Paulsen v. 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


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.

William R. Nicholas:

Thus, Commerce transferred property to Citizens Federal, a mutual associations which under the terms of the Internal Revenue Code is a corporation; and therefore, no gain was recognized under Section 361 of the Code.

Likewise, the petitioners exchanged stock in Commerce for passbook accounts in Citizens Federal, but under the definitions in the Code, those passbook accounts are shares and included in stock, and therefore would meet the requirements of the Code.

Sandra Day O’Connor:

We’ll resume there at 1:00.

Mr. Nicholas, you may resume.

William R. Nicholas:

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

In connection with the reorganization, the petitioners, the Paulsens, in this case transferred their stock in Commerce for share accounts in the Citizens.

Under Section 7701, those share accounts are treated as stock, and therefore, there was an exchange of stock for stock, and no gain is recognized under Section 354 of the Code.

However, in addition to the statutory language, it was necessary to meet certain judicially imposed requirements in order for there to be a reorganization, and those judicially imposed requirements make sure that the spirit of the law is carried out as well as the letter.

One of those tests is the continuity of proprietary interest test which distinguishes between pure sales of assets and those where the seller has a continuing proprietary interest in the transferee.

Thus, the owners of the acquired entity, Commerce, must have a continuing proprietary interest in the reorganized enterprise which is Citizens Federal.

It is this test that the petition… that the respondent in this case claims that the petitioners did not meet.

This Court, in a series of landmark decisions nearly 50 years ago, defined what satisfies the continuity of proprietary interest test, and these cases are still used by the financial community today in determining when a reorganization exists.

In Letulle v. Scofield there was a transfer of assets for cash and notes, and the Court held that did not satisfy the continuity of interest test, because the only relationship the person transferring the assets to the continuing corporation had was that of a debtor.

Likewise, in Pinellas Ice & Cold Storage Company, there was a transfer of assets for cash and serial bonds which were secured by the assets which were transferred.

This Court there held that there was not a sufficient equity interest in the transferee corporation because there still was only a debtor-creditor relationship.

However, in Minnesota Tea v. Helvering, the receipt of voting trust certificates by this Court was held to satisfy the proprietary interest, and thus, a reorganization was allowed.

In the Minnesota Tea case, the respondent argued that the petitioner in that case had given up common stock and only received back voting certificates, and therefore, there wasn’t a good reorganization.

But the Court pointed out that the statute does not require a transferor to receive back the same equity interest that it gave up, as long as it has an equity interest in the continuing operation.

And likewise, on the same day this Court in John A. Nelson Company v. Helvering held that where a petitioner had transferred common… petitioner who had common stock and ended up with preferred stock which was nonvoting, redeemable, that there was a sufficient continuity of proprietary interest in the corporation which went on that there was a reorganization.

Thus, it is clear from these tests that an equity interest satisfies the continuity of interest test, and it must not be necessarily the same interest, equity interest which was give up as that received.

Debt, however, will not satisfy the test.

Therefore, the question comes down to the point of whether the interest received by the Paulsens in this case was an equity interest in the continuing corporation which was a Citizens… which was Citizens Federal, which was a federal mutual savings and loan association.

If the continuity of interest test is not met, the reorganization fails, and it is not tax-free either at the corporate level or at the shareholder level.

The tax court examined the nature of the interest received in this case by the petitioners and held that the petitioners had received an equity interest, not debt, that satisfied the continuity of interest test.

The tax court, in holding there was a reorganization, recognized the congressional intent to broadly apply the reorganization sections to encourage combinations of corporations.

Looking at the Senate Finance Committee report accompanying the 1954 Act, it shows that the Senate had rejected a narrow definition of the term 7701 of the Code which provides the general definition.

It also looked back to the original Income Act of 1921 and there found that Congress sought to encourage combinations in reorganizations by allowing shareholders to receive interest in the ongoing corporation which had a readily realizable market value.

But so long as the transferring shareholder kept his money invested in that ongoing corporation and did not withdraw it, there was a valid reorganization.

The position of the respondent in this case is contrary both to the reorganization provisions and certainly to the protection and encouragement of savings and loan associations which Congress has sought to encourage over the years.

By changing his position in 1969, the respondent has discriminated against mutual savings and loan association by not allowing them to be a party to a reorganization where a stock savings and loan association is merged into a mutual savings and loan association.

William R. Nicholas:

If reorganizations like this are not allowed, it has a harmful effect on the savings and loan industry, and, for instance, in this case if the reorganization is taxable at the corporate level and at the shareholder level, it takes away those funds which have been invested by the shareholders in a mutual savings and loan association and withdraws them from the market which makes available to homeowners mortgage loans.

The Ninth Circuit below reversed the tax court and found that the interest received by the Paulsens in this case constituted debt rather than a proprietary interest.

In doing so, that Ninth Circuit departed from an unbroken line of cases that had previously examined the issue.

The court of claims in Capital Savings and Loan Association held that such an interest was an equity proprietary interest.

The Sixth Circuit in the West Side Federal also held that such an interest was a proprietary interest.

And in Everett v. the United States, the Tenth Circuit found not only was it proprietary interest, but it constituted voting stock under the more narrow definition as that term is used in the so-called C reorganization under the Internal Revenue Code.

The tax court, of course, in Paulsen had reached the same result, and also in the subsequent case of Owens had found that there was a valid reorganization.

Also, two district courts have held that there had been a reorganization on the same facts… district courts in Wyoming and in the Northern District of Ohio.

Also, the Ninth Circuit in the decision below ignored the cases decided by this Court which had examined the legal characteristics and the rights and obligations of a shareholder in a mutual saving and loan association.

And lastly, the Ninth Circuit misapplied the continuity of proprietary interest test set forth by this test in Minnesota Tea and John A. Nelson when it sought to compare the equity interest which the Paulsens received with the equity interest which they exchanged for their interest in Citizens Federal.

