76 T.C. 202">*202 OPINION

Respondent1981 U.S. Tax Ct. LEXIS 179">*181 determined deficiencies in petitioner's income taxes for the calendar years 1974 and 1975 in the amounts of $ 41,639.14 and $ 6,269.73, respectively, and an addition to tax under section 6653(a), I.R.C. 1954, for 1974 in the amount of $ 2,081.95.

Due to concessions by the parties, the issues remaining for decision are (1) whether consolidated net operating losses which were incurred by petitioner and its wholly owned subsidiary during the taxable years 1976 and 1977, and which are attributable solely to the subsidiary can be carried back to petitioner's separate return year 1974, and (2) whether any part of petitioner's underpayment of tax for 1974 was due to negligence or intentional disregard of rules and regulations within the purview of section 6653(a).

All of the facts are stipulated. The stipulation of facts, with exhibits attached thereto, is incorporated herein by reference. The relevant facts are as follows.

Petitioner, a Texas corporation incorporated during 1968, has its principal office in Dallas, Tex. Prior to 1974, petitioner was a subchapter S corporation. However, petitioner's subchapter S election was revoked as of January 1, 1974.

76 T.C. 202">*203 B. W. Coastal Sales, 1981 U.S. Tax Ct. LEXIS 179">*182 Inc., was incorporated under the laws of the State of Texas on January 30, 1976. Its name was changed to 20th Century Plastic Pipe, Inc., on April 15, 1976, and it will be hereinafter referred to as BW/20th.

On February 1, 1976, the initial shares of stock in BW/20th were issued as follows: James A. Burch, Sr., 200 shares; James A. Burch, Jr., 200 shares; and Duncan Burch, 1,600 shares. James A. Burch, Jr., and Duncan Burch are the sons of James A. Burch, Sr. During the period February 1, 1976, through March 31, 1976, BW/20th was primarily in the business of purchasing and selling pipes, pipefittings, and other plumbing supplies. On March 10, 1976, the board of directors of BW/20th met to discuss the possibility of BW/20th becoming a wholly owned subsidiary of petitioner. According to the minutes of that meeting, Duncan Burch, the president of BW/20th, stated that this would be accomplished by petitioner's purchasing from the shareholders all of the shares of BW/20th at their stated par value. The directors further determined that such action would be advantageous to BW/20th. On March 31, 1976, the then-existing share certificates of BW/20th were canceled and a share certificate1981 U.S. Tax Ct. LEXIS 179">*183 was issued to petitioner evidencing its ownership of 2,000 shares in BW/20th.

Prior to January 30, 1974, petitioner operated a branch office in Houston, Tex. At that time, Burch-Yates of South Texas, Inc. (hereinafter South), was incorporated and undertook the operation of the business conducted by that branch office. All of the shares of stock in South were initially issued to James A. Burch, Sr. Inventory worth $ 75,000, which was located at the branch office of petitioner, was purchased from petitioner by South. Petitioner did not reflect this sale on its return for 1974. Petitioner concedes that its taxable income for 1974 should be increased in the amount of $ 75,000 to reflect the transfer of that inventory.

Petitioner filed consolidated Federal income tax returns with BW/20th for the years 1976 and 1977. Petitioner and BW/20th incurred consolidated net operating losses during 1976 and 1977 in the amounts of $ 40,808.42 and $ 28,091, respectively. These losses are attributable solely to the operations of BW/20th.

Petitioner contends that the net operating losses incurred during 1976 and 1977 may be carried back to its separate taxable return year 1974. In support of 1981 U.S. Tax Ct. LEXIS 179">*184 this contention, petitioner directs 76 T.C. 202">*204 our attention to section 1.1502-79(a), Income Tax Regs. The general rule regarding the carryover and carryback of consolidated net operating losses is found in section 1.1502-79(a)(1), Income Tax Regs., which states in pertinent part:

(a) Carryover and carryback of consolidated net operating losses to separate return years -- (1) In general. (i) If a consolidated net operating loss can be carried under the principles of section 172(b) and paragraph (b) of section 1.1502-21 to a separate return year of a corporation (or could have been so carried if such corporation were in existence) which was a member in the year in which such loss arose, then the portion of such consolidated net operating loss attributable to such corporation (as determined under subparagraph (3) of this paragraph) shall be apportioned to such corporation (and any successor to such corporation in a transaction to which section 381(a) applies) and shall be a net operating loss carryover or carryback to such separate return year; accordingly, such portion shall not be included in the consolidated net operating loss carryovers or carrybacks to the equivalent consolidated1981 U.S. Tax Ct. LEXIS 179">*185 return year. Thus, for example, if a member filed a separate return for the third year preceding a consolidated return year in which a consolidated net operating loss was sustained and if any portion of such loss is apportioned to such member for such separate return year, such portion may not be carried back by the group to its third year preceding such consolidated return year.

An exception to the general rule is contained in section 1.1502-79(a)(2), Income Tax Regs., which provides:

(2) Nonapportionment to certain members not in existence. Notwithstanding subparagraph (1) of this paragraph, the portion of a consolidated net operating loss attributable to a member shall not be apportioned to a prior separate return year for which such member was not in existence and shall be included in the consolidated net operating loss carrybacks to the equivalent consolidated return year of the group (or, if such equivalent year is a separate return year, then to such separate return year), provided that such member was a member of the group immediately after its organization.

Petitioner's position is that the consolidated net operating losses incurred during 1976 and 1977, which are1981 U.S. Tax Ct. LEXIS 179">*186 solely attributable to BW/20th, may be carried back to the 1974 separate return of petitioner under the authority of the exception provided by section 1.1502-79(a)(2), Income Tax Regs. Petitioner does not contend that section 1.1502-79(a), Income Tax Regs., is invalid. Rather, petitioner argues that BW/20th was a member of the consolidated group immediately after its organization within the meaning of section 1.1502-79(a)(2), Income Tax Regs. We disagree.

Petitioner offers alternative rationales for its assertion that BW/20th was a member of the group immediately after its 76 T.C. 202">*205 organization. Petitioner's primary contention is that the organization of BW/20th was not completed until BW/20th became a wholly owned subsidiary of petitioner. Alternatively, petitioner argues that BW/20th was owned by agents of petitioner during the period January 30, 1976, through March 31, 1976.

Petitioner requests that we liberally construe section 1.1502-79(a)(2), Income Tax Regs., so as to include within the "organization" of BW/20th, as that term is used in the regulation, the incorporation, operation, and conveyance of BW/20th by the original shareholders to petitioner. As a basis for this1981 U.S. Tax Ct. LEXIS 179">*187 request, petitioner asserts that there was no intent on the part of petitioner to employ BW/20th as a tax avoidance device, an assertion which respondent does not assail. However, the absence or presence of a tax-avoidance motive is irrelevant to the issue. Rather, our task is to interpret and apply the applicable law to the facts presented. We find nothing in the clear language of section 1.1502-79(a)(2), Income Tax Regs., or in the case law to support the strained construction urged by petitioner.

Concerning the contention that BW/20th was owned by agents of petitioner, we find the record totally devoid of evidence of an agency relationship. Petitioner has the burden of proving such relationship and clearly has failed to meet that burden.

Section 1501 provides that an affiliated group of corporations shall have the privilege of making a consolidated return of income. An "affiliated group" is defined by section 1504(a) as:

one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if --

(1) Stock possessing at least 80 percent of the voting power of all classes of stock and at least1981 U.S. Tax Ct. LEXIS 179">*188 80 percent of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and

(2) The common parent corporation owns directly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations.