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Keywords

corporation
corporation

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Honbarrier v. C.I.R., 115 T.C. No. 23, 115 T.C. 300, Tax Ct. Rep. Dec. (RIA) 115.23

Facts

H was the sole shareholder of P, a corporation that had ceased its trucking operations in 1988 and sold its operating assets by 1990, investing the proceeds in tax-exempt bonds. C, a privately held trucking company, merged with P on December 31, 1993, with H receiving shares of C stock in exchange for his P stock. The IRS determined that the merger did not meet the continuity of business enterprise requirement necessary for tax-free reorganization, as C did not continue P's historic business or use a significant portion of P's historic business assets.

H was the sole shareholder of P. P was engaged in the business of hauling packaged freight in trucks. Its trucking operations were terminated in 1988. By 1990, P had sold its operating assets. P invested the proceeds from the sale of its operating assets in tax-exempt bonds and a municipal bond fund.

Issue

Whether the merger of Colonial into Central Transport, Inc. qualifies as a tax-free reorganization within the meaning of section 368(a)(1)(A).

Whether the merger of Colonial into Central Transport, Inc. qualifies as a tax-free reorganization within the meaning of section 368(a)(1)(A).

Rule

In order for a merger to be a tax-free reorganization under section 368(a)(1)(A), there must be continuity of the business enterprise of the acquired corporation, which 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.

In order for a merger to be a tax-free reorganization under section 368(a)(1)(A), there must be continuity of the business enterprise of the acquired corporation.

Analysis

The court found that Central did not continue Colonial's historic business or use a significant portion of Colonial's historic business assets in its operations. Colonial had ceased its trucking operations years prior to the merger and had primarily held tax-exempt bonds, which were not utilized by Central post-merger. Therefore, the continuity of business enterprise requirement was not satisfied.

The court found that Central did not continue Colonial's historic business or use a significant portion of Colonial's historic business assets in its operations.

Conclusion

The merger of Colonial into Central was not a tax-free reorganization under section 368(a)(1)(A), and Mr. Honbarrier must recognize capital gain from the exchange of Colonial stock for Central stock.

The merger of Colonial into Central was not a tax-free reorganization under section 368(a)(1)(A), and Mr. Honbarrier must recognize capital gain from the exchange of Colonial stock for Central stock.

Who won?

IRS, as the court ruled that the merger did not qualify for tax-free treatment due to the failure to meet the continuity of business enterprise requirement.

IRS, as the court ruled that the merger did not qualify for tax-free treatment due to the failure to meet the continuity of business enterprise requirement.

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