Source: https://supreme.justia.com/cases/federal/us/353/382/
Timestamp: 2019-04-19 19:12:00+00:00

Document:
Under §§ 23(s) and 122 of the Internal Revenue Code of 1939, as amended, a corporation resulting from a merger of 17 separately incorporated businesses which had filed separate income tax returns may not carry over and deduct the pre-merger net operating losses of three of its constituent corporations from the post-merger income attributable to the other businesses. Pp. 353 U. S. 382-390.
The issue before us is whether, under §§ 23(s) and 122 of the Internal Revenue Code of 1939, as amended, a corporation resulting from a merger of 17 separate incorporated businesses which had filed separate income tax returns may carry over and deduct the pre-merger net operating losses of three of its constituent corporations from the post-merger income attributable to the other businesses. We hold that such a carry-over and deduction is not permissible.
services for corporations selling women's apparel at retail. Its articles of incorporation also permitted it to sell apparel. At about the same time, the same interests incorporated 16 separate corporations to sell women's apparel at retail at separate locations. Twelve were incorporated and went into business in Missouri, four in Illinois. Each of these 16 sales corporations was operated separately, and filed separate income tax returns. Petitioner's sole activity was to provide management services for them. The outstanding stock of all 17 corporations was owned, directly or indirectly, by the same individuals in the same proportions.
On August 1, 1949, the 16 sales corporations were merged into petitioner under the laws of Missouri and Illinois. New shares of petitioner's stock were issued pro rata in exchange for the stock of the sales corporations. By virtue of the merger agreement, petitioner's name was changed, the amount and par value of its stock revised, and its corporate purposes expanded. Following the merger, petitioner conducted the entire business as a single enterprise. Thus, the effect of the merger was to convert 16 retail businesses and one managing agency, reporting their incomes separately, into a single enterprise filing one income tax return.
In the year following the merger, each of the retail units formerly operated by these three corporations continued to sustain a net operating loss.
In its income tax return for the first year after the merger, petitioner claimed a deduction of the above $22,432.76 as a carry-over of its pre-merger losses. Petitioner sought this deduction under §§ 23(s) and 122 of the Internal Revenue Code of 1939, as amended. The Commissioner of Internal Revenue disallowed it, and petitioner paid the resulting tax deficiency. In due course, petitioner brought this suit for a refund in the United States District Court for the Eastern District of Missouri. That court dismissed petitioner's complaint, and the Court of Appeals affirmed. 229 F.2d 220. We granted certiorari to decide the questions of tax law involved. 351 U.S. 961.
the aggregate of the net operating loss carry-backs and carry-overs applicable to a given taxable year is the "net operating loss deduction" for the purposes of § 23(s) (§ 122(c)).
"If for any taxable year beginning after December 31, 1947, and before January 1, 1950, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the three succeeding taxable years. . . ."
(Emphasis supplied.) § 122(b)(2)(C), 64 Stat. 937, 938, 65 Stat. 505, 26 U.S.C. § 122(b)(2)(C). The controversy centers on the meaning of "the taxpayer." [Footnote 2] The contentions of the parties require us to decide whether it can be said that petitioner, a combination of 16 sales businesses, is "the taxpayer" having the pre-merger losses of three of those businesses.
chartered corporations are not the same taxable entity. Petitioner, on the other hand, relying on Helvering v. Metropolitan Edison Co., 306 U. S. 522, and cases following it, [Footnote 4] argues that a corporation resulting from a statutory merger is treated as the same taxable entity as its constituents to whose legal attributes it has succeeded by operation of state law. However, we find it unnecessary to discuss this issue, since an alternative argument made by the Government is dispositive of this case. The Government contends that the carry-over privilege is not available unless there is a continuity of business enterprise. It argues that the prior year's loss can be offset against the current year's income only to the extent that this income is derived from the operation of substantially the same business which produced the loss. Only to that extent is the same "taxpayer" involved.
"essentially a continuing enterprise, entitled to all . . . benefits [of the carry-over provisions] in ameliorating otherwise harsh tax consequences of fluctuating profits or expanding business."
This difference is not merely a matter of form. In the Newmarket case, supra, a corporation desiring to change the state of its domicile caused the organization of a new corporation and merged into it. The new corporation sought to carry back its post-merger losses to the pre-merger income of the old corporation. But for the merger, the old corporation itself would have been entitled to a carry-back. In the present case, the 16 sales corporations, prior to the merger, chose to file separate income tax returns rather than to pool their income and losses by filing a consolidated return. Petitioner is attempting to carry over the pre-merger losses of three business units which continued to have losses after the merger. Had there been no merger, these businesses would have had no opportunity to carry over their losses. If petitioner is permitted to take a carry-over, the 16 sales businesses have acquired by merger an opportunity that they elected to forego when they chose not to file a consolidated return.
