## Facts

- Members of the Bentsen family were shareholders of three closely held Texas land-development corporations: Rio Development Company, Bentsen Brothers, Inc., and Bentsen Loan & Investment Company.
- A new corporation, Consolidated American Life Insurance Company, was organized to operate as a life-insurance business and was a going concern.
- On March 7, 1955, the three land-development corporations transferred substantially all assets (subject to liabilities) to the life-insurance company.
- Immediately after the transfers, the shareholders surrendered their stock in the three corporations for cancellation, and the corporations were liquidated and dissolved.
- The life-insurance company issued its voting stock directly to the former shareholders of the three corporations and also to a related partnership and to an individual family member who transferred assets.
- The parties stipulated the transactions were undertaken for business reasons.
- The Internal Revenue Service treated the shareholders’ exchange as taxable, denied reorganization nonrecognition, and assessed federal income taxes; the taxpayers paid and filed a refund suit on stipulated facts.

## Issues

1. Whether the asset transfers, liquidations, and stock issuance qualified as a tax-free reorganization under I.R.C. § 368(a)(1).
2. Whether the continuity of business enterprise requirement is satisfied when the acquiring corporation conducts a business entirely different from the transferor corporations’ business.

## Decision

- The court entered judgment for the taxpayers in the refund suit.
- The court held the transaction qualified as a reorganization under I.R.C. § 368(a)(1), so the stock exchange received nonrecognition treatment.
- The court rejected the government’s position that continuity of business enterprise requires continuation of the same or a similar business; continuity was satisfied despite the shift from land development to life insurance.

## Legal Principles

- A transaction that fits within the statutory forms of reorganization under I.R.C. § 368(a)(1) may still be tested under judicial continuity doctrines, including continuity of proprietary interest and continuity of business enterprise.
- Continuity of proprietary interest is satisfied where former shareholders of the transferor corporations receive equity in the acquiring corporation and maintain an ongoing equity stake rather than cashing out.
- Continuity of business enterprise requires continuation of meaningful business activity by the reorganized enterprise; it does not require the acquiring corporation to carry on the same or a similar line of business as the transferors.
- A stipulated bona fide business purpose and the existence of an operating acquiring corporation support characterization of the transaction as a reorganization rather than a sale or liquidation in substance.

## Conclusion

The court held that the taxpayers’ exchange qualified as a tax-free reorganization under I.R.C. § 368(a)(1) and that continuity of business enterprise was met even though the acquiring corporation operated a different business, entitling the taxpayers to a refund of income taxes assessed on the exchange.


Bentsen v. Phinney, 199 F. Supp. 363 (S.D. Tex. 1961)