Harold T. And Marie T. Paulsen v. Commissioner of Internal Revenue

Pursuant to a merger plan between a stock savings and loan association and a mutual savings and loan association, shareholders in the stock association exchanged their “guaranty shares” for passbook accounts and time certificates of deposit in the mutual association. The Tax Court, believing that it was “constrained to follow the guidelines of several circuit court decisions holding [transactions such as this one to be tax free],” held the exchange to be a stock for stock transaction not taxable under 26 U.S.C. § 354 . Paulsen v. Commissioner, 78 T.C. 291, 302-303 , 303 n. 24 (1982).

On appeal, the Government argues that the predominant characteristics of the passbook accounts and time certificates received in the exchange are those of debt rather than those of equity, and that, in reality, the shareholders simply sold their guaranty shares for the equivalent of cash. We agree and therefore reverse.

I

The material facts are not in dispute.

Commerce Savings and Loan Association (Commerce) was a stock savings and loan association chartered by the State of Washington and authorized to issue guaranty stock, to offer various classes of savings accounts, and to make loans. Each…