Settlement Payments Fixing Price After a Short‑Form Merger Are “Under” the Merger for IRC §483; Short‑Form Merger Agreements Are “Contracts” Despite Minority Non‑Assent

Introduction

In Estate of David M. Berwind v. Commissioner of Internal Revenue, the Third Circuit affirmed a Tax Court decision holding that a 2002 settlement payment to a dissenting shareholder trust was a deferred payment made “under” a 1999 short‑form merger agreement. Because the payment lacked stated interest and was made more than a year after the sale effected by that merger, Internal Revenue Code §483 required imputing interest, taxable as ordinary income rather than capital gain. The court also held that a short‑form merger agreement is a “contract” for §483 purposes, even though the minority shareholder did not assent, and that the sale date was the merger’s effective date under Pennsylvania law notwithstanding later litigation and settlement to determine price.

The decision clarifies two important federal tax points with corporate‑law intersections:

For §483, a payment is “under” the contract that served as the basis for and authorized the sale and payment obligation—not necessarily the later agreement that fixed the final amount.
A short‑form merger plan approved and filed under state law is a “contract for the sale or exchange of property” within §483 even if the minority shareholder dissents and later obtains a negotiated valuation.

Parties: The appellants were successors and beneficiaries of the Charles G. Berwind Trust, including the DB Trust, and related individuals; the appellee was the Commissioner of Internal Revenue. Judge Chung authored the precedential opinion for a panel including Judges Phipps and Roth.

Summary of the Opinion

The court affirmed the Tax Court’s determination that the 1999 short‑form merger extinguished the DB Trust’s 16.4% BPSI common shares and created a payment obligation. Under Pennsylvania’s Business Corporation Law (BCL), the merger became effective on filing (Dec. 16, 1999), thereby effecting the sale.
The 2002 settlement payment of $191 million was a payment “under” the 1999 merger agreement because that agreement served as the legal basis for, and authorized, payment for the Trust’s shares. The 2002 agreement merely supplied the amount and terms.
The merger plan was a “contract” for §483 purposes, notwithstanding the Trust’s lack of assent; the operative assent was by the constituent corporations and their boards under the BCL’s short‑form merger provisions.
The court rejected challenges that the merger was void for violating the BCL or BPSI’s articles; the Tax Court’s findings were not clearly erroneous, and in any event Pennsylvania law indicates such defects would render a transaction voidable, not void ab initio.
Because the payment was made more than a year after the sale and there was “total unstated interest,” §483 required imputing interest. Roughly $31 million of the $191 million was taxable as ordinary income.
The origin‑of‑the‑claim doctrine did not change the timing analysis. The payment’s nature (for stock) was undisputed; §483’s application turned on when the sale occurred and whether the payment was “under” the sale contract.

Detailed Analysis

1) The statutory framework: §483’s four prerequisites and how they apply

Section 483 imputes interest to unstated or inadequately stated interest in deferred payments for property, thereby preventing taxpayers from converting interest (ordinary income) into purchase price (typically capital gain). See Vorbleski v. Commissioner (3d Cir. 1978); Schusterman v. United States (10th Cir. 1995); S. Rep. No. 88‑830 (1964).

The court distilled §483 into four conditions:

A payment “under any contract for the sale or exchange of any property.” 26 U.S.C. §483(a)(1).
The payment is “on account of the sale or exchange,” constitutes part or all of the sales price, and is 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. §483(c)(1)(A).
There is “total unstated interest” under §483(b), measured against rates determined under §1274.

Once those conditions are met, the amount of unstated interest allocable to the payment is treated as interest and taxed as ordinary income. Here, all four conditions were satisfied if (a) the 1999 merger was the sale, (b) the merger agreement was a §483 “contract,” and (c) the 2002 settlement payment was made “under” that contract.

2) When did the sale occur? The sale was effected in 1999 upon filing the merger

The court reviewed for clear error the Tax Court’s pivotal factual finding on the sale date. Under BCL §1928, a merger becomes effective upon filing with the Pennsylvania Department of State. The articles of merger were filed on December 16, 1999, and by operation of law the Trust’s shares were extinguished then. See Seven Springs Farm, Inc. v. Croker (Pa. Super. Ct. 2000) (merger extinguishes stock).