This Court is certainly no stranger to the legal character of share accounts in a mutual savings and loan association.

In 1967 in Tcherepnin v. Knight, the issue was whether the owner of withdrawable share accounts in a savings and loan association could bring an action under the Securities and Exchange Act of 1934, a so-called 10(b)(5) action.

There, the court of appeals, like the Ninth Circuit and this Court, had found that the relationships of the owner of the share accounts was more like a debtor-creditor relationship than that of a stockholder.

This Court, however, reversed that holding and said that forms should be disregarded in substance… for substance, and emphasis should be placed on economic reality.

It noted that in a mutual savings and loan association, the petitioners, the investors in the association were engaged in a common enterprise: that of lending money.

And they relied on the skill and efforts of the management for return on their investment: for it there are no earnings and profits in the savings and loan association, there can be no dividends paid.

The Court found in reaching that… in making its determination that the following factors were present, and these factors are present in this case.

The share accounts carry with them a right to vote.

The shares represented all of the equity of the association.

The right to withdraw as a shareholder was subject to certain conditions, and the application to withdraw did not automatically make the withdrawing shareholder a creditor of the association.

Harry A. Blackmun:

Mr. Nicholas.

William R. Nicholas:


Harry A. Blackmun:

Do you draw any distinction at all between the certificates of deposit, on the one hand, and the passbook savings account on the other?

William R. Nicholas:

No, I do not, Your Honor.

The rights which are given to the holder of the certificate in this particular case are exactly the same as those on the passbook accounts.

Harry A. Blackmun:

If you prevail here, how is the gain taxed?

William R. Nicholas:

When the share account holder withdraws the money from the association… in other words, takes out his investment… the he must pay the tax.

Harry A. Blackmun:

As a practical matter, how is that enforceable?

William R. Nicholas:

Well, I think that particularly in these types of mergers, Your Honor, usually these accounts are segregated, and of course, since it is a reorganization, the organizations must file the necessary information with the Commissioner under the regulations under Section 368 that would tell that there has been a reorganization.

Harry A. Blackmun:

But it certainly is unusual to… when money cash is drawn out of say a passbook savings account, to have gain realized thereby.

Harry A. Blackmun:

I’m just wondering how the Commissioner ever would… would enforce it if a taxpayer overlooked including it.

William R. Nicholas:

I don’t believe that that really is an administrative problem, Your Honor.

I think that there are certainly ways to enforce that, and it is certainly no more difficult than a share of stock where one must keep track of his basis in that stock, and the stock might split, or there are going to be stock dividends, all of which affect the basis, and when that stock is ultimately sold, the gain reported.

It is a self-assessment system, and–

Harry A. Blackmun:

Well, there is some… there is some difference.

Certainly with stock one has a stock certificate, and it has to be turned in.

But with just a savings account, a passbook savings account, your client draws out $100, there’s no other certificate or title that gets passed the way there is with a stock certificate.

I realize the Solicitor General makes no point of this.

He merely mentions it as a… with a passing reference.

But I’m a little concerned about the practicalities of it, I guess.

William R. Nicholas:

–I think, Your Honor, as a practical matter certainly the mergers that we have been involved with when the decision has been made to withdraw the accounts by the parties involved, the tax has always been paid, and in particularly in these types of situations where these accounts are segregated and marked as exchange accounts.

They are not the normal type accounts in–

Byron R. White:

Well, it says between the bank, though, and the… and the account holder it is.

He can draw it out any time he wants to.

William R. Nicholas:

–Well, remember that in these reorganizations, Justice White, first those accounts could not be withdrawn for one year.

Byron R. White:


William R. Nicholas:

And so they were segregated in that manner so that–

Byron R. White:

But after that he can draw it out any time he wants.

William R. Nicholas:

–That is correct.

He could go in and–

Byron R. White:

You would know how much gain there is, wouldn’t you?

William R. Nicholas:


Byron R. White:

And in advance.

So the first dollar you draw out, is that all gain or just part?

William R. Nicholas:

I think the basis would be allocated over the full amount in each portion of–

Byron R. White:

So for every $100 there would be X dollars.

William R. Nicholas:

–Yes, Your Honor.

Byron R. White:

And if he draws out $100 and then he deposits $200–

William R. Nicholas:

Well, I think–

Byron R. White:

–And then… and it becomes an active account, how would you ever know?

William R. Nicholas:

–I think from a practical standpoint, Your Honor, that if he wanted to put any additional money into a passbook savings account, he would have to open a new account so that this could be kept segregated.

Byron R. White:

Would that be a Treasury regulation or what?

William R. Nicholas:

Oh, I think… I’m sure the Commissioner has the authority to issue regulations that would cover this situation, and there would be no loss to the FISC.

Harry A. Blackmun:

Well, suppose it doesn’t?

It certainly is unusual to have basis in cash less than face value, isn’t it?

William R. Nicholas:

Well, I don’t think there is basis in cash, Your Honor, and… and I think that what a passbook account holder has is an interest in that savings and loan association.

It is not the equivalent of cash, and you can’t take it out and buy a television set with it.

He has invested his money in that mutual association, and if he wants to get out, he has to go down and withdraw from that association and give up rights connected with… it is not a debtor-creditor relationship such as with a bank.

Warren E. Burger:

When does he give up… at what stage does he give up those rights?

Not until the last dollar, does he?

William R. Nicholas:

Well, his rights go down as he withdraws your $100… the rights that he has are to participate in the earnings of the… of the association, so that if he has $100, his rights are less than if he has $1,000.

So that as he withdraws, his rights go down proportionally just as with all the other share account holders in the association, relative rights in the association.

John Paul Stevens:

Do you think those additional rights… say he has a $100,000 account… do you think those additional rights make that account worth more than $100,000?

William R. Nicholas:

Oh, yes, they do.

I… I don’t think there’s any question about it.

At least in the litigated cases it shows that mutual associations do have a residual value.

