## Facts

- Aetna Life Insurance Co. owned a majority (about 61.61%) of the voting stock of The Aetna Casualty and Surety Co. (Old Aetna), a Connecticut casualty insurer.
- After changes in federal tax treatment of life insurers, Aetna Life sought to reduce its taxable “asset base” by removing its majority stock interest in Old Aetna from its balance sheet.
- Aetna Life formed Farmington Valley Insurance Co., a wholly owned shell corporation with no prior business or assets, to implement a restructuring.
- Old Aetna shareholders exchanged their Old Aetna shares for Aetna Life shares, resulting in Aetna Life owning all Old Aetna shares; minority Old Aetna shareholders became shareholders of Aetna Life.
- Old Aetna merged into Farmington Valley, which acquired Old Aetna’s assets and business and then changed its name to The Aetna Casualty and Surety Co. (New Aetna).
- After the merger, New Aetna continued Old Aetna’s casualty and surety business under the same operational setup (license, management, employees, and customers); the only meaningful change was the corporate shell.
- In later years, New Aetna incurred net operating losses (NOLs) and sought to carry them back under I.R.C. § 172 to offset Old Aetna’s pre-merger taxable income (including 1963) and obtain a refund.
- The IRS disallowed the carryback, asserting that I.R.C. § 381(b)(3) barred carrying back losses to a predecessor’s pre-reorganization years because the transaction was not an I.R.C. § 368(a)(1)(F) “F reorganization.”
- The district court granted summary judgment to the United States, and Aetna appealed.

## Issues

1. Whether the transaction qualified as an I.R.C. § 368(a)(1)(F) reorganization—“a mere change in identity, form, or place of organization of one corporation, however effected.”
2. If it was an F reorganization, whether I.R.C. § 381(b)(3) allowed New Aetna to carry back post-reorganization NOLs to Old Aetna’s pre-reorganization taxable years.

## Decision

- The Second Circuit reversed and remanded with directions to enter judgment for the taxpayer.
- The court held the transaction qualified as an I.R.C. § 368(a)(1)(F) reorganization because Farmington Valley was a shell formed solely to receive Old Aetna’s business, and the enterprise continued without substantive operational change.
- The court rejected the view that incidental shifts in minority shareholders’ proprietary interests prevented F-reorganization treatment in these circumstances.
- Because F reorganizations are excluded from the § 381(b)(3) bar, the court held New Aetna could carry back its post-reorganization NOLs to Old Aetna’s pre-reorganization years under §§ 172 and 381.

## Legal Principles

- An I.R.C. § 368(a)(1)(F) reorganization covers a transaction that is, in substance, a continuation of the same corporate enterprise in a different corporate shell, particularly where the acquiring entity is a newly formed shell with no prior business.
- Limited changes in shareholder ownership interests do not necessarily defeat F-reorganization status when continuity of the business enterprise and corporate identity is otherwise maintained and no independent businesses are combined.
- I.R.C. § 381(b)(3) generally restricts NOL carrybacks across certain acquisitions, but it does not apply to F reorganizations; therefore, tax attributes such as NOL carrybacks may continue across an F reorganization.
- Statutory anti-avoidance concerns cannot override the express carve-out for F reorganizations where the transaction fits the statutory definition and does not involve trafficking in unrelated loss entities.

## Conclusion

The court treated the restructuring as a mere change in corporate form accomplished through a shell subsidiary, making it an F reorganization and permitting New Aetna to carry back its post-reorganization NOLs to Old Aetna’s earlier taxable years notwithstanding § 381(b)(3).


Aetna Cas. & Sur. Co. v. United States, 568 F.2d 811 (2d Cir. 1977)