Solomon v. Commissioner

Sidney Solomon (plaintiff) and his wife, along with Samuel Katkin and his wife, owned Quinn Manufacturing Corporate (Quinn) and Detroit Bolt and Nut Company (Detroit). Each of the four shareholders owned 25 shares of Quinn’s stock. Detroit’s outstanding capital stock was owned by Quinn (300 shares), Mr. Solomon (1,391.5 shares), Mrs. Solomon (931.5 shares), Mr. Katkin (1,522 shares), and Mrs. Katkin (783 shares). In August 1968, the Solomons and Katkins entered into an acquisition agreement and reorganization plan with Whittaker Corporation, in which all of the Quinn and Detroit shares would be exchanged for Whittaker voting stock. Pursuant to the agreement, Mr. Solomon received 6,037 shares of Whittaker’s $5 par value preferred stock and 22,890 shares of Whittaker common stock in exchange for his shares of Quinn and Detroit. Mrs. Solomon received 3,963 shares of Whittaker preferred stock and 15,027 shares of Whittaker common stock. Additionally, Whittaker agreed to transfer additional shares of common stock to the Solomons if the Solomons retained the common stock they initially received until August 1971, and, at that time, the value of the Whittaker stock was worth less than 120 percent of its value as of August 1968 or if the preferred shares the Solomons initially received was valued at less than $100 a share. Until 1971, Whittaker placed the shares that might be issued to the Solomons in 1971 in a reserve account, but the Solomons were not able to vote the stock or receive dividends payable on it. The agreement did not include any provision for Whittaker to pay the Solomons interest on the additional shares for the time the shares were held in reserve. On their 1971 joint income tax returns, the Solomons did not declare any part of the 1971 deferred stock payments as interest income. The Commissioner of Internal Revenue (the commissioner) (defendant) determined that the Solomons owed a deficiency of over $46,000 to account for the interest portion of the deferred payments received in 1971. The Solomons brought a lawsuit against the commissioner in United States Tax Court, arguing that the deferred payments related to a tax-free reorganization should not be taxed. The tax court affirmed the commissioner’s deficiency. The Solomons appealed to the United States Court of Appeals for the Second Circuit.