Abstract
The continuity of interest doctrine, in its present form, is the extra-statutory requirement that the historic shareholders of a target company must retain a quantum of equity interest in the acquiror in order for an acquisition to qualify as a reorganization entitled to tax-free treatment. If sufficient stock of the acquiror is not retained by the target's shareholders for a long enough period, the transaction is not a tax-free reorganization, and the target corporation and target shareholders (including those that did retain the acquiror's stock) are subject to tax on their gains. On the other hand, because the doctrine is not an anti-abuse rule, if the continuity of interest requirement is not met, the target and its shareholders are entitled to recognize any loss on the transaction.
This summary of the doctrine and its consequences is, of course, greatly simplified. Every aspect of the continuity of interest doctrine carries with it a formidable array of complex issues. For example, for how long must the target's shareholders have held their stock to be considered "historic" shareholders? What types of interests in the target qualify as equity for purposes of the test? What type and quantum of continuing interest in the acquiror is required, and for how long and in what form must it be retained? Some of these questions have recently attracted significant attention as a result of a Tax Court case, J.E. Seagram Corp. v. Commissioner, newly issued regulations under section 338, and an announcement that the Internal Revenue Service is considering a comprehensive reassessment of the doctrine.
This article does not attempt to answer these metaphysical questions or purport to assert what the law should be (although a few suggestions are made along the way). Instead, the article makes a simple prediction: The continuity of interest doctrine in its present form will not survive for long.
This article advances what should be an unremarkable proposition—a doctrine whose policy basis evaporated over 60 years ago and exists without any express or implicit basis in the statutes, which is as often invoked by taxpayers to recognize loss as by the Service to impose tax on gain, which in its present form is the source of significant instability and uncertainty, and which leads to results that are as inequitable and counterintuitive as they are economically inefficient—cannot survive for long. In the course of developing this argument, the article explores how this wayward doctrine went astray and how its course might be corrected.
Recommended Citation
David S. Miller,
The Devolution and Inevitable Extinction of the Continuity of Interest Doctrine,
3 Fla. Tax Rev.
(1998).
Available at: https://scholarship.law.ufl.edu/ftr/vol3/iss1/6