OPINION
The threshold controversy in this case centers around the narrow question of whether the petitioner “continued to carry on a trade or business substantially the same as that conducted before” its stock was purchased by Trippeer. The applicable provision of the law is section 382(a),1 I.R.C. 1954, which imposes special limitations on the use of net operating loss carryovers following certain changes in stock ownership resulting from stock purchase.
There is no dispute about the existence of the requisite percentage change in stock ownership or that a “purchase” of the petitioner’s stock was made by the “persons” described in section 382(a)(2). The only limitation which is in dispute is that imposed by section 382(a)(1)(C).2
Petitioner contends that it was engaged exclusively in the “business” of owning and leasing real estate for 2½ years after the termination of its brewery operations on July 1, 1954. The petitioner admits that after the change in its stock ownership it also engaged in the business of selling and servicing construction equipment, but asserts that adding “an additional line of business does not mean that it failed to continue to carry on a trade or business substantially the same as that conducted before the change in ownership.” To support its contention the petitioner cites our decision in Goodwyn Crockery Co., 37 T.C. 355 (1961), affd. 315 F. 2d 110 (C.A. 6, 1963). Taking the contrary view, respondent argues that the “business” of the loss corporation was “substantially changed” and that the general intent of Congress in enacting section 382 was to prohibit the use of loss carryovers to offset profits of a business unrelated to that which caused the loss.
We agree with petitioner that adding a new business does not necessarily trigger the change-of-business test so long as the “prior business” is continued.3 But just what was the prior business of Gerst? Was it the manufacture and distribution of beer? Or was it merely the temporary rental of its industrial buildings following the abandonment of its brewery operations? In our opinion the correct answer— and certainly the realistic one under these facts and circumstances— is that the “prior business” was the manufacture and distribution of beer and not the leasing of its real property.
Both the regulations4 and the Senate Committee report5 clearly indicate that the very transaction section 382(a) seeks to prohibit is the stock puchase made “for the purpose of” using a carryover to offset profits of a business unrelated to that which caused the losses. The petitioner’s sole business from 1931 until July 1, 1954, when it operated as the William Gerst Brewing Co., Inc., was the manufacture and distribution of beer. Prior to the abandonment of its brewery operations, petitioner had incurred substantial losses for 3 successive years. When the termination of the brewery business occurred, its principal assets consisted of the brewery equipment and the real property which it owned. The brewery equipment was sold, but Gerst was unable to arrange for an advantageous sale of its land and buildings. Consequently, it retained the real property and leased it. There is no doubt that renting property was not one of the business purposes for which Gerst was formed. Its corporate charter was never changed to reflect leasing as a business purpose, although technically under Tennessee law it had the power to rent its realty. But it had no intention of permanently doing so. The property was always for sale.
While it is true that Gerst incurred losses of $6,023.44 in 1955 and $5,112.50 in 1956 from leasing its property, these amounts were small by comparison with the previous losses of $302,069.48 incurred in the brewery operations. Respondent submits, and we agree, that the most reasonable and logical interpretation of the phrase “continued to carry on a trade or business substantially the same,” as used in this statutory contest, means the active business, viz, the manufacture and distribution of beer, which actually incurred the losses. See sec. 1.382(a)-1(h)(6), Income Tax Regs., and compare Fawn Fashions, Inc., 41 T.C. 205, 214 (1963). Gerst Brewing Co. had terminated its regular business activities and the stockholders rented the real property (1) as a step in the process of disposing of all the brewery assets, and (2) as a means of minimizing its losses until an advantageous sale thereof could be arranged. Had it not owned its own real property it would have been completely inactive in 1957. To allow the petitioner the net operating losses merely because it happened to own the property in which it conducted the business for which it was created, but which had been terminated, would confer upon the petitioner benefits wholly beyond the spirit and intendment of section 382(a).
Petitioner argues that the primary, bona fide business purpose in the acquisition of its stock by Trippeer was to supply Euclid with a place to relocate its heavy equipment and machinery business at a time when it looked like Euclid’s location would be taken for the construction of a new highway. Nevertheless, it is frankly admitted by petitioner that both Trippeer and Euclid knew about Gerst’s prior net operating losses and that the tax advantage was an inducement to the purchase of Gerst’s stock. It seems to us that the merger of Euclid into South Nashville Properties, Inc. (Gerst), was not necessary because the property acquired by Trippeer through its purchase of Gerst’s stock could have been rented by Trippeer to Euclid. This at least casts some doubt on the genuineness of the alleged business purpose for the acquisition of Gerst’s stock and the subsequent merger. Certainly the petitioner would be the beneficiary of an artificial tax situation.
