Business Continuity (COBE) – Company and Company Law


To print this article, all you need to do is be registered or log in to


Generally, any gain recognized on the sale or exchange of property is taxable, but the Internal Revenue Code (IRC) provides that certain sales or exchanges are not federally taxable events. An example is a § 368 corporate reorganization. The rationale for allowing corporate reorganizations under § 368 to be non-taxable events is that they are, according to Treas. Reg. 1.368-1(b): “…required by business requirements and…effect only a readjustment of the continuing interest in the property in modified corporate forms.”

“Continuation of Business Enterprise” or “COBE” is one of the requirements that a reorganization must meet to be “tax-exempt” under IRC § 368.

After reviewing the key concepts and legislation relating to the COBE requirement for tax-free reorganizations, this guide identifies and discusses the considerations relevant to determining whether COBE exists in a particular reorganization.

Key concepts and legislation

Tax-exempt reorganizations

IRC § 354(a)(1) states that, in general:

[n]o a gain or loss shall be recognized if shares or securities of a company party to a reorganization are, in accordance with the plan of reorganization, exchanged solely for shares or securities of that company or of another company party to the reorganization.

IRC §§ 368(a)(1)(A) through (G) inclusive define “reorganization” in the context of § 354(a)(1) exhaustively. In brief, the operations that can be considered as “reorganizations” eligible for the tax exemption are:

  • Mergers and statutory combinations – § 368(a) (1)(A)

  • Stock exchanges – § 368(a)(1)(B)

  • Exchanges of shares for assets – § 368(a)(1)(C)

  • Separative reorganizations – § 368(a)(1)(D)

  • Recapitalization – § 368(a)(1)(E)

  • Changes in Location or Form of Organization – § 368(a)(1)(F)

  • Insolvency Reorganizations – § 368(a)(1)(G)

Business enterprise continuity

Treasures. Reg. 1.368-1(d) indicates that for § 368 reorganizations occurring after January 28, 1998, COBE may be displayed if the reorganization has one of the following:

  1. “going concern”, where the “issuing company” (as defined in 1.368-1(b), generally the acquiring company or a company controlling an acquiring company, and including companies in which the issuing company holds an interest such as described in § 368(c)) continues the legacy business of the acquired company; or

  2. “continuity of assets”, when the issuing company uses a significant part of the assets of the acquired company in its business.

Treasures. Reg. 1.368-1(d)(2) further clarifies that with respect to business continuity, being in the same line of business tends to establish COBE, but that alone is not sufficient. If the acquired company had more than one line of business, COBE only requires the acquiring company to continue a significant line. The “historic activity” of the acquired company is the one it carried out most recently and not the one it started as part of the reorganization plan. The IRS will look at all of the facts and circumstances to determine if an industry is “material.”

As for the continuity of assets, Treas. Reg. 1.368-1(d)(3) notes that a company’s “historic business assets” are those assets used in its “historic business” and may include stocks, securities, and intangibles, whether or not they have a tax base. Whether they are “significant” is based on their relative importance to the operation of the business, but the IRS will also consider other facts and circumstances, such as the net fair market value of the assets.

Relevant Considerations for Determining COBE

Staff and physical location

The continuity between the personnel and the physical location of two companies is relevant in determining whether there is COBE. For example, in Atlas Tool v. Commissioner, 614 F.2d 860 (3rd Cir. 1980), aff’g 70 TC 86 (1978), the appellate court held that there was COBE between two companies that had effected a transfer of assets. In reaching this conclusion, the court pointed out that the beneficiary of the asset retained all the employees of the transferor company, that the transferor’s machinery and equipment remained in the same place, ready for use, and that the beneficiary of the The asset was actually using these machines and equipment at this location shortly after the transfer (to 864).

Duration of operations

The duration of operations after the reorganization may also be relevant for COBE. For example, in Honbarrier c. Commissioner, 115 TC 300 (2000), “historic business assets” were found to be the bonds and bond fund of the acquired company; and the “historical activity” was “to acquire and hold [bonds]The acquirer liquidated substantially all of the bonds a few days after the merger and distributed the proceeds to shareholders. The acquirer liquidated the last bond, of relatively low value, 4 months later. business continuity and asset continuity analyses, the short time these bonds were held factored into the court’s findings (at pp. 313-14) that the acquirer did not continue the business of holding bonds and has not used a significant portion of the bonds in a business.

Customers and Suppliers

Continuity in customers, customers and suppliers may be relevant to a COBE finding. For example, in Simon v. Commissioner, 644 F.2d 339 (5th Cir. 1981), in addition to transferring all of the transferor’s operating assets to the acquiring company, and operations continuing as before with the same personnel, same facilities and same address, except under the name of the acquiring company, the transferee had the same supplier rights and dealt with the same customers, as if nothing had happened except for the change of name of the company. In describing this transaction, the court concluded (at 342) that it demonstrated the “fullest corporate continuity … which is the basis of a corporate reorganization”. It was “same as that [situation] in previous cases where reorganizations have been noted.”

Assets transferred

Whether the issuing company uses a “significant portion” of the acquiree’s assets in its business may depend on the importance of the assets used in the issuing company’s business as well as their monetary value relative to the total value of transferred assets. In
Call of Laura, 653 F.2d 253 (6th Cir. 1981), the reorganization saw the sale of the old company’s aircraft, inventory, prepaid insurance, accounts receivable and equipment, but the new company retained the lease of the land and an aircraft hangar. These two retained assets have proven to be of “crucial importance” to the new company’s ability to secure reliable air charter and repair services (at 261). In terms of their value relative to the total assets transferred in the transaction, the ground lease and aircraft hangar appeared to represent approximately 27.25% of the total. The court held that the value of the ground lease and shed was substantial in these circumstances and that it was not necessary for a transferee to use all or a majority of the assets for there to be COBE.

Tax provision

Does your client’s business reorganization meet the business continuity requirement for a § 368 tax-free reorganization? Discover!

Tax outlook Business Continuity Business Classifier asks you to complete a questionnaire about the facts of your case. Each of the questions represents a factor or factors found to inform court decisions on the continuity of the commercial enterprise. Once you have answered all the questions, Tax Foresight will calculate the probability of a finding of business continuity, by comparing your scenario to previous relevant cases.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

POPULAR ARTICLES ON: US Corporate/Commercial Law

The Election of Section 962

law of the free man

For years, Section 962 was a relatively obscure tax planning mechanism. The Tax Cuts & Jobs Act, however, changed that, pushing the so-called Section 962 election into fashion.

An open letter to a DEI skeptic

Collins Einhorn Farrell

My law firm is one of many to have formed a Diversity, Equity, and Inclusion, or DEI, committee in recent years. You’re right: it seems to be a national trend.


Comments are closed.