Bracy Development Co. v. Milam, 5--5836

• Decision Date: 03 April 1972
• Docket Number: No. 5--5836,5--5836
• Citation: 252 Ark. 268,478 S.W.2d 765
• Parties: BRACY DEVELOPMENT CO., Inc., Appellant, v. Max MILAM, Director of Department of Finance and Administration for the State of Arkansas, Appellee.
• Court: Arkansas Supreme Court

Page 765

478 S.W.2d 765

252 Ark. 268

BRACY DEVELOPMENT CO., Inc., Appellant, v. Max MILAM, Director of Department of Finance and Administration for the State of Arkansas, Appellee.

No. 5--5836.

Supreme Court of Arkansas.

April 3, 1972.

Rehearing Denied May 8, 1972.

Smith, Williams, Friday, Eldredge & Clark, by Byron M. Eiseman, Jr., and James C. Clark, Jr., Little Rock, for appellant.

Dewey Moore, Jr., Dept. of Finance & Administration, Little Rock, for appellee.

JONES, Justice.

This is an appeal by Bracy Development Co., Inc. from an adverse decree of the Pulaski County Chancery Court in a suit by Bracy Development to void a corporate income tax assessment made by Max Milam, Director of Department of Finance and Administration for the State of Arkansas, hereinafter referred to as 'director.'

The question presented, under carefully stipulated facts, is whether a net operating loss carryover available to a corporation as a deduction for state income tax purposes under Ark.Stat.Ann. § 84--2016(l) (Repl.1960) is available to another corporation with which the first corporation has merged. The question is not answered by state statute or by prior decision of this court.

According to the stipulated facts, Bracy Realty, Inc. and Bracy Development Co., Inc. were separate domestic corporate entities having the same designated principal place of business and the same officers. Both corporations were primarily engaged in the same business of constructing public housing projects. During the period December 1, 1966, through July 31, 1968, Bracy Realty accumulated a net operating loss of $164,506.24. By August 1, 1968, Bracy Realty was near financial collapse and on that date it formed a legal, or statutory, merger with Bracy Development, and Bracy Development emerged as the surviving corporation.

The record is silent as to when the two corporations were formed and as to the ownership of stock in Bracy Realty, but in Bracy Development's state income tax return for the fiscal year ending October 31, 1968, the $164,506.24 operating loss accumulated by Bracy Realty was carried over by Bracy Development as a deduction under Ark.Stat.Ann. § 84--2016(l) (Repl.1960) which provides as follows:

'In addition to other deductions allowed by this law there shall be allowed as a deduction from gross income a net operating loss carryover under the following rules:

1. The net operating loss as hereinbelow defined for any year ending on or after the passage of this act and for any succeeding taxable year may be carried over to the next succeeding taxable year and annually thereafter for a total period of three (3) years next succeeding the year of such net operating loss, or until such net operating loss has been exhausted or absorbed by the taxable income of any succeeding year, whichever is earlier. The net operating loss deduction must be carried forward in the order named above.

(A) As used herein the term taxable income, or net income shall be deemed to be the net income computed without benefit of the deduction for income taxes, personal exemptions and credit for dependents. The net income of the taxable period to which the net operating loss deduction, as adjusted, is carried, shall be the net income before the deduction of Federal income taxes, personal exemption and credit for dependents, and such income taxes, exemption and credits shall not be used to increase the net operating loss which may be carried to any other taxable period.

2. As used in this subsection the term 'net operating loss' is hereby defined as the excess of allowable deductions over gross income for the taxable year, subject to the following adjustments. * * *'

The director disallowed the deduction and assessed Bracy Development an additional tax in the amount of $8,075.12. The chancellor found that the operating loss carryover available to Bracy Realty as a deduction against its future years' income under the statute, was personal to Bracy Realty and expired when Bracy Realty ceased to exist. The chancellor found that Bracy Realty's operating loss was not available to Bracy Development as a carryover deduction and the chancellor upheld the validity of the assessment. The point on which Bracy Development relies for reversal is designated in its brief as follows:

'The chancellor erred in his determination that Bracy Development Co., Inc. was not entitled to a deduction as permitted by Ark.Stats.Ann. § 84--2016(l) for premerger losses of Bracy Realty, Inc.'

