Settlement Payments After a Short‑Form Merger Are “Under” the Merger Contract for § 483 Imputed Interest; Minority Assent Not Required

Case: Charles G. Berwind Trust v. Commissioner of Internal Revenue

Court: United States Court of Appeals for the Third Circuit

Date: October 30, 2025

Disposition: Tax Court affirmed (precedential)

Introduction

This precedential decision from the Third Circuit clarifies two questions with outsized importance for federal tax treatment of merger-related settlements and dissenters’ rights litigation:

When is a payment made in a later settlement deemed paid “under” an earlier merger agreement for purposes of Internal Revenue Code § 483 (imputed interest on deferred payments)?
Can a short-form merger plan constitute a “contract for the sale or exchange” of a minority shareholder’s stock—even if the minority shareholder never assented?

The dispute arose amidst a decades-long restructuring of the closely held Berwind enterprise. In December 1999, BPSI Acquisition (an 83.6% parent) and BPSI completed a Pennsylvania short-form merger that extinguished the DB Trust’s 16.4% BPSI common shares and promised a two-year, 10% promissory note—while the DB Trust simultaneously pursued dissenters’ rights and broader fiduciary claims in federal and state court. In 2002, the parties settled for $191 million, with the settlement agreement expressly reserving disagreement about when a “sale” occurred. The IRS imputed interest under § 483, contending the payment was made “under” the 1999 merger contract. The Tax Court agreed, and the Third Circuit now affirms.

At stake is the characterization of a large portion of the settlement as ordinary-income interest rather than lower-taxed capital gain. The Third Circuit’s analysis—which draws on state corporate law to fix the sale date, and on federal interpretive principles to define “under” as “authorized by” and “based on”—cements a rule that taxpayers cannot avoid § 483 by splitting the “sale” and “payment” across different instruments and years.

Summary of the Opinion

Sale occurred in 1999 under Pennsylvania law: Filing the articles of merger made the merger effective and extinguished the DB Trust’s BPSI common shares. That event fixed the “sale or exchange” date for § 483.
The merger plan is a “contract” for § 483: The plan, executed by BPSI Acquisition and BPSI and effective upon filing, is a contract “for the sale or exchange” of the DB Trust’s shares even though the Trust never assented. Minority shareholders can be bound by majority-driven merger contracts.
The 2002 settlement payment was made “under” the 1999 merger contract: “Under” means “authorized by” or “based on.” The merger agreement created the obligation to pay for the extinguished shares; the settlement merely fixed the amount and mechanics. Section 483 thus applies to impute interest.
Other § 483 elements stand: The Trust’s only other challenge (that the merger adequately stated interest) was first raised in reply and deemed forfeited. Approximately $31 million of the $191 million was subject to ordinary-income treatment as interest.
Corporate-law challenges rejected: Claims that the merger violated Pennsylvania’s BCL or BPSI’s charter failed. The plan adequately set forth the conversion terms for preferred classes; the absence of proof on a required preferred-stock vote was resolved against the Trust, which bore the burden. In any event, the Third Circuit was skeptical that any such defect would render the merger void ab initio rather than voidable.
Origin-of-the-claim doctrine inapplicable: Characterizing the settlement as payment for stock was undisputed; the question was timing, which the origin-of-the-claim doctrine does not resolve.

Detailed Analysis

I. Statutory Framework and Issues Presented

Section 483 imputes interest to deferred payments made “under any contract for the sale or exchange of any property” where there is “total unstated interest,” as measured by § 1274 rates. The case turned on four conditions (all required):

A payment is made “under any contract for the sale or exchange of any property.” 26 U.S.C. § 483(a).
The payment is “on account of” that sale, part of the sales price, and “due more than 6 months after” the sale date. § 483(c)(1).
Some or all payments are due more than one year after the sale date. § 483(c)(1)(A).
There is “total unstated interest” relative to statutory benchmarks. § 483(b), § 1274.

