shares in a new

corporation, issued as the consideration for the acqui-

sition of the assets of an old corporation, were issued

directly to and in the name of the holders of the shares

of the stock of the old corporation, involved a tax on the

transfer of the right to receive the new shares. The ques-

tion here presented was not considered or decided in either

the Raybestos-Manhattan case or the Founders General

case.

The learned Circuit Court of Appeals for the Second

Cireuit erroneously stated that ‘‘a transfer by a New

10

Jersey consolidation has been held taxable’’, citing the

Raybestos-Manhattan case.

Although Treasury Regulations 71, Article 34(r) in-

clude as an ‘‘example’’ of a taxable transfer the transfer

of shares from a merged to a merging corporation upon

the merger of one corporation into another (and where

no new corporation is formed out of a constituent corpo-

ration), the Regulations have never included within such

‘‘examples’’ a vesting of ownership of shares through a

statutory proceeding (such as is provided in the corpo-

ration laws of New York), whereby two or more existing

corporations are consolidated to form a single, consoli-

dated corporation. The effect of the decision of the Cir-

cuit Court of Appeals for the Second Circuit is to add to

the Treasury Regulations a new ‘‘example”’ of a trans-

action which gives rise to a taxable transfer, but which

the Treasury Department itself has never included in its

Regulations.

So far as we know, the validity of the “example”

in the case of a merger, as stated in Regulations 71, has

never been considered by this Court.

In any event, we believe it is reasonable to assume that

the Treasury Department was and is aware of the marked

distinction between the situation where one corporation

acquires the assets of another corporation by merger and

that in which there is a succession by a new corporation

to the corporate powers and the assets and liabilities of

two constituent corporations by virtue of a statutory con-

solidation.

Unlike the statutes of some of the states, in New York

the corporate proceedings necessary to effect a merger

11

differ substantially from those by which constituent corpo-

rations are consolidated.*

The distinction in New York was noted as late as July

15, 1938, in an opinion of Deputy Commissioner of Internal

Revenue, D. Spencer Bliss, regarding the liability for Fed-

eral documentary stamp taxes under the provisions of

Schedule A-8 of Title VIII of the Revenue Act of 1926,

as amended by Section 725 of the Revenue Act of 1932,

imposing a tax upon the sale of realty, wherein he said:

“Under the consolidation procedure followed in

New York there is no preliminary agreement by stock-

holders to sell, convey and dispose of the realty to the

consolidated corporation such as is normally made in

other States. In New York the stockholders merely

vote for consolidation. The certificate of consolida-

tion executed and filed with the Secretary of State

brings into effect the New York laws relating to

consolidation. These laws bring about a change in

ownership in the realty. * * *

“‘For the reasons indicated and particularly be-

cause of the unusual procedure prescribed in the laws

of New York regarding the consolidation of corpora-

tions, it is the opinion of this office that the change in

ownership of the realty * * * was not effected by

means of a conveyance of realty sold and was not,

therefore, subject to the stamp tax ** *.’’ (See let-

* Apparently no distinction is made between merger and consoli-

dation under the laws of the states of Delaware, New Jersey, Mary-

land and Pennsylvania. Section 59, Delaware General Corporation

Law ; see also Section 105 of the New Jersey General Corporation

Act, New Jersey Revised Statutes, Section 14: 12-2; and Sections

33 and 33% of Article 23 of the Maryland Code, Edition of 1924

as amended, Maryland Laws of 1935, Chapter 551. See also K Oppers

Coal and Transportation Co. v. United States, Raybestos-Manhattan,

12

ter of Deputy Commissioner Bliss, dated July 15,

1938 addressed to Messrs. Whitmen, Ransom, Coulson

& Goetz, New York, N. Y.)

To extend the ‘‘example’’ stated in Article 34(r) of

Treasury Regulations 71, describing as taxable a transfer

resulting from a merger, to include transfers of stock inci-

dent to a consolidation of constituent corporations not

only does violence to the provisions of the New York law,

but also fails to note the distinctions between the procedure

under New York law and that which prevails in other

states, as noted in the letter of Deputy Commissioner Bliss.

