NEWMARKET MANUFACTURING COMPANY v. United States

• Citation: 130 F. Supp. 706
• Decision Date: 15 April 1955
• Docket Number: Civ. A. No. 53-886.
• Parties: NEWMARKET MANUFACTURING COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Massachusetts

130 F. Supp. 706

NEWMARKET MANUFACTURING COMPANY, Plaintiff, v. UNITED STATES of America, Defendant.

Civ. A. No. 53-886.

United States District Court D. Massachusetts.

April 15, 1955.

David R. Pokross, Peabody, Brown, Rowley & Storey, Boston, Mass., for plaintiff.

Edmund C. Grainger, Jr. Sp. Asst. to the Atty. Gen., for defendant.

WYZANSKI, District Judge.

Newmarket Manufacturing Company, a Massachusetts corporation, on September 26, 1951 caused the organization of Newmarket Manufacturing Company, a Delaware corporation. For bona fide purposes, on November 30, 1951, in accordance with inter-corporate Articles of Consolidation and an Agreement of Merger, and pursuant to Mass.G.L.(Ter. Ed.) c. 156, §§ 46A-46D and Delaware Revised Code 1935, as amended c. 65, §§ 59 and 60, 8 Del.C. §§ 251, 252, 259, the Massachusetts corporation was merged into and consolidated with the Delaware corporation.

The details are set forth in a stipulation, and need not be repeated. For present purposes it will be sufficient rapidly to summarize the effect of that merger. The consolidated corporation acquired from the Massachusetts corporation all its assets and rights, (except that it did not acquire any right which it could not have exercised under the law under which it existed immediately prior to the merger). The consolidated corporation became liable for all the obligations of the Massachusetts corporation. The consolidated corporation had the same business as the Massachusetts corporation, the same officers, the same stockholders, even the same outstanding stock certificates. Moreover, having been created at the behest of and with funds from the Massachusetts corporation, its assets were exclusively derived from the Massachusetts corporation. After the merger, the Massachusetts corporation ceased to exist as a separate corporation.

The question presented is whether under § 122 of the Revenue Code of 1939, as amended, 26 U.S.C.A. § 122, a net operating loss incurred by the consolidated corporation in its fiscal year December 1, 1951 to November 30, 1952 (that is, after the merger) may be carried back to be deducted from the income tax liability attributable to the separate operations of the Massachusetts corporation for the period January 1, 1951 to November 30, 1951 (that is, before the merger). This form of stating the question deliberately uses the phrase "income tax liability attributable to the separate operations of the Massachusetts corporation", without saying whether in connection with that liability: "the taxpayer" is the Massachusetts corporation or the consolidated corporation or both.

The relevant federal tax statutes follow.

Section 23 of the Internal Revenue Code of 1939, as added by § 211(a) of the Revenue Act of 1939, c. 247, 53 Stat. 862, 26 U.S.C.A. § 23, provides:

"Net operating loss deduction. For any taxable year beginning after December 31, 1939, the net operating loss deduction computed under section 122."

Section 122 of the Internal Revenue Code of 1939, as added by § 211(b), Revenue Act of 1939, supra, and as amended by § 153(a), Revenue Act of 1942, c. 619, 56 Stat. 798, and § 215(a), Revenue Act of 1950, c. 994, 64 Stat. 906, makes this provision for a net operating loss deduction:

"(b) Amount of carry-back and carry-over.

"(1) Net operating loss carry-back.

* * * * * *

"(B) Loss for taxable year beginning after 1949. If for any taxable year beginning after December 31, 1949, the taxpayer has a net operating loss, such net operating loss shall be a net operating loss carry-back for the preceding taxable year. * * *"

Plaintiff says that the stated question should be answered affirmatively because within the meaning of § 122(b) (1), it is "the taxpayer". The argument proceeds in this manner. The effect of a merger is to be determined by local law, — here the law of Massachusetts and of Delaware. Under both of these local laws the Massachusetts and the Delaware corporations after the merger became identical. This is shown by Aspinook Corp. v. Commissioner of Corporations & Taxation, 326 Mass. 327, 94 N.E.2d 366, which held that when a Delaware corporation had merged with another Delaware corporation under the Delaware statute the consolidated corporation could prosecute an application for abatement of a Massachusetts state excise tax previously filed by one of the two merging corporations. The reason given was that only the separate existence of the constituent corporations ceased, and that both corporations nonetheless continued to exist in the consolidated corporation 326 Mass. at pages 330-331, 94 N.E.2d 366. Where identity between the merging corporations and the consolidated corporation is recognized by local law, then, so the argument runs, the federal tax law accepts the identity. Indeed, it is said, such identity has been recognized in connection with carry-back provisions, Moldit, Inc. v. Jarecki, D.C.N.D.Ill., Aug. 13, 1953, (P. H. par. 72, 681), as well as in connection with unused excess profits credits. Stanton Brewery, Inc., v. Commissioner, 2 Cir., 176 F.2d 573.

There are two fundamental vices in this argument. First is the erroneous assumption that the federal tax law determines the identity of the taxpayer under federal law by reference to state rules of law or private agreements governing mergers. However, the question whether the same taxpayer is involved in two different accounting periods under federal law is to be decided exclusively by federal tax law. Second is the fallacious proposition that the Delaware corporation is the same person as the Massachusetts corporation merely having, as plaintiff's brief contends, another domicil and another name. However, even if the situation at bar involved two corporations chartered by the same state it would not be true that the identity of one corporation survives when merged with another. The state could, of course, transfer from one corporation to another certain rights and privileges. But it could transfer only such rights and privileges as it controlled. For example, it could not (without the consent of another sovereign) transfer the right to do business in a foreign state, or the right to a franchise, license, or tax credit given by a foreign state or the federal government. The separate identity of two corporations, their permanent distinction, is underlined where, as in the case at bar they derive their charters from different states. Where two corporations respond to different sovereigns, are...