The Trust argued the merger was void for violating BCL §1922(a)(3) (the plan must set forth the terms of conversion) and BPSI’s articles (requiring a preferred-stock vote). The court upheld the Tax Court’s resolution:

BCL compliance. The plan adequately stated that the preferential shares would be redeemed at $1 per share. Although the plan mistakenly stated that the redemption had already occurred, it nonetheless “set forth … the manner and basis of converting” those shares. No BCL violation.
Articles compliance. The record did not show whether BPSI Acquisition voted as the sole holder of the “Preferred Stock” referenced in the articles, and the Trust bore the burden of proof. The Tax Court’s adverse factual finding was not clearly erroneous. The court also signaled skepticism that any technical voting defect would render the merger void rather than voidable. See Fishkin v. Hi‑Acres, Inc. (Pa. 1975) (statutory noncompliance makes transfer voidable); In re Jones & Laughlin Steel Corp. (Pa. 1980) (injunction only on “fraud or fundamental unfairness”); Barter v. Diodoardo (Pa. Super. Ct. 2001).

With the sale date fixed at December 16, 1999, the 2002 payment was plainly more than one year after the sale for §483 purposes.

3) Is a short‑form merger plan a “contract” for §483? Yes

The merger agreement was executed by BPSI and BPSI Acquisition and approved by their boards, and under BCL §1928 it took legal effect upon filing, thereby converting the Trust’s common shares into a right to be paid for those shares (initially via a two‑year note with 10% interest that did not issue because the Trust pursued dissenters’ rights).

The court held that this is a “contract for the sale or exchange” even without the minority shareholder’s assent:

Corporate law vests governance power in the board and majority; a dissenting minority is bound by a properly executed merger. See American Jurisprudence quoted; BCL §1924(b)(1)(ii) (short‑form merger without shareholder vote when parent owns ≥80%).
The federal tax code does not distinguish “forced” from “voluntary” sales for this purpose. See Helvering v. Hammel (U.S. 1941) (no basis to distinguish forced from voluntary sales under a different tax provision).
Other federal tax cases reflect similar treatment of non‑consensual or constrained transactions as sales. See Vorbleski (3d Cir. 1978); Solomon v. Commissioner (2d Cir. 1977); Katkin v. Commissioner (6th Cir. 1978); Jeffers v. United States (Ct. Cl. 1977).

The Trust’s reliance on Tribune Publishing Co. v. United States (9th Cir. 1988) was rejected. Tribune was read as holding that a later settlement payment was not “under” the earlier merger agreement on its facts; it did not graft a voluntariness requirement into §483’s “contract” language.

4) What does “under” mean in §483? The payment is “under” the instrument that served as the basis for, or authorized, the sale and payment obligation

The court drew on analogous usage of “under”/“pursuant to” in other contexts, explaining that “under” identifies the provision that served as the basis for the relevant action—i.e., the provision that authorized it. See Harrow v. Department of Defense (U.S. 2025) (“under” identifies the provision that served as the basis); In re Hechinger Investment Co. of Delaware, Inc. (3d Cir. 2003) (“under the plan confirmed” means “authorized by” the plan).

Applying that meaning, the 1999 merger agreement—not the 2002 settlement—was the instrument that authorized and required BPSI to pay for the extinguished shares. The settlement set the amount and related terms but did not create or substitute the underlying obligation to pay for a sale; it acknowledged and resolved litigation about price, timing, and fairness.

The court expressly rejected a narrow reading that would allow taxpayers to avoid §483 by splitting the transaction into (i) a sale contract without price or with a disputed price and (ii) a later contract setting price and timing, and then claiming that payments are “under” the latter only. Such a reading would be inconsistent with:

The text (“any payment under any contract for the sale,” and “any payment on account of the sale”).
Congress’s anti‑conversion purpose in §483 to prevent transforming interest into capital gain through drafting maneuvers.

5) The settlement’s role: supplying (or revising) price terms without changing the sale contract or sale date

Pennsylvania contract law undergirds the analysis: a contract is not invalid because price is omitted or later contested; a reasonable price may be supplied or later fixed. See Greene v. Oliver Realty, Inc. (Pa. 1987). Although the merger agreement here specified a price (the promissory note), the dissenters’ rights process prevented the note from issuing and opened a pathway to judicial or negotiated valuation. The settlement in 2002 supplied the amount of payment; the merger remained the legal basis for owing payment for the shares.

