## Facts

- An older New York corporation (formed 1920) operated an ice business but became financially unable to meet debts and complete needed equipment.
- Creditors’ and stockholders’ committees investigated and found irregularities, including stock reportedly issued without record or consideration.
- A plan reorganized the business by forming a new New York corporation (formed 1922) with a substantially similar capital structure.
- The new corporation took over all assets, liabilities, and business of the older corporation in exchange for a portion of the new corporation’s stock.
- The older corporation distributed the received new stock to its stockholders share-for-share, retiring the old shares; creditors obtained supervisory control through a voting trust until paid.
- The older corporation was not dissolved and continued to exist as a corporate entity.
- The older corporation had sustained net losses in prior periods; the new corporation sought to deduct those losses against its own income for 1922 and 1923 under § 204(b) of the Revenue Act of 1921.
- The Commissioner assessed income tax deficiencies for 1922 and 1923; the Board of Tax Appeals and the court of appeals upheld the deficiencies.

## Issues

1. Whether § 204(b) of the Revenue Act of 1921 permits a newly formed corporation that acquired an older corporation’s business and assets to deduct the older corporation’s prior net losses in computing the new corporation’s later taxable income.

## Decision

- The Supreme Court affirmed the judgment sustaining the tax deficiencies for 1922 and 1923.
- The Court held that the new corporation was a distinct taxpayer and could not deduct net losses sustained by the older corporation.
- Section 204(b) contemplates continuity of the same taxpayer from the loss year to the carryover year; it does not authorize transferring losses to another legal entity.

## Legal Principles

- Tax deductions are allowed only when clearly authorized by statute; they are matters of legislative grace rather than general equitable entitlement.
- Federal income taxation generally uses annual accounting; loss carryovers are limited exceptions that must be applied strictly according to statutory terms.
- Net loss deductions under § 204(b) are confined to the taxpayer that sustained the loss and are treated as personal to that taxpayer, not transferable to another.
- Separate corporate entities are treated as separate taxpayers for federal tax purposes, even if business operations and shareholder ownership substantially continue through a reorganization.
- The continuing existence of the predecessor corporation supports treating it as a different taxpayer from the successor corporation for purposes of loss carryovers.

## Conclusion

The Court held that § 204(b) allows net loss carryovers only for the same legal taxpayer that incurred the loss, so a successor corporation could not use a predecessor’s net losses despite continuity of business and shareholder interests.


New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934)