Brief for the Respondents in Opposition — Niagara Hudson Power Corp. v. Hoey

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INDEX

Page

asc ok wing. dus in aa ceok Amici caaunu bein 1

RNRMNONN cls ne rhe io dee On as kas Seana evewadan cis 1

PON oats on Hk ase wees Disue ane cock ewee 2

Statutes and regulations involved__....__.__.__......___.___ tS

ptatement............ mee peo Iai dss Sh geass 4

NE A ea PENE Chin de Se uae ann aw kk ou sao ae au wis wien 8

DENIM Seo rea eae eta Sey ek ae eet 11

CITATIONS

Cases:

Founders General Co. v. Hoey, 300 U. 8. 268.._..._______ 8

Helvering v. Metropolitan Edison Co., 306 U.S. 522__.___- 11

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

Ra? PM wanda cena bee cakaaeeu les Eee eet ee eae

Morgan v. Commissioner, 309 U. S. 78._.__.___________- 11

Provost v. United Statrs, 269 U. S. 443_._._.___..._____. 8

Raybestos-Manhattan Co. v. United States, 296 U. S. 60____ 8

United States v. Merchants National Trust & Savings Bank,

SOAS ORO Pee ene he eas aia ig ngd.. 9,11

Week v. Kerckhef, 64 F. (9d) 206...................... 10

Statutes:

Revenue Act of 1926, c. 27, 44 Stat. 9:

Section 800 (U. 8S. C., Title 26, Sec. 900)_.__________ 2

Schedule A-3, as amended (U.S. C., Title 26, Sec. 902) _ 2

Miscellaneous:

Treasury Regulations 71 (1932 Ed.):

ES RA Aan awn ch wider Bean wasn don oLawinia's wcbtnwcanambice duis 3

aceidl h aim Anh Win ears Woda Wakeimanicew accismioen beaded 4

811357—41

Inthe Supreme Court of the Wnited States

OctToBER TERM, 1940

No. 871

NraGara Hupson Power CorPoRATION, PETITIONER

v.

JAMES J. Hoty, COLLECTOR OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SECOND

CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the District Court (R. 83-87) is

reported in 34 F. Supp. 302. The opinion of the

Circuit Court of Appeals (R. 94-96) is reported in

117 F, (2d) 414.

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered February 19, 1941 (R. 97). The pe-

tition for writ of certiorari was filed March 26, 1941.

The jurisdiction of this Court is invoked under

(1)

Section 240 (a) of the J udicial Code, as amended

by the Act of February 13, 1925.

QUESTION PRESENTED

Whether a corporation resulting from a consoli-

dation of two existing corporations under Section

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, as amended, upon the aequi-

sition of the stocks owned by the constituent

companies.

STATUTES AND REGULATIONS INVOLVED

Revenue Act of 1926, ¢. 27, 44 Stat. 9:

Src. 800. On and after the expiration of

thirty days after the enactment of this Act

there shall be levied, collected, and paid, for

and in respect of the several bonds, deben-

tures, or certificates of stock and of in-

debtedness, and other documents, instru-

ments, matters, and things mentioned

and described in Schedule A of this title,

* * * the several taxes specified in such

schedule. * * *.

ScHEDULE A.—StTaMP TAXES

* * * * *

3. (As amended by Section 723 (a) of the

Revenue Act of 1932, ¢. 209, 47 Stat. 169, and

the Act of June 29, 1936, ¢. 865, 49 Stat.

2029.) On all sales, or agreements to sell,

or memoranda of sales or deliveries of, or

3

transfers of legal title to any of the shares

or certificates mentioned or described 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 de-

livery, 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, cer-

tificate, interest, or rights, or not), on each

$100 of par or face value or fraction thereof

of the certificates of such corporation or

other organization (or of the shares where

no certificates were issued) 4 cents until

July 1, 1937, and 2 cents thereafter, and

where such shares or certificates are with-

out par or face value, the tax shall be 4

cents until July 1, 1937, and 2 cents there-

after, on the transfer or sale or agreement

to sell on each share (corporate share, or in-

vestment trust or other organization share

as the case may be). * * *.

Treasury Regulations 71 (1932 ed.) :

Art. 34. Sales or transfers subject to

tax.—The following are examples of trans-

actions subject to the tax:

* * * * *

(r) Upon a merger, the transfer of stock

owned by a corporation which is merged

into another corporation from the name of

the first to the name of the second corpora-

a

tion, such a transfer being effected by the

act of the parties and not wholly by opera-

tion of law.

* * * * *

Art. 35. Sales or transfers not subject to

tax.—The following are examples of trans-

actions not subject to the tax:

* * *

(x) 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 transfer of stock from

decedent to executor.

