Before MOORE, FRIENDLY and HAYS, Circuit Judges.
This petition to review a decision of the Tax Court denying a net operating loss carry-over under § 122 of the Internal Revenue Code of 1939 requires us to decide a difficult question as to the effect of Libson Shops Inc. v. Koehler, 353 U.S. 382, 77 S. Ct. 990, 1 L. Ed. 2d 924 (1957), which we were able to avoid last term in Norden-Ketay Corp. v. C.I.R., 319 F.2d 902 (2 Cir.), cert. denied, 375 U.S. 953, 84 S. Ct. 444, 11 L. Ed. 2d 313 (1963). The question, in substance, is this: 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 a similar 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.
In 1946 and 1947 petitioner Julius Garfinckel & Co., Incorporated, acquired all the stock of Brooks Brothers, a New York corporation long engaged in the retail selling and manufacturing of men's wear. Another New York corporation, likewise engaged in selling clothing, both men's and women's, at retail, the A. DePinna Company, had an outstanding capital stock of 164,902 shares of common and 37,549 shares of preferred, each convertible into two shares of common. In January, 1950, Garfinckel acquired from DePinna's management 91,869 shares of common and an option on 22,879 shares of convertible preferred, which it exercised December 5, 1952; by an offer to other common stockholders it secured additional common shares, bringing its total to 97,087.76.
On February 6, 1952, the directors of Brooks Brothers, wholly owned by Garfinckel, and of DePinna, controlled by it, adopted resolutions whereby, pursuant to § 86 of the New York Stock Corporation Law, McKinney's Consol. Laws, c. 59, the two companies would be consolidated into DePinna, whose name was to be changed to Brooks Brothers, Inc. The 60,870 common shares of Brooks Brothers would become 1,217,400 shares of common stock of the consolidated corporation; the common and preferred stocks of DePinna would remain unchanged. The consolidation became effective on February 29, 1952. The Commissioner does not dispute the existence of substantial business reasons for the transaction. The corporation maintained separate records for the Brooks Brothers and DePinna divisions as well as for "Unallocated 'Headquarters' Expenses."
DePinna, which had previously made its income tax returns on the basis of a fiscal year ending January 31, changed to a July 31 fiscal year in 1950. Its returns for the five months ending July 31, 1950, showed a net operating loss of $208,903.27; the 1951 return showed such a loss of $310,851.66; and the return for the year ended July 31, 1952, which included five months of the consolidated operation, showed a net operating loss of $71,087.01. Brooks Brothers had been reporting on the basis of a July 31 fiscal year and filed a final return for the period ending February 29, 1952. In its first report covering a full year's operation, the consolidated corporation, Brooks Brothers, Inc., ne DePinna, deducted $586,687.78, the sum of the net operating losses detailed above with a few minor adjustments. The following schedule shows the results by divisions for the fiscal years 1952, 1953 and 1954:
Year Total Brooks Brothers Unallocated
Divisionh DePinna "Headquarters"
7/31/52 ($71,087.01) $296,727.31 ($325,626.82)($42,187.50)
7/31/53 638,837.75 1,020,382.58 (275,211.50)(106
7/31/54 774,270.60 1,145,258.27 ...