Berger Machigan Prods., Inc. v. Comm'r of Internal Revenue
| Decision Date | 08 June 1977 |
| Docket Number | Docket Nos. 7427-73—7434-73. |
| Citation | 68 T.C. 358 |
| Parties | BERGER MACHINE PRODUCTS, INC.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In a statutory merger, four active manufacturing or sales corporations, the stock of which was owned or controlled in varying proportions by related individuals, were merged into a newly organized corporation. That corporation seeks to carry back a net operating loss to the premerger years. Held: The merger of four active corporations into one corporation, resulting in a change in the relative percentages of stock held by the individual shareholders, was not ‘a more change in identity, form, or place of organization’ within the meaning of sec. 368(a)(1)(F). Accordingly, sec. 381(b)(3) does not permit the carryback of the net operating loss deduction. Martin Rosen and Sheldon Schwartz, for the petitioners.
Stanley J. Goldberg and Peter Matwiczyk, for the respondent.
In these cases, respondent determined deficiencies in income tax as follows:
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¦Petitioner ¦Docket No. ¦Year ¦Amount ¦
+-----------------------------------+------------+------+--------¦
¦ ¦ ¦ ¦ ¦
+-----------------------------------+------------+------+--------¦
¦Berger Machine Products, Inc. ¦7427-73 ¦1966 ¦$124,984¦
+-----------------------------------+------------+------+--------¦
¦Berger Tube Corp. ¦7428-73 ¦1966 ¦22,472 ¦
+-----------------------------------+------------+------+--------¦
¦E.T.P. Labs, Inc. ¦7429-73 ¦1966 ¦25,418 ¦
+-----------------------------------+------------+------+--------¦
¦E.T.P., Inc. ¦7430-73 ¦1966 ¦11,626 ¦
+-----------------------------------+------------+------+--------¦
¦Berger Industries, Inc., transferee¦7431-73 ¦1966 ¦124,984 ¦
+-----------------------------------+------------+------+--------¦
¦Berger Industries, Inc., transferee¦7432-73 ¦1966 ¦22,472 ¦
+-----------------------------------+------------+------+--------¦
¦Berger Industries, Inc., transferee¦7433-73 ¦1966 ¦25,418 ¦
+-----------------------------------+------------+------+--------¦
¦Berger Industries, Inc., transferee¦7434-73 ¦1966 ¦11,626 ¦
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The sole question for decision is whether the statutory consolidation of four corporations into a single successor corporation constitutes a reorganization within the meaning of section 368(a)(1)(F)2 so as to allow the carryback of postconsolidation losses to preconsolidated years.
All of the facts have been stipulated and are so found. The stipulation of facts together with exhibits attached thereto are incorporated herein by this reference.
The petitioner, Berger Machine Products, Inc. (hereinafter referred to as Berger Machine), was a corporation organized under the laws of the State of New York. Its principal place of business was Maspeth, N.Y. Berger Machine filed its corporate income tax return for the taxable period ending December 26, 1966, with the District Director of Internal Revenue, Brooklyn, N.Y.
Berger Tube Corp. (hereinafter referred to as Berger Tube) was a corporation organized under the laws of the State of New York. Its principal place of business was Maspeth, N.Y. Berger Tube filed its corporate income tax return for the taxable period ending December 26, 1966, with the District Director of Internal Revenue, Brooklyn, N.Y.
E.T.P. Labs, Inc. (hereinafter referred to as E.T.P. Labs), was a corporation organized under the laws of the State of New Jersey. Its principal place of business was Metuchen, N.J. E.T.P. Labs filed its corporate income tax return for the taxable period ending December 26, 1966, with the District Director of Internal Revenue, Newark, N.J.
E.T.P., Inc. (hereinafter referred to as E.T.P.), was a corporation organized under the laws of the State of New York. Its principal place of business was Maspeth, N.Y. E.T.P. filed its corporate income tax return for the taxable period ending December 26, 1966, with the District Director of Internal Revenue, Brooklyn, N.Y.
Berger Industries, Inc., is a corporation organized under the laws of the State of New York. Berger Industries, Inc., filed its corporate income tax return for the taxable period ending December 29, 1969, with the North-Atlantic Service Center, Andover, Mass.
On or about November 15, 1966, a special meeting of the boards of directors of Berger Machine, Berger Tube, E.T.P. Labs, and E.T.P. was held. At the meeting, the boards resolved that the four predecessor corporations would be consolidated into a single corporation, to be known as Berger Industries, Inc. The plan of consolidation was adopted by the shareholders of the four predecessor corporations on November 16, 1966. Pursuant thereto, the corporations were consolidated into Berger Industries, Inc., effective December 26, 1966.
Since the consolidation, Berger Industries, Inc., has been operating with three tubing divisions, an electrical fittings division, and two lamp and lighting fixture divisions. Each division, except for one tubing division, has a historical predecessor in the consolidated corporate structure which conducted the identical business activities prior to consolidation. The one tubing division which does not have a historical precedent came into existence after the consolidation; this is the Mebane, N.C., plant. The following schedule on p. is a list of the shareholders, the number of shares held, and the percentage of ownership in the four preconsolidated corporations and Berger Industries, the successor.
In its corporate income tax return for the taxable year ending December 29, 1969, Berger Industries, Inc., reported a taxable loss of $1,363,407. Berger Industries, Inc., seeks to carryback this loss to the preconsolidated corporations pursuant to section 381.
1 E.T.P. acquired all of the stock in E.T.P. Labs in November 1966. The three shareholders of E.T.P. Labs, Sidney Berger, Robert Berger, and Marilyn Steiner donated their stock to E.T.P. for the purpose of terminating E.T.P. Labs' status as a subch. S corporation.
Section 381 provides the rules applicable to carryovers in the case of corporate acquisitions or reorganizations. Pursuant to section 381(b)(3), the acquiring corporation is not entitled to carry back a net operating loss for a subsequent taxable year to a taxable year of the transferor corporation except in the case of an acquisition in connection with a reorganization as described in section 368(a)(1)(F).
The parties agree that in order for Berger Industries, Inc., to be able to carry back its taxable loss of $1,363,407 to the preconsolidated corporations, the transaction pursuant to which its corporations were consolidated into Berger Industries, Inc., must qualify as a reorganization under section 368(a) (1)(F). The respondent contends that the consolidation does not qualify under section 368(a)(1)(F) because of a divergence in the respective interests of the shareholders of the constituent corporations after the merger, as compared with their interests prior to such merger. This divergence is reflected in the schedule appearing above.
The respondent somewhat reluctantly has conceded that a statutory merger or consolidation of two or more operating corporations which qualifies under section 368(a)(1)(A) may also be deemed ‘a mere change in identity, form, or place of organization’ within the meaning of subparagraph (F). However the respondent limits his concession to reorganizations pursuant to which there is complete identity of shareholders and their proprietary interests in the transferor corporations and the acquiring corporations. Rev. Rul. 75—561, 1975—2 C.B. 129.3
In Rev. Rul. 75—561, supra, respondent prescribes the conditions pursuant to which such reorganizations would qualify under subpart (F), as follows:
In conformance with the rules of these decisions, it is now the position of the Service that the combination of two or more corporations may qualify as a reorganization within the meaning of section 368(a)(1)(F) of the Code,...
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