The appellant and the appellee both recognize that in Arkansas we do not have a state statutory provision comparable to §§ 381 and 382 of the Federal Internal Revenue Code expressly permitting such carryover by a surviving corporation following a merger. The appellant argues, therefore, that in the absence of such statutory provision we should follow prior federal decisions and regard the resulting or surviving corporation as a union of component corporations into an all-embracing whole which absorbs the rights and privileges, as well as the obligations, of its constituents, and permit the surviving corporation to utilize the unused net loss carryovers of its component corporations.

The appellee argues that in the absence of specific statutory authority to the contrary, we should hold that taxpayer to the strict burden of proving his right to a tax deduction under the same strict rule of construction applicable to tax exemptions, and that we should recognize the deductible net loss carryover as a matter of statutory grace available only to the corporation sustaining the loss. The appellee contends that the net loss carryover that would have been available to Bracy Realty in the case at bar, was personal to Bracy Realty and was not available as a deduction against income earned by Bracy Development following the merger.

Following statutory merger or consolidation of domestic corporations, Ark.Stat.Ann. § 64--705C, D, E, (Repl.1966) provides as follows:

'C. Such surviving or new corporation shall have all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this act (chapters 1--10 of this title).

D. Such surviving or new corporation shall thereupon and thereafter possess all the rights, privileges, immunities, and franchises, as well of a public as of a private nature, of each of the merging or consolidating corporations; and all property, real, personal and mixed, and all debts due on whatever account, including subscriptions to shares, and all other choses in action, and all and every other interest, of or belonging to or due to each of the corporations so merged or consolidated, shall be taken and deemed to be transferred to and vested in such single corporation without further act or deed; and the title to any real estate, or any interest therein, vested in any of such corporation shall not revert or be in any way impaired by reason of such merger or consolidation.

E. Such surviving or new corporation shall henceforth be responsible and liable for all the liabilities and obligations of each of the corporations so merged or consolidated; and any claim existing or action or proceeding pending by or against any of such corporations may be prosecuted as if such merger or consolidation had not taken place, or such surviving or new corporation may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any such corporation shall be impaired by such merger or consolidation.'

The appellant points to three federal court decisions, Newmarket Mfg. Co. v. United States, 233 F.2d 493 (1st Cir. 1956); Helvering v. Metropolitan Edison Co., 306 U.S. 522, 59 S.Ct. 634, 83 L.Ed. 957 (1939) and Stanton Brewery, Inc. v. Commissioner of Internal Revenue, 176 F.2d 573 (2d cir. 1949) in support of its argument. In the Newmarket case an operating loss carry-back was involved and we agree with the court's observation in that case that, 'an issue of this sort peculiarly lends itself to logic-chopping, finespun distinctions, and dubious arguments by analogy.' In Newmarket a Massachusetts corporation engaged in the business of weaving synthetic fibers, formed a wholly owned subsidiary corporation under the laws of Delaware and then merged with the Delaware corporation in order to avoid the application of a Massachusetts franchise tax on goods sold in New York. The court observed in Newmarket that after the merger everything remained the same as before except the corporation had changed its domicile from Massachusetts to Delaware. In holding that the new corporation was entitled to the refund claimed through net operating loss carry-back, the court distinguished the merger in Newmarket from mergers in other cited cases by pointing out that in Newmarket the merger was statutory and did not have the results of allowing Newmarket to obtain a carry-back in refund that otherwise would have been unavailable. The court also observed that the government placed undue emphasis on the term 'taxpayer.'

In the 1939 case of Helvering v. Metropolitan Edison Co., supra, a parent corporation formed a number of subsidiary electric power producing corporations and guaranteed the payment of the bonded indebtedness of the subsidiary corporations. The subsidiaries sold all the energy they produced to the parent corporation and after the bonded indebtednesses were paid, they transferred all their assets to the parent corporation. The parent corporation deducted from its gross income the unamortized discount and expense of one of its subsidiaries. The Commissioner of Revenues ruled against the deduction and determined a deficiency. The Board of Tax Appeals sustained the Commissioner and the Circuit Court of Appeals reversed the Board. The question in Helvering was whether or not the transaction between the corporations amounted to a sale or a true merger. On certiorari the United States Supreme Court affirmed the...