these decisions teach only that the Libson test of continuity between the loss operation and the profit one applies even if the loss corporation survives the merger and, hence, is technically still the "same taxpayer."
The fullest treatment of the relationship between stock continuity and the carry-over privilege appears in a series of Second Circuit decisions: Norden-Ketay, supra; Julius Garfinckel & Co. v. Commissioner, 335 F.2d 744, (2nd Cir., 1964); Allied Central Stores, Inc., supra. In Norden-Ketay, since the surviving taxpayer was the original loss corporation, the Court first considered the variance between the profit business and the loss business, and then considered the change in stock ownership as a second factor bearing on the "continuity of the business enterprise."
But the full passage discussing continuity of ownership shows that it was explored as a possible saving grace, which might preserve the carry-over otherwise precluded by the merger.
Thus, the Court of Appeals in Norden-Ketay prefigured the problem, spelled out in Garfinckel the following year, of whether continuity of ownership could be an ameliorating fact in situations where Libson was prima facie applicable.
This was made clear by Judge Friendly's thoughtful review of Libson and its aftermath in Garfinckel. Julius Garfinckel & Co. had acquired all the stock of Brooks Brothers (a profit corporation) by 1947, and about 58 per cent of DePinna (a loss corporation) in 1950; both companies retailed men's wear. In 1952 Garfinckel caused Brooks Brothers to be merged into DePinna, the latter remaining as the surviving corporate entity, but changing its name to Brooks Brothers, Inc. Garfinckel thereby acquired approximately 95 per cent of the consolidated company.
Unlike the situation in Norden-Ketay, the loss corporation had not been a mere shell at the time of merger, both companies had been in the same business, and there was substantial overlap of stock ownership; unlike Libson, the loss corporation was the surviving entity. Thus, Judge Friendly found himself faced with a question left undecided by those two cases:
"When a corporation which has incurred losses but is still actively engaged in business acquires by consolidation another corporation with a history of profits in the same business, does § 122 permit the consolidated corporation to deduct pre-consolidation losses from post-consolidation profits derived solely from operations of the acquired corporation - this in a context in which a single stockholder owned 58% of the common stock of the loss corporation and 100% of the common stock of the profit corporation during the period of the losses and, by virtue of the consolidation, owned 95% of the stock of the surviving corporation? With some hesitation, we have concluded that Libson requires a negative answer." 335 F.2d at 745.
Judge Friendly then reviewed the difficult questions raised by Libson when the loss corporation was the survivor and found it "hard to draw an intelligible line between a case where a corporation has provided itself with new assets to establish a new business and another where it has bought a business already established."
He hypothesized a continuum of situations varying as to the pre-merger relationship of the corporations; the method of combination or acquisition; and the degree to which the original loss corporation, whether acquired or acquiring, was merely a shell.
The important point is the plain assumption that as a common denominator each situation involved a combination or reshuffle of several businesses.
In short, the Court seemed to contemplate the possibility that the pre- Libson results in Newmarket and Metropolitan Edison might be appropriate if the taxpayer could show sufficient ameliorating facts such as continuity of beneficial ownership and proof that the loss company was more than a shell. If anything is clear, it is that the carryover was not denied, as the Government contends "solely" because of the change in stock ownership.
Shortly after the decision in the Garfinckel case, the Second Circuit denied the loss carry-over to profits arising after a consolidating merger of several department stores, since the revenues had been generated by different units than those suffering the pre-merger losses. Allied Central Stores, Inc. supra. Even though all three stores had been wholly owned by a common parent corporation prior to their merger, the court held that "[The] regrouping of subsidiaries which have been treated as separate entities, with resultant changes in stated capital, total assets, and net worth, has an effect on 'continuity'". 339 F.2d at 504.
Reviewing all the above discussed decisions, I conclude that the correct legal analysis is the exact reverse of the Government's position. That is, the minimum requirement for denying the privilege is that there be some substantial change between the business unit involved in the loss years and that unit which creates the profits; even then, if there is anything left of Judge Friendly's dictum in Garfinckel after the Supreme Court's denial of certiorari and the subsequent decision in Allied, the privilege may not be forfeit in appropriate cases of continuity in stock ownership.
None of the post- Libson decisions, either singly or collectively, stand for the proposition that change in ownership alone suffices. To hold that such a discontinuity within a single company, otherwise unchanged, eliminates § 122 would be not only to extend the already much-criticized Libson Shops doctrine, but also to open a Pandora's box of difficulties in determining when sufficiently substantial and permanent stock transfers had occurred.
I shall decline the opportunity. Defendant's motion is denied.
Let an appropriate order be submitted.
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