Continuity of Interest Doctrine (CID)

What is the Continuity of Interest Doctrine?

The Continuity of Interest Doctrine (CID) requires shareholders of an acquired company to hold an equity stake in the getting company to permit tax deferral. The doctrine, (or CID, otherwise called Continuity of Proprietary Interest) specifies that a corporate acquisition of a target firm should be possible on a tax-free basis assuming that the shareholders of the acquired company receive and hold an equity stake in the getting company.

The Continuity of Interest Doctrine was planned to guarantee that a stockholder in an acquired company, who kept on holding an interest in the replacement corporation or continuing entity made after the reorganization, wouldn't be taxed. In commonsense terms, notwithstanding, the doctrine can do close to nothing to uphold a continuing interest since shareholders of the acquired company are free to discard their holdings when the acquisition transaction is completed.

Figuring out the Continuity of Interest Doctrine (CID)

The Internal Revenue Service (IRS) abandoned the post-reorganization continuity requirement and adopted new regulations in January 1998 and eventually concluded the regulations in December, 2011. The focal point of the new regulations was essentially on the consideration received by the shareholders of the acquired company, with the objective of preventing a transaction that is really a sale of the company from getting tax-free status. The Continuity of Interest doctrine expects that a predefined percentage of such consideration be as the getting company's stock. While the IRS required this percentage to be half for advance ruling purposes, case law proposes that Continuity of Interest can be kept up with even at 40%.

The continuity of interest requirement is resolved in view of while a binding contract for acquisition by the parent company is marked, and the price at which the stock of the target firm is purchased. In an acquisition, shareholders of the target firm may normally receive stock in the securing firm as well as cash for their shares initially held in the target firm. On account of a cash-just sale of stock in a target company, shareholders of the acquired firm would regularly pay tax on the sale of shares when the acquisition is completed. Under CID, taxes would be deferred until the place where they sold the shares acquired in the merger.