{
  "id": 8574707,
  "name": "ABERFOYLE MANUFACTURING COMPANY v. IVEY L. CLAYTON, Acting Commissioner of Revenue",
  "name_abbreviation": "Aberfoyle Manufacturing Co. v. Clayton",
  "decision_date": "1965-07-23",
  "docket_number": "",
  "first_page": "165",
  "last_page": "173",
  "citations": [
    {
      "type": "official",
      "cite": "265 N.C. 165"
    }
  ],
  "court": {
    "name_abbreviation": "N.C.",
    "id": 9292,
    "name": "Supreme Court of North Carolina"
  },
  "jurisdiction": {
    "id": 5,
    "name_long": "North Carolina",
    "name": "N.C."
  },
  "cites_to": [
    {
      "cite": "92 S.E. 2d 799",
      "category": "reporters:state_regional",
      "reporter": "S.E.2d",
      "opinion_index": 0
    },
    {
      "cite": "244 N.C. 170",
      "category": "reporters:state",
      "reporter": "N.C.",
      "case_ids": [
        2219520
      ],
      "opinion_index": 0,
      "case_paths": [
        "/nc/244/0170-01"
      ]
    }
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    "word_count": 3165
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  "last_updated": "2023-07-14T21:31:16.118019+00:00",
  "provenance": {
    "date_added": "2019-08-29",
    "source": "Harvard",
    "batch": "2018"
  },
  "casebody": {
    "judges": [],
    "parties": [
      "ABERFOYLE MANUFACTURING COMPANY v. IVEY L. CLAYTON, Acting Commissioner of Revenue."
    ],
    "opinions": [
      {
        "text": "PaRkee, J.\nPlaintiff has one assignment of error reading as follows: \"For that the court erred in the signing and entry of judgment dismissing plaintiff\u2019s suit for refund, the facts, as appear on the face of the record, being insufficient to support the judgment.\u201d This assignment of error presents for review the question as to whether the agreed statement of facts support the judgment, and whether error of law appears on the face of the judgment. Strong\u2019s North Carolina Index, Vol. 1, Appeal and Error, \u00a7 21.\nThis statement appears in the agreed statement of facts: \u201cIf the Commissioner\u2019s contention with respect to the $1,120,418.65 unrecognized gain is sustained, plaintiff would not be entitled to recover any amount because this gain alone would more than offset the $231,546.68 in operating losses without regard to the treatment given the $97,730 in dividends.\u201d This quoted statement in the agreed statement of facts presents this basic question for decision, as stated in plaintiff\u2019s brief: \u201cWhen on the liquidation of a wholly-owned subsidiary a parent corporation has a gain which under G.S. Sec. 105-144 (c) is not recognized, is such gain nontaxable income which the parent must offset against its operating losses in computing the G.S. Sec. 105-147 (9) (d) net operating loss deduction?\u201d This quoted statement presents this basic question for decision, as stated in defendant\u2019s brief: \u201cDoes a capital gain which qualifies for nonrecognition as taxable income under the provisions of G.S. 105-144 (c) constitute \u2018income from all sources in the year including income not taxable under this (Income Tax) Article of the Revenue Act\u2019 in determining net economic loss under G.S. 105-147 (6) (d) (now G.S. 105-147(9) (d)) ?\u201d G.S. 105-147(6) (d) is the same section of our Income Tax Statute as G.S. 105-147(9) (d), and is expressed in substantially the same words, except that G.S. 105-147(9) (d) (2) was rewritten by Ch. 1169, p. 1610, 1963 Session Laws. This 1963 rewriting of G.S. 105-147 (9) (d) (2) by the General Assembly is not relevant here on the basic question specifically stated above. This section is codified as G.S. 105-147 (6) (d) in G.S. Yol. 2C, 1957 Cumulative Supplement to Recompiled Vol. 2C, 1950, and is codified as G.S. 105-147 (9) (d) in G.S. Vol. 2C \u2014 Replacement 1958, and as G.S. 105-147(9) (d) in G.S. Vol. 2D \u2014 Replacement 1965. It will hereafter be referred to as G.S. 105-147(9) (d).\nPlaintiff makes these contentions: \u201cGain realized by plaintiff in the liquidation of a wholly-owned subsidiary should not reduce the carryover loss deduction authorized under G.S. 105-147(9) (d).