Rev. Rul. 81-25

ISSUE For a transaction to qualify as a reorganization under section 368(a)(1) of the Internal Revenue Code of 1954, does the continuity of business enterprise requirement apply to the business or business assets of the acquiring (transferee) corporation prior to the reorganization?

LAW AND ANALYSIS

Section 1.368-1(b) of the Income Tax Regulations states that in order for a reorganization to qualify under section 368(a)(1) of the Code there must be continuity of the business enterprise under the modified corporate form.

Rev. Rul. 63-29, 1963-1 C.B. 77, holds that the continuity of business enterprise requirement of section 1.368-1(b) of the regulations was satisfied where a transferee corporation sold its assets and discontinued its business, then acquired the assets of another corporation in exchange for its voting stock, and used the sales proceeds realized from the sale of its assets to expand the business formerly conducted by the acquired corporation. The holding of Rev. Rul. 63-29 is now reflected in the recent amendment to section 1.368-1 (1.368-1(d)) of the regulations, which looks only to the transferor's historic business or historic business assets for determining if the continuity of business enterprise requirement is satisfied.

HOLDING

In a section 368(a)(1) reorganization the continuity of business enterprise requirement does not apply to the business or business assets of the transferee corporation prior to the reorganization.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 63-29 is obsoleted, and Rev. Rul. 79-433, which suspended Rev. Rul. 63-29, is superseded.