Good Will Distributors (Northern), Inc. v. Shaw

• Decision Date: 20 November 1957
• Docket Number: No. 167,167
• Parties: GOOD WILL DISTRIBUTIRS (NORTHERN), Inc. v. Eugene G. SHAW, Commissioner of Revenue of the State of North Carolina.
• Court: North Carolina Supreme Court

Page 334

100 S.E.2d 334

247 N.C. 157

GOOD WILL DISTRIBUTIRS (NORTHERN), Inc. v. Eugene G. SHAW, Commissioner of Revenue of the State of

North Carolina.

No. 167

Supreme Court of North Carolina.

Nov. 20, 1957

Whitener & Mitchem, Gastonia, for plaintiff appellee.

Atty. Gen. George B. Patton and Asst. Attys. Gen. Peyton B. Abbott and Samuel Behrends, Jr., for defendant appellant.

RODMAN, Justice.

This case requires a construction of G.S. § 105-147, subd. 6(d) which permits, under certain conditions, a deduction of a prior economic loss from current gross income to determine taxable income. We must apply 'legislative intent' to a factual situation which we feel certain was not contemplated when the statute was enacted. Hence to determine the proper application of that statute to the facts of this case, we do not confine ourselves to that particular section of the tax law but look at all other statutory provisions which may assist in finding an answer to the question presented.

Express statutory authority is given domestic corporations to merge, G.S. § 55-165. When the merger is consummated, one corporation survives and the corporate existence of the other parties to the merger ceases. The surviving corporation becomes vested with 'all the rights, privileges, powers and franchises * * * of each of said constituent corporations * * and (they) shall be thereafter as effectually the property of the resulting of the surviving corporation as they were of the several and respective constituent corporations. * * *' G.S. § 55-166.

The language is clear and specific. The surviving corporation, plaintiff here, is vested with all of the rights which each party to the merger could exercise but only those rights. A merger does not create new or additional rights. Having ascertained that plaintiff has all of the rights which the parties to the merger could exercise and only those rights, we turn to the statutory provisions relating to the computation and assessment of income taxes.

We find every domestic corporation is required to pay a tax on its net income received during the income year, G.S. § 105-134. Net income is gross income less allowable deductions, G.S. § 105-140. Gross income is defined in G.S. § 105-141. No question with respect to gross income is presented by this case.

What deductions may plaintiff, the survivor, take to determine its net income? May it, as it asserts and the court adjudged, deduct from its gross income an economic loss sustained prior to the merger by another party thereto?

Ever since the adoption of our first income tax statute a taxpayer has been permitted to deduct certain losses in computing his net income. Prior to 1943 a loss could only be deducted in the income year in which the loss was sustained. The 1943 Legislature broadened the statute and permitted the taxpayer to carry forward certain kinds of losses as a deduction against income accruing in either of the two succeeding tax years. S.L.1943, c. 400. The 1945 Legislature rewrote that portion of the Act dealing with the deduction of losses. See sec. 4, c. 708, S.L.1945. The Act is substantially the law today and is applicable to the facts of this case.

Statutory provision permitting exemption from tax liability should be so construed as to bring within the exemption only those clearly entitled to its provisions. Sabine v. Gill, 229 N.C. 599, 51 S.E.2d 1; Henderson v. Gill, 229 N.C. 313, 49 S.E.2d 754; White v. United States, 59 S.Ct. 179, 305 U.S. 281, 83 L.Ed. 172. Applying this principle to this very provision, it was said by Denny, J., in Dayton Rubber Co. v. Shaw, 244 N.C. 170, 92 S.E.2d 799, 802: 'Our Legislature was under no constitutional or other legal compulsion to allow any carry-over to be deducted from taxable income in a future year. It enacted the carry-over provisions purely as a matter of grace, gratuitously conferring a benefit but limiting such benefit to the net economic loss of the taxpayer after deducting therefrom the allocable portion of such taxpayer's nontaxable income.'

Most of the cases involving the right of one corporation to claim as a deduction from its income a loss sustained by another corporation have arisen under Federal income or excess profits acts. The right of a successor corporation taking by conveyance, or a corporation resulting from a consolidation of corporations, or a corporation surviving as the result of a merger, to claim a loss sustained by another corporation, party to the consolidation or merger, has been repeatedly denied on the ground that the corporation claiming the deduction was not the taxpayer within the meaning of the statute. See New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L.Ed. 1348; Shreveport Producing & Refining Co. v. Commissioner of Internal Revenue, 5 Cir., 71 F.2d 972; Brandon Corporation v. Commissioner of Internal Revenue, 4 Cir., 71 F.2d 762; Pennsylvania Co., etc. v. Commissioner of Internal Revenue, 3 Cir., 75 F.2d 719; Weber Flour Mills Co. v. Commissioner of Internal Revenue, 10 Cir., 82 F.2d 764; Standard Paving Co. v. Commissioner of Internal Revenue, 10 Cir., 190 F.2d 330.

On the other hand, the right to deduct has been allowed where the transaction was a mere matter of form and the new or surviving corporation was for all practical purposes the same as the old, continuing the business of its predecessor. Industrial Cotton Mills Co. v. Commissioner of Internal Revenue, 4 Cir., 61 F.2d 291; Helvering v. Metropolitan Edison Co., 306 U.S. 522, 59 S.Ct. 634, 83 L.Ed. 957; Stanton Brewery, Inc., v. Commissioner of Internal Revenue, 2 Cir., 176 F.2d 573; Newmarket Manufacturing Company v. United States, 1 Cir., 233 F.2d 493. These cases emphasize the necessity of a continuing business of the kind and character conducted by the corporation whose loss is claimed as a deduction from income earned by another.

The right of a corporation surviving a merger to claim losses sustained by another member of the merger was presented to the Supreme Court of the United States in Libson Shops, Inc., v. Koehler, decided in May of this year, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924. The Court said: 'The issue before us is whether, under §§ 23(s) and 122 of the Internal Revenue Code of 1939, as amended, 26 U.S.C.A. §§ 23(s), 122, a corporation resulting from a merger of 16 separate incorporated businesses, which had filed separate income tax returns, may carry over and deduct the pre-merger net operating losses of three of its constituent corporations from the post-merger income...