Under the New York law, as it read on February 1, 1937,

when the consolidation forming petitioner was completed,

to effect a merger of one corporation into another (1) the

merging corporation was required to own all (in the case

of certain public utility corporations 95%) of the stock of

the corporation to be merged, (2) the corporation to be

merged had to be authorized to engage in business ‘‘similar

or incidental’’ to the authorized business of the merging

corporation and (3) the merger was effected solely by action

of the Board of Directors of the merging corporation (Sec-

tion 85, Stock Corporation Law of New York,* as in effect

February 1, 1937). In the case of a consolidation, however,

the statutes did not require either of the constituents to own

any of the stock of any other constituent corporation, there

was no requirement regarding similarity of businesses and

the consolidation could only be accomplished with the con-

sent or votes of the stockholders of the constituent cor-

porations; no action by the directors of any of the con-

stituent corporations was required (Section 86, Stock Cor-

poration Law of New York, as it read February 1, 1937).**

* Printed in the Appendix beginning at page 32.

** Printed in the Appendix beginning at page 35.

13

Moreover, in the case of a merger of one existing cor-

poration into another, it is only the shares of stock owned

by the merged corporation which, in any event, could

be subject to the documentary stamp tax. The effect of

the decision below is that the consolidation of two or more

constituent corporations into a single corporation creates

a liability for the documentary Stamp tax, not only as to

the shares owned by one of the constituent corporations,

but also to the shares owned by both or all of the other

constituent corporations.

The court below completely ignored the distinctions

(which presumably the draftsmen of the Treasury Regu-

lations had in mind) between a “*transfer’’ resulting

through a merger, on the one hand, and the vesting of

ownership resulting through consolidation proceedings, on

the other hand.

If in the situation here presented, Mohawk Hudson

Power Corporation had been merged into Niagara Hudson

Power Corporation (constituent), in view of the ‘ex.

ample’’ stated in Article 35(r) of Treasury Regulations

71, a stock transfer tax would have been claimed to be due

only in respect of the shares in other corporations owned

by Mohawk Hudson and no tax would have been claimed

on the stocks owned by Niagara Hudson (constituent).

The stipulated facts show that Niagara Hudson (con-

stituent) was the holder of a larger number of shares in

many more corporations than was Mohawk Hudson and

that Niagara Hudson (constituent) owned 99% and a

substantial amount of the outstanding preferred stock of

Mohawk Hudson. (R. 59, 94-99)

A correct determination by this Court of the question

here presented is, therefore, of the utmost importance in

14

order that it finally may be determined whether the selec-

tion of one of two available corporate proceedings may

substantially affect the amount of Federal stock transfer

taxes which may or may not be payable.

2. The decision of the Circuit Court of Appeals for

the Second Circuit is in conflict with a decision of the

Circuit Court of Appeals for the Ninth Circuit on the

same matter.

In sustaining the liability for the documentary stamp

tax the court below refused to hold that the Federal taxing

statute by necessary implication makes its operation de-

pendent upon state law and refused to accept and follow

w

the decisions of the New York State courts which hold $

that such a ‘‘transfer’’ as here involved is one which re- p

sults wholly by operation of law. st

The court below held: 0

‘*Decisions of state courts holding similar trans- :

fers not subject to a state documentary stamp tax

because resulting ‘by operation of law’ [citing Electric

Bond & Share Co. v. State of New York, 249 App. Div. L

371, aff’d 274 N. Y. 625, and other cases in the New 3

York State court] may be of persuasive value, but i

cannot be determinative as to what is a transfer under

federal law”’ [citing Burnet v. Harmel, 287 U. S. 103,

Lyeth v. Hoey, 305 U. S. 188, and its own decision in

Weil v. U. S., 115 F. (2d) 999].

Prior to the decision below the opposite view was taken

by the Cireuit Court of Appeals for the Ninth Circuit in

United States v. Merchants National Trust and Savings

Bank, 101 F. (2d) 399, where it was squarely held that the

Federal documentary stamp tax by necessary implication

makes its own operation dependent upon state law.

15

The Ninth Cireuit Court said (at page 401):

“The tax statute here involved by necessary im-

plication makes its own operation dependent upon

state law. Lyeth v. Hoey, 59 S. Ct. 155,158 * * °.

There is cited to us no federal law or statute pro-

viding for the method of transfer ‘by operation of

law’ of a trust estate from one corporate trustee

to another, where the trust business of one is sold

to the other. The questions of whether legal title to

this personal property has been transferred and

whether the transfer was by operation of law neces-

sarily depend for their answer upon state law.’’

