“Under” Means “Authorized By”: Third Circuit Holds Short‑Form Merger Plans Are “Contracts” for § 483 and Imputes Interest to Later Settlement Payments

Introduction

In a precedential decision with significant consequences for tax planning around corporate control transactions and appraisal disputes, the Third Circuit affirmed the Tax Court’s determination that a settlement paid years after a short‑form merger triggered imputed interest under Internal Revenue Code § 483. The court held that the payment made in 2002 was “under” the 1999 merger agreement because that agreement authorized and provided the legal basis for the sale and the obligation to pay for the dissenting shareholder’s stock. The court further held that a short‑form merger plan is a “contract for the sale or exchange of property” for § 483 purposes—even when the minority shareholder did not assent—and that the later settlement’s role in setting price terms does not change the date of sale or avoid imputed interest.

The appellants were various successor trusts and beneficiaries of the Charles G. Berwind Trust, principally the Trust for the benefit of David M. Berwind, Jr. (the “DB Trust”). They challenged an IRS deficiency determination that allocated approximately $31 million of a $191 million settlement to ordinary income as imputed interest under § 483. The Third Circuit (Judge Chung, joined by Judges Phipps and Roth) affirmed, providing new guidance on three fronts:

What qualifies as a “contract for the sale or exchange of property” under § 483 in a corporate merger context;
How to determine whether a payment is made “under” a contract for § 483’s application; and
Why the origin-of-the-claim doctrine does not control the timing analysis central to § 483.

Summary of the Opinion

The court affirmed the Tax Court’s decision that § 483 applies to a $191 million settlement paid to the DB Trust on December 31, 2002. The court found:

The sale occurred in 1999: Under Pennsylvania’s Business Corporation Law (BCL), the short‑form merger became effective upon filing the articles of merger on December 16, 1999. At that moment, the DB Trust’s BPSI stock was extinguished and replaced with a right to payment.
The merger agreement was a “contract” for § 483 purposes: Even though the DB Trust did not assent, the merger agreement between BPSI and its parent authorized the sale of the DB Trust’s shares and obligated payment, satisfying § 483’s “contract for the sale or exchange of property” requirement.
The 2002 settlement payment was made “under” the 1999 merger agreement: Interpreting “under” to mean “authorized by” or the “legal basis for,” the court held the merger agreement—not the later settlement—was the operative contract under which payment was due.
Section 483’s conditions were met: The payment was on account of the 1999 sale, due more than six months after the sale; at least some payments were due more than one year after; and there was total unstated interest allocable to the payment. Approximately $31 million was therefore taxable as ordinary interest income.
Attacks on the merger failed: The court rejected arguments that the merger was void under the BCL or BPSI’s charter and further noted that, even if there were defects, Pennsylvania law treats such issues as rendering a merger voidable, not void ab initio, absent appropriate judicial relief.
Origin-of-the-claim doctrine inapplicable: That doctrine informs the character of proceeds, not the timing of a sale for § 483 purposes; the dispositive issue here was when the sale occurred, which state law resolved as 1999.

Background

Founded in 1883, the Berwind Corporation became a holding company with interests including Colorcon, Inc., held through Berwind Pharmaceutical Services, Inc. (BPSI). Ownership consolidated over time into family trusts. By 1999, BPSI’s parent (BPSI Acquisition) held over 80% of BPSI’s common stock, permitting a short‑form merger under Pennsylvania law. The DB Trust, a minority holder (16.4% of common; 13.12% of a class of “Preferential Stock”), opposed the consolidation.

On December 16, 1999, BPSI filed the articles of merger. The merger agreement:

Converted DB Trust’s common shares into the right to a subordinated note of $82.82 million due two years later at 10% interest;
Addressed redemption of preferred classes; and
Referenced Pennsylvania dissenters’ rights for appraisal.

The DB Trust exercised dissenters’ rights and litigated. In November 2002, the parties settled the federal litigation (the Warden action). On December 31, 2002, escrow released $191 million to the DB Trust, and the cases were dismissed. The IRS determined that part of the $191 million represented unstated interest taxable as ordinary income under § 483. The Tax Court agreed. The Third Circuit affirmed.

