Before L. HAND, Chief Judge, and CLARK and FRANK, Circuit Judges.
The Commissioner of Internal Revenue determined a deficiency in petitioner's excess profits tax for 1942, which, as adjusted, was approved in a decision reviewed by the entire Tax Court, 11 T.C. 310, on the facts as stipulated. This petition for review raises the single issue whether or not, after a merger, the resulting corporation is entitled, in determining its adjusted excess profits net income, to carry over the unused excess profits credit of oneof its components for the two years preceding the merger.
Petitioner was formed by a merger of The John Stanton Brewing and Malting Company and The Stanton Brewery, Inc., both New York corporations, under § 85 of the N. Y. Stock Corporation Law, McKinney's Consol. Laws, c. 59. The merger took place on December 31, 1941. The original Stanton Brewery, Inc., had been an operating company, all but one hundred of its shares being held by The John Stanton Brewing and Malting Company. Immediately before the merger, the holding company acquired the last one hundred shares, in exchange for previously authorized shares of its own stock. Upon the merger, the new company took the name of the operating company. In determining its adjusted excess profits net income for 1942, the first year of its existence, the new company deducted the unused excess profits credits of its component corporations for 1940 and 1941. The Commissioner disallowed the deduction of the operating company's credits, which were sufficient, either in 1940 or 1941, to cancel out the 1942 excess profits tax liability. The approval of the Commissioner's determination by the Tax Court led to this petition for review.
As is well known, Congress sought by the excess profits tax, I.R.C. §§ 710-736, 26 U.S.C.A. §§ 710-736 - imposed in 1940 and repealed in 1945 - to capture for the government the amount of corporate profits of any one year which were excessive in relation to the like receipts during an earlier or base period (normally 19361939). But it was considered equitable that lean years should be set off against lush ones to strike some sort of average, and hence we have the device of the "unused excess profits credit carry-back and carry-over" from one tax year to another. Here we are interested only in the carryover.In circumstances such as are here disclosed the statutory scheme operated as follows: To reduce the excess profits net income, as defined in I.R.C. § 711, to the adjusted excess profits net income, upon which the excess profits tax was based, I.R.C. § 710(b) provided for three deductions: (1) a specific exemption (then $5,000); (2) an excess profits credit, as defined in §§ 712 and 713, amounting to 95 per cent of the average base period net income, with certain adjustments; and (3) an unused excess profits credit adjustment, computed under § 710(c), which defines it as "the aggregate of the unused excess profits credit carry-overs and unused excess profits credit carry-backs to such taxable year." "Unused excess profits credit" is defined, in § 710(c) (2), as "the excess, if any, of the excess profits credit for any taxable year beginning after December 31, 1939, over the excess profits net income for such taxable year." Subsec. (c) (3) (B) provides further that "If for any taxable year beginning after December 31, 1939, the taxpayer has an unused excess profits credit, such unused excess profits credit shall be an unused excess profits credit carry-over for each of the two succeeding taxable years." Petitioner's claim is that, as "the taxpayer" in the quotation, it is entitled to the carry-over from its component operating company's unused excess profits credit. We are constrained to agree.
The issue as so stated is thus seen to turn upon the nature of merged corporations after a merger. At the outset we find ourselves confronted with one of those questions of legal semantics or categorization which constantly dog the judicial process. For here the decision seems to be sought in terms of which legal entity swallowed the other. Moreover there appears to be the further assumption, on the part of respondent, that necessarily the inactive holding company - which lost its identity in the other so far at least as its name is concerned - swallowed the really active part of the enterprise, so that an important privilege of the latter, taxwise, is irrevocably lost. And it seems that, had the converse been true and the swallower originally had the privilege, it would still be retained. While nowhere stated in these exact terms, this does appear to be the premise of the Commissioner as accepted by the Tax Court. Thus in his original Statement to "The Stanton Brewery, Inc. (Formerly The John Stanton Brewing and Malting Co.)" he allowed it a small credit "Unused - available for carryover to 1942," but went on to say "that you are not entitled to deduct, in determining your adjusted excess profits net income, the unused excess profits credit of your dissolved subsidiary for the years 1940 and 1941 under the provisions of section 710 of the Internal Revenue Code." And now his counsel refers to the "taxpayer" as though steadily in existence throughout the period, defines the latter's claim as one for the unused credits of "its" subsidiary for 1940 and 1941, and asserts that "taxpayer is not in fact 'the taxpayer' which had unused excess profits credits in 1940 and 1941."