That court affirmed the judgment of the district court

which directed that a Federal documentary stamp tax of

$1,019.37 with interest and costs be refunded to the tax-

payer. There, pursuant to the provisions of California

statutes, the trust department of a bank and the shares

of stocks which the bank held as trustee under various

trusts were sold and conveyed to another bank with the

approval of the State Superintendent of Banks.

After reviewing the decisions of this Court (including

Lang v. Commissioner, 304 U. S. 264, and Lyeth v. Hoey,

305 U. 8. 188), it was said in the opinion of the Ninth Cir-

cuit (101 F. (2d) 399, at page 401):

““We note the language of Lyeth v. Hoey, supra,

concerning the desire for uniformity throughout the

states in the administration of federal taxation. We

do not consider this case overrules Lang v. Commis-

sioner, supra, and that the Washington law on com-

munity property is to be disregarded to the end that

there shall be no difference in federal estate taxation

between community property and common law states.

Likewise, here, one state may by operation of law

make such a transfer between corporate trustees, as

16

is here sought to be taxed, and another state may not.

Uniformity for all the states is no more possible than

is it for the estate tax.”’

The Ninth Cireuit Court concluded that under Cali-

fornia law the transfer by one trust company of the shares

held in trust to the acquiring bank was by operation of law

and directed judgment for the taxpayer.

In the course of its opinion the Ninth Circuit Court also

referred to the decisions in the New York courts construing

ihe stock transfer tax imposed pursuant to the statutes

of New York (Section 270, Tax Law of New York), the pro-

visions of which are substantially identical with those of

the Federal statute, and indicated approval of those deci-

sions.

In June 1937 the highest appellate court of New York

had unanimously affirmed a decision of the Appellate Divi-

sion of the New York Supreme Court, Third Department,

holding that there is no liability for stock transfer stamp

taxes under the New York statute where, as here, the

ownership of shares of stock previously owned by the con-

stituent corporations vests through consolidation of con-

stituent corporations in a new consolidated corporation.

tlectric Bond & Share Co. v. State of New York, 249 App.

Div. 371, aff’d 274 N. Y. 625. (That decision followed

earlier decisions of the New York courts in Rockefeller

Foundation v. State of New York, 144 Mise. 460; Phelps-

Stokes Estates v. Nixon, 222 N. Y. 93.)

The Ninth Circuit Court further refused to apply the

dictum in the opinion of this Court in Raybestos-Manhat-

tan, Inc. v. U. S., supra, (discussed infra at page 18) say-

ing (at page 403):

U

su

«<* * * This dictum has no relevance to a statu-

tory transfer by operation of law where, the instant

before the law makes the transfer, the title to the

stocks is in one trustee and the instant after it is in

another. Here it is stipulated that this is the trans-

fer sought to be taxed.’’

The Cireuit Court of Appeals for the Second Circuit,

in deciding the case at bar, referred to the decision of

the Cireuit Court of Appeals for the Ninth Circuit in

United States v. Merchants Nat. Trust & Savings Bank,

supra, and said:

‘“* * * whatever may be said as to that decision on

its facts, the record here shows that this transfer was

not wholly by operation of law.’’

Reference was also made below to the decisions in the

New York state courts mentioned above, and while admit-

ting that such decisions ‘‘may be of persuasive value’’

the court below held that they ‘‘cannot be determinative

as to what is a transfer under federal law’’ (citing

Burnet v. Harmel, 287 U. 8. 103; Lyeth v. Hoey, supra, 305

U. S. 188).

The court below also cited its own decision in Weil v.

U. S., 115 F. (2d) 999, decided December 16, 1940, where

it was held that there was liability for the Federal docu-

mentary stamp tax on the sale or transfer of bonds under

Section 800, Schedule A-9 of Title VIII of the Revenue Act

of 1926, 44 Stat. 101, as amended by Section 724(a) of the

Revenue Act of 1932, 47 Stat. 274, 26 U. S. C. A. Internal

Revenue Acts, page 297, upon a conveyance of the bonds

to new trustees by the Mortgage Commission of the State

of New York, pursuant to provisions of state law which

18

required, as conditions of such conveyance, authorization

by the affirmative votes of a majority of the beneficial

owners of the bonds and approval of the state court

(c. 745, L. of 1933, commonly called ‘‘The Schackno Act’’).

In addition, the court below also relied upon the decision

of the Cireuit Court of Appeals for the Third Circuit in

Koppers Coal & Transportation Co. v. United States, 107

F. (2d) 706, decided November 15, 1939, where the transfer

of shares of stock by a merged corporation to a merging

corporation, pursuant to the Corporation Laws of Dela-

ware, was held to be taxable under the Federal statute.

