## Facts

- Sidney R. Solomon and Beatrice Solomon owned stock in Quinn Manufacturing Corporation and Detroit Bolt and Nut Company.
- In 1968, the Solomons and other shareholders entered into an acquisition agreement with Whittaker Corporation to exchange their Quinn and Detroit shares for Whittaker voting stock in a transaction intended to qualify as a tax-free reorganization under I.R.C. §§ 354(a)(1) and 368(a)(1)(B).
- The Solomons received substantial blocks of Whittaker preferred and common stock in 1968 upon closing.
- Because of valuation concerns, the agreement included a “price-protection” provision under which Whittaker might transfer additional common shares in 1971 if the initially received stock failed to meet specified value benchmarks as of August 19, 1971.
- Shares potentially issuable in 1971 were placed into a reserve account until 1971; during the reserve period, the Solomons had no voting rights and no dividend entitlement as to those reserved shares.
- The agreement did not provide for stated interest on any delayed or contingent stock issuance.
- In 1971, the value-based formula resulted in Whittaker delivering additional shares to the Solomons.
- On their 1971 return, the Solomons did not report any portion of the 1971 shares as interest income.
- The Commissioner determined a 1971 deficiency of $46,492.42, imputing interest under I.R.C. § 483 to part of the 1971 stock delivery; the Tax Court upheld the deficiency.

## Issues

1. Whether I.R.C. § 483 applies to a stock-for-stock exchange qualifying as a tax-free corporate reorganization under I.R.C. §§ 354(a)(1) and 368(a)(1)(B).
2. Whether part of contingent, deferred Whittaker shares delivered in 1971 under a price-protection clause must be characterized as ordinary interest income under § 483.

## Decision

- The Second Circuit affirmed the Tax Court.
- The court held that I.R.C. § 483 applied to the deferred-payment feature of the transaction notwithstanding its reorganization characterization.
- A portion of the Whittaker shares received in 1971 was properly treated as imputed interest taxable as ordinary income.
- The Commissioner’s deficiency determination for 1971 was sustained.

## Legal Principles

- I.R.C. § 483 may impute interest where consideration for a sale or exchange is deferred and the arrangement provides no (or inadequate) stated interest, requiring segregation of an interest component from purported purchase price.
- Tax-free reorganization treatment under I.R.C. §§ 354 and 368 does not, by itself, preclude characterization of the time-value component of delayed consideration as interest when the exchange includes a deferred-payment mechanism.
- Courts may treat contingent, delayed “price-protection” consideration as part of deferred payment in substance, particularly where the recipient lacks interim incidents of ownership (e.g., voting and dividend rights) over the withheld shares.

## Conclusion

The Second Circuit held that § 483’s imputed-interest rules can apply within a § 368(a)(1)(B) stock-for-stock reorganization when part of the consideration is effectively withheld and delivered later without stated interest, requiring ordinary-income treatment for the interest component of the deferred stock received in 1971.


Solomon v. Comm’r, 570 F.2d 28 (2d Cir. 1977)