## Facts

- Cortland Specialty Company, a New York corporation, bought and sold petroleum products in 1925.
- Herbert R. Sargent and Bertha C. Sargent were Cortland’s sole shareholders; Herbert Sargent managed the business.
- Deyo Oil Company, Inc., also a New York petroleum business, agreed to acquire substantially all of Cortland’s operating assets.
- On September 26, 1925, Cortland and Deyo executed agreements under which Cortland transferred real property, leases, physical equipment, and merchantable petroleum products, and agreed to discontinue business after October 1, 1925.
- Consideration to Cortland consisted principally of cash and short-term promissory notes issued by Deyo.
- The Commissioner determined Cortland realized $101,175.58 of gain over depreciated cost and assessed a 1925 deficiency of $13,412.82.
- The Commissioner also asserted transferee liability against the Sargents; their liability depended on whether Cortland’s deficiency stood.

## Issues

1. Whether Cortland’s transfer of substantially all assets to Deyo qualified as a “reorganization” under § 203(h)(1) of the Revenue Act of 1926, permitting nonrecognition of gain.
2. Whether payment in cash and short-term notes provided the continuity of proprietary interest required for reorganization treatment, or instead made the transaction a taxable sale.

## Decision

- The Second Circuit affirmed the Board of Tax Appeals and sustained the Commissioner’s determination.
- The transaction was a sale rather than a statutory reorganization.
- Cash and short-term notes did not provide the kind of continuing interest contemplated by the reorganization provisions.
- The deficiency against Cortland was upheld, and the Sargents’ transferee liability was sustained because it followed from Cortland’s liability.

## Legal Principles

- Reorganization nonrecognition applies to restructurings that preserve continuity of proprietary interest for the transferor or its shareholders in the transferred enterprise, typically through stock or investment-type securities of the transferee.
- A transaction that cashes out the transferor or its shareholders, eliminating any continuing ownership stake in the transferee, is treated as a taxable sale even if described as a “plan of reorganization.”
- Short-term promissory notes functioning as near-cash consideration are not “securities” sufficient to establish continuity of interest for reorganization treatment.
- Post-transfer employment or management roles do not substitute for a continuing proprietary interest in the transferee.

## Conclusion

The court held that Cortland’s asset transfer to Deyo for cash and short-term notes severed any continuing ownership interest and therefore failed the continuity requirement for a tax-free reorganization; the transaction was a taxable sale, and the asserted deficiency and transferee liability were affirmed.


Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 F.2d 937 (2d Cir. 1932)