Appeal from a decision of the Tax Court holding that § 483 of the Internal Revenue Code, which provides that part of certain deferred payments shall be treated as interest, applies to a deferred transfer of stock made pursuant to a tax-free corporate reorganization, see §§ 354(a)(1), 368(a)(1)(B).
Waterman, Anderson and Mansfield, Circuit Judges.
MANSFIELD, Circuit Judge:
Mr. and Mrs. Sidney R. Solomon appeal from a decision of the Tax Court which upheld an IRS determination of a deficiency of $46,492.42 in their joint return for the 1971 taxable year. The only question before us is whether § 483 of the Internal Revenue Code,*fn1 which requires that a portion of deferred payments received on account of the sale or exchange of property must be treated as interest rather than capital, applies to a "non-taxable corporate reorganization," see §§ 354(a)(1), 368(a)(1)(B), so as to render part of those shares interest income. The Tax Court held that § 483 was applicable.*fn2 We affirm.
This dispute - the facts of which have been stipulated - arose out of a transaction in which the Whittaker Corporation acquired 100% control of the Quinn Manufacturing Corporation and of the Detroit Bolt and Nut Company, by exchanging Whittaker shares for the outstanding shares of those two companies, which were held by appellants and by another couple, Mr. and Mrs. Samuel Katkin.*fn3 Prior to August 19, 1968, appellants and the Katkins owned all of Quinn's outstanding capital stock, each individual owning 25 shares. Detroit's outstanding capital stock was owned by Quinn (300 shares), appellant Mr. Solomon (1,391.5 shares), appellant Mrs. Solomon (931.5 shares), Mr. Katkin (1,522 shares), and Mrs. Katkin (783 shares). On that date, appellants and the Katkins entered into an Acquisition Agreement and Plan of Reorganization with Whittaker, in which they agreed to exchange all of their Quinn and Detroit shares for Whittaker voting stock. Pursuant to that agreement, Mr. Solomon received immediately 6,037 shares of Whittaker's $5 par value preferred stock and 22,890 shares of Whittaker common in exchange for his holdings; Mrs. Solomon received 3,963 shares of Whittaker preferred and 15,027 shares of its common.
In addition, the Agreement stated that because of the difficulty in determining the value of the shares exchanged, Whittaker would transfer additional shares of its common stock to the appellants if the Whittaker common stock they received initially should be retained by them until August 19, 1971, and at that time be worth less than 120% of its value as of August 1968, or if the value of the preferred shares initially received was then below $100 per share. The Agreement set out a formula for determining the precise number of shares to which appellants would in such event be entitled in 1971. During the interim, the maximum number of shares that might be issued to appellants were to be placed in a reserve account to be established by Whittaker, but appellants were not entitled to vote this stock or to receive dividends payable on it. The Agreement made no provision for the payment of interest on the additional shares.
When the shares initially received and retained by appellants failed on August 19, 1971, to reach the values specified in the Agreement, Whittaker on September 27, 1971, issued from the stock held in reserve 29,797 additional shares of its common stock to Mr. Solomon and 19,561 shares to Mrs. Solomon, each share having a value of $10.125.
After the appellants had filed their joint return for the 1971 taxable year, the Commissioner of Internal Revenue, on the basis of § 483, determined a deficiency of $46,492.42 in their income tax for that year, citing their failure to declare any part of the value of the stock they received in 1971 as interest income. On February 25, 1974, appellants filed a petition for redetermination of their deficiency, § 6213, with the Tax Court. In its opinion, as modified after a rehearing, 67 T.C. 379 (1976), that court held that the 1971 transfers of Whittaker shares to the Solomons were "payments" to which § 483 applies, and that a portion of those shares should, therefore, have been treated by appellants as interest income on their 1971 return. The court below relied on explicit language in § 483 making the provision applicable to "any payment" meeting specified criteria, Congress' failure to include contingent stock payments in the list of specific exceptions to § 483, legislative history suggesting that the legislature had meant this provision to apply to any deferred payment "for all purposes of the Code," and a Treasury regulation that appears to subject tax-free corporate reorganizations to § 483, see Treas. Reg. § 1.483-1(b)(6), example 7.*fn4 Judge Goffe's opinion also rejected the Solomons' narrower position to the effect that, even if Congress had meant to apply § 483 to some contingent transfers of stock, their scheme was exempt.*fn5
On appeal, the appellants renew three closely related arguments that they made before the Tax Court. They claim (1) that the transfer of stock that occurred in 1971 was not a deferred "payment"; (2) that, if it were deemed to be such a payment, then a conflict would exist between § 483 and specific Code sections governing the tax treatment of tax-free corporate reorganizations, in which § 483 would have to yield; and (3) that the application of § 483 is inconsistent, in a more general way, with the extension of the benefits of nonrecognition of gain to contingent stock reorganizations.