If there were real substance, for present purposes, to this conception of a corporate merger as a continuance of existence of the dominant corporation only, it would seem more in accord with business realities here to say that the larger and active operating business had taken over the inactive entity. It is true that upon his assumption the Commissioner may seem to avoid the dilemma of holding that a substantial tax credit is harshly destroyed by a comparatively minor change in corporate form. He at least can assert - as he does on the basis particularly of New Colonial Ice Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 78 L. Ed. 1348 - that the legal entity having the credit is now gone.But even upon his, to us, dubious assumption, we do not think he really avoids it, for he still employs a mere change in corporate form - of a slightly different nature, but still capable of avoidance by skillful legal manipulation - to bring about a yet more arbitrary destruction of a credit as to one only of two or more component parties to a merger. We doubt, therefore, that any of these linguistic formulae suggests a really fruitful approach to the solution of our present problem. More properly we must regard the "resulting corporation" as the union of component corporations into an all-embracing whole which absorbs the rights and privileges, as well as the obligations, of its constituents.*fn1
That the corporation resulting from a merger takes on the obligations of its components directly by operation of law is clear on the authorities. In Commissioner of Internal Revenue v. Oswego Falls Corp., 2 Cir., 71 F.2d 673, 676, this court held that the resulting corporation after a merger under the same New York statute as involved here was primarily liable for the tax obligations of a component, as "the taxpayer" and not secondarily as a transferee after a purchase. Cf. United States v. Oswego Falls Corp., 2 Cir., 113 F.2d 322; A.D. Saenger v. Com'r, 38 B.T.A. 1295, 1302. In Adrian & James, Inc., v. Com'r, 4 T.C. 708, 719, the Tax Court held that a continuing corporation, after a merger under the Delaware General Corporation Law, which paid the income tax liability of a component was entitled to a deduction under § 406 of the Revenue Act of 1938, as in payment of its own liability. The Koppers Coal Co. v. Com'r, 6 T.C. 1209, 1223, is in accord, as are the cases upholding jurisdiction of petitions by a resulting corporation as "the taxpayer" for review of deficiencies determined against its components. Alaska Salmon Co. v. Com'r, 39 B.T.A. 455; Skaneateles Paper Co. v. Com'r, 29 B.T.A. 150. All these decisions deal with the substance of the transaction and are not to be brushed aside by the oversimplified formula suggested by the Commissioner - in line with his assumed premise stated above - that involved only was the continued corporation, and not the merged or submerged one.
The question of the resulting corporation's right to deduct unamortized bond discount and expense on obligations of its components has aroused considerable judicial discussion. In New York Cent. R. Co. v. Commissioner of Internal Revenue, 2 Cir., 79 F.2d 247, 249, certiorari denied 296 U.S. 653, 56 S. Ct. 370, 80 L. Ed. 465, our brethren distinguished the consolidation there from a purchase, yet turned their decision, allowing the deduction, on the rationale that "no loss was sustained by the issuing corporations in selling their bonds at a discount; the loss will be sustained by the consolidated corporation when the bonds mature and are paid." But in Helvering v. Metropolitan Edison Co., 306 U.S. 522, 529, 59 S. Ct. 634, 638, 83 L. Ed. 957, the Supreme Court, approving the result in the New York Central case, declared that in the merger situation, as opposed to the sale, "the corporate personality of the transferor is drowned in that of the transferee." And since the transaction had "all the elements of a merger," it allowed the deduction.
Respondent's reliance on the dictum in the New York Central case, supra, 79 F.2d at page 249, to the effect that losses sustained by a predecessor may not be deducted by a successor is therefore illplaced, since all the cases cited in its support, and independently stressed by respondent, deal with succession by purchase and contract, rather than by operation of law. This is, in fact, a distinction of which the court in the New York Central case was clearly aware, since in the preceding paragraph it cited its earlier decisions making the distinction. Commissioner of Internal Revenue v. Oswego Falls Corp., supra; Cortland Specialty Co. v. Commissioner of Internal Revenue, 2 Cir., 60 F.2d 937, 939, certiorari denied 288 U.S. 599, 53 S. Ct. 316, 77 L. Ed. 975.
