Washington Law Review




Taxpayer corporation, which had sustained losses in the hardware business, entered into an agreement with two partners engaged in real estate development whereby a department of real estate development was established within the corporation. Funds needed for the department's operations were furnished by the partners through the purchase of non-voting preferred stock valued at approximately two-fifths of the total value of the corporate stock. By the terms of the agreement, ninety percent of the profits of the department were to be distributed to the preferred stockholders. Voting control of the common stock was placed in a voting trust. Thereafter, the hardware business was discontinued and the real estate department operated at a profit. In filing income tax returns, the corporation offset the past losses of the hardware business against profits of the real estate department. The Commissioner's disallowance of the loss carryover was upheld by the Tax Court on the basis that there was not the continuity of business enterprise between the hardware business and the real estate development required by the so-called Libson Shops doctrine. On appeal, the Ninth Circuit Court of Appeals reversed. Held: In single corporation cases involving post-1954 carryovers, the statutory restrictions provided in the Internal Revenue Code of 1954 are exclusive; when these restrictions do not apply, the Libson Shops doctrine may not be used to disallow the carryover. Maxwell Hardware Co. v. Commissioner, 343 F.2d 713 (9th Cir. 1965).

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