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By Elizabeth Knoll, CPA,
Eisner & Lubin

The Connecticut Department of Revenue Services (DRS) has consistently disallowed net operating loss carryovers after a merger or reorganization. A recent Connecticut Superior Court decision has allowed a survivor corporation to utilize the merged corporations' losses because the business unit continued essentially unchanged.

The prior DRS position has been that only the entity which sustained the loss can claim the NOL in a subsequent year; when the corporate merger extinguishes the loss corporation, the loss corporation's attributes die with it. Unlike the IRC, there is no separate Connecticut code section authorizing carryovers after a merger.

The case, Grade A Market, Inc. v. Commissioner, was facts sensitive. Three retail supermarkets were owned by one family who organized them as three separate corporations. One corporation acquired the other two in a statutory merger. The non-tax justification for the merger was to reduce administrative expenses. There was no change in ownership and no change in business operation of any of the retail markets. The surviving corporation attempted to deduct carryover pre-merger losses incurred by each of the merged corporations on its post-merger Connecticut return.

The court looked to the 1939 IRC and associated cases, before the Federal carryover of attributes was enacted.

The court held that a post-merger corporation was entitled to deduct pre-merger NOLs provided there was a continuity of the business enterprise of the loss corporation. The court detailed four elements that will give rise to continuity of business enterprise:

"(1) Has the surviving corporation retained the same corporate identity of the pre-merged corporation;

(2) Has the business enterprise which produced the loss been continued in the surviving corporation;

(3) Has there been any substantial change in the ownership of the surviving corporation; and

(4) Has the income producing business of the surviving corporation been altered, enlarged, or materially affected by the merger?"

Corporate taxpayers with "continuity of business enterprise" fact patterns should consider filing claims for refund for open years based upon the Superior Court ruling. *


By Marshall Fineman, CPA,
David Berdon & Co. LLP

In a recent notice (TSB-M-96-(2)C), New York State has streamlined the process of dissolving domestic (New York) corporations.

Effective June 1, 1996, rather than sending the dissolution forms and filing fee, plus all required returns, to the New York State Department of Taxation and Finance and then waiting for the consent to dissolve to be sent by the Commissioner to the Secretary of State for completion of the dissolution process, taxpayers may contact New York State directly (by telephone or fax) and receive such consent (or a letter detailing what still is needed to dissolve) within five business days. The major consequence of this procedural change is that with the information about a corporation now online, a taxpayer will know within a short period of time whether any additional filings, fees, or taxes are necessary, and, if none are required, taxpayers will directly receive the consent within five business days. The corporation can then send the consent, certificate of dissolution, and filing fee directly to the Secretary of State, thus effectuating the dissolution in a much shorter period of time. *

State and Local Editor:
Marshall L. Fineman, CPA
David Berdon & Co. LLP

Interstate Editor:
Stuart A. Rosenblatt, CPA
Wiss & Company LLP

Contributing Editors:
Henry Goldwasser, CPA
M. R. Weiser & Co. LLP

Leonard DiMeglio, CPA
Coopers & Lybrand L.L.P.

Steven M. Kaplan, CPA
Konigsberg Wolf & Co., PC

John J. Fielding, CPA
Price Waterhouse LLP

Warren Weinstock, CPA
Paneth Haber & Zimmerman LLP

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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