Stange Company v. Commissioner

G. F. DeCoursin, Mark Duce, and Norris Adams acquired 51 percent of the stock in Media Graphics, Inc. (MGI), a commercial-photography business. Meanwhile, DeCoursin and Duce were the sole shareholders in April Corporation, which was formed in 1966 to acquire the assets of Jem Foods, a bankrupt company specializing in flour products. Although Jem Foods had previously served multiple clients, it reached a point at which Kentucky Fried Chicken (KFC) was its sole customer, and many KFC franchisees were increasingly unhappy with the flour product—a source of concern for April’s management. A reorganization was planned and executed in 1968. All MGI shareholders exchanged their MGI stock for April stock, and April transferred its assets and liabilities to MGI. April continued to exist as a holding company. MGI served as the operating company for the businesses previously owned by both MGI and April. MGI had net operating losses that were preserved in the reorganization and reported as a carryover for the fiscal years ending August 31, 1968, and August 31, 1969. The Commissioner of Internal Revenue (defendant) disallowed the deductions, reasoning that the reorganization’s underlying purpose had been to gain the benefit of MGI’s net operating losses. MGI’s successor, Stange Company (plaintiff), challenged the deficiency in the United States Tax Court. Stange argued that the reorganization had several purposes, including (1) supplying capital to MGI, (2) streamlining the administration of two business entities, (3) providing diversity of investment, and (4) creating a vehicle for future acquisitions and diversification.