The IRS argued the settlement payment satisfied these conditions because the merger in 1999 effected a sale and authorized payment, while the 2002 settlement simply set the price. The Trust argued the sale occurred in 2002 and, alternatively, that the 1999 plan was not a “contract.”

II. Precedents and Authorities Cited

Section 483 purpose and operation: Vorbleski v. C.I.R., 589 F.2d 123, 134 (3d Cir. 1978); Schusterman v. United States, 63 F.3d 986, 990 (10th Cir. 1995); S. Rep. No. 88-830 (1964) (closing strategies that converted interest into capital gain by omitting stated interest in installment sales).
“Under” means “authorized by/based on” in legal usage: Harrow v. Department of Defense, 601 U.S. 480, 486 (2025) (interpreting “pursuant to”/“under”); In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243, 252 (3d Cir. 2003) (“under” a plan means authorized by it).
Forced sales treated as sales for federal tax purposes: Helvering v. Hammel, 311 U.S. 504, 510 (1941) (no basis to distinguish forced vs. voluntary sales for tax characterization); see also 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).
State-law merger effect and contract law: BCL § 1928 (merger effective upon filing); Seven Springs Farm, Inc. v. Croker, 748 A.2d 740, 748 (Pa. Super. Ct. 2000) (stock extinguished by operation of law upon merger); Greene v. Oliver Realty, Inc., 526 A.2d 1192, 1194 (Pa. 1987) (courts may supply reasonable price when omitted/disputed); Lesko v. Frankford Hosp., 15 A.3d 337, 341–42 (Pa. 2011) (settlements governed by contract law); Zuber v. Boscov’s, 871 F.3d 255, 258 (3d Cir. 2017) (same).
Breach/charter challenges and voidness: Fishkin v. Hi-Acres, Inc., 341 A.2d 95, 98 (Pa. 1975) (noncompliant transfers voidable, not void ab initio); In re Jones & Laughlin Steel Corp., 412 A.2d 1099, 1103 (Pa. 1980) (injunctive relief requires fraud or fundamental unfairness); Barter v. Diodoardo, 771 A.2d 835, 839–41 (Pa. Super. Ct. 2001) (materiality threshold for “fundamental unfairness”).
BCL mechanics: § 1924(b)(1)(ii) (short-form merger at 80% without subsidiary shareholder vote); § 1922(a)(3) (plan must set forth conversion terms for each class).
Origin-of-claim doctrine: Lyeth v. Hoey, 305 U.S. 188 (1938); Francisco v. United States, 267 F.3d 303, 319 (3d Cir. 2001); Freda v. C.I.R., 656 F.3d 570, 574 (7th Cir. 2011); Nahey v. C.I.R., 196 F.3d 866, 868 (7th Cir. 1999) (characterization follows the nature of the compromised right).
Administrative consistency and burden: Gerardo v. C.I.R., 552 F.2d 549, 555 (3d Cir. 1977) (Commissioner may take inconsistent positions to ensure recovery); Anderson v. C.I.R., 698 F.3d 160, 164 (3d Cir. 2012) (clear-error review of Tax Court factfinding).
Corporate separateness: Dole Food Co. v. Patrickson, 538 U.S. 468, 474–75 (2003).
Ninth Circuit’s Tribune decision distinguished: Tribune Publishing Co. v. United States, 836 F.2d 1176 (9th Cir. 1988) (settlement not “under” earlier merger agreement because that agreement did not contemplate the settlement consideration).
Treasury regulations for contingent payments: 26 C.F.R. § 1.483-4 (contingent payments under contracts subject to § 483).

III. The Court’s Legal Reasoning

A. The sale date: Pennsylvania law fixes the sale at the 1999 merger filing

Under BCL § 1928, the merger took effect upon the filing of articles of merger on December 16, 1999; by operation of law, the Trust’s BPSI shares were extinguished. That is when the “sale or exchange” occurred for § 483. The Trust’s challenges failed:

BCL § 1922(a)(3) compliance: Although the plan misstated that preferred shares had already been redeemed, it set forth the conversion basis ($1 par redemption). That satisfied the “terms of conversion” requirement.
Charter vote requirement: The Trust offered no proof that BPSI Acquisition, as the sole preferred holder, failed to vote. The Tax Court resolved this evidentiary gap against the Trust, which bore the burden. The panel also questioned whether any such defect would render the merger void ab initio rather than merely voidable.

