MICHAEL L. MADDEN vs. STATE TAX COMMISSION.

QUA, C.J. This is a bill for declaratory relief under G. L. (Ter. Ed.) c. 231A brought in this court and reserved and reported by the single justice without decision for determination by the full court upon the bill, a demurrer, and an answer and case stated which are operative if the demurrer is overruled.

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The bill alleges that the plaintiff was a holder of common stock in Hollingsworth & Whitney Company, a Massachusetts corporation; that by a two-thirds vote of the stockholders entitled to vote of that corporation and by a similar vote of the stockholders of Scott Paper Company, a Pennsylvania corporation, it was decided to merge the two corporations into one (G. L. [Ter. Ed.] c. 156, Section 46D, inserted by St. 1941, c. 514, Section 2, as amended; Purdon's Pa. Sts. Anno. Title 15, Section 2852-901 to 908), of which Scott Paper Company was to be the surviving corporation; that the necessary articles of consolidation or merger were filed in each jurisdiction; that the requirements of the laws of each were observed; that the basis of conversion of common stock was that one share of Hollingsworth stock was converted into one and four tenths shares of Scott stock; that the defendants have ruled that this conversion of shares is reportable by Massachusetts residents on their State income tax returns for the purpose of computing gain or loss under G. L. (Ter. Ed.) c. 62, Section 5 (c), as appearing in St. 1935, c. 481, Section 1, and as amended in respects not here material by St. 1954, c. 599, Section 1; that the plaintiff believes and avers that the conversion of his shares following the statutory merger was not reportable under said Section 5 (c); that the defendants propose to compute a tax against the plaintiff based upon this erroneous ruling and to collect the same; and, upon information and belief, that there are more than one thousand other residents of this Commonwealth who held Hollingsworth stock on the conversion date to whom the defendants propose to apply their erroneous ruling. [Note p735-1]

The grounds of demurrer in so far as they have not been waived are (1) that the bill does not state a cause of action for declaratory relief, (2) that the plaintiff has not exhausted his administrative remedies under c. 62, and (3) that these remedies are exclusive because of c. 62, Section 48.

In the recent case of Meenes v. Goldberg, 331 Mass. 688, we held that the traditional reluctance of courts of equity

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to intervene in the matter of assessment and collection of taxes did not necessarily preclude declaratory relief under c. 231A. We there cited many recent cases. That decision is in line with present tendencies. See Borchard, Declaratory Judgments (2d ed.) 825. The principal reliance of the defendants is upon c. 62, Section 48, which provides that "The remedies provided by sections forty-three to forty-seven, inclusive, shall be exclusive, whether or not the tax is wholly illegal. But the word `exclusive' in this section shall not be construed to deprive any person of a right of action at law in any federal court."

There seem to us to be two answers to this contention.

(1) The sections to which reference is made in Section 48 provide for petition to the commission for abatement of over-payments of assessed taxes (Section 43 as appearing in St. 1954, c. 269) and then for appeal to the Appellate Tax Board. Section 45, as most recently amended by St. 1953, c. 654, Section 48. In the present case there has been no assessment and there has been no overpayment. The question as to which the bill specifically sets forth an "actual controversy" (c. 231A, Section 1) relates only to the present legal duty of the plaintiff in making his return relative to the "conversion" of his stock. Although it is hardly conceivable that a decision now will not affect the ultimate assessment, yet it is true that the plaintiff must first make a return under oath with possible penalties (c. 62, Sections 22, 24, 55, 56 [Note p736-1]) before any question of assessment or abatement arises, and he does not know how to make that return. In the use of declaratory procedure it must not infrequently occur that the declaration of "right, duty, status and other legal relations" (c. 231A, Section 1) will affect subsequent procedures, even though they are "exclusive."

(2) A broader and perhaps more satisfactory answer is found in the nature of declaratory relief. The present comprehensive statute (c. 231A) was enacted long after c. 62, Section 48, which contains the exclusive remedy provision. The

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declaratory judgment law was superimposed upon the existing statute and common law of the Commonwealth. It was intended to create a new and additional remedy either previously unknown or but very slightly used. That it might be expected in some instances to affect existing law is shown by the care taken to provide in Section 1 that nothing therein contained should be "construed to authorize the change, extension or alteration of the law regulating the method of obtaining service on, or jurisdiction over, parties or affect their right to trial by jury." In many, if not most, instances in which declaratory judgments might be expected to be entered there were preexisting remedies which in law were actually as "exclusive" as those referred to in c. 62, Section 48, whether or not expressly so designated by statute. Section 9 of the declaratory judgment law provides that the chapter is remedial and that it is to be "liberally construed and administered." Use of this procedure is discretionary, and is subject to the control of this court. C. 231A, Section 3. National Shawmut Bank v. Morey, 320 Mass. 492, 497-498.

We conclude that a bill for declaratory relief may be entertained in the discretion of the court notwithstanding the "exclusive" provision in c. 62, Section 48. Booth v. New York, 268 App. Div. (N. Y.) 502. The remedies referred to in that section still remain as therein provided the "exclusive" remedies available as of right.

It follows that the demurrer must be overruled.

