Taxation Status of Transactions Involving

Taxation Status of Transactions Involving Travis Corporation

Facts: Austin Corporation purchased 8% of the stock of Travis Corporation for cash on January 10th. Austin Corporation then purchased 75% of the stock of Travis Corporation on August 25th, for common shares of Austin. Austin had tendered for all of the stock at the time, but 17% of the stock is in the hands of small groups of minority shareholders who do not wish to tender their shares. Austin retained the 8% that it had purchased for cash.

At issue is whether or not either of these transactions can be classified as a non-taxable reorganization. The time frame of the transactions may have an impact, since they take place within one year. The CEO of Travis has also now asked whether or not Austin can liquidate Travis into Austin without recognizing a gain or loss. The 8% interest was maintained, such that after the 75% was purchased Austin held an 83% interest.

Applicable law and analysis: 26 CFR 1.368-2 holds that transactions where a company exchanges its own voting stock for voting stock of another company are considered to be non-taxable reorganizations. Based on that, the original 8% cash transaction would not be considered a reorganization, but the subsequent exchange of stock for the 75% interest in Travis would be considered a non-taxable reorganization. This view was upheld in Chapman v. CIR. This recognizes the principle of continuity of interest that is required. The first transaction, the 8% that was purchased for cash, would not qualify as a reorganization, as it does not represent continuity of interest. In Chapman V. CIR, the court ordered that the 8% interest would need to be liquidated in order for the transaction to be considered a nontaxable reorganization.