Brief for the Respondent — Libson Shops, Inc., v. Koehler, District Director of Internal Revenue

Supreme Court brief1957

Ask Donna

What actually matters in this document.

Text

24) one

Opinions below . :

‘Jurisdiction - | Lae

Question . presented : 7 2 oe

Statute and Regulations involved |

Statement .

Summary of afgyment —-

Argument:

The courts bel ‘low correetly held that taxpayer cor-:

poration is not entitled te deduct from ifs own

income for the taxable vear here involved net

‘operating losses sustained in prior taxable ver

by other corporations which were merged into it

A. Sinee taxpayer corporation is not the taxable

entity, which sustatbed the losses, it is not

centitled to carry over and de duct the losses

1. Under Seetions 250s) and 122 of the

1959 Cade, the deduction of a net:

eperating loss by way of carry-back

“or-varry-over is available only to the

same taxpaver who ‘sustained the

loss

-. . taxpayer as the predecessér corpora:

tions whose-losses it seeks to carry

over and dgduet

3. ‘Taxpayer corporation is not the same.

taxable entity as sits) predecessors

>» merely because it acquired the prede-

cessors’ assets by a merger rather

, then through some other type of

“reorganization Tree

B. Even if regarded as the same taxable entity as

its predecessors, taxpayer is not entitled

the claimed operating loss deduction sifee

its business was not the same

Conclusion 92 5 pees Tate s r

Appendix _ * eh i Se

Tas xpayer corporation is not the came

we bo

"48

IL-

ee CITATIONS ©

Cases: :

Alaska Salmon Co. v. Commitssioner, 39 B. S A. 455

Abprosad Wateh Corp. v. Commissioners 11 T. . 240 41

' American Cas & Electric Co. vo United aa we 17 :

Supp. jlo. Bes yy .« 35, 37

American Gas & Elec. Co. v. Commissioner, 85 F. 2d

527.2 |. _— oe et ee

- Athol Miu. Cw. Vv. Commissioner, 54 F. 2d 230_. m= eewet

Bowman [Lotel Corp. Vv. Commissioner, 24 Bo OT. A. :

L1gs sae 26

Brandon Corp. V. Commissiqner, 71 F. 2d ee. -<~-2 24

Burnet v. Harmel, 287 U.S. 103 : ed osee tel 30

Burnet y. Sanford & Brooks Co., 282 UeS; 359 1]

California Casket Co. v. Commissioner, 19 T. CL 32. . 25,29

Cem Securities Corp. v. Commissioner, 72 F.2d 295 24

Commissioner v. Flowers, 326 U.S. 465° 10,

Commissioner ¥. Phipps, 336 US. 410 21

Commonwealth Title Co. v.+ Rothensies,- 124 Fo Supp.

o74_.:.. . aes 24

| Deputy vy. difPont, 308 US. 488 ph ea cee 10

Donok wey. United States, VAD F. Supp. §600-. . 25

Follansbee Sted Corp. v. Pnited States, 109 F. Supp.

oo “ ‘ . 25

Found rs Central Coos. [hoe y. 300 US. 26S - 34

Cally, I J. Win ry Vv. fommissioner, a cided en i7, :

1953 UP, ly de 25, 29

Gallo, bo d., " ‘Tnerys¥. Commissioner, 227 F. 2d 699 25,

ee 28,99, 33, 34,43

Gregory Vv. Eelrering, 29:33 US. 465. 20)

Fle ner vo Mellon, 304 i. &, 271 : 1]

Helvering v. Metro. Kidison Co., 306 VS. 522. 6,35,

: | " : ’ 8.49, 40°

Hhelve ring Vv. Reynolds, 315 U5. 428 , Peta 40

Telrering v. Southwest Corn., 315 U, 194 “ 40

Helrering v. Stuart; 317 Urs, 154 c Ray 30

Helvering ¥. Worl shire (H/ ie 308 ye wo. < 40)

Higgins Vv. Smith, 308 ». 173. nt OM 20

Interstate Tragstt Lines vy. Commissioner. 319 &. S.

590. Bets ee ae AQ, 21, 43°

Jones vo Noht Deity CW, Yad I. JQt-721 ar 9 3G

Kopp rs Coon. CUstear States, Aad F. Supp. 200 | 28, 33. 43 ;

- ill

‘Cases —Continued ; Page

Lyeth v. Hoey, 305, cm. 196". Rear erg aN - > 30

“May Gil Burner C orp. ¥. Commissioner, 7 F. od 644; 24

» MeDanaldy. (ainiadeaiine $23 US, 577 in cae 10

Moline-Properties ¥. Commissioner, 319 U, S. 4: 36 ,-_» 20,

Sit nh gle io eerie . ; 80, 34,35

National Carbide ¢ Orpen, Comm ISNIGHE! 336 t. s.. 422. zi,

are, eee . 30,34, 35

; National Securities Corp. v. Commissioner, 137 F. 2d |

600, certiorari denied, 320.U.S. 794.000.0020 ;

. New Colonial Co. v. Helix ring, 66 F. 2d 480 __ - : 20.

New Colonial Co. v. Helvering, 292 US. 435 0 . &6,

10, 11-13, 16, 20,22, 23, 27, 30, 32; 33, 34, 35, 39. 40. 47

., Newmarket Manufacturing Co. vo U nited State x, 130 F,

~ Supp, 706-23. ~. nee

Newmarket Manufacturing Co, | ad Slates. 233 z

2 ee | :.. 25, 28, 33, 35, 42

New York Cent. R. Co. . Commissioner, 79 F, 2d 247.

‘certiorari denied, 206U +: OOM. ox de, dn ae a

Oswego Falls Corp. vo Commissioner, 26 B. To A. 69.

affirmed, 71 F. 2d 673 ae a 24)

. ieee a /

Pennsylvania‘Co., Ete. vo Commissioner, 75 F.2d 719 4 24

Phillips x. Commissioner, 283 U.S. 589 ee 3

Phillips-Jones Corp. s. Parmley, 302 U.S. 233 : 3]

Plant rs Oil Co. vy. Hopkins, 286 EY. ; mae 47

Reo Motors v. Commissione f, oan €... 440. , Mey, 10

Rohmer vo Commiissioner, Las F. 2d 61, certiorari de-

nied, 228 U.S. 862 . . . - 27

Saenger v. Commissioner, 38 B. T. A. 1295 : a 5

Scenuiity Mills Co. v. Pomme. oot U.S, 281 V1

Shreis port NEON ip At Refin mag Co. (a ommi SSLONER, :

71 F. 2d-972, certiorari denied, 293 C O16 4

Standard Paring Co. Vv. Commissioner, 13 sae " 425.

- affirmed, 190 IF. 2d 330, certiorari denied, ae s

SH) eet a ee 1805 a je; 2:

Stanton Brewe ry Vv. Commissioner; 176 F.2d 573 | 26,

29,,30, 32. 33, 34, 42

Trahern Pinep Co. ¥. Commissioner, 27 B T. A. 363 a

Trineo Industries V2 Commissioner, 22-7) C. 959) 25, 29.47.

United States vo Gilbert . Ixsoriatcs, $45 UL SS. 36) | 3H

United States vo Leuvs, 340 U. S2590 ene | 1}

United States Vv. Olym pre Radic: Tilerision, 3H Els

2:32 Sune ite eae eee a te, Aad 10

3 IV

Cases ( ‘ontinued

lnited States v. Pel r. oS » ae S. 399. 5 a

Weber Flour ADA Cony © om mMISSTONEr, &? F. Od. 764.

Western J Fyland Ry. (fo. vi. Com MISSTONE?, 33. F.

2d 695

W “oolferd neany C 0.

. Statutes: ” -

Internal

see 13 (b) (26 EES.

h) (26.0.5.

p) (26 US.

a) (26 U.S.

2 (b). (226 U.S.

(@) (26 ee

we 3e

—_— me

e122 (a) 26ULS.

- 122 (b) (26 ULS.

, 122 (e) 126 ELS

ce, 129 (26: TLS.

ec, 141:(26'U. S.C.

See, 811 (26 US S.C.

Intérnal Revenue (

Sec. 381 (26U fe. Se bh

See, 382 (26 Us. C

Act of July 15, 1947,

» Rose,

(S.. 1942

05122 (d) (26 U.S.

* 1952 ed.,

1452 ed. 7 wer.

1952 ed.,

Code of 1954:

1952 ed., Supp. If, See. 381

. 1952 ed., Supp. I. See.

Revenue dot of A302

1952

4% 1952

* 1952 ed.,

_ T9952 ed., Sec.

Sec,

see.

See, 122)... -

8, 9, 10, 18, 17, 20,

C; 1952

CC, 1982

~ 1952 ed.,

(*..1962

& 1952

». C. 52

C1952

286 US

ed.,

ed...

ed.,

-ed.,

See.

See,

23 (s))

12. (b))

1.12 (g))

113 (a))_

3191 dp a

ed See, 13 fo) 2:

ed., Sec. 15 (b))

2 ed, See. 23 (p))

asec, - (ay).

Sec, 122 hy)

Sée, 122 (c))

Sec. 122 (d))

129)

1-41)

311) fs

¢, 249, 61 Stat. 324, See. 1

Revenue Act,of 1918, ¢, 18, 40 Stat. 1057, Sec, 204

Revenue Act of 1g2l, ¢. 136, 42 Stat. 227, See. 204 (b)_

Revenue Act of face. ce, 247,.53 Stat. 862, Sec, 2d1

(26 U.S. €. 1952 ed.; Sees. 23 (s) and 122).

Revenue Act of 1942, ¢. 619, 56 Stat. 798, See. 1 53; (a)

26 U.S. €. 1952 ed., See. 122 (by) ah

Revenue Act of 1945, e265, 58 Stat. 21, Sec. 128 <a)

(26 Ges. C. 1942 ed., Sec. 129)

Miscellaneous: | a

H. Confe renee oui No. 2543, Sid (% ong., 2d Sess., pp.

39-471 . Cong. & ia News (1954) 5280,

5298-5501) | | ,

— £.

10)

_ 8,9, 48.

17,31

26.

30, 41

10, 4S

10,

11,48

10, 49

719

26,31

18, 45

42,45

13°

18, 46 - -

| «

Miscellaneous—Continued: -

Pon

H. Rep. No. 855, 76th Cong., Ist Sess.. pp. 9-10:

(1939-2 Cum. Ball.504, 510-511)... eles 14

H. Rep. No. 871, 78th Cong., Ist Sess., pp. 24,49-50 .

(4944 Cum. Bull. 901, 988). | 46

H. Rep. No. 624, SOth Cong., Ist Sess. po bo tty 1H

TL. Rep. No. 1337, 83d Cong., 2d Sess. :

Pp: 41- “42 #8 & ot. Cong. & Adm. News (1%. 4p

4017, 4066-4067). 0 6: rete ge, a

Pp. Aisa Aldo t. 3S. CC. Coug. € Adin, News

(1954) 4017, 4273-4284) ap a ae

P.S..62 (Mat 5, 1950, 1950 ©. CL EE, ce BLS) 40.

Schorr, Tasabl Divide nds ih Reorganization: Cases,

New York University fastitute on Federal Taxation,

Seventh Annual (1948) 02 eae cers : $1

i. hate No. 617, 65th Cong.. 3d Sess. pow (b939-1

‘um. Bull. (Part 2) 117,°121.-122) - MM bs

S. Peat No. 627, TSth Cong., ‘Ist Sess. “pp. 26. 98°61

(1944 Cum. Bulk. 973, 1016-1017) aes 46

S. Reép. No. 1622, 88d Cong., 2d Sess., pp. 32> 5, 274 ;

287 4-0. SOF ©€ — & Adm. oo" (1954) 4021. .

