Source: https://www.legalcrystal.com/case/95929/new-colonial-ice-co-inc-vs-helvering
Timestamp: 2019-04-21 04:42:53+00:00

Document:
Appellant New Colonial Ice Co., Inc.
1. Whether and to what extent deductions of losses shall be allowed in computing income taxes depends upon legislative grace, and only as there is clear statutory provision therefor can any particular deduction be allowed. P. 292 U. S. 440 .
defined, has there been provision for an allowance for losses suffered in an earlier year. P. 292 U. S. 440 .
3. The statutes also have disclosed a general purpose to confine allowable losses to the taxpayer sustaining them -- i.e., to treat them as personal to him, and not transferable to or usable by another. P. 292 U. S. 440 .
4. In order to overcome financial difficulties, all the assets, liabilities and business of a corporation were taken over by a new corporation specially organized for the purpose and having substantially the same capital structure, in exchange for a portion of its stock, which was distributed by the older corporation among its stockholders, share for share, thereby retiring the old shares. Creditors were given a supervising management of the new corporation through a stock voting trust until their claims should be paid. The corporate existence of the older corporation continued. Held that the two corporations were distinct entities, and that the new corporation, in the computation of the tax on its net income for succeeding year, was not entitled to deduct earlier losses of the old corporation, under § 204(b) of the Revenue Act of 1921, which provides that, where any "taxpayer" has sustained a net loss, the amount may be deducted from the net income of "the taxpayer" for succeeding tax years. P. 292 U. S. 440 .
5. As a general rule a corporation and its stockholders are deemed separate entities, and this is true in respect of tax problems. P. 292 U. S. 442 .
Certiorari, 290 U.S. 621, to review the affirmance of a decision of the Board of Tax Appeals, 24 B.T.A. 886, upholding deficiency assessments of income taxes.
This is a controversy respecting deficiencies in the petitioner's income taxes for 1922 and 1923.
"If, for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year, and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commission with the approval of the Secretary."
and the plant was being operated at 40 percent of its intended capacity, the company became financially embarrassed and unable to meet its indebtedness or supply additional equipment needed to render the business profitable.
A creditors' committee was organized, and likewise a stockholders' committee. Investigation disclosed that much stock had been issued of which there was no record and for which no consideration was received. Negotiations resulted in the restoration and cancellation of the spurious stock and in an agreement to organize a new company to take over the assets and liabilities, proceed with the completion of the equipment, and continue the operation of the business. The agreement included provisions for the issue of stock by the new company to the old equal in class, par value, and number of shares, to the outstanding stock so that the old company could make an exchange share for share with its stockholders, and thereby retire its outstanding stock; for obtaining new funds with which to complete the equipment; for an extension of time by existing creditors, and for investing creditors with a supervising management through a stock voting trust until their claims were paid.
Accordingly, the new corporation, petitioner here, was organized and took over the assets, liabilities, and business of the old corporation on April 13, 1922. Other provisions of the agreement were carried out in the manner contemplated, save in minor particulars not material here. The corporate existence of the old corporation continue (so it is stipulated) during the remainder of 1922 and all of 1923, but, after the transfer, it transacted no business and had no assets or income.
and of $56,242.55 during the year 1923. In this proceeding, the new corporation asserts a right under § 204(b) to a deduction from its income so realized of the losses so sustained by the old corporation.
The petitioner insists that the continuity of the business was not broken by the transfer from the old company to the new, and this may be conceded. But it should be observed that this continuity was accomplished by deliberate elimination of the old company and substitution of the new one. Besides, the matter of importance here, as will be shown presently, is not continuity of business alone, but of ownership and tax liability as well. Had the transfer from one company to the other been effected by an unconditional sale for cash, there would have been continuity of business, but not of ownership or tax liability.
Petitioner also insists that the ultimate parties in interest -- stockholders and creditors -- were substantially the same after the transfer as before, and this may be conceded. But there is here no effort to tax either creditors or stockholders. Other statutes, as also constitutional provisions, have an important bearing on the taxation of gains by stockholders through corporate reorganizations, and the cited decisions relating to that subject [ Footnote 1 ] are not presently apposite. What is being taxed in this instance is the income realized by the new company in conducting the business after the transfer, and the sole matter for decision is whether, under § 204(b), there shall be deducted from that income the losses suffered by the old company in its conduct of the same business before the transfer.
The Board of Tax Appeals, 24 B.T.A. 886, and the Circuit Court of Appeals, 66 F.2d 480, both ruled that the deduction is not admissible under the statute.
