Stanton Brewery v. Commissioner of Internal Revenue

• Citation: 176 F.2d 573
• Decision Date: 25 July 1949
• Docket Number: Docket 21287.,No. 271,271
• Parties: STANTON BREWERY, Inc., v. COMMISSIONER OF INTERNAL REVENUE.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

176 F.2d 573 (1949)

STANTON BREWERY, Inc., v. COMMISSIONER OF INTERNAL REVENUE.

No. 271, Docket 21287.

United States Court of Appeals Second Circuit.

Argued June 8, 1949.

Decided July 25, 1949.

Elden McFarland, of New York City (G. A. Donohue, of New York City, on the brief), for petitioner.

Melva M. Graney, Sp. Asst. to the Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., and Ellis N. Slack and Lee A. Jackson, Sp. Assts. to the Atty. Gen., of Washington, D. C., on the brief), for respondent.

Before L. HAND, Chief Judge, and CLARK and FRANK, Circuit Judges.

CLARK, Circuit Judge.

The Commissioner of Internal Revenue determined a deficiency in petitioner's excess profits tax for 1942, which, as adjusted, was approved in a decision reviewed by the entire Tax Court, 11 T.C. 310, on the facts as stipulated. This petition for review raises the single issue whether or not, after a merger, the resulting corporation is entitled, in determining its adjusted excess profits net income, to carry over the unused excess profits credit of one of its components for the two years preceding the merger.

Petitioner was formed by a merger of The John Stanton Brewing and Malting Company and The Stanton Brewery, Inc., both New York corporations, under § 85 of the N. Y. Stock Corporation Law, McKinney's Consol.Laws, c. 59. The merger took place on December 31, 1941. The original Stanton Brewery, Inc., had been an operating company, all but one hundred of its shares being held by The John Stanton Brewing and Malting Company. Immediately before the merger, the holding company acquired the last one hundred shares, in exchange for previously authorized shares of its own stock. Upon the merger, the new company took the name of the operating company. In determining its adjusted excess profits net income for 1942, the first year of its existence, the new company deducted the unused excess profits credits of its component corporations for 1940 and 1941. The Commissioner disallowed the deduction of the operating company's credits, which were sufficient, either in 1940 or 1941, to cancel out the 1942 excess profits tax liability. The approval of the Commissioner's determination by the Tax Court led to this petition for review.

As is well known, Congress sought by the excess profits tax, I. R. C. §§ 710-736, 26 U.S.C.A. §§ 710-736 — imposed in 1940 and repealed in 1945 — to capture for the government the amount of corporate profits of any one year which were excessive in relation to the like receipts during an earlier or base period (normally 1936-1939). But it was considered equitable that lean years should be set off against lush ones to strike some sort of average, and hence we have the device of the "unused excess profits credit carry-back and carry-over" from one tax year to another. Here we are interested only in the carryover. In circumstances such as are here disclosed the statutory scheme operated as follows: To reduce the excess profits net income, as defined in I. R. C. § 711, to the adjusted excess profits net income, upon which the excess profits tax was based, I. R. C. § 710(b) provided for three deductions: (1) a specific exemption (then $5,000); (2) an excess profits credit, as defined in §§ 712 and 713, amounting to 95 per cent of the average base period net income, with certain adjustments; and (3) an unused excess profits credit adjustment, computed under § 710(c), which defines it as "the aggregate of the unused excess profits credit carry-overs and unused excess profits credit carry-backs to such taxable year." "Unused excess profits credit" is defined, in § 710(c) (2), as "the excess, if any, of the excess profits credit for any taxable year beginning after December 31, 1939, over the excess profits net income for such taxable year." Subsec. (c) (3) (B) provides further that "If for any taxable year beginning after December 31, 1939, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-over for each of the two succeeding taxable years." Petitioner's claim is that, as "the taxpayer" in the quotation, it is entitled to the carry-over from its component operating company's unused excess profits credit. We are constrained to agree.

