Warsaw Photographic Associates, Inc. v. Commissioner

A majority of the common stock in Warsaw Studios, Inc. (Studios), a photography business, was owned by Warsaw & Co., Inc., a corporation owned by J. J. Warsaw. The remainder of the common stock was owned by 10 individual shareholders. Studios leased offices in two locations: Thirty-First Street and Thirty-Fourth Street in Manhattan. The 10 shareholders wished to streamline operations by getting out of the Thirty-Fourth Street lease. The 10 shareholders organized a new corporation, Warsaw Photographic Associates, Inc. (Photographic) (plaintiff), which issued 1,000 shares of stock at $100 per share. Each shareholder bought 100 shares for $10,000. Photographic then implemented a plan under which Studios transferred all its assets to Photographic except for the Thirty-Fourth Street lease. In exchange, Photographic issued an additional 100 shares of stock, giving each of the 10 shareholders—who were shareholders in both Studios and Photographic—an additional 10 shares. When Studios filed its federal income-tax return, it declared a net operating loss of $363,948. The same amount was claimed as a deduction on Photographic’s tax return for the following year in accordance with a rule that allows a transferee corporation to claim losses from its transferor corporation. The Commissioner of Internal Revenue (the commissioner) (defendant) disallowed the deduction, reasoning that Photographic was attempting to make use of a statutory benefit associated with corporate reorganizations, but that the transaction did not qualify as a reorganization. Photographic challenged the commissioner’s ruling in the United States Tax Court.