1Initial StructureCorp TManufacture ofSynthetic ResinsManufacture ofChemicalsDistribution ofChemicals2Sale of Businesses (July 1, 1981)Synthetic Resin& ChemicalDistributionBusinessesUnrelatedPartyCorp TManufacture ofSynthetic ResinsManufacture ofChemicalsDistribution ofChemicals3Reorganization (December 31, 1981)SolelyP Voting StockSolely P VotingStockAll TAssetsTShareholdersCorp TCorp PCashManufacture ofChemicals4Ending PointTShareholdersCorp PCashManufacture ofChemicalsP’s HistoricBusinessLegendOwnership / structural holdingTransfer of stock / cash / assets

COBE — One Line Continued Explained

The diagram tracks a corporate reorganization across four steps. In the Initial Structure, Corp T conducts three significant lines of business that are approximately equal in value: the manufacture of synthetic resins, the manufacture of chemicals for the textile industry, and the distribution of chemicals.

In the Sale of Businesses (July 1, 1981), T sells the synthetic resin and chemical distribution businesses to an unrelated party for cash and marketable securities. After the sale, T retains only cash (and the securities) plus its chemical-manufacturing business.

In the Reorganization (December 31, 1981), T transfers all of its assets — the cash, securities, and the chemical-manufacturing business — to Corp P solely in exchange for P voting stock. T then distributes that P voting stock up to its shareholders in liquidation, an asset acquisition structured to qualify as a § 368(a)(1)(C) reorganization.

At the Ending Point, the former T shareholders own Corp P, which holds the cash, the chemical-manufacturing business, and P’s own historic business. P continues the chemical-manufacturing line without interruption, so COBE is met: the regulation requires only that P continue one of T’s three significant historic lines of business.

Key Takeaways

One significant line is enough

Continuity of business enterprise is satisfied if the acquiring corporation continues just one of the target’s significant historic lines of business. P need not carry on all three of T’s businesses. Treas. Reg. § 1.368-1(d)(5), Example 1.

Pre-reorganization dispositions are respected

T’s July 1 sale of two of its three businesses to an unrelated party does not defeat COBE, because the line P actually continues — chemical manufacturing — was itself a significant historic business of T.

Significant means measured by value

Because T’s three lines of business were approximately equal in value, the retained chemical-manufacturing business was plainly a significant — not merely token — historic business of T.

COBE is one of several tests

Satisfying COBE addresses only the continuity-of-business-enterprise requirement; the transfer of all T assets solely for P voting stock must still independently qualify under § 368(a)(1)(C) and meet continuity of interest and business purpose.

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