## Facts

- The Ix family controlled several related corporations manufacturing woven synthetic fibers, each operating a separate mill but using centralized accounting, purchasing, technical staff, and sales operations.
- Cornelius Ix operated a mill in North Carolina; Charlottesville Ix operated a mill in Virginia; both were commonly owned in the same proportions by Ix family members and engaged in the same business line.
- In 1952, an affiliated corporation borrowed $3,000,000 from a bank to fund several Ix corporations; the bank required the group’s corporations to maintain specified working-capital levels.
- Cornelius Ix received $2,550,000 and agreed to maintain $2,800,000 in working capital, but it operated at a loss and fell nearly $1,000,000 below the required level.
- With the bank’s approval, a statutory merger was executed in September 1953 in which Charlottesville Ix transferred all assets to Cornelius Ix, which was the surviving corporation.
- After the merger, Cornelius Ix later changed its name to Frank Ix & Sons Virginia Corporation.
- For 1957–1959, the renamed surviving corporation claimed net operating loss (NOL) carryover deductions based on Cornelius Ix’s pre-merger losses.
- The Commissioner disallowed the carryovers and issued deficiencies; the Tax Court sustained the disallowance.

## Issues

1. Whether a corporation that survives a statutory merger may deduct NOL carryovers from its own pre-merger losses after acquiring a sister corporation’s assets, when the merger materially changes the enterprise’s assets, capitalization, and earning potential.
2. Whether the NOL carryovers are barred by statutory limits and anti-abuse provisions aimed at preventing the use of reorganizations to shelter income with preserved losses.

## Decision

- The Third Circuit affirmed the Tax Court’s decision for the Commissioner.
- The court held the taxpayer could not deduct the claimed NOL carryovers for 1957–1959 based on Cornelius Ix’s pre-merger losses.
- The court rejected reliance on the merger’s formal continuity (Cornelius Ix as surviving entity and later name change) as sufficient to preserve NOL use.
- The court treated the merger’s substantive effect—combining businesses and altering capital structure to remedy a working-capital deficiency—as incompatible with allowing the old losses to offset post-merger income.

## Legal Principles

- NOL carryovers are limited by statute and are not available where their use would conflict with provisions intended to prevent trafficking in corporate tax losses.
- In evaluating post-reorganization NOL use, courts may look beyond corporate form to the transaction’s substance, including changes in assets, capitalization, and earning capacity.
- A surviving corporation’s formal identity does not alone establish entitlement to pre-reorganization NOL carryovers when the reorganization produces a materially different income-producing enterprise.

## Conclusion

The court held that, despite the survivor’s formal corporate continuity, the merger substantially changed the enterprise and therefore the post-merger corporation could not use pre-merger losses to offset later income in a manner inconsistent with the Code’s limits on NOL carryovers and anti-abuse policies.


Frank Ix & Sons Va. Corp. v. Comm’r of Internal Revenue, 375 F.2d 867 (3d Cir. 1967)