TIMBERS, Circuit Judge:
The questions here presented under the corporate reorganization provisions of the Internal Revenue Code appear to be of first impression, at least in this Circuit.
The corporate taxpayer, The Aetna Casualty and Surety Company, appeals from a judgment entered December 10,1975 in the District of Connecticut, M. Joseph Blumenfeld,
District Judge,
403 F.Supp. 498, granting the government’s motion for summary judgment
and dismissing the complaint in a tax refund action brought by the taxpayer to recover federal corporate income taxes and interest for the taxable year 1963 in amount of $4,467,630.59 claimed to have been erroneously assessed and collected.
The central question is whether the corporate taxpayer, which was a subsidiary organized by its parent solely for the purpose of acquiring the assets and business of one of the parent’s other subsidiaries, should be allowed as a deduction its post-reorganization net operating losses as carry-backs against the pre-reorganization income of its predecessor under §'§ 172 and 381(b)(3) of the Internal Revenue Code.
The answer to this question turns on whether the reorganization qualified as “a mere change in identity [or] form” within the meaning of § 368(a)(1)(F).
For the reasons below, we hold that the reorganization did qualify as a § 368(a) (1)(F) reorganization and that the taxpayer should be allowed to carry back its losses against the pre-reorganization income of its predecessor pursuant to §§ 172 and 381(b) (3). Accordingly we reverse the judgment of the district court and remand with directions to enter judgment for the taxpayer.
I. FACTS AND PRIOR PROCEEDINGS
In view of the district court’s clear, comprehensive and detailed statement of the facts, 403 F.Supp. at 500-04, it is sufficient for our purpose to summarize only the essential facts believed necessary to an understanding of our rulings on the questions presented.
The facts are not in dispute.
(A)
Prior Proceedings
Aetna Life Insurance Company (Aetna Life) is a Connecticut corporation which writes and sells life, accident and health insurance. Prior to December 29,1964 Aetna Life held 61.61% of the outstanding voting common stock of The Aetna Casualty and Surety Company (Old Aetna), a Connecticut corporation which wrote and sold liability, fire, theft, property damage and surety insurance. In November or December 1964 Aetna Life organized Farmington Valley Insurance Company (Farmington Valley), a Connecticut corporation which was a wholly owned shell subsidiary with no business or assets of its own, for the sole purpose of acquiring the business and assets of Old Aetna. On December 29, 1964 Old Aetna was merged into Farmington Valley in a complex, three-party reorganization described more fully below. As a result of this merger and the related stock transfers, minority shareholders of Old Aetna received shares of Aetna Life in return for their Old Aetna shares and the shares of Farmington Valley were placed in trust for the shareholders of Aetna Life. The name of Farmington Valley later was changed to The Aetna Casualty and Surety Company (New Aetna), plaintiff herein.
* * *
Pursuant to the loss carryback provisions of the Code, New Aetna sought to carry
back its net operating losses for the taxable period December 30 through 31, 1964 and the calendar year 1965 against the net income of Old Aetna for the calendar year 1963 and the period January 1 through December 29, 1964.
The IRS allowed New Aetna to carry back the $7,213,547 net operating loss allocated to the period prior to the December 29, 1964 reorganization, see note 5,
supra,
to offset a part of Old Aetna’s 1963 taxable income; but no part of New Aetna’s net operating losses for the periods subsequent to December 29, 1964 was allowed as a carryback to offset Old Aetna’s other 1963 taxable income.
As a result of the disallowance of the latter New Aetna paid federal income taxes for the calendar year 1963 in amount of $4,071,655.21, plus deficiency interest of $395,975.38. New Aetna filed a timely claim for refund to recover the sum of these two amounts ($4,467,630.59) plus statutory interest.
Following the disallowance of New Aetna’s refund claim, the instant action was commenced on August 14, 1973 in the District of Connecticut. Jurisdiction was invoked under 28 U.S.C. § 1346(a) (1970). Both sides moved for summary judgment. The court, having found after a hearing that there was no dispute as to the material facts, filed an opinion on October 15, 1975, 403 F.Supp. 498, granting the government’s motion for summary judgment and denying the taxpayer’s motion for summary judgment. From the judgment entered December 10, 1975 dismissing the complaint, the instant appeal has been taken.
