## Facts

- South Jersey Gas, Electric and Traction Co. leased its operating properties to Public Service Electric and Gas Co. for a 900-year term for $480,000 annual rent.
- Ferdinand W. Roebling purchased 166 shares of South Jersey stock for $16,600.
- South Jersey merged into Public Service under a New Jersey statutory merger plan.
- Under the plan, South Jersey shareholders exchanged their stock solely for Public Service mortgage bonds.
- Roebling received Public Service bonds with a fair market value of $34,777 for his shares.
- The Commissioner treated the $18,177 excess of bond value over stock basis as taxable gain in 1938.
- The Tax Court upheld the deficiency; Roebling appealed.

## Issues

1. Whether exchanging South Jersey stock solely for Public Service bonds in a statutory merger required recognition of gain for federal income tax purposes.
2. Whether the merger qualified for nonrecognition as a reorganization given the continuity-of-interest requirement when shareholders received only debt securities.

## Decision

- The Third Circuit affirmed the Tax Court.
- The exchange resulted in recognizable taxable gain measured by the bonds’ fair market value over Roebling’s stock basis.
- The transaction did not qualify as a tax-free reorganization because receiving only bonds converted shareholders to creditors and failed the continuity-of-interest requirement.

## Legal Principles

- State corporate-law characterization (e.g., “statutory merger”) does not control federal income tax consequences; federal tax turns on the transaction’s substance.
- Nonrecognition treatment for reorganizations requires continuity of proprietary (equity-type) interest by target shareholders in the acquiring enterprise.
- Receipt solely of debt instruments, without stock or a comparable equity stake, generally breaks continuity of interest and prevents reorganization nonrecognition.
- An exchange for readily valued debt securities can constitute a closed transaction requiring current recognition of realized gain.

## Conclusion

Because Roebling exchanged stock for bonds only, he realized and had to recognize gain equal to the bonds’ fair market value minus his stock basis, and the merger did not qualify for reorganization nonrecognition due to the absence of continuing equity ownership.


Roebling v. Commissioner, 143 F.2d 810 (3d Cir. 1944)