Even the respondent’s own regulations or published rulings show that in certain situations–

John Paul Stevens:

Well, could he sell the account to a third party for more than $100,000?

William R. Nicholas:

–Probably not, Your Honor.

John Paul Stevens:

If it had market value, I don’t know why not.

William R. Nicholas:

Well, I think that perhaps in certain circumstances that does exist, and there is a much litigated case, the Federal Home Loan Bank Board v. Elliot which involved a Long Peach savings and loan association, and when it was going to liquidate and there was a substantial surplus, there was a sudden influx of large depositors.

The Federal Home Loan Bank Board felt that the board of directors of the company was not stepping in fast enough.

It came in and prohibited those large depositors from sharing in the proceeds upon the liquidation, although it actually subsequently changed to a… a merger with a guaranteed stock type association.

But they were not allowed… the Federal Home Loan Bank Board cut off as a certain date the right to share in that… in the residual assets of the association when it was subsequently merged into a stock-type association to prevent, in effect, insider training, which is what happened in the Elliot case.

Thus, in… in Tcherepnin, even without the guidance of a definition in the Securities and Exchange Act such as there is in the Internal Revenue Code that the shares do represent stock, this Court held that the share account holder could bring an action under 10(b)(5) and that such shares were stock.

The respondent seeks to characterize, and the Ninth Circuit unfortunately agreed, that the petitioners’ relationship to Citizens is that of a depositor in a bank.

However, as recently as 1982 this Court rejected by that analogy in Marine Bank v. Weaver, and in that case a depositor in a bank sought protection under Section 10(b) of the Securities and Exchange Act of 1934, and cited as precedent Tcherepnin.

In that case this Court pointed out that Tcherepnin was a different situation.

There, there was a mutual savings and loan association, and the share accounts carried with it the right to dividends based on profit, voting rights, and it was a stock situation, not a debtor-creditor relationship such as with a bank.

Other courts have also looked at the relationship of a stock or a share account holder in a savings and loan association.

William R. Nicholas:

In Wisconsin Bankers, decided by the D.C. circuit in 1961, an action was brought by an association of bankers who claimed that savings and loan associations were competing unfairly with banks because they allowed the share account holders to deposit money on what were called savings accounts.

However, the court said that they were more concerned with the legal realities and not the appearances, and even though these were called savings accounts, they were really share accounts since the represented the capital of the association, and therefore, they were not violating or competing illegally with the banks.

The Ninth Circuit in its opinion below did not discuss one of these cases.

However… and dismissed in its decision the right to vote as having no value.

It, directly contrary to the decisions and the discussion relating to the cases in Tcherepnin, it said that the dividend payments were precisely like interest and not distinguishable, and that the right to share proportionally in the residual value of the association had no value.

We believe that these points are all… the Ninth Circuit was mistaken on each one of those points.

The Ninth Circuit also misapplied the continuity of interest test in the decision below.

William H. Rehnquist:

When you say that the Ninth Circuit was mistaken in determining that the right to share residual value… residual proceeds had no value, do you rely on some sort of evidence or somewhere that that type of thing does have a market value?

William R. Nicholas:

Well, it has a value, Your Honor.

I think in Midwest Savings, a case that was cited which involved the merger of two mutual savings and loan associations, in order to equalize the value a 4 percent bonus dividend was declared by one of the associations just prior to the merger.

In the Federal Home Loan Bank Board case versus Elliot there was a residual value which was recognized where the insiders tried to come in and claim a portion of that value.

Russell, in his volume on savings and loan associations, talks about there being numerous liquidations of savings and loan associations at or above par during the thirty-year period.

In Revenue Ruling 69649 cited in the brief, the respondent in that case… it was the merger of a federal mutual savings and loan association into a stock-type savings and loan association… and in that ruling the share account holders in the mutual received face value accounts in the stock-type association and then received guarantee stock for the residual value for the undistributed profits and the reserves.

So there is a value there.

The share account holders own that value and share proportionally in it if there is a merger or liquidation.

The Ninth Circuit, we believe, also misapplied the continuity of interest test in its decision below when it looked to the change in the proprietary interest received by the Paulsens in the reorganization to determine whether the test was met.

In its opinion the court stated that there was little doubt that the passbook accounts are equity, since they represent the entire capital structure of the association.

However, after making that observation, the court went on to say,

“The critical question, however, is whether the position of the shareholder in the reorganized entity has really changed. “

“Has his risk increased or decreased? “

“Is his investment more or less liquid? “

“This, we suggest, is not the test. “

“The only inquiry is whether a proprietary interest was received, not what kind of a proprietary interest was received. “

As noted by this Court in Minnesota Tea and John A. Nelson, the relationship to the assets can change, but so long as there is a proprietary relationship with the ongoing corporation, there is a proprietary interest which meets the test.

The respondent, we believe, is also making the same incorrect comparison if you examine his published revenue rulings.

In Revenue Ruling 69-3, which involved the merger of two mutual savings and loan associations, the respondent ruled that it was a tax-free reorganization under Section 368(a)(1)(A).

This is the same interest that the petitioners received in this case.

If that ruling is right, how can this be stock for one purpose and not for another?

In other words, the position of the respondent right now is that if there is a mutual… a merger of a mutual association into a mutual association, it is tax free; but if there is a merger of a stock association, such as in this case, into a mutual and the shareholders of the stock association exchange their stock for the only equity the mutual association can give the share accounts, it is not tax free.

We think this is inconsistent and wrong.

William R. Nicholas:

Thus, the only question to be decided is whether the petitioners continued as owners of the reorganized enterprise.

Since passbook accounts by the Court’s own concession are equity, we think this question has to be answered in the affirmative.

I’d like to reserve any remaining time, Your Honor.

Warren E. Burger:

Mr. Lauber.

Albert G. Lauber, Jr.:

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

What happened here is that petitioners sold their stock for the equivalent cash.