4683 4054. 4914-4925 eae IS, 14.45

Treasury Regulations ae Sees. 29.52-1- 29.122-1,

Te ee ee a MEPIS

<iq)

3 nthe e Supreme Court of the United Sites

On “TOBER TERM, 1956

‘No. 64 -*

‘ LIBSON Suops, INC., PETITIONER

° i , ‘ ; Uv. —

Gustave F. Korn_er, District DimectoR OF [TNTERN AL

REVENUE

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF -

APPEALS FOR THE EIGHTH CIRCUIT

’ . .

, +

BRIEF FOR THE. RESPONDENT

OPINIONS eA |

The ‘opinion o f the: District Court (R. 32-43) is

not officially reported. The opinion of the Court of.

Appeals (lM. 47-60) is reported at 229 F, 2d 220.

JURISDICTION .

The judgment of the Court Duis was’ entered

on Janwary 19, 1956. (R. 61.) An order deny-

ing taxpayer's petitidn for rehearing was entered on

‘February 16,’, 1956. (R.°61.) . The petition’ for a:

writ_of ce rtiorari was filed on Apr i] 14, 1956, and was.

granted on June 4, 1956. (R. 62.) The jurisdiction

of this taal rests hy a 98 UL S. C., Section 1254.

pig **e . 5 ai ro. Ae °

QUESTION PRESENTED

Ww hether. the Taxpayer Corporation. is cntitled, Tie

der-Seefions 23 (5) aml 122: of the Inte ral ReVente

(ode of 1989) ta CAPT Over anid deduét frony Its own

iTieome for the taxable year here dnvelved “netVoper:.

“ating fosses <ustiined in prior taxidble years by other

corperatians Which were merzed inte It.

STATUTE AND REGULATIONS INVOLVED

The statute and Regulations invelved are Sections

33.{9), 422 (a), (b)° CE) CA} mw ey (2)°(C), and. (¢)°

wt the briternial Revenue ‘Code 0 1939, nel Section:

, 2 {22-1 “cay and (hy of eae Regulat’ ons 11.

Thexesare set fort] Ln the: Ap pendix, aera, Pp. 48-: a0.

— | STATEMENT ye ae:

Fhe material facts, which the Distriet. Court found

CR. 333) to be as stipulated by the parties: ag | a 18-18),

may he summarized as follows: oer

Taxpayer is a Missouri corporation -organized in

1946 under’, the name of Ltbson Shops: Management -

Corpor: ation, (R. 14, 18.). It engaged ‘in the -usi-

ness of providing management services’ for sixteen aa

~~ Missouri and Hlinois: corpor ations, each of which

operated «, a store sélling Wome n’s é pparel at retail.

“(R. 14-15.) All of fhe outstanding stocke of tax-

payer and-of ‘each of the sixteen other corporations

was owned, directly or ‘indirectly, by the same. cight

individuals and an the same proportions, | (R.. 15).

On August’ 1, 1949, pursuant to an agreement’ for

merger under the laws" of Migsouri and: Illinois, the

“sixteen separate operating, corporations were merged

—s

oe .

“’

“>

inte the t taxpayer corporation and dissolved. (1. To,

30-32.) °° The Merger agreement provided that tax-

Sayer should contintic as the surviving torporation

+e)

under the name LibsoneShops, Ine. OR. 22): and that

new stock of the taxpayer; in revised amount and

par value, should be issued in exchange, pro rata, for,

the stock of the merged corporations. (R. 24-26.)

The agreement also enlarged taxpayer: 's- business pr

| poses. (R. 22-24:)) After the merger, taxpayer Op-

erated the stores which had formerly been operated

pepararely by the sixteen operating fs ations, and

. Which new constituted assets of , the taxpayer.

. CR. 17.):

Prior to the nierger, three of ithe operatmg cor- >

_porations: had sustained net operating losses from

gtheir respective businesses as follows: (1) Evanston

Libson Shops, Tne, $8,115.11 for the calendar year

1948, and $6,422.28 for the period January 1 to July -

‘31, 1949 ; (2) ‘Lawrence Libson Shops, Inc., $2,770.42

for its fiseal year ended July 31, 1949, and an anused

‘arry-over eredit) of $245.03; (3) Hampton. Libson

Shops; dne., $4,879.92 for its fiseal year ended July

31, 1949. (RR. 16.) In the vear following the merger

(the taxable year here involved, ended July 3t, 1950),

each: of the. businesses formerly operated by these.

three corporations continued to sustain a net ‘operat:

ing loss. (R. 16-17.) °° *

In its income tax retum for the first: taxable year

‘after the merger, ended July 31,1950, taxpayer. re-

ported a net. income of $46,794.70. From this figure

it claimed a deduction, by oway of carry-over, of the

Sam = y

40°50 BS ne 4

total net operating’ losses ($22,452.76) sustained he

fore the merger by three of the operating corporations,

as set_forth above. °C. 16-17 3

ry” . ‘ ‘ : *

Phe Commissioner disallowed thee ti armed deduetion,

and taxpayer pad the resulting tax detiereney, CR.

WAL) Taxpayer duly tiled: a “claim. for refund, which

was disallowed, and? then instituted the present lithe

gation, GR. 17-18.) The ‘Distriet Court held that the

*~Selaimed net Oper ating loss deduction was hot permis

sible under Seetions 23> ¢s) and ty of the Internal

Revenue Code of 19 6, arid aecdordingty Ssustiued the

Commissioner's disallowance of the deduetion. *(R.

33-41.) The Court of Appeals affirmed, . CR. 47-60.)

SUMMARY OF ARGUMENT |

Taxpayer corporation claims the right, under See-

tions 23 (s) and-122_of the Internal, Revene Code

of 1939, to carry d and deduet frome its income

| for the taxable vear he Te involved viet oper: ating losses.

sustained in prior years by three other corporations

merged into it. The assets and liabilities of the three

corporations which sustained the losses, together with

the assets and liabilities of thirteen other operating

corporations (in all, sixteen separate ‘stores), were.

transferred to the taxpayer corporation pursuant to

the merger. After the merger, the three ailing busi-

nesses continued to, have losses, while those formerly .

condueted by the other merged corporations continued

‘to have profits, resulting in a net income from all of

the businesses combined. The decision | below, sus-

taining the Commissioner’s disallow rance of the claimed

‘ | a . t

\ :?

CALTY- “OVER is stipported by the terns of, the statute,

‘its legislative history, and the controlling pe codents,

Section 122 ‘authoyiges “the daxpayver’ te COP,

over and deduet from the imeome ef a current taxable

year a het operating Juss stustaihed ‘in a preceding

Yeare: Itoi to be strietly construed not-oonly beearhe

HW ogrants a tax deduction but because it marks a sharp

dephrture from the. anneal accoumiing rule. Phe pee

Visions of the statute, theilegislativ: history, and the

relevant deGkstons miaike if clear thei the CALEY -OFeT

privilege is vot aviwdable a less two conditions are.

-mets (1) The one claiming the pri ewe must be the

Sune “taxpayer”, © 6, the same taxable entity, as

the one which sustamed the prier wear'’s. loss; ane

(2) ther. must be continuity of the Dusiiess enter

prise, tr o¢., the current Year's ineome against. which

oe taxpayer seeks to offset the’ prior year’s loss must

e derived from the. oper ation of substantially the

same business « vas that which produced the loss.” As

the courts helow he Id, neither of those conditions lias

here been met. |

That taxpayer corporation ts not the same *tax-

payer” as the traisferor corporations which were

merged into ‘it, follows from the established doctrine

of corporate entity—which requires Yecognition of

every corporation for federal income fay purposes —

and this Court’s decisicn in, Veu ¢ ‘olonial- C ov. Hel-

vering, 292. ©. S. 435, applying that doctrine in

interpreting: a sti wutory _provision similar in all ma-

terial. respects to that he ‘re involved. In New Colonial,

this, Court held that a corporation whie h nequired the.

Bes

t: pes

assets and Liabilities of another corporation pursuant

te A PeOPeEn nization Was not enti ed to carry over and

deduct the transferor corporations loss “hecause the.

twe COPPOTATIONS Were not the spune “taxpayer” within

The purview of the statute, ‘Nd it se held hotwath-

standing the faet that the business and. stockholders

of each remained the same. JPhe ratiousle of Wee:

‘Colonial cand, of weases following. it) applies cto a

effected. ‘See

The Gases relied upon hy taxpayer, ‘insofar as they

merger avpe oof reorganization, such as was here

hold that a cerporation resulting. from a merger is .

the same taxpayer as its dissolved predecessors for

purposes of applying the uet- operating loss provi

sions ofthe federal taxing statute, run counter to this

Court’s reasoniag ino New Colonial and are based

upon an untenable distinetian between merger and

non-merger types of. reorganization. Since taxpayer

is not the e¢orpor: ation. which sustained the operating —

loss in question, it is no more entitled to -the benefit -

of the carry-over privilege. than was’ the suteessor |

corporation i In’ Vew Colonial. Decisions allowing a |

corporation Ee cie from a merger to deduct unam-

ortized discount on bond" indehtedness (e. g., Helver-

mao V. Metro, Edison Co, 306 U: S. 522), also relied

upon by taxpaver, deal with post-mierger losses sus-

tained hy the successor cérporation itself; they are

hot inconsistent with the Mew Colonial decision, and

they furnish no authority for the proposition that |

the net Ope rating loss carry-over privilege is ‘assign-

able from one corporate taxpayer te another by way

: ; . ’

of merger. Nor is there any inconsistency, as tax.

paver charees, rt tweeii Lit’ Governine “hat 'S “Posie it)

this cafse and i nh others involving the sane question,

Even assuming argeuendo that: the loss - ‘arPVv-over

privilege may be extended to a corporation other

than the one which sustained the loss, taxpayer stl

‘annot prevail since it has not met the contimity of:

enterprise test: That test his been applied in the very

cases ‘relied upon by taxpaver, and taxpaver’s: failure

to satisfy the requirement serves to distinguish: this

case from those. Here, the taxpayer corporation ac-

quired the assets of three separate retail stores whose

businesses were unprofitable, combined them with

those of thirteen other stores whose businesses were

profitable, and now sgeks to offset against the profits

of the new ee eee the Josses sustained

by the three losing ventures,

What is more, each of the three ailing’ businesses

whose losses taxpayer now seeks ‘to carty over. and

deduct ftom the income of the new enterprise’ con-

tinued to have losses during the taxable year, so. that

In the absence of the merger there admittedly would

have been no right to'a loss “ATTY-over, Thus even if,

as taxpayer contends, ft. stands ‘in the shoes of the

Jnerged corporations, it; would net he: entitled _to the

“aimed deduction, In. effect, taxpayer 1s Se king,

solely by virtue of the merger, to create a right to a

het gperating loss deduction which would not other...

wise have existed. It is clear that Congress .did not

-intend’ such a result.

eae

gs...

ARGUMENT

& . 1

THE COURTS BELOW CORRECTLY HELD THAT TAXPAYER COR-

PORATION IS NOT ENTITLED TO DEDUCT FROM ITS OWN

INCOME FOR THE TAXABLE YEAR HERE INVOLVED NET

OPERATING LOSSES SUSTAINED EN PRIOR TAXABLE YEARS”

BY OTTER CORRORAT IONS WHICH WERE MERGED INTO IT.

The taxpayer 1 ix a Missouri corporation orginally

organized in 1946 to stipervise ‘and manage’ other cor-

-porations, owned by ‘the same stockholders, which op-

erated clothing stores in Missouri and Illinois. On

August 1, 1949; the operating corporations—sixteen

in nuMmber—were merged into taxpayer, pursuant to

the laws of Missouri and Illinois; and taxpayer con-

tinued to operate, as a single’ enterprise,: the stores

theretofore separately operated by the merged corpora- )

tions. Be fore the merger, threé of the operating cor-

porations. had sustained net operating losses ; and the

, biixinesses of these cor por ations continued to operate

at a loss after ‘taxpayer acquired them through the’

merger procee dings. Taxpay er, however, reported an

over-all net income for the year succeeding the mer-

ger, and the question presented by this litigation is

whether it is entitled to.carry over and ‘deduct from

that ‘net Income. under Seetions 23 fs) and 122 of the

Internal Reve nué Code of 1939 (Appendix, infra,

pp. 48-50), the pre-merger net operating. losses of the

tliree ailing énterprises.