(B)
December 29, 1964 Merger
In order better to focus on the corporate reorganization of December 29, 1964 which is at the core of this case, it is necessary to back up a bit and review certain events which led to that reorganization.
As a result of the Life Insurance Company Income Tax Act of 1959, Pub.L. No. 86-69, § 2(a), 73 Stat. 112, the federal income tax liability of insurance companies such as Aetna Life depended in part on the value of the assets held by the company. The greater the value of the company’s assets, the greater the portion of its income which was subject to tax. See §§ 802(a)(1) and (b), 804(a)(1), 805(a)(1), (b)(2)(B), and (b)(4). Understandably, Aetna Life wished to remove its 61.61% ownership of Old Aetna from its tax base.
Aetna Life also wished to achieve an identity of ownership between the shareholders of Aetna Life and those of Old Aetna. Although the officers and directors of the two companies had been identical for several years prior to the reorganization, they had fiduciary duties to different groups of shareholders because of Aetna Life’s 61.61% stock interest in Old Aetna. This prevented the two companies from further integrating their operations, from selling insurance together, and from taking other business steps which might have achieved operational economies. The diverse stock ownership of the two companies also required elaborate cost allocation accounting procedures.
The obvious way for Aetna Life to remove Old Aetna from its tax base would
have been for Aetna Life to distribute its Old Aetna stock to the Aetna Life shareholders. This would have resulted in taxable income to Aetna Life under § 802(b)(3) which makes certain portions of distributions to shareholders taxable to the life insurance company. See §§ 815(a)(1) and (b)(3).
Aetna Life therefore sought to persuade Congress to amend these provisions of the Code. In 1964 Congress enacted the Act of September 2, 1964, Pub.L. No.
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TIMBERS, Circuit Judge:
The questions here presented under the corporate reorganization provisions of the Internal Revenue Code appear to be of first impression, at least in this Circuit.
The corporate taxpayer, The Aetna Casualty and Surety Company, appeals from a judgment entered December 10,1975 in the District of Connecticut, M. Joseph Blumenfeld,
District Judge,
403 F.Supp. 498, granting the government’s motion for summary judgment
and dismissing the complaint in a tax refund action brought by the taxpayer to recover federal corporate income taxes and interest for the taxable year 1963 in amount of $4,467,630.59 claimed to have been erroneously assessed and collected.
The central question is whether the corporate taxpayer, which was a subsidiary organized by its parent solely for the purpose of acquiring the assets and business of one of the parent’s other subsidiaries, should be allowed as a deduction its post-reorganization net operating losses as carry-backs against the pre-reorganization income of its predecessor under §'§ 172 and 381(b)(3) of the Internal Revenue Code.
The answer to this question turns on whether the reorganization qualified as “a mere change in identity [or] form” within the meaning of § 368(a)(1)(F).
For the reasons below, we hold that the reorganization did qualify as a § 368(a) (1)(F) reorganization and that the taxpayer should be allowed to carry back its losses against the pre-reorganization income of its predecessor pursuant to §§ 172 and 381(b) (3). Accordingly we reverse the judgment of the district court and remand with directions to enter judgment for the taxpayer.
I. FACTS AND PRIOR PROCEEDINGS
In view of the district court’s clear, comprehensive and detailed statement of the facts, 403 F.Supp. at 500-04, it is sufficient for our purpose to summarize only the essential facts believed necessary to an understanding of our rulings on the questions presented.
The facts are not in dispute.
(A)
Prior Proceedings
Aetna Life Insurance Company (Aetna Life) is a Connecticut corporation which writes and sells life, accident and health insurance. Prior to December 29,1964 Aetna Life held 61.61% of the outstanding voting common stock of The Aetna Casualty and Surety Company (Old Aetna), a Connecticut corporation which wrote and sold liability, fire, theft, property damage and surety insurance. In November or December 1964 Aetna Life organized Farmington Valley Insurance Company (Farmington Valley), a Connecticut corporation which was a wholly owned shell subsidiary with no business or assets of its own, for the sole purpose of acquiring the business and assets of Old Aetna. On December 29, 1964 Old Aetna was merged into Farmington Valley in a complex, three-party reorganization described more fully below. As a result of this merger and the related stock transfers, minority shareholders of Old Aetna received shares of Aetna Life in return for their Old Aetna shares and the shares of Farmington Valley were placed in trust for the shareholders of Aetna Life. The name of Farmington Valley later was changed to The Aetna Casualty and Surety Company (New Aetna), plaintiff herein.