The power to tax income like that of the new corporation is plain, and extends to the gross income. Whether and to what extent deductions shall be allowed depends upon legislative grace, and only as there is clear provision therefor can any particular deduction be allowed.
The statutes pertaining to the determination of taxable income have proceeded generally on the principle that there shall be a computation of gains and losses on the basis of a distinct accounting for each taxable year, and only in exceptional situations, clearly defined, has there been provision for an allowance for losses suffered in an earlier year. Not only so, but the statutes have disclosed a general purpose to confine allowable losses to the taxpayer sustaining them -- i.e., to treat them as personal to him, and not transferable to or usable by another.
Obviously, therefore, a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms.
These views, often reflected in decisions of this Court, have been recently reaffirmed and applied in Woolford Realty Co. v. Rose, 286 U. S. 319 , 286 U. S. 326 et seq.; Planters' Cotton Oil Co. v. Hopkins, 286 U. S. 332 , and Helvering v. Independent Life Ins. Co., ante, p. 292 U. S. 371 .
be allowed. Had there been a purpose to depart from the general policy in that regard, and to make the right to the deduction transferable or available to others than the taxpayer who sustained the loss, it is but reasonable to believe that purpose would have been clearly expressed. And, as the section contains nothing which even approaches such an expression, it must be taken as not intended to make such a departure.
of the two corporations were substantially the same constitutes such a basis.
As a general rule, a corporation and its stockholders are deemed separate entities, [ Footnote 3 ] and this is true in respect of tax problems. [ Footnote 4 ] Of course, the rule is subject to the qualification that the separate identity may be disregarded in exceptional situations where it otherwise would present an obstacle to the due protection or enforcement of public or private rights. [ Footnote 5 ] But, in this case, we find no such exceptional situation -- nothing taking it out of the general rule. On the contrary, we think it a typical case for the application of that rule.
The petitioner relies on Pioneer Pole & Shaft Co. v. Commissioner, 55 F.2d 861, Industrial Cotton Mills Co. v. Commissioner, 61 F.2d 291, and H. H. Miller Industries Co. v. Commissioner, 61 F.2d 412. The decisions in these cases are not wholly in point, but contain language giving color to the petitioner's claim, and are to that extent in conflict with other federal decisions, notably Athol Mfg. Co. v. Commissioner, 54 F.2d 230; Turner-Farber-Love Co. v. Helvering, 68 F.2d 416, and the decision now under review. Insofar as they are not in harmony with the views expressed in this opinion, they are disapproved.
United States v. Phellis, 257 U. S. 156 ; Rockefeller v. United States, 257 U. S. 176 ; Cullinan v. Walker, 262 U. S. 134 ; Weiss v. Stearn, 265 U. S. 242 ; Marr v. United States, 268 U. S. 536 .
See Southern Pacific Co. v. Lowe, 247 U. S. 330 , 247 U. S. 337 ; Peabody v. Eisner, 247 U. S. 347 , 247 U. S. 349 ; Gulf Oil Corp. v. Lewellyn, 248 U. S. 71 .
Pullman's Palace Car Co. v. Missouri Pacific Ry. Co., 115 U. S. 587 , 115 U. S. 596 -597; Donnell v. Herring-Hall-Marvin Safe Co., 208 U. S. 267 , 208 U. S. 273 ; United States v. Delaware, L. & W. R. Co., 238 U. S. 516 , 238 U. S. 527 -529; Cannon Mfg. Co. v. Cudahy Packing Co., 267 U. S. 333 ; Klein v. Board of Tax Supervisors, 282 U. S. 19 , 282 U. S. 24 .
Klein v. Board of Tax Supervisors, 282 U. S. 19 , 282 U. S. 24 ; Dalton v. Bowers, 287 U. S. 404 , 287 U. S. 410 ; Burnet v. Clark, 287 U. S. 410 , 287 U. S. 415 ; Burnet v. Commonwealth Improvement Co., 287 U. S. 415 , 287 U. S. 418 -420.
United States v. Lehigh Valley R. Co., 220 U. S. 257 , 220 U. S. 272 -274; Chicago, Milwaukee & St. Paul Ry. Co. v. Minneapolis Civic & Commerce Assn., 247 U. S. 490 , 247 U. S. 500 -501; Southern Pacific Co. v. Lowe, 247 U. S. 330 , 247 U. S. 337 -338; Gulf Oil Corp. v. Lewellyn, 248 U. S. 71 .

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