* * *

* *

* *

STATEMENT

The facts, which were stipulated (R. 17-81), may

be summarized as follows:

The petitioner was formed on February 1, 1937,

pursuant to Section 86 of the Stock Corporation

Law of New York, by the consolidation of two cor-

porations, Mohawk Hudson Power Corporation,

and another which bore the same name as peti-

tioner, and is therefore referred to herein as

“Niagara Hudson Power Corporation (constitu-

ent)’’ (R. 18).

The consolidation was effected by the following

procedure: A proposal to consolidate the constitu-

ent corporations, in accordance with a plan which

had already been formulated, was made at a meet-

os anti aiete _ - —

SENET ERTL PARNER ONS AMO a Oop Rane

ALIASES EAU ROMO

5

ing of the board of directors of Niagara Hudson

Power Corporation (constituent) held on Decem-

ber 18, 1936. <A certificate of consolidation con-

taining all of the terms, conditions and provisions

of the proposed consolidation was presented to

the meeting, and the board of directors approved

the plan and recommended it to the stockholders

of the corporation. The board also directed the

secretary to call a special meeting of the stock-

holders on January 29, 1937, to take action on the

plan, and directed the officers to give notice to the

stockholders of the meeting, and to secure the ap-

proval of the Public Service Commission of New

York State for the consummation of the consolida-

tion (R. 20-21, 34-45).

Similar action was taken at a meeting of the

board of directors of Mohawk Hudson Power Cor-

poration held on the same date (R. 22-23, 57-68).

Pursuant to the action taken at the meeting of its

board of directors, Niagara Hudson Power Corpo-

ration (constituent) sent to its stockholders a cir-

cular letter dated December 22, 1936, advising them

of the proposed consolidation and the terms there-

of, together with a notice of the stockholders’ meet-

ing to be held on January 29, 1937 (R. 21).

A similar circular letter dated December 22,

1936, was sent by Mohawk Hudson Power Corpo-

ration to its stockholders, together with a notice of

a stockholders’ meeting to be held on January 29,

1937 (R. 24).

6

The stockholders’ meeting of Niagara Hudson

Power Corporation (constituent) was held on Jan-

uary 29, 1937, but no action was taken until the

convening of the adjourned meeting on January

30, 1937. At this meeting the proposed plan of

consolidation was considered, and was approved

by the holders of more than two-thirds of the vot-

ing stock of the corporation. Further action was

taken authorizing the officers of the corporation to

perform the acts necessary and proper to carry the

consolidation into effect, including the execution

and filing of the certificate of consolidation in the

Department of State of New York (R. 21-22,

48-56).

Similar meetings of the stockholders of Mohawk

Hudson Power Corporation were held on January

99 and January 30, 1937, at which similar action

was taken (R. 24-25, 71-80).

Pursuant to the authority granted at the stock-

holders’ meetings of the two constituent corpora-

tions, the certificate of consolidation, duly executed

by the corporate officers and accompanied by their

appropriate affidavits, was filed with the Secretary

of State of New York on February 1, 1937 (R. 26).

At the first meeting of the board of directors of

petitioner on February 1, 1937, the directors au-

thorized the issuance of certificates for the peti-

tioner’s capital stock in exchange for certificates

of the capital stock of the constituent corporations,

and appointed agents to receive the old certificates

PPS SE Ae ee Meese rey.

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7

for cancellation and to issue new certificates repre-

senting capital stock in petitioner in exchange

therefor (R. 26-27).

Niagara Hudson Power Corporation (constitu-

ent) had kept certificates representing stocks in

other corporations which it owned prior to the con-

solidation in a safe deposit box. After the consoli-

dation, and at the first meeting of petitioner’s

board of directors on February 1, 1937, certain of

its officers were authorized to have access to the

safe deposit box containing the securities men-

tioned (R. 26-27). The certificates for stocks in

other corporations held by Mohawk Hudson Power

Corporation prior to the consolidation were

shipped on February 3, 1937, to petitioner and

were deposited by it in the same safe deposit box

(R. 28-29).

Through the consolidation petitioner acquired

title to all of the assets, including a large amount of

capital stocks referred to above (R. 32-33), held

by the constituent corporations. Upon the trans-

fer to petitioner of these stocks, the Commissioner

of Internal Revenue assessed a tax under Schedule

A-3, Title VIII of the Revenue Act of 1926, as

amended, supra, in the sum of $260,960.04 (R. 29).

Petitioner paid this tax, filed a claim for refund

which was rejected, and then commenced this suit

(R. 29-30). The District Court sustained the

Commissioner (R. 87-88) and the court below

affirmed (R. 97).

8

ARGUMENT

1. The court below correctly held that the trans-

fer of the stocks owned by the constituent corpora-

tions to the petitioner was subject to the stamp tax

imposed by Section 800, Schedule A-3, Title VIII

of the Revenue Act of 1926, as amended, supra.

