## Facts

- In 1928, A. L. Miller and Henry C. Hawk (majority shareholders of Enquirer-News Co.) transferred all of their Enquirer-News stock to Federated Publications, Inc.
- The consideration to Miller and Hawk was partly cash and partly Federated stock.
- Federated simultaneously acquired the remaining Enquirer-News minority shares, resulting in Federated owning all Enquirer-News stock.
- The taxpayers conceded they realized gain; the dispute was whether gain attributable to the Federated stock portion was eligible for nonrecognition.
- The Commissioner determined 1928 income tax deficiencies recognizing gain on the transaction; the Board of Tax Appeals sustained the deficiencies.

## Issues

1. Whether the transaction qualified as a “reorganization” under § 112(i)(1)(A) of the Revenue Act of 1928, as opposed to a taxable sale.
2. If it was a reorganization, whether § 112(b)(3) permitted nonrecognition of gain on the portion of consideration received as Federated stock.

## Decision

- The Sixth Circuit affirmed the Board of Tax Appeals.
- The court held the transaction was a taxable sale, not a statutory merger or reorganization within § 112(i)(1)(A).
- Because the transaction did not qualify as a reorganization, gain attributable to the stock consideration was recognizable for income tax purposes.

## Legal Principles

- The general rule is that gain on a sale or exchange is recognized unless a statutory exception applies; nonrecognition provisions are construed as limited exceptions.
- An acquisition of a corporation’s stock that literally fits statutory wording does not necessarily constitute a “reorganization”; courts examine the transaction’s substance.
- Reorganization treatment requires a continuing proprietary interest by the transferors in the ongoing enterprise; a transaction that effectively cashes out owners resembles a sale rather than a reorganization.
- Paying part of the purchase price in the acquirer’s stock does not, by itself, convert an otherwise sale-like transaction into a tax-free reorganization.

## Conclusion

The court upheld tax deficiencies because the 1928 transfer of Enquirer-News stock for cash and Federated stock was treated in substance as a sale rather than a qualifying reorganization, requiring recognition of gain including the portion tied to the stock received.


Miller v. Commissioner of Internal Revenue, 84 F.2d 415 (6th Cir. 1936)