The Trust argued that the negotiators intended a 2002 valuation of BPSI (including Zymark/ZYAC elements) and included a “ride‑up” feature tied to future performance. The court found those features immaterial to the §483 “under” analysis: valuation inputs in 2002 do not change that the payment was “on account of” the 1999 sale. Contingent or supplemental payments are handled within the §483/§1274 framework. See Treas. Reg. §1.483‑4.

6) The origin‑of‑the‑claim doctrine: not the right tool for §483 timing

The origin‑of‑the‑claim doctrine determines the character of settlement proceeds (ordinary income vs capital) by looking to the nature of the claim as if litigated to judgment. See Francisco v. United States (3d Cir. 2001); Lyeth v. Hoey (U.S. 1938). The Third Circuit deemed it irrelevant to §483’s timing and “under which contract” inquiry because the payment’s nature—consideration for stock—was uncontested; what mattered was the sale date and whether the payment was made under the sale contract. Those are answered by the corporate merger law and the definition of “under,” not by the origin‑of‑the‑claim doctrine.

7) Precedents and authorities cited and how they shaped the analysis

Mylan Inc. v. Commissioner (3d Cir. 2023): standards of review (de novo for legal interpretations, clear error for facts).
Interfaith Community Organization v. Honeywell (3d Cir. 2013): clear error standard articulated.
Lattera v. Commissioner (3d Cir. 2006): distinction between ordinary income and capital gains and differing tax rates—context for §483’s anti‑conversion purpose.
Vorbleski v. Commissioner (3d Cir. 1978) and Schusterman v. United States (10th Cir. 1995): legislative purpose of §483—to prevent transforming interest into purchase price through structuring.
Harrow v. Department of Defense (U.S. 2025) and In re Hechinger (3d Cir. 2003): the legal meaning of “under” as “authorized by” or “based on.”
Helvering v. Hammel (U.S. 1941): no meaningful tax distinction between forced and voluntary sales—supporting that non‑assent does not defeat “contract for sale” characterization.
Solomon v. Commissioner (2d Cir. 1977); Katkin v. Commissioner (6th Cir. 1978); Jeffers v. United States (Ct. Cl. 1977): consistent treatment of sales in non‑consensual contexts.
Tribune Publishing Co. v. United States (9th Cir. 1988): distinguished; read as a case‑specific holding that a later settlement payment was not under the earlier agreement, not as imposing a voluntariness requirement.
Dole Food Co. v. Patrickson (U.S. 2003): corporate separateness—undergirding that the corporation’s acts bind shareholders in mergers.
Fishkin v. Hi‑Acres (Pa. 1975); In re Jones & Laughlin Steel (Pa. 1980); Barter v. Diodoardo (Pa. Super. Ct. 2001): Pennsylvania remedies and standards for corporate law defects—voidable vs void ab initio and “fraud or fundamental unfairness.”
Seven Springs Farm v. Croker (Pa. Super. Ct. 2000): merger extinguishes stock by operation of law, fixing sale date.
Greene v. Oliver Realty (Pa. 1987): courts may supply reasonable price terms; used by analogy to explain later determination of the amount.
DIRECTV v. Imburgia (U.S. 2015); Zuber v. Boscov’s (3d Cir. 2017); Lesko v. Frankford Hospital Bucks County (Pa. 2011): contract law governs interpretation of merger and settlement agreements.
Gerardo v. Commissioner (3d Cir. 1977): Commissioner may take inconsistent deficiency positions—explaining parallel audits/litigation.
Anderson v. Commissioner (3d Cir. 2012): clear error review of Tax Court factfinding.

Impact and Practical Implications

A. Federal tax consequences for M&A settlements with dissenters

When a short‑form merger extinguishes minority shares, a later settlement that fixes the price will be treated as a payment “under” the merger for §483. If paid more than a year after the sale, unstated interest will be imputed and taxed as ordinary income.
Labeling or drafting the settlement as a standalone payment for stock does not change the result if the merger already effected the sale and created the payment obligation.
Interest‑avoidance strategies that separate the sale instrument from the payment instrument will not defeat §483 within the Third Circuit because “under” means the document that authorized the sale and payment obligation.

