Docket No. 46698.
H. A. Mihills, C.P.A., for the petitioner, Theodore E. Davis, Esq., for the respondent.
H. A. Mihills, C.P.A., for the petitioner, Theodore E. Davis, Esq., for the respondent.
Petitioner, as the owner of 50 per cent of the stock and a substantial creditor of a corporation engaged in a similar line of business, decided such corporation could no longer be operated at a profit and continued operation would further impair its investment. It therefore purchased the remaining stock, took over all physical assets and liabilities, and liquidated the company. Held: In computing its income tax liability for the fiscal year ended June 30, 1950, petitioner is not entitled to carry over the net operating losses of the liquidated corporation. Sec. 23(s) and sec. 122(b)(2)(C), I.R.C. 1939.
Respondent has determined a deficiency in income tax of the petitioner in the amount of $13,497.90 for the taxable year ended June 30, 1950.
The issue is whether, in computing its income tax liability for the fiscal year ended June 30, 1950, petitioner is entitled to carry over the net operating losses of Gramm-Curell Equipment Company for the fiscal year ended March 31, 1949, and for the 3-month period ended June 30, 1949, under sections 23(s) and 122(b)(2)(C), Internal Revenue Code of 1939.
FINDINGS OF FACT.
Some of the facts were stipulated and are included herein by this reference.
Petitioner was organized in 1934 under the laws of Ohio. It has its principal office in Lima, Ohio, and its manufacturing plant in Delphos, Ohio. It is engaged in the manufacture and distribution of commercial trailers. Petitioner filed its income tax return for the taxable year ended June 30, 1950, with the then collector of internal revenue for the tenth district of Ohio.
In October 1947 petitioner acquired 250 of the total 500 outstanding shares of stock of the Curell Trailer Company of Reading, Ohio (hereinafter referred to as Curell) for $15,000. The latter company was an Ohio corporation organized on February 18, 1946, by Randal Curell and others to manufacture and distribute truck bodies, trailers, and other equipment.
On November 5, 1947, petitioner's president, C. V. Wolfe, was elected treasurer of Curell and the latter's name was changed by charter amendment to Gramm-Curell Equipment Company (hereinafter referred to as Gramm-Curell). Gramm-Curell continued to be engaged in the distribution of petitioner's products in the Cincinnati, Ohio, area and in the modification of commercial trailers to customers' specifications. Prior to June 30, 1949, only three or four of the major customers of the two companies were the same. Until the petitioner's investment in Curell the activity between the two corporations was slight. Thereafter many intercompany sales were transacted. Petitioner purchased about 6 per cent of the output of Gramm-Curell in the fiscal year period ended March 31, 1948; about 24 per cent of its output in the fiscal period ended March 31, 1949; and 50 per cent of its output during the 3-month period March 31, 1949; through June 30, 1949.
Petitioner manufactured uni-steel truck bodies, which were small van bodies to be mounted on trucks, van semi-trailers, refrigerators, and various other designs. Gramm-Curell had the design patents on a flat trailer with a deep outside rail, called a superframe, which petitioner did not have. Gramm-Curell also had designs on both low-bed and tilt-top trailers for hauling machinery
In February 1949 the Curell interests sold the remaining 250 shares of stock in Gramm-Curell to Roy L. Standard. Standard was elected president and treasurer of Gramm-Curell at a special meeting of its board of directors on February 11, 1949.
The Gramm-Curell Equipment Company was not financially successful, one of the reasons being that it was operating under a $700 a month rental for its manufacturing plant. As of June 30, 1949, the outstanding balance upon loans to it by petitioner totaled $18,831.33. It sustained operating losses for the fiscal year ended March 31, 1949, and for the 3-month period ended June 30, 1949, in the respective amounts of.$25,533.52 and $10,662.95.
In a meeting held June 27, 1949, petitioner's board of directors decided that Gramm-Curell could no longer be operated at a profit and further operation would further impair petitioner's investment in that company. It was then decided to buy the other 50 per cent of Gramm-Curell stock held by Standard, to take over all of the physical assets and liabilities of the company, and then to liquidate it. Those in charge of petitioner felt that by moving the operations of Gramm-Curell to Delphos, the situs of petitioner's plant, and manufacturing the items itself, rental expense could be eliminated, operating overhead and sales expense could be reduced, and petitioner would realize a greater profit. Accordingly, on July 1, 1949, petitioner purchased the 250 shares from Standard for $5,650 and on the same date liquidated the company.