Respondent also relies on cases such as Jones v. Noble Drilling Co., 10 Cir., 135 F.2d 721, and Marion-Reserve Power Co. v. Commissioner, 1 T.C. 513, holding that the resulting corporation, after a state statutory merger or consolidation, is not entitled, in computing its income tax, to a deduction for the unused dividends paid credit of a component corporation, under I.R.C. §§ 26 and 27, 26 U.S.C.A. §§ 26, 27. But, unlike § 710, these sections refer to the credit as belonging to "the corporation" rather than to "the taxpayer," so that difficult and complex questions of corporate identity are raised, which are unnecessary to the simple determination of the locus of corporate rights and liabilities. "Taxpayer" is defined as "any person subject to a tax imposed by this title" by I.R.C. § 3797, 26 U.S.C.A. § 3797, which also defines "person" to include "corporation." Here the resulting corporation is liable for the taxes imposed upon its components, whatever may be the merits of the academic controversy over their fate. When the Supreme Court, in the Metropolitan Edison case, supra, spoke of the component corporate personalities as being drowned, it found it unnecessary to speculate on the nature of the sea changes that might ensue thereafter.
Hence we conclude that under the natural interpretation of § 710 petitioner, who has absorbed the two former corporations, is "the taxpayer" now obligated to pay their taxes and entitled to their credits. Indeed, we doubt if the matter would have been open to serious question except for a later provision of the statute which is the chief reliance of both the Commissioner and the Tax Court. This is a provision in "Part II. - Rules in Connection with Certain Exchanges," intended as a further act of grace in these "exchanges," but now used as the basis for a claim of restricted meaning as to matters not particularly covered therein. The important provision is I.R.C. § 742, 26 U.S.C.A. § 742, which prescribes an alternative method for the computation of average base period net income, in the case, among others, of a corporation resulting from a statutory merger. The method permits inclusion of the excess profits net incomes of the components in determining the base. Respondent argues that, since the section makes no provision for carryovers from the components to the resulting corporation, none can be assumed. But the provision for carry-overs in general is in an entirely different and quite distant part of the statute, namely, § 710; and if adequate provision is made there, it is unnecessary elsewhere. Nor can we say that the distinctions made in § 740, for the purposes of the § 742 calculations, between the "acquiring corporation," which is defined to include the corporation resulting from a merger, and the "component corporations" are applicable in an entirely different context in § 710, to preclude identification of the resulting corporation with "the taxpayer" liable for the tax and entitled to the carry-over. The purpose of § 742, and its associated definitional section, as indicated by U.S. Treas. Reg. 112, § 35.740-1, is merely to provide an alternative method for computation of one element in the tax base. It should not be read to limit the meaning of other sections.*fn2
Respondent's final argument is an attempt to find a clear congressional intent that the general carry-over provisions should not apply to mergers, in the later enactment of a special carry-over relief measure for railroad reorganizations. Pub. L. No. 189, 80th Cong., 1st Sess., Act of July 15, 1947, c. 249, 61 Stat. 324, § 1, 26 U.S.C.A. § 122 note. We may pass the point whether such a later statute may control the meaning of this earlier Act-now already repealed - since we think the intent, if any, revealed by the statute suggests the opposite conclusion. The House Report, No. 624, 80th Cong., 1st Sess., U.S. Code Cong. Serv. 1297, explains, at page 1, that "Under existing law, if a railroad corporation is reorganized in a receivership proceeding or in a proceeding under section 77 of the National Bankruptcy Act, as amended [11 U.S.C.A. § 205], and the reorganization is effected through the organization of a new corporation, any carry-overs of net operating losses or unused excess profits credits of the old corporation cannot be used by the new corporation. The reorganized corporation is regarded as a different taxpayer from the old corporation. Consequently, railroads coming out of receivership or bankruptcy proceedings are treated differently, depending upon whether they can be reorganized under the same charter or under a new charter. The bill removes this discrimination."
The purpose of the bill, therefore, was limited to remedying inequalities of treatment among the railroads in reorganization, where the reorganized corporation was not regarded as the same taxpayer. We do not think it throws light upon the situation where a corporation resulting from a merger has been ...