Before HASTINGS, Chief Judge, and KNOCH and MAJOR, Circuit Judges.
This is a petition for review of a decision of the Tax Court of the United States, sustaining deficiencies in income tax for the fiscal years ending February 28, 1954, 1955, and 1956, assessed against petitioner by respondent. Petitioner was organized on March 3, 1949, as Great American Farm Implement Corporation. At the time of its incorporation, 1795 shares of stock were issued, of which Benjamin A. Snyder and his brother, Warren P. Snyder, each acquired 625 shares, for which they respectively paid $62,500. In 1941, Thomas E. Snyder Sons Company (called "Old Snyder") was incorporated, with Benjamin as President and sole stockholder. The corporate purposes for which Great American was incorporated, so far as here material, were "To make, manufacture, design, own and sell, and otherwise use, deal in, and dispose of all kinds and types of machinery, parts and products." On September 2, 1953, its purpose clause was amended by adding, "and produce, including molasses." Effective March 1, 1954, petitioner (Great American) and Old Snyder agreed to merge under Illinois law. Under the agreement, Old Snyder was to merge into petitioner and the latter change its name to that of Old Snyder, i. e., Thomas E. Snyder Sons Company. The reorganization was duly effected on March 25, 1954.
The findings of the Tax Court are based in the main upon a stipulation entered into by the parties. The only witnesses heard were Benjamin A. Snyder, called by petitioner, and Warren P. Snyder, called by the Commissioner. Thus, there is little if any dispute as to the evidentiary facts, a brief statement of which will be sufficient for our present purpose.
Petitioner (Great American) in its income tax returns for the years 1950 to 1953, both inclusive, reported a substantial net loss for each year. For each of the same years Old Snyder reported a substantial net income. Petitioner (after merger) also reported a substantial normal and surtax net income for the years 1954, 1955 and 1956, the years involved in this proceeding. Against this income, petitioner deducted operating losses sustained and reported during the pre-merger years and thus showed no taxable income. The Commissioner disallowed petitioner's net operating loss deductions and determined deficiencies in income tax for each of the years. This determination by the Commissioner was sustained by the Tax Court. 34 T.C. 400.
In the posture of the case before the Tax Court, the primary issue as stated by that Court was as follows:
"The only question for decision is whether petitioner is entitled to carry over net operating losses incurred in its former farm implement business in prior years against its subsequent earnings from a different type of business not owned at the time of the losses."
Section 129 of the Internal Revenue Code of 1939 (Title 26 U.S.C.A. § 129) provides:
"If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, * * * and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. * *" (So far as here pertinent, Sec. 269, I.R.C. 1954, 26 U.S.C.A. § 269, contains no substantial change.)
The Tax Court found that "Benjamin acquired control of petitioner in 1953," and "The principal purpose of Benjamin for acquiring control of petitioner was to evade or avoid Federal income tax by securing to himself, as sole shareholder, the benefit of petitioner's net operating loss deductions, a benefit or deduction which he would not otherwise have enjoyed."
As we understand, petitioner raised no question before the Tax Court but that Benjamin acquired control in 1953, as found. The main contention was that Section 129 was not applicable because the acquisition of control by Benjamin was not made for the principal purpose of evasion or avoidance of Federal income tax. Petitioner before the Tax Court relied strongly upon the decision of that Court in British Motor Car Distributors, Ltd., 31 T.C. 437. In that and similar cases the Tax Court had held that Sec. 129 applied only where the person acquiring control of a corporation was the taxpayer seeking the benefit of a loss carryover, and that the section did not apply where the taxpayer, as here, was the corporation whose control was acquired. The Tax Court, however, was reversed by the Court of Appeals for the Ninth Circuit. C.I.R. v. British Motor Car Distributors, Ltd., 278 F.2d 392.In the instant case, the Tax Court concluded that it had been in error and agreed with the reasoning and decision of the Court of Appeals. Two other Circuits have joined the Ninth in rejecting the position previously taken by the Tax Court. Mill Ridge Coal Co. v. Patterson, 5 Cir., 264 F.2d 713, and James Realty Co. v. United States, 8 Cir., 280 F.2d 394. In the latter case (page 402) the Court discusses and approves not only these cases but also the decision of the Tax Court in the instant case.
It is not open to question but that the cited cases squarely support the decision under review, based on the findings which the Tax Court made; in fact, petitioner does not contend to the contrary. However, petitioner does urge that there is no substantial support for certain findings essential to support the decision. An important challenge is to the finding that Benjamin acquired control of petitioner in 1953.It is contended that Benjamin and his brother, Warren, acquired control in 1949 when petitioner (Great American) was organized, at which time the two brothers became the owners of more than 50% of petitioner's outstanding shares. Obviously, if this position is sound, the decision could not stand inasmuch as there is no basis for a contention that there was a purpose to evade or avoid taxes at that time.
Petitioner in support of its argument on this point relies upon Sec. 24(b)(2)(B), which states, "An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family," and Sec. 24(b)(2)(D), which states, "The family of an individual shall include only his brothers * * *." No case is cited and we find none in which the question has been raised and it is unfortunate that it was not first presented to the Tax Court.
Petitioner also argues that Commissioner's regulation Sec. 39.129-2(b) supports its contention as to the applicability of Sec. 24(b). As to this regulation, petitioner in its brief states that the "1953 transaction was not an acquisition of control within the meaning of Section 129, because under Section 24(b) and Section 129 operating together, control had been acquired in 1949." Referring to such sections, the regulation states: "The principle of law and the particular sections of the Code are not mutually exclusive and in appropriate circumstances they may operate ...