Holly Farms Poultry Industries, Inc. v. Clayton

Parker, J. The issue before us is whether under the circumstances disclosed by the stipulated facts, a surviving corporation (Mocks-ville Feed Mills, Inc.) which resulted from the merger into it of two other corporations (Lovette Poultry Company, Inc., and Davie Poultry Company, Inc.) is entitled under G.S. 105-147 (9)d to carry over and deduct for North Carolina income tax purposes the pre-merger net economic losses of the two submerged corporations from the post-merger income earned by the combined corporate businesses. We hold that it is not. (No question is presented on this appeal as to the right of one of the submerged corporations, Lovette Poultry Company, Inc., to carry forward and deduct from its own income losses previously incurred by two other corporations which had been submerged into it as a result of earlier corporate mergers. We express no opinion on that question.) The allowance of a deduction in the computation of taxable income is a privilege granted as a matter of legislative grace. One claiming the deduction must bring himself within the statutory provisions authorizing it, and in general the deduction may be taken only by the taxpayer to whom it accrues. 85 C.J.S., Taxation, § 1099. The North Carolina Income Tax Statutes formerly required all taxpayers to account strictly on an annual basis, reporting for each taxable year all items of gross income and claiming as deductions for that year only items properly pertaining to that accounting period. For the purpose of “granting some measure of relief to taxpayers who have incurred economic misfortune or who are otherwise materially affected by strict adherence to the annual accounting rule in the determination of taxable income,” our Legislature added a loss carry-over provision to our State income tax statute. This provision first appeared in the Revenue Act of 1943, Chap. 400, Sec. 4, Subsection (g) (4), Session Laws 1943, and, as amended from time to time, has remained a part of our income tax statutes to the present time. G.S. 105-147 (9)d, formerly codified as G.S. 105-147 (6) d. This section permits, under certain conditions, a deduction of a prior year’s net economic loss from current gross *350 income in order to determine taxable income. “Our Legislature was under no constitutional or other legal compulsion to allow any carry-over to be deducted from taxable income in a future year. It enacted the carry-over provisions purely as a matter of grace, gratuitously conferring a benefit but limiting such benefit to the net economic loss of the taxpayer after deducting therefrom the allocable portion of such taxpayer’s nontaxable income.” Rubber Co. v. Shaw, Comr. of Revenue, 244 N.C. 170, 174, 92 S.E. 2d 799, 802. The question of whether a corporation surviving a merger is entitled to carry forward and deduct from its own gross income pre-merger losses incurred by other corporate taxpayers with which it had merged, was first presented to the North Carolina Supreme Court in Distributors v. Shaw, Commissioner of Revenue, 247 N.C. 157, 100 S.E. 2d 334. In that case our Supreme Court approved and adopted the reasoning in Libson Shops v. Koehler, 353 U.S. 382, 1 L. Ed. 2d 924, 77 S. Ct. 990, in which the United States Supreme Court, construing the loss carry-over provisions of the Federal Internal Revenue Code of 1939, held that a corporation resulting from the merger of 17 separate incorporated businesses was not entitled to carry over and deduct the pre-merger net operating losses of three of its constituent corporations from the post-merger income attributable to the other businesses, since the income against which the offset was claimed was not produced by substantially the same businesses which incurred the losses. On a second appeal of Distributors v. Currie, Com’r. of Revenue, reported in 251 N.C. 120, 110 S.E. 2d 880, the North Carolina Supreme Court continued to adhere to the reasoning in the Libson Shops case, though at the same time the opinion of the Court expressly refrained from rejecting the theory that the deduction might also be disallowed on the grounds that the corporation which survived the merger was not the “same taxable entity” as the corporations which had suffered the losses. The Court, however, chose to base its decision, which denied the deduction, on the ground that there was in that case a lack of “continuity of business enterprise.” Defining these words, Moore, J., speaking for the North Carolina Supreme Court said (at page 126) : “This expression has a definite and well defined meaning. There is continuity of business enterprise when the income producing business has not been altered, enlarged or materially affected by the merger.” *351 The opinion then expressly held (page 127) : “Where there has been a merger of corporations, the resulting corporation may not deduct from its post-merger net income the pre-merger economic loss of its constituent corporations unless there is a ‘continuity of business enterprise’ as above defined.” In the case now before us the trial court concluded as a matter of law that there had been a “continuity of business enterprise” between the taxpayer, Moeksville Feed Mills, Inc., and the two corporations, Lovette Poultry Company, Inc., and Davie Poultry Company, Inc., with which it merged. The facts do not support this conclusion. Immediately before the merger of Lovette Poultry into Moeksville Feed, the latter corporation had a net worth of $2,057,204.94 and was engaged in the manufacture of feeds. Immediately after the merger Moeksville Feed had a net worth of $8,017,414.78 and was engaged not only in the manufacture of feeds but, in addition, was engaged in the business of “feeding-out” chickens. The income producing business was thus both substantially enlarged and materially affected by the merger. The subsequent merger of Davie Poultry into Moeksville Feed further increased the net worth of the enterprise by $76,935.66 and added an experimental farm as well as additional “feed out” operations to the combined enterprise. Thus, each merger both substantially enlarged and materially affected the income producing business of the surviving corporation. The businesses of each of the submerged loss corporations were even more dramatically affected. By the miracle of a merger each was transformed in an instant from a relatively small chicken feeding operation, which was losing money, into a much larger and financially stronger combined manufacturing and feeding operation, which operated at a profit. To find here any continuity of business enterprises requires either that the three businesses be considered as though they had always been one or that the mergers be ignored. However, the fact is that the three separate businesses were not always one and the mergers did in fact occur. In our opinion, and we so hold, each merger so substantially enlarged and materially affected the income producing business that there was not here a “continuity of business enterprise” within the definition laid down in Distributors v. Currie, Com’r. of Revenue, supra. Appellee seeks to distinguish the present case from Distributors v. Currie, Com’r. of Revenue, supra, by pointing out *352 there was here a “vertical type” merger, in which the several merged corporations were doing different jobs in one continuous chain of processing, while the mergers before the Court in that case were of a “horizontal type,” in which each of the corporations involved were doing basically the same job. In our opinion this distinction, if any, is without a difference. Furthermore, the fact that the mergers in the present case may have been made in pursuance of an overall plan to bring into being an “integrated” operation, and were not for tax avoidance purposes, is, in our opinion, simply not determinative of the question before us. We also note that while Congress changed the Libson Shops doctrine by enactment of § 381 of the Internal Revenue Code of 1954, no similar amendment to the North Carolina Revenue Act has been enacted by the North Carolina General Assembly. Five regular biennial sessions of the North Carolina General Assembly have occurred since our Supreme Court rendered its decision in Distributors v. Currie, Com’r. of Revenue, supra. The absence of any pertinent amendment for so long a period would indicate approval by the Legislature of the Court’s construction of its statute. The judgment appealed from is Reversed. Mallard, C.J., and Hedrick, J., concur.