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Kass v. Commissioner of Internal Revenue, 60 T.C. 218

Facts

May B. Kass, the petitioner, owned 2,000 shares of ACRA stock, which was merged into TRACK after TRACK acquired 83.95% of ACRA's stock through a tender offer. The merger was part of a plan to gain control over ACRA's racetrack business. Following the merger, Kass received TRACK stock in exchange for her ACRA shares but did not report any capital gain from the transaction. The court noted that the merger was prearranged and involved a significant cash tender offer that affected the continuity of interest for minority shareholders like Kass.

For a period greater than 6 months prior to 1965, petitioner had owned 2,000 shares of common stock of Atlantic City Racing Association (herein called ACRA).

Issue

Whether the petitioner, a minority shareholder of an 84-percent-owned subsidiary, must recognize gain upon the receipt of the parent's stock pursuant to a statutory merger of the subsidiary into the parent.

The only issue for decision is whether petitioner, a minority shareholder of an 84-percent-owned subsidiary, must recognize gain upon the receipt of the parent's stock pursuant to a statutory merger of the subsidiary into the parent.

Rule

The continuity-of-interest test must be applied to determine if a statutory merger qualifies as a reorganization under section 368(a)(1)(A) of the Internal Revenue Code, which requires that the stock ownership in the subsidiary was not acquired as a step in a plan to acquire the subsidiary's assets.

Where the parent's purchase of stock in its subsidiary is prearranged in relation to the subsequent subsidiary-parent merger, continuity-of-interest is gauged by looking to all the old stockholders— including nontendering stockholders like petitioner— rather than to the parent corporation and the nontendering stockholders only.

Analysis

The court analyzed the facts and determined that TRACK's acquisition of ACRA's stock was part of an integrated plan to gain control over ACRA, which included a cash tender offer for the majority of ACRA's shares. Since the majority of ACRA's shareholders sold their stock for cash, the continuity-of-interest test was not satisfied. The court concluded that the merger did not qualify for nonrecognition treatment under the Internal Revenue Code, and thus the petitioner must recognize the gain from the exchange of her ACRA stock for TRACK stock.

In petitioner's case, TRACK's stock in ACRA was acquired as part of an integrated plan to obtain control over ACRA's business.

Conclusion

The court held that the petitioner must recognize gain realized as a result of the exchange, as the continuity-of-interest test was not met due to the majority of shareholders selling their stock for cash.

Decision will be entered for the respondent.

Who won?

Respondent (Commissioner of Internal Revenue) prevailed because the court found that the continuity-of-interest test was not satisfied, requiring the petitioner to recognize gain.

Respondent determined a deficiency in petitioner's Federal income tax for the year 1966 in the amount of $10,134.67.

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