In the Koppers case and in the Weil case (as well as

in the opinion below in the case at bar) it appears that the

Second and Third Circuits have attempted to apply to

‘*transfers’’ resulting from mergers or consolidations of

constituent corporations a dictum of this Court in the

Raybestos-Manhattan case, supra, 296 U. S. 60, where this

Court said at page 62:

‘‘The stock transfer tax is a revenue measure ex-

clusively. Its language discloses the general pur-

pose to tax every transaction whereby the right to

be or become a shareholder of a corporation or to

receive any certificate of any interest in its property

is surrendered by one and vested in another. * ° *°

While the statute speaks of transfers, it does not

require that the transfer shall be directly from the

hand of the transferor to that of the transferee. It

is enough if the right or interest transferred is, by

any form of procedure, relinquished by one and vested

in another.’’

In the Merchant’s Nat. Trust & Savings Bank case, as

noted, the Ninth Circuit held that such dictum ‘‘has no

relevance to a statutory transfer by operation of law.’’ *

* 101 F. (2d) 399, at page 403.

19

The dictum, we believe, can have no application in the

situation here presented, because, as a matter of law the

constituent corporations Niagara Hudson and Mohawk

Hudson ceased to exist at the moment the petitioner

came into existence as a consolidated corporation.* There-

fore, no ownership of the stocks could be **relinquished”’

by the constituent corporations as ‘‘transferors’’ and

thereby ‘‘vested’’ in the petitioner as the **transferee’’.

Furthermore, as noted above, the only question de-

cided by this Court in the Raybestos-Manhattan case

was whether a transfer of a right to receive shares was

taxable where the certificates for shares in a new corpo-

ration, which was the consideration for the acquisition by

the new corporation of the business properties and assets

of the old corporation, were issued directly to the stock-

holders of the old corporation. As noted above, the same

question was also considered by this Court in Founders

General Co. v. Hoey, supra, 300 U. S. 268, where the decision

in the Raybestos-Manhattan case was followed.

Since the court below attempted to apply the dictum

of this Court in the Raybestos-Manhattan case and since

the Ninth Circuit in the Merchants Nat. Trust & Savings

Bank case expressly held that such dictum has ‘‘no rele-

vance’’, there is a sharp conflict in the Cireuit Courts in

regard to the applicability of what appears to have been

the most recent statement by this Court regarding the

Federal stock transfer taxing statute.

*New York Stock Corporation Law, Sections 88, 89 and 90 ;

People v. N. Y., C. & St. L. R. R. Co., 129 N. Y. 474; Miner v.

N.Y.C.& H.R.R. Co., 123 N. Y. 242; People ex rel. New York

Phonograph Co. v. Rice, 57 Hun 486, aff’d on opinion below 128

N. Y. 591; see also Electric Bond & Share Co. v. State of New

York, 249 App. Div. 371, at page 372.

20

There are also conflicting holdings, as noted above, in

those Cireuit Courts of Appeals (and possibly in the Third

Cireuit as well*) on the question whether the Federal

documentary stamp tax statute by necessary implication

makes its operation dependent upon state law in situa-

tions where ownership of stocks vests in a new or differ-

ent corporation through statutory proceedings taken pur-

suant to the laws of the state where such corporations

are incorporated.

It is therefore respectfully submitted that this Court

should resolve the conflicts in the holdings of the aforesaid

Cireuit Courts of Appeal.

3. The Circuit Court of Appeals for the Second Cir-

cuit has decided a Federal question in a way which is

probably in conflict with the applicable decisions of this

Court.

In addition to the conflict in regard to the application

and interpretation of the dictum in the Raybestos-Man

hattan case, it also appears that the decision below, sought

to be reviewed, conflicts with the applicable rules stated

by this Court in its decision in Helvering v. Metropolitan

Edison Company, 306 U. S. 522, decided April 3, 1939.

In that case this Court clearly indicated that whether

there is a sale or transfer of property for the purpose of

determining liability for Federal income taxes (where cor-

porate proceedings were taken under Pennsylvania stat-

utes to merge or consolidate constituent corporations into

a new corporation), is to be determined according to state

law. There it was held that a corporation formed by

merger or consolidation of predecessor corporations, pur-

* Koppers v. United States, 107 F. (2d) 706.

