E. & J. GALLO WINERY v. Commissioner of Internal Rev.

• Decision Date: 09 November 1955
• Docket Number: No. 14180.,14180.
• Citation: 227 F.2d 699
• Parties: E. & J. GALLO WINERY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

227 F.2d 699 (1955)

E. & J. GALLO WINERY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE.

No. 14180.

United States Court of Appeals Ninth Circuit.

November 9, 1955.

Charles L. Barnard, San Francisco, Cal., for petitioner.

H. Brian Holland, Asst. Atty. Gen., Melva M. Graney, Hilbert P. Zarky, Ellis N. Slack, Morton K. Rothschild, Sp. Assts. to Atty. Gen., John Potts Barnes, Chief Counsel, I. R. S., Chicago, Ill., for respondent.

Before STEPHENS and LEMMON, Circuit Judges, and JAMES M. CARTER, District Judge.

JAMES M. CARTER, District Judge.

This case arises on an amended petition to review a decision of the Tax Court of the United States. It involves a merger of corporations, and raises the question whether the taxpayer, Gallo Winery, (hereafter Gallo) may use the unused excess profits tax credit of Valley Agricultural Company, (hereafter Valley), the merged corporation, as a carry-over under Sec. 710(b) (3) and (c) of the 1939 Internal Revenue Code, 26 U.S.C.A. § 710(b) (3), (c) for its taxable year ending April 30, 1946.

The case was tried below on a stipulation of facts. A memorandum opinion was filed, the equivalent of findings, and a decision entered on August 31, 1953. Within time the petition for review was filed. The opinion and decision below was not officially reported.

The facts are as follows: Gallo, the taxpayer, was incorporated under the laws of California on May 28, 1942, under the name of Gallo Tank Lines, to engage in the railroad tank car business. On March 9, 1944, Gallo amended its articles of incorporation so as to substitute its present name for Gallo Tank Lines and to authorize it to engage in the winery business.

Valley was incorporated under the laws of the State of California on March 6, 1926.

On December 19, 1945, by proceedings duly had and taken in accordance with Section 361 of the California Civil Code,^* Valley was merged with and into Gallo. Pursuant to that section, an agreement for the merger was approved by the board of directors of each of the two corporations on November 7, 1945. The execution of the merger agreement was delayed until the following month, pending the result of a hearing by the Commissioner of Corporations of California, on the fairness of the terms and conditions thereof. The Commissioner of Corporations approved the terms and conditions on December 7, 1945, and the merger was effected on December 19, 1945.

Valley filed a tax return for its last taxable year of operation beginning January 1, 1945, and ending December 18, 1945.

The excess profits credit of Valley was $169,478.26. Its excess profits net income for the same taxable year was $102,777.22, and after annualization in accordance with Regulations 112, Section 35.710-3, the annual net income for the year totaled $106,572.97. Accordingly, the unused excess profits credit of Valley for its taxable year was $60,664.83.

Gallo's fiscal year ran from May 1, 1945 to April 30, 1946, and its excess profits tax net income for its fiscal year was in excess of $589,000.00.¹

The Tax Court held that Gallo was not entitled to use, in its taxable year ended April 30, 1946, any unused excess profits credit of Valley arising out of the latter's taxable year ended December 18, 1945. The correctness of this decision is the sole question presented on this appeal. All other disputes have been adjusted or conceded by the parties.

There is no contention by Respondent that Gallo acquired in Valley a hollow shell for tax deduction purposes. In the Revenue Act of 1943, amending Sec. 129 of the Internal Revenue Code of 1939, Congress provided against such practices. Section 128, Revenue Act of 1943, Act of Feb. 25, 1944, 58 Stat. 21 et seq., 26 U.S.C.A. § 129. Respondent has not cited or relied upon this statute.

Section 710 of the Internal Revenue Code, 26 U.S.C.A. § 710, pertinent to our problem, is set forth in the margin.²

1. There Occurred a True Merger

The merger of Gallo and Valley was pursuant to California law and was a statutory merger. Sec. 361, Civil Code of California in effect in 1945,³ the date of the merger provides in subd. (5) that upon following the statutory procedure, the merging corporations, "shall be one corporation"; and in subd. (7) "upon the merger * * * the separate existence of the constituent corporations shall cease, except that of the surviving corporation * * *".

