## Facts

- Zanesville Investment Company, an Ohio corporation, owned all stock of Earl J. Jones Enterprises, Inc., which operated a profitable newspaper.
- Muskingum Coal Company, originally profitable, sustained substantial operating losses from 1951 through August 1955 while developing a new mine opening; those efforts were financed partly by loans from Zanesville and Enterprises.
- Earl J. Jones owned all stock of both Zanesville and Muskingum before transferring all Muskingum stock to Zanesville in September 1955, making Muskingum a subsidiary in the group.
- After the stock transfer, Zanesville filed consolidated federal income tax returns for Zanesville, Enterprises, and Muskingum.
- In the consolidated returns, Zanesville offset Muskingum’s post-affiliation operating losses and losses from sales of physical assets against Enterprises’ post-affiliation profits.
- The Commissioner disallowed the offsets under I.R.C. § 269 on the theory that the principal purpose of the affiliation was to obtain tax benefits from anticipated losses.

## Issues

1. Whether I.R.C. § 269 (or a nonstatutory anti-avoidance doctrine) bars a consolidated group from offsetting one member’s post-affiliation operating and asset-sale losses against another member’s post-affiliation profits when those losses were anticipated at the time of affiliation.
2. Whether § 269 applies where the losses used on the consolidated return were economically and taxwise incurred after affiliation rather than “built-in” pre-affiliation losses.

## Decision

- The Sixth Circuit reversed the Tax Court.
- The court held that § 269 did not prevent the consolidated offset of Muskingum’s post-affiliation, actual operating and asset-sale losses against Enterprises’ post-affiliation profits.
- The court rejected the Commissioner’s proposed extension of § 269 and found no supporting authority in the consolidated-return framework for denying the deductions on these facts.

## Legal Principles

- I.R.C. § 269 targets acquisitions made primarily to secure tax benefits from pre-existing corporate tax attributes (including “built-in” losses), not bona fide affiliations that result in post-affiliation losses incurred in actual operations.
- Anticipation that a subsidiary may sustain future operating losses does not, by itself, make an otherwise genuine affiliation an acquisition “for the principal purpose” of tax evasion or avoidance under § 269.
- In consolidated returns, post-affiliation profits and losses of affiliated corporations are generally combined unless a specific statutory or regulatory limitation applies; courts will not create additional limitations absent textual or historical support.

## Conclusion

The Sixth Circuit held that § 269 did not authorize the Commissioner to disallow consolidated-return offsets where the losses were real, incurred after affiliation, and not pre-affiliation built-in losses, even if the losses were anticipated when the stock transfer occurred.


Zanesville Inv. Co. v. Comm'r of Internal Revenue, 335 F.2d 507 (6th Cir. 1964)