Rev. Rul. 85-197

ISSUE

Whether the continuity of business enterprise requirement stated in section 1.368-1(d) of the Income Tax Regulations is satisfied under the facts described below.

FACTS

P is a holding company whose only asset consists of all the stock of an operating subsidiary, S. P merges into S and the P shareholders exchange their P stock for S stock.

LAW AND ANALYSIS

Section 1.368-1(b) of the regulations states that requisite to a reorganization under the Internal Revenue Code is a continuity of the business enterprise under modified corporate form.

Section 1.368-1(d)(3) of the regulations states that the continuity of business enterprise requirement is satisfied if the acquiring corporation continues its historic business of the acquired corporation. Section 1.368-1(d)(2) of the regulations states that:

The application of this general rule to certain transaction, such as mergers of holding companies, will depend on all facts and circumstances. The policy underlying this general rule, which is to ensure that reorganizations are limited to readjustments of continuing interests in property under modified corporate form, provides the guidance necessary to make these facts and circumstances determinations.

In the instant case, the policy enunciated in section 1.368- 1(d)(2) of the regulations is satisfied. For purposes of the continuity of business enterprise requirement, the historic business of P is the business of S, its operating subsidiary. Therefore, after the merger, S continues to conduct P's historic business.

HOLDING

The continuity of business enterprise requirement is satisfied when a holding company is merged into its wholly owned operating subsidiary.