(dissenting).
The majority opinion allows a conglomerate taxpayer to turn a multimillion dollar loss into a profit of approximately half a million dollars. The full import of this holding is that, whenever a corporate subdivision of a conglomerate has sustained substantial losses and becomes worthless, the parent corporation can, by acquiring a profitable business and placing it within the worthless corporate shell of its subsidiary, take a double deduction: one, by the parent for its worthless stock and debt, and, two, by the new business by way of a net operating loss carryover. This shell game means that the Government becomes an insurer of the business risks that the conglomerate undertakes. The decision is an open invitation to a conglomerate with a subsidiary losing money to allow it to become worthless so as to take advantage of a double tax deduction rather than attempt to put the subsidiary on a profitable footing.
The majority and I view the facts, the law and the issue from different perspectives.
The issue, as I see it, is not whether the taxpayer should be prevented from declaring its investment in a wholly owned subsidiary worthless at the time it actually becomes so, but whether the subsequent beneficial use by its wholly owned subsidiary of a loss carryover is a double deduction requiring disallowance of the loss taken by the parent for the worthless stock and debt.
Although I do not quarrel with my brethren’s condensation of the facts, I think they should be set forth more fully so that the relationship between Textron and its subsidiary Hawaiian can be understood and appreciated. A careful analysis of the facts reveals that Hawaiian and Textron operated hand-in-glove and were distinct and separate corporate entities only as a matter of form.
In early 1956, Hawaiian Steamship Company (Steamship), a corporation in no way *1028connected with Textron, purchased a former World War II troop ship, the La Guardia, from the United States Maritime Administration for $3,850,438. The purchase price was largely met by the execution of a note secured by a first mortgage on the ship in favor of the United States. The mortgage provided that Steamship was to recondition the vessel to make it suitable for passenger service between the West Coast and the Hawaiian Islands.
Steamship approached Textron for financial help to refurbish the ship, and an arrangement was entered into whereby Tex-tron purchased the vessel from Steamship at Steamship’s cost and assumed the payment of the first mortgage note held by the Maritime Commission. Textron also agreed to recondition the vessel and charter it to Steamship for fifteen years at the rate of $100,000 per month. To reflect its new purpose, the name of the ship was changed to Leilani.
The operation was never financially successful. By October, 1957, Steamship was three months in arrears on its payment to Textron and owed substantial sums to other creditors. Textron repossessed the ship on November 22,1957. On November 29, 1957, Hawaiian Textron, Inc. (Hawaiian) was incorporated as a subsidiary of Textron which paid $200,000 for 1,000 shares of stock and loaned Hawaiian $600,000 on a 6% note due December 1, 1967. On December 4, 1957, Textron chartered the ship to Hawaiian on substantially the same terms as it had previously been chartered to Steamship.
On February 11, 1958, officials of Tex-tron and the Maritime Administration agreed that title to the ship would be transferred to Hawaiian. Textron guaranteed all conditions of the note and mortgage from the Maritime Administration. Hawaiian issued additional shares of stock and a promissory note to Textron in exchange for title and continued to operate the vessel as well as assuming Textron’s obligations in regard to the Leilani’s operation. Textron also advanced $589,843.32 to Hawaiian in return for an additional, unsecured promissory note.
Hawaiian operated the Leilani at a substantial loss, requiring continued financial assistance from Textron. In an effort to save its sinking business, Hawaiian’s management chartered two additional ships in the hopes that a line with an expanded schedule would attract more customers. This effort was unsuccessful and the Leilani was drydocked.
On May 11, 1959, the Maritime Administration foreclosed on its mortgage and repurchased the ship. Hawaiian was left with a deficiency of $688,176.86. At this point, Hawaiian had no assets except nominal cash, accounts receivable, and office furniture. Total assets on June 6, 1959, were $139,000 with liabilities to creditors other than Textron of $1,254,000. In addition, Hawaiian owed Textron $4,585,476.02 in unpaid debt and accrued interest.
Textron’s investment of nearly $6,000,000 was hopelessly lost and its investment worthless. Textron took tax deductions in the amount of $1,259,714.67 for worthless securities and $4,670,520.02 for bad debts for the taxable year ended January 2, 1960. The amount of the deductions claimed was computed as follows:
Basis of Hawaiian Textron stock $1,259,714.67
Basis of Hawaiian Textron notes 2,725,724.63
Accrued and unpaid interest through June 2, 1959 213,374.61
Open account advances through June 2, 1959 1,646,376.78
Expenses paid on behalf of Hawaiian Textron 85,000.00
$5,930,190.69
At the end of 1959, Hawaiian settled its deficiency with the Maritime Administration for $100,000, and Textron released Hawaiian from all of its obligations as a contribution to Hawaiian’s capital. Hawaiian was now an empty shell with value only for tax purposes.