We think they should be required to pay tax on their gain just as anybody else would have to do.

It might be helpful to begin with an analogy.

Imagine a wise investor who buys stock in a corporation like IBM when it’s still a new company.

The company prospers, and the investor finds over time that his stock has quadrupled in value.

At that time our wise investor might well decide that he had a great deal of wealth tied up in that relatively risky equity investment, that what has gone up might well come down, and that it would be prudent to take his profits and convert that relatively risky equity investment into a safer and more liquid form.

Now, if our investor chose to do that by selling his stock on the open market for cash, he’d have to pay tax on his gain.

And the result would be the same if instead of selling his stock for cash, he sold it for short-term notes or bonds issued by any individual or by a corporation.

That’s basically what happened here.

Petitioners bought stock in Commerce when it was a very new savings and loan company.

The company prospered.

By 1976, petitioners found that their stock, which they had paid $50,000 for, was now worth about $200,000.

They may have thought this was a good time to sell their stock.

Interest rates had been declining for about two years at this period… at this period.

Savings and loans were doing very well.

Now, if petitioners chose to sell their stock for cash or for promissory notes to an individual or a corporation, they would have had to pay tax on their gain; and it would make no difference if they chose as a mechanism for selling their stock a statutory merger.

For example, if Commerce had merged into an ordinary corporation and petitioners gave up their stock and got back corporate bonds or promissory notes, they’d have to pay a tax on their gain.

If Commerce had merged into a commercial bank and petitioners gave up their stock and got back bank deposits, or savings accounts or CDs, they’d have to pay tax on their gain.

And if Commerce had merged into a stock savings and loan association, and petitioners gave up their stock and got back not stock, which would have been a relatively risky investment, but savings accounts, they would have had to pay tax on their gain.

The only question here, therefore, is whether the result should be different merely because the vehicle petitioners chose to cash out their investment was a merger not with a bank or with a stock savings and loan, but with a mutual savings and loan whose savings accounts happened to carry with them certain proprietary features like the right to vote.

We submit such a difference in outcome is unjustifiable because those proprietary interests simply have no value.

We think the entire case boils down to one simple proposition.

It’s clear that if petitioners had sold their stock for bank deposits, it would have had to pay tax.

There’s no reason why the result should be different, that they should be able to avoid paying tax because they sold their stock for bank deposits plus something else where that something else has no economic value.

Sandra Day O’Connor:

Well, Mr. Lauber, had the taxpayer obtained stock in a… or obtained the interest obtained in this case on a merger with another mutual, assuming the ownership had been in a mutual to begin with, there would have been a tax-free reorganization apparently?

Albert G. Lauber, Jr.:

That’s right.

Our… our position is that we had a mutual merging into another mutual.

Nothing really happens.

The mutual account holders get back their exact same account with a different obligor on the passbook.

The name of the obligor changes.

Sandra Day O’Connor:

And if there’d been a mutual into a stock type savings and loan–

Albert G. Lauber, Jr.:

There again, typically the mutual–

Sandra Day O’Connor:

–it would be a tax-free reorganization?

Albert G. Lauber, Jr.:

–We agree with that as well, Justice O’Connor.

Sandra Day O’Connor:

Or a stock type into a stock type.

Albert G. Lauber, Jr.:

That would also be tax free, or it could be done tax free.

Sandra Day O’Connor:

So it’s just this one instance where it’s a stock type into a mutual–

Albert G. Lauber, Jr.:


Sandra Day O’Connor:

–that IRS takes a contrary view.

And that’s a little hard to understand.

Albert G. Lauber, Jr.:

Well, the reason is it’s only in this stock into mutual regime where you have shareholders cashing out an equity investment.

In the other examples, mutual into mutual or mutual into stock, the old account holders remain account holders.

There’s simply a different name on the passbook of the obligor.

It’s not an appropriate occasion for taxing anybody.

Sandra Day O’Connor:

Well, is our proper inquiry, since it meets technically the statutory requirements for a tax-free reorganization, is our inquiry in… should it be directed to whether it’s a continued proprietary interest?

Is that our whole focus here?

Albert G. Lauber, Jr.:

That’s one of our two submissions; that there is no continuing proprietary interest because the value of the proprietary interest obtained is very close to zero, and that is not a substantial interest within the meaning of Minnesota Tea and this Court’s other cases.

Sandra Day O’Connor:

Well, does this mean that in the future you would be urging that we would apply a similar analysis to all hybrid instruments… for instance, preferred stock received on a reorganization?

Albert G. Lauber, Jr.:

Well, preferred stock has always been treated by the Commissioner as stock.

Convertible bonds–

Sandra Day O’Connor:

Well, but you can make the same kind of an argument.

If you’re going to open it up into looking into hybrid instruments in the way you suggest, I suppose a lot of exchanges in the future would be at risk that hadn’t been questioned so far.

Albert G. Lauber, Jr.:

–I don’t think that’s true, Justice O’Connor, because this interest here on its face is not stock; it’s a savings account.

And I think it’s not we but petitioners who are trying to recharacterize this as something other than it is.

And the normal case of preferred stock would never be recharacterized… typically would not be recharacterized as that unless it were a very, very shaky corporation.

Albert G. Lauber, Jr.:

And I don’t think this position we’re taking here is inconsistent, because the point of the continuity of proprietary interest test is to find out if the shareholder has cashed out or continued his equity investment.

Here, these people clearly cashed out their investment.

Lewis F. Powell, Jr.:

Mr. Lauber, isn’t the Government’s position as simple as this: that there can never be a tax-free measure of a stock S&L into a mutual S&L?

Albert G. Lauber, Jr.:

That is our position.

But I would… I would–

Lewis F. Powell, Jr.:

Do you think Congress intended that in the Reorganization Act?

Albert G. Lauber, Jr.:

–I think, Justice Powell, that Congress never really spoke to that.

Congress plainly recognized on different occasions that a merger that takes the form of a merger could be characterized as a sale, even where S&Ls are involved.

