Paulsen v. Commissioner

RESPONDENT: Commissioner
LOCATION: New Mexico State Police Headquarters

DOCKET NO.: 83-832
DECIDED BY: Burger Court (1981-1986)
LOWER COURT: United States Court of Appeals for the Ninth Circuit

CITATION: 469 US 131 (1985)
ARGUED: Oct 29, 1984
DECIDED: Jan 08, 1985

Albert G. Lauber, Jr. - on behalf of the Respondent
William R. Nicholas - on behalf of the Petitioners

Facts of the case


Media for Paulsen v. Commissioner

Audio Transcription for Oral Argument - October 29, 1984 in Paulsen v. Commissioner

Warren E. Burger:

Mr. Nicholas, you may proceed whenever you're ready.

William R. Nicholas:

Mr. Chief Justice, and may it please the Court:

The issue for decision here today is whether the owner of a share account in a federal mutual savings and loan associations chartered by the federal government has a proprietary interest in that association.

And the issue arises because of the merger of Commerce Savings and Loan Association, which was a guaranteed stock-type savings and loan association organized under the laws of the State of Washington.

It merged with and into Citizens Federal Savings and Loan Association, which was a federal stock... nonstock-type mutual savings and loan association which was owned exclusively by the share account owners in the association.

In the transaction, which qualified as a merger under state law, the assets and liabilities of Commerce were transferred to and merged with the assets and liabilities of Citizens Federal.

Citizens Federal was the surviving corporation in the merger, and in accordance with the terms of the merger agreement, Commerce went out of existence.

However, Citizens continued on carrying on the business... that of loaning money... that it had done prior to the merger, and also carried on the business that had been carried on by Commerce prior to the merger.

The shareholders of Commerce, including the Paulsens, who are the petitioners in this case, exchanged their stock in Commerce for share accounts in the mutual savings and loan association.

The mutual association has only one form of equity, and that is the share memberships in its association, and that is what was transferred to the Paulsens in this case.

And they were represented by passbook and certificate accounts in Citizens Federal.

Thus, after the merger, the business of the two associations were carried on by one organization, and the owners of the two associations prior to the merger were the same owners of the merged association at the completion of the transaction.

The two associations and the petitioners in this case treated the merger as a tax-free reorganization under the applicable provisions of the Internal Revenue Code.

Therefore, no gain was recognized by Commerce on the transfer of its assets to Citizens Federal and no gain was recognized by the Paulsens on the transfer of their guaranteed stock in Commerce in exchange for the share accounts in Citizens Federal.

The reorganization provisions of the Internal Revenue Code defer the recognition of gain on the transaction that qualifies as a reorganization.

Thus, until such time as Citizens Federal sold the assets which it acquired in the merger, it would not have any gain on the transaction, and until such time as the Paulsens liquidated their investment in Citizens Federal, they would not recognize any gain on the transaction.

Sandra Day O'Connor:

Would there be any justification on that latter point for taking the position that as soon as the time expired so that the Paulsens could withdraw the funds from the saving account that it would become taxable, as opposed to when they actually withdraw?

William R. Nicholas:


I don't think so, Your Honor, because the withdrawal of the savings account or what are termed savings account causes a loss of the rights that are conferred upon the Paulsens by the mutual savings and loan association; so that at the time they withdraw, then they lose the right to share in any further profits of the savings and loan association, and they lose the right to vote and the right to share in any proceeds upon the termination or liquidation of the mutual association.

The respondent asserted a deficiency against the petitioners, claiming that there was no reorganization, and therefore that gain had to be recognized by the Paulsens on the difference between their basis in the shares of the guarantee stock association which they exchanged for the passbook accounts in Citizens Federal.

The case was taken to the tax court, and the tax court agreed with the petitioners and held that the merger of Commerce into Citizens was a reorganization under the Internal Revenue Code, and any gain that the Paulsens might have recognized would be deferred.

The tax court in analyzing the transaction--

Harry A. Blackmun:

Was that a decision of a single judge, or was it reviewed by the court?

William R. Nicholas:

--It was the decision of a single judge, Your Honor.

Judge Featherstone made the decision.

The transaction the tax court analyzed met the statutory requirements set forth in the Code, and under the applicable provisions, a merger is included within the definition of a reorganization under Section 368.

And turning to Section 7701 of the Code, which provides the general definitions for applications throughout the Code, the following terms are included.

Corporation includes association.

Stock includes shares in an association.

And shareholder includes members in association.