Applicability of the "Libson Shops Rationale" under 1954 Code cases;

              A recent article in the "Quarterly" by this author
expressed the fear that the Internal Revenue Service and
the courts would continue to apply the "Libson Shops
Doctrine" to 1954 Code cases even though the Libson
case was decided under the 1939 Code.
In summary, the Libson Shops decision held that a cor­poration's
net operating loss carryovers would survive a
corporate liquidation or merger only when there was a
continuity of business enterprise. This decision was handed
down by the Supreme Court in 1957 and there has been
considerable discussion as to the real meaning of the
Court's language.
Recent months have brought a fulfillment of the
expected application of "Libson" to 1954 Code cases. As
might be expected, the Treasury Department has jumped
in with both feet and pronounced in T.I.R. 773 that it
will continue to invoke Libson Shops in certain 1954
Code cases. This T.I.R. states that Libson will be applied
where there has been a change in business coupled with
a 50% or more change in "beneficial ownership". The
Treasury is thus enlarging the Code by using the phrase
"beneficial ownership" instead of the definition of owner­ship
under Section 382.
Further, the IRS says it will also use its broad powers
under Section 269 and under Section 482 to reallocate
income if this seems an appropriate way to eliminate traf­ficking
in loss corporations.
Early action by the Courts on 1954 Code cases went
along with the IRS. In Maxwell Hardware Company,
41 T.C. 386, the corporation had sustained losses in the
hardware business. The hardware operations were dis­continued
after the corporation entered the real estate
development business, the funds for such new operation
being furnished by the issuance of non-voting preferred
stock to the former owners of the real estate. The value
of this preferred stock was two-fifths of the value of the
common stock. The operating losses suffered in the hard-
Applicability
of the
"LMon Shops
Rationale"
under 1954
Code Cases
by Jerry B. Jackson
ManagerJRB&S in Kansas City
30 THE QUARTERLY