In April, 1960, Textron acquired the assets of the Bell Defense Group from Bell Aircraft Corporation using Hawaiian as the receptacle. Textron transferred approximately $16,500,000 to Hawaiian to purchase *1029Bell’s assets, and Hawaiian’s name was changed to Bell Aerospace Corporation (Bell).
Bell, in contrast with Hawaiian, made money. Hawaiian’s operating loss carryover of $6,745,025.35 was claimed by Bell (pursuant to section 172 of the Internal Revenue Code), and was first disallowed and then allowed in accordance with a change in the Service’s position in 1963.1 The loss carryover was fully utilized by Bell.
The deductions for the worthless stock and bad debts of Hawaiian under sections 165 and 166 of the Internal Revenue Code, which Textron had already claimed on its return for the taxable year ended January 2, 1960, were disallowed on audit. At the time of the audit, Textron claimed an additional deduction in the amount of $41,541.47 for certain expenses incurred in connection with its investment in Hawaiian which had been capitalized and not fully amortized as of January 2,1960. Textron was assessed a deficiency amounting to $3,974,106.36 plus $768,799.03 for interest of which $3,105,-300.72 in taxes and $600,727.31 in interest are in issue here.
The net result is that Bell, a subsidiary of Textron, has been allowed to offset its profits by using a loss carryover that its predecessor, Hawaiian, had accumulated, and Textron has been allowed an additional tax deduction for its investment in Hawaiian.
At the outset of my analysis, I note that deductions for worthless securities and debts are treated separately in the Internal Revenue Code. Section 166 allows for deductions for bad debts. Subsection (e) specifically provides that it does not apply to worthless securities.2 Section 165 of the Code, which is the general provision for the deduction of losses from gross income, applies to deductions for worthless securities.3
Although Congress may not have foreseen the possibility of worthless securities’ subsequently acquiring value, it definitely anticipated that worthless debts might later acquire value. Accordingly, section 111 of the Internal Revenue Code provides for the recoupment by the Government of any deductions previously allowed for worthless debts which have become valuable to the taxpayer. It excludes from gross income a recovery of a previously deducted bad debt. But where that deduction resulted in an income tax benefit for the year of the deduction, as is the case here, it provides that the recovery must be included in gross income.4
*1030Tax Regulation 1.111-1(2) defines “recovery” to include “the receipt of amounts in respect of the previously deducted or credited section 111 items, such as from the collection or sale of a bad debt, refund or credit of taxes paid, or cancellation of taxes accrued.” The loss carryover taken by Tex-tron’s subsidiary, Hawaiian, would seem to be such a recovery.
I am not suggesting that section 111 is inapplicable to worthless securities. The contrary may well be true. Regulation l.lll-l(a)(4) makes section 111 specifically applicable to worthless securities which are treated as capital losses. I see no reason why it might not also include, by implication, worthless securities treated as ordinary losses under section 165(a).
No distinction was made by the court below or the parties between worthless stock and a worthless debt when they framed the issue in terms of whether Tex-tron’s investment in Hawaiian, both stock and loans, became worthless in 1959 or whether it had value because of the potential use of a loss carryover. In the only ease previously decided on that point, Becker v. United States, 308 F.Supp. 555 (D.Neb. 1970), it was held that a loss carryover did not add value to otherwise worthless securities. Insofar as I can determine from the reported case, Becker was concerned solely with worthless stock. While I concur with the majority that the tax benefits that may accrue to a defunct corporation are not, in and of themselves, sufficient to make an otherwise worthless corporation valuable, I do not think that this determination ends the case.
