Section 483 Applies to Deferred Settlement Payments Authorized by Short‑Form Merger Plans: Third Circuit Defines “Under” and Confirms Merger Plans as “Contracts” Without Minority Assent

Section 483 Applies to Deferred Settlement Payments Authorized by Short‑Form Merger Plans: Third Circuit Defines “Under” and Confirms Merger Plans as “Contracts” Without Minority Assent

Court: U.S. Court of Appeals for the Third Circuit (precedential)

Date: October 30, 2025

Case: Duncan Warden v. Commissioner of Internal Revenue (consolidated appeals Nos. 24-2360 to 24-2364)

Panel: Judges Phipps, Chung (author), and Roth

Introduction

This precedential decision addresses a recurring tax planning issue at the intersection of corporate law and federal income taxation: when a minority shareholder’s stock is extinguished in a short-form merger, and the price is later fixed by settlement, is a subsequent payment subject to imputed interest as ordinary income under Internal Revenue Code Section 483?

The dispute arises out of restructuring among closely held entities within the Berwind enterprise. In 1999, Berwind Pharmaceutical Services, Inc. (BPSI) executed a short-form merger with its new parent (BPSI Acquisition), extinguishing the DB Trust’s 16.4% common interest and setting forth an obligation to pay via a two-year note. Litigation ensued over the validity and fairness of the merger and related conduct. In 2002, the parties settled for $191 million, paid on December 31, 2002. The tax question: Did Section 483 impute interest to some portion of that payment—taxable at ordinary income rates—because it was a deferred payment “under” a “contract for the sale” of property?

The taxpayers (the DB Trust and related parties) argued that the 2002 settlement, not the 1999 merger, was the operative contract and sale, which would avoid interest imputation. The Commissioner argued that the sale occurred in 1999 under the Merger Agreement, and the 2002 payment merely fixed the amount due on account of that earlier sale—triggering Section 483. The Tax Court agreed with the Commissioner. On appeal, the Third Circuit affirmed.

Summary of the Opinion

  • Sale date: The sale of the DB Trust’s BPSI shares occurred upon the effectiveness of the short-form merger on December 16, 1999, when the articles of merger were filed under Pennsylvania law (BCL § 1928). The Trust’s arguments that the merger was void under the BCL or BPSI’s articles failed.
  • “Contract” under Section 483: The 1999 Merger Agreement, executed by BPSI and BPSI Acquisition and effective under state law, is a “contract for the sale or exchange of property,” even though the minority shareholder never assented. Minority assent is not required.
  • “Under” the contract: The $191 million paid in 2002 was made “under” the 1999 Merger Agreement because that instrument “served as the basis” for and authorized the payment obligation. A later settlement that specifies price and timing does not change the underlying legal source of the obligation.
  • Section 483 applies: Because the payment was on account of a 1999 sale, due more than one year after the sale, and with total unstated interest, Section 483 imputes interest. The Tax Court’s determination that roughly $31 million constituted ordinary interest income was affirmed.
  • Other arguments rejected: The Court rejected reliance on the origin-of-the-claim doctrine and distinguished the Ninth Circuit’s Tribune decision; it also treated a new “stated interest” argument, raised only in reply, as forfeited.

