Paulsen v. Commissioner

Harold and Marie Paulsen (plaintiffs) held 17,459 shares of stock in Commerce Savings and Loan Association (Commerce), of which Harold served as president. Commerce merged into Citizens Federal Savings and Loan Association (Citizens), which had no capital stock. In exchange for their stock in Commerce, which had a basis of $56,802, the Paulsens received passbook savings accounts and certificates of deposit in Citizens worth $209,508. The Paulsens did not pay tax on the $152,706 difference. Commerce’s savings-account holders had one vote for each $100 up to a maximum of 400 votes, and each borrower had one vote. Earnings were distributed into the savings accounts twice per year as dividend distributions. The certificates of deposit were withdrawable with 30 days’ notice. The Commissioner of Internal Revenue (the commissioner) (defendant) assessed a deficiency. The Paulsens sought a redetermination in the United States Tax Court. The court held that because the savings accounts and certificates of deposit were the only available forms of equity in Citizens, the Paulsens had a continuity of interest in Citizens sufficient to make the merger a tax-free reorganization. The commissioner appealed. The federal appellate court reversed, reasoning that the savings accounts were essentially the equivalent of cash. The Paulsens appealed. The United States Supreme Court granted certiorari.