Chilivis v. Studebaker Worthington, Inc.

• Decision Date: 08 January 1976
• Docket Number: No. 51127,No. 1,51127,1
• Citation: 137 Ga.App. 337,223 S.E.2d 747
• Parties: N. P. CHILIVIS, Commissioner v. STUDEBAKER WORTHINGTON, INC
• Court: Georgia Court of Appeals

Page 747

223 S.E.2d 747

137 Ga.App. 337

N. P. CHILIVIS, Commissioner v. STUDEBAKER WORTHINGTON, INC.

No. 51127.

Court of Appeals of Georgia, Division No. 1.

Jan. 8, 1976.

Rehearing Denied Jan. 23, 1976.

Arthur K. Bolton, Atty. Gen., Lauren O. Buckland, Asst. Atty. Gen., H. Perry Michael, Sp. Asst. Atty. Gen., Atlanta, for appellant.

Haas, Holland, Levison & Gibert, Hugh W. Gibert, Atlanta, for appellee.

MARSHALL, Judge.

The State Revenue Commissioner appeals from a judgment in favor of the taxpayer, Studebaker Corp., allowing Studebaker to carry over and deduct on current income tax returns losses sustained by a liquidated predecessor corporation.

The facts were stipulated by the parties. In 1964, Studebaker Corp. (Old Studebaker), a Michigan corporation doing business in Georgia (and in other states) incurred a net operating loss in excess of $45 million attributable to its business of manufacturing and selling automobiles. In 1966, it sustained a net operating loss in excess of $6 million attributable to its business of manufacturing, distributing and selling plastics, garden tractors, farm implements and other items.

In 1967, Old Studebaker reincorporated in Delaware, and entered into a reorganization agreement with two Delaware corporations, Worthington (Old Worthington) and Christopher Properties. Under the agreement, several transactions occurred wherein, in essence, a new corporation was formed, Studebaker-Worthington Corp. (S-W Corp.), under which two wholly owned subsidiaries were formed, Studebaker Corp. (New Studebaker, taxpayer herin) and Worthington Corp. (New Worthington). Old Studebaker and Old Worthington transferred substantially all their assets to the respective new subsidiaries in exchange for stock in the parent S-W Corp. The stockholders of Old Studebaker received most of the common stock of S-W Corp. and 49% of its voting power. The stockholders of Old Worthington received most of the total preferred stock of S-W Corp. and 51% of its voting power. The stock of New Studebaker and New Worthington was wholly owned by S-W Corp. After these transfers, Old Studebaker and Old Worthington were liquidated. The same business operations of both old corporations were carried on separately by the new subsidiaries. There was no mingling of the manufacturing and sales activities of the two new subsidiaries. Under the agreement, New Studebaker succeeded to all of the property rights, privileges, powers and franchises of Old Studebaker and was subject to all restrictions, disabilities, duties, debts and liabilities of Old Studebaker. The accumulated earnings and profits of Old Studebaker became the earnings and profits of New Studebaker.

The Internal Revenue Service treated the transactions as a tax-free reorganization (Type C) under I.R.C of 1954 § 368(a)(1)(C) (26 U.S.C.A. § 368(a)(1)(C)). The Service also ruled that New Studebaker would be entitled to carry forward and deduct net operating losses incurred by Old Studebaker for Federal Income Tax purposes under I.R.C. of 1954 § 381 (26 U.S.C.A. § 381).

For the tax years, 1968, 1969 and 1970, New Studebaker carried forward and deducted some of the above-mentioned losses of Old Studebaker on its Georgia income tax returns. The State Commissioner, appellant herein, disallowed the deductions and assessed deficiencies for those tax years. On appeal by the taxpayer to the Fulton County Superior Court, the trial judge, sitting without a jury found that 'New Studebaker carried on the business of Old Studebaker essentially in the same manner as has Old Studebaker' and taxpayer was therefore entitled to the deduction.