Analysis

Precedents and Authorities Cited and Their Influence

  • Statutory framework—IRC § 483: Section 483 imputes interest to deferred payments under “any contract for the sale or exchange of any property” where there is “total unstated interest,” ensuring that taxpayers cannot convert what is economically interest into capital gain by omitting stated interest from installment terms. The Court relies on congressional purpose (S. Rep. No. 88-830 (1964)) and prior interpretations:
    • Vorbleski v. C.I.R., 589 F.2d 123 (3d Cir. 1978): Section 483’s aim is to prevent conversion of ordinary interest income into capital gain via deferred payment structures.
    • Schusterman v. United States, 63 F.3d 986 (10th Cir. 1995): Section 483 ensures that an installment contract without stated interest is not used to avoid ordinary income taxation.
  • Meaning of “under”: The Court adopts a textualist understanding that “under” identifies the legal instrument that “serves as the basis” or “authorizes” the action.
    • Harrow v. Department of Defense, 601 U.S. 480, 486 (2025): In analogous statutory usage, “under” identifies the provision that served as the basis for the conduct.
    • In re Hechinger Investment Co. of Del., Inc., 335 F.3d 243, 252 (3d Cir. 2003): “Under” a plan means “authorized by” a plan—guiding the Court’s reading of Section 483(a)(1).
  • Forced vs. voluntary sales: The Court rejects any limitation of Section 483 to voluntary sales.
    • Helvering v. Hammel, 311 U.S. 504, 510 (1941): No distinction between forced and voluntary sales in tax characterization in analogous contexts.
  • Distinguishing the Ninth Circuit’s Tribune:
    • Tribune Publishing Co. v. United States, 836 F.2d 1176 (9th Cir. 1988): The Third Circuit reads Tribune as holding only that the settlement payment there was not “under” the earlier merger agreement because the original agreement did not contemplate the later payment—not that Section 483 applies only to voluntary sales. Here, by contrast, the 1999 merger contemplated monetary payment for the DB Trust’s shares.
  • Pennsylvania corporate law (BCL) as state-law backdrop to determine sale timing and contract validity:
    • Effectiveness upon filing: BCL § 1928 makes mergers effective upon filing articles with the Department of State; that filing occurred on December 16, 1999. See also Seven Springs Farm, Inc. v. Croker, 748 A.2d 740, 748 (Pa. Super. Ct. 2000) (merger extinguishes stock by operation of law).
    • Short-form merger authority: BCL § 1924(b)(1)(ii) authorizes a parent with ≥80% to merge with its subsidiary without a vote by the subsidiary’s shareholders.
    • Plan content: BCL § 1922(a)(3) requires the plan to set forth terms of conversion; the Court finds the plan satisfied this for preferential shares notwithstanding timing misstatements.
    • Void vs. voidable corporate acts: Fishkin v. Hi-Acres, Inc., 341 A.2d 95 (Pa. 1975): Corporate acts violating the BCL are voidable rather than void ab initio; the Third Circuit notes this but holds there was no violation in any event.
    • Articles-based voting right argument: The Trust failed to prove a violation; the Tax Court’s finding against the Trust on this factual point was not clearly erroneous.
  • Settlement characterization and “origin-of-the-claim” doctrine:
    • Lyeth v. Hoey, 305 U.S. 188 (1938) and origin-of-the-claim line: Typically used to classify settlement proceeds as capital or ordinary. The Court finds it inapposite here because the dispute is timing for Section 483, not whether the payment was “for stock”—which the Trust conceded.
  • Standards of review and procedural points:
    • Mylan Inc. v. C.I.R., 76 F.4th 230 (3d Cir. 2023): De novo review of legal conclusions; clear-error review of facts.
    • Gerardo v. C.I.R., 552 F.2d 549, 555 (3d Cir. 1977): Commissioner may issue inconsistent deficiency notices to protect the fisc.
    • Forfeiture: The Trust’s new “stated interest” argument raised only in reply was not considered. See In re Wettach, 811 F.3d 99, 115 (3d Cir. 2016).

Legal Reasoning

  1. Section 483 framework and elements: Section 483 imputes interest to:
    • a payment “under any contract for the sale or exchange of any property”;
    • made “on account of” that sale;
    • where “some or all” payments are due more than one year after the sale;
    • and there is “total unstated interest.”
    The parties stipulated or did not seriously dispute the latter two elements; the core disputes were (i) whether the 1999 Merger Agreement is a “contract for the sale” and (ii) whether the 2002 payment was made “under” that contract.
  2. Sale occurred in 1999 under state law: The merger became effective upon filing (BCL § 1928). That effectiveness extinguished the Trust’s shares and created BPSI’s obligation to pay for them, satisfying “sale or exchange” for federal tax purposes. The Trust’s attempts to void the merger for alleged BCL or charter violations failed on the merits and evidentiary grounds. Even if a defect existed, Pennsylvania treats such acts as voidable, not void ab initio, and no court order voided the merger.
  3. The Merger Agreement is a “contract for the sale” despite minority non-assent: A contract existed between BPSI and BPSI Acquisition—two assenting parties whose boards approved the plan. Under corporate law, the corporation can bind minority shareholders to mergers effectuated by majority control; dissenters’ remedies lie elsewhere (e.g., appraisal), but their non-assent does not negate the existence of a contract within the meaning of Section 483. Federal tax law does not carve out “forced” or “involuntary” sales from the concept of a sale for inclusion in Section 483.
  4. The 2002 payment was made “under” the 1999 Merger Agreement: Adopting the ordinary legal meaning of “under” as “authorized by” or the provision that “served as the basis for” the obligation (Harrow; Hechinger), the Court concluded the merger plan—not the later settlement—created the payment obligation. The settlement merely fixed the amount and timing after the Trust exercised dissenters’ rights and litigated value. Reading “under” to require the instrument that mechanically remits cash (the settlement) would allow taxpayers to avoid Section 483 by bifurcating a sale contract (with no specific payment terms) from a later payment agreement—contrary to the text (“payment on account of the sale,” § 483(c)(1)) and purpose of Section 483.
  5. Valuation timing and ancillary features (e.g., “ride-up” payments) do not change the analysis: Whether the settlement price reflected a 2002 valuation (including Zymark-related value and potential contingent components) is immaterial. BPSI owned ZYAC/ Zymark interests both in 1999 and 2002; any fair-value determination would necessarily incorporate those assets. Treasury regulations (e.g., 26 C.F.R. § 1.483-4) address contingent deferred payments; regardless, the $191 million was “on account of” the 1999 sale.
  6. Origin-of-the-claim doctrine is not controlling here: The Trust conceded that the $191 million was paid for its stock. The doctrine, aimed at characterizing the nature of settlement proceeds (capital vs. ordinary), does not govern timing for Section 483’s imputation of interest.