As originally added to the 1939 Code by the Revenue Act of 1939, c. 247, 53 Stat. 862, 867-868, § 122 provided for the computation and carry-over of net operating losses without expressly relating them to a given taxpayer. Section 153(a) of the Revenue Act of 1942, c. 619, 56 Stat. 798, 847-848, amended § 122(b) not only to allow carry-backs for the first time, but also to provide, as to both carry-backs and carry-overs, that it was only the net operating losses of "the taxpayer" which could be so utilized.
These words have been omitted from the new provisions of the Internal Revenue Code of 1954 relating to carry-backs and carry-overs after corporate acquisitions of assets of another corporation. ~ See §§ 381, 382.
E.g., Standard Paving Co. v. Commissioner, 190 F.2d 330; Weber Flour Mills Co. v. Commissioner, 82 F.2d 764; Pennsylvania Co. v. Commissioner, 75 F.2d 719; Shreveport Producing & Refining Co. v. Commissioner, 71 F.2d 972; Brandon Corp. v. Commissioner, 71 F.2d 762.
E.g., Newmarket Manufacturing Co. v. United States, 233 F.2d 493; E. & J. Gallo Winery v. Commissioner, 227 F.2d 699; Stanton Brewery, Inc. v. Commissioner, 176 F.2d 573; Koppers Co. v. United States, 133 Ct.Cl. 22134 F.Supp. 290.
See Lewyt Corp. v. Commissioner, 349 U. S. 237, 349 U. S. 243-244 (dissenting opinion); Manning v. Seeley Tube & Box Co., 338 U. S. 561, 338 U. S. 566-567; Stanton Brewery, Inc. v. Commissioner, 176 F.2d 573, 574; H.R.Rep. No. 855, 76th Cong., 1st Sess. 9-10; S.Rep. No. 1631, 77th Cong., 2d Sess. 51-52.
"The bill, together with the committee amendments, permits taxpayers to carry over net operating business losses for a period of 2 years. Prior to the Revenue Act of 1932, such 2-year carry-over was allowed. No net loss has ever been allowed for a greater period than 2 years. In the Revenue Act of 1932, the 2-year net loss carry-over was reduced to 1 year, and, in the National Industrial Recovery Act, the net loss carry-over was entirely eliminated. As a result of the elimination of this carry-over, a business with alternating profit and loss is required to pay higher taxes over a period of years than a business with stable profits, although the average income of the two firms is equal. New enterprises and the capital goods industries are especially subject to wide fluctuations in earnings. It is therefore believed that the allowance of a net operating business loss carry-over will greatly aid business, and stimulate new enterprises."
(Emphasis supplied.) H.R.Rep. No. 855, 76th Cong., 1st Sess. 9.
Koppers Co. v. United States, 133 Ct.Cl. 22, 134 F.Supp. 290, also involves a situation in which the corporation resulting from the merger carried on essentially the same taxable enterprise as before, since the merged corporations had been filing consolidated tax returns. E. & J. Gallo Winery v. Commissioner, 227 F.2d 699, is inconclusive on this point, since the opinion does not disclose whether or not a continuing enterprise was involved. Cf. § 382(a) of the Internal Revenue Code of 1954, relating to the purchase of a corporation and change in its trade or business. Under circumstances there defined, that section precludes a carry-over by the same corporation unless it continues to engage in "substantially the same" trade or business as before the change in ownership. § 382(a)(1)(C).
"SEC. 129. ACQUISITIONS MADE TO EVADE OR AVOID INCOME OR EXCESS PROFITS TAX."
"(a) DISALLOWANCE OF DEDUCTION, CREDIT, OR ALLOWANCE. -- If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately prior to such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For the purposes of clauses (1) and (2), control means the ownership of stock possessing at least 50 per centum of the total combined voting power of all classes of stock entitled to vote or at least 50 per centum of the total value of shares of all classes of stock of the corporation."
See H.R.Rep. No. 871, 78th Cong., 1st Sess. 24, 49-50; S.Rep. No. 627, 78th Cong., 1st Sess. 26-27, 58-61.
We do not pass on situations like those presented in Northway Securities Co. v. Commissioner, 23 B.T.A. 532; Alprosa Watch Corp. v. Commissioner, 11 T.C. 240; A.B. & Container Corp. v. Commissioner, 14 T.C. 842; W A G E, Inc. v. Commissioner, 19 T.C. 249. In these cases, a single corporate taxpayer changed the character of its business, and the taxable income of one of its enterprises was reduced by the deductions or credits of another.

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