B. The merger plan is a “contract for the sale or exchange” even without minority assent

The plan, executed by BPSI and its 80%+ parent and effective on filing, was an enforceable agreement that converted the Trust’s shares into a right to payment. Federal tax law does not distinguish “forced” from “voluntary” sales in this context. A minority shareholder’s lack of assent does not defeat the existence of a contract between the corporate parties that effects a sale for § 483 purposes.

C. The settlement payment was made “under” the merger contract because the plan authorized and served as the basis for the obligation to pay

The Third Circuit adopted a functional, legal-authorization reading of “under”: a payment is made “under” a contract when the contract “served as the basis for” or “authorized” the payment. The court drew on Harrow and Hechinger to reach that interpretation.

Applying that standard, the merger plan both (i) effected the sale in 1999 and (ii) obligated BPSI to pay for the Trust’s extinguished shares. The 2002 settlement did not create a new sale; it merely set the price, timing, and mechanics after the Trust exercised dissenters’ rights and litigated. The Trust conceded that the $191 million was wholly “for the Trust’s BPSI stock.” Consequently, the payment was “on account of” the 1999 sale and “under” the 1999 contract for § 483.

Crucially, the court rejected a formalistic approach that would let taxpayers evade § 483 by splitting the transaction across two documents—a “sale” instrument that leaves price open and a later “payment” contract that sets price. Section 483, read as a whole, applies to “any payment on account of” the sale; it is not limited to payments under the four corners of the initial sale document so long as the payment obligation arose from (and was authorized by) that document.

D. Addressing counterarguments

Tribune Publishing distinguished: The Ninth Circuit’s observation that the seller did not “voluntarily contract” was read as a statement about what the 1969 merger agreement did—or did not—contemplate, not as erecting a voluntariness requirement. Here, the 1999 plan did contemplate monetary payment for the Trust’s shares; only the amount was later negotiated.
Valuation year and “ride-up” features: That the settlement reflected 2002 values (including BPSI’s Zymark-related assets) and contained contingent “ride-up” provisions did not change that the payment was made on account of the 1999 sale. The regulations separately address contingent payments.
Origin-of-the-claim doctrine: Inapposite. The nature of the settlement consideration (payment for stock) was undisputed; the contested issue was timing, not characterization of the underlying right.
Unstated interest: The Trust’s argument that the merger had adequately stated interest (10% note) was forfeited when raised only in reply. In any event, the note never issued, and the settlement lacked stated interest—opening the door to § 483 imputation.

IV. Impact and Practical Consequences

This decision is likely to shape tax planning and litigation strategies in mergers, squeeze-outs, redemptions, and appraisal/dissenters’ rights settlements in the Third Circuit and beyond.

Settlement ≠ reset of § 483 clock: When state law deems the sale complete at merger effectiveness, later settlements fixing price will not avoid § 483. Interest may be imputed from the sale date if payments are due beyond the statutory thresholds.
Short-form mergers bind minority holders for § 483: A merger plan is a “contract for sale” even absent minority assent, and the sale date is fixed by corporate-law effectiveness rules, not by a later compromise.
Drafting to address § 483:
- Where price cannot be fixed at closing because of appraisal risk, consider how stated interest will be handled if payments are delayed. Absent adequate stated interest that satisfies § 1274, § 483 imputation is likely.
- Settlement agreements that are silent on interest will not insulate the payment from § 483 if they merely implement the payment obligation of an earlier sale contract.
BCL and charter compliance challenges rarely erase the tax consequences: Even arguable state-law defects that are at most voidable typically will not undo a sale for federal tax timing purposes unless a court actually sets the merger aside.
Allocation in mixed-claim settlements: If a settlement compensates for multiple categories (e.g., stock value and separate tort/fiduciary claims), careful allocation and evidentiary support matter. Here, the Trust conceded the $191 million was entirely for stock, simplifying the § 483 analysis.
Government’s litigation latitude: The IRS may issue inconsistent notices to different parties to protect the fisc; taxpayers should anticipate parallel proceedings and preserve all arguments early to avoid forfeiture.