* * *
Pursuant to the loss carryback provisions of the Code, New Aetna sought to carry
back its net operating losses for the taxable period December 30 through 31, 1964 and the calendar year 1965 against the net income of Old Aetna for the calendar year 1963 and the period January 1 through December 29, 1964.
The IRS allowed New Aetna to carry back the $7,213,547 net operating loss allocated to the period prior to the December 29, 1964 reorganization, see note 5,
supra,
to offset a part of Old Aetna’s 1963 taxable income; but no part of New Aetna’s net operating losses for the periods subsequent to December 29, 1964 was allowed as a carryback to offset Old Aetna’s other 1963 taxable income.
As a result of the disallowance of the latter New Aetna paid federal income taxes for the calendar year 1963 in amount of $4,071,655.21, plus deficiency interest of $395,975.38. New Aetna filed a timely claim for refund to recover the sum of these two amounts ($4,467,630.59) plus statutory interest.
Following the disallowance of New Aetna’s refund claim, the instant action was commenced on August 14, 1973 in the District of Connecticut. Jurisdiction was invoked under 28 U.S.C. § 1346(a) (1970). Both sides moved for summary judgment. The court, having found after a hearing that there was no dispute as to the material facts, filed an opinion on October 15, 1975, 403 F.Supp. 498, granting the government’s motion for summary judgment and denying the taxpayer’s motion for summary judgment. From the judgment entered December 10, 1975 dismissing the complaint, the instant appeal has been taken.
(B)
December 29, 1964 Merger
In order better to focus on the corporate reorganization of December 29, 1964 which is at the core of this case, it is necessary to back up a bit and review certain events which led to that reorganization.
As a result of the Life Insurance Company Income Tax Act of 1959, Pub.L. No. 86-69, § 2(a), 73 Stat. 112, the federal income tax liability of insurance companies such as Aetna Life depended in part on the value of the assets held by the company. The greater the value of the company’s assets, the greater the portion of its income which was subject to tax. See §§ 802(a)(1) and (b), 804(a)(1), 805(a)(1), (b)(2)(B), and (b)(4). Understandably, Aetna Life wished to remove its 61.61% ownership of Old Aetna from its tax base.
Aetna Life also wished to achieve an identity of ownership between the shareholders of Aetna Life and those of Old Aetna. Although the officers and directors of the two companies had been identical for several years prior to the reorganization, they had fiduciary duties to different groups of shareholders because of Aetna Life’s 61.61% stock interest in Old Aetna. This prevented the two companies from further integrating their operations, from selling insurance together, and from taking other business steps which might have achieved operational economies. The diverse stock ownership of the two companies also required elaborate cost allocation accounting procedures.
The obvious way for Aetna Life to remove Old Aetna from its tax base would
have been for Aetna Life to distribute its Old Aetna stock to the Aetna Life shareholders. This would have resulted in taxable income to Aetna Life under § 802(b)(3) which makes certain portions of distributions to shareholders taxable to the life insurance company. See §§ 815(a)(1) and (b)(3).
Aetna Life therefore sought to persuade Congress to amend these provisions of the Code. In 1964 Congress enacted the Act of September 2, 1964, Pub.L. No. 88-571, § 4(a)(2), 78 Stat. 859, which added,
inter alia,
what is now § 815(f)(3)(B) of the Code.