Both the District Court and the one of Appeals

have ruled that taxpayer is not entitled to the deduc-

tion, and we submit that their decision is correct.

Only the taxpayer who actually sustains a net cperat-

ing loss ‘is entitled, under the relevant statutes and de-

9 s

: cisions, to deduct’ that loss, by way of carry-over or.

earry-baeck, in computing his t taxable income for years |

other than the year of loss, The taxpayer corporation |

ia the case at har is not the sare taxpayer which sus-_

tained the net operating: losses in quéstion, and the

claimed deduction has therefore been properly denied.

Alternatively, it is the Government?s. position that,

even if the-statute may properly be read as aceord-

ing the earry-over privilege to.a taxpayer other than,

the one who sustained the Joss, in any event it may

not be construed. as extending the privilege to one

Who carries on a business different froma that. which

produced , the loss, Here sixteen separate operating

Corpor ations condue tine sixteen se parate ay

merged ito the taxpayer corporation, so that the busi-

ness thereafter -carmed on, was substantially: differ- .

ent; vet taxpayer is attempting to deduct) the pre-

merger losses of three of the sstores from the prost-

merger income of_all of the stores combined, Indeed,

since these three stores continued to operate at a loss

after the merger, taxpayer.is here claiming a tax

benefit to which it Concededly. would | not have been

entitled i in the ‘absence of merger. .

AL SINCE TAXPAYER CORPORATION IS SOT THE TAXABLE ENTIFY WHICH

SUSTAINED TJ@h Lassks. IP IS NOP EN TIPLED TO CARRY, OVER AND

DEDU CT THE Lossks :

lL. Under Neetions 23 (x) and 122 of the 19.39 Code, the deduction

of a net operating los by way ef carry back or-carry-over is

urilable only to-the same tarpayer who sustained ‘the loss

Section 23 (3) of the Internal Revenue Code of 1939

authorizes a “net operating loss deduction computed

under section 122... Section 122 in turn provides that

. _

- ° j

if ‘‘the t axpaver’ * has a net operating loss for a des-

ignated taxable veak, the loss (with certain adj. t-

“ments) may be earried back as a deduction against in-_

‘come eared, in the two preceding years, and, té the

extent not exhansted by the carry hack, be carriéd over

asa deduetion as eainst Income earned inthe three sue-

ceeding years. sO

The Jprevisions of Neetion 122 must be examined

mm the fight of the how faunal: " rile that an iicome -

tax deduction is a matter gf legislative grace and that

the burden of clearly showing the right, to the claimed

deduction is on the taxpayer.” - belgie Transit

Lines ve Comimisstoner, 319 U.S. 590, 993. See also

MeDonald y. Comurissioner, 3953 Pr. He) 602 Com-'

nussioncr Vv: Flowers, 326 U.S. 465; Deputy x.

duPont, 308" UL S..488, 493. For tonly as there is

Clear provision the refor ean any particular deduction’

be allowed.’ New Colonial Co. v. Helvering, 292

U. S..485, 440. See. also, the recent decision i

United States v. Oy pic Radio, & Television, 349

U.S. 232, whe Te, this Court stated - 236):

But as we have said hefor “general equitable

eonsidey ations do not contial the question of

ile auiiin of the net ‘ommea Toss ‘duets involves

three steps. The first is the computation of the het operating losss

if any, for the vears preceding or succeeding the current taxable

“year. (Section [V2 (a y ane (d).) The second is the determina-

tion of the extent to w hich the losses nivy be used as a carry-over or

carry-back to the vrrent taxable year, (Section 12 Tb).) The

third step is the conversion of the agyregute of the yeboneatneall

— carry-overs and carry-backs into the net operating loss deduction.

(Section 122 ¢e).). See Treastry Regulations Lt, Section 29, 222-

ioe e Appendix, Intra. pr. td) >: Reo Motors +. Commissioner, $38

U.S. 442, 446-447. . .

what deductions are permissible. Deputy v.

duPout, supra, at 493, Tt may’ be that Congress,

granted less than some thought or less than was

originally intended... We can only take the @ode

as we find it. and give it as great an internal

symmetry and consistency as its words permit.

This rule of strict construction takes om added sig

nificance here, since the allowance of a’ loss carry-

over from one taxable year to another, for deduction

PULposes, marks a sharp departure from our estab-

lished) system oof annual tax accounting “periods.

Security Mills Co. vy. Commissioner, 321 U. S. 281;

United States v. Lewis, 340 U.S. 590: - Burnet x,

Sanford er Brooks Ce. 28? U, “. 399; Hetner

»Mellon, 304 U.S. 271. a, | :

Nothing in the language of Section 122 suggests that

Congress intended to permit one taxpayer to carry

over (or carry back) and deduct ope rating. losses of

anothgr taxpaver. Far from authorizing such a trans-

ror language of the section would. seem plainly

to exclude -H.- Section 122 (b) (2) (C), the sub-

| section invoked by t taxpayer m the instant case, per-

mits carry-over ofa net ope rating os? from one year

to another “[ijf * * * the ¢ taxpay er’’ sustained’ the

loss. Thus the only “taxpayer” authorized to carry

over a loss of ; t preceding taxable year and offset it

against the income of a current taxable Vear is “the”

taxpayer Wwho had the loss. ie

Square authority for this interpre tation is found

in New Colonial Co. s Helvering, supra, where this

Court construed and 4 the carry-over provision

of. the 1921 Reve rue Act .(t. 136, 42 Stat..227; Seetion

* 405918—55—3

:w y

Er (b)), which, itl material respects, was the same — »

cis the statutory provision here involved, The ¢ Bours

Sti ated (pp. 440-41): 7 von d

The statutés pert aIniNng tothe dete rmination

al taxable income have proceeded generally on

the principle that there Shall be a computation

of aims and losses on the-basis of-a distinet ae-

. counting fer each taxable vear: and only ii

~ exeeptional situations, clearly defined, has there

heen provision for an, ailowance for losses suf-

rered ino an eartier vear, Not ouly so, but the

statutes have disclosed da general purpose to *

confine allowable losses to the taxpayer sustain-

my them, 2, e., to treat them as. personal to him

and not transferable to-or usable by another.

fe , * _ * *.

When -section 204 (b) is read with the gen-

eral poliey of the statutes in. mind, as it should »

be, we think it cannot be regarded as giving.

uny support to the deduction here claimed. - It

brings into the-statutes an exceptional provi-

sion declaring that where for one year ‘any

taxpayer has sustained a net loss’? the same

shail be deducted’ from the net income of ‘the

taxpaver’’ for the succeeding taxable. vear;

and, if-such loss be in excess Of the income for

that vear, the excess shall be deducted from

‘the net income for the next -suceceding tax-

able year. Its words’ are plain and free from

ambiguity. -Taken according to theirs natural

import they mean that thé tarpayer who sus-

tained the loss is the one tow hom the: deduc-

tion shall be dilowed. Vlad there been a pur-

pose to de part from the general policy in that

regard, and to. make th? right to the deduction

transferable or. available to others. than the

ta. r payer who sustained the loss, it, is but ‘rea-

sonable to believe that purpose would have been

clearly expressed. And as the section contains:

nothing which even approaches suéh an er:

— pression, tt. ‘must be: taken as not intended to

~~ make. such a- de parcure, [ Emphasis added. ]

The ae isions af Section 122, like those of Section

204 (b) of the 1921 Act, must he read in the light

of the gene if policy of the statutes ‘to confine allow-

able losses to: the taxpayer sus taining them, i. e., to

treat them as pey sonal to him and not eae. able to

or namie by another.” And: there is obviously no

clear expression m Section 122-of a purpose to depart’

from that general policy. | To the contrar y, the section’

"focuses upon “the t taxpayer’’—both as to the computa-

tion of net operating losses, and as- to the ¢: arry-back

-and carry-over o@ such losses for deduction: purposes.

it follows that ofly “the taxpayer” sustainihg the net

operating loss can deduct it, by way of earry-back or:

carry-over , from the imeome of gears lias tHan the

year of ae

This ¢ nelusion is supported not only by the Nev .

Colénial decision but by the pertinent legislative his- .

tory.. The privilege’ of carrying over a net operating

‘loss from one year to another’ was first allow ed by Sec-_

tion 204 .of the: Revenue Act of 1918, 18, 40 Stat.

1057. The Senate Conmittée Report accompanying

the 1918 bill stated (S, Rep. No. 617, io Coin a

Sess. p. 7 (1939-1 Cum. Bull. (Part 2) 11%, 12i1-

122)): | |

At the present time. ne Feeogenii on is g ven

to net losses; that is, if in any year the losses

ang expenses of a taxpayer exceed his gross in-

Leb

| | ;

come: the excess (or in. other words,.the net

loss) can not be carried ovef into the next vear

For purposes of taxatiof the settlement must"

be made upon the basis of each year’s business

*. by itself. , The chief merit of the. present plan

' ds its simplicity of administration. | But it does

not adequately recognize - the exigencies of busi-

né&s, and, under our pre sent high’ rates of taxa-

es may often result in grave injustice. The

committee has. accordingly incorporated —an>

amendment (section 204) which provides that

under certain, limitations net losses sustained

in 1917 or in 1918 may be deducted mm comput-

ing the net income of the t taxpayer, for the sue-

ceeding taxable vear; that a net 158s sustained

.in the future may be deducted from the net in-

-come of the preceding t taxable vear, and 1f it Is

_ in excess of the net income for such preceding

. °- taxable year, that such éxcess may be allowed

asa indies in computing the net income for

the succeeding taxable year.

A niet loss carry-over and carry- ik were also al-

lowed in the 1921, 1924, 1926 and 1928 Revenue Acts.

. Seetions 23 (s) and 122 were added to the 1939 Code.

by Section 211 of the Revenue Act of 1939, c. 247, 53

Stat. 862, in order to restere the relief as it. had

existed under the 1928 Act. ‘The committee report

“bearing upon the addition of Sections 23 (s) and 122

contained the following’ explanation (H. Re ‘p. No.. 855,

7th Cong., Ist Sess. Pp: 9-10 te 39-2 Cum. Bull. 504,

510-511)):

The bill toge zr with: the committee amend-

ments, permits. taxpayers to carry over net op-

erating business loss¢s for a period of two

years, Prior to the Revenue Act of 1932, such,

2-year carry-over was, alicwed. ie 26. toe

Revenue Act. of 1932, the 2 2-vear het kone Ci IT Y-

over Was reduced: to one year and in the Na-- |

tonal Industrial Recovery. Act the net) loss

carry-over was entirely eliminated. As a result

of the climimation of this carry-over, a busitiess

with alternating profit: ajid: Toss “is require “dl to

ps higher taxes ever a period of years: than

a business with’ st: ible profits, althouch the aver

age income of the two firms is equal, New: en-

terpfises and the capital-goods industries are

especially subject to wide thictuations im earn-

ings. It is, therefore, beheved that the allow-

canee offa net operating business loss carry-over

will greatly’ aid business and: stimnlate new

enterprises, , . ae

‘a originally added to thie 1939 Code, Seetion 122.

provided for the computation and carry-over of net

operating losses without expressly relating them to ‘a

‘given taxpayer. But Section 153 (a) of the’ Reve-

‘nue Act of, 1942, ¢.. 619, 56 Stat. 798, amended See-

‘tion 122. (b), not. ae to allow loss carry-backs for

the. first time, but also to provide, as to both carry:

backs and carry-overs, that it was the net operating —

losses of “thet taxpayer” ‘whieh could be so utilized.

6 th the light of this history, it is apparent that the

lass carry: -over privilege allowed by Section 122 and

‘its predecessors was’ intended to permit a taxpayer

whse|businc ‘SS Income fluctuated widely Secu vear to:

year to average the income éver a periodof vears,

‘and thereby alleviate the occasional harsh ‘effect of

computing his income on an annital accounting basis.

