Target stock acquired in anticipation of merger counts toward the continuity-of-interest requirement for subsequent nontaxable reorganization.

• Author: Yecies, Mark L.

Among the requirements for tax-free reorganization treatment is that there be a continuity of interest on the part of those persons who, directly or indirectly, were owners of the acquired corporation prior to the reorganization; see Regs. Sec. 1.368-1 (b). Courts have taken the position that those shareholders to be "counted" for continuity purposes are the target's historic shareholders, i.e., those persons who were the shareholders at the commencement of the plan of reorganization. When a reorganization is preceded by a series of ownership changes, it is often difficult to determine the identity of the "historic shareholders." In JE. Seagram Corp., 104 TC 75 (1995), the Tax Court applied a "step-into-the-shoes" rule to make that determination.

In June 1981, Seagram launched an unfriendly takeover of Conoco. Conoco then found a white knight," DuPont, which agreed to make a competing tender offer for Conoco stock. The agreement also provided that, if DuPont was able to acquire at least 51 % of the Conoco stock, Conoco would be merged into a Dupont subsidiary. Thereafter, DuPont would acquire any Conoco shares not acquired in the tender offer. The merger was subject to, among other conditions, approval by the shareholders of DuPont and Conoco.

By August, DuPont had acquired over 51% of the Conoco shares, while only 32% of the Conoco stock had been tendered to Seagram. At all times, Seagram and DuPont were acting independently of each other and pursuant to competing offers. On August 17, Seagram gave up on its takeover bid and tendered its Conoco shares for DuPont common stock. Pursuant to the...