Analysis

Precedents Cited and Their Influence

Vorbleski v. C.I.R., 589 F.2d 123 (3d Cir. 1978): Articulated § 483’s core purpose—to prevent taxpayers from converting what is effectively interest into capital gain by deferring payments without stated interest. This purpose animated the court’s refusal to allow taxpayers to bifurcate obligations (sale vs. later pricing) to defeat § 483.
Schusterman v. United States, 63 F.3d 986 (10th Cir. 1995): Reinforced that § 483 prevents installment contracts from masking interest as principal. The Third Circuit’s reading aligns with this anti‑abuse principle.
Helvering v. Hammel, 311 U.S. 504 (1941): Recognized that tax consequences frequently do not turn on whether a sale is “forced” or “voluntary.” The court used this to reject the notion that minority non‑assent precludes a “contract for sale” under § 483.
Solomon v. C.I.R., 570 F.2d 28 (2d Cir. 1977); Katkin v. C.I.R., 570 F.2d 139 (6th Cir. 1978); Jeffers v. United States, 556 F.2d 986 (Ct. Cl. 1977): Support the applicability of federal tax rules to compelled transactions, undermining the “no assent, no contract” argument.
Tribune Publishing Co. v. United States, 836 F.2d 1176 (9th Cir. 1988): Distinguished. The Ninth Circuit there concluded a settlement was not “under” the earlier merger agreement. The Third Circuit read Tribune as turning on whether the original agreement contemplated the later payout, not on “voluntariness” as a requirement for § 483. Because the 1999 merger here did contemplate monetary payment for DB Trust’s shares, Tribune did not help the taxpayer.
Harrow v. Dep’t of Defense, 601 U.S. 480 (2025) and In re Hechinger Inv. Co., 335 F.3d 243 (3d Cir. 2003): Provided the interpretive backbone for “under”—meaning “authorized by” or the legal basis for the action—used here to locate the operative contract as the merger plan, not the settlement.
Pennsylvania corporate law: BCL §§ 1924(b)(1)(ii), 1928 (short‑form merger mechanics and effectiveness); Seven Springs Farm, Inc. v. Croker, 748 A.2d 740 (Pa. Super. Ct. 2000) (merger extinguishes stock by operation of law); Fishkin v. Hi‑Acres, Inc., 341 A.2d 95 (Pa. 1975) (corporate acts violating BCL are voidable, not void ab initio). These authorities anchored the court’s conclusion that the sale occurred on filing in 1999 and that alleged defects did not erase the sale for tax purposes absent a judicial decree.
Origin‑of‑the‑claim line: Lyeth v. Hoey, 305 U.S. 188 (1938); Francisco v. United States, 267 F.3d 303 (3d Cir. 2001); Freda v. C.I.R., 656 F.3d 570 (7th Cir. 2011); Nahey v. C.I.R., 196 F.3d 866 (7th Cir. 1999). The Third Circuit explained that origin‑of‑the‑claim allocates character (ordinary vs. capital) but not the timing of a sale—which is the critical predicate for § 483.
Standards and other guideposts: Mylan Inc. v. C.I.R., 76 F.4th 230 (3d Cir. 2023) (standards of review); Interfaith Community Org. v. Honeywell, 726 F.3d 403 (3d Cir. 2013) (clear‑error standard content); Gerardo v. C.I.R., 552 F.2d 549 (3d Cir. 1977) (Commissioner may take inconsistent positions); DIRECTV, Inc. v. Imburgia, 577 U.S. 47 (2015); Zuber v. Boscov’s, 871 F.3d 255 (3d Cir. 2017); Lesko v. Frankford Hosp., 15 A.3d 337 (Pa. 2011) (contract interpretation principles, including for settlements); Greene v. Oliver Realty, 526 A.2d 1192 (Pa. 1987) (courts can supply reasonable price where not definite); In re Jones & Laughlin Steel, 412 A.2d 1099 (Pa. 1980); Barter v. Diodoardo, 771 A.2d 835 (Pa. Super. Ct. 2001) (fraud or fundamental unfairness thresholds for merger challenges).