Impact and Practical Implications

The decision sets a clear rule within the Third Circuit for how Section 483 applies to payments following corporate mergers where consideration is determined later by litigation or settlement.

  • Broader definition of “under” for Section 483: Payments that satisfy obligations created by an earlier merger or sale agreement are “under” that earlier agreement for Section 483—even if a later settlement dictates price and schedules payment.
  • Short-form mergers and dissenting shareholders: A short-form merger plan is a “contract for the sale” for Section 483 purposes. Minority non-assent does not prevent application of Section 483. Parties should expect interest imputation on deferred payments made more than one year after the effective date of the merger.
  • Tax planning and drafting: Attempting to avoid Section 483 by divorcing the sale instrument from a later price-setting settlement will not work where the original instrument authorized the disposition and created the obligation to pay. Practitioners should explicitly consider stating interest or using market rates (see § 1274) when deferral beyond one year is possible.
  • State law governs sale timing: The effective date of sale for Section 483 is determined by state corporate law (here, upon filing under the BCL). Tax advisors must track statutory effectiveness rules to identify the “sale date,” which drives the six‑month and one‑year timing thresholds in § 483(c)(1).
  • Litigation strategy: Appraisal and fiduciary-duty claims that lead to delayed payment do not convert the underlying payment into one made “under” a later settlement for § 483 purposes. If the economic reality is a deferred payment “on account of” the earlier sale, imputed interest will follow.
  • Circuit alignment: The Third Circuit distinguished, rather than rejected, the Ninth Circuit’s Tribune. While approaches appear harmonious in principle (focusing on whether the earlier contract contemplated the later payment), this decision provides a robust, text-and-purpose-driven analysis that other circuits may follow.
  • Procedural caution: Arguments about “stated interest” or rate adequacy must be raised timely; new arguments first advanced in reply risk forfeiture.

Complex Concepts Simplified

  • Section 483 (Imputed Interest): If you sell property and agree to get paid later without clearly specifying adequate interest, the tax law pretends part of your payment is interest (ordinary income) rather than principal (usually capital gain). It prevents taxpayers from re-labeling interest as sale price to get lower tax rates.
  • “Under” a contract: In legal contexts, “under” typically means “authorized by” or “based on.” Here, a payment is “under” the contract that gave rise to the obligation to pay, even if a later document sets the precise amount and date.
  • Short-form merger: When a parent already owns a large majority (e.g., 80% or more), state law may allow a merger without a shareholder vote of the subsidiary. Dissenting minority shareholders typically get appraisal rights, not veto power.
  • Void vs. voidable corporate acts: A void act is a legal nullity from the start; a voidable act is effective unless and until a court sets it aside. Pennsylvania tends to treat BCL violations as voidable. That distinction matters for whether a merger “happened” for tax purposes.
  • Origin-of-the-claim doctrine: Used to decide whether settlement proceeds are taxed like the claim they resolved (e.g., capital gain if it replaces the sale price of stock; ordinary income if it replaces wages). Here, the key question was timing for imputed interest, not characterization, so the doctrine didn’t control the outcome.

Conclusion

The Third Circuit’s decision provides a definitive and practical rule: for Section 483, a payment is made “under” the legal instrument that authorized and effectuated the sale—even if the amount and timing are determined later by settlement. A short-form merger plan is a “contract for the sale of property,” and the lack of minority assent does not alter its contractual nature for federal tax purposes. Where payment is made more than a year after the sale and the contract has total unstated interest, Section 483 requires imputation of interest, taxable as ordinary income.

By focusing on state-law effectiveness to identify the sale date and adopting a functional understanding of “under,” the Court forecloses tax-avoidance strategies that bifurcate the sale and payment instruments. The decision aligns with Section 483’s purpose to prevent conversion of interest into capital gain and will guide tax planning for mergers, redemptions, and settlements across the Third Circuit and likely beyond.

Key Takeaways

  • Short-form merger plans are “contracts for the sale” under Section 483, even without minority assent.
  • “Under” means “authorized by” or “based on”: later settlements that set price do not reset the sale date or the governing contract for Section 483.
  • State law determines when a sale occurs; here, the sale happened upon filing the articles of merger in 1999.
  • Deferred payments tied to earlier mergers will carry imputed interest as ordinary income if the § 483 timing and unstated‑interest conditions are met.
  • Raise all interest-related arguments (e.g., whether interest was adequately stated) in opening briefs to avoid forfeiture.

Case Details

Year: 2025
Court: Court of Appeals for the Third Circuit

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