What is the Continuity Of Business Enterprise Doctrine?

The continuity of business enterprise doctrine is a taxation principle in which an acquiring firm must continue the acquired firm’s business before the acquisition can qualify as a tax-deferred reorganization. In cases where the acquired firm’s business cannot be continued, a significant percentage of the firm’s assets must be used for the new business so that the acquisition can qualify as a tax-deferred transaction. The continuity of business enterprise doctrine is a taxation doctrine that stipulates tax treatment for firms during reorganization.

How Does the Continuity Of Business Enterprise Doctrine Work?

Under the continuity of business enterprise doctrine, before an acquisition can be treated as a tax-deferred reorganization or transaction, the actual business of the acquired firm must be retained or a significant portion of the company’s assets used for the combined (new) business. This doctrine is used by the Internal Revenue Service (IRS) for tax treatments when firms go through reorganization. Usually, tax benefits are the motivator of most mergers and acquisitions, this doctrine helps the IRS to control or limit the number of transactions that can be regarded as tax-deferred. An acquisition that fails to meet these criteria will automatically not qualify for a preferential tax treatment despite going through a reorganization.