Court Opinion

ID: 4482112
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:19.118591+00
Date Added: 2024-06-11T07:58:02.290492
License: Public Domain

SimpsoN, /., dissenting: I must dissent with respect to the Court’s holding that section 382(a) is not applicable in this case. ’Since at least 1944, ’Congress has been concerned with the trafficking in corporations with operating loss carryovers. See H. Eept. No. 871, 78th Cong., 1st Sess., 1944 C.B. 901,938. In that year, Congress enacted the predecessor of section 269, Which provided that if the primary intent or purpose of the acquisition was the evasion of taxes, the benefit of the carryovers would be denied to the successor corporation. By 1954, Congress had concluded that the intent or purpose test had “proved ineffectual” and that a test based on objective factors was needed. H. Eept. No. 1337, 83d Cong., 2d Sess., p. 41 (1954); see S. Eept. No. 1622,83d Cong., 2d Sess., p. 53 (1954). The House passed a bill which provided that whenever there was a substantial change in the ownership of a corporation, the successor corporation would be denied the benefits of the carryovers. See H. Eep’t. No. 1337, sufra at pp. A142-A144. The Senate believed that the House bill was too stringent and concluded that the benefits of the carryovers should not be denied if the successor corporation continued to carry on substantially the same business as bad the corporation before tbe acquisition. See S. Rent. No. 1622, supra at pp. 284-285. In considering tbis case, tliere may be a tendency to lose sight of the true issue. We are not concerned with what changes may be made by the owners of a corporation to make the business profitable, or whether to adopt rules that encourage or discourage such changes. We are concerned solely with the question of whether investors may purchase the stock of a corporation and reduce or eliminate the tax on the income that they derive from the corporation by reason of the loss generated by the business prior to their acquisition. The purpose of net operating loss carryovers is “to ease the tax burden imposed by annual tax accounting rules on a business which encounters fluctuations extending beyond the accounting period.” Coast Quality Construction Corp. v. United States, 463 F. 2d 503 (C.A. 5, 1972). By the enactment of section 382 (a), Congress laid down the rule that the new owners are not to be allowed to use such carryovers unless they carry on substantially the same business. The applicability of section 382(a) turns on the legal question of what test is to be utilized in determining whether a corporation continues to carry on substantially the same business. Coast Quality Construction Corp. v. United States, supra. Clearly, the statute does not require the new owners to continue exactly the same business; some changes may be made. For example, the new owners may make some changes in the personnel, and products may be Changed from year to year to accommodate to changes in design. However, the Senate committee report stated that a corporation is not carrying on substantially the same business “If * * * the corporation shifts from one type of business to another, discontinues any except a minor portion of its business, changes its location, or otherwise fails to carry on substantially the same trade or business.” S. Rept. No. 1622, supra at p. 285. To be substantially the same, it seems to me as though the permitted changes can be only minor or insubstantial; in other words, to be substantially the same, the new 'business must in most respects constitute the same business operations. See Coast Quality Construction Corp. v. United States, supra. The statute requires that the business operations before the acquisition be compared with the business operations at the end of the year of the acquisition and at the end of the succeeding year. There is no indication in the statute or the legislative history that when 'Congress required merely that the business be substantially the same, it contemplated unlimited or extensive changes necessary to eliminate unprofitable operations. Before the acquisition, Asheville was in the business of manufacturing full-fashioned and seamless hosiery for sale to the public. After the acquisition, its 26 machines, which had been used for the manufacture of full-fashioned hosiery, were converted to the production of the flat fabric which was sold to Glen Eaven. During 1964 and most of 1965, Asheville continued to manufacture seamless hosiery. However, according to the findings of the majority: In order to make room for * * * [the new machines to manufacture additional knit-de-knit fabric for Glen Raven] and to allow the plant to be expanded for these new machines, Asheville’s seamless hosiery knitting machines were moved to Newland and were no longer operated by Asheville by the end of 1965. * * * After Asheville discontinued manufacturing seamless hosiery, the only manufacturing that was conducted by that company was the knitting of yarn into a flat fabric. * * * * * * [Fabric manufactured for hosiery] is white and is shaped as if a lady’s hose were split and ironed out flat. The material is narrow at one end and wide at the other end, and at the wide end the material is different in that it is much heavier. All the flat knit material produced on Asheville’s full-fashioned machines after Glen Raven’s acquisition on May 12,1964, was the same width and texture. By the end of 1965, Asheville was no longer manufacturing hosiery or fabric for hosiery. At that time, the plant of Asheville, some of its equipment, and some of its employees were still being used, but they were being used to supplement the production of knit-de-knit flat fabric for Glen Eaven. The product lines had been completely changed, and the customers were completely different. Although some of the flat fabric which Glen Eaven acquired from Asheville was used to make yarn for the manufacture of hosiery, it was Glen Eaven that converted the fabric into such use. Moreover, since Glen Eaven has the burden of proving that section 382(a) is not applicable, and since we have no evidence as to the amount of the fabric so converted, that use of the fabric does not support Glen Eaven’s position. When Asheville’s operations at the end of 1965 are compared with its operations before the acquisition, it seems clear to me that it was no longer conducting the same business or substantially the same business. Although Ashe-ville was still engaged in the textile industry, the applicability of section 382(a) does not turn on whether the corporation remains in the same industry. In Goodwyn Crockery Co., 37 T.C. 355 (1961), the corporation, before its acquisition, was engaged in the selling of housewares at wholesale ; after the acquisition, a new business was added — selling dry goods at retail. This Court held that section 382(a) was not applicable because under the new ownership, the corporation continued to carry on the business of selling housewares at wholesale, with only minor changes in the customers and the place of doing business. Our decision was affirmed by the Sixth Circuit, although that court expressly indicated that it might not have reached the same conclusion if it had been deciding the matter initially. Commissioner v. Goodwyn Crockery Co., 315 F. 2d 110 (C.A. 6, 1963). Our opinion stands for the proposition that the addition of a new business will not cause section 382 (a) to be applicable, if the former business is also carried on with only minor changes. Euclid-Tennessee, Inc., 41 T.C. 752 (1964), affd. 352 F. 2d 991 (C.A. 6, 1965), certiorari denied 384 U.S. 940 (1966). Bittker & Eustice consider that Goodwyn Crockery represents the probable outer limit of the changes that can be made without causing section 382(a) to become applicable. Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders, par. 16-22, pp. 16-50 (3d ed. 1971). Nevertheless, the Court’s holding in this case goes significantly beyond Goodwyn Orookery. Here, Asheville no longer carried on the business of manufacturing hosiery at the end of 1965. That business had been replaced entirely by the business of manufacturing flat fabrics to be sold to Glen Eaven. Baum and Quealy, JJ., agree with this dissent.