There are several objective factors in this case which reflect that the business was in fact substantially Changed in such a manner that the petitioner did not continue substantially the same trade or business. The property rentals were very insignificant in relation to the total income derived from the heavy equipment business. The pertinent figures are shown in our Findings of Fact. After the merger, rental income comprised about 1 percent of petitioner’s gross income. Although the statute does not define the word “substantial,” we think it is safe to say that Congress did not contemplate a ratio of 99 to 1 in favor of the added business.
The basic Character of the business was also substantially changed by the addition of new employees, new customers, and the new product — heavy equipment and machinery. The charter of the corporation was likewise changed to correspond with that of the old Euclid-Tennessee, Inc. Other prime factors indicating a change in the business are the change in name and the change in location. The petitioner immediately took the name of the profitable corporation which was absorbed by it. And it continued to operate from the location of the profitable business and adopted this new address as its business address. These facts point to a substantial change in petitioner’s business as contrasted with a continuation of substantially the same business.
We have carefully considered the case of Goodwyn Crockery Co., supra, which is principally relied upon by the petitioner, but find that it involved a factual situation so different from that present herein that we regard it as distinguishable.
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OPINION
The threshold controversy in this case centers around the narrow question of whether the petitioner “continued to carry on a trade or business substantially the same as that conducted before” its stock was purchased by Trippeer. The applicable provision of the law is section 382(a),1 I.R.C. 1954, which imposes special limitations on the use of net operating loss carryovers following certain changes in stock ownership resulting from stock purchase.
There is no dispute about the existence of the requisite percentage change in stock ownership or that a “purchase” of the petitioner’s stock was made by the “persons” described in section 382(a)(2). The only limitation which is in dispute is that imposed by section 382(a)(1)(C).2
Petitioner contends that it was engaged exclusively in the “business” of owning and leasing real estate for 2½ years after the termination of its brewery operations on July 1, 1954. The petitioner admits that after the change in its stock ownership it also engaged in the business of selling and servicing construction equipment, but asserts that adding “an additional line of business does not mean that it failed to continue to carry on a trade or business substantially the same as that conducted before the change in ownership.” To support its contention the petitioner cites our decision in Goodwyn Crockery Co., 37 T.C. 355 (1961), affd. 315 F. 2d 110 (C.A. 6, 1963). Taking the contrary view, respondent argues that the “business” of the loss corporation was “substantially changed” and that the general intent of Congress in enacting section 382 was to prohibit the use of loss carryovers to offset profits of a business unrelated to that which caused the loss.
We agree with petitioner that adding a new business does not necessarily trigger the change-of-business test so long as the “prior business” is continued.3 But just what was the prior business of Gerst? Was it the manufacture and distribution of beer? Or was it merely the temporary rental of its industrial buildings following the abandonment of its brewery operations? In our opinion the correct answer— and certainly the realistic one under these facts and circumstances— is that the “prior business” was the manufacture and distribution of beer and not the leasing of its real property.
Both the regulations4 and the Senate Committee report5 clearly indicate that the very transaction section 382(a) seeks to prohibit is the stock puchase made “for the purpose of” using a carryover to offset profits of a business unrelated to that which caused the losses. The petitioner’s sole business from 1931 until July 1, 1954, when it operated as the William Gerst Brewing Co., Inc., was the manufacture and distribution of beer. Prior to the abandonment of its brewery operations, petitioner had incurred substantial losses for 3 successive years. When the termination of the brewery business occurred, its principal assets consisted of the brewery equipment and the real property which it owned. The brewery equipment was sold, but Gerst was unable to arrange for an advantageous sale of its land and buildings. Consequently, it retained the real property and leased it. There is no doubt that renting property was not one of the business purposes for which Gerst was formed. Its corporate charter was never changed to reflect leasing as a business purpose, although technically under Tennessee law it had the power to rent its realty. But it had no intention of permanently doing so. The property was always for sale.
While it is true that Gerst incurred losses of $6,023.44 in 1955 and $5,112.50 in 1956 from leasing its property, these amounts were small by comparison with the previous losses of $302,069.48 incurred in the brewery operations. Respondent submits, and we agree, that the most reasonable and logical interpretation of the phrase “continued to carry on a trade or business substantially the same,” as used in this statutory contest, means the active business, viz, the manufacture and distribution of beer, which actually incurred the losses. See sec. 1.382(a)-1(h)(6), Income Tax Regs., and compare Fawn Fashions, Inc., 41 T.C. 205, 214 (1963). Gerst Brewing Co. had terminated its regular business activities and the stockholders rented the real property (1) as a step in the process of disposing of all the brewery assets, and (2) as a means of minimizing its losses until an advantageous sale thereof could be arranged. Had it not owned its own real property it would have been completely inactive in 1957. To allow the petitioner the net operating losses merely because it happened to own the property in which it conducted the business for which it was created, but which had been terminated, would confer upon the petitioner benefits wholly beyond the spirit and intendment of section 382(a).