B. Corporate law practice in short‑form mergers

Per this opinion, minor or technical defects alleged under state law will not readily undo a merger retroactively; at most, they may render the transaction voidable under Pennsylvania law. That attenuates arguments that a merger was void ab initio for federal tax timing.
Boards executing short‑form mergers should maintain a robust record of approvals, notices, and compliance with articles and statutory prerequisites to forestall factual inferences against them in subsequent tax disputes.

C. Litigation strategy and burden of proof

Taxpayers bear the burden to prove defects (e.g., missing shareholder votes) when arguing that a merger was void. Absent evidence, courts may resolve factual disputes against the taxpayer.
Arguments that a settlement reflects a new “sale” will fail if the state merger statute makes the sale effective upon filing; settlement of price and related terms does not reset the sale date.
Origin‑of‑the‑claim doctrine does not recharacterize the timing or contract underlying §483; litigants should focus on the sale date, the instrument authorizing the payment, and the presence of unstated interest.

D. Potential circuit considerations

The opinion distinguishes—not contradicts—Tribune (9th Cir.). Practitioners litigating outside the Third Circuit should still consider local precedent on whether a later settlement payment can be “under” an earlier merger contract on materially different facts.

E. Planning pointers

Consider stating interest expressly in sale instruments to avoid §483 “unstated interest” (subject to §1274 rate rules). Where dissenters’ rights may delay payment beyond a year, model the §483/§1274 consequences early.
When settlements will occur long after a merger, evaluate whether contingent or “ride‑up” features implicate Treas. Reg. §1.483‑4 and the allocation of imputed interest over multiple payments.
Be cautious with settlement recitals that purport to disavow the original sale; they will not overcome state‑law effectiveness of mergers or §483’s focus on the contract that authorized the sale.

Complex Concepts Simplified

Unstated interest (IRC §483): If a contract for selling property defers payment and does not state adequate interest, the tax law imputes interest to part of the payment. That imputed amount is taxed as ordinary income, not capital gain.
Short‑form merger: A merger where a parent owning a statutory minimum (here 80%) can merge a subsidiary without a shareholder vote. Upon filing the merger, minority shares are extinguished and converted into a right to payment (often subject to appraisal/dissenters’ rights).
“Under” a contract: In legal usage, “under” typically means “authorized by” or “based on.” A payment is “under” the contract that creates the obligation to pay, even if another agreement later sets the amount and mechanics.
Void vs voidable: A “void” act has no legal effect from inception; a “voidable” act stands unless and until a court sets it aside. Pennsylvania decisions generally treat corporate‑law noncompliance as making transactions voidable, not void ab initio, absent fraud or fundamental unfairness.
Origin‑of‑the‑claim doctrine: Used to decide whether settlement payments are ordinary income or capital in nature by looking to the claim’s essence. It does not determine when a sale occurred or which contract a payment is “under” for §483.
Forced vs voluntary sale: For federal tax characterization purposes, forced sales (e.g., foreclosure, short‑form merger) can be treated the same as voluntary sales. A minority’s lack of assent does not negate that a “contract for sale” exists between the corporate parties.

Conclusion

The Third Circuit’s precedential decision cements two important federal tax propositions in the context of corporate mergers and dissenters’ rights. First, when a state‑law merger extinguishes stock upon filing and creates an obligation to pay the minority, a later settlement that fixes or adjusts price is a payment “under” the merger agreement for §483; it is “on account of” the earlier sale even if the amount is supplied years later. Second, a short‑form merger agreement approved by boards and effective under state law is a “contract for the sale or exchange of property” within §483, regardless of minority shareholder assent.

The court’s application of “under” to mean the instrument that authorized the sale aligns with the statute’s text, anti‑conversion purpose, and analogous usage in federal law. The decision narrows taxpayer strategies to avoid ordinary income on deferred payments by recasting settlements as freestanding sale instruments, and it reinforces that corporate‑law timing and form—especially merger effectiveness upon filing—drive §483’s timing. For practitioners, the case underscores the need to account for imputed interest in long‑tail dissenters’ settlements and to document interest explicitly where feasible, while recognizing that settlement structure will not override the underlying merger for §483.