Commissioner v. Morris Trust

367 F.2d 794 (1966)

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Commissioner v. Morris Trust

United States Court of Appeals for the Fourth Circuit
367 F.2d 794 (1966)

Facts

American Commercial Bank (American), a North Carolina bank chartered under state law, sought to merge with Security National Bank of Greensboro (Security National), a national bank chartered under federal law. The parties wanted the merged company to operate under the national charter, not the state charter. American had operated an insurance division. However, a nationally chartered bank could not lawfully operate such an insurance division. To avoid breaking the law, the parties organized the transaction so as to spin off American’s insurance business before the merger. American transferred its assets connected with the insurance business to a newly formed corporation, American Commercial Agency, Inc. (ACA), in exchange for ACA’s stock, which American then distributed to its own shareholders (plaintiffs). American then merged with Security National, with Security National as the surviving entity. After the merger, American’s banking business continued to be operated by Security National. American’s shareholders treated their receipt of the ACA stock as tax-free. The Internal Revenue Service (IRS) (defendant) disagreed, arguing that, when the spin-off of the insurance company and the merger of the banks were stepped together, the overall transaction did not qualify as a tax-free reorganization. The United States Tax Court ruled in favor of the shareholders, and the IRS appealed.

Rule of Law

Issue

Holding and Reasoning (Haynsworth, C.J.)

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