This provided two avenues by which Aetna Life could distribute its Old Aetna stock without incurring tax liability to itself. § 815(f)(3)(B)(i) excluded from the definition of taxable distributions certain distributions of the stock of an 80% controlled corporation which is an insurance company if the distributing corporation obtained such control pursuant to a § 368(a)(1)(B) reorganization (stock for stock exchange) and if the distributing corporation at all times owned more than 50% of the controlled corporation. § 815(f)(3)(B)(ii) excluded from the definition of taxable distributions certain distributions of the stock of a 100% controlled insurance corporation provided (i) that control was obtained in exchange for the distributing corporation’s own stock; (ii) that the controlled corporation immediately exchanged the distributing corporation’s stock to a third corporation in a § 368(a)(1)(A) reorganization (statutory merger or consolidation) or a § 368(a)(1)(C) reorganization (exchange of stock for assets); and (iii) that the distributing corporation had owned at least 50% of the third corporation’s voting stock.
In order to bring itself within the provisions of the new law and thus avoid incurring tax liability to itself as a result of distributing its Old Aetna stock to its shareholders, Aetna Life devised a plan substantially as follows:
Aetna Life would organize Farmington Valley as a wholly owned shell subsidiary with no business of its own. Aetna Life would issue 13,300,000 shares of its voting common stock and exchange them for all 1,000 shares of Farmington Valley. Then, pursuant to a reorganization plan to be approved by the shareholders of Farming-ton Valley and Old Aetna, Farmington Valley would exchange its Aetna Life stock for the voting common stock held by Old Aetna shareholders in the ratio of 1.9 shares of Aetna Life stock for each share of Old Aetna stock. Aetna Life would retire the Aetna Life stock which it received in return for its 61.61% stock interest in Old Aetna. Farmington Valley would cancel its newly acquired Old Aetna stock. Then by opera
tion of Connecticut’s merger law Farming-ton Valley would succeed to all of the assets and liabilities- of Old Aetna. Farmington Valley would change its name to The Aetna Casualty and Surety Company (New Aetna). Under that name New Aetna would carry on the business of Old Aetna. Aetna Life would distribute the 1,000 shares of Farmington Valley (now New Aetna) by putting them into a trust for the benefit of the Aetna Life shareholders. Evidence of a proportional beneficial interest in the trust would be stapled to each Aetna Life share so that both the Aetna Life shares and its proportional beneficial interest of New Aetna shares in the trust would always be held by the same owner.
On October 21, 1964 the Connecticut Insurance Commissioner approved the plan.
On October 23, 1964 the IRS issued a number of rulings which had been requested by Aetna Life with respect to the plan, including the following: that the merger of Old Aetna into Farmington Valley and the transfer of Aetna Life stock held by Farmington Valley to Old Aetna’s shareholders would constitute a § 368(a)(1)(C) reorganization; and that the transfer by Aetna Life of its New Aetna stock to a trustee for the benefit of Aetna Life shareholders would be non-taxable to Aetna Life and its shareholders under §§ 355 and 311.
On November 24, 1964 the shareholders of Aetna Life and Old Aetna approved the plan. The reorganization was carried out on December 29, 1964.
(C)
Claims In District Court And Rulings Thereon
In support of the taxpayer’s claim that it was entitled to carry back its post-reorganization operating losses against the pre-reorganization income of Old Aetna under §§ 172 and 381(b)(3), New Aetna made three basic arguments in the district court. First, it argued that the transactions pursuant to which it merged with Old Aetna did not constitute a “reorganization” within the meaning of §§ 368 and 381, but merely a “redemption” of the minority shareholders’ interest in Old Aetna.
Casco Products Corp.,
49 T.C. 32 (1967),
appeal dismissed,
No. 32261 (2 Cir., June 11,1968). Second, it argued that, even if there was a ‘‘reorganization,” the merger of Old Aetna into New Aetna constituted a § 368(a)(1)(B) reorganization even if it also constituted a reorganization under § 368(a)(1)(C), and that § 381(b)(3) does not prohibit carrybacks in the case of a § 368(a)(1)(B) reorganization.
Third, it argued that the merger of Old Aetna into the shell which later became New Aetna was a “mere change in identity [or] form” within the meaning of § 368(a)(1)(F) and that New Aetna therefore was entitled to the carryback under § 381(b)(3), which expressly excludes (F) reorganizations from the prohibition against carrybacks.