Appellant contends that the trial court's holding was erroneous for two reasons: (1) the word 'taxpayer,' as used in the Georgia statute permitting loss carryover deductions, means the taxpayer who sustained the loss, and was not intended to mean a successor corporation; and, (2) the taxpayer in this case does not meet the requirements established by case law for allowing the loss carryover deduction. The first argument merely asks the question answered in the cases posed in the second argument: Is the 'taxpayer' who suffered the net operating loss (Old Studebaker) essentially the same 'taxpayer' under the law who is seeking to carry over and deduct it (New Studebaker)? That is the only issue in this case. Held:

1. The law applicable to this case is Ga.L.1931, Ex.Sess., p. 24, as amended by Ga.L.1952, pp. 405, 428, and Ga.L.1953, Nov.Sess. pp. 316, 318 (Code Ann. § 92-3109(m)(6)(B)), which provided: 'Net operating loss carry-over.-If, for any taxable year ending on or after February 15, 1952, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the five succeeding taxable years . . .' This Code section was repealed by Ga.L.1971, pp. 605, 615, but was in effect during the tax years in question and was the only Georgia statute dealing with loss carry-over deductions. It was identical to a provision in the Federal Internal Revenue Code of 1939. The federal statute, which controls the issue now, is I.R.C. § 381, supra, of the Internal Revenue Code of 1954, and it was upon that section that the Internal Revenue Service based its determination that the loss could be carried over and deducted. However, during the tax years in question here Georgia had no statute like § 381, and for that reason we do not consider the I.R.S. ruling allowing the deduction to be controlling. Instead, as taxpayer acknowledges, the issue is controlled by the Georgia statute, Code Ann. § 92-3109 and cases interpreting same. Since there are no Georgia cases on the subject, we look to federal law and cases (to the extent that § 381 and other provisions of the I.R.C. of 1954 do not control) because of the identical nature of the 1939 federal revenue code and Code Ann. § 92-3109. See Ga.L.1969, pp. 114, 119, as last amended by Ga.L.1974, pp. 554, 555 (Code Ann. § 92-3108).

The federal courts, both before and after 1954, have struggled to develop some meaningful test to determine whether and under what circumstances a profitable corporation will be allowed to absorb the beneficial tax attributes of a loss suffering corporation. In an early leading case on the subject, New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 (1934), the Supreme Court upheld the disallowance of a loss carry-over where the assets of the loss suffering corporation were transferred to a newly created corporation in exchange for the latter's stock. The new corporation sought to offset the losses of the old corporation against its current income. The court found that the new corporation was not the same taxpayer, in spite of the fact that it carried on the same business, had the same stockholders and had substantially the same capital structure. Under this 'continuity of the legal entity' rule, if the loss corporation did not emerge as the surviving corporation in the reorganization transaction, the loss could not be carried over. The case has been followed on numerous occasions. See, e.g., Shreveport Producing and Refining Co., Inc. v. Commissioner, 71 F.2d 972 (5 Cir. 1934); Standard Paving Co. v. Commissioner, 190 F.2d 330(5, 6) (10 Cir. 1951). Departures from the 'entity' rule usually involved mergers by operation of law or 'statutory mergers' (Type A reorganizations under I.R.C. § 368(a)(1)(A), supra), which are not directly involved in this case in spite of appellees reliance on these cases. See Helvering v. Metropolitan Edison Co., 306 U.S. 522, 59 S.Ct. 634, 83 L.Ed. 957 (1939); Newmarket Mfg. Co. v. United States, 233 F.2d 493 (1 Cir. 1956); E & J Gallo Winery v. Commissioner of Internal Revenue, 227 F.2d 699 (9 Cir. 1955); Stanton Brewery v. Commissioner of Internal Revenue, 176 F.2d 573 (1949); Koppers Co. v. United States, 134 F.Supp. 290, 133 Ct.Cl. 22 (1955). The New Colonial Ice 'entity' test remains intact today (see Rev.Ruling 59-395 (1959-1 C.B. 474)) under old code situations such as the present case, and is relied on heavily by appellant.

An additional test was pronounced by the Supreme Court in 1957 in Libson Shops, Inc. v. Koehler, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924. In that case the taxpayer was a corporation into which 16 other corporations merged. Prior to the merger, the 16 corporations were owned separately and operated separately as retail clothing stores. As a result of the merger, the stockholders of the 16 corporations were given prorata shares of the taxpayer in exchange for their old shares, and the taxpayer conducted the entire business as a single enterprise filing a single tax return. Three of the 16 corporations had sustained losses prior to the merger and taxpayer sought to carry these losses forward and deduct them from its post-merger income from the entire enterprise. The Supreme Court upheld the disallowance on the basis of the intent of the statutory loss carry-over provisions. 'They were designed to permit...