Section 483 provides in pertinent part that in the case of any contract for the sale or exchange of property under which any payment constituting part or all of the sales price is deferred for more than one year after the sale or exchange without providing for payment of any interest or of adequate interest on the deferred payment or payments, a portion of each payment received by the seller more than six months after the date of the sale or exchange shall be treated as unstated interest. Such interest, of course, is treated for tax purposes as ordinary income to the seller. Section 483(c)(2) further provides that an "evidence of indebtedness" (such as a promise to pay) given for property purchased shall not be considered a "payment." However, it is clear that the term "payment" may include shares of stock. See Treas. Reg. § 1.483-1(b)(1). Moreover, § 483(d) applies to contingent payments by providing that where any portion of a payment is indefinite as to time, liability or amount at the time of the contract of sale or exchange, these matters (time, liability or amount) shall be determined for purposes of applying the statute at the time when the contingently payable portion is actually paid. In addition, § 483 lists specific exceptions to which it shall not apply (e.g., sales of less than $3,000, sales in which all gain, if any, would be considered ordinary income, sales or exchanges of patents, amounts received as an annuity).
Section 483 was passed in 1964 in order to close a loop-hole that had enabled sellers of property to convert ordinary interest income into capital gain, which is taxable at lower rates.*fn6 Prior to that time, a taxpayer could agree to sell a capital asset on an installment basis without provision for interest on the deferred payments. By increasing the total amount of the principal payments above the amount that would have been charged for immediate payment, the parties could compensate economically for the absence of a stated rate of interest. Nevertheless, by agreeing not to label any part of a deferred payment as "interest" the seller had been able to report all amounts received on account of the sale as capital gain.
To rectify this situation, the Kennedy Administration proposed that a portion of any deferred payment should be treated as interest, as long as (1) the payment met certain objective criteria, (2) no specific exception was applicable, and (3) either too little or no stated interest had been provided for by the parties to a sales agreement.*fn7 Before it passed this proposal as § 215 of the Internal Revenue Act of 1964, Congress considered the arguments of many critics who suggested that the proposed solution was much broader than the abuse at which it was directed; these critics contended that many deferred installment payments - particularly contingent payments - contained no hidden interest element even when no interest was stated, since the placement of the risk associated with such transactions made interest inappropriate in an economic sense.*fn8 Nevertheless, Congress passed § 483 as it had been proposed, making it applicable to "any" deferred payments (on account of the sale or exchange of property) which met certain specified criteria, including contingent payments, see § 483(d); note 1, supra.
Thus, Congress opted for a broad, prophylactic approach to the problem of unstated interest, making the operation of § 483 dependent upon certain objectively verifiable circumstances which had usually evidenced a potential for the abuse against which the section was aimed and not on the subjective intent of the parties to a sale. See Jeffers v. United States, 214 Ct. Cl. 9, 556 F.2d 986, 995 (Ct. Claims 1977). Although this approach may have led to the enactment of a statute which, because of its breadth, might encompass within its scope some deferred payments that would not be intended by the parties to include hidden interest, Congress, by creating what amounted to a conclusive presumption on the basis of relevant criteria, avoided the insoluble problems that might arise if the ...