Petitioner's stock investment in Gramm-Curell and the outstanding balance of the loans made by petitioner to that company were in the total amount of $39,481.33. The fair market value of Gramm-Curell's assets which were transferred to petitioner on July 1, 1949, was $31,252.89. Petitioner's loss on liquidation was $8,228.44, which loss was reflected on Schedule M of petitioner's income tax return for the taxable year ended June 30, 1950, and is not in dispute here.
The losses sustained by Gramm-Curell for the fiscal year ended March 31, 1949, and for the 3-month period ended June 30, 1949, in the total amount of $36,196.47 were claimed as a net operating loss deduction of petitioner in its income tax return for the fiscal year ended June 30, 1950. Respondent has disallowed the deduction.
Petitioner moved all of the Gramm-Curell manufacturing facilities, inventories, etc., to Delphos and integrated them with its own manufacturing facilities and inventories. None of the Gramm-Curell property was scrapped because it included either current inventory or manufacturing facilities designed to produce the Gramm-Curell product. The Gramm-curell assets taken over by petitioner on July 1, 1949, were duly recorded on petitioner's books and the liabilities assumed at that time were similarly recorded.
After July 1, 1949, petitioner continued to manufacture and sell all the former Gramm-Curell products without modification in design. It also serviced all of the products previously sold by Gramm-Curell as well as its new manufacture of Gramm-Curell equipment. There was no separation on petitioner's books between the so-called Gramm-Curell business and petitioner's business. However, the products of Gramm-Curell design and petitioner's design were separately designated by serial numbers. Also cost accounting for the two lines was kept separately, the records showing that the same personnel was used but the time was recorded separately. Overhead was applied on a common basis. Petitioner's advertising policies and sales program were changed to reflect the acquisition of the Gramm-Curell designs.
Petitioner contends that in computing its income tax liability for the fiscal year ended June 30, 1950, it is entitled to carry over the net operating losses of Gramm-Curell for the fiscal period ended March 31, 1949, and for the 3-month period ended June 30, 1949, pursuant to sections 23(s) and 122(b)(2)(C), Internal Revenue Code of 1939. Respondent argues that the net operating loss carryover is not to be allowed petitioner because it is not the ‘taxpayer’ within the meaning of section 122(b)(2)(C).
SEC. 23. DEDUCTIONS FROM GROSS INCOME.In computing net income there shall be allowed as deductions:(s) NET OPERATING LOSS DEDUCTION.— For any taxable year beginning after December 31, 1939, the net operating loss deduction computed under section 122.
SEC. 122. NET OPERATING LOSS DEDUCTION. (b) AMOUNT OF CARRY-BACK AND CARRY-OVER.—(2) NET OPERATING LOSS CARRY-OVER.—(C) Loss for taxable year beginning after December 31, 1947, and before January 1, 1950.— 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, * * *
Petitioner argues that ‘there is a continuity of interest between Gramm-Curell Equipment Company and the resulting corporation, The Gramm Trailer Corporation, and that ‘the taxpayer,‘ during the year ended June 30, 1950, was made up of the two components, Gramm-Curell Equipment Company and The Gramm Trailer Corporation. That the resulting corporation must be regarded as the union of component corporations into an all-embracing whole which absorbs the rights and privileges, as well as the obligations of its constituents.’
In support of its position petitioner relies primarily upon Stanton Brewery, Inc. v. Commissioner, 176 F.2d 573 (C.A. 2, 1949), reversing 11 T.C. 310.
See also E. & J. Gallo Winery v. Commissioner, 227 F.2d 699 (C.A. 9, 1955), reversing a Memorandum Opinion of this Court dated April 17, 1953, and Koppers Co. v. United States, 134 F.Supp. 290 (Ct. Cl. 1955). Contra, California Casket Co., 19 T.C. 32, 38-39.
