Archie L. and Louise B. Honbarrier - Page 15




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          See sec. 354(a)(1).  Section 368(a)(1)(A) defines a                         
          reorganization as “a statutory merger or consolidation”.  A                 
          statutory merger or consolidation is one effected pursuant to the           
          corporate laws of the United States, a State, a territory, or the           
          District of Columbia.  See sec. 1.368-2(b)(1), Income Tax Regs.             
          The merger of Colonial into Central meets this literal                      
          requirement.  Petitioners argue that they are entitled to tax-              
          free treatment under the Code because the merger was a complete             
          and valid transaction for State law purposes.                               
               It has long been held that qualification as a merger under             
          State law is not, by itself, sufficient to qualify as a                     
          reorganization under section 368(a)(1)(A).  Courts have                     
          interpreted section 368 as imposing three additional requirements           
          for a merger to be treated as a reorganization under section                
          368(a)(1)(A).  These are: (1) Business purpose; (2)continuity of            
          business enterprise; and (3) continuity of interest.  See Gregory           
          v. Helvering, 293 U.S. 465 (1935); Wortham Mach. Co. v. United              
          States, 521 F.2d 160 (10th Cir. 1975); Cortland Specialty Co. v.            
          Commissioner, 60 F.2d 937 (2d Cir. 1932); Atlas Tool Co. v.                 
          Commissioner, 70 T.C. 86, 100 (1978), affd. 614 F.2d 860 (3d Cir.           
          1980).  Following judicial precedent, the regulations also                  
          require that there be a business purpose for the transaction,               
          continuity of business enterprise, and continuity of interest, in           
          order for a merger to qualify as a reorganization under section             







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