Appellant made an assessment against appellee of $18,474.08 for income taxes for 1969 and 1970 because of his disallowance of a net operating loss carryover of B. C. Gin Company claimed by B. C. Land Company, Inc., the survivor in a merger of the two corporations, which took place right after July 31, 1969. Thereafter appellee brought this suit to have the assessment set aside. The chancery court held that appellee was entitled to the net operating loss carryover and set the assessment aside. We reverse.
The facts are undisputed. B. C. Land Company, Inc., B. C. Gin Company and B. C. Seed & Mercantile Company were all corporations. The Land Company was incorporated in 1917 and the Gin Company in 1937. J. G. Hoyt, Sr. owned all the stock in both corporations. J. G. Hoyt, Jr. became the sole stockholder of the land company in 1958, by acquiring the interest of a brother, after their father’s death. He owned over 95% of the stock at the time of the merger, having given a few shares to his son. At the time of the merger the land company owned about 7,000 acres of land, which was its principal asset. Prior to the merger this corporation’s principal function was the production of crops on this land, most of which was rented to tenants who paid crop share rentals. The gin company operated several gins. B. C. Seed & Mercantile Company conducted a grain elevator and warehousing operation and processed and stored soybeans and other grains produced on the farm land. All these operations were supported by the 7,000 acres of land. There was a two to three thousand acre cotton allotment on the land company lands. It is not unusual for the owner of 2,000 acres to own a gin in connection with his farming operation and most plantation owners that appellee’s vice president and accountant knew had one or two gins.
Prior to the merger, the principal office of all three corporations was in one location in Leachville, where books of account of all three operations were kept by Mrs. Winnie Pierce. There was no change in the administrative setup after the merger. After the merger, a separate set of records for the gin operation was kept in order that the profitability of the gins could be known.
At the time of the merger, B. C. Gin Company had unused net operating loss carryovers of $53,000 for its fiscal year ending July 31, 1968 and $295,518 for the year ending July 31, 1969. These were claimed as a deduction on the income tax returns of B. C. Land Company for the calendar year of 1969 and subsequent years. The books on the gin operation reflected that the profits thereon after the merger would have been more than enough to absorb the carryovers had the gin company continued in existence. Due to a subsequent merger, there is now only one corporation instead of three, with Hoyt, Jr. the only stockholder in the family enterprise except for his son.
Prior to the mergers, each of the corporations was utilized for a different purpose. Each of their purposes was considered by appellee, according to its vice president and certified public accountant (the only witness who testified), as a different activity in one farming operation. The avowed purpose of having had three separate corporations was to take advantage of federal income tax laws under which the first $25,000 in taxable income of each corporation was subject to a very low federal income tax rate. The merger resulted from the desire of the principal owner of the three corporations to simplify his business operations. Appellant considers the two corporations involved here as being engaged in two different types of business, i.e., farming on the one hand, and the ginning of cotton on the other. He took the position that the business of the survivor had been altered, enlarged and materially affected by the merger. There is no evidence that the land company had ever engaged in ginning cotton or that the gin company had ever engaged in the growing or production of crops. The merger with the seed and mercantile company has no bearing on the issue here.
We have no statute allowing the survivor in a corporate merger to take advantage of a net operating loss carryover of a merged corporation. The only authority in this state is found in the case of Bracy Development Company v. Milam, 252 Ark. 268, 478 S.W. 2d 765. The only significant difference in that case, where we held that the survivor was entitled to the benefit of such a deduction and this one, was that there was no question about the two corporations in Bracy having been engaged primarily in the same business. This primary business was construction of public housing projects. We think this case is governed by what we said in Bracy.
Inasmuch as appellee relies to some extent upon cases we reviewed in Bracy, we will not undertake a complete treatment of these cases. We did extensively review many supporting the opposing views in that case and reached the following conclusions:
We think the better procedure, however, is that followed by the North Carolina court where the “separate taxable entity” theory is not rejected in a proper case, but the “continuity of business enterprise” theory is followed in a proper case. We disagree with the chancellor in the case at bar and hold that the “continuity of business enterprise” theory should apply under the facts of this case.
