## Facts

- A shareholder of Long-Bell sought an income tax refund for 1956 after the IRS treated part of the merger consideration she received as taxable “other property.”
- In November 1956, The Long-Bell Lumber Corporation (Maryland) and The Long-Bell Lumber Company (Missouri) merged into International Paper Company (New York) as the surviving corporation.
- Long-Bell shareholders received, in exchange for their Long-Bell shares:
  - Whole shares of International common stock;
  - Rights to fractional shares of International common stock; and
  - “Certificates of Contingent Interest” representing a contingent interest in reserved International common shares.
- The certificates reflected a deferred, conditional possibility of receiving additional International shares, depending primarily on the outcome of pending litigation involving Missouri and related contingencies.
- The certificates lacked ordinary current incidents of stock ownership (e.g., present voting and dividend rights) and represented a separate, contingent claim to possible future stock.
- The merger’s business purpose and qualification as a reorganization were not disputed; the dispute centered solely on the tax characterization of the certificates.
- The parties stipulated that if the certificates were “stock” under I.R.C. § 354(a), the taxpayer would recover; if they were “other property” under § 356(a)(1), the government would prevail.
- The district court entered judgment for the United States; the taxpayer appealed.

## Issues

1. Whether “Certificates of Contingent Interest” received in a qualifying statutory merger constitute “stock” within I.R.C. § 354(a), permitting nonrecognition of gain.
2. Whether those certificates instead constitute “other property” under I.R.C. § 356(a)(1), requiring recognition of gain to the extent of their fair market value.

## Decision

- The Eighth Circuit affirmed the judgment for the United States.
- The court held the Certificates of Contingent Interest were not “stock” under I.R.C. § 354(a).
- The court held the certificates were “other property” within I.R.C. § 356(a)(1).
- Accordingly, gain was recognizable to the extent of the certificates’ fair market value, even though the exchange otherwise involved qualifying stock in a reorganization.

## Legal Principles

- In a reorganization exchange, I.R.C. § 354(a) provides nonrecognition only when a taxpayer receives solely “stock or securities” for “stock or securities.”
- If, in addition to qualifying stock or securities, the taxpayer receives “other property or money,” I.R.C. § 356(a)(1) requires recognition of gain up to the amount of money and the fair market value of the other property received.
- Characterization turns on the substantive rights received at the exchange date, not labels; an instrument tied to possible future stock can still be “other property” if it does not represent a present equity interest.
- An interest treated as “stock” for § 354 purposes ordinarily carries typical incidents of stock ownership (e.g., present voting rights and participation in dividends and earnings), rather than being a segregated, contingent claim dependent on future events.

## Conclusion

The court treated contingent certificates received alongside acquirer stock in a statutory merger as taxable “other property” under I.R.C. § 356, not “stock” under § 354, requiring gain recognition to the extent of the certificates’ fair market value.


Carlberg v. United States, 281 F.2d 507 (8th Cir. 1960)