Upon purchase of a public shell accumulated losses may be used only if there was a commercial base for the purchase

About a year and a half after a pubic company collapsed, control of the shell was acquired and a profitable activity was introduced into it. However, the Tax Authority refused to recognize the use for offsetting gains in skeletal accumulated losses in excess of ILS 150 million.
The Court held that the accumulated losses may not be used for tax purposes. A taxpayer may offset losses between its various businesses, whether it is an individual or a company. However, when control over a company is sold to new shareholders, with the insertion of a profitable activity into it to offset its accumulated losses and without a material commercial reasoning, the tax assessor may refuse to recognize the losses. In contrast, when a commercial basis for the transaction exists and the dominant purpose is not offsetting the accumulated losses, these losses may be offset. Not every change in the activity of a company after its acquisition indicates an artificial transaction, but when the assessing officer suspects that a transaction is artificial, the burden is on the company to show that it is a transaction with material commercial reasoning. In general, a public shell is purchased in order to shorten the process of making the company public, while saving time, efforts and costs, but in this case the purchasers failed to show that they had made reasonable efforts to locate additional shells, which had no losses or less losses, and that could be purchased in the same structure. In any case, in view of the huge losses in the acquired company, the value of the losses significantly outweighs other benefits of the transaction and therefore the center of the transaction was the acquisition of the losses and therefore it is an artificial transaction and the losses will not be recognized for the purpose of offsetting profits.