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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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