## Facts

- Several separately incorporated retail clothing companies operated as affiliated parts of a single store chain.
- The corporations merged into one surviving corporation, Libson Shops, Inc., which continued operating retail clothing stores.
- Before the merger, some of the constituent corporations incurred net operating losses (NOLs), while others had net income.
- After the merger, the surviving corporation had taxable income and sought to carry forward and deduct the pre-merger NOLs of certain merged corporations to offset post-merger income.
- The state tax authority denied the NOL carryovers on the ground that the post-merger taxpayer could not deduct losses incurred by other corporations where the later income was not produced by the same loss-incurring operations.

## Issues

1. Whether a surviving corporation may carry forward and deduct pre-merger NOLs incurred by some merged corporations to offset post-merger income when the income is not produced by substantially the same business that generated the losses.
2. Whether the NOL carryover statute requires continuity between the loss-incurring taxpayer or business and the taxpayer or business generating the later income.

## Decision

- The Supreme Court affirmed the denial of the claimed NOL carryovers.
- The Court held the surviving corporation could not use pre-merger losses of some constituent corporations to offset post-merger income largely generated by other constituent operations.
- The Court interpreted the NOL carryover provisions to require a link between the loss and the later income through continuity of the business that sustained the loss.

## Legal Principles

- NOL carryover provisions are designed to permit a continuing business to average income and losses over time, not to allow losses to shelter income from other operations.
- For NOL carryovers following a merger, it is not enough that the surviving corporation is the legal successor; the deduction depends on whether the same business that produced the losses produces the income being offset.
- Where post-merger income is not derived from substantially the same operations that generated the pre-merger losses, the carryover is disallowed.
- The statutory interpretation reflects a limitation against using mergers to transfer or trade in unused tax losses to reduce tax on unrelated income.

## Conclusion

The Court rejected Libson Shops’ attempt to apply pre-merger NOLs of certain merged corporations against post-merger income from other operations, holding that NOL carryovers require continuity between the loss-producing business and the income sheltered by the deduction.


Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957)