21

suant to the laws of Pennsylvania regulating the merger

or consolidation of constituent corporations, may deduct

unamortized discount and expenses with respect to bonds

issued by the predecessor corporatoins in determining net

income of the successor (consolidated) corporation, and

that statutory proceedings to merge or consolidate con-

stituent corporations do not constitute a ‘‘sale’’ of the

properties of such constituent corporations in the gener-

ally accepted meaning of the word.

In discussing the proceedings taken under the Pennsyl-

vania statutes for the merger or consolidation of the pre-

decessor corporations, the original issuers of the bonds,

this Court said (306 U. S. 522, at pages 527 and 528):

ce + *

The Act of May 3, 1909, permits what

it terms a merger but what is in truth a consolidation

to be effected by a joint agreement of two or more

corporations approved by the stockholders setting

forth the terms and conditions of the merger and con-

solidation and providing for the organization of a

new corporation to which the franchises and prop-

erty of the consolidating corporations are to be trans-

ferred. This act contemplates the issue of letters

patent to the consolidated corporation, and the issue

of new stock by it, in lieu of that of the old. The

procedure under the Act of 1874 has repeatedly been

referred to in the decisions of the Supreme Court of

the Commonwealth as the ‘short form’ and that under

the Act of 1909 as the ‘long form’ of merger.

‘“‘Inasmuch as the transfer of the franchises and

assets is authorized by statute, it seems reasonably

clear that the transferee is, as matter of law, liable

for the obligation of the transferor. The cases indi-

cate that this is so.

‘We are of opinion that a transfer without valu-

able consideration, with the intent that the trans-

22

feror shall, as the statute provides, cease to exist,

made in accordance with the statute, has all the ele-

ments of a merger and comes within the principle that

the corporate personality of the transferor is drowned

in that of the transferee. It results that the con-

tinuing corporation may deduct unamortized bond

discount and expense in respect of the obligations of

the transferring affiliate.’’

' The question in the Metropolitan Edison Company

case was said to be ‘‘solely one respecting the law of

Pennsylvania’’ (306 U. S. 522, at page 527), i. e., whether

the statutory proceedings under the Pennsylvania statutes

whereby constituent corporations were merged (or con-

solidated) into a new corporation was a ‘‘mere sale’’ of

the assets of the existing corporations to the new corpo-

ration. This Court held that, as a matter of state law,

there was no ‘‘sale’’, because the transfer was without

valuable consideration and that it was made with the intent

that the transferor should cease to exist, as provided by

the state statute. As a further reason for holding that

there was no ‘‘sale’’ of the assets of the constituent corpo-

rations, this Court found that the ease came within the

principle that ‘‘the corporate personality of the transferor

is drowned in that of the transferee’’.

Applying the same reasoning and the same rule to the

case at bar, we believe this Court will also find that under

New York law there is no ‘‘sale’”’ of assets where con-

stituent corporations are consolidated into a new, single

corporation which succeeds to all the rights, powers, in-

terests, franchises, businesses, properties and assets of

every character previously owned by the constituent corpo-

rations, including shares of stock in other corporations,

Co oe ee A rE TS a

if

23

and that it necessarily follows that there is no **transfer’’

of such stocks, as a matter of state law. Upon such a

process of reasoning (which the court below rejected as a

‘‘highly formalistie and arbitrary analysis of the conso-

lidation’’), it is respectfully submitted that there should

be no liability for the Federal documentary stamp tax in

respect of the vesting in the consolidated corporation of

the ownership of such shares of stock.

In the case at bar it clearly appears that the vesting

of the ownership of the shares of stock in other corpo-

rations resulted wholly from the operation of the pro-

visions of Section 89 of the Stock Corporation Law. ‘The

highest appellate court of the State of New York has

squarely held (in deciding whether liability arises for a

documentary stamp tax under the New York statute) that

the vesting in a consolidated corporation of shares pre-

viously owned by constituent corporations results wholly

by operation of law.

Electric Bond & Share Co. v. State of New York,

supra, 249 App. Div. 371, aff’d 274 N. Y. 625.