Petitioner argues that the primary, bona fide business purpose in the acquisition of its stock by Trippeer was to supply Euclid with a place to relocate its heavy equipment and machinery business at a time when it looked like Euclid’s location would be taken for the construction of a new highway. Nevertheless, it is frankly admitted by petitioner that both Trippeer and Euclid knew about Gerst’s prior net operating losses and that the tax advantage was an inducement to the purchase of Gerst’s stock. It seems to us that the merger of Euclid into South Nashville Properties, Inc. (Gerst), was not necessary because the property acquired by Trippeer through its purchase of Gerst’s stock could have been rented by Trippeer to Euclid. This at least casts some doubt on the genuineness of the alleged business purpose for the acquisition of Gerst’s stock and the subsequent merger. Certainly the petitioner would be the beneficiary of an artificial tax situation.
There are several objective factors in this case which reflect that the business was in fact substantially Changed in such a manner that the petitioner did not continue substantially the same trade or business. The property rentals were very insignificant in relation to the total income derived from the heavy equipment business. The pertinent figures are shown in our Findings of Fact. After the merger, rental income comprised about 1 percent of petitioner’s gross income. Although the statute does not define the word “substantial,” we think it is safe to say that Congress did not contemplate a ratio of 99 to 1 in favor of the added business.
The basic Character of the business was also substantially changed by the addition of new employees, new customers, and the new product — heavy equipment and machinery. The charter of the corporation was likewise changed to correspond with that of the old Euclid-Tennessee, Inc. Other prime factors indicating a change in the business are the change in name and the change in location. The petitioner immediately took the name of the profitable corporation which was absorbed by it. And it continued to operate from the location of the profitable business and adopted this new address as its business address. These facts point to a substantial change in petitioner’s business as contrasted with a continuation of substantially the same business.
We have carefully considered the case of Goodwyn Crockery Co., supra, which is principally relied upon by the petitioner, but find that it involved a factual situation so different from that present herein that we regard it as distinguishable.
In the Goodwyn case, the taxpayer, after the change in ownership, moved its principal office from Memphis, Tenn., to Cairo, Ill., and later to Scottsville, Ky.; experienced a turnover of employees; added a dry goods line to its durable household goods line, which constituted much of its business; began to operate as a retailer in addition to continuing to operate as a wholesaler; and integrated its operations with those of the acquiring corporation. We categorized the issue as requiring “a finding of absence or presence of substantial sameness of the trade or business.” Reading the statute literally, we said that there could be some changes in the manner of conducting a trade or business without violating the requirement that the business in question remain “substantially the same.” Thus, we found as a fact that, despite the many changes that occurred after the change in stock ownership, the basic character of Goodwyn’s business remained unchanged, stating:
It did business under the same name in the same area as a seller of general merchandise to the same type of customers.
In essence, this Court held in the Goodwyn case that what had taken place was not a change of business but an expansion from a wholesale seller of merchandise to an integrated wholesale-retail organization. The same merchandise was sold in the same area but in a different manner. That, of course, is far different from what we have here— an attempt to offset the losses of a brewery, which had not carried on its norma] business activities for 2y2 years prior to the sale of its stock, against the profits of a heavy equipment business which was merged into it.
In Goodwyn the mere purchase of an additional line of business did not assure that any profits would ever be made to offset against its losses; whereas the merger of the heavy equipment business into the petitioner assured the petitioner of profits so that it could utilize the losses. In Goodwyn the addition of the new line of business was directly related to its previously conducted business and there was no change in the name of the company; whereas in this case the heavy equipment business had no direct relation to either the brewery business or the leasing of property. Because of this fact the petitioner changed its name to that under which the heavy equipment business was conducted. Moreover, the leasing of property was insignificant in the overall operations of the petitioner after the merger. This was not true of the additional business added in Goodwyn. And, finally, in Goodwyn the additional line of business was not previously owned by the same controlling interests; whereas in the instant case Trippeer, a bolding company, owned all the stock of the petitioner and the heavy equipment business which was merged into the petitioner.
After considering the factors previously discussed in the light of section 382(a), we have concluded that the basic character of the brewery business, which produced almost all of the losses, was so changed that it did not continue to carry on “substantially the same” business which generated the profits. Unlike the Goodwyn case, where a new line of business was added but the old business continued, we simply view the composite facts in this case as clearly demonstrating that the old business — the brewery operations and not the subsequent, insignificant leasing of its industrial property — has not continued substantially unchanged. Accordingly, we sustain respondent’s disallowance of the net operating losses.
So holding, we find it unnecessary to decide, as respondent urges us to do, whether the principal purpose of the acquisition by Trippeer of Gerst’s stock was to evade or avoid tax under the provisions of section 269 (a). See Federal Cement Tile Co., 40 T.C. 1028 (1963), on appeal (C.A. 7, Feb. 17, 1964).
Decision will be entered for the respondent.