Judge Blumenfeld held that the merger of Old Aetna into New Aetna was a “reorganization”; that the transactions did constitute a § 368(a)(1)(C) reorganization; and that the merger of Old Aetna into the new shell which became New Aetna was not a “mere change in identity [or] form” within the meaning of § 368(a)(1)(F). In holding that the merger did not qualify as an (F) reorganization, the judge acknowledged that a reorganization could be an (F) reorganization while at the same time falling within one of the other classes of reorganizations defined by § 368(a)(1). He held however that the instant reorganization did not qualify as an (F) reorganization because during its course there was a shift in the ownership of Old Aetna. In support of this holding the judge emphasized the fact that the 38.39% minority shareholders were forced to exchange their Old Aetna stock for Aetna Life stock, together with the
interest in New Aetna which they received as a result of Aetna Life’s placing the New Aetna stock in a trust for the benefit of Aetna Life shareholders.
II. INTERNAL REVENUE CODE PROVISIONS AND THEIR APPLICATION TO THIS REORGANIZATION
(A)
Code Provisions
In view of the complexity of the Code provisions here involved, a brief summary of the relevant provisions, and their interrelationship one to the other, may be helpful to an understanding of our rulings below.
§ 172 provides generally that a corporation may carry back its net operating losses against the three preceding years’ income and that it may carry over such losses to five succeeding years until they are exhausted.
In allowing corporations to spread losses over a nine year period, § 172 is intended to equalize the tax treatment of a corporation whose income may fluctuate from year to year with that of other corporations whose incomes may be relatively constant.
§ 381 deals with carrybacks and carryovers where there has been a corporate “reorganization” as that term is defined in § 368(a)(1). § 381(b)(3) provides that — except for reorganizations under § 368(a) (1)(F) (“a mere change in identity, form or place of organization, however effected”) —the acquiring corporation “in a distribution or transfer described in subsection (a)” may not carry back its losses against the pre-acquisition income of the acquired corporation. Since § 381(a) does not apply to reorganizations under § 368(a)(1)(B) (acquisition by one corporation of the controlling interest in another corporation in exchange for its own or its parent’s stock) or under § 368(a)(1)(E) (recapitalizations), the prohibition of § 381 (b)(3) against carryback does not apply to those types of reorganizations. § 381(b) (3) does prohibit carrybacks after reorganizations under § 368(a)(1)(A) (statutory merger or consolidation).
§ 368 (a)(1)(C) (acquisition by one corporation of substantially all of the assets of another in exchange for the stock of the acquiring corporation or its parent), and § 368 (a)(1)(D) (transfer of assets of one corporation to another where the transferor or its shareholders control the transferee and the transferor distributes to its shareholders its stock in the
transferee)
— unless
the reorganization also qualifies as “a mere change in identity [or] form” under § 368(a)(1)(F).
§ 381(b)(3) does not prevent the acquiring corporation from carrying back its losses against its
own
pre-reorganization income, even if those losses resulted from the operations of the non-surviving corporation. The purpose of § 381(b)(3) was to provide a hard and fast rule that the acquiring corporation may not carry back losses to the pre-reorganization tax years of the transferor corporation — unless the acquisition qualifies as a § 368(a)(1)(F) reorganization. § 381(b)(3) avoids the need for divisional accounting and prevents the manipulation that would result if the acquiring corporation were allowed to apportion current losses between the operations acquired from each of the predecessor corporations.
§ 368, which defines various types of “reorganizations”, depends for its effect on other provisions of the Code. § 354 provides (with qualifications) that there shall be no gain or loss to shareholders who exchange their stock in one corporation for stock in another corporation pursuant to a plan of “reorganization” between the corporations. Under § 361 a corporation does not realize a gain or sustain a loss when it
transfers its assets to another corporation in exchange for stock in the other corporation pursuant to a plan of reorganization. See also §§ 356, 357, 358, 361, 362(b) and 381.
Prior to the 1954 revision of the Code, the lines of demarcation between what are now § 368(a)(1)(F) reorganizations and other types of reorganizations under § 368(a)(1) were not nearly as significant as the boundaries between reorganizations in general and transactions which did not qualify as reorganizations. Under §§ 354 and 361 certain transactions were tax free if carried out pursuant to a plan of reorganization. Distributions to shareholders might be taxed at capital gains rates if made as part of a corporate “liquidation”, while certain distributions of corporate profits to shareholders pursuant to “reorganizations” could be taxed as regular income.
