Continuity Of Interest Doctrine - CID

DEFINITION of 'Continuity Of Interest Doctrine - CID'

A doctrine which stipulates that a corporate acquisition can be done on a tax-free basis if the shareholders of the acquired company hold an equity stake in the acquiring company. The continuity of interest doctrine was intended to ensure that a stockholder in an acquired company, who continued to hold an interest in the successor corporation or continuing entity created after the reorganization, would not be taxed.

BREAKING DOWN 'Continuity Of Interest Doctrine - CID'

In practical terms, however, the doctrine can do little to enforce a continuing interest because shareholders of the acquired company are free to dispose of their holdings as soon as the acquisition transaction is completed.

The Internal Revenue Service (IRS) abandoned the post-reorganization continuity requirement and adopted new regulations in January 1998. The focus of the new regulations was primarily on the consideration received by the shareholders of the acquired company, with the objective of preventing a transaction that is actually a sale of the company from receiving tax-free status. The continuity of interest doctrine requires that a specified percentage of such consideration be in the form of the acquiring company's stock. While the IRS required this percentage to be 50% for advance ruling purposes, case law suggests that continuity of interest can be maintained even at 40%.