In that case, as previously noted, the New York Court

of Appeals affirmed the decision of the Appellate Division

of the New York Supreme Court, Third Department, where

it was said (249 App. Div. 371, at page 372):

“The effect of the consolidation was to dissolve

all the constituent corporations, terminate their ex-

istence in toto except for certain limited purposes and

to create a new corporate entity out of the component

bodies.”’ [Citing Stock Corporation Law, §§ 88, 89,

90; People v. N.Y. C. & St. L. R. R. Co., 129 N. Y. 474;

Miner v.N. Y¥.C.@ H.R. R. R. Co., 123 id. 242; People

24

ex rel. New York Phonograph Co. vy. Rice, 57 Hun,

486; affd. on opinion below 128 N. Y. 591.]

and at page 373:

‘‘Within the reasoning of Phelps-Stokes Estates

v. Nixon (222 N. Y. 93) it would seem that such tax

relates to a sale or transfer within the ordinarily

accepted meaning of these terms, and does not apply

to a transfer occurring merely by operation of law.

We think the court below properly held that the trans-

fers in question are not taxable under said section

270.’”

It has also been held by this Court that the state law

must determine whether a particular transaction creates

liability for a Federal tax when the Federal taxing act

by express language or ‘‘by necessary implication makes

its own operation dependent upon state law.’’

Burnet v. Harmel, supra, 287 U. S. 103;

Lyeth v. Hoey, supra, 305 U. S. 188.

Therefore, since the change of the ownership of the

shares of stock here involved was effected solely by the

state law, applying the rules stated by this Court, it

follows that, in the circumstances here presented, the

operation of the Federal taxing statute, by necessary im-

plication, is dependent upon the state law; and apply

ing that state law, there should be no liability for the

tax, because the ‘‘transfer’’ of ownership of the stocks

was effected solely ‘‘by operation of law’’, that is Section

89 of the Stock Corporation Law of New York.

Such was the view taken by the Circuit Court of Ap-

peals in the Ninth Cireuit in the Merchants Nat. Trust &

Savings Bank case and which, as shown, was rejected by

a a - UVa “ae -— oe aa

25

the Cireuit Court of Appeals for the Second Cireuit in

the case at bar. The probable conflict, therefore, with the

applicable decisions of this Court warrants a review of

the decision by this Court.

Prayer.

For the reasons stated, therefore, your petitioner re-

spectfully prays that a writ of certiorari issue out of this

Court to the United States Circuit Court of Appeals for

the Second Circuit, commanding said court to certify

and send this Court on a day to be determined a full

and complete transcript of the record of all of the pro-

ceedings of such Cireuit Court of Appeals had in this

case to the end that this case may be reviewed and de-

termined by this Court; that the judgment of the Circuit

Court of Appeals be reversed; and that the petitioner be

granted such other and further relief as may be proper.

Dated: New York, New York

March 25, 1941

Respectfully submitted,

Niacara Hvupson Power Corporation,

Petitioner

By Horace R. Lams

Its Attorney

Ranpaut J. Le Borvr, Jr,

CraicH Leonarp,

of counsel.

26

Opinion.

Before:

Swan, CHase and Ciark,

Circuit Judges.

Ciark, Circuit Judge:

The question here presented is whether or not a corpora-

tion resulting from a consolidation of two existing corpora-

tions under $86 of the New York Stock Corporation Law

is liable for the federal documentary stamp tax levied by

Section 800, Schedule A-3, of Title VIII of the Revenue Act

of 1926, c. 27, 44 Stat. 9, 99, 101, as amended by Section 723

(a) of the Revenue Act of 1932, c. 209, 47 Stat. 169, 272,

26 U.S. C. A. Int. Rev. Acts, page 290, in respect of stocks

received by it from the constituent corporations.

Section 800, Schedule A-3, imposes the tax on ‘‘all sales,

or agreements to sell, or memoranda of sales or deliveries

of, or transfers of legal title to any * * * shares or certifi-

eates.’”’ U.S. Treas. Reg. 71 (1932 Ed.) Art. 35(r), how-

ever, declares transfers ‘‘which result wholly by operation

of law,’’ ie., ‘‘those which the law itself will effect with-

out any voluntary act of the parties,’’ not to be subject to

the tax.

This consolidation took place February 1, 1937, upon the

filing with the Secretary of State of a certificate of con-

solidation signed by two officers of each of the two con-

stituent corporations, so authorized by a two-thirds major-

ity of the stockholders of each of the constituents, voting at

meetings called for the purpose by their respective boards

of directors. See $86, New York Stock Corporation Law.