In reaching that conclusion (there being no specific statute on the subject), we expressed a decided preference for the treatment of the question by the North Carolina courts, which do not reject the “separate entity” theory, under which appellee would be totally barred from claiming the loss in any event. Consequently, this case turns upon whether the merger resulted in a continuity of business enterprise.
We found such a continuity in Bracy, where both the constituent corporations had engaged, prior to merger in the same type, if not identical, business. We made it quite clear that the deduction was allowable in the Bracy case because, following the statutory merger, the business of the survivor “was not altered, enlarged, or materially affected by the merger but that it constituted, or at least included a continuation, of the business enterprise of [the merged corporation] but on a much sounder financial basis, and almost to the exclusion of separate entities.” If it were not for the qualification that the business of the survivor was not altered, enlarged or materially affected, we might well say the chancellor was not in error in drawing an inference from the facts in this case that the remaining criteria of Bracy had been met. But we cannot say he was warranted in reaching the conclusion that, on the evidence presented, the business of B. C. Land Company was not altered, enlarged or materially affected.
In viewing this matter, we must say that appellee failed .to meet its burden of proof in this respect. Although we have never expressly held that the taxpayer has the burden of showing his entitlement to a tax deduction, we have many times held that one (particularly a plaintiff) claiming an exemption from taxation bears the burden of proving clearly that he is entitled to it and to bring himself clearly within the terms of such conditions as may be imposed by statute. Hervey v. Southern Wooden Box, 253 Ark. 290, 486 S.W. 2d 65; Hervey v. International Paper Co., 252 Ark. 913, 483 S.W. 2d 199; C.J.C. Corporation v. Cheney, 239 Ark. 541, 390 S.W. 2d 437; Missouri Pacific Hospital Assn. v. Pulaski County, 211 Ark. 9, 199 S.W. 2d 329: Wiseman v. Town of Omaha, 192 Ark. 718, 94 S.W. 2d 116; Wiseman v. Madison Cadillac Co., 191 Ark. 1021, 88 S.W. 2d 1007, 103 A.L.R. 1208. Reason and the decided weight of authority dictate the application of the same rule to one claiming a deduction, since both exemptions and deductions are privileges allowed merely as matters of legislative grace. White v. United States, 305 U.S. 281, 59 S. Ct. 179, 83 L. Ed. 172 (1938); Palmer v. Commission of Revenue and Taxation, 156 Kan. 690, 135 P. 2d 899 (1943); Christopher v. James, 122 W. Va. 665, 12 S.E. 2d 813 (1941); Fennell v. South Carolina Tax Commission, 233 S.C. 43, 103 S.E. 2d 208 (1958); Arizona State Tax Commission v. Phelps Dodge Corp., 53 Ariz. 252, 88 P. 2d 79, 121 A.L.R. 1458 (1939); Brosnan v. Undercofler, 111 Ga. App. 95, 140 S.E. 2d 517 (1965); 85 C.J.S. 772, Taxation Sec. 1099; 71 Am. Jur. 2d 804, State and Local Taxation Sec. 518. See also Commissioner of Corporation and Taxation v. Adams, 316 Mass. 484, 55 N.E. 2d 697 (1944); Southern Soya Corporation v. Wasson, 252 S.C. 484, 167 S.E. 2d 311 (1969). Deductions from gross income in income tax statutes are in the nature of exemptions, so the general rule as to the burden on the taxpayer is applicable. Bigelow v. Reeves, 285 Ky. 831, 149 S.W. 2d 499 (1941); Tupelo Garment Co. v. State Tax Commission, 178 Miss. 730, 173 So. 656 (1937). Although an income tax case was not involved, we have tacitly accepted the idea that a deduction is in the nature of an exemption in the application of the rule as to the burden on the taxpayer. See Bangs v. McCarroll, 202 Ark. 103, 149 S.W. 2d 53. This is the burden the taxpayer had in this case. Its proof falls far short of a showing that the addition of the business of ginning cotton did not alter, enlarge or materially affect the business of B.C. Land Company. Appellant takes the position that the business was not affected because both operations constituted farming. The ordinary and commonly accepted meaning of the word farming is the act or business of cultivating land (Webster’s New International Dictionary, 2d Ed); the business of operating a farm (The Random House Dictionary of the English Language). Be that as it may, appellee had never engaged in the ginning of cotton prior to the merger and it seems to us that the addition of this operation materially extended its business, which had previously consisted only of the production of crops.