In that case there was a merger of two New York corporations, the one a holding company and the other an operating company. The merger was carried out under provisions of the New York Stock Corporation Law, the new company taking the name of the operating company. The issue presented in that case was whether the resulting corporation in a statutory merger was entitled to carry over an unused excess profits credit of one of its components. The Court of Appeals, with Judge Learned Hand dissenting, held that the carryover was available to the petitioner therein under section 710(c)(3)(B) of the Internal Revenue Code of 1939. It criticized as overly technical and unrealistic the assumption by the Commissioner that a ‘comparatively minor change in corporate form’ was sufficient to deny the resulting corporation the benefit of a substantial tax credit. The court then stated, at page 575: We doubt, therefore, that any of these linguistic formulae suggests a really fruitful approach to the solution of our present problem. More properly we must regard the ‘resulting corporation’ as the union of component corporations into an all-embracing whole which absorbs the rights and privileges, as well as the obligations, of its constituents.
SEC. 710. IMPOSITION OF TAX. (Repealed by sec. 122(a), Rev. Act 1945.)(c) UNUSED EXCESS PROFITS CREDIT ADJUSTMENT.—(3) AMOUNT OF UNUSED EXCESS PROFITS CREDIT CARRY-BACK AND CARRY-OVER.—(B) Unused Excess Profits Credit Carry-Over.— If for any taxable year beginning after December 31, 1939, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-over for each of the two succeeding taxable years, * * *
The instant proceeding is clearly distinguishable from the Stanton Brewery case as well as the Gallo Winery and Koppers Co. cases. In each of those cases the merger was carried out in strict compliance with applicable State statutes and each of the merging corporations was held to be a component of the resulting corporation. Here, as petitioner concedes, there was no compliance with the Ohio statute relating to the merger or consolidation of corporations. See Throckmorton's Ohio Code Ann. secs. 8623-68 (Baldwin 1948). There was accordingly no statutory merger and Gramm-Curell did not become a ‘component’ of petitioner.
It is true that on July 1, 1949, Gramm-Curell was liquidated and petitioner acquired its assets, assumed its obligations, and thereafter integrated Gramm-Curell's manufacturing facilities, inventories, etc., with its own. Except as to some differences in types or designs of trailers the two companies had been engaged in a similar kind of business, the manufacture and distribution of truck bodies, trailers, and other equipment, and there had been many intercompany transactions. Under no theory, however, are we able to find that the legal entity known as the Gramm-Curell Equipment Company was continued, after its liquidation, in petitioner. Curell's legal life was brought to a close. Upon its liquidation there was no transfer of powers, privileges, and immunities which gave it life to petitioner, as there would have been had there been a statutory merger.
On the facts presented, therefore, we think the present case is clearly distinguishable from the Stanton Brewery case and those cases which have followed it. Moreover, the policy considerations arising out of the ameliorating provisions of section 710(c)(3)(B), when considered in conjunction with the purposes of the excess profits tax provisions, which lead to the conclusion in those cases (see Koppers Co. v. United States, supra), are not present here.
Section 23(s) provides for the deduction of net operating losses computed under section 122, subsection (b)(2)(C) of which provides that ‘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 * * * .’ In New Colonial Co. v. Helvering, 292 U.S. 435, the Supreme Court, commenting on the construction of section 204(b) of the Revenue Act of 1921, which contains substantially the same language as found in section 122(b)(2)(C) of the Internal Revenue Code of 1939, said: Its words are plain and free from ambiguity. Taken according to their natural import they mean that the taxpayer who sustained the loss is the one to whom the deduction shall 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.
In our opinion petitioner is not ‘the taxpayer’ who sustained the losses involved herein, within the meaning of section 122(b)(2)(C) of the Internal Revenue Code of 1939. New Colonial Co. v. Helvering, supra. See also Lisbon Shops, Inc. v. Koehler, 229 F.2d 220, certiorari granted June 4, 1956, 351 U.S. 961. We accordingly hold that, in computing its income tax liability for the fiscal year ended June 30, 1950, petitioner is not entitled to carry over the net operating losses sustained by Gramm-Curell Equipment Company for the fiscal year ended March 31, 1949, and for the 3-month period ended June 30, 1949.
Decision will be entered for the respondent.