## Facts

- Metropolitan Edison Co., a Pennsylvania utility, acquired all assets and franchises of certain Pennsylvania subsidiary corporations and assumed their liabilities under Pennsylvania law; the subsidiaries ceased to exist as separate entities.
- After the asset transfers, Metropolitan redeemed bonds originally issued by the former subsidiaries.
- At redemption, unamortized bond discount and issuance expenses remained, which Metropolitan deducted from gross income; the Commissioner disallowed the deductions.
- In a companion matter, Pennsylvania Water & Power Co. acquired all assets of another Pennsylvania corporation and assumed all its liabilities (including bonds it had guaranteed), then redeemed those bonds; technical statutory compliance was disputed.
- The Board of Tax Appeals sustained the Commissioner; the Third Circuit reversed, treating the transactions as mergers (or their equivalent) and allowing the deductions.

## Issues

1. Whether, under the Revenue Acts of 1926 and 1928, a corporation that acquires all assets and assumes all liabilities of another corporation in a merger-type transaction may deduct the predecessor’s unamortized bond discount and issuance expenses when it redeems the predecessor’s bonds.
2. Whether a transfer of franchises and assets under Pennsylvania’s 1874 corporate statute makes the transferee liable by operation of law for the transferor’s obligations and is tantamount to a merger.
3. Whether an asset transfer with assumption of liabilities that does not fully satisfy statutory formalities can still be treated as a de facto merger for purposes of the deduction.

## Decision

- The Supreme Court affirmed the Third Circuit.
- A transfer of franchises and assets under Pennsylvania’s 1874 statute makes the transferee liable as a matter of law for the transferor’s obligations and is tantamount to a merger.
- In such a merger-type transaction, the surviving corporation may deduct unamortized bond discount and issuance expenses on the predecessor’s bonds when the surviving corporation redeems them.
- Where the acquirer takes all assets and assumes all liabilities but statutory formalities are imperfect, the transaction may constitute a de facto merger, yielding the same deduction.

## Legal Principles

- For federal income tax purposes, deductibility of unamortized bond discount and issuance expenses upon redemption may follow state-law consequences of a corporate combination that leaves one continuing obligor.
- When state law makes the transferee the continuing entity responsible for the predecessor’s debts in a merger-type transaction, the transferee may claim deductions tied to those obligations upon redemption.
- A transaction that functions as a merger in substance—complete asset transfer plus assumption of liabilities—may be treated as a de facto merger for the same tax result, even without full statutory compliance.

## Conclusion

The Court held that when Pennsylvania law treats an all-assets transfer with assumption of liabilities as a merger (or de facto merger), the surviving corporation stands in the predecessor’s place for purposes of deducting remaining unamortized bond discount and issuance expenses upon redeeming the predecessor’s bonds under the Revenue Acts of 1926 and 1928.


Helvering v. Metro. Edison Co., 306 U.S. 522 (1939)