Libson Shops v. Koehler

• Decision Date: 16 February 1956
• Docket Number: No. 15397.,15397.
• Citation: 229 F.2d 220
• Parties: LIBSON SHOPS, Inc., Appellant, v. Gustave F. KOEHLER, District Director of Internal Revenue, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

229 F.2d 220 (1956)

LIBSON SHOPS, Inc., Appellant, v. Gustave F. KOEHLER, District Director of Internal Revenue, Appellee.

No. 15397.

United States Court of Appeals Eighth Circuit.

January 19, 1956.

Rehearing Denied February 16, 1956.

Owen T. Armstrong, St. Louis, Mo. (Lowenhaupt, Mattingly, Chasnoff & Stolar, St. Louis, Mo., were with him on the brief), for appellant.

Harry Marselli, Atty., Dept. of Justice (H. Brian Holland, Asst. Atty. Gen., and Ellis N. Slack and Harry Baum, Attys., Dept. of Justice, Washington, D. C., and Harry Richards, U. S. Atty., St. Louis, Mo., were on the brief), for appellee.

Before GARDNER, Chief Judge, and WOODROUGH and VOGEL, Circuit Judges.

VOGEL, Circuit Judge.

The sole question involved in this case is whether the appellant, as the surviving corporation in a statutory merger of seventeen separate corporations, in computing its net income for a taxable period commencing on the date of the merger, is entitled to carry over and deduct net operating losses sustained by three of the merged corporations in taxable periods ended prior to the date of the merger under the provisions of §§ 23(s) and 122(b) (2) (C) of the Internal Revenue Code of 1939, 26 U.S.C. §§ 23(s), 122(b) (2) (C).

The facts, as found by the district court and as stipulated by the parties, may be summarized as follows:

The appellant, Libson Shops, Inc., is a Missouri corporation with offices in St. Louis, Missouri. It was originally incorporated on January 2, 1946, as Libson Shops Management Corporation to supervise and manage certain other corporations formed for the purpose of operating stores for the sale of women's wearing apparel. Its articles of incorporation also authorized it to engage in the business of selling apparel. Of the other corporations, ten were also incorporated in Missouri on January 2, 1946, one was incorporated in Missouri on January 8, 1946, and four were incorporated in Illinois on January 2, 1946. An additional corporation, Hampton Libson Shops, Inc., was incorporated in Missouri on May 28, 1948. All of the outstanding stock of each of the corporations was owned directly or indirectly by the same eight individuals and in the same proportions.

On August 1, 1949, pursuant to the laws of Missouri and Illinois, the seventeen separate operating corporations were merged into one, the taxpayer (appellant), and taxpayer's stock was issued in exchange for the stock of the merged corporations. Under the terms of the merger, the name of the taxpayer corporation was changed, the amount and par value of its stock was revised and its business purposes were extended. After the merger, the taxpayer, appellant, operated the stores which had formerly been operated by the merged corporation.

Prior to the merger, two of the Illinois corporations and one Missouri corporation had sustained net operating losses from their respective businesses.

In the year following the merger, that is the taxable year involved herein, each of the businesses formerly operated by such three corporations continued to sustain a net operating loss.

In its income tax return for the first taxable year after the merger, the taxpayer claimed as a net operating loss carry-over and deduction the net operating losses sustained before the merger by the three corporations above referred to. Such deduction was disallowed by the commissioner and the appellant paid the resulting tax deficiency. It then claimed a refund which was disallowed; whereupon, it instituted the present action. The district court held that the claimed net operating loss deduction was not permissible under the law and sustained the commissioner's disallowance of the deduction. This is an appeal from the district court's action.

The statute involved, insofar as it may be applicable herein, is as follows: Section 122(b) (2) (C) Internal Revenue Code of 1939 as amended by Revenue Act of 1951, 65 Stat. 452, 505, effective for taxable years beginning after December 31, 1948:

"(C) Loss for taxable year beginning after December 31, 1947, and before January 1, 1950. If for any taxable year beginning after December 31, 1947 and before January 1, 1950, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-over for each of the three succeeding taxable years, except that the carry-over in the case of each such succeeding taxable year (other than the first succeeding taxable year) shall be the excess, if any, of the amount of such net operating loss over the sum of the net income for each of the intervening years computed —". (Emphasis supplied.)

