Herculite Protective Fabrics Corp. v. Commissioner of Internal Revenue

387 F.2d 475, 21 A.F.T.R.2d (RIA) 408, 1968 U.S. App. LEXIS 8478

• Court: Court of Appeals for the Third Circuit
• Decided: January 9, 1968
• Docket: 16600_1
• Status: Published

Opinions

OPINION OF THE COURT

PER CURIAM:

The petitioner is a business corporation, the stock of which was bought by Seymour Hyman on May 11, 1960, at a bargain price after it had suffered substantial losses for several years. Operation of the business was continued substantially as before until January 31, 1961, when another corporate enterprise, also owned by Hyman, was merged with the petitioner.

The petitioner’s income tax return for 1961 claimed a carry-over deduction for losses it sustained from 1956 through 1960. A small part of the loss appears to have resulted from operations after Hyman’s acquisition in May, 1960.

The Commissioner disallowed the claimed deduction in its entirety, as both contrary to the provisions of section 269, Internal Revenue Code of 1954, and inconsistent with the special limitations on operating loss carry-over in section 382, and determined a tax deficiency accordingly. The Tax Court sustained the Commissioner’s ruling under the provisions of section 269 without passing upon the application of section 382 to the facts of this case. This appeal followed.

Admittedly, the facts of this case establish a statutory presumption under section 269(c) that “the principal purpose” of the 1960 acquisition by Hyman was the “evasion or avoidance of Federal income tax”. Our examination of the record satisfies us that the Tax Court’s factual determination that the taxpayer’s evidence did not overcome the statutory presumption and prima facie case supporting the Commissioner’s determination was justified. Accordingly, so much of the deficiency as resulted from the disallowance of losses sustained before Hyman’s 1960 acquisition of corporate control must stand.

Different considerations are presented by the additional loss suffered and claimed for the latter part of 1960 after Hyman’s acquisition. The statute makes no particular reference to any losses sustained after acquisition of control. However, the Court of Appeals .for the First Circuit, over the dissent of Judge, now Chief Judge Aldrich, has held that an improper attempt of a taxpayer to deduct pre-acquisition losses so taints the acquisition that even losses which in a realistic economic sense have been incurred after acquisition should be disallowed. R. P. Collins & Co. v. United States, 1st Cir., 1962, 303 F.2d 142. But we agree with Chief Judge Aldrich that the disallowance of the carry-over of losses caused by the operation of the business after acquisition constitutes a penalty that should not be imposed in the absence of a clear legislative mandate. Certainly such post-acquisition losses would have been deductible by way of carry-over had not pre-acquisition losses also been claimed. Zanesville Investment Co. v. Commissioner of Internal Revenue, 6th Cir., 1964, 335 F.2d 507. Thus, their deduction is in no sense artificial and represents no unjust enrichment of the taxpayer. Indeed, in this case Hyman appears to have advanced money to the corporation to help finance the 1960 post-acquisition operations with resultant losses about equaling the advances. We conclude, therefore, that section 269 does not preclude the claimed post-acquisition loss deduction.

The Commissioner also contends that the post-acquisition losses should'be disallowed under section 382. We think that the Tax Court should now pass upon that contention which it did not reach in its original disposition of this case.

Accordingly, the decision of the Tax Court will be vacated and the cause remanded with instructions to redetermine the amount of the deficiency in accordance with this opinion.