## Facts

- Media Graphics, Inc. (MGI) operated a commercial-photography business and had net operating losses (NOLs) and investment tax credits from prior years.
- G. F. DeCoursin, Mark Duce, and Norris Adams acquired 51% of MGI’s stock, giving them control.
- DeCoursin and Duce were the sole shareholders of April Corporation (April), formed in 1966 to acquire the assets of Jem Foods, a bankrupt flour-products business.
- By the time April acquired the Jem Foods business, Kentucky Fried Chicken (KFC) had become effectively the only customer, and April’s management viewed customer dissatisfaction and concentration risk as a serious business concern.
- In 1968, the owners planned and carried out a corporate reorganization involving April and MGI:
  - All MGI shareholders exchanged their MGI shares for April shares.
  - April transferred its operating assets and liabilities to MGI.
  - April continued to exist as a holding company, while MGI became the operating company for both lines of business.
- After the reorganization, MGI reported its preserved NOL carryovers and investment credits on returns for fiscal years ending August 31, 1968, and August 30/31, 1969.
- The Commissioner of Internal Revenue disallowed the NOL and credit carryovers under I.R.C. § 269 and determined income tax deficiencies of $23,937.69 for 1968 and $43,211.89 for 1969.
- Stange Company, as successor in interest to MGI (later GCO, Inc.), petitioned the Tax Court for redetermination and argued the restructuring served multiple business aims: providing capital to MGI, simplifying administration, diversifying the shareholders’ business risks, and creating a structure for future acquisitions.

## Issues

1. Whether I.R.C. § 269 authorized the Commissioner to disallow MGI’s claimed NOL and investment credit carryovers on the ground that the principal purpose of acquiring control and completing the 1968 reorganization was federal income tax avoidance.

## Decision

- The Tax Court held that § 269 did not apply because tax avoidance was not the principal purpose of the acquisition and reorganization.
- The court allowed the NOL and investment credit carryovers for the years at issue.
- The Commissioner’s disallowance based on § 269 was not sustained (subject to the parties’ other concessions in the case).

## Legal Principles

- Under I.R.C. § 269, the Commissioner may disallow deductions, credits, or other tax benefits if a person acquires control of a corporation (or its property) and the principal purpose of the acquisition is evasion or avoidance of federal income tax by securing a deduction, credit, or allowance that would not otherwise be available.
- “Principal purpose” means the dominant purpose; the presence of tax planning does not trigger § 269 if substantial non-tax business reasons drove the transaction.
- In deciding whether § 269 applies, the court evaluates the full set of facts and circumstances surrounding the acquisition and subsequent steps, not merely the form of the transaction.
- Evidence that the businesses continued as operating enterprises after the restructuring, and that the restructuring addressed financing, administrative, and risk-management needs, supports a finding that the transaction was not chiefly undertaken to obtain tax attributes.
- The taxpayer bears the burden of showing that § 269 should not bar the claimed deductions and credits; credible business explanations and consistent transactional conduct may satisfy that burden.

## Conclusion

Stange Company v. Commissioner held that the Commissioner could not use I.R.C. § 269 to disallow MGI’s NOL and investment credit carryovers because the 1968 reorganization joining April’s flour-products operations with MGI’s photography business was supported by real business reasons—capital needs, administrative simplification, diversification, and a structure for growth—so tax avoidance was not the transaction’s dominant purpose.


Stange Company v. Commissioner, 36 T.C.M. 31 (1977)