In 1954 Congress completely revised the • Code. With the addition of § 381 and the significance of § 368(a)(1)(F) to the operation of the carryback and accounting provisions of § 381,
it became more important to delineate the boundaries between a § 368(a)(1)(F) reorganization and other types of reorganizations than previously had been the case.
Reef Corp. v. Commissioner,
368 F.2d 125, 136 (5 Cir. 1966),
cert. denied,
386 U.S. 1018 (1967).
Unlike the other subsections of § 368(a)(1) which contain definitions of various types of reorganizations, § 368(a)(1)(F) on its face says very little. What may be “a mere change in identity [or] form” for one purpose may not be for another purpose. At least one other Circuit which has dealt with this provision of the Code, in the context of interpreting the provisions relating to tax-exempt transactions, or determining whether certain corporate transactions constitute liquidations or reorganizations, has assumed that a transaction deemed an (F) reorganization for those purposes must also be an (F) reorganization for purposes of § 381. E. g.,
Estate of Stauffer v. Commissioner,
403 F.2d 611, 619 (9 Cir. 1968); but see
Gordon v. Commissioner,
424 F.2d 378, 384 (2 Cir.),
cert. denied,
400 U.S. 848 (1970). That is a matter we need not decide in the instant case.
(B)
Claims In Court of Appeals And Our Rulings Thereon
Stripped to its essentials, the critical elements of the reorganization here involved were the following: Aetna Life owned 61.61% of Old Aetna. Aetna Life organized New Aetna (then Farmington Valley) as a 100% owned subsidiary solely to acquire Old Aetna. New Aetna had no business or assets of its own. New Aetna acquired Old Aetna’s assets on December 29, 1964. As an incident of the reorganization, the 38.39% minority shareholder's of Old Aetna exchanged their Old Aetna stock for Aetna Life stock. These minority shareholders retained a reduced proprietary interest in the business of the subsidiary upon the distribution by Aetna Life of the New Aetna stock which was placed in a trust for the benefit of Aetna Life shareholders.
New Aetna argues that this reorganization was a § 368(a)(1)(B) one. It also argues that § 381(b)(3) was not intended to apply to a reorganization of this type where the acquiring corporation was a mere shell with no business or tax history of its own.
The government argues that the reorganization was a § 368(a)(1)(C) one. It further argues that-§ 381(b)(3), including the exception for § 368(a)(1)(F) reorganizations, was intended to prevent an acquiring corporation from carrying back its losses to offset the acquired corporation’s pre-reorgani
zation income whenever the reorganization involved a shift in proprietary interests.
We need not rule upon Aetna’s claim that its merger with Old Aetna was a reorganization under § 368(a)(1)(B) even if it also was covered by § 368(a)(1)(C), since under the circumstances of this case § 381(b)(3) does not bar the loss carryback. While the transactions did involve the type of stock-for-stock exchange contemplated by § 368(a)(1)(B), they also involved acquisition of Old Aetna’s assets by New Aetna.
As the district court recognized, however, reorganizations under § 368(a) (1)(A)-(E) may qualify also under § 368(a) (1)(F); and it is well settled that many (F) reorganizations do fit within the types of reorganizations defined by the other subsections of § 368(a)(1).
Gordon v. Commissioner, supra,
424 F.2d at 384;
Associated Machine v. Commissioner,
403 F.2d 622, 624 (9 Cir. 1968);
Reef Corp. v. Commissioner, supra,
368 F.2d at 136;
Davant v. Commissioner,
366 F.2d 874, 883 (5 Cir. 1966),
cert. denied,
386 U.S. 1022 (1967);
Movielab, Inc. v. United States,
494 F.2d 693, 698-99 (Ct.Cl.1974).
Absent the shift in the proprietary interests of the minority shareholders of Old Aetna, there would be no basis for contending that the merger of Old Aetna into a shell corporation, which had no business or assets of its own, did not qualify as a § 368(a)(1)(F) reorganization. The government has acknowledged in the past that such a reorganization is “a mere change in identity [or] form” for purposes of §§ 368(a)(1)(F) and 381(b)(3). E. g.,
Associated Machine
v.