There avas no intention, express or mphed, te permit

- the averaging of business incomes of different taxpay-

—

weit | (EG. | cos

Bees | Congress authorized a deduction personal te a

given taxpayer “diid nontransferable to any other tax-

_ payer, as this Court held | in New Colonial C a Het-

vering, supra. mS f

Congress appare tly accepted this Court's 1934 de-

cision in New Colonial as a correct interpretation of

the statute, ‘for it made no change in the net oper at- .

Jng oss provisions insofar.as they -affeet the question 7

here presented. That Congress did not intend the

Section 122. relief to apply generallyin favor of A cor-

poration acquiring the assets and liabilities of another

corporation through a merger ‘or other reorganiza-

.tion is affirmatively shown, moreover, by the fact that.

_in 1947 it retreactively. granted such, relief limited to 2

. certain reorganized railroad corpoxations. Seetion 1

of the Act of. July 15, 1947, ¢. 249, 61 Stat. 324. Sig-

nificantly, the explanatory committee report Stated

(A. Rep: No. 624, 80th Cong., Ist Sess., p. 1):

Under existing law, if a railroad ccrporation

is rganigzed in a receivership ‘proceeding or

‘in a Nroceeding under section 77 of the Na-

tional. Benkruptey Act, as amended, and the

reorgartzation is effectid through the organi-

’ zation of a new corporation, any carry-overs of

. het operating losses or unusell excess profits

credits. of the old corporation-cannot .be used

by the ney corporation. The-reorganized cor-.

poration is regarded as a different taxpayer

from the old corporation. Consequently, rail-

roads coming out of receivership or bankruptcy

proceedings are treated differently, depending

_ upon whether they can be reorganized under

. the.same charter or under a new charter. ‘The.

bill removes this diserimination * * * and: the

wat 4 “< 17

‘lial is limited’ rt railroad corporations as de-

fined: in settion’ 77m of the National Bank-

‘ruptey Act. [Emphasis added. ] :

"Thus, in clear terms, Congress’ recognized tliat a cor-

| poration emerging from a reorganization with a “new

charter” is not the same taxpayer as ‘its predecessor

for purposes of applying the loss and credit ‘carry:

over provisions of the statute. Had Congress re-.

garded a corporation acquiring f& assets of a prede-,

cessor corporation as the same ta ayer for purposes

of Section 122, there obviously woul have been no

“need for -the enactment of the 1947. statute. And

since the special relief granted in 1947 was expressly |

limited to certain acquiring railroad corporations, it

| may not be extended by implication to other classes -

of acquis ing corporations. . :

Enlargements of ‘the rehef: allowed in Section 122

should be- made by Congress, not by the courts.” ¢ ‘on-

gress was,fully aware that the assets and liabilities.

of one corporation are often taken ‘over by another.

corporation -pursuan merger oY cons lidation or

other kind ‘of. reorg sanization, resulting | in termination

of the separate corporate existence of the transferor.’

Had C ongress wished to.extend the carry-over privi-

lege accorded by Section 122. to a corporation which.

did’ not itself experience the net operating loss, but

which acquired the business of another corpo vation

which had, the. loss, it could. readily and simply have

* Elsewhere in the 2959 @ode Congress enacted elaborate pro-

visions respecting the consequences flowing from corporate reor-

ganizations, and it defined a reorganization as including statutory

mergers: or consolidations. Section 112 (b) (3)..(b) (4) and (a)

“(i 26 U: : S.C. Sec. 112 ( ©) (3), (b) (4) and (g))..

ee 2 | . s y a ie 18 A , o :

done“so: It did do so—bnt with well-defined qual

fications and linitations—in the Intepnal “Revenue .

Code of 1954 which, of course, Is not applic ible to

the case at har. |

ee tion 38h of the Internal Rev enue ( ‘ode of 19: 40

organization to carry over various tax benefits (including a net

operating loss) whieh would have been available to the prede-

cessor, provided certain enumerated conditions are met. Com-

panion Section 382 places “Special Limjtations on Net Oper: ating

Loss Carryovers,” even where the conditions specified in/ Section

3sl are met. TheWays and Means Committee report: accom-

panyving the 1954 Code states in part with reference to — sec-

.tions (H. Rep. No. 1357, 53d Cong., 2d Sess., pp. +1- 42 (30.

Cong. & Adin, News (1954) 4017. 4066-41067 ve .

“Present law makes no prov ision for the transfer from one cor-

por ation to another, iri a tax-free merger or consolidation, of the

major tax benetits, privileges, elective rights, and obligations .

which were available to the predecessor, . These inelnde such.

items as loss carrvovers, * * *. 0. ‘ :

* *. "4 * } “te, ”

“The bill. provides for the carryover of about 16 specific tux

attributes or items from: one corporation to another mi -certain

tax-free reorganizations, * *-* >

“* * * At the same time the new provision makes it difficult to

escape the tnx consequences of the law by nieans of a legal artifice

such as Tiquid: ition and reincorporation. or merger inte another

corporation.” 2 a

See also, pages AL: — “A145 >of H. Rep. No. 1937. supra (3 pg

Cong. & Adm. News ( 1954) 017, 427 (34284) 2S, Rep. No. niighy

.Cong., 2d Sess... pp. 52-53, 275-287 ( 3ULS. GC. Cong. & Adina News.

(154) 4621, 4683-4684, 4914-4925) ; HH. epee Rep. No. }

2543, 83d Cong., 2d Sess. pp. 39-41 (5 U.S. C. Cong. & Adm.

News ( 1954)" 5280, 5298-5301). 4'ontrary 6 taxpayer's assertion

(Br. 6, 0S), it is far from clear that the deduction in controversy

would have been allowable under the 1954 Code. But even as-

suming that if were, there is no basis for toxpayer’s further as-

sumption that the 1954 Code confirmed, rather than changed, the

pre-existing law. The committee reports caution that “No in-

ference is to be drawn from the enactment of thie section {Section

applicable to .

vears after 1955, permits a suecessor corporation in a tax-free re-

In sum, under the statutory -provisions which ¢on-

trol this case, the. taxpayer corporation ean carry.

over and deduct the net. operating losses. in question |

only if, it was **the taxpayer, ie, the same tixable 7

entity whieh sustained those losses.

$. Pacpayer corporation is not the same tar payer as “the prede-

cessor corporations whose losses it seeks to ‘carry over and

deduct‘ | a ot -

The doctrine of cor rpor: ite entity—that every cor. |

poration is a separate t taxable unit—forms an. -inte-

“gral part of the federal inc ome tax system. Sections °

‘13 (b). and 15 (b) of the Inter nal Revenue ‘Code of

1939 impose a normal tax and .surtax, respectively,

; upon the net income of-*tevery corporation,’’ and

(with exceptions . not here relevant ‘) “every cor-

poration’? subject to tax is required by Section 52

(a). to“fle a return depicting its gross Income ‘and

deductions. .See, also, Sections .29.52-1 of. Treasury

Regulations 111. No exception is: made in the ease |

of a merger, consolidation, or other type of reorgani- |

gation. Furthermore, any taxpay er not in existence |

during the whole of an annual accounting ‘period 1

re quired by Section 47 (g) to file a return “for ve

fractional part of the year durihg which the taxpayer

381] whether any item or tax attribute may be utilized by a suc-:

cessor or a predecessor corpor ation under existing law.” Hy Rep.

No. 1337, supra, p. A135; S. Rep. No. 1622, supra, p. 277. At any

rate, since the 1954 ‘ode provisiong are not applicable, there is no

need to inquire whether the conditions precedent to the carry-over

there imposed are met in this case, or, if met, to ascertain the -

limited extent to which.the ‘losses might be deductible.

* See, e. g., the prov isions of Section 141 relating to consolidated

returns.

40591 8—56——4 : P _%

_ 9

: 20 .

. «

was in. existenee.”’ _ These pfovisions have always

heen: recognized as demanding separate returns b) a |

predecessor, and oe (including —

those participating in a: merger). of: their respective

incomes for the periods ering their respective lives.

A transfer by way of merger or other reorganization

does not have the effect of amalgamating the separate

taxable entities of the transferor. and transferee cor-

porations.’ :

The doctrine of sorporate entity requires recogni-

tion of every corporation asa separate aay ety,

so long,as it has some business purpose.” Thus this»

Court said in Moline Properties v. Commissioner, 319

U.S. 436, 438-45

‘The doctrine of corporate entity fills a useful

purpose in business life. Whether the purpose

be to gain an advantage under the law of the |

state of incorporation or to avoid’ or to comply

with the demands of creditors or to serve the

ereator’s personal oi undisclosed convenience, so _

long as that purpose is the equivalent of busi-

Less vetivity, or is. followed by the earrying on

* Indeed, in. the instant case, taxpayer and its predlecessors | re-

wi arded themselves as separate taxable entities, despite the merger,

_ since seprrate returns for a short taxable year ending with the

inerger (July 31, 1949) were filed on behalf of those predecessors -

which had been. filing returns on a calendar year basis. (R. 16.)

Tf, as taSpayer now contends, the taxable identity of the predeces-

sors was continued in it us successor, then a single return covering

the calendar vear 1949 and reflecting their combined operations for

that year should have been or See Vew Colonial Co. v.. Helver-

ing, 66 F. 2d 480, 181-482 (C. A. 2d), affirmed, 292 U.S. 435.

*The rnle may be digregarded only where there is an express

legislative exception, or where the corporate form is a sham cr

unreal, JA gqgins ve Smith, 308 U.S. 4738, 477-78; Gregory v.

‘Telvering, 293 VS. 465. . 7

ied ne 4

of. business by thé corporation, the corporation.

remains a separate taxable entity. New Colonial

Co. v. Helve ring, 292 U.S. 435, 442; Depuly vo

duPont, 308 U.S. 488, A94. In Burnet v. Com-

monwealthA m provement Co, 287 U.S. 415, this

Court appraised the relation between a corpora-

~ tion and its sole stockholder and held taxable to.

_, the corporation a profit on a_sale to its stock-

. holder.. This was- because the taxpayer had

adopted the corporé ate form for purposes of his

own. The choice of the advantages of incor-

poration to do business, it Was, held, required —

the acceptance of the tax disadvantages. .

This doctrine of separate tax identity applies, of,

course, not only as between the corporation and. its

stockholders, but as between commonly owned cor-

porations . conducting similar businesses. , Thus, a

parent corporation and its wholly-owned subsidiaries

are separate taxpayers; and the parent may not, by

any device, report as its.own income the income of

its: subsidiaries. National ( ‘arbide ( ‘orp. V. Commis-

sioner, 336 U. 8. 422. Similarly, a.parent corporation

may not deduct. its subsidiary’s operating deficit.

Interstate: Transit Lines v. Commissioner, 319 U.S

590.. See’ also Commissioner. V cae 336 UL 8.

410; National Securities Corp. v. Commissioner, 137

F. 2d 600 (C. A, 3d), certiorari Seuied: 320 U. S. 794.

The doctrine of corporate entity comes into play

with full foree- for purposes of applying ‘the net

operating loss deduction provisions, as was made

‘clear by this Court in its landmark decision, in the

New Colonial case. There, the taxpayer corporation.

