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Commissioner of Internal Revenue v. Virginia Metal Products Inc.


decided: May 15, 1961.


Author: Goodrich

Before GOODRICH, KALODNER and STALEY, Circuit Judges.

GOODRICH, Circuit Judge.

This case involves the application of the net loss carry-over provisions of Section 122(b) of the 1939 Internal Revenue Code, 26 U.S.C.A.*fn1 The real heart of the case involves the question whether, to get the benefit of these provisions, continuity of the corporate entity is enough.

A corporation named Winfield incurred losses in 1950 and 1951 when it was engaged in the business of making aluminum storm windows and doors and selling and servicing automatic furnace stokers. Its shares were acquired by a corporation which we shall call "Virginia."*fn2 Virginia was a wholly new ownership. Virginia sold the Winfield assets keeping ownership of the corporate shell.*fn3 And Winfield never again engaged in the window and automatic stoker business. A new business formerly operated by Virginia was put into its existing shell. The new business made money. Can the Winfield loss incurred before Virginia acquired Winfield be carried over to lessen Virginia's tax under Section 122(b)?

Virginia starts out with a finding of fact which it is very happy to have. The Tax Court found that the transactions outlined above were carried on for a business purpose and not with a view to tax avoidance. 33 T.C. 788 (1960). Section 129 of the 1939 Internal Revenue Code, 26 U.S.C.A., therefore, is out of the way, although the Commissioner is a bit grudging in its acknowledgment of the finding.

In spite of the taxpayer's earnest and very able argument, we think Libson Shops, Inc. v. Koehler, 1957, 353 U.S. 382, 77 S. Ct. 990, 1 L. Ed. 2d 924, is unmistakably decisive of this case. In that case 16 women's apparel shops, separately incorporated but owned by the same people, were merged with a management corporation to form one corporation called Libson Shops, Inc. Three of these corporations, prior to the merger, showed net operating losses. The taxpayer claimed a deduction of these pre-merger losses as a carry over under Section 122.The Supreme Court said no.

The basis of the Court's decision is directly applicable to this case and we think leaves no doubt of what it meant. Mr. Justice Burton, for the Court, pointed out that the government was contending "that the carry-over privilege is not available unless there is a continuity of business enterprise." Id., 353 U.S. at page 386, 77 S. Ct. at page 992. Then the opinion goes on to say that this requirement of continuity of business enterprise accords "with the legislative history of the carry-over and carry-back provisions." The Court cites the legislative history pointing out that the 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." Ibid. (Footnote omitted.) That case is a stronger case for the taxpayer than the one before us. The shareholders remained the same in these various Libson corporations. The same business was carried on after the merger as before. They all continued to sell women's apparel.

Since the Supreme Court said that was insufficient for the application of Section 122, this is an a fortiori case. Here there was no continuity of business and there was no continuity of ownership. The taxpayer's hopeful reliance upon footnote 9 on page 390 of the report of Libson, page 994 of 77 S. Ct., is misplaced. The Supreme Court was simply confining its decision to the facts before it. But the thrust of that decision easily includes such a case as this. This result accords with what other circuits have been saying in applying the Libson decision. Bookwalter v. Hutchens Metal Products, Inc., 8 Cir., 1960, 281 F.2d 174; Mill Ridge Coal Co. v. Patterson, 5 Cir., 264 F.2d 713. (In this case, however, there was no business purpose but a "neatly confected arrangement.") certiorari denied 1959, 361 U.S. 816, 80 S. Ct. 57, 4 L. Ed. 2d 63; Patten Fine Papers, Inc. v. Commissioner, 7 Cir., 1957, 249 F.2d 776.*fn4

The decision of the Tax Court will be affirmed in No. 13,392; the decision of the Tax Court will be reversed and the cause remanded for further proceedings not inconsistent with this opinion in No. 13,391.

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