V. Complex Concepts Simplified

Section 483 (imputed interest): If you sell property and don’t adequately provide for interest on deferred payments, the tax law imputes an interest portion (taxed as ordinary income) to prevent converting interest into lower-taxed capital gains.
“Under” a contract: In legal usage, “under” means the action is authorized by or based on the instrument. A payment is “under” a contract if that contract created the obligation to pay—later paperwork that just sets the amount doesn’t change that.
Short-form merger: When a parent owns a specified threshold (80% in Pennsylvania at the time), it can merge with its subsidiary without a shareholder vote at the subsidiary. Upon filing, the merger is effective and minority shares are extinguished for a right to payment.
Void ab initio vs. voidable: A void act is treated as if it never existed; a voidable act remains effective unless and until a court sets it aside. Many corporate-law defects render transactions voidable, not automatically void.
Origin-of-the-claim doctrine: Settlement payments take their tax character from the nature of the underlying right. It decides “what kind” of income, not “when” the sale occurred for § 483 timing.

VI. Practical Takeaways for Counsel and Advisors

Fix the sale date early: Identify the state-law moment when stock ownership terminates (often at filing). That date governs § 483 timing.
Address interest explicitly: Where deferred price or appraisal outcomes are likely, negotiate stated interest provisions consistent with § 1274 to reduce or eliminate § 483 exposure.
Preserve arguments: Appellate courts will deem late-raised positions forfeited. Raise “stated interest” defenses and any state-law invalidity theories timely.
Allocate settlement consideration: If any non-stock claims are being resolved, document allocation and valuation to support character and to avoid everything being treated as stock consideration “on account of” the sale.
Understand “ride-up” and contingent features: Contingent components don’t change that the initial payment is “on account of” the sale; they instead affect interest computations under the regulations.

VII. Limits and Open Questions

What if the merger is later judicially voided? The court did not need to reach whether a judicial decree invalidating a merger retroactively would alter § 483 timing. The panel’s discussion suggests mere defects without judicial relief won’t suffice.
How much stated interest suffices? Because the Trust’s “stated interest” argument was forfeited, the opinion does not address whether the merger’s original 10% note (which never issued) would have precluded “total unstated interest.” Future cases may clarify how to analyze stated interest that is contemplated but supplanted by a later settlement.
Multi-claim settlements: The holding is clearest where, as here, the entire payment is for stock. When settlements include distinct components (e.g., fiduciary-duty damages), careful parsing and evidence will be critical.
Beyond Pennsylvania mergers: The reasoning relies on state corporate law to fix the sale date. In other jurisdictions with different effectiveness rules, the analysis may vary—but the “authorized by/based on” concept of “under” will likely travel.

Conclusion

The Third Circuit sets a clear, administrable rule: for § 483, a settlement payment following a short-form merger is made “under” the merger plan when the plan effected the sale and authorized payment, even if the price is fixed years later in litigation. Minority shareholder assent is not required for the merger plan to constitute a “contract for the sale or exchange.” By anchoring “sale” and “under” to state-law effectiveness and legal authorization, the court forecloses a common tax-avoidance gambit—using a later settlement to recast deferred sale consideration as pure capital gain. The opinion strengthens the coherence of § 483’s anti-conversion purpose and gives transactional and tax advisors concrete drafting and litigation cues: address interest up front, expect § 483 to apply where payments trail the state-law sale date, and do not count on settlement formalities to transform interest into capital gain.

Settlement Payments After a Short‑Form Merger Are “Under” the Merger Contract for § 483 Imputed Interest; Minority Assent Not Required (Third Circuit)