Archie L. and Louise B. Honbarrier - Page 2




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               reorganization within the meaning of sec. 368(a)(1)(A),                
               I.R.C.  R determined that the merger failed to meet the                
               continuity of business enterprise requirement necessary                
               to qualify as a tax-free reorganization within the                     
               meaning of sec. 368(a)(1)(A), I.R.C.                                   
                    Prior to the day of the merger, P’s assets                        
               consisted of tax-exempt bonds, a municipal bond fund,                  
               and $1,500 in cash.  On the day of the merger, P                       
               liquidated one of its tax-exempt bonds and its                         
               municipal bond fund.  As a result, P’s assets at the                   
               time of the merger consisted of $2,415,321 in cash,                    
               $4,849,146 in tax-exempt bonds, $37,800 in interest and                
               dividends receivable, and $18,926 in money funds.  At                  
               the time of the merger, C distributed $7 million to C’s                
               shareholders.  This distribution was made with checks                  
               totaling $2,450,854 and tax-exempt bonds worth                         
               $4,549,146 that had been acquired from P.  Within 4                    
               months, C had disposed of the remaining tax-exempt bond                
               that it had acquired from P in the merger.                             
                    Held:  In order for a merger to be a tax-free                     
               reorganization within the meaning of sec. 368(a)(1)(A),                
               I.R.C., there must be continuity of the business                       
               enterprise of the acquired corporation.  See sec.                      
               1.368-1(b), Income Tax Regs.  Continuity of business                   
               enterprise requires that the acquiring corporation                     
               either continue the acquired corporation’s historic                    
               business or use a significant portion of the acquired                  
               corporation’s historic business assets in a business.                  
               See sec. 1.368-1(d)(2), Income Tax Regs.  C did not                    
               continue P’s historic business or use a significant                    
               portion of P’s historic business assets in a business.                 
               Therefore, C did not satisfy the continuity of business                
               enterprise requirement for a tax-free reorganization.                  
               As a result, H must recognize gain equal to excess of                  
               the fair market value of the property that he received                 
               for his P stock over his basis in his P stock.                         


               Frederick Brook Voght and Shane T. Hamilton, for                       
          petitioners.                                                                
               Ross A. Rowley and Steven M. Webster, for respondent.                  







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