Legal Definitions - continuity of interest

Definition: Continuity of interest refers to a legal requirement that must be met in certain types of corporate reorganizations to qualify for tax-deferred treatment. This requirement mandates that the shareholders of the target corporation must retain an interest in the acquiring or controlled corporation.

Example 1: In an acquisitive reorganization, the shareholders of the target corporation must hold shares in the acquiring corporation to qualify for tax-deferred treatment. For instance, if Company A acquires Company B, the shareholders of Company B must receive shares in Company A and hold them for a certain period to avoid immediate tax consequences.

Example 2: In a divisive reorganization, the shareholders of the target corporation must retain an interest in both the distributing and the controlled corporations to qualify for tax-deferred treatment. For example, if Company A splits into two separate entities, Company B and Company C, the shareholders of Company A must hold shares in both Company B and Company C to avoid immediate tax consequences.

These examples illustrate how continuity of interest is a legal requirement that must be met in certain types of corporate reorganizations to qualify for tax-deferred treatment. It ensures that the shareholders of the target corporation maintain a stake in the new entity and prevents them from immediately realizing taxable gains or losses.