But I would like to point out that the fact that Commerce could not merge into Citizens the way they did it doesn’t mean that Commerce could not have effected a merger.

Commerce could have found a stock savings and loan and merged with it.

Lewis F. Powell, Jr.:

You’re not assuming that one who wishes to merge always can find precisely the partner that would be desirable, most desirable?

In other words, mergers are the result of a great many considerations.

Albert G. Lauber, Jr.:

Well, that’s right.

Lewis F. Powell, Jr.:

Let me ask another question.

Albert G. Lauber, Jr.:

Well, may I finish answering your first one?

Lewis F. Powell, Jr.:

Yes, sure.

Albert G. Lauber, Jr.:

The other alternative Commerce had was to have Citizens convert from a federal mutual association into a federal stock association.

That conversion–

Lewis F. Powell, Jr.:

Or they couldn’t have merged at all.

Albert G. Lauber, Jr.:


But if they wanted to merge with that company, they could have converted Citizens from a mutual into a stock organization.

The IRS has ruled that that conversion would be tax free.

Following the conversion, Commerce could have merged into Citizens on a stock-for-stock exchange, and that would have been tax free.

Now, the only down side to that would be that petitioners would have had to take back stock rather than savings account, and could therefore not have cashed out their equity investment.

But that down side is a down side the Revenue Code imposes when people sell their stock for cash.

So the Commissioner here is not obstructing mergers.

And relevant to the petitioners’ concerns about the health of the S&L industry, I should make the point what the effect of this cashing out process is on the balance sheet of the corporation and therefore on its financial health.

When petitioners owned stock in Commerce, their stock investment was reflected on the balance sheet as a large retained earning shareholder’s equity account.

That account functioned as a reserve or cushion that protected the organization and the deposits against the risk of loss.

As a result of the merger, petitioners gave up their equity interest and got back garden variety savings accounts.

Albert G. Lauber, Jr.:

Now, the effect of that was to convert what used to be a cushion, a shareholder’s equity, into a short-term debt obligation of the organization; and therefore, the effect of this by cashing these people out was, relatively speaking, to diminish rather than enhance the well-being of the society.

And the point is–

Sandra Day O’Connor:

Well, doesn’t that assume the answer to say what they got back was a garden variety savings account?

The whole question is whether an account in a mutual organization is a garden variety account.

Albert G. Lauber, Jr.:

–Well, let’s analyze that–

Sandra Day O’Connor:

It carries characteristics that may make it equivalent to a proprietary interest.

That’s the whole point.

And you keep sliding over that and treating it a something different.

Albert G. Lauber, Jr.:

–Well, let me address it more directly then, because that is the key question in the case.

I think one reason the courts of appeals have occasionally had trouble seeing the common sense truth of our position is that the mutual savings account are kind of a freak of nature in modern American society, because they are… you have one piece of paper that has the dichotomous qualities of debt and equity at the same time.

And it might be helpful if we could imagine splitting up that one piece of paper into two discrete instruments; that is, imagine here that petitioners gave up their stock in Commerce and got back two pieces of paper.

The first piece of paper, let’s say, would be a corporate IOU.

I owe you $200,000 payable on demand, plus interest.

That would be a garden variety bank deposit.

They also got back a second piece of paper which we might call a membership certificate in Citizens that said you’re hereby a member, and you can vote and so forth.

The question is is that second piece of paper worth anything; would anybody pay you any money for that second piece of paper?

I think the answer is clearly no.

William H. Rehnquist:

Well, what do you say in response to your opponent’s contention that the Elliot case and some others have recognized the fact that there is a residual value that the owners have?

Albert G. Lauber, Jr.:

Well, some… it’s possible that some merger deals might be constructed where you might be able to kick out a little bit of bonus money to the mutual shareholders, but that was not done here.

The facts of this merger agreement show that the parties who negotiated the deal placed absolutely no economic value on these residual proprietary interests.

William H. Rehnquist:

But in those other cases I take it that the residual value may not have appeared until liquidation.

Might not the same thing happen here, that if they decide to liquidate, perhaps there would be some residual value?

Albert G. Lauber, Jr.:

Well, it’s possible, although this Court in Society for Savings v. Bowers characterized that residual interest in the liquidation as being so remote a contingency as to reduce to the vanishing point on the theory that the solvent liquidation of an S&L is very unlikely.

William H. Rehnquist:

But that’s a question of fact, isn’t it?

I mean certainly this Court can’t just by picking out law books and citing precedents know whether something like that does have a value or not.

Albert G. Lauber, Jr.:

Well, I could point out that the Federal Home Bank… Home Loan Bank Board, which must approve liquidation, has never approved liquidation of a solvent federal savings and loan.

And that fact is recorded in the York case of 1980 and Revenue Ruling 80-105.

So, in fact, these things… maybe there have been liquidations of state S&Ls, but not of federal S&Ls like Citizens.

Lewis F. Powell, Jr.:

Mr. Lauber.

Mr. Lauber, may I ask this question?

Lewis F. Powell, Jr.:

Do you agree that your position is contrary to that taken by two courts of appeals, and the court of claims, and two district courts?

Albert G. Lauber, Jr.:

It is contrary to all those courts.

Lewis F. Powell, Jr.:

And is it your suggestion that all, what is it, five of those failed to exercise common sense and good judgment?


Albert G. Lauber, Jr.:

I think they were just… they were just bamboozled by the form of the thing and–

Lewis F. Powell, Jr.:

Bamboozled by whom?

Albert G. Lauber, Jr.:

–They never looked to the substance of it.

But to go back to my example–

Lewis F. Powell, Jr.:

Wait just a minute.

Let me ask you another question.

What about the problem of being fair to taxpayers generally?

I realize the reputation of the Internal Revenue Service is very technical and not necessarily always fair, and I would understand that.

