## Facts

- Silent Automatic Company (Silent Automatic) and Timken-Detroit Company (Timken), both Michigan corporations, executed an agreement on October 2, 1931, labeled a “plan and agreement of merger, consolidation and reorganization.”
- Silent Automatic agreed to transfer all of its assets, including those of its wholly owned subsidiary, Silent Automatic Sales Corporation, to Timken.
- The agreement fixed January 2, 1932, as the effective date for transfer of assets and assumption of liabilities; before that date, the subsidiary was to be dissolved and its assets distributed.
- Timken agreed to assume Silent Automatic’s obligations as of the transfer date (with exceptions not material here).
- Consideration was $2,100,000, consisting of: (1) $760,000 cash paid upon execution (to Tant as trustee), (2) a $100,000 promissory note payable to brokers, and (3) $1,240,000 in 5% gold debentures, payable in annual installments beginning January 2, 1933, and guaranteed by an affiliated company.
- Silent Automatic and its principal stockholders, Karl B. Segall and Walter F. Tant, received cash and debt instruments, but no stock or other equity interest in Timken.
- The Commissioner determined 1932 income tax deficiencies on the theory that the dissolution-related steps amounted to a taxable asset sale, making Segall and Tant liable as transferees for taxes attributable to gain distributed to them.
- The Board of Tax Appeals held the transaction was a tax-free reorganization; Segall and Tant conceded transferee status, disputing only the characterization and timing of the transaction.

## Issues

1. Whether the transfer of Silent Automatic’s assets to Timken qualified as a tax-free reorganization under the Revenue Act of 1932, or instead was a taxable sale.
2. If it was a sale, whether the sale occurred in 1931 (execution and partial payment) or in 1932 (effective transfer date and passage of title/possession), for deficiency-year purposes.

## Decision

- The court reversed the Board of Tax Appeals.
- The court held the transaction was a taxable sale, not a tax-free reorganization, because the consideration was cash and debentures and did not preserve a continuing proprietary interest for the transferor or its shareholders.
- The court held the sale occurred in 1932, when the agreement fixed the transfer of assets and assumption of liabilities and when control, title, and business risks shifted.
- The case was remanded for recomputation of the 1932 deficiencies consistent with the sale characterization.

## Legal Principles

- A tax-free reorganization requires continuity of proprietary interest by the transferor or its shareholders in the transferred business; receipt of cash and debt instruments, without equity, makes the transferor a creditor rather than an owner.
- Labels in transactional documents (e.g., “merger” or “reorganization”) do not control tax consequences; characterization turns on the substance of what the parties accomplished.
- For timing of gain recognition on an asset sale, the relevant year is when the sale is consummated—typically when title/possession and the burdens and benefits of ownership shift—rather than merely when a contract is signed or partial consideration is paid.

## Conclusion

The Sixth Circuit treated the asset transfer as a 1932 taxable sale because Silent Automatic’s shareholders received only cash and debentures and retained no continuing equity interest in the acquiring company, defeating reorganization nonrecognition and supporting transferee liability for the recomputed 1932 deficiencies.


Commissioner v. Segall, 114 F.2d 706 (6th Cir. 1940)