It is a well established principle that the Internal Revenue Code and the regulations promulgated pursuant to it are not to be construed as permitting a deduction for the same loss twice. United States v. Skelly Oil Co., 394 U.S. 678, 89 S.Ct. 1379, 22 L.Ed.2d 642 (1969); Ilfeld Co. v. Hernandez, 292 U.S. 62, 54 S.Ct. 596, 78 L.Ed. 1127 (1934); Mitchel v. Commissioner of Internal Revenue, 428 F.2d 259 (6th Cir. 1970); Marwais Steel Co. v. Commissioner of Internal Revenue, 354 F.2d 997 (9th Cir. 1965); Missouri Pacific Railroad Co. v. United States, 337 F.2d 637, 167 Ct.Cl. 725 (1964); Ford v. United States, 311 F.2d 951, 160 Ct.Cl. 417 (1963); Candy Bros. Mfg. Co. v. Commissioner of Internal Revenue, 198 F.2d 330 (8th Cir. 1952); Robinson v. Commissioner of Internal Revenue, 181 F.2d 17 (5th Cir. 1950); Comar Oil Co. v. Helvering, 107 F.2d 709 (8th Cir. 1939); Commissioner of Internal Revenue v. National Casket Co., 78 F.2d 940 (3d Cir. 1935); Baltimore and O. R. Co. v. Commissioner of Internal Revenue, 78 F.2d 456 (4th Cir. 1935); Levi Strauss Realty Co. v. United States, 41 F.2d 55 (9th Cir. 1930). The Court in Ilfeld Co., supra, 292 U.S. at 68, 54 S.Ct. at 598, stated:
The allowance claimed would permit petitioner twice to use the subsidiaries’ losses for the reduction of its taxable income. By means of the consolidated returns in earlier years it was enabled to deduct them. And now it claims for 1929 deductions for diminution of assets resulting from the same losses. If allowed, this would be the practical equivalent of double deduction. In the absence of a provision of the Act definitely requiring it, a purpose so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers.
In Marwals, supra, a subsidiary’s carryover losses were denied to its successor parent corporation, which had liquidated its subsidiary, where the parent had previously taken loss deductions for its advances to and investment in the subsidiary.
*1031The majority distinguishes this case from those cited above on the grounds that Tex-tron and its subsidiary are separate taxable entities filing separate, not consolidated, returns. I feel that the court should look to the financial realities of how the corporations act and not the forms used. In interpreting tax law substance must prevail over form. Commissioner of Internal Revenue v. Hansen, 360 U.S. 446, 79 S.Ct. 1270, 3 L.Ed.2d 1360 (1959); Commissioner of Internal Revenue v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958); Wilkinson-Beane, Inc. v. Commissioner of Internal Revenue, 420 F.2d 352 (1st Cir. 1970); Palmer v. Commissioner of Internal Revenue, 354 F.2d 974 (1st Cir. 1965).
The Internal Revenue Code is drawn to lessen or eliminate the burdens of double taxation in the case of a parent corporation and its subsidiary. Even where corporations elect to file consolidated returns pursuant to sections 1501 through 1506, the parent is subject to taxes on only 15% of distributions made prior to 1964 and may avoid taxation on any portion of dividends distributed in later years. Section 243. A corporation may also avoid recognition of a gain on the liquidation of a subsidiary. Section 332. Congress has recognized in these provisions that corporations and their wholly owned subsidiaries are not completely separate entities.
Textron realized that any distinction between Hawaiian and itself was only one of form when it published annual reports to its shareholders containing financial statements which show the results of operations of Textron and its wholly owned subsidiaries on a consolidated basis. The fact that Textron’s funds were freely transferred to Hawaiian for the acquisition of Bell also shows that there was no real distinction between Textron and Hawaiian as separate corporate entities. Hawaiian was used as Textron’s instrument for the purchase of Bell solely to avoid taxes.
It is necessary to look at what actually happened in this case. The operation of Hawaiian was subsidized by funds advanced by Textron totalling $5,971,732.16. Hawaiian’s operating losses totalled $6,745,025.35. Hawaiian’s successor, Bell, was able to use this operating loss carryover to offset its profits.
The money which Hawaiian lost and which allowed it to have a loss carryover was the same money that Textron invested in the securities and notes of Hawaiian. If Textron were not forced to advance funds to Hawaiian under the agreement with the Maritime Administration, Hawaiian would have sunk long before it did. Hawaiian kept afloat only because of the constant infusion of money from Textron, and it was Textron’s funds which Hawaiian lost.
Bell took a tax deduction based on the loss which Hawaiian had incurred pursuant to section 172(b) and Rev.Rul. 63-40,1963-1 Cum.Bul. 46.5 There is no doubt that the securities and debt became worthless to Textron in 1959. But deductions for this investment should not be allowed now since Bell has already deducted the operating losses incurred by Hawaiian from its otherwise taxable income. The net effect of allowing this double deduction is a tax savings to Textron and it subsidiary in excess of the actual loss sustained.
Hawaiian had a total operating loss of $6,745,025.35. This amount was completely used by Bell for the tax years 1960, 1961, *1032and 1962. Textron claimed a deduction for worthless debts and securities in the amount of $5,971,732.16. The tax deductions for Textron and its subsidiary, Bell, total $12,716,757.51. If Textron and Bell are both taxed at the corporate rate of 52%, this deduction is worth $6,612,713.90 to Tex-tron, which is more than the $5,971,000 which it invested in the first place. The majority holding means that the Government has subsidized Textron to the tune of over half a million dollars that it never lost. This is a pretty steep price to pay for avoiding uncertainty in a remote corner of the tax law.