But here you have a case where since 1971 if a lawyer were advised or asked to advise a client, he would find that cases uniformly have taken a position contrary to the one you take here today.

I realize the Commissioner has never acquiesced in it, but what do people do when they wish to consider a measure, counsel tells them that five courts, including… well, the tax court would make six… have said that they may do so on a tax-free basis?

And here they come along, and the Government says you’ve got to pay us some taxes.

Is that fair?

Albert G. Lauber, Jr.:

–Well, we didn’t just come along now.

We were on the public record in 1969 as ruling that a stock into a mutual merger where the old shareholders are cashed out does not qualify for tax-free treatment.

That ruling antedated all the court of appeals cases, and we kept litigating it in court after court; and now we finally won one, and that’s why we’re in this court, and you’re the Supreme Court.

And the fact that people may have relied on lower court opinions in the face of our obvious resistance doesn’t set up any estoppel of alliance interest they can rely on.

They knew there was a risk that the Commissioner would always contend that this merger was not a tax-free reorganization.

And they took that–

Sandra Day O’Connor:

Well, Mr. Lauber, had the Commissioner taken a contrary position prior to 1969?

Albert G. Lauber, Jr.:

–I don’t think–

Sandra Day O’Connor:

It was my understanding that the Commissioner treated it differently and thought it was a proprietary interest to have an account in a mutual before that time.

So was the earlier Commissioner bamboozled, do you suppose?

Albert G. Lauber, Jr.:

–Well, as I understand it, the Commissioner had not taken any public ruling position on the question before 1969.

There was an in-house position which may have been reflected in some private letter rulings to the… to support the petitioners’ position.

But what happened in 1968 is that the Commissioner received a huge barrage of requests for private letter rulings as to the tax results of this kind of merger.

People wanted him to bless one of these mergers in advance.

Albert G. Lauber, Jr.:

The reason for that, I think, is that between October of 1966 and August of ’68 the value of savings and loan stocks as reflected in Standard 8 Poor’s S&L index quintupled in value.

So you had an awful lot of shareholders in stock S&Ls with a huge unrealized gain on their stock.

They wanted to merge and cash out their investment.

The Commissioner got this huge influx of requests for private rulings, and the rulings branch of the IRS realized that the Commissioner had not looked at this area for a long period of time.

During the interim, up until ’69, as we note in our brief, there’d been a long series of congressional amendments to the both banking and regulatory and tax treatment of S&Ls.

They were tax exempt until 1951, and Congress gradually began an incremental process changing the way they were treated.

At the same time, their economic function changed.

They became less and less like true mutual organizations and more and more like banks.

That’s reflected in the legislative treatment.

So what happened was the Commissioner got this huge bunch of ruling requests and decided it was a good time to review the area authoritatively in light of all the changes that had occurred on the congressional front, and he did so and issued the three rulings in question.

And I think that this is simply a reasoned response to changes in the economy and in the way Congress treated these organizations.

They are really not like… like true mutual organizations.

They’re like banks that pay rate of return like banks pay interest, and they’re just fungible with other financial institutions.

John Paul Stevens:

May I ask you a question about… you mentioned that the value of the stock before the merger, the stock in Commerce, was set up on the balance sheet as a retained… equivalent to the retained earnings.

Are the balance sheets in the record of the merging companies?

Albert G. Lauber, Jr.:

I don’t believe they are, because the case–

John Paul Stevens:

Do you know what, for example, their fixed assets were?

Albert G. Lauber, Jr.:

–I don’t think that’s in the record, because the case is stipulated on the tax court, and there’s a very brief set of stipulated facts.

John Paul Stevens:

I gather it’s your position that the stock, in effect, represented sort of the net worth of the company, the excess of assets over liabilities.

Albert G. Lauber, Jr.:

In Commerce, that’s right.

John Paul Stevens:

And why wouldn’t it be possible that after the merger you would have a new company that had some kind of big… a couple of buildings and maybe owned some real estate and one thing and another, in which there would be fixed assets in which the various depositors would have a prorata share just as if they owned stock?

And if so, why wouldn’t it be the same kind of proprietary interest?

Albert G. Lauber, Jr.:

It would probably be peanuts really, because when you think about it, the–

John Paul Stevens:

Well, I’ve been in some pretty big savings and loan company buildings that are pretty fancy-looking buildings.

Albert G. Lauber, Jr.:

–But the bulk of their assets are mortgage loans, not, you know, bricks and mortar and typewriters.

I mean–

John Paul Stevens:

But the net worth sometimes is partially represented by their fixed assets.

Albert G. Lauber, Jr.:

–That… there could be… could be some.

But it’s clear that the parties who negotiated the merger here didn’t think it was worth anything, because the merger agreement says that… places a value of $12 a share on the Commerce stock petitioners gave up.

In exchange for that, each share, they got a $12 deposit in a Citizens passbook account.

Albert G. Lauber, Jr.:

That $12 deposit consisted of the right to withdraw $12, which was worth $12, plus these membership rights.

John Paul Stevens:

Yes, but also, I suppose if they struck oil just after the merger in the new company, that passbook would give you an interest in the oil well, wouldn’t it?

Albert G. Lauber, Jr.:

I suppose if they struck oil right after the… after the merger, and they were then to liquidate the company, the shareholders–

John Paul Stevens:

Which might be advisable under circumstances.

Albert G. Lauber, Jr.:

–might get… might find… might get some… something beyond their savings account.

William H. Rehnquist:

Well, sometimes a bond is issued at a discount.

I don’t know that it’s necessarily always factually true that a promissory note from a particular obligor is always worth the face value at the time it’s issued, which is your assumption, I take it.

Albert G. Lauber, Jr.:

Well, if we assume that these people negotiated the merger at arm’s length and that the savings accounts… or an arm’s length rate of interest, as they must have done, the right to withdraw $12 from a federally-insured savings and loan… this is a federally-insured deposit we’re talking about… must be equal, more or less, to $12.