Legal Reasoning

1) The sale occurred in 1999 under Pennsylvania law

BCL § 1928 makes a merger effective on filing the articles with the Department of State. BPSI filed on December 16, 1999; at that moment, the DB Trust’s stock was extinguished, and BPSI’s obligation to pay arose. Alleged violations of BCL § 1922(a)(3) (terms of conversion for preferred) and of BPSI’s charter (voting rights for preferred) did not render the merger void. The court found either no violation or no proof of violation; in any event, Pennsylvania law treats such defects as rendering corporate acts voidable, not void ab initio, absent a judicial decree—which the DB Trust did not obtain. Thus, the sale date was 1999.

2) The merger agreement is a “contract for the sale or exchange of property” even without minority assent

The court emphasized corporate separateness and majority control: corporations act through boards and majority shareholders; minority holders are bound by statutorily authorized mergers. The merger plan, executed by BPSI and its parent and approved by both boards, effected the sale of the DB Trust’s shares and mandated payment. That is enough to be a “contract for the sale or exchange of property” under § 483. The court cited Helvering v. Hammel and related cases to reject a voluntariness requirement and distinguished Tribune Publishing as not imposing such a requirement.

3) “Under” means “authorized by”: the operative contract was the 1999 merger, not the 2002 settlement

Drawing on Harrow and Hechinger, the Third Circuit defined “under” to identify the legal instrument that authorized or served as the basis for the action. Here, the merger authorized and required payment for the extinguished shares. The settlement did not create a new sale; it resolved the valuation dispute and supplied pricing mechanics (including a ride‑up feature), but it did not displace the legal basis for the obligation to pay. Adopting a narrow reading that the payment was “under” only the settlement would invite evasion of § 483 by splitting sale and payment terms across multiple documents—contrary to the statute’s purpose.

4) All § 483 conditions were satisfied

Section 483 imputes interest if four conditions are met:

A payment is made under a contract for the sale or exchange of property;
The payment is on account of the sale, constitutes all or part of the sales price, and is due more than six months after the sale;
Some payments under the contract are due more than one year after the sale; and
There is total unstated interest (measured against IRS-prescribed rates; see § 1274).

The court held that the 2002 payment satisfied each condition: (1) It was under the 1999 merger agreement; (2) it was paid on account of the 1999 sale and due more than six months later; (3) under the original plan, payment terms extended beyond one year, and the ultimate settlement occurred more than one year post‑sale; and (4) the payment contained no stated interest. The taxpayer’s belated argument that the merger plan stated interest was forfeited because not raised in the opening brief.

5) Origin-of-the-claim doctrine does not determine the sale’s timing

The origin‑of‑the‑claim doctrine matches the character of settlement proceeds to the underlying claim. But § 483 turns on the timing of the sale versus payment. Because Pennsylvania law fixed the sale at 1999, characterizing the settlement as resolving multiple claims did not alter that timing. The court declined to re‑cast the settlement as anything other than payment for stock.

Impact

This decision is likely to shape federal tax planning and litigation strategy in corporate control transactions, especially where minority holders exercise dissenters’ rights:

Settlement does not reset the clock: For § 483, the sale date is determined by state law effectuation of the merger, not by a later settlement that supplies or adjusts price terms. Parties should not expect to avoid imputed interest by litigating or negotiating for years and then memorializing payment in a separate agreement without stated interest.
Short‑form merger plans are “contracts” under § 483: Even where a minority shareholder never assented, the merger plan can be the operative contract that triggers § 483. This undermines arguments premised on consent or privity.
“Under” = “authorized by”: Across statutes, courts are converging on a functional reading of prepositions like “under” and “pursuant to.” In tax disputes, this favors identifying the instrument that creates the legal obligation, not merely the document that sets the final payment terms.
Practical drafting and compliance:
- Where deferred consideration is expected, include adequate stated interest consistent with § 1274 (applicable federal rate) to avoid “total unstated interest.”
- If a dissenters’ appraisal is likely, consider explicit interest accrual provisions in the merger plan or settlement aligned with § 483/§ 1274 to minimize recharacterization.
- Expect the IRS to argue that any later settlement payment is “on account of” the earlier sale; plan for possible ordinary‑income allocations.
Litigation posture: Challenges to corporate formalities (BCL or charter violations) will not, without a court order voiding the merger, defeat federal tax consequences tied to the merger’s effectiveness.
Geographic scope and alignment: Within the Third Circuit, this is binding. It narrows the space for arguments suggested by readings of Tribune Publishing and promotes uniformity with § 483’s anti‑conversion purpose.