Commissioner, supra,
403 F.2d at 624;
Movielab, Inc. v. United States, supra,
494 F.2d at 697. The government does not contend to the contrary here. We know of no authority for the proposition that the merger of one corporation into a mere corporate shell does not constitute a § 368(a)(1)(F) reorganization.
The government argues, however, that we should reach a different result here merely because the 38.39% minority shareholders of Old Aetna were forced to exchange their Old Aetna stock for Aetna Life stock.
We disagree.
Although this precise question is presented in the instant case for the first time in this Circuit, similar claims have been made in a number of other cases. In
Casco Products Corp. v. Commissioner, supra,
the Tax Court dealt with a very similar situation in which a parent corporation merged a subsidiary into a newly organized shell in order to freeze out a 9% minority shareholder interest. The Tax Court held that the transactions did not constitute a reorganization at all and that the new corporation was entitled to carry back its losses to the premerger tax years of its predecessor.
Reef Corp. v. Commissioner, supra,
involved the merger of one corporation into a different shell corporation, together with the redemption of a 48% minority shareholder interest in the old corporation. There it was the government that urged that the 48% change in proprietary interest did not strip the transactions of their § 368(a)(1)(F) character for purposes of the accounting provisions of § 381(b). The court agreed that there had been an (F) reorganization.
In
Gordon v. Commissioner, supra,
424 F.2d at 384, in the context of applying § 368(a)(1)(F) to § 354(b), we expressed some doubt whether a complete identity of shareholder interest is “an indispensable condition to the invocation of Section 368(a)(1)(F).”
The Code deals extensively with the tax consequences of redemptions. See § 302
et seq.
Those provisions represent a comprehensive set of rules relating to the problems of partial and complete redemptions. Clearly a corporation which merely
redeems its minority shareholders’ stock has not undergone a reorganization at all under § 368(a)(1) and is entitled to carry back its losses under § 172. We see no reason why the result should be different simply because the redemption occurs in the course of merging one corporation into a different shell.
Casco Products Corp.
v.
Commissioner, supra,
49 T.C. at 36;
Reef Corp. v. Commissoner, supra,
368 F.2d at 134-38. If the redemption, reorganization and carry-back provisions were not intended to preclude carrybacks where there has been a simple redemption, we do not believe those provisions should be construed to preclude the carryback here involved.
Accepting arguendo the government’s contention that Aetna Life had independent business reasons for freezing out the minority shareholders during the course of the merger of Old Aetna into New Aetna,
we do not believe that a redemption which occurs in the course of what otherwise would be a § 368(a)(1)(F) reorganization should strip the reorganization of its subsection (F) character. Even assuming that the merger could not be separated from the redemption, as apparently it was possible for the court to do in
Reef Corp.
v.
Commissioner, supra,
368 F.2d at 134, we agree with the reasoning of the Fifth Circuit that a “redemption is not a characteristic of a reorganization. . . .”
Id.
at 136. This view also is implicit in the Tax Court’s reasoning in
Casco Products Corp. v. Commissioner, supra.
We believe that where the issue is whether a corporation is entitled to a carry-back after a corporate reorganization, § 368(a)(1)(F) should be construed with particular sensitivity to the purposes of § 381(b). The interplay between subsections (F) and (A)-(E) gains its principal significance under the Code through the application of § 381(b). Since New Aetna was merely a corporate shell with no business of its own, none of the accounting problems which motivated § 381(b)(3) is present here.
Indeed, since New Aetna had no pre-reorganization tax history of its own, application here of the carryback prohibition contained in § 381(b)(3) would prevent New Aetna from obtaining
any
carry-back of its current losses, even though § 381(b)(3) does not prevent acquiring corporations in other types of reorganizations from carrying back losses to their
own
prereorganization tax years. We do not believe that the mere fact that a redemption has occurred should lead to so Draconian a result, particularly since § 172 manifests a legislative policy in favor of carrybacks which ordinarily would not be affected by a simple redemption.