Turning now to the merits, the case stated agrees in general with the factual allegations of the bill and need not be recapitulated here. The question is whether the receipt by the plaintiff of his new Scott stock in exchange for the Hollingsworth stock that he formerly held produced a taxable gain measured by the difference between what he originally paid for his Hollingsworth stock and the value of his new stock within the provisions of G. L. (Ter. Ed.) c. 62, Section 5 (c), as appearing in St. 1935, c. 481, Section 1, as amended by St. 1954, c. 599, Section 1. [Note p737-1] This subsection imposes a tax of three

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per cent upon the excess of gains over losses "received by the taxpayer from purchases or sales of intangible personal property." It contains the following provision, "If, in any exchange of shares upon the reorganization of one or more corporations . . . the new shares received in exchange for the shares surrendered represent the same interest in the same assets, no gain or loss shall be deemed to accrue from the transaction until a sale or further exchange of such new shares is made."

The contentions of the plaintiff are in brief that the conversion of shares upon a statutory merger or consolidation results by operation of law and is not a purchase or sale; that it is not a taxable event; and that the attempt is here made to tax mere paper profits. The plaintiff cites a great many cases, including many dealing with subjects other than taxation, for the purpose of showing that the exchange of shares in a constituent corporation for shares in a merged or consolidated corporation is not a sale or purchase. It cannot be doubted, however, that in general an exchange may be a sale or purchase for tax purposes. Bryant v. Commissioner of Corporations & Taxation, 291 Mass. 498, 500. See the cases hereinafter cited. And we know of no reason why the Legislature cannot make an exchange, even in the case of a merger, a taxable event, if it so desires. The question here is simply one of the construction of c. 62, Section 5 (c), and that construction is materially affected by the wording of the sentence last quoted above. In our opinion there was in this instance a "reorganization of one or more corporations" and an "exchange of shares," and the new shares received by the plaintiff in exchange for the shares surrendered did not "represent the same interest in the same assets," because they represented an interest in the assets of the Scott company as well as an interest in those of the Hollingsworth company. The sentence we have been discussing was inserted in subsection (c) by St. 1922, c. 449, Section 1, approved on May 20 of that year. In the case of Osgood v. Tax Commissioner, 235 Mass. 88, decided in 1920, this court had held that an exchange of stock upon reorganization

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where the new stock represented the same identical assets as the old was a taxable sale. See also the companion case of Stone v. Tax Commissioner, 235 Mass. 93, decided at the same time, where, however, the stock finally acquired by the taxpayers represented assets in addition to those represented by the taxpayers' original stock. This also was held to be a taxable sale. It is a fair assumption that the statute of 1922 was designed to mitigate what was thought to be a hardship in imposing a tax upon exchanges of stock in consequence of reorganizations, but only to the extent expressed in the 1922 statute; that is to say, where the new shares received represent the same interest in the same assets as the shares formerly held. Later decisions, in so far as they are in point, are consistent with this theory. Commissioner of Corporations & Taxation v. Tousant, 309 Mass. 84. De Cordova v. Commissioner of Corporations & Taxation, 314 Mass. 371. State Tax Commission v. Smith, 331 Mass. 387. See Marr v. United States, 268 U.S. 536.

But the plaintiff contends that this case is different, because we are here dealing with a merger or consolidation of two corporations into one, and because, as he says, as soon as the requisite number of stockholders of each corporation has voted in favor of the merger his exchange of stock is accomplished by operation of law and ceases to be voluntary and so lacks the elements of a sale. Nevertheless the fact remains that the stockholder has given up one thing and in exchange for it has received something different representing different assets. He was not obliged to do this, since c. 156, Section 46E, inserted by St. 1941, c. 514, Section 2, gives any stockholder a right to object to the merger and to receive payment for his stock at a valuation to be fixed as provided in Section 46. Even if there is still some element of compulsion in this it is no more than a consequence of the legislative power over corporations to which the plaintiff submitted when he acquired his stock. See G. L. (Ter. Ed.) c. 155, Section 3. It has been held in various cases that a forced or involuntary sale is none the less a sale for tax purposes. Helvering v. Hammel, 311 U.S. 504, 510.

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Electro-ChemicalEngraving Co. Inc. v. Commissioner of Internal Revenue, 311 U.S. 513. Welch v. Street, 116 Fed. (2d) 953, 956. Commissioner of Internal Revenue v. Coggan, 119 Fed. (2d) 504. It is difficult to see why this should not be so.

Whatever result might be reached in other jurisdictions that have taken a more liberal attitude toward the taxation of exchanges of stock we must conclude that the law as developed in this Commonwealth from the beginning of income taxation as shown by the cases herein cited considers this transaction as more than a mere paper transaction and as a sale in which the gain has been realized.

It must not be thought that because we have entertained this bill we are likely to permit taxpayers to by-pass the Appellate Tax Board in other cases by bills for declaratory relief. In addition to reasons already stated we have been influenced in this instance by the novelty of the question in this Commonwealth and by the large number of persons who are interested in its solution.

An interlocutory decree is to be entered overruling the demurrer, and a final decree is to be entered declaring that the plaintiff is required to make return of the transfer of his stock as a sale.

So ordered.