MR. JUSTICE BURTON delivered the opinion of the Court.
The issue before us is whether, under §§ 23 (s) and 122 of the Internal Revenue Code of 1939, as amended, a corporation resulting from a merger of 17 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 attributable to the other businesses. We hold that such a carry-over and deduction is not permissible.
Petitioner, Libson Shops, Inc., was incorporated on January 2, 1946, under the laws of Missouri, as Libson Shops Management Corporation, to provide management
On August 1, 1949, the 16 sales corporations were merged into petitioner under the laws of Missouri and Illinois. New shares of petitioner's stock were issued, pro rate, in exchange for the stock of the sales corporations. By virtue of the merger agreement, petitioner's name was changed, the amount and par value of its stock revised, and its corporate purposes expanded. Following the merger, petitioner conducted the entire business as a single enterprise. Thus, the effect of the merger was to convert 16 retail businesses and one managing agency, reporting their incomes separately, into a single enterprise filing one income tax return.
Prior to the merger, three of the sales corporations showed net operating losses. These were as follows:
Corporation Taxable Period Amount Evanston Libson Shops, Inc.. Calendar year 1948...... $8,115.11 Fiscal period begun Jan.1, 1949, and ended July 31, 1949.................... 6,422.28 Lawrence Libson Shops, Inc.. Fiscal period ended July 31, 1948................ 245.03 Fiscal year ended July 31, 1949.................... 2,770.42 Hampton Libson Shops, Inc.. Fiscal year ended July 31, 1949.................... 4,879.92 ___________ Total .............................................. $22,432.76
In its income tax return for the first year after the merger, petitioner claimed a deduction of the above $22,432.76 as a carry-over of its pre-merger losses. Petitioner sought this deduction under §§ 23 (s) and 122 of the Internal Revenue Code of 1939, as amended. The Commissioner of Internal Revenue disallowed it and petitioner paid the resulting tax deficiency. In due course petitioner brought this suit for a refund in the United States District Court for the Eastern District of Missouri. That court dismissed petitioner's complaint and the Court of Appeals affirmed. 229 F.2d 220. We granted certiorari to decide the questions of tax law involved. 351 U.S. 961.
Section 23 (s) authorizes a "net operating loss deduction computed under section 122."
We are concerned here with a claim to carry over an operating loss to the immediately succeeding taxable year. The particular provision on which petitioner's case rests is as follows:
The controversy centers on the meaning of "the taxpayer."
In support of its denial of the carry-over, the Government argues that this statutory privilege is not available unless the corporation claiming it is the same taxable entity as that which sustained the loss. In reliance on New Colonial Co. v. Helvering, 292 U.S. 435, and cases following it,
The requirement of a continuity of business enterprise as applied to this case is in accord with the legislative history of the carry-over and carry-back provisions. Those provisions were enacted to ameliorate the unduly drastic consequences of taxing income strictly on an annual basis. They were designed to permit a taxpayer to set off its lean years against its lush years, and to strike something like an average taxable income computed over a period longer than one year.
This distinction is recognized by the very cases on which petitioner relies. In Stanton Brewery, Inc. v. Commissioner, 176 F.2d 573, 577, the Court of Appeals stressed the fact that the merging corporations there involved carried on "essentially a continuing enterprise, entitled to all . . . benefits [of the carry-over provisions] in ameliorating otherwise harsh tax consequences of fluctuating profits or expanding business." (Emphasis supplied.) And in Newmarket Manufacturing Co. v. United States, 233 F.2d 493, 497, the court expressly distinguished the case before it from the instant case on the ground that there "one single business" was involved
This difference is not merely a matter of form. In the Newmarket case, supra, a corporation desiring to change the state of its domicile caused the organization of a new corporation and merged into it. The new corporation sought to carry back its post-merger losses to the premerger income of the old corporation. But for the merger, the old corporation itself would have been entitled to a carry-back. In the present case, the 16 sales corporations, prior to the merger, chose to file separate income tax returns rather than to pool their income and losses by filing a consolidated return. Petitioner is attempting to carry over the pre-merger losses of three business units which continued to have losses after the merger. Had there been no merger, these businesses would have had no opportunity to carry over their losses. If petitioner is permitted to take a carry-over, the 16 sales businesses have acquired by merger an opportunity that they elected to forego when they chose not to file a consolidated return.
We do not imply that a question of tax evasion or avoidance is involved. Section 129 (a) of the 1939 Code, as amended, does contain provisions which may vitiate
The judgment of the Court of Appeals is
MR. JUSTICE DOUGLAS dissents.
MR. JUSTICE WHITTAKER took no part in the consideration or decision of this case.
"The bill, together with the committee amendments, permits taxpayers to carry over net operating business losses for a period of 2 years. Prior to the Revenue Act of 1932, such 2-year carry-over was allowed. No net loss has ever been allowed for a greater period than 2 years. In the Revenue Act of 1932, the 2-year net loss carry-over was reduced to 1 year and in the National Industrial Recovery Act the net loss carry-over was entirely eliminated. As a result of the elimination of this carry-over, a business with alternating profit and loss is required to pay higher taxes over a period of years than a business with stable profits, although the average income of the two firms is equal. New enterprises and the capital-goods industries are especially subject to wide fluctuations in earnings. It is, therefore, believed that the allowance of a net operating business loss carry-over will greatly aid business and stimulate new enterprises." (Emphasis supplied.) H. R. Rep. No. 855, 76th Cong., 1st Sess. 9.
"SEC. 129. ACQUISITIONS MADE TO EVADE OR AVOID INCOME OR EXCESS PROFITS TAX.
"(a) DISALLOWANCE OF DEDUCTION, CREDIT, OR ALLOWANCE.—If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately prior to such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For the purposes of clauses (1) and (2), control means the ownership of stock possessing at least 50 per centum of the total combined voting power of all classes of stock entitled to vote or at least 50 per centum of the total value of shares of all classes of stock of the corporation."
See H. R. Rep. No. 871, 78th Cong., 1st Sess. 24, 49-50; S. Rep. No. 627, 78th Cong., 1st Sess. 26-27, 58-61.