dissenting: In my view, the majority unduly extend the provisions of section 382(a) beyond its intended scope. I think their strict interpretation of section 382(a) (1) (C) ignores the underlying purpose of that provision.
Section 382(a) was enacted to curtail the traffic in net operating losses for the purpose of offsetting income of businesses nmrelated to those which produced the losses. The congressional intention to limit the application of section 382(a) to situations in which the income and losses arise from unrelated businesses is plainly revealed in the committee reports.1
In the case at bar, however, the income in question was undeniably derived from the same business that produced the operating losses for which petitioner seeks a net operating loss carryover. Petitioner’s gross income during the taxable year at issue was primarily attributable to the collection in that year of accounts receivable which had been created during prior years, and to installments received and reported during the taxable year in question pursuant to section'453. The balance of its gross income was derived from sales made during its taxable year ended June 30, 1962. All the income attributable to such sales was absorbed by expenses incurred during the same period so that the reported net income for the taxable year in question was attributable solely to the aforementioned payments on accounts receivable and installment obligations. Under such circumstances, I would not disallow a net operating loss carryover to petitioner. I think that the condition contained in section 382(a) (1) (C) has not been met in the instant case and that section 382(a) is therefore inapplicable.
Section 382(a) (1) (C) provides that a net operating loss carryover shall be disallowed only if “such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership.” Where the new owners do not initiate a new business and instead the corporation continues to derive all of its income solely from the 'business conducted in prior years, I would readily conclude that the corporation continued to carry on the same trade or business within the intendment of section 382 (a)(1)(C).2
The majority suggest that their holding is required by this Court’s prior holding in Fawn Fashions, Inc., 41 T.C. 205 (1963), and by Commissioner v. Barclay Jewelry, Inc., 367 F. 2d 193 (C.A. 1, 1966), involving the reactivation of a dormant business following a change in ownership of a corporation. These cases have disallowed the claimed net operating loss carryover, under section 382(a). See also sec. 1.382 (a)-l(b) (6), Income Tax Regs.
While I agree with the reactivation cases, I think that they are both conceptually and factually distinguishable from the case at bar, and any reliance upon them is misplaced. Therefore, I feel that a fresh consideration of the applicability of section 382(a) to the facts herein presented is in order.
In the case of a business which is dormant at the time a change in ownership takes place but which is subsequently revived by the new owners, the denial of a net operating loss carryover is clearly warranted because, as the Court pointed out in Barclay, the taxpayer seeks to gain the benefit of operating losses incurred in a prior business by offsetting such losses against income generated by a “different business.” The reactivated business, albeit similar in type to the defunct business, can nevertheless be appropriately termed unrelated to such business because of the lack of continuity between them. A change in business may be in the temporal rather than qualitative dimension. Commissioner v. Barclay Jewelry, Inc., supra at 196. By applying section 382(a) to reactivation situations, the effort has been to prevent the trafficking in net operating losses within the same industry which, clearly, is within the framework of and intent of section 382. Clarksdale Rubber Co., 45 T.C. 234, 245 (1965). Significantly, however, the instant case involves a single business operation since no reactivation took place. This salient feature, in my mind, sharply distinguishes the reactivation cases from the case at bar. Unlike Barclay and Fawn Fashions, the income which petitioner seeks to offset by the operating losses of prior years was generated by the same and not an unrelated or different business. I think that section 382(a) cannot apply to a case in which the income sought to be offset consists solely of income realized in prior years, the recognition of which, was deferred to the taxable year in question.
A second rationale suggested in Barclay for restricting the allowance of a net operating loss carryover to cases in which the business continues to operate after the change in ownership is that the purchaser, who is to derive the benefit of the net opearting loss carryover, “presumably, in agreeing on a purchase price, compensated the persons who suffered the loss.” In the instant case, since the collection of accounts receivable and installment payments was, in all probability, anticipated at the time of the change in ownership, petitioner likewise compensated the seller for the net operating loss carryover and therefore should not be denied a net operating loss on this basis either.
The inapplicability of section 382(a) to the instant case is also strongly supported by the regulations thereunder. Section 1.382(a)-1(h) (7) provides:
(7) A corporation has not continued to carry on a trade or business substantially the same as that conducted before an increase in the ownership of its stock if the corporation discontinues more than a minor portion of its business carried on before such increase. In determining whether the discontinued activities are more than “minor” for purposes of the preceding sentence, consideration shall he given to whether the discontinuance of the activities has the effect of utilizing loss carryovers to offset gains of a "business unrelated to that which produced the losses. * * * [Emphasis added.]
Thus, under the regulations, the corporation is treated as not having continued to carry on a trade or business only if the discontinuance of a portion of such 'business has the effect of utilizing loss carryovers to offset gains of a business unrelated to that which produced the losses. No meaningful distinction can be drawn between a partial discontinuance and a complete discontinuance of business activities in this respect. Since the income, in this case, was generated by the same business as the losses in question, it follows that section 382 is inapplicable. The mechanical approach to section 382 (a) (1) (C) adopted by the majority is thus clearly rejected by the regulations.
I think that the denial of a net operating loss carryover in the final year of a business, in which no portion of the reported income is attributable to an unrelated business but rather to business operations of prior years, under section 382(a), goes beyond the intent of Congress in its enactment of section 382(a). Becognizing that the construction placed upon section 382(a) by the majority may be consistent with a narrow reading of the statutory language, I think it entirely unfaithful to the spirit of that section as expressed in the committee reports. I think that the instant case is fundamentally outside the scope of section 382 (a) and that section 382(a) (1) (C) must be construed in this perspective.
Baum, /., agrees with this dissent.S. Rept. No. 1622, 83d Cong., 2d Sess., (1954). See fn. 5 in, tie majority opinion which sets forth the text of this report.
I do not regard petitioner’s statement on brief that tie prior business activities were discontinued as a concession by him that this statutory requirement was not met. I think petitioner’s statement alluded to the facts rather than the legal conclusions to be drawn therefrom.