## Facts

- Archie L. Honbarrier was the sole shareholder of Colonial Motor Freight Line, Inc. (Colonial), a trucking company that hauled packaged freight.
- Colonial’s trucking operations ended in 1988 after sustained losses, and by 1990 Colonial had sold its operating assets and invested proceeds in tax-exempt bonds and a municipal bond fund.
- By the end of 1992, Colonial had sold all assets except its ICC operating authority and held primarily tax-exempt investments.
- Archie and Louise Honbarrier were also shareholders and directors of Central Transport, Inc. (Central), a closely held trucking company that transported chemicals in tanker trailers.
- On December 31, 1993, Colonial merged into Central; Archie received 17,840 shares of Central stock valued to match the net fair market value of Colonial’s assets.
- The Honbarriers’ basis in Colonial stock was approximately $291,506, while the fair market value of assets reflected in the exchange was approximately $7,245,051.
- Immediately before the merger, Colonial’s assets were essentially investment-type holdings; on the merger date Colonial held substantial cash and tax-exempt bonds, plus receivables and money market funds.
- At the time of the merger, Central distributed approximately $7 million to its shareholders using cash and tax-exempt bonds acquired from Colonial.
- Within four months, Central disposed of the remaining tax-exempt bond obtained from Colonial.
- Taxpayers reported the merger as a tax-free “A” reorganization under I.R.C. § 368(a)(1)(A); the IRS determined deficiencies, asserting the merger failed continuity of business enterprise.

## Issues

1. Whether the December 31, 1993 merger qualified as a tax-free reorganization under I.R.C. § 368(a)(1)(A).
2. Whether the merger satisfied the continuity of business enterprise requirement in Treas. Reg. § 1.368-1(b) by continuing Colonial’s historic business or using a significant portion of Colonial’s historic business assets in a business.

## Decision

- The Tax Court held that the merger did not meet the continuity of business enterprise requirement.
- The court concluded the merger was not a tax-free reorganization under I.R.C. § 368(a)(1)(A).
- The transaction was treated as taxable, and the IRS’s deficiency determinations were sustained (subject to Rule 155 computations).

## Legal Principles

- A statutory merger under I.R.C. § 368(a)(1)(A) must satisfy continuity of business enterprise as required by Treas. Reg. § 1.368-1(b).
- Continuity of business enterprise requires that the acquiring corporation either continue the acquired corporation’s historic business or use a significant portion of the acquired corporation’s historic business assets in a business.
- Investment assets held after liquidation of an operating business generally do not constitute the acquired corporation’s “historic business assets” for continuity purposes when they are not used in an operating business and are promptly distributed or disposed of.
- Reorganization nonrecognition is limited to transactions reflecting a continuation of the enterprise in modified corporate form rather than a functional liquidation or distribution of assets.

## Conclusion

The Tax Court treated the merger as taxable because Colonial had terminated its trucking business years earlier and held primarily investment assets that Central quickly distributed and disposed of, so Central neither continued Colonial’s historic business nor used a significant portion of Colonial’s historic business assets in a business as required for a § 368(a)(1)(A) reorganization.


Honbarrier v. Commissioner, 115 T.C. 300 (2000)