The opinion of the court was delivered by: COOLAHAN
This is a civil action for refund of income taxes and interest assessed against and paid by the plaintiff, Commercial Industries Corp., [Commercial], for the calendar years of 1956, 1957 and 1958, in the amounts set out in the margin.
Jurisdiction is premised on 28 U.S.C. §§ 1340, 1346.
The ultimate issue presented is whether the Commissioner of Internal Revenue properly disallowed the net operating loss carry-overs claimed as deductions by the plaintiff in its returns for those years, where such attempted carry-overs represent the net operating losses of a predecessor company, Seyer Silk Dyeing & Finishing Company, during the years 1951 through 1954.
The Government brings this motion for summary judgment. For the reasons given below the motion will be denied.
Since the chronology of events has been stressed by both sides in regard the applicable Tax Code provisions, a brief history of the matter will be useful. For purposes of this motion the Government is willing to assume the following facts.
Seyer Silk Dyeing & Finishing Co. [Seyer] was organized in 1931, and was engaged in the business of dyeing and finishing fabrics at its plant in Haledon, New Jersey.
On October 6, 1953, all the stock of Seyer was sold by the Seyer family to four individuals - Oliver Lazare, Bruno Herman, Samuel Fire, and Arthur Rhodes - for $320,513.65. The last three named individuals were at that time associated in the ownership and operation of Nina Dye Works Company, Inc. [Nina], which was engaged in the same business of dyeing and finishing fabrics at its plant in York, Pennsylvania. Oliver Lazare, a customer of Nina, was invited to join in the purchase of Seyer by the owners of Nina.
Shortly after the purchase of the Seyer stock, the new owners voted to discontinue their own dyeing and finishing, allegedly on the ground that the machinery and equipment of Seyer was in poor condition and not capable of profitable operation. The machinery was sold,
but contact with Seyer's customers was retained; their orders for fabric were then obtained; and the actual dyeing and finishing was farmed out to other companies on a commission basis.
On May 24, 1954, seven months after the Seyer Company had been purchased, the other three owners bought Lazare's share of the Seyer stock for $140,949.88, representing a $34,000.00 gain to Lazare over his share of the original purchase price.
Thereafter, Seyer continued to accept orders on a commission basis for dyeing and finishing by other companies, until September, 1955.
Seyer incurred net operating losses during the years 1951 through 1954 which are set out in the margin.
In 1955 the three remaining owners of Seyer decided to merge it with Nina, whose shares they owned in the same proportion as the shares of Seyer. Nina had continued to do its own dyeing and finishing up to the merger when its machinery and equipment were sold prior to the consummation. The mechanics of the merger were simply that Seyer acquired the assets and liabilities of Nina and changed its name, effective as of September 8, 1955, to Commercial Industries Corp. From that date on, the Government contends, the income of the new corporation was derived principally from rents, interests, dividends, and commissions. There was also a side transaction involving a third corporation which is not pertinent to this motion.
The net operating losses listed above for Seyer were claimed by Commercial as deductions in the years 1955 through 1958 as noted.
These deductions were claimed under Section 172 of Internal Revenue Code of 1954.
The Government argues that the attempted carryover is governed by the Internal Revenue Code [I.R.C.] of 1939 and the case law thereunder, which it claims prohibits the deductions. It maintains that such carryovers are precluded by Libson Shops, Inc. v. Koehler, 353 U.S. 382, 1 L. Ed. 2d 924, 77 S. Ct. 990 (1957), and later cases applying that decision. Discussed more fully below, the Libson line of cases teaches that net operating losses cannot be carried forward (or back) to other tax years under Section 122 of the 1939 Code (predecessor of § 172, I.R.C. 1954, supra) if ...