‘had taken over all the assgts and liabilities of another

corporation in exchange for its stock, pursuant to a

reorganization; and the question was whether the tax-

payer could deduct, by way of carry-over, a net oper |

ating Jloswof the predecessor corporation, This Court,

held (1) that only the taxpayer who sustains ‘a net

operating loss is’ entitled. to carry “over ‘the loss. as

a deduction; (2) that the taxpayer corporation was

not the samé taxable entity as the predecessor, al-

though it continued to operate the same business and

had the same stockholders ;:and’ (3) that, accordingly,.

it was not entitled to carry over.the net operating

loss of the predecessor. In disposing of the taxpayer’s

contention that it was’ the same ‘taxpayer’ as’ the

predecessor corporation, becausé it had the same

assets, stockholders, «and business, and. was therefore

for all practical purposes. the same entity, this Court

said (292 U. S. at 441-442): \

This is not in accord with the view, on which |

the stockholders and creditors proceeded .w hen *

the new company was brought into being. They

deserted the old company and-turned to the new

one because they regarded it as-a distinet cor-

porate entity and therefore free from difficulties

attending the old one. Having sought and

reaped the advantages incident to the change,

it well may -be that. they would encounter some

. embatrassment in’ now objecting to an inei-

dental and remote disadvantage. such as is here

in question. But, be this as it may, we are

.of opinion that, in law and in fact the two

corporations were not identical but distinct.

This. was plainly implied in the transfer of the _

_ assets and business from one to the other. That

transaction was voluntary and contracttia}, ‘not

hy operation. of law. * Thereafter heithey cor."

poration had-any control over the other; the old

‘corporation had ne ‘Interest in the assets or

business, and the chance of gain and the risk

eof loss were wholly with the new one? Thus the

contention that the two corporations were prac-

tically the same entity and therefore the same

taxpayer has .no basis, unless, as the petitioner

insists, the fact that the stockholders of the two

corporations were - substantially, the same con-.

\ stitutes such a basis.

As a general rule a cor poration and its stock-

holders-are deemed separate-entities-and. this

is true in respect of tax problems, * * * in

_ this case we find, * * * nothing taking it out

of the general rule. On the contrary, we think

it. a typical case for the application of that

rule.’ —_ : ;

*To be sure, as taxpayer stresses (Br. 29-31), this Court in

New Colonial observed that the transfer of the assets and. liabil-

ities from the old to the new corporation in exchange for the

- Jatter’s stock “was voluntary and contractual, net by operation

of law.” But the transfer here involved was likewise ¢oluntary.

and contractual, having been based upon an “Agreement” for

statutory merger. (R. 15.) Indeed, the intercorporate reorgan-

ization transfer effected in this case was no different in’ sub- °

stance from that which occurred in New Colonial; in both cases

‘all the assets and liabilities of one corporation were voluntarily .

transferred to another in exchangé for the stock’ of the trans-

feree, which was distributed to the transferor’s stockholders,

and thereafter the transfer or transacted no business and had no

income. See 292.U. S.-at 437-438. In any event, as is plain from 7

a reading of the entire opMion in Vew ¢ clonal, a net Operating

‘loss is not transferable from one corporation peng by any

“by deliberate

form of consensual arrangement, @ é (éd., p. 43%

elimination of the old company and substitution of the new

one.” ——

A like, decision: had be ‘en reached ear lie ‘re by the First

Circuit in Athol Mfg. Co. v. Commissioner, 54 F. 2d

230, in which one Nene had similarly taken over

the assets,» liabilities, and business of another in a

reorganization, And since 1934, , when New Colonial

was decided, many cases have denied carry-over or

carry-back on similar facts, and on the same ra-

tionale: that one, corporation is not and eannot be

the same taxpayer as another. FE. g., Brandon Corp.

vy. Commissidner, 71 F.2d 762 (C. A. 4th) 3 May Oil |

Burner Corp. v. Commissioner, 71 F.2d 644 °(C. A.

4th); Cem Sccurities. Corp: v. Commissioner, 72 F.

2d 295 (C. A. 4th); Shreveport Produging & Re-

ning Co. v. Commissioner, 71-F. 2d 972° .(@. A.

y _ 71

oth), certiorari denied, 2 293: U.. S. 616; Pennsylvania: —

Co., Ete. v. Commissioner, 75 F. 24-719 (Ce A. 3d) ;

Weber Flour Mills Co. . Commissioner, 82 F. 2d

764 (C. A. 10th) ; Pe Paving Co. v. Commis-

stoner, 13: T. C. 425, affirmed, 19@ F. 2d 330 (C. A.

* 10th), certiorari denied, 342 U. 8. 860;* Common-

SIn Standard Paving (which involved a claimed carry-back

instead of carry-over) the Tenth Circuit declared that (p. 333)

“A corporation being a separate legal entity, its net earnings,

whether ascertained or not, belong to it, " and went ‘on to hold

(pp. 333-334) ; :

“To entitle a taxpayer to deductigns in meome ‘tax Yrabitity, |

it must bring itself clearly within ~the, statutory provisions.

White v. United States, 305 U. S. 281, 292 * *-*. This we

think the taxpayer here has failed to do. Oklahoma Standard,

an entity separate from its suc ‘essor, ceased to exist upon the

date of dissolution. It is a basic concept of taxation that_the

only person ‘who, can take a ‘net operatitig Joss deduction is the

taxpayer-ho sustained the loss and therefore a successor corpo-

ration is not entitled to deduct the losses of its predecessor even

} a,

wealth Title Co. Vy. Rotheusies, 124 F. Supp. 274 (E. D.

Pa.) ; Follaushec Steel Corp. v. United States, {09 F.

Supp.-635 (W. D. Pa): eae » United States,

_ 112. F. Supp-666+E-D- Mo.) ; Ne u en oer Manufac-

turing Co. V. United. States, 130 F, Supp. 706 (D.

' Mass.), reversed, 233 F. 24 493° (Cc. A. Ist): Trinco

Industries, v. Com missioner, 22 T. C. 959; California

Casket Co. v. Commissioner, 19 'T. C. 32; EB. & J. Gallo

Winery vy. Commissioner, decided April 17, 1953 —

(1953. P-H_ TC. Memorandtim Decisions, par. 53,

*Y 131), reversed, 227.F. 2d 699 (C. A. 9th). —

There is no need to join in taxpayer's discussion *

ae. 10-14) of the effect of a merger or other type of

corporate reorganization under the Missotiri and Thhi-

nois laws. It suffices that the laws of. those states

do not. purport to erase, or to dény ‘recognition to, the

Separate prior existences of the transferor and trans-.

feree corporations, and that they do not purport to

authorize a deduction by one of the corporations of

- net operating losses sustained hy the. other for pur-

poses of computing their respective federal income tax

liabilities.’ Moreover, evert, if a state through its leg--

though it h: id assumed all of. the liabilities of the predecessor. |

FC iting Yew “Colonial Co. and many other decisions.] —* * *

" We: think the rule applies conversely, which would prohibit

Oklahoma Standard from ne losses sustuned by Dela-

ware Standard.” :

* Even under state law the successor corporation in a statutory

merger or consolidation is not the same entity, in all respects, as

its predecessor or’ predecessors; otherwise the reorganization -

would have accomplished*nothing. ‘Indeed, it is only because the

merger or consolidation will effect sonie desired change that it, is \

conceived and carried out. .As for state laws which provide in

26 |

islature or courts seteenpend. to ‘do so, the Jocal law

would not be controlling, sine e the question is mani-

“ festly one of federal law governed by the federal

taxing statute, and it is clear from the scheme of the

federal statute, ‘as well as from the. decisions of this’

Court, that every. corpor ition is a separate - unit for

_ purposes of determining its federal-income tax liability

(including. the. availability of a net operating loss

carry-over under: Séction 122}. It is true that -for

some limited purposes the federal taxing statute treats

a transferee corporation ‘which is a party to a tax-

free reorganization (including a merger) ‘as stand-

ing in the shoes of a transferor (see, - ¢. Uy Sections

113 (a) (7) and 311). -It has also been held that,

under state merger and consolidation laws which |

shift the obligations of the transferor corporations

to the transferee corporation, the federal tax liabil- :

ities of the. transferors are shifted in the same man-

ner; and that the ‘t ‘austere, as substituted: obligor;

may. petition for redetermination of a sa

} x, ‘ = a . *

creneral terms that the successor cor poration in a mgyger or-con-

solidation shall succeed to the rights, privileges and obligations of -

the predecessor or predecessors, such provisions must, of course,

be read_as conferring only what.it is within the power of the state.

to give; that is, 1 rights, privileges and ‘obligations created by the.

laws of that parti¢ular-state. As Judge Learned Hand pointed

out ip -his dissent in Xtanton Brewery.¥. Commissioner, 176. F; 2d

573 (C. AL 2d), such laws cannot be réad as creating credits or

+ deduction rights under federal revenue laws, passing with corpo-

rate assets; like good will or trademarks. ~

Oswego Falls Corp. v. Commissioner, 26 B. T. A. 60, affirmed,

71 F. 2d 673 (C. A. 2d) y Saenger v. Commissioner, 38 B. T, A. .

#1295 ; Bowman Hotel Corp. v. Commissioner, 24 B. T. A. 1193;

: Trahern Pump Co. v. Commissioner, 27 B. T. A. 568 5 Alaski

Salmon Co. ay Commissione or, 39-B. T. A. 455. ome

“

he 2 a 97°

But these ‘deci isions, while they speak of the SUCCESSOT -

corporation as *‘the taxpayer” with respect to the tax

* liabilities of, its: predecessors, do not stand for the

proposition that the former is to be treated as the same

taxable entity as the latter for all. purposes, \ To. the

contrary, they recognize that the successor corporation —

is to be so viewed solely for the purpose of enforce:

ment or redetermination of-the surviving .tax liabil-

_ ities. It hardly follows, as taxpayer | apparently as~

sumes (Br, 14-16), that Congress meant to treat. the

successor ddrporation and its predecessors, as one and

the same ‘‘taxpayer’’ for the purposes of applying the r

net operating loss carry-over privilege afforded by Sec--

tion 122." In New Udawe, this Court flatly held

otherwise. .

| Certainly; a corporation’ which acqured a business,

by transfer from an individual stockholder would not.

be entitled to carry over and deduct from its own in-

~ gome an operating: loss sustained in an earlier year by

the stockholder, for the simple reason that the trans-

_feror stockholder and transferee corporation are -sepa-

rate taxable entities. Similarly, -an estate which ae-

quires a business froma dece ‘dent (by testamentary .

transfer or by ope ration of intestacy laws) clearly

would‘not be entitled to carry over and deduct from

‘its income an operating loss sustained in an earlier

year by the decedent, since the decedent and his estate |

"“Tt is well to retnember that the concepts employed. in con- *:

struing one section of a statute are not necessarily pertinent when

construing another with a —— background.” Rehmer

v. C ommisstonc r, 153 F.2d 61,65 (CLA 2d), certiorar! denied, 328

U.S. 862. .

are likewise ‘separate taxable entities. - No ‘valid

Teas@t appears, and’ none’ is. suggested by taxpayer,

for. Revat ah opposite result in “the case of inter-

corporate transfers effected by way of a merger or

other type of reor ganization. In the latter situation,

no less than in the former, the transferor and trans-_

- feree are different ‘taxable entities and consequently

are not the same {‘taxpayer’” within the meaning of

the net operating loss deduction provisions.

3. Taxpayer corporation ix not the same taxable entity ax sts

predecessors. merely because it acquired the predecessors’ as-

sets by a merger rather than through. some other type of

‘reo! ganization ‘ '

Relying chiefly upon Stanton Brewery v. Commis-

sioner, 176 F. 2d 573 (C. A. 2d), and cases’ following

-it,* taxpayer takes the position that the doctrine of

corporate entity does not apply in the case of a reor-

ganization transfer which takes thé form of-a merger.

It argues that, by virtue of the laws of the states un-

der which the instant merger’ was effected, a trans-

_feree corporation resulting from the merger succeeds

by: operation of law to all of the rights and obligations -

of the merged transferor, including deduction rights -

created by Congr ess for federal income tax purposes ;

‘and that consequently the ere corporation must

bé deemed the-sSame ‘‘taxpayer”’ as’ the transferor

within the meaning of the net oper ating loss pr ovisions

BE. & J. Gallo Winery vi Commissioner, 227 F. 2d 699 (Ca A,

9th).; Hoppers Co: v. United States, 134 F. Supp. 290 (C. Cls.) 3

Newmarket Manufacturing Co. v. United States, 233-F. 2d' 493 — .