\u201d Upon the liquidation of its subsidiaries, it merely transferred its subsidiaries\u2019 assets to its own books. G.S. 105-144(c) provides that any \u201cgain\u201d attendant upon such transfer will not be recognized for tax purposes. The nonrecognition of gain on the liquidation of a subsidiary might well be a .temporary condition, i.e., subsequent sale of the property by the parent corporation can result in the taxation of this gain.\nG.S. 105-144(c) reads:\n\u201cNo gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation, if the corporation receiving such property was on the date of the adoption of the plan of liquidation and has continued to be at all times until the receipt of the property the owner of stock (in such other corporation), possessing at least eighty per centum (80%) of the total combined voting power of all classes of stock entitled to vote, and the owner of at least eighty per centum (80%) of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends).\u201d\nIt seems clear that the nonrecognition principle embodied in G.S. 105-144(c) was to permit a corporation to simplify its corporate structure, and to relieve a parent corporation from tax liability liquidation gains realized in a particular year as a result of corporate liquidation. However, the instant case on the precise basic question above stated does not involve taxation of liquidation gains or the public policy embodied in G.S. 105-144 (c). The instant case is concerned with the application of the net economic losses provisions of G.S. 105-147(9) (d), and the only pertinent public policy considerations are those which underlie this particular section of the statute.\nThe net economic losses deduction claimed by plaintiff is described and defined in G.S. 105-147 (9) (d). The pertinent parts of G.S. 105-147 so far as the instant case is concerned on the precise basic question above stated are as follows:\n\u201c\u00a7 105-147. Deductions. In computing net income there shall be allowed as deductions the following items:\n\u25a0Yt * *\n\u201c(9) Losses of such nature as designated below:\n* * *\n\u201c(d) Losses in the nature of Net ECONOMIC Losses sustained in any or all of the five preceding income years arising from business transactions or to capital or property as specified in (a) and (b) above subject to the following limitations:\n\u201c1. The Purpose in allowing the deduction of net economic loss of a prior year or years is that of granting some measure of Relief to Taxpayers who Have INCueeed ECONOMIC Misfoetune or who are otherwise materially affected by strict adherence to the annual accounting rule in the determination of taxable income, and the deduction herein specified does not authorize the carrying forward of any particular items or category of loss except to the extent that such loss or losses shall Result in the IMPAIRMENT of the Net ECONOMIC SituatioN of the taxpayer such as to result in a net economic loss as hereinafter defined.\n\u201c2. The net economic loss for any year shall mean the amount by which allowable deductions for the year other than contributions, personal exemptions, prior year losses, taxes on property held for personal use, and interest on debts incurred for personal rather than business purposes Shall Exceed Inoome From all Sources IN THE Year INCLUDING ANY INCOME NOT TAXABLE UNDER THIS ArtiCle.\u201d (Emphasis ours.) (\u201c2\u201d is, quoted as it appears prior to its being rewritten by the 1963 Session of the General Assembly. As rewritten in Ch. 1169, p. 1610, 1963 Session Laws, it reads:\n\u201c2. The net economic loss for any year shall mean the amount by which allowable deductions for the year other than personal exemptions, non-business deductions and prior year losses shall exceed income from all sources in the year including any income not taxable under this Article.\u201d)\nThe General Assembly was under no constitutional or other legal compulsion to permit a net economic loss or losses deduction for a corporation from taxable income in a subsequent year or years. It enacted the carry-over provisions of G.S. 105-147(9) (d) \u201cpurely as a matter of grace, gratuitously conferring a benefit but limiting such benefit to the net economic loss of the taxpayer after deducting therefrom the allo-cable portion of such taxpayer\u2019s nontaxable income.