Complex Concepts Simplified

Capital gain vs. ordinary income: Capital gains (e.g., profit on sale of stock) often enjoy lower tax rates than ordinary income (e.g., salary or interest). Taxpayers prefer capital gain treatment where possible.
Section 483 (imputed interest): Prevents taxpayers from disguising interest as principal in deferred payment sales. If a sale’s payments are delayed and the contract lacks adequate stated interest, the law “imputes” interest—treating part of the payment as ordinary income.
“Contract for the sale or exchange of property”: Any binding agreement that authorizes a transfer of property (here, stock) for consideration. In a corporate merger, the merger plan, once effective under state law, can be such a contract.
“Under” a contract: In legal parlance, means the action is authorized by or based on that contract. The question is: Which document created the obligation to pay?
Short‑form merger: When a parent company owning a high percentage (e.g., ≥80%) of a subsidiary can merge without a shareholder vote of the subsidiary, under state law. The merger becomes effective on filing, extinguishing minority shares and replacing them with a right to payment and appraisal rights.
Dissenters’ rights: Statutory rights allowing a shareholder who opposes a merger to demand judicial appraisal of the “fair value” of their shares, often resulting in later settlements or judgments.
Origin-of-the-claim doctrine: A tax characterization rule: settlement proceeds are taxed in the same manner as the claim they resolve (e.g., wages → ordinary income; damage to capital asset → capital gain). It does not typically determine the date a sale occurred.
Void vs. voidable corporate acts: A void act has no legal effect; a voidable act is valid unless and until a court sets it aside. Pennsylvania generally treats BCL violations in this arena as voidable, preserving interim legal consequences (like the sale date) absent a court order.

Key Points Applied to the Facts

Sale timing: Occurred on December 16, 1999 (filing date).
Operative contract: The 1999 merger agreement—despite DB Trust’s dissent—authorized the sale and payment obligation.
Payment characterization: The $191 million was wholly “for the stock,” on account of the 1999 sale.
Imputed interest: Because the 2002 settlement payment lacked stated interest and was deferred more than one year after the sale, § 483 required ordinary‑income interest allocation (about $31 million).
Unavailing defenses: Alleged BCL/charter defects; reliance on Tribune Publishing for a voluntariness requirement; origin‑of‑the‑claim doctrine; late‑raised argument about stated interest in the original merger plan.

Conclusion

The Third Circuit’s decision establishes a clear, administrable rule in the § 483 context: A settlement payment made years after a short‑form merger is treated as paid “under” the merger plan if that plan authorized the sale and created the payment obligation, even though the settlement later set the price. The merger plan qualifies as a “contract for the sale or exchange of property,” notwithstanding minority non‑assent. Reading “under” to mean “authorized by” aligns with broader statutory interpretation and § 483’s anti‑conversion purpose.

For practitioners, the message is direct: When deferred consideration is possible—especially in appraisal or dissenters’ rights scenarios—build adequate stated interest into either the merger plan or the settlement (consistent with § 1274) or be prepared for the IRS to impute interest under § 483. Corporate law disputes over merger formalities, without a court order voiding the merger, will not erase the tax consequences associated with the merger’s effective date. The opinion will likely guide future § 483 disputes across the Third Circuit and serve as persuasive authority elsewhere in aligning substance over form in the characterization of deferred payments.