## Facts

- A California corporation (Empire Home Equipment Co., Inc.) operated a home-appliance business and incurred net operating losses (NOLs) totaling $374,406.57 in fiscal years ending 1949–1951.
- Empire wound down and disposed of its business operations and assets: it canceled its lease, sold inventory and fixtures, sold accounts receivable, and ultimately reported assets as “Nil,” leaving a corporate shell with NOL carryovers.
- A partnership (British Motor Car Company) operated a profitable foreign automobile import and distribution business in San Francisco.
- The partnership offered to purchase Empire’s outstanding stock for $21,250, conditioned in part on changes to Empire’s capital structure.
- After the stock acquisition, the corporation changed its name to British Motor Car Distributors, Ltd.
- The partnership transferred its automobile business assets to the corporation, which then conducted the profitable automobile business formerly operated by the partnership.
- For 1952 and 1953, the corporation claimed deductions using the pre-acquisition NOLs from the discontinued appliance business.
- The Commissioner disallowed the NOL carryovers under I.R.C. § 129(a) (1939), asserting the principal purpose of acquiring control was tax avoidance.

## Issues

1. Whether I.R.C. § 129(a) (1939) bars NOL carryovers when new owners acquire control of a corporation whose prior business has ceased and then use it to operate a different profitable business, principally to obtain the NOL tax benefit.
2. Whether § 129(a) applies notwithstanding the transaction’s form (i.e., characterizing the loss corporation as the entity that “acquired” the profitable business assets).

## Decision

- The Ninth Circuit reversed the Tax Court.
- The court held that § 129(a) applied to the acquisition of control and subsequent use of the corporation.
- The court concluded the principal purpose of the acquisition was to secure the benefit of Empire’s NOL carryovers.
- The claimed NOL carryover deductions were disallowed.

## Legal Principles

- Under I.R.C. § 129(a) (1939), deductions or other tax allowances must be denied when control of a corporation is acquired principally to evade or avoid tax by obtaining benefits not otherwise available.
- Application of § 129(a) turns on the transaction’s substance and principal purpose, not formal labels assigning “acquirer” status under corporate law.
- Where a corporation’s operating business has effectively ceased and its meaningful value lies in unused losses, acquisition and use of that shell to offset income from an unrelated profitable business supports a finding of a principally tax-motivated acquisition within § 129(a).
- Lack of continuity between the loss-generating business and the post-acquisition profitable business is evidence that the losses were being purchased as tax attributes rather than used as part of a continuing enterprise.

## Conclusion

The Ninth Circuit held that § 129(a) required disallowance of NOL carryovers when new owners acquired control of a liquidated corporate shell and inserted a different profitable business into it, because the principal purpose of the acquisition was to obtain the loss deductions and reduce federal income tax.


Comm’r v. British Motor Car Distribs., Ltd., 278 F.2d 392 (9th Cir. 1960)