And if that’s so, and the stock they gave up is worth $12, there’s nothing left… there’s no value left to assign any value to those proprietary interests they got.

William H. Rehnquist:

But that… that’s a very abstract, hypothetical type of argument you’re making; that because… and, you know, you can certainly argue that, but we’re not a fact-finding tribunal.

Has there ever been a specific finding of fact by any court that purported to find facts in this case that there was or was not a value to the so-called equity interest?

Albert G. Lauber, Jr.:

Well, the court of appeals… I guess it wasn’t really a finding of fact; it was a characterization… said that the proprietary interest had no value; and they relied on a number of… of reasons for that.

And it’s clear if one looks at what those interests are that they don’t have a great deal of value.

I mean the right to vote in a savings and loan has no value on its face, and in practice, most S&L account holders sign away their right to vote when they open their account by executing a proxy to management in favor of management to vote their votes on behalf of them.

I doubt if there’s anybody in this room who’s ever voted in a savings and loan association.

It’s just not the kind of thing people would pay money for.

And the right to share in the liquidation proceeds again was extremely contingent and speculative, because you would have to get Federal Home Loan Bank Board approval for a liquidation, and they’ve never approved liquidation of a solvent S&L.

So if you kind of break the rights down on a piece-by-piece basis, it’s clear that no one would pay any money for those interests; and that fact is reflected in the… in the merger agreement.

William H. Rehnquist:

Well, what if this outfit were to merge into some other outfit?

Albert G. Lauber, Jr.:

If Citizens were to merge into another organization?

William H. Rehnquist:


Albert G. Lauber, Jr.:

Well, it would depend on how that merger were… were constructed.

If it were a mutual to mutual merger, the Citizens people would just get back another savings account in the same amount–

William H. Rehnquist:

What if it were mutual to stock?

Albert G. Lauber, Jr.:

–If it was a mutual to stock, the way those deals are done in practice, as I understand it, is that the mutual account holder will get back another account in the same dollar amount from the new enterprise.

And beyond that, he will get what’s called a liquidation account equal to his residual interest in the ultimate liquidation value.

The way these deals are done in practice, a liquidation account is simply a balance sheet entry.

The… the account holder cannot sell it, exchange it or cash in on it in any way.

William H. Rehnquist:

Of course, your… your opponent disagrees with you, and I wonder if these aren’t arguments that should be made to a fact-finding tribunal to a tribunal that simply decides questions of law.

Albert G. Lauber, Jr.:

Well, Justice Rehnquist, I think all these arguments are simply directed to show that the interest these people got beyond the interest of account holders as proprietors was not substantial.

Albert G. Lauber, Jr.:

Whether it was zero or one-tenth of one percent or two percent, it was not substantial.

And this Court set out the relevant test in Minnesota Tea where it said that the shareholders of the old enterprise must get a proprietary ownership interest that represents a substantial part of the value of the thing transferred.

The thing transferred here was the Commerce stock.

The value of the thing transferred was $12 per share.

And I think it’s clear–

John Paul Stevens:

On that substantiality question, may I just interrupt because I’m trying to think this thing through.

Presumably the assets… I notice there are noncompetition agreements in the merger here.

Presumably the assets have some earning capacity and which is somewhat higher than if they just deposited the money at flat interest rates.

And to the extent that that’s true, isn’t that the amount of equity, you might say, that they have here, and isn’t it precisely the same amount it would have been if it had been a stock-for-stock transaction?

So why is one substantial and the other insubstantial?

Albert G. Lauber, Jr.:

–But the thing is the petitioners would never get anything beyond the… what was, in effect, a passbook rate of interest.

I mean given the market place and the competition among banks and different kinds of S&Ls, they’re all paying competitive rates of interest; and it’s not the case that the mutual S&L because between earnings will pay a higher rate of interest.

They all pay the same thing.

And therefore, the account holder can never cash in on the earnings power, because all he ever gets, all he’s entitled to is that basic rate of interest, the market rate of interest.

So although he has a notional interest in–

John Paul Stevens:

If it were a stock-for-stock transaction, could he sell the stock separately without selling his account after a merger?

Say this had been a stock-for-stock transaction, wouldn’t he also just have to sell that when he closed out the account?

Isn’t that how these things work?

Albert G. Lauber, Jr.:

–I don’t think… no, as I understand it, there usually isn’t any linkage between stock ownership and depositor status in a stock S&L.

In fact, usually the two groups of people are totally separate.

And I think normally it would be possible if you had a stock-for-stock deal and got stock back, you could keep your deposit and sell your stock or vice-versa.

There’d be no automatic linkage between the two.

I’d like to make one final kind of argument that… directed to petitioners’ contention that their concern is with the health of the savings and loan industry.

They point out that the S&L industry is currently in a depressed situation, that Congress has often voiced the intention to help them out, and that the Commissioner should not be able to come along and throw a big tax monkey wrench into the deal and prevent an otherwise desirable S&L merger.

I’d like to point out first of all that the Commissioner has publicly ruled that the vast majority of S&L mergers can be done tax free; that is, mutual to mutual, mutual to stock, and stock into stock.

Furthermore, Commerce here, had they wanted to merge tax free, could have had Citizens convert to a stock form of organization, which would have been tax free, and then do a stock-for-stock transaction.

That would have been bad for petitioners, because they would have had to get back stock rather than cash and therefore pay tax in order to avoid paying tax.

Lewis F. Powell, Jr.:

Mr. Lauber?

Albert G. Lauber, Jr.:


Lewis F. Powell, Jr.:

May I ask you one more question?

Lewis F. Powell, Jr.:

Assume that the consideration received by the stockholders of Commerce in the merger had been ten-year notes, nothing else, and the notes had the same equity interest that the CDs and the savings account had in this case; that is, a right to vote and the right in the event of litigation… of liquidation to participate.

Would that make any difference to your position?