(C. A. Ist). Petitions for certiorari are pending in the 1 oppers

and Vewmarket cases, Nos. 215 and 216.

of: the federal taxing statute, entitled to: carry over

and deduct from its own income a ret operating loss

sustained by the. transferor corporation’ in a prior

year. We respect fall¢ submit that the Stanton case

was incorrectly detided; that ‘the strong dissenting.

opinion of Judge Le arned. Hand represents: the cor-

rect view; that the Tax Court has properly declined

to follow Stanton,” as have both courts belo; and

that, in any ‘eve nt, the Stanton case is distinguishable

from ‘this case.

Stanton dealt with the merger of an 1 operating and.

a holding corporation, and it was held that the suc-

_ cessor corporation could carry over and deduct an

unused excess profits credit of the operating ,corpora-

tion. The majority of the court so held on the theory

that, since the successor corporation became directly

liable under the state (New York) law for outstand-

ing debts of the transferor (merged) corporation, in-

cluding tax btedness, it should be deemed to be

the same lise” as the transferor for purposes

_of applying the carry-over — ' It reasoned:

tliat the successor corporation was a ‘union of: com-

porient corporations into an all- embracing whole which

absorbs the rights and privileges, as well as the ‘obli-

gations, of its constituents” by operation | of state

13 ‘alifornia Casket Co. v. Commixsioner, 19 T. C. 32: T'rinco |

Industries vy. Commissioner, 22 T.C. 959; Edd. Gallo ¥ inery V.

Commissioner, decided April 17, 1953 (1953 P-H T. C. Memoran-

dum Decisions, par. 53,131), reversed, 227 F. 2d 699 (C. A. 9th) 7

Standard Paving Co. v. Commissionér, supra. See also the. opin- _

ion of the District Court in the Newmarket case, supra, reported

at 130 F. Supp. 706 -(D. Mass.). 6

law (p. 575), and consequently was ‘‘ ‘thie taxpayer’

now obligated to pay their taxes and entitled to their

credits’’. under the. federal. taxing statuté A p. 576).

‘The reasoning of the majority ‘of the court in”

Stanton is vulnerable in at least three important re-

spects. First, by treating the merged ‘corporation and

the corporation resulting from the merger as the same

“taxpayer’’, the court. disregarded the established rule

that every corporation is a separate taxable entity for

federal iticome tax ‘purposes. New Colonial Co. v.

Helvering, supra; Moline Pr operties v. Cammissioner,

supra; National Carbide Corp. v. C ‘extinissione r, supra.

_: Secondly, by hinging the meaning of.‘‘the taxpayer”’,

as used in Section 122 of the Internal Revenue Code,

upon the nature and effect of a mérger under state

‘law, the majority disregarded the settled” principle -

— the federal revenue laws should be interpreted

“so as to give a uniform application toa nationw ide

scheme of aay > Burnet_-¥- Harel, 287 U. S.

103, 110; Lyeth v. Hoey, 305 U. S. 188, 194; United

States v..Pelzer, 312 U. S. 399, 402-403; Helvering v.

Stuart, 317 U. S. 154,161; United States v. Gilbert .

“Associates, 345 U.S. 361, 364. . ‘Congress establishes

its own criteria and the state law may- control only

when. the federal taxing act by express language or

necessary implication makes its operation dependent

upon state law.” Cyeth v. Hoey, supra, p. 194.

Nothing in thé language of the carry-over provisions

involved in the Stanton case, or of those involved in

the present case, either expressly or by necessary |

implication, warrants the view that local law. is to |

govern’ who is ‘‘the taxpaver’” entitled te carry over

#4 i. . : : a1,

a federal tax eredit or loss from one yearta another

’ Thirdly, there is no ground for the further assump-

tion—upon-’ which the majority. opinion in’ Stanton

also rests—that, because’ the transferee corporation in

a_nierger becomes obligated by operation of law to

. pay existing tax debts of-the transferor, it neces-

sarily also becomes entitled to carry over and sub-

tract from its own ftiture taxable i income any tax cred-

its 6¥ deductions which belonged to the tr ansferor.”’

Whéther unused ‘income tax credits or’ benefits be-

longing to the transferor pass to the transferee and

are deductible from its ‘future taxable income is purely.

~a matter of legislative grace, and Congress has. not

4 Many states do not permit mergers or consolidations at all,

while others limit them to domestic. corporations. See Schorr,

Taiable’ Dividends in Reorganization Cases, New York Univer-_'

sity Institute on Federal Taxation, Seventh Annual (1948), pp...

507-509. Under taxpayer's interpretation of Section, 122, the.

availability of the net operating loss privilege would vary from

‘state to state, depending on whether a merger js permissible under

' the local law, and, if permissible, on whether. the local law pur-

‘ ports to treat tax deduction privileges created by C ongress as as-

signable from one corporate taxpayer to another.

'® 1939 Code Section 311 imposes upon a “transferee” of a tax-

owing by the taxpayer, to the extent of the value of the. property

received by the transferee. It affords an expeditious method for

the collection of taxes whenever a taxpayer by transferring his

_ assets leaves himself without. funds to meet his tax liability, by

~~ gproviding'a summary procedure for enforcing the transferee’s -

pritity at law or in equity. Phillips v. Commissioner, 283 U.

589; Phillips-J ones Corp. v. Parmley, 302. U.S. 253. The term

“transferee” as used in Section 311 includes “the successor of a

corporation, a party to a reorganization as defined: in’ section

112” (Section 29.311-1 of Regulations ty; and Sectiog 112 (g)

defines a “reorganization” RS inclnding “a “a statutory merger or

consolidation.’ - oes 3

“pay er’s property “liability, at law or in equiiy,” for federal taxes.” 6

‘3a

seen ‘fit in. the 19: 39 Code to extend ‘such’ tax benefits

toa taxpay er’s transferee. New Colonial Co. v. Hel-

vering, supra. As Judge Lenrned Hand stated in his -

Stanton dissent (p. 578) :

aie I do not think that it is more consist- .

ent with any declared purpose that I can find,

to extend the privilege of a “carry-over’’ to the

taxpayer at bar. Indeed, as the decisioris cited

in my brothers’ opinion show, privileges, closely

akin in purpose to this, are ordinarily lost by.

transfers by one corporation t6 another; and

the form of the transfer cannot be important.

We have no warrant for supposing that Con-

gress in general regards such credits as parts

of a “‘universitas juris,?’ ‘passing, with the

chattels, choses in action and: the rest, like

goo0d-w ill or trade- marks.

Tn any event, the Stanton ease is. distinguishable |

on its facts. There, the merger involved a single

operating corporation and a parent holding: corpo-

ration. The business carried on by the tr ‘ansferee cor-'

poration: -after the merger was substantially the same

as that which had theretofore been earried on’ by/the’ :

merged operating corporation, and even without the-

merger. the latter’ would ‘have . been entitled to the

claimed deduction—a crucial: feature, in the opinion

of. the majority, in. view of i€ holding (p. 577) that

Congress intended the carry-over provisions to apply.

‘‘to what is essentially .a- continuing enterprise”’.

‘Here, sixteen. separate ope’ rating | corporations con-

ducting sixteen separate stores were merged into a:

seventeenth éorporation, so that the business there-

. \ . . P ‘

after carried on by the transferee corporation was

substantially different. The taxpayer here is’ seeking

to deduct pre-merger losses of three of the stores from”

the post-merger income of the other stores. Moreover, |

these three stores continued to operate at a loss after

the merger; had the merger, never occurred the three |

taxpayers ,.who ‘sustained the losses would not ‘have

been, entitled. to the carry-over which the transferee-

taxpayer lrere se eks.. Thus taxpayer is not asserting

a tax benefit Which would: have existed in the absence

of the merger, as was the: t taxpayer in Stanton; it is

seeking to ereate. one solely by reason of the mer ger.

' The. other cases involving: application of the net -

Gute logs. provisions (EE. & J. Gallo Winery. v.

Commissioner, 227 F. 2d 699 %C: A. 9th) ; Koppers

Co. v. United States, 134 F. Supp. 290 (C. Cls:) New:

market Manufacturing Co. v. United-States, 233. ¥F.

493 (C, A. Ist) ), upon which ‘taxpayer relies; fol-

low the majority opinion in Stanton. Like Stanton,

', they proceed upon a combination of two theories: (1)

a corporation resulting from a mérger is the same

corporate entity as the merged corporation; (2) the

resulting corporation continued to earry on the same .

business enterprise as the merged corporation. Tnso-

_ far-as they hold that a transferée corporation in‘a

merger is the same taxable entity as the transferor for

* purposes of applying Section 122, they Gerogate from _

this Court’s New Colonial decision and rest upon a

"meaningless distinction between merger rand non-merger

transfers. As this Court made clear in New Colonial,

the carry-over privilege does not inure to the benefit

| ee :

of a reorganisation transferee for the simple reason

_that it is not the sarne taxable entity as the:tre ansferor ;

and that reason applies equally w hether the nporgen-

zation is of the merger. or non-merger-type.” And

| insofar as the cases rest upon the continuing erterprise |

‘theory, they are, of course, grounded upon 4 tet

not present here, since taxpayer took over the ,

of. sixteen different operating corporations and not

just the business of the corporations whoge losses it

seeks to carry over and deduct. |

The court below properly observed, ther ‘efore, that

the Stanton and Gallo cases ‘stand on the same foot-

ing” and are ‘*not persuasive. oy (R. 58.) ‘The same

observation applies to Kopper rs, where the merged cor-

porations had been filing consolidated returns. As for

the Newmarket case, which also involved a continuing

enterprise, it is to be noted that the court there did

not disagree with the decision below; on the contrar :

” w] t is true, as noted in the Sfanton majority opinion, that ‘ap-

plication of the corporate entity doctrine may, in some instances,

render the availability of the net operating loss deduction, de- .

pendént upon which of two or more corporations survives a

merger orsother reorganization. But the corporate entity doc-

trine, albeit a technical one based tipon a fictional distinction be-

tween a corporation and;its stockholders, plays a vital role in the

federal taxing scheme as in other fields, and must be strictly and

uniformly applied: irrespective of whether it is the taxpayer or

the Government. whose interests are adversely affected. Moline

Properties v. Commissioner, supra; National Carbide Corp. v

. Cominissioner, , supra; New Colonial -Co.v. Helvering, supra. Be-

"sides, a taxpayer is not immune from tax liability on a ‘taxable

transaction merely because it might have chosen a non- -taxable (or

iess taxable) method of achieving the same result tax conse-

~ quences flow from what the taxpayer does, not from what it —

have done. Founders General Co. v. Hoey, 300 U.S. 268, 275.

usiness.”. -

, ae 35

it expressly pistinguished Newmarket from the instant

‘ase, and ruled (p. 499) in the taxpaver’s favor ‘*with-

out intending to go bevond the faets of. the ease at

bar.” ee ae... 2

Equally misplaced is. ieipevee’ s reliance upon Jiel-

vering v. Metro, Edison Co., 306, U.S. 522, and eases

which led up to that decision. Those cases insolved a

question far removed from that here presented,

namely, Whether a corporation resulting from a merger

may deduct unamortized discount on bonds issued. hy

the predecessor and assumed by the successor. ~ Noth- .

ing in those decisions may be fairly construed as

undermining the corporate entity doctrine enunciated:

in the New Colonial case and impleme nted 1 the

Moline and National Carbide cases, or paper sai

a distinction between, merger and hon-merger reor-

ganizations ‘for purposes of determining the right of

‘one corporation to carry over and deduct a net oper-

ating loss sustained by another. 3 |

Prior to Metro, Edison, there had been four de¢isions

allowing a suc cessor ¢or poration to deduct unamortized

bond discount and expense. In all of these, the courts

view ed the bond indebtedness as having been transferred

from the predecessér by operation of law asa result of

statutory merger or consolidation. Westen Maryland

Ry. Ca. Commissioner, 33 F.2d 60 (A. 4th); New

York ¢ ‘ents R, Co. Vv. Commissioner... 20-247 (C. A

2d), certiorari denied, 296 U.S. 655; American Gas &

Elec. Cov. Commissione ir, 85 F.2d 527-(C. A. 2d) sand

American Gas &-Eleetric Co. v. United States, 17 ¥.

