## Facts

- J.E. Seagram Corp. (through a subsidiary) acquired Conoco, Inc. shares and commenced a cash tender offer for up to 35,000,000 shares (about 40.76%) of Conoco.
- Conoco entered an agreement with DuPont Holdings, Inc., a wholly owned subsidiary of E.I. du Pont de Nemours & Co., under which DuPont Holdings made a competing tender offer for all Conoco shares, offering cash and DuPont stock.
- The Conoco–DuPont agreement provided that Conoco would merge into DuPont Holdings if DuPont Holdings acquired more than 50% of Conoco stock.
- DuPont Holdings obtained tenders exceeding 50% of Conoco stock; Seagram acquired approximately 32% under its cash tender offer.
- Seagram then tendered its entire Conoco position into DuPont’s exchange offer and received DuPont stock; Conoco later merged into DuPont Holdings.
- After the transaction, Seagram’s subsidiary held roughly 20% of DuPont’s outstanding stock.
- DuPont and Conoco treated the tender offer and merger as a tax-free reorganization and advised shareholders receiving DuPont stock that no gain or loss was recognized.
- Seagram claimed a recognizable loss on its exchange of Conoco stock for DuPont stock; the Commissioner disallowed the loss, treating the exchange as a nonrecognition event under the reorganization rules.
- The Commissioner determined a federal income tax deficiency for Seagram’s fiscal year ending July 31, 1982, and related withholding tax deficiencies for 1982–1984; both parties moved for summary judgment.

## Issues

1. Whether DuPont’s acquisition of Conoco through a tender offer followed by a statutory merger constituted a single plan of reorganization under I.R.C. §§ 368(a)(1)(A) and 354(a).
2. Whether the transaction satisfied the continuity-of-interest requirement where approximately 54% of Conoco stock was acquired for DuPont stock and the remainder for cash, including stock Seagram had purchased for cash before exchanging it for DuPont stock.
3. Whether Conoco’s merger into DuPont Holdings qualified as a reorganization under I.R.C. § 368(a)(1)(A) and § 368(a)(2)(D).

## Decision

- The Tax Court denied Seagram’s motion for summary judgment and granted the Commissioner’s motion for summary judgment.
- The court held that the tender offer and the subsequent merger were integrated steps constituting a single plan of reorganization under §§ 368(a)(1)(A) and 354(a).
- The court held that continuity of interest existed where about 54% of Conoco stock was acquired for DuPont stock and the balance for cash, even though Seagram had acquired Conoco shares for cash before tendering them for DuPont stock.
- The court held that the merger of Conoco into DuPont Holdings qualified as a reorganization under § 368(a)(1)(A) and § 368(a)(2)(D).
- The court directed the parties to submit computations under Tax Court Rule 155.

## Legal Principles

- A tender offer followed by a contractually contemplated statutory merger may be treated as an integrated, two-step transaction constituting an A reorganization under I.R.C. § 368(a)(1)(A).
- Continuity of interest is satisfied when a sufficient portion of target shareholders, in the aggregate, receive equity in the acquiring corporation; substantial cash consideration does not necessarily defeat continuity.
- For continuity-of-interest purposes, stock exchanged for acquiring-company stock is not disqualified merely because the exchanging shareholder previously purchased the target stock for cash.
- Under I.R.C. § 354(a), no gain or loss is recognized on an exchange of stock solely for stock pursuant to a qualifying reorganization, barring loss recognition by an exchanging shareholder.

## Conclusion

The Tax Court treated DuPont’s tender offer and ensuing merger of Conoco into DuPont’s subsidiary as a single qualifying A reorganization with sufficient continuity of interest; Seagram’s exchange of Conoco stock for DuPont stock therefore fell under § 354 nonrecognition, preventing Seagram from claiming a loss, and judgment was entered for the Commissioner subject to Rule 155 computations.


J.E. Seagram Corp. v. Commissioner, 104 T.C. 75 (1995)