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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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