Kalodner, Seitz, and Aldisert, Circuit Judges.
The question presented is whether the Tax Court erred in holding that the appellant corporation was precluded by Section 382 of the Internal Revenue Code of 1954,*fn1 which prescribes "Special limitations on net operating loss carryovers," from carrying over to its taxable year ended June 30, 1962, a net operating loss sustained in a prior taxable year, because it had sold all of the assets of its retail furniture business and ended the latter's operation some eight months prior to the end of the taxable year.
Relevant to our disposition are these stipulated facts found by the Tax Court:
The taxpayer, S.F.H., Inc. (formerly Sam Fortas Housefurnishing Company, Inc.), had for many years engaged in the business of selling furniture at retail in Memphis, Tennessee. It filed its corporate income tax returns on the basis of a taxable year ended June 30, and reported income from sales in accordance with the installment method of accounting. Taxpayer filed its federal corporate income tax return for the taxable year ended June 30, 1962 with the District Director of Internal Revenue, Philadelphia, Pennsylvania.
For the taxable year ended June 30, 1961, taxpayer incurred a net operating loss of $167,807.18, which arose from the operation of the retail furniture business. After carrybacks, there remained $159,830.76 for carryover to future years.
As of July 1, 1961, all of taxpayer's outstanding capital stock was owned by Son-Mark Industries, Inc. On August 11, 1961, Son-Mark Industries, Inc. sold, in an arm's length transaction, all of taxpayer's capital stock to Chester Tricot Mills, Inc., whose name was later changed to Merion Securities, Inc. ("Merion").
On October 27, 1961, Merion acquired control of Mount Clemens Metal Products Company ("Mount Clemens"), a Michigan corporation. On the same date, taxpayer sold all of its assets, subject to all its liabilities, to Mount Clemens for cash, and then immediately purchased 85,000 shares of the stock of Mount Clemens from Merion.
After October 27, 1961, and on June 30, 1962, the last day of the taxable year in issue, taxpayer had no assets with which to carry on the retail furniture business. After October 27, 1961, taxpayer's only assets were 85,000 shares of Mount Clemens stock, cash of less than $1,000, and a claim for refund of federal income tax in the amount of $6,480.59. Taxpayer did not engage in any other business from October 21, 1961 until its dissolution in its fiscal year ending June 30, 1964. It had no gross income during its fiscal years ending June 30, 1963 and June 30, 1964.
On its income tax return for the year ended June 30, 1962, taxpayer reported gross profit from sales of $349,508.67. This consisted of $131,448.11, gross profit from current year's sales, and $218.060.56, gross profit from prior years' sales realized in the current year, by way of either current year's collections, or the disposition by taxpayer on October 27, 1961, of all of its installment accounts receivable to Mount Clemens. On its income tax return for the year ended June 30, 1962, taxpayer claimed a net operating loss deduction of $133,398.08 comprised entirely of a net operating loss carryover from the year ended June 30, 1961.
In his notice of deficiency, the Commissioner disallowed this net operating loss deduction with the following explanation:
"Within your taxable year ended June 30, 1962, all your capital stock was purchased by new owners, Chester Tricot Mills, Inc., and by the end of said taxable year ended June 30, 1962, you had ceased to carry on the retail furniture business heretofore conducted by you. Accordingly, under the provisions of section 382(a) of the Internal Revenue Code of 1954, the net operating loss carryover from prior taxable years has been disallowed as a deduction in the year ended June 30, 1962."
The Commissioner's determination was sustained by the Tax Court in a reviewed decision, two judges ...