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distributed to Mr. Honbarrier.18 The remaining tax-exempt bond,
valued at $300,000, which was held in an account with Alex Brown
and Sons, was liquidated 4 months later.
As a result of the transactions surrounding the merger, all
of Colonial’s investments in tax-exempt bonds and the municipal
bond fund were disposed of and Colonial ceased to exist. We find
that Central did not use a significant portion of Colonial’s
historic business assets in a business.
3. Conclusion
Central did not continue either Colonial’s historic business
or use a significant portion of Colonial’s historic business
assets in a business. As a result, Central did not satisfy the
continuity of business enterprise requirement. See sec. 1.368-
1(b), Income Tax Regs.
We hold that the merger of Colonial into Central was not a
tax-free reorganization within the meaning of section
368(a)(1)(A). Because this merger did not qualify as a
reorganization under section 368(a)(1)(A), Mr. Honbarrier’s
exchange of Colonial stock for valuable consideration was a
taxable event. Colonial’s assets had a net fair market value of
18The merger was not effective until 1 second before
midnight on Dec. 31, 1993. As a result, ownership in Colonial’s
assets could not pass to Central until then. However, on Dec.
27, 1993, Central instructed the financial institutions holding
Colonial’s bonds valued at $4,549,146 that those bonds were to be
transferred to Mr. Honbarrier effective Jan. 3, 1994. On Jan. 3,
1994, they were transferred to Mr. Honbarrier.
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