Supp. 151 (C. Cls.). In Metro. Edison, this Court also

found that taxpayer had consummated a merger and it

similarly concluded, in harmony with the earlier de-

cisions’of the lower federal courts, that the bond indebt-

edness had been transferred by operation of law. “From

this, it followed logically that-the deduction was permis-

sible. _Forsince there was no consideration for the pass-

ing of the obligation to the transferee corporation, the

loss Was one which would ultiniately be sustained by the ,

| transferee. In New-York Cent. R. CQ. v. Commis-

sioner; the Second Soins had stated the rationale as

‘follows (79 F. 2d at 249) : | ;

The. consolidated corpor ation does not ‘succeed -

tothe r ightsand liabilities of the constituent com-

panies as a purchaser but as a successor by opera- ..

tionoflaw. ** * * Theassets of the consolidated

corporation have the same cost basis as they had

when held by the old companies, and are subject

to the lien of the bond issues. Hence the consoli- -

dated corporation will suffer a loss when it pays

the bonds at par * * *; As already stated, the —

subject of amortization is the difference between

the cash realized on the bonds and their par value.

This difference the consolidated corporation will .

pay when the bonds mature, and this expenditure

it should beallowed to anticipate by yearly amor-

. tization during the life of the bonds in order n more

clearly to reflect its income. of

The ‘Commissioner argues that allowable de-

ductions are personal to the taxpayer and cannot

be transferred to or used by another. But the

cases which announce this doctrine deal with

losses sustained by a predecessor and sought to be .

deducted by a successor. [Citing New Colonial

and companion.decisions.] * * * noloss was sus-

; /

> pe 7 | 37 -

tained by the issuing corporations in selling their

bonds at a discount; the loss will be sustained by

_the consolidated corporation when the bonds ma-:

ture and are paid. Hence the deductions here in

question are by way of anticipation of the tax- -

payer’s own loss and should have been allowed. _

‘{ Emphasis added.] ; ;

Thus, where bond indebtedness is transferred by

operation of law, rather’than for a consideration, the

successor corporation itself.sustains the unamortized

hond discount loss after the reorganization, and hence

ean deduct the loss as its own.” -It is in this context”

’ The reason for distinguishing between a gratuitous transfer :

by operation of law and a contractual transfer for a considera.

tion was stated in Jones v. Noble Drilling Co., 135 F. 2d 721, 725

C. A. 10th): |

“If the corporate taxpayer acquired the assets of the subsidiary

by contract for a stipulated consideration, it would be a reason-

- able assumption that, in fixing the amount of consideration to be

| paid, it w ‘ould give regard to and make due allowance for the bond

discount to be assumed and paid by it; whereas, if the obligations ;

Were assumed by operation of law, it would have no opportunity

so to do.” ‘ :

Put another way in Athol Miy. CON. Commissioner, supra,

D4 F.2d at 231, where the successor corporation contractually as-

sumes the obligations of the predecessor, subsequent payments on

the obligations eannot be deductible loeses or expenses of the

successor, because they are in reality “part of the consideration

for the purchase of the assets of the old company; *'* * part of

the cost to the petitioner of those assets and constitutéd a capital,

. hot a business, expense.” Where the transfer is by operation of

haw, howev er, the losses and expenses are sustained 6y the successor

after the reorganization, and hence are deductible. New York

Cent. R. Co, v. Commissioner, supra. As the Court of Claims

yea in American Gas & Klectric Ue. v. United Ntates, supra,

7 F.Supp. at 159: —

“The right to claim a deduction on ac count, of havi ing r redeemed

* the bonds at a price above par did not come into éxistence until

that the Commissioner conceded int Metro, Edison, as

noted in this Court’s opinion. {p. 526), that in the case .

of a merger or ¢ onsolidation, as contrasted with a sale,

‘the identity of the ecorporation issuing the bonds

continues in the successor and-the datter becomes liable |

for the debts of the former by operation of law”, and

that in such sitrations the successor may deduct losses

‘and expenses attr ibutable to the assumed bond indebt-

edness: And it is in the same sense, we believe, that

this ae concluded in Metro. Edison (p. 529) :.

*. We are of -opinion that a transfer without

valuable consideration, with’the intent that the

transferor shall, as the statute provides, cease to

exist, made in aeceordance with the statute, has

all the elements of a merger and comes within

‘the principle that the corporate personality of

the transferor is drowned in that of the trans-

feree. It results that the continuing corpora- _

tion may deduct unamortized bond discount and

expense in respect of the obligations of the

transferring affiliate. [Emphasis added. |

te short, the bond dise ‘ount .cases upon which tax-

payer “relies stand mere ly for the proposition that

where the bond indebtedness is transferred “without

raluable -consideration”, so that there has been no

adjustment of a purchase price to reflect prospective

losses and expenses attributable to the bonds, the suc- .

cessor corporation is to be treated as if it were’-the

issuer of the bonds, and accordingly may deduct the

the bonds were so redeemed and, as we think, belonged to the cor-

poration making the payment. Clearly it was this corporation

that sustained -+the loss.”

©€

‘

é,

future losses and expenses as they are sustained, after ™

the merger.

The problern here .is not comparable’ to that t pre-_

sented fmthe. cases involving deductibility of unamor-.

tized hond discount, nor do the: decisions in those cases

depart from the rile of ‘the - New Cc ‘olonial case. Tax-

paver -here is “not attempting to deduct a post-merger

3 EXPENSE, or loss of its own arising out-of an assump-

tion of a predecessor's bond oblige tions, as were the

taxpayers in those eases. Rather, it is attempting to

carry over and deduct pre-merger net operating losses

of three of its predecessors. As this Court held in

New Colonial, the taxing statute accords the carry-over

privilege only to ‘the taxpayer” who sustained the

loss, not to a transferee. Under that decision the -

privilege is not assignable from one taxpayer to an-

other, and this is so Teg ‘ardless of whether the pur-

ported assignment is made gratuitously, by way of a

merger or other corporate reorganization, or for a

consideration. Significantly, there -is nothing in the

opinion of this Court in Metro. Edison which even re- -

motely suggests that the Court was de ‘parting from its |

holding in New Colonial; indeed, in view of the ab-

seve of reference to New Colonial, it is apparent that

‘this Court did not consider the issues in the two cases

‘to be anal agous,

Taxpayer's fajlure. to distinguish hetween a_post-

merger. expense - of the transferee corporation: itself

(involved in Metro. Edison) and a pre-merger net op-

erating loss of the transfe ‘ror corporation (involved in

New Colonial and this ease) likewise accounts for its

40)

claim (Br. 7, 91-22) that the Government's position *

here. is inconsistent with an n informal: administrative

ruljrg contained in P. 8. 62 (May 5, 1950, 1950 C. C.

H., par. 6118). That ruling: was addressed to ‘the

question of deductibility of the unamortized portion

of an amount paid by an employer corporation under

a pension plan to fund the cost of past service credits

of the employee henefiri iaries, under the provisions of

Section 23 (p) (1) (A) (iii) and (iv) of the Internal

‘Revenue Code of 1939. After the cost had been par-

tially amortized, the employer corporation, pursuant

to a merger, transferred its assets ‘and liabilities. to»

another corporation, which assumed. the obligatiyns

under the pension plan and consequently obligated it-

» self to pay the pensions as they became due. In P. 5S. |

62, the Deputy. Commissioner: took the view that the

problem was analogous -to that presented in Metro. -

Edison, rather than to the question in New Colonial,

and accordingly instructed Internal Revenue agents

to allow the transferee corporation to deduct the un-

amortized ‘cost of the pension plan assumed by it to

the same extent that the transferor would have been

‘entitled to do so. Surely, this ruling furnishes ‘no

basis for taxpayer’s charge of inconsistency.” In —

cases involving the question whether net operating _

* Even if it were assumed that the view expressed in P.S. 62 is *

not fully consistent with the contention urged here, that would’

scarcely be a decisive consideration, particularly since the earlier

view did not have the status of a formal Treasury ruling nor

reflect an established course of administrative construction. See

Helvering v. Noutharest Corp.. 315 U. So 194, 201, fn. 2; Hel.

vering Vv. Reynolds, 313 U.S. 428; Me leering V. tera side Oil Co.

308 U.S. 90. -

of a statutory merger, the

ly urged that they may not

‘losses may cross the li

Government -has consi

and that New Colonial eo}

B. EVEN IF REGARDED AS THE SAME TAXABLE ENTITY AS ITS PREDECES-

. SORS, TAXPAYER IS NOT ENTITLED TO THE CLAIMED OPERATING LOss

DEDUCTION. SINCE ITS BUSINESS WAS NOT THE SAME

If; as we submit, taxpayer corporation is not the

‘same ‘taxpayer’ as its extinct predecessors, within

the meaning of Section 122, then the decision below ‘is

entitled to affirmange on that ground alone, and there

is‘no necessity to inquire Whether taxpayer has also

met the so-called continuity of enterprise test, ¢. e.,

whether the income for the taxable year against which.

it seeks to offset the predecessors’ operating losses in

‘prior years was derived from a continuation of. the

same business as, that which produced the losses.

However, should this Court hold that taxpayer is to be

deemed the same taxable entity as its prédecessors,

then we submit that the decision below is nevertheless |

correct on the alternative ground—also relied upon by

the court below—that taxpayer’s business was substan- |

tially different. from that of the predecessors.

As is plain from the legislative history of the net

operating loss provisions, discussed above (pp. 13-15), |

the loss carry-over privilege was designed 'to permit a |

taxpayer whose business income fluctuated widely

- Indeed, the Commissioner has taken the position, albeit un-

successfully, that even the same corporate taxpayer is not entitled

fo carry-over a net operating loss, where the business which gave

rise to the loss. was not substintially the safme as that which pro-

duced the income from which the taxpayer sought to deduct the

loss, AT pros W ate AeCorps nv. Commissioner, Vi F.C. 240.

- a S,

° CP %2 Gem. @

me ages

Arma, .

ee aes

Oy capil

from year. to year to average the income .over a period:

of years. In substance, the privilege constitutes an

2xception to the fundamental rule that taxable income

is to be computed on an annual-acecountifig basis. “It

manifestly was never intended to permit the averag-'

ing of business incomes of corporations which conduct

different businesses. . Compare: Section 382 (a) (1).

precludes a carry-over even hy the same corporation

unless, among other things, the corporation continues

to carry on “substantially the same’ ’* business as be-

fore. | i

This underlying purpose of the net operating loss

carry-over privilege has indeed received recognition in :

the very cases fpon. which taxpayer relies. Phus in

Stanton,: upon which it chiefly relies, the court in

reachitig its decision stressed (176°F. 2d at‘577) that

the: transferor and transferee, corporations in the

merger carried on ‘‘essentially a continuing enterprise,

entitled to. all their [net. operating loss provisions]

benefits in ameliorating -otherwise harsh tax conse-_

quences of fluctuating profits or expanding business.”