The majority suggests that, because we are considering the first of the double deductions, the one for worthless securities and debts, rather than the second, the loss carryovers, we should ignore the mandate of Ilfeld and Skelly Oil. But the thrust of those decisions is not that deductions should be taken in their proper years, but that we are prohibited from construing the tax code so as to permit the use of a double deduction. Were we free to choose the footing of the case, we might well prefer to disallow the deduction for the loss carryover. But that option is not open to us, and we should follow the holding of Ilfeld and Skelly Oil in the case as presented.
It seems clear that both deductions inure to the benefit of the parent corporation, Textron, and both represent the loss of the same dollars. The result is that Textron is allowed the tax advantage of two deductions for the loss of the same money. This is a situation where, as in Ilfeld, supra, 292 U.S. at 68, 54 S.Ct. at 598, a result “so opposed to precedent and equality of treatment of taxpayers will not be attributed to lawmakers.”
I would reverse the judgment of the district court.
. Rev.Rul. 63-40, 1963-1 Cum.Bul. 46, changed the Internal Revenue Service’s prior position by announcing that, in the absence of a change in stock ownership, it would allow a corporation to use its own net operating loss carryover to offset the income of a newly acquired business.
If this case were the usual situation covered by section 269, where the loss corporation was the one acquired, the loss carryover would not have been allowed.
. “This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C).” Section 166(e).
. Section 165(g)(1) of the Code provides for the deduction of worthless securities which are capital assets in the hands of the taxpayer. Included as a security is “a share of stock in a corporation.” Section 165(g)(2)(A). However, section 165(g)(3) provides that securities
in a corporation affiliated with a taxpayer . . . shall not be treated as a capital asset.
This clearly is the situation in the case at bar.
Since only those worthless securities which are treated as capital assets are deductible under section 165(g)(1), the worthless securities in this case are not deductible under section 165(g) as stated by the parties and the court below. They are, however, deductible under section 165(a). Regulation 1.165 — 5(b) provides:
If any security which is not a capital asset becomes wholly worthless during the taxable year, the loss resulting therefrom may be deducted under section 165(a) as an ordinary loss.
Regulation 1.165 — 5(d) prescribes the rules under which the loss on worthless securities of an affiliated corporation are deductible as an ordinary loss. In order to take advantage of the deductions for worthless securities, the securities must be absolutely worthless. Regulation 1.165-4(a). There is no express provision for the recoupment of deductions for worthless securities which subsequently gain value,
. §111. Recovery of bad debts, prior taxes, and delinquency amounts
(a) General rule. — Gross income does not include income attributable to the recovery during the taxable year of a bad debt . . .
*1030(b) Definitions. — For purposes of subsection (al-
ii) Bad debt. — The term “bad debt” means a debt on account of the worthlessness or partial worthlessness of which a deduction was allowed for a prior taxable year.
* * Sfc if! * 5(5
(4) Recovery exclusion. — The term “recovery exclusion”, with respect to a bad debt, . means the amount, determined in accordance with regulations prescribed by the Secretary or his delegate, of the deductions or credits allowed, on account of such bad debt, . . which did not result in a reduction of the taxpayer’s tax ... reduced by the amount excludable in previous taxable years with respect to such debt . . .
. In Lisbon Shops, Inc. v. Koehler, 353 U.S. 382, 77 S.Ct. 990, 1 L.Ed.2d 924 (1957), the Court ruled that a net operating loss carryover could be used only against income from the very same business which incurred the loss. This was the case regardless of continuity of ownership or form of business. Norden-Ketay Corp. v. Commissioner of Internal Revenue, 319 F.2d 902 (2d Cir.), cert. den., 375 U.S. 953, 84 S.Ct. 444, 11 L.Ed.2d 313 (1963).
The 1954 Code provisions require a change in ownership as well as a change in business. Section 169. The Libson doctrine does not apply to transactions since the enactment of the 1954 Tax Code. Exel v. United States, 451 F.2d 80 (8th Cir. 1971); Frederick Steel Co. v. Commissioner of Internal Revenue, 375 F.2d 351 (6th Cir.), cert. den., 389 U.S. 901, 88 S.Ct. 219, 19 L.Ed.2d 217 (1967); Maxwell Hardware Co. v. Commissioner of Internal Revenue, 343 F.2d 713 (9th Cir. 1965). This result was recognized by the Internal Revenue Service at Rev. Rul. 63-40, 1963-1 Cum.Bul. 46.