Chapman v. Commissioner

ITT, a multinational corporation, became interested in acquiring Hartford Fire Insurance Company (Hartford) in 1968. Hartford initially rejected ITT’s offer to merge the companies. Between November 1968 and March 1969, ITT purchased shares of Hartford totaling 8 percent of Hartford’s outstanding stock from mutual funds and on the open market in cash purchases. In April 1969, Hartford and ITT reached an agreement for the two corporations to merge through a stock-for-stock exchange. Hartford’s shareholders transferred a controlling interest in Hartford for voting stock in ITT. Some of the shareholders (collectively, the plaintiff shareholders) (plaintiffs) believed that the merger qualified for nonrecognition as a B reorganization. Under § 368(a)(1)(B) of the Internal Revenue Code, a B reorganization, in which at least 80 percent the stock of one corporation is acquired by another corporation solely in exchange for voting stock of the acquiring corporation, is tax-free. The Commissioner of Internal Revenue (the Commissioner) (defendant) assessed tax deficiencies against the plaintiff shareholders. The Commissioner reasoned that the reorganization was not a tax-free B reorganization because ITT did not acquire Hartford solely in exchange for ITT voting stock. Instead, ITT’s initial acquisition of 8 percent of Hartford’s stock was for cash. The United States Tax Court disagreed with the Commissioner and held that the merger did qualify as a B reorganization because 80 percent or more of Hartford’s stock was acquired solely for ITT voting stock. According to the tax court, the initial 8 percent purchase of Hartford stock for cash was irrelevant to the determination. The Commissioner appealed.