Thereupon the ownership of certain stocks, until then in the

27

constituents, became vested in the plaintiff, and on October

21, 1938, plaintiff paid a tax of $260,969.04 in respect there-

of, which it has thus far unsuccessfully sought to have

refunded.

We think that the opinion of the district court (34 F.

Supp. 302) clearly and adequately answers the contention

that this transfer should be exempt under U. 8. Treas. Reg.

71, Art. 35(r), as having resulted ‘wholly by operation of

law.’’ Indeed, this court more lately has rejected the same

contention, for similar reasons, in Weil v. United States, 2

Cir., F. 2d , where the transfer of bonds to trustees

from the Mortgage Commission of the State of New York

was authorized by the affirmative vote of the proper major-

ity of certificate holders. A transfer by a New Jersey con-

solidation has been held taxable in spite of this objection

(Raybestos-Manhattan, Inc. v. United States, 296 U. 8. 60,

56 S. Ct. 63, 80 L. Ed. 44, 102 A. L. R. 111), and also a

transfer by a Delawar:: merger (K oppers Coal é Transpor-

tation Co. v. United States, 3 Cir. 107 F. 2d. 706) ; nor can

these cases be distinguished as to the voluntary nature of

the transfer, since the consolidation of plaintiff’s con-

stituents was brought about by the resolutions of their

directors and votes of their stockholders. In United States

v. Merchants Nat. Trust & Savings Bank, 9 Cir., 101 F. 2d

399, the court held that, where a bank sold its trust depart-

ment to another bank, no stamp taxes were required upon

the transfer of the individual trust securities to the new

bank as successor trustee; but, as we said in the Weil case,

whatever may be said as to that decision on its facts, the

record here shows that this transfer was not wholly by

operation of law.

28

Decisions of the state courts holding similar transfers

not subject to a state documentary stamp tax because re-

sulting ‘‘by operation of law’’ (Electric Bond & Share Co.

v. State of New York, 249 App. Div. 371, 293 N. Y. S. 175,

affirmed 274 N. Y. 625, 10 N. E. 2d 083 ; Rockefeller Fo unda-

tion v. State of New York, 144 Mise. 460, 258 N. Y. S. 812)

may be of persuasive value, but cannot be determinative as

to what is a transfer under federal law. Burnet v. Harmel,

287 U.S. 103, 53 S. Ct. 74, 77 L. Ed. 199; Lyeth v. Hoey, 305

U. S. 188, 59 S. Ct. 155, 83 L. Ea. 119, 119 A. L. R. 410;

Weil v. United States, supra.

Plaintiff seeks to avoid the tax not only under the ex-

emption of Art. 35(r), but also on the ground that no trans-

fer occurred at all, so that the scope of Section 800 is not

extended to this situation. For the purpose of this argu-

ment, plaintiff makes a highly formalistie and arbitrary

analysis of the consolidation to the effect that the constitu-

ent corporations’ stockholders voted merely for a consoli-

dation, and that New York Stock Corporation Law, §89,

operated of itself to ‘‘vest’’ the property of the constituents

in the plaintiff, not to “‘transfer’’ it. Indeed, it is said, a

transfer is inconceivable, for there were no instruments of

transfer, nor was there any moment of time at which a

transferor and a transferee were co-existent. But in legal

jargon a change of ownership, terminating rights and other

relations in one entity and creating them in another, is the

essence of ‘‘transfer,’’ 29 Yale L. J. 91, 93, 429, 29 Harv. L.

Rev. 816, 817; and the Weil, Raybestos-Manhattan, and

Koppers Coal cases all presuppose it to be so without re-

gard to these suggested difficulties. In fact, Welch v.

Kerckhoff, 9 Cir., 84 F. 2d 295, 106 A. I, R. 1434, held a

bequest of stock to be a transfer subject to this tax. Section

29

89 itself declares that on the filing of the certificate, prop-

erty shall be deemed ‘‘to be transferred to and vested in

such new corporation, without further act or deed.”’

There is no reason why the language of the federal Act

should be restricted to an unusual meaning. A consolida-

tion is more than a change of form; it definitely changes

stockholders’ interests in a business, often most exten-

sively, and more than does a merger (as under New York

Stock Corporation Law, §85), which is given as an example

of a transfer subject to the tax in U. S. Treas. Reg. 71,

Art. 34(r). Further, unless the taxing statute clearly

requires it, formal differences in state laws relating to

consolidations and mergers should not be made the basis

of discrimination in the assessment of federal taxes.

Affirmed.