Moreover, even assuming that § 368(a)(1)(F) should be given a fixed meaning in its application to the different provisions of the Code — a question which we need not decide here — our view of § 368(a)(1)(F) is not inconsistent with the implementation of those other provisions.
In holding that the merger of Old Aetna into New Aetna did not qualify as a § 368(a)(1)(F) reorganization, the district court relied on
Helvering
v.
Southwest Consolidated Corp.,
315 U.S. 194, 202-03 (1942), where the Supreme Court stated that “a transaction which shifts the ownership of the proprietary interest in a corporation is hardly ‘a mere change in identity, form, or place of organization’ . . . .” There the assets of an insolvent corporation were transferred to a new corporation which was owned and controlled by the old corporation’s creditors. The shareholders of the old corporation received only a small minority interest in the new corporation. In determining whether there had been a “sale” of the old corporation’s assets to the new corporation, or merely a reorganization, the Court dealt in one sentence with what is now § 368(a)(1)(F).
Here, unlike
Southwest Consolidated,
there was merely a shift in the proprietary interest of the
minority
shareholders of Old Aetna. The transaction here involved cannot be described accurately as a “sale” of one corporation’s assets to another corporation. We agree with the Fifth Circuit that the instant reorganization might begin to look more like a “sale” — or at least might look less like a § 368(a)(1)(F) reorganization and a redemption — “if the change in proprietary interests were to new persons and less than 50% of the former stockholders’ interest in the old corporation remained in the new corporation.”
Reef Corp.
v.
Commissioner, supra,
368 F.2d at 137. But that is not the situation here.
We conclude that the reorganization of Old Aetna into New Aetna was a § 368(a)(1)(F) reorganization and that New Aetna is entitled to carryback its post-reorganization losses against the pre-organization income of Old Aetna pursuant to §§ 172 and 381(b)(3).
Reversed and remanded with directions to enter judgment for the taxpayer.
ON PETITION FOR REHEARING
Petition for rehearing by the government, addressed to the panel, with respect to this Court’s decision of December 15, 1976.
Petition denied.
PER CURIAM:
The government has petitioned for rehearing, contending that our decision of December 15, 1976 in this case is in conflict with decisions of this and other courts as to the scope of § 368(a)(1)(F) of the Internal Revenue Code of 1954.
We think the government misapprehends the point of our decision. We are concerned in this case only with whether § 381(b)(3) of the Code bars the loss carry-back that New Aetna claimed it was entitled to offset against pre-reorganization income of Old Aetna. In ruling that § 381(b)(3) did not bar the loss carryback, we concluded that the reorganization was exempted from the prohibition of § 381(b)(3) because it fell within the definition of § 368(a)(1)(F), and (F) reorganizations are specifically exempted from the bar of § 381(b)(3). We ruled that the reorganization was an (F) reorganization only for purposes of determining the reach of § 381(b)(3). We specifically declined to decide whether classifying a reorganization as an (F) reorganization for purposes of § 381(b)(3) would necessarily mean it is an (F) reorganization for purposes of other provisions of the Code. Ante 822.
None of the decisions of the Supreme Court or of the Courts of Appeals cited to us by the government as allegedly in conflict with ours involves the issue of whether a reorganization is an (F) reorganization for purposes of § 381(b)(3). Hence we consider our decision to be far narrower than the
government apprehends and not in conflict with any appellate case that has been called to our attention.
We are concerned here with a reorganization in which a corporation is merged into a corporate shell with no prior business or tax history of its own. Since this reorganization presents none of the accounting or allocation problems that might arise in reorganizations involving two corporations each with a prior business and tax history, we concluded that Congress did not intend the loss carryback to be unavailable. In our view, it makes no difference whether effectuating Congressional intent in the circumstances of this reorganization is achieved by construing § 368(a)(1)(F) somewhat broadly to include the reorganization of Old and New Aetna, or by construing § 381(b)(3) somewhat narrowly so as to be inapplicable to this particular reorganization. Either way, a loss carryback favored by the policies of the Code, see §§ 172 and 832(c)(10), and not presenting the problems with which the prohibition of § 381(b)(3) was concerned, is allowed. Having decided only that narrow point, we hold that the petition for rehearing should be denied.