Marwais Steel Company v. Commissioner of Internal Revenue

Wilmington Metal Manufacturing Company, wholly owned by Marwais Steel Company, lived at the whim of the latter.

Marwais organized Wilmington in 1951 to do a special wheel manufacturing job. The latter company was dissolved at the will of Marwais in August, 1956. Wilmington was never successful in business and existed on loans from Marwais which amounted to $57,857.35 on the eve of dissolution. Just before dissolution of Wilmington, Marwais, by a board of directors resolution, forgave the whole amount. At dissolution, Wilmington surrendered its cash assets of $110.02 to Marwais.

Marwais claimed as a deduction on its tax return for its taxable year ending January 31, 1957, $23,967.52. Then it carried over to the following year ending January 31, 1958, as a deduction, $35,-807.35. These represented accumulated net operating losses of Wilmington of $59,774.87, approximately the amount of the forgiven debt from Wilmington to Marwais: $57,857.35.

Except for the special circumstances here, the commissioner would not question Marwais’ right to take advantage of its subsidiary’s losses in the manner it did. The special circumstances are that Marwais had already for its taxable year…