## Facts

- West Shore Fuel, Inc. and Ruth A. Kolb were shareholders of American Steamship Company.
- American combined with Oswego Steamship Corporation in a state-law statutory merger, with a subsequent liquidation that distributed the merger consideration to American’s shareholders.
- In the transaction, shareholders received a mixture of cash and promissory notes; West Shore, for example, received $93,600 in cash and $218,400 in notes.
- The taxpayers elected to report their gain using the installment method under I.R.C. § 453 for tax year 1967.
- The IRS disallowed installment reporting, assessed additional tax, and the taxpayers paid and sued for refunds.
- The district court entered judgment for the United States, rejecting the refund claims, and the taxpayers appealed.

## Issues

1. Whether shareholder gain realized in a statutory merger and related liquidation, where consideration included cash and promissory notes, qualified for installment-method reporting under I.R.C. § 453.
2. Whether the transaction should be characterized for federal tax purposes as a shareholder-level installment sale of stock or as an integrated merger/liquidation governed by the Code’s corporate reorganization and liquidation rules requiring current recognition of gain.

## Decision

- The Second Circuit affirmed the judgment against the taxpayers.
- The court sustained the IRS’s denial of installment-method treatment for the transaction.
- The taxpayers were not entitled to the claimed refunds, and the gain was required to be recognized currently rather than deferred under § 453.

## Legal Principles

- Installment-method reporting under I.R.C. § 453 is not automatically available merely because consideration includes promissory notes; eligibility depends on the federal tax characterization of the overall transaction.
- When a transaction is structured and treated as a statutory merger and related liquidation, the specific tax rules governing reorganizations and liquidations control over attempts to recast the event as a shareholder-level installment sale to obtain timing benefits.
- Courts may evaluate the transaction as an integrated corporate restructuring for federal tax purposes, limiting step-by-step recharacterizations aimed at deferring gain recognition.

## Conclusion

The Second Circuit upheld the IRS’s position that shareholders receiving cash and notes in a merger followed by liquidation could not defer gain under the installment method, because the transaction was properly characterized and taxed under the corporate merger/liquidation framework requiring current recognition.


West Shore Fuel, Inc. v. United States, 598 F.2d 1236 (2d Cir. 1979)