Archie L. and Louise B. Honbarrier - Page 21




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          business.  See sec. 1.368-1(d)(4)(ii), Income Tax Regs.  Business           
          assets may include stock and securities.  See id.  In general,              
          the determination of the portion of the corporation’s assets                
          considered “significant” is based on the relative importance of             
          the assets to the operation of the business.  See sec. 1.368-               
          1(d)(4)(iii), Income Tax Regs.  However, all other facts and                
          circumstances, such as the net fair market value of those assets,           
          will be considered.  See id.                                                
               Colonial’s historic business assets were its tax-exempt                
          bonds and municipal bond fund.  It was never intended that                  
          Colonial’s tax-exempt bonds and municipal bond fund be held by              
          Central and, after the merger, Central did not use those assets             
          in its business.  On the day of the merger, Colonial liquidated a           
          tax-exempt bond and its municipal bond fund for more than $2.5              
          million in cash.  On the same day, Central made a cash                      
          distribution to Central’s shareholders in the total amount of               
          $2,450,854.17  Three days after the merger, tax-exempt bonds                
          totaling $4,549,146 that had been held by Colonial were                     

               17Both the merger and distribution were authorized on Dec.             
          22, 1993, and both transactions occurred on Dec. 31, 1993.  We              
          are not convinced that Central would have made a $7 million                 
          dividend absent the merger with Colonial in light of Central’s              
          needs for expansion and replacement of aging equipment and                  
          Central’s practice of not borrowing money.  Indeed, Central’s               
          yearend balances in its accumulated adjustments account (the                
          undistributed earnings on which tax has been paid by Central’s              
          shareholders) for 1991 and 1992 were $8,378,797 and $9,893,868,             
          respectively.  Yet, Central made no distributions to shareholders           
          in 1991 and distributed only $1 million in 1992.                            





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