And in Newmarket, upon. which taxpayer also strongly

relies, the court expressly distinguished that case from

this one on the ground (233° F. 2d at 497) that there

the Kusiness and stockholders of the transferor and

transferee corporations were the same—‘one single

business”—whereas in this-case there was a merger of

‘‘several businesses.’’ » Thus; the. very considerations

which impelled the Courts in Stanton and Newmarket

to allow the claimed deduction—epntinuity, of the en-

terprise—compel an opposite result in this case by"

reasan of the absence of that feature. “a :

‘The taxpayer corporation w hich here claims the r ight

to carry over a previous } year’s oper ating loss is not. only:

a different taxpayer from the one which sustained the

loss; the Income against which it seeks to offset the loss

was not even derived. from the same business which

gave rise te the loss... Here, the assets and liabilities of

‘sixteen separate: corporations, each conducting a re-.

tail store at a different location and each having a sep-

irate profit-loss history, were transferred to another

_ corporation (taxpayer) pursuant to a merger. The:

busifiess which was thereafter conducted by the trans-

feree corporation—a combination of all-of the stores—

Was substantially different from that previously con-

ducted, when each store was separately owned and

operated. Cf. Interstate Transit Lines v. Coinmis-

sioner, 319- U.S. 590, The segregated pre- merger husi- -

ness operations which. produced the losses in question

had no post-merger counterpart; conversely, the inte-.

grated post-merger operations which produced the in-

come against which taxpayer: would apply the losses ~~

had no pre-merger counterpart. While the several

: ° :

” The Hoppers case likewise presented situation in which the

corporation resulting from the merger carried on essentially the

same enterprise as before, since the merged corporations had been

filing consolidated tax returns. As for Gallo, as the.court below

observed (R. 57-58), the opinion in that case does not disclose |

“whether or not there was.involved a continuing enterprise,” and —

“[a]pparently the Gal/o and Stanton cases stand on the same

footing.”

corporations were converted into a single entity by

_ virtue of the merger, that entity was neither the same

corporate entity nor the same business entity which

experienced the pre-merger losses. Only by recon-

structing a hypothetical consolidated profit and: loss

statement of the merged corporations for the pre-

merger years and comparing the result swith | the in-

come for the post-merger year here involved, and by )

| superimposing the further- hypothesis that taxpayer

and the merged corporations were one and the same

taxable entity, can it be said that taxpayer is. entitled

to the claimed carry-over privilege. To allow the,

post-merger income of the consolidated enterprise to

_ be offset by pre-merger | losses of some of the merged |

corporations would extend the relief granted by the %

carrytover provisions far beyond that contemplated by

Congress. It would enable taxpayer to reduce its own _

average business income, which Congress meant to tax,

by losses sustained) by other taxpayers in_ other

businesses. sy |

Furthermore, to allow the deduction in controversy

would produce the anomalous result that losses which

the:transferor (merged) corporations themselves could.

not have carried over in the absence of the merger

‘may be carried over by the transferee (taxpayer) cor- |

poration Solely by reason of the merger. The losses

in question could not_liave been éarried over ‘by the

merged corporations, éven if their separate existences

had not been terminated by the merger, since the stores

which they respectively operated adinittedly continued

, to sustairf losses after the merger and during the tax-

a is 45:

able year here involved. (R. 17.) Thus, taxpayer is

not asserting a right to a net operating Joss deduction

which, but for the merger, would have been available —

to the transferor corporations that sustained the. losses.

Rather it is seeking, solely by virtue of the merger, to

obtain a deduction unavailable tothe transferor cor-

porations themselves. Surely, the merger did ‘not in —

and of itself serve to create a Section 122. deduction

where none existed before. That section was designed

to place taxpayers whose, business earnings fluctuated

from year to year on a tax parity with. those having

‘stable. annual ‘earnings; it was never intended to ac-

cord them an advantage over other taxpayers. ~ In-

stead of achieving the objective at which Section 122

was aimed, allowance of-the deduction in ‘eontroversy. |

would ‘bestow upon taxpayer a tax windfall.

- To Subscribe to taxpayer's interpretation of Section

122 would: sanction abuse of the relief intended. It

would extend the benefits of that section to a corpora-

tion which absorbs another corporation with a history

of operating losses, with a view. to deducting the losses

from its own future income. In effect; it would lend

judicial: approval to the exploitation, : for bargaining

purposes, of the tax benefits afforded by thé net oper-

) ating. loss carry-over provisions.” The District Court

*1 The limitation provisions in Sections 381 and 382 of the 1954

Code, relating to net opexating loss carry-overs by successor eor-

porations in. mergers or. other tax- tree reorganization, were de-

signed 3 Mm part to prevent “trafficking 1 ini corporations with oper- ’

ating loss carryovers, the tax benefits of which are exploited by

persons other than those who ine urred the loss.” H. Rep. No.

1337, «wpra, pp. 41-42 .(3 U.S. C. Cong. & Adm. News’ (1954),

4017, 4067). See also S. a No. 1628, supra, pp. 52-53 (3 -

had *‘no doubt’’ that, whatever other motive taxpayer

corporation. may have had in acquiring’ the assets of

tue three corporations whose stores had-sustained op- .

erating losses, ‘use of their tax credits Was one,”"*

(R.41.)- | : i,

Had the loss stores been ow wned and operated by t tax- _

“payer's stockholders and then transferred to.taxpayer..

‘corporation, the latter unquestionably could not avail

itself of the.carry-over privilege. No reason appears,

nor is any offered by taxpayer, for reaching a different |

tax result inerely because the transferots were .cor-

por ‘ations rather than individuals. In the one case, as

-UiS. C. Cong. & Adm. News ie 4621, 4683-4) : ama: |

ence Rep. 2543, supra, pp. - 40 (5 U.S. C. Conge 8 Adm. News

(1954) 5280, 5298-5300).

2 Whether the claimed loss deduction would in any event: he

bares! by Section 129 of the 1939 Code, as added by. Section 12s

(a) of the Revenue Act of 1945, &. 63, 58 Stat. 21, even if it quali-

fied for deduction under Section 122, is of academic importance

in this case in the absence of.a. finding that tax avoidance was the

principal purpose of the transfer. Section 129 provides in sub-

stance that where any person acquires control of a corporation,

or any corporation acquires the property of another corporation

- (other than one controlled by the same interests) in a tax-free

exchange, and the “principal purpose” of the acquisition is tax

avoidance througli the benefit of a deduction or credit, then the

deduction or credit shall not be allowed. Its provisions do not,

as taxpayer implies (Br. 33). enlarge the category of allowable

deductions, but. were intended merely to.supplement and extend -

established safeguards against. tax avoidance schemes. H.:Rep.

No. 871, 78th Cong., 1st Sess., pp. 24, 49-50 (1944 Cum. Bull.

901, 938); S. Rep. No. 627, 78th Cong., Ist Sess., pp. 26, 58-61

(1944 Cum: Bull, 973, 1016-1017). Accordingly, while Section

129 might preclude deduction of a net 6perating loss which other-

_ wise qualified for deiuction under Section 122, it obviously can-

not serve conversely to authorize deduction of a loss not. other-

wise allowable under Section 122._

. 47

-in the ofher, the iiss ors and transferee are sepa-

7 rate business and taxable entities. Having chosen for

reasons of their Own to discard the multiple corporate

form as a mode for conducting business, and there-

after to car ry on as a‘single taxable entity, the partic S

cannot ‘now escape the tax “disadvantage” of that

choice. New Colonial Co. v. Helvering, supra, 292

U.S. at 441, See also Woolford Realty Co: v. Rose,.-

286 U.S. 319; Planters Oil Co. V2 Hopkins, 286 U. Ss.

332; Princo Industries Vv. Commissioner, supra.

CONCLUSION | 7

The judgment of the court below should-be affirmed.

Respect ful} submitted. <

— — . J. LEE RANKIN,

ed . Solicitor General.

, re ~ Cuarces K. Rice,

_ Assistant Attorney Gene ral. .

Harry Baum,

Grant W. W TPRUD,

=o Attorneys.

OCTOBER 1956. ce

i J

APPENDIX

Inte mat Revenue Gane a of “1939:

SEC. . Depvue TIONS FROM GROSS INCOME.

In pee: net income there shall be al-

lowed as deductions:

a * ; was “ CARE

(s) [As added hy Section 211, Revenue Act

of 4939, ¢. 247, 53 Stat. 862] Net Operating

Loss Deduction.—For any taxable: year begin-

ning after December 31, 1939, the net operating

"Joss: deduction computed under section 122.

*- * * * %

(26.U.S. C. 4952 ed., Sec, 23. ee

Sec. 122 [As_ added | by Section 211, Revenue

Act of 1939, supra].. NET OPERATING LOSS

“DEDUCTION: . , :

(a) [As amended by Section 105 (e) (3) (!

Revenue Act of 1942, ¢, 619, 56 Stat. 798] Defi-

nition of Net Operating Loss.—-As used in this

section, the term ‘‘net operating loss” means the

excess of the deductions allowed by this chapter

over the gross income, with.thé exceptions, addi-

tions, and. limitations provided in subsec- |

tion (d). ,

(b) [As ardchdell by Section 215, Revenue

Act of 1950, ¢. 994, 64 Stat. 906]. Amount of

Carry-Back and, Carry-Over.—

(1) Net operating loss carry-back.—

>} (A) Loss for Taxable Year Beginning Before

1950.—If for any taxable vear beginning after

December 31, 1941, and before January 1, 1950,

the taxpayer has a net operating loss, such net

operating loss shall be a net operating loss ear-

(48)

49 ~<.

rv- baek for each of the two pre¢ ‘eding taxable

years, except that the carry-back in the case of

the first preceding taxable year shall be the ex-

evss, if any. of the amount of such net operating

loss over the sity income for the second preced-

ing t taxable year * * *.—

* * * * | *

(2) Net operating loss carry-over.—

* * * * ; *

Yoar Beginnthe After December 31, 1947, and

Before January 1, 1950+-If for any taxable

vear beginning after December 31, 1947, and

before January 1, 1950, the taxpayer has a net

operating loss, stich net operating loss shall be

_ a net. operating. loss carry- “wee for each of the

three ‘suceeeding taxable years, except that. the.

‘arry-over 1D the case of. deh such sueceeding

taxable vear (other than the first succeeding

taxable year) shall be the éxcess, if any, of the

‘amount of such net operating loss over the stun

of the net income for each ‘of the intervening

-years *.* *,

* . # io am *

(B) and 153 (b) of the Revenue Act of 1942,

supra, and Section 121 (g) (2) of the. Revenue

Act of 1950, supra] Amount of Net Operating

Loss Deduction.—The amount of the net oper-

ating loss deduetion shall be the aggregate of the »

net operating loss carry-overs and of the net

operating loss carry- -hacks to the taxable yeat:

reduced by the amount, if any, by which the net

income (computed avith the exceptions and lim-

itations provided -in subsection (d) (1), (2),

(3), and (4)) exceeds, in the case of a taxpayer

other than a eorporation, the net-income (com-

puted without such’ deduction), or, in the ease

of a corporation, the normal- tax net income

« a ; :

(computed without such deduction and with-

out the credits provided inAections 26 (h) and.

M)5 |

(26 [" S.C. 1952 ed., See. 122.)

Treasury Regulations 111, promulgated under aie

Inter nal Rev enue Code of 1939:

{f-"

Sec. 29,122-1. Net Gaverdiins Loss: Deduc-

tion—(a) General. (1) Section 122 provides

the rules for the computation of the net oper-

ating loss deduetion- allowed by. section 23 (s).

The net operating loss deduction is “the aggre-

gate of-the net operating loss carry-overs and

cafry-hacks to the taxable year, reduced by cer-

tain adjnstments to prevent the deduction of

losses absorbed by income not taxed.

*. _ % ~ ie _ ie *

(b) [As amended. by 'T. D. 5963, 1953-1 Cum.

Bull. 197] Steps in computation of net oper-

ating loss deduction. There are three steps in

the ascertainment of the net operating Joss de-

duction. The first-step is the computation of.

the net operating loss, if any, for any preceding

or succeeding taxable year ‘from which a net

operating loss may be carried forward or car-

ried back to the current taxable year. The sec-

ond-is the computation of the net oper ating loss

carry-overs to the taxable year from such pre-.

ceding taxable years and the computation of the

net operating. loss carry-hacks to the taxable -

vear from such succeeding taxable years. The

third is the conversion of the aggregate. of such

net operating loss carry-overs and carry-bac ks

into the net operating loss deduction.

~~ a . * * os

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.