Since we preferred the “continuity of business enterprise” concept in Bracy as expressed in North Carolina in Good Will Distributors (Northern) v. Currie, 251 N.C. 120, 110 S.E. 2d 880, we should look to that case in evaluating the evidence here. When we do, the conclusion that appellee is not entitled to the deduction under the evidence here seems inescapable. In that case the three merged corporations (of which the appellant there was one) had all been engaged in the distribution of books through independent contractors and franchise dealers. The kind of business was identical, but the operations were in different territories with some overlapping. After the merger the same character of business was continued in the same territories. The North Carolina court said there was a continuity of business enterprise when the income producing business has not been altered, enlarged, or materially affected by the merger. It illustrated the meaning by discussing two cases. In the first, Newmarket Manufacturing Co. v. U.S., 233 F 2d 493 (1 Cir., 1956) there was a merger of a parent corporation into its wholly owned subsidiary, created for that purpose. The subsidiary had no business until after the merger. Therefore, the court, in that case, held that the income producing business was unchanged by the merger because in substance there was no change in business but only a change of name. In the second, Industrial Cotton Mills Co. v. Commissioner, 61 F 2d 291 (4 Cir., 1932), a corporation operating a textile manufacturing business was merged into a holding company organized to avoid a financial disaster for the merged corporation by inducing its creditors to accept stock of the holding company in lieu of their claims. Post-merger deduction of the losses of the manufacturing corporation from the post-merger income of the resulting corporation was allowed. Both cases are clear illustrations of the meaning of “continuity of business enterprise.” While we found that meaning sufficiently broad to embrace the Bracy merger, we cannot expand it to encompass the B. C. merger.
It is interesting to note that in Industrial Cotton Mills the court of appeals of the Fourth Circuit said that if the resulting corporation had owned any business or property other than the stock and obligations of the constituent corporation, there would be reason for denying the resulting corporation the right to deduct such loss from its income. It is very significant that the Good Will court reversed the trial court’s holding on stipulated facts that there was a continuity of business enterprise. That court said:
The facts in this case are analogous with those in the Koehler case. Before the merger the three corporations operated in separate territories, though somewhat overlapping, made separate incomes and filed separate income tax returns. By virtue of the merger a larger and more expanded business came into being and included all of the former income producing businesses. There was no continuity of the business of either of the constituent corporations. By reason of the merger a new and more extensive enterprise has emerged. This new enterprise did not suffer the loss and cannot claim a deduction therefor.
As was said in the former opinion of this Court in the instant case, the enactment of loss carry-over legislation by the General Assembly was purely a matter of grace. The provision should not be “construed to give a ‘windfall’ to a taxpayer who happens to have merged with other corporations.” Its purpose “is not to give a merged taxpayer a tax advantage over others who have not merged.” Lisbon Shops, Inc. v. Koehler, supra.
Since we cannot agree that appellee has brought itself within the conditions essential to allowance of the net operating loss carryover of B. C. Gin Company, the decree of the chancery court is reversed and appellee’s action is dismissed.
Byrd and Holt, JJ., dissent.