In Mutual Building & Loan Ass'n of Pasadena v. Wiborg, 1943, 59 Cal.App.2d 325, 139 P.2d 73, the California court said of a merger under Sec. 361 Civil Code: "By virtue of the merger, the separate corporate existence of Title Guarantee suffered the fate of all merged corporations, to wit, they became a part of the muscle and the blood stream of the mergee corporation, transfusing into the mergee all its (their) rights and privileges * * *", 59 Cal.App.2d at page 328, 139 P.2d at page 74. "While the Title Guarantee merger with Title Insurance caused it to lose its identity as to its separate existence, yet it became an integral part of Title Insurance, and carried with it all of its rights, powers, liabilities, and assets `except the indicia and attributes of a corporate body, distinct from that into which it is merged.'" 59 Cal.App.2d at page 329, 139 P.2d at page 75. Emphasis supplied.

Valley therefore, on merger with Gallo, under California law, became an integral part of Gallo by statutory merger.

2. The Supreme Court Cases

New Colonial Ice Co., Inc., v. Helvering, 1934, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348, involved a construction of Sec. 204(b) of the Revenue Act of 1921, c. 136, 42 Stat. 227, 231, a statute permitting a taxpayer to carry over to a succeeding year, a loss from a prior year, and thus very similar to the statute involved in this case. The court rejected a contention that for all practical purposes, a successor corporation, where no merger existed, was the same entity as the old one and therefore the same taxpayer. The court pointed out various reasons why there was no basis for the contention, 292 U.S. at page 441, 54 S. Ct. 788. These, petitioner refers to as the requirements laid down by the Supreme Court for establishing identity between the two corporations. Suffice it to say that if these were requirements for such a test, the Gallo-Valley merger met them all. In Gallo there was a true statutory merger. In New Colonial, there was nothing resembling a merger.

Helvering v. Metropolitan Edison Co., 1939, 306 U.S. 522, at page 523, 59 S.Ct. 634, at page 635, 83 L.Ed. 957, presented the question as to "whether under the Revenue Acts of 1926 and 1928, a Pennsylvania corporation may deduct unamortized bond discount and expense in connection with redemption of the bonds of a subsidiary, all of whose assets it had previously acquired pursuant to local law." The circuit court had reversed the Board of Tax Appeals and answered the question in the affirmative. The Supreme Court affirmed the Circuit.

Helvering, the Commissioner of Internal Revenue, conceded that if a true merger existed, the decision below was correct, but contended the transaction was a mere sale by one corporation of all its assets to another which assumes the liability of the former.⁴ The respondents therein, contended the transaction constituted merger under Pennsylvania law. The court said the question was solely one of Pennsylvania law and proceeded to analyse that law. This much of Helvering v. Metropolitan Edison Co., supra, the petitioner herein refers to as the "major premise" in that case.

As to the two transactions, involving two sets of corporations, the court held as to one, that it "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 transferee", and as to the other transaction, "the transfer in question constituted a de facto merger * * *". The final holding was that "the continuing corporation may deduct unamortized bond discount and expense in respect of the obligations of the transferring affiliate." 306 U.S. at page 529, 59 S.Ct. at page 638.

Respondent concedes "that a successor corporation may in some instances succeed to a deduction which its submerged corporation would otherwise have had, as in Helvering" * * * (supra). We believe that the Supreme Court held, a fortiori, that in the event of a true statutory merger, the mergee corporation was entitled to the deductions of the other corporation.

New Colonial Ice Co., supra, had pointed out that "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." 292 U.S. at page 440, 54 S.Ct. at page 790. Thus the Supreme Court held in substance in Metropolitan Edison Co., supra, that the old corporation continued in the new as so integral a part, that it might use, acting through the identity of the new corporation, its own deductions.

3. The Stanton Case

Gallo relies upon, and the Commissioner attacks Stanton Brewery, Inc., v. C.I. R., 2 Cir., 1949, 176 F.2d 573.⁵ There the corporate transaction was between an operating company and a holding company and the court termed it a "merger."⁶ The tax year was 1942 and a carry over of the unused excess profits credits of the component corporations for years 1940 and 1941 under the same statutes involved here, was held proper.

Relying on Sec. 710(c) (3) (B), Title 26 U.S.C.A. § 710(c) (3) (B), "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 * * *", Emphasis added, the petitioner contended and the court held that "as the `taxpayer' in the quotation, it is entitled to the carry-over from its component operating company's unused excess profits credit", 176 F.2d at page 574. "Hence we...