Albert G. Lauber, Jr.:

It would not, Justice Powell, because in that event it would–

Lewis F. Powell, Jr.:

So it… it’s immaterial how long they… they had the right to vote, for example.

Albert G. Lauber, Jr.:


Because in order for this to be–

Lewis F. Powell, Jr.:

You would… you would concede that’s normally an equity interest, wouldn’t you?

Albert G. Lauber, Jr.:

–No, we would not say a long-term bond is equity.

Lewis F. Powell, Jr.:

If it had the right to vote?

Albert G. Lauber, Jr.:

No, that would not be equity either.

In fact, we’re ruled that convertible bonds are–

Lewis F. Powell, Jr.:

It’s a proprietary right.

Don’t the cases say that?

Albert G. Lauber, Jr.:

–Well, the right to vote is normally… is something stockholders normally have, so that people who–

Lewis F. Powell, Jr.:


If you’re a stockholder in Commerce and you end up with only the right to vote that is in the mutual company, don’t you… haven’t you retained that identical right?

Albert G. Lauber, Jr.:

–Well, the fact that you have a right to vote doesn’t mean you have stock.

I mean I have the right to vote in charities that I give money to, but that doesn’t make me a stockholder.

Lewis F. Powell, Jr.:

What’s the difference?

As a practical matter, what’s the difference?

Albert G. Lauber, Jr.:

Well, what you need to have an equity interest is more than a right to vote in an organization.

You need to have some real stake in the… some risky stake–

Lewis F. Powell, Jr.:

If you had a common stock ownership, what would you have other than the right to vote?

You’d have the possibility of appreciation but also the possibility of substantial depreciation.

Albert G. Lauber, Jr.:

–That’s right.

And here there is no bottom… no real down side risk because they had… these people got a federally-insured savings account.

A stockholder in a normal corporation has unlimited down side risk and unlimited up side potential, plus the right to dividends–

Lewis F. Powell, Jr.:

Suppose you had a capitalization for the very small issue of prior preferred stock outstanding with a very substantial common equity underneath it so your preferred stock let’s say matured in five years with a right to vote.

Would that be an equity interest?

Albert G. Lauber, Jr.:

–Could you give that to me again?

Albert G. Lauber, Jr.:

I’m sorry.

I didn’t take–

Lewis F. Powell, Jr.:

Preferred stock, prior preferred stock that… that had to be surrendered in ten years or could be redeemed within five or ten years, but a right to vote accompanied it.

Would that be a proprietary–

Albert G. Lauber, Jr.:

–That would–

Lewis F. Powell, Jr.:

–Would that be a proprietary interest?

Albert G. Lauber, Jr.:

–The Commissioner has probably ruled on that kind.

I don’t know what the ruling is.

I would suspect that that would held… would be held to be stock, because there is a risk of nondividends for the entire period of the ownership prior to redemption, and the risk the company could go bankrupt, and you’d get nothing at all.

So I would suspect that would be stock.

John Paul Stevens:

May I ask one other factual question?

Prior to the transaction at issue in this case, supposing the petitioners… they own, I think, 17,500 shares… could they have sold 1,000 of those shares to somebody for cash without changing their… their… their borrowing account… I mean, no, their deposit accounts at the institution?

In other words, was the stock in Commerce transferrable independent of the bank account?

Albert G. Lauber, Jr.:

I don’t think the record reflects that.

I would… I’d suspect the normal practice is that it would be transferrable independently.

John Paul Stevens:

Because if it… if… if it were, then it would be… that would be a difference between the character of the ownership before the merger and the character afterward… the character of the ownership interest and the equity in that institution.

But you say the record doesn’t tell us that.

Albert G. Lauber, Jr.:

I don’t think it reflects whether the shares were freely transferrable before the merger.

John Paul Stevens:

Because if they’re not, they’re kind… they’re really not much different from… from mutual ownership.

Albert G. Lauber, Jr.:

Well, I mean if… if it were the case they had to simply withdraw their money from the account in order to sell their stock, that wouldn’t be a terribly onerous burden really.

I mean it wouldn’t be like a restrictive stock agreement where you couldn’t sell at all.

John Paul Stevens:

No, but it would… would prevent the stock from having an independent value from the accounts.

It’d be a prorata interest in the business that was exactly proportionate to the prorata interest in total deposits, which is what you’ve got now.

Albert G. Lauber, Jr.:


I think the… if that were true beforehand, that you couldn’t sell your stock unless you also withdrew your money from the institution, you could simply withdraw your money and sell your stock.

I mean it wouldn’t be… you wouldn’t have to satisfy anybody of anything before you did that.

John Paul Stevens:

Well, you say the record doesn’t tell us.

Albert G. Lauber, Jr.:

I don’t… I don’t believe it does.

Warren E. Burger:

You have one minute remaining, Mr. Nicholas, if you have anything further.

William R. Nicholas:

Thank you.

William R. Nicholas:

I would just like to point out in closing that the test of the proprietary interest received should not be how risky it is.

It is whether it is a proprietary interest that should control.

And once one gets down… started down the line of whether there is a risk, then how do you take into account preferred stock, how do you value the equity interest, how can you separate the equity interests from the other interests that one has?

I think it’s a dangerous way to go, and I… I would urge this Court that if we are going to depart from the line of cases that have held what the rights and obligations are of a share account owner in a savings and loan association, it is something that should be addressed to Congress.

Sandra Day O’Connor:

Mr. Nicholas, is there anything in the record to respond… enable you to respond to Justice Stevens’ last question?

William R. Nicholas:

I do not believe there is anything in the record, Justice O’Connor.

My understanding is that they are separate; they could be transferred from a guarantee stock type association.

John Paul Stevens:

They could be sold separately.

William R. Nicholas:


John Paul Stevens:

But you didn’t bring that out in the record.

I wonder why.

William R. Nicholas:

Thank you, Your Honor.

Warren E. Burger:

Thank you, counsel.

The case is submitted.