## Facts

- Atlantic City Racing Association (ACRA) was a New Jersey corporation with 506,000 outstanding common shares held by about 500 shareholders.
- May B. Kass owned 2,000 ACRA shares for more than six months; her basis was $1,000, and the shares were capital assets.
- Track Associates, Inc. (TRACK) was formed in November 1965 to gain control of ACRA and change ACRA’s capital structure and business policy.
- TRACK’s plan was to (1) purchase at least 80% of ACRA stock and then (2) merge ACRA into TRACK.
- In December 1965, TRACK purchased over 424,000 ACRA shares (about 84%) for cash at $22 per share; roughly 30,000 ACRA shares were not purchased for cash.
- After TRACK obtained 84% ownership, ACRA merged into TRACK under New Jersey law.
- Kass and other remaining ACRA minority shareholders exchanged their ACRA shares for TRACK stock in the merger.
- Kass reported no gain, claiming the exchange qualified for nonrecognition as a tax-free reorganization.
- The Commissioner determined Kass recognized gain on the exchange and asserted a 1966 income tax deficiency of $10,134.67.

## Issues

1. Whether Kass’s receipt of TRACK stock for her ACRA shares in the merger qualified for nonrecognition as a reorganization exchange under the Internal Revenue Code.
2. Whether the pre-merger cash purchase of 84% of ACRA stock caused the overall transaction to fail the continuity-of-interest requirement as applied to Kass.

## Decision

- The Tax Court upheld the deficiency and entered decision for the Commissioner.
- The court held the transaction, viewed as an integrated series of steps, did not qualify as a tax-free reorganization for Kass.
- Kass was required to recognize gain on exchanging ACRA stock for TRACK stock, measured by the value of TRACK stock received over Kass’s basis in ACRA stock.

## Legal Principles

- Federal reorganization nonrecognition depends on the substance of the overall transaction, not solely on compliance with state-law merger formalities.
- Continuity of shareholder proprietary interest is required for reorganization treatment; a transaction that is predominantly a cash acquisition may fail this requirement.
- Where an acquirer purchases control for cash and then uses a merger primarily to eliminate the remaining minority interest, the minority shareholders’ stock-for-stock receipt may be treated as a taxable disposition rather than a protected reorganization exchange.

## Conclusion

Because TRACK acquired control of ACRA largely through a cash purchase and the later merger functioned mainly to acquire the remaining minority shares, the exchange did not satisfy reorganization nonrecognition standards for Kass, and she had to recognize gain on receiving TRACK stock.


Kass v. Commissioner, 60 T.C. 218 (1973)