Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 63-40

1963-1 C.B. 46

IRS Headnote

Where there has been no change in the stock ownership of a corporation during or after a period in which it incurred losses, the Internal Revenue Service will not rely on the rationale of Libson Shops, Inc. v. Koehler , 353 U.S. 382 (1957), Ct. D. 1809, C.B. 1957-2, 891, to bar the corporation from carrying over the losses under section 172 of the Internal Revenue Code of 1954 against income from a new business enterprise, acquired through a cash purchase of assets at their fair market value, solely because the losses are attributable to a discontinued corporate activity.

Where the facts are the same except that the corporation after a bona fide attempt to purchase the assets of another corporation was unable to do so and therefore purchased its stock and immediately thereafter liquidated the acquired corporation, the Service will not contend that the acquisition of control of the immediately liquidated corporation has as its principal purpose the evasion or avoidance of Federal income tax for purposes of section 269(a) of the Code.

Full Text

Rev. Rul. 63-40 /1/

Advice has been requested whether either the rationale of the decision in Labson Shops, Inc. v. Koehler , 353 U.S. 382 (1957), Ct. D. 1809, C.B. 1957-2, 891, or the provisions of section 269 of the Internal Revenue Code of 1954 prevent the use of a net operating loss carryover under the circumstances described below.

1. The M corporation was organized in 1947 by three individuals who owned an equal number of shares of its authorized and outstanding stock. From the date of its incorporation until the early part of 1958 it was engaged in the fabrication and sale, through distributors, of household light steel products. The business was successful during its early years of operation. However, commencing in 1953 it sustained losses in each of its taxable years and over the period ending December 31, 1957, had accumulated substantial net operating losses.

In 1958 M corporation purchased for cash, at fair market value, all of the assets of N corporation, which had a history of successful operation of drive-in restaurants. M and N were unrelated corporations and none of the shareholders of M corporation owned, directly or indirectly, and stock of  N corporation. The funds for the cash purchase were derived in part from M corporation's own business assets and in part from an equal contribution to its capital of cash by its three stockholders. Shortly thereafter, M corporation discontinued its former business activity, sold the assets connected therewith, and engaged exclusively in the business of operating the chain of drive-in restaurants formerly operated by the N corporation.

Under the facts presented, neither section 269 nor section 382 of the Code is applicable and the sole question raised is whether the rationale of the Libson Shops decision bars the allowance of the net operating loss deduction attributable to losses incurred prior to the acquisition of the new business activity for M corporation's taxable year ended December 31, 1958.

In cases, like the one discussed above, arising under section 122 of the Internal Revenue Code of 1939 or section 172 of the 1954 Code in which losses have been incurred by a single corporation and there has been little or no change in the stock ownership of the corporation during or after the period in which the losses were incurred, the Internal Revenue Service will not rely on the rationale of the Libson Shops decision to bar the corporation from using losses previously incurred by it solely because such losses are attributable to a discontinued corporate activity. Accordingly since there was no change in stock ownership in M corporation either before the discontinuance of its former business activity or after the commencement of its new business activity, a net operating loss deduction is allowable for its taxable year ended December 31, 1958.

However, if there is more than a minor change in stock ownership of a loss corporation which acquires a new business enterprise, the Service may continue to contest the deductibility of the carryover of the corporation's prior losses against income of the new business enterprise. See, for example, as involving substantial changes in stock ownership, Mill Ridge Coal Co. v. Patterson , 264 Fed.(2d) 713 (1959), certiorari denied, 361 U.S. 816 (1959); a. c. Willingham v. United States , 289 Fed.(2d) 283 (1961), certiorari denied, 368 U.S. 828 (1961); Commissioner v. Virginia Metal Products, Inc. , 290 Fed.(2d) 675 (1961), certiorari denied, 368 U.S. 889 (1961); J. G. Dudley Co., Inc. v. Commissioner , 298 Fed.(2d) 750 (1962); and Huyler's v. Commissioner , 38 T.C. 773 (1962). Compare Kolker Bros., Inc. v. Commissioner , 35 T.C. 299 (1960), nonacquiescence at page 5 of this Bulletin, where part of the funds used by the corporation to purchase assets of a new business activity were borrowed from some nonstockholders who several months after the purchase acquired about 46 percent of the corporation's stock in exchange for the indebtedness owed them.

For a discussion of the Service position with respect to the application of Libson Shops to a merger or other transaction described in section 381(a) of the Code, see  Revenue Ruling 58-603, C.B. 1958-2, 147. Further Service views concerning the application of Libson Shops are set out in Revenue Ruling 59-395, C.B. 1959-2, 475.

2. Advice has also been requested whether the Service would apply different treatment to a case involving the same facts as are set out in the foregoing except for a difference in the method of acquisition by M corporation of the assets of N corporation. In this second case M corporation first attempted in extended negotiations to purchase the assets of N corporation, but the shareholders of N corporation were unwilling to consummate the transaction except by way of the sale of their stock to M corporation. M corporation purchased the stock of N corporation for cash, at fair market value, solely for the purpose of acquiring its assets to earn a profit with those assets and immediately liquidated that corporation under such circumstances that the basis of the assets to M corporation will be determined by the amount it paid for the stock of N corporation.

Under the facts of this second case, the Service will not contend that the acquisition of control of N corporation has as its principal purpose the evasion or avoidance of Federal income tax for purposes of section 269(a) of the Code. Accordingly, section 269 of the Code will not, under these facts, bar the M corporation from carrying over its prior losses and the conclusion reached with respect to the first case is equally applicable here.

No opinion is expressed as to other cases where the facts show that the purchase price is payable over a substantial period of time (whether or not specifically payable only out of earnings of the business) or exceeds fair market value or where other circumstances may justify the application of section 269 of the Code.

For the availability of net operating loss deduction to a personal holding company for the purposes of the tax imposed by section 11 of the Code. See Rev. Rul. 63-109, page 111.

/1/ Also released as Technical Information Release 456, dated March 4, 1963.