Problems of Loss Corporations
BY CHARLES N. WHITEHEAD Partner, San Francisco Office
Presented before the Eighth Annual Tax Accounting Conference of The California Society of Certified Public Accountants — October 1957
Loss corporations have intrigued taxpayers and their counsel for many years. The tax picture is one of a corporation with net operating losses or high-basis assets or both which, for one reason or another, has been unable to earn a profit. Profitable corporations or businesses look with envy on the net operating losses or high-basis assets which are of no use to the company itself, but could be used to offset the profit company's earnings, resulting in happiness to everyone except the U. S. Treasury. The problems of loss companies, other than their inability to earn a profit, largely comprise methods by which others can use these losses and the counter attempts of the government by legislation and Treasury rulings to prevent their utilization.
In 1940 the Court1 decided that an affiliated group acquiring the stock of a loss corporation primarily to reduce taxes was not entitled to use the net operating losses, sustained before affiliation, in computing consolidated
net income for the affiliated group after affiliation. Not much else was done until 1943, when Section 129 of the 1939 Code was introduced
to stop what was characterized as the "Trafficking in Loss Corporations."
This was the period of the World War II excess profits tax. Some corporate taxpayers were acquiring corporations having high invested capital to bolster their own excess profits credits or to reduce their profits. On the whole the government was unsuccessful in its attempts to apply Section 129. Cases beginning with Alprosa Watch Corporation2 were decided uniformly in favor of the taxpayer, and it was not until 1957 that Section 129 was applied successfully in two cases. These cases and the general provisions of Section 129 are discussed later in this paper.
In the 1954 Code further attempts were made to limit the use of loss corporations by others. Section 129 of the 1939 Code became Section 269 of the 1954 Code and was re-enacted almost without change except for the inclusion of a prima-facie presumption under certain circumstances that a transaction was within its scope.3 Section 382 was introduced into
1 J. D. and A. B. Spreckels Co. - 41 BTA 370.
2 Alprosa Watch Corp. - 11 TC 240.
3 Section 269 (c) IRC 1954.