\u201d Rubber Co. v. Shaw, Comr. of Revenue, 244 N.C. 170, 92 S.E. 2d 799.\nIt appears from the agreed statement of facts that during plaintiff\u2019s fiscal and tax year ending 30 June 1960, it liquidated two wholly-owned subsidiaries and realized a gain of $4,120,418.65. This gain was not included in plaintiff\u2019s state taxable income for the year 1960, because the gain qualified for nonrecognition under the provisions of G.S. 105-144 (c). Even though this liquidated gain of $4,120,418.65 did not constitute taxable income to plaintiff, it seems manifest that it did in fact constitute a gain and increased plaintiff\u2019s assets for the year by $4,120,418.65 over the value of plaintiff\u2019s two wholly-owned subsidiaries as carried in plaintiff\u2019s assets before the liquidation.\nFor its three fiscal and tax years ending 30 June 1958, 1959, and 1960, plaintiff had net operating losses apportionable to North Carolina under G.S. 105-134 in the total amount of $231,546.63. G.S. 105-147 (9) (d) (2), in force at all times relevant here, provides in relevant part: \u201cThe net economic loss for any year shall mean the amount by which allowable deductions for the year * * shall exceed income from all sources in the year including any income not taxable under this article.\u201d\nG.S. 105-132(1) reads: \u201cThe word 'taxpayer\u2019 includes any individual, corporation, or fiduciary subject to the tax imposed by this article.\u201d\nG.S. 105-140 reads: \u201cThe words \u2018net income\u2019 mean the gross income of a taxpayer, less the deductions allowed by this article.\u201d\nG.S. 105-141 (a) reads in relevant part: \u201cThe words \u2018gross income\u2019 mean the income of a taxpayer derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, business, commerce or sales, or dealings in property, whether real or personal, located in this or any other state or any other place, growing out of the ownership or use of or interest in such property, also from interest, rent, dividends, securities, or the transactions of any business carried on for gain or profit, or gains or profits, and income derived from any source whatever and in whatever form paid.\u201d (Emphasis ours.)\nIn our opinion, and we so hold, plaintiff\u2019s gain in the amount of $4,-120,418.65 realized from the sale of its two wholly-owned subsidiaries by reason of our statutory definition of \u201cgross income\u201d constitutes \u201cincome from all sources in the year including any income not taxable under this article,\u201d as stated in G.S. 105-147 (9) (d) (2). Consequently, plaintiff is not entitled to any net economic losses deduction as sought in its complaint, and is not entitled to recover anything sought in this suit, because as stated in the agreed statement of facts \u201cthis gain [$4,-120,418.65] alone would more than offset the $231,546.63 in operating losses without regard to the treatment given the $97,730. in dividends.\u201d\nThe Federal cases and statutes relied on by plaintiff are clearly distinguishable. We are here concerned with our own statutes.\nHaving reached this conclusion, the question presented for decision in plaintiff\u2019s brief reading: \u201cWhen dividends received by a parent corporation from a subsidiary are deductible under G.S. Sec. 105-147 (7) (because all of the subsidiary\u2019s income was subject to taxation by North Carolina) does the parent thereby receive nontaxable income which must be offset against its operating losses in computing the G.S. Sec. 105-147 (9) (d) net operating loss deduction?\u201d, has become moot.\nThe agreed statement of facts support Judge Riddle\u2019s judgment, and no error of law appears on the face of the record. The judgment below is\nAffirmed.",
        "type": "majority",
        "author": "PaRkee, J."
      }
    ],
    "attorneys": [
      "Moore and Van Allen by Robert W. King, Jr., for plaintiff appellant.",
      "Attorney General T. W. Bruton and Assistant Attorney General Charles D. Barham, Jr., for defendant appellee."