It is the appellant's position that the surviving corporation in a statutory merger, as distinguished from a new corporation in other kinds of reorganization, is entitled to carry over and deduct losses sustained in prior years by other parties to the reorganization.

Appellant concedes that in New Colonial Ice Co., Inc., v. Helvering, 1934, 292 U.S. 435, 54 S.Ct. 788, 789, 78 L.Ed. 1348, the Supreme Court ruled out the conclusion that the benefit of a carry-over extends to any successor. It argues that in the New Colonial Ice case, the statute involved was worded slightly differently than that with which we are here concerned, in that it provided that where "* * * any taxpayer has sustained a net loss * * *" the same shall be deducted from the net income of "the taxpayer" for the succeeding taxable year, whereas the statute here does not repeat the term "taxpayer". That is, the statute does not say if the taxpayer has a loss, such loss shall be a carry-over for succeeding taxable years of the taxpayer. It takes the position that the failure to expressly repeat the term "the taxpayer" is significant as suggesting that the statute does not limit the right to the carry-over to the person who sustained the loss. Appellant points out that "the right to the carry-over is stated in the passive voice — the statute does not say that, if the taxpayer has a loss he shall be entitled to a loss carry-over; that it says only that such loss shall be a carry-over". From this appellant argues that Congress was not concerned with who sustained the loss but with the fact of the loss itself, and that it intended to confer the tax benefit thereof to anyone who could associate himself with the loss, such as a successor corporation in a corporate reorganization.

Much is attempted to be made of little. We see no significance in the failure to repeat the term "taxpayer" in the present statute. In providing that if the taxpayer has a loss such loss shall be a carry-over, Congress could only have meant such carry-over was for the benefit of the taxpayer referred to. Had Congress intended that this right to a loss carry-over be transferable to someone other than the original taxpayer, it would have said so. In New Colonial Ice Co., Inc., v. Helvering, supra, the Supreme Court said, 292 U.S. at page 440, 54 S.Ct. at page 790:

"* * * 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.

"Obviously, therefore, a taxpayer seeking a deduction must be able to point to an applicable statute and show that he comes within its terms."

The Supreme Court, in the case of Interstate Transit Lines v. Commissioner of Internal Revenue, 1943, 319 U.S. 590, 593, 63 S.Ct. 1279, 1281, 87 L.Ed. 1607, stated:

"* * * the now familiar rule that an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer. New Colonial Ice Co., Inc., v. Helvering, 292 U.S. 435, 440, 54 S.Ct. 788, 790, 78 L.Ed. 1348; Deputy v. du Pont, 308 U.S. 488, 493, 60 S.Ct. 363, 366, 84 L.Ed. 416."

In order to obtain credit for the loss carry-over appellant must establish that it is the same "taxpayer" having the net operating loss.

Arriving at the same conclusion, the trial court stated the question herein as follows:

"* * * is the survivor corporation the same as each of the corporations whose tax credit the merged corporation would appropriate?"

It found that there had been much more than a "comparatively minor change", Stanton Brewery, Inc., v. Commissioner of Internal Revenue, 2 Cir., 1949, 176 F.2d 573, 575, between the merged corporations and the appellant and concluded:

"We cannot on this record hold plaintiff and any one of the corporations having either of tax credits in issue, is the same corporation.

"There are far too many differences between the new or survival corporation and each of the old corporations that must fail to survive, to find the corporation surviving is for tax credit purposes the same as the corporations that have ceased to exist."

The trial court further stated:

"The effect of a ruling such as plaintiff seeks would be establishing a precedent susceptible of widespread abuse. That is if Federal courts are to consider themselves bound by state laws and merger agreements under them in tax matters. Such a rule might result in a different Federal tax status for corporations in each state. * * * The law must operate uniformly. It cannot make fish of one and fowl of another. And so bankrupt corporations with tax credits would find themselves the object of desirable purchase or `merger\' by or with corporations with tax liabilities, in order that after purchase the tax credits could be used to offset taxes due, just as plaintiff would do in this case. Regardless of what the motive or motives for including the corporations with tax credits in the merger, we have no doubt that use of their tax credits was one. The corporations holding the tax credits could not use them, as apparently the stipulation indicates the stores operated by the corporations having tax credits continued to lose money."

Appellant in this case relies principally upon Stanton Brewery, Inc., v. Commissioner of Internal Revenue, supra....