Continuity-of-interest requirement not affected by partnership's distribution of stock received in reorganization.

• Author: Yecies, Mark L.
• Position: Brief Article

It has been a long-standing IRS position that the continuity-of-interest requirement is met only if the shareholders of the target corporation maintain a meaningful and definite ownership in the acquiring corporation. In Rev. Rul. 66-23, the Service suggested that five years of unrestricted ownership normally was sufficient to warrant a conclusion that continuity of interest existed on the part of the target shareholders through their ownership in the acquiring corporation. When the target shareholder is a partnership, it has been unclear whether the partners of the partnership could be viewed as the relevant target shareholders. If so, this would permit the partnership to distribute to the partners the acquiring corporation stock received in the reorganization in a nonliquidating distribution without violating the continuity-of-interest requirement.

In the Sec. 351 area, the IRS has issued Rev. Rul. 84-111, allowing a partnership-transferor to distribute to its partners the stock received from the transferee corporation without violating the control requirement of Sec. 351 (a). However, until the issuance of Rev. Rul. 95-69, there was no assurance that the Service would apply the rationale of Rev. Rul. 84-111 in a reorganization context. Similarly, while in Rev. Rul. 84-30 the IRS ruled that continuity was satisfied when a corporate shareholder of the target distributed the acquiring...