    ],
    "corrections": "",
    "head_matter": "ABERFOYLE MANUFACTURING COMPANY v. IVEY L. CLAYTON, Acting Commissioner of Revenue.\n(Filed 23 July, 1965.)\n1. Appeal and Error \u00a7 21\u2014\nAn assignment of error to the signing and entry of judgment presents for review whether the agreed statement of facts supports the judgment and whether error of law appears on the face of the judgment.\n2. Taxation \u00a7 28c\u2014\nProvision for loss carry-over in computing income tax for a particular year is not required by the organic law but is solely a matter of grace, and such allowance must be determined in accordance with public policy as set forth in the statute permitting such loss carry-over. G.S. 105-147(9) (d).\n3. Same\u2014\nWhere a corporation realizes a gain from the liquidation of wholly-owned subsidiaries, such gain, even though not constituting taxable income, G.S. 105-144(c), does constitute income \u201cfrom all sources including income not taxable\u201d within the purview of G.S. 105-147(9) (d) (2), and consequently must be deducted from any asserted loss carry-over from a previous year.\nAppeal by plaintiff from Riddle, S.J., 2 March 1964 non-jury Session of Gaston.\nThe complaint alleges two causes of action: (1) to recover an alleged overpayment of income tax in the amount of $2,423.44, with interest; and (2) to recover the sum of $12,596.04, with interest, for an alleged additional income tax assessed against it by the then Commissioner of Revenue, and paid under protest.\nWhen the action came on to be heard before Judge Riddle, the parties presented to him an agreed written statement of facts, signed by counsel of record of both parties on 26 November 1963, which is as follows:\n\u201cThe parties, by their respective counsel, do hereby stipulate and agree that the following statement of facts, in narrative form, is true and correct and that said statement includes all facts necessary to a determination of the issues raised by the pleadings.\n\u201cIt is further stipulated and agreed that the cause may be heard by the Court sitting without a jury upon the facts contained in this statement.\nPRELIMINARY STATEMENT\n\u201cThis case arises under Section 105-147 of the income tax article of the North Carolina Revenue Act. That section provides, in Subsection (9) (d), for a net economic loss deduction. \u2018Net economic loss\u2019 is defined as the amount by which allowable deductions (with certain exceptions) \u2018exceed income from all sources in the year including any income not taxable under this article.\u2019 Net economic losses for any or all of the five preceding years may be carried forward and deducted in a current year but \u2018only to the extent that such carry-over loss . . . shall exceed any income not taxable under this article received in the same year in which the deduction is claimed, . . .\u2019 Any such loss carry-over is also required to be offset by \u2018any income taxable or non-taxable\u2019 of any intervening year.\nFacts\n\u201cPlaintiff taxpayer is a Pennsylvania corporation which was domesticated in North Carolina in 1927 and which has its registered office in Ranlo, Gaston County. Plaintiff\u2019s business, at all times relevant to this action, was conducted and transacted partly within and partly without North Carolina.\n\u201cFor plaintiff\u2019s tax years ended June 30, 1958-1961, the percentages of its net apportionable income which was allocable to North Carolina under G.S. 105-134 were as indicated below:\n1958 29.4459%\n1959 35.0895%\n1960 41.3288%\n1961 65.0033%\n\u201cDuring the three years ended June 30, 1958-1960, plaintiff\u2019s income tax deductions (other than those excepted by G.S. 105-147 (9) (d) (2)) exceeded its taxable income and thus produced operating losses apportionable to North Carolina of $11,725.38, $123,-245.39 and $96,575.86, respectively, a total of $231,546.63.\n\u201cPrior to the close o\u00ed business June 30, 1960, plaintiff owned 100 percent of the stock of Rex Mills, Incorporated, a North Carolina corporation, and 100 percent of the stock of Aberfoyle Manufacturing Company of Canada, Limited. The business activities of plaintiff and its two named subsidiaries constituted a unitary textile manufacturing business.\n\u201cDuring plaintiff\u2019s tax year ended June 30, 1960, it received from Rex Mills dividends in the amount of 197,730. Subsequently, during the same tax year plaintiff liquidated Rex Mills and the above-named Canadian subsidiary. Gain to plaintiff from the liquidation of these subsidiaries amounted to $4,120,418.65. This gain, under the provisions of G.S. 105-144 (c), was not recognized.