The broad scope of this statute was recognized in

Provost v. United States, 269 U. S. 443, 458, where

this Court pointed out that it evidenced a purpose

to tax all transfers of legal title to shares whether

technical sales or not. This view was reiterated in

Raybestos-Manhattan Co. v. United States, 296

U. S. 60, 62-63:

The stock transfer tax is a revenue meas-

ure exclusively. Its language discloses the

general purpose to tax every transaction

whereby the right to be or become a share-

holder of a corporation or to receive any

certificate of any interest in its property is

surrendered by one and vested in another.

* * * The reach of a taxing act whose

purpose is as obvious as the present is not

to be restricted by technical refinements.

And in Founders General Co. v. Hoey, 300 U. S.

268, 275, this Court observed that ‘‘The statute de-

fines the scope of the tax in terms whose breadth is

emphasized by the careful particularity of its

provisos.”’

Treasury Regulations 71 (1932 ed.), supra, re-

lating to the stamp tax, definitely support rather

than contradict the Government’s position here.

Article 35 (x), supra, upon which the petitioner

relies, classifies as exempt those transfers of shares

9

which result wholly by operation of law without

any voluntary act of the parties, such as from de-

cedent to executor. However, among the examples

of transactions subject to the tax set forth in the

preceding Article 34 (1), supra, is found the trans-

fer of stock owned by a corporation which is

merged into another corporation, such a transfer

being considered as resulting from the act of the

parties and not wholly by operation of law.

The contention that the transfer of legal title

here was a transfer wholly by operation of law

(Pet. 5-6) is refuted by all of the acts preliminary

to the filing of the certificate of consolidation, in-

cluding those of the boards of directors, officers and

stockholders, which are summarized in the state-

ment of facts, supra. In this respect, a ‘‘consoli-

dation’’ cannot be distinguished from a ‘*merger,”’

as petitioner suggests; in both cases there is a

definite change in the stockholders’ interest in a

business, and in both that change occurs because

the stockholders, directors, and officers will it.

The decision below is thus in full accord with

Koppers Coal & Transportation Co. v. United

States, 107 F. (2d) 706 (C. C. A. 3d), in which the

stamp tax was held applicable to a transfer of

stocks resulting from a Delaware merger.

2. Petitioner asserts a conflict with United States

v. Merchants’ National Trust & Savings Bank, 101

F, (2d) 399 (C. C. A. 9th). In that case the trust

department of one bank was sold to another bank

pursuant to Section 31 of the California Bank Act,

RRL RNY LRN

10

and the question was whether the resultant trans-

fer of title to the securities held in the trust ac-

counts was subject to the stamp tax. The court

held that the transfer was not subject to the tax, in

part because the transferee bank was deemed to

have succeeded to the securities solely by operation

of California law. Irrespective of the correctness

of that decision, the facts upon which it was based

are obviously very different from those here in-

volved. The conflict between the decisions, if any,

relates solely to the effect to be given to state law

in applying the Regulations; the Cireuit Court

of Appeals for the Ninth Cireuit believed that the

question of whether a transfer is “‘by operation

of law”? within the meaning of the Regulations de-

pends solely upon local law, while the court below,

although deeming state court decisions to be ‘‘of

persuasive value,”’ held that they ‘“‘cannot be deter-

minative as to what is a transfer under federal

law” (R. 96). That this apparent difference in

view may be a result of a difference in statement

rather than of a difference in opinion is indicated

by the earlier decision of the Circuit Court of Ap-

peals for the Ninth Cireuit in Welch v. Kerckhoff,

84 F. (2d) 295, in which the court squarely held

that the operation of the federal stamp tax statute

is not dependent on state law. But even if the

cases may be considered as being in conflict on this

point, the conflict may be taken to have been re-

solved by the decision of this Court in Morgan V.

Commissioner, 309 U. S. 78. That decision, al-

though concerned with the estate tax rather than

1

11

the stamp tax, plainly discredits the principle

enunciated in the Merchants’ National Bank case.

Furthermore, since the question at issue relates

to the operation of the Regulations, rather than to

the meaning of a specific statutory provision, any

necessary clarification can readily be secured

through administrative action.

3. There is no conflict with Helvering v. Metro-

politan Edison Co., 306 U. 8. 522. The question

there was whether there had been a merger, a ques-

tion necessarily to be determined under local law.

The question here, on the other hand, is whether

the type of transfer accomplished by a statutory

consolidation under the law of New York is the

type of transfer which Congress has subjected to

tax. On that issue, federal law is plainly decisive,

classification of the transaction under local law be-

ing immaterial. Morgan v. Commissioner, supra.

CONCLUSION

The petition for a writ of certiorari should be

denied.

Respectfully submitted.

CHARLES Fany,

Acting Solicitor General.

SAMUEL O. CLARK, Jr.,

Assistant Attorney General.

SEWALL Key,

RicHarp H. DEMvUTH,

JOSEPH M. JONES,

Special Assistants to the Attorney General.

‘Aprit 1941.

U. S. GOVERNMENT PRINTING OFFICE: 1941