The issue as so stated is thus seen to turn upon the nature of merged corporations after a merger. At the outset we find ourselves confronted with one of those questions of legal semantics or categorization which constantly dog the judicial process. For here the decision seems to be sought in terms of which legal entity swallowed the other. Moreover there appears to be the further assumption, on the part of respondent, that necessarily the inactive holding company — which lost its identity in the other so far at least as its name is concerned — swallowed the really active part of the enterprise, so that an important privilege of the latter, taxwise, is irrevocably lost. And it seems that, had the converse been true and the swallower originally had the privilege, it would still be retained. While nowhere stated in these exact terms, this does appear to be the premise of the Commissioner as accepted by the Tax Court. Thus in his original Statement to "The Stanton Brewery, Inc. (Formerly The John Stanton Brewing and Malting Co.)" he allowed it a small credit "Unused — available for carryover to 1942," but went on to say "that you are not entitled to deduct, in determining your adjusted excess profits net income, the unused excess profits credit of your dissolved subsidiary for the years 1940 and 1941 under the provisions of section 710 of the Internal Revenue Code." And now his counsel refers to the "taxpayer" as though steadily in existence throughout the period, defines the latter's claim as one for the unused credits of "its" subsidiary for 1940 and 1941, and asserts that "taxpayer is not in fact `the taxpayer' which had unused excess profits credits in 1940 and 1941."

If there were real substance, for present purposes, to this conception of a corporate merger as a continuance of existence of the dominant corporation only, it would seem more in accord with business realities here to say that the larger and active operating business had taken over the inactive entity. It is true that upon his assumption the Commissioner may seem to avoid the dilemma of holding that a substantial tax credit is harshly destroyed by a comparatively minor change in corporate form. He at least can assert — as he does on the basis particularly of New Colonial Ice Co. v. Helvering, 292 U. S. 435, 54 S.Ct. 788, 78 L.Ed. 1348 — that the legal entity having the credit is now gone. But even upon his, to us, dubious assumption, we do not think he really avoids it, for he still employs a mere change in corporate form — of a slightly different nature, but still capable of avoidance by skillful legal manipulation — to bring about a yet more arbitrary destruction of a credit as to one only of two or more component parties to a merger. We doubt, therefore, that any of these linguistic formulae suggests a really fruitful approach to the solution of our present problem. More properly we must regard the "resulting corporation" as the union of component corporations into an all-embracing whole which absorbs the rights and privileges, as well as the obligations, of its constituents.¹

That the corporation resulting from a merger takes on the obligations of its components directly by operation of law is clear on the authorities. In Commissioner of Internal Revenue v. Oswego Falls Corp., 2 Cir., 71 F.2d 673, 676, this court held that the resulting corporation after a merger under the same New York statute as involved here was primarily liable for the tax obligations of a component, as "the taxpayer" and not secondarily as a transferee after a purchase. Cf. United States v. Oswego Falls Corp., 2 Cir., 113 F.2d 322; A. D. Saenger v. Com'r, 38 B.T.A. 1295, 1302. In Adrian & James, Inc., v. Com'r, 4 T.C. 708, 719, the Tax Court held that a continuing corporation, after a merger under the Delaware General Corporation Law, which paid the income tax liability of a component was entitled to a deduction under § 406 of the Revenue Act of 1938, as in payment of its own liability. The Koppers Coal Co. v. Com'r, 6 T.C. 1209, 1223, is in accord, as are the cases upholding jurisdiction of petitions by a resulting corporation as "the taxpayer" for review of deficiencies determined against its components. Alaska Salmon Co. v. Com'r, 39 B.T.A. 455; Skaneateles Paper Co. v. Com'r, 29 B.T.A. 150. All these decisions deal with the substance of the transaction and are not to be brushed aside by the oversimplified formula suggested by the Commissioner — in line with his assumed premise stated above — that involved only was the continued corporation, and not the merged or submerged one.

The question of the resulting corporation's right to deduct unamortized bond discount and expense on obligations of its components has aroused considerable judicial discussion. In New York Cent. R. Co. v. Commissioner of Internal Revenue, 2 Cir., 79 F.2d 247, 249, certiorari denied 296 U.S. 653, 56 S.Ct. 370, 80 L.Ed. 465, our brethren distinguished the consolidation there from a purchase, yet turned their decision, allowing the deduction, on the rationale that "no loss was sustained by the issuing corporations in selling their bonds at a discount; the loss will be sustained by the issuing corporations in selling their bonds at a discount; the loss will be sustained by the consolidated corporation when the bonds mature and are paid." But in Helvering v. Metropolitan Edison Co., 306 U.S. 522, 529, 59 S.Ct. 634, 638, 83 L.Ed. 957, the Supreme Court, approving the result in the New York Central case, declared that in the merger situation, as opposed to the sale, "the corporate personality of the transferor is drowned in that of the transferee." And since the transaction had "all the...