\n\u201cPlaintiff, for the year ended June 30, 1961, had a net income apportionable to North Carolina in the amount of $341,123.00.\n\u201cIn computing its net economic loss carry-over deduction on its June 30, 1961, return, plaintiff reduced its loss carry-over by $40,-390.00. This was the amount by which plaintiff\u2019s net taxable income apportionable to North Carolina would have been increased for the year ended June 30, 1960, but for the dividends received deduction allowed by G.S. 105-147(7) with respect to the $97,-730.00 in dividends from Rex Mills. Plaintiff was entitled to 'deduct 100% of the dividends it received from Rex Mills in the year ended June 30, 1960, because for that year all of Rex Mills income was apportionable to and taxed by North Carolina. The $40,390.64 reduction brought the plaintiff\u2019s claimed net economic loss appor-tionable to this State down from $231,546.63 to $191,155.99. On its June 30, 1961, return, plaintiff claimed a' loss carry-over deduction of $191,155.00. The Commissioner required that the economic losses incurred in the years ended June 30, 1958-1960 be further reduced by the gain on the liquidation of Rex Mills and the Canadian subsidiary and disallowed the deduction in its entirety.\n\u201cPlaintiff made timely application to the Commissioner for a refund of the tax attributable to the $40,390.64 dividend deduction item. Plaintiff averred that it had erred in reducing its carryover loss deduction by said amount and in paying $2,423.44 in tax (6% x $40,390.64) on account of the reduction. The refund application was denied.\n\u201cPlaintiff also made timely protest to the proposed assessment of additional tax on account of the disallowance of the $191,155.00 net carry-over loss deduction as aforesaid. The assessment, in the amount of $11,469.30 plus $1,126.74 in interest, was. sustained by the Commissioner and paid under protest by plaintiff.\n\u201cThe Commissioner contends that the $97,730 in 1960 dividends and $4,120,418.65 in 1960 gain both constituted non-taxable income which under G.S. 105-147 (9) (d) (2) \u2014 (4) was required to be offset against plaintiff\u2019s 1958-1960 losses in computing the net economic loss which could be carried over and deducted in 1961. Plaintiff contends that the dividends did not constitute non-taxable income and that the Commissioner\u2019s denial of the claimed refund has deprived plaintiff of a deduction for these dividends in contravention of Section 105-147 (7) and 105-147 (9) of the General Statutes. Further, plaintiff contends that the gain from the liquidation of the two subsidiaries constituted \u2018gain\u2019 rather than \u2018income\u2019 which did not economically benefit plaintiff and which was not \u2018non-taxable\u2019 but was merely not \u2018recognized\u2019 during 1960 under G.S. 105-144 (e).\n\u201cThis suit was instituted for refund of (1) the $2,423.44 alleged to have been erroneously paid and (2) the $12,596.04 assessment plus interest which was paid under protest. If the Commissioner\u2019s contention with respect to the $4,120,418.65 unrecognized gain is sustained, plaintiff would not be entitled to recover any amount because this gain alone would more than offset the $231,546.63 in operating losses without regard to the treatment given the $97,-730.00 in dividends. If plaintiff\u2019s contentions regarding the unrecognized gain are sustained, however, plaintiff would be entitled to recover the $12,596.04 with interest from June 10, 1963, the date of payment of assessment under protest. If, in addition, plaintiff\u2019s contentions regarding the $97,300.00 in dividends are sustained, plaintiff would be entitled to recover the $2,423.44 with interest from June 10, 1963, the date of denial of its claim for refund.\n\u201cPlaintiff has complied with all prerequisite statutory requirements and has exhausted its administrative remedies and is entitled to maintain and prosecute this action.\u201d\nBased upon the agreed statement of facts, Judge Riddle entered a judgment ordering and adjudging that plaintiff take nothing by this action, dismissing its action, and taxing it with the costs.\nThe Attorney General moved in this Court to substitute Ivey L. Clayton, acting Commissioner of Revenue, as party defendant in the place and stead of W. A. Johnson, former Commissioner of Revenue. The Court allowed this motion on 2 March 1965.\nFrom the judgment entered, plaintiff appeals to the Supreme Court.\nMoore and Van Allen by Robert W. King, Jr., for plaintiff appellant.\nAttorney General T. W. Bruton and Assistant Attorney General Charles D. Barham, Jr., for defendant appellee."
  },
  "file_name": "0165-01",
  "first_page_order": 205,
  "last_page_order": 213
}