48 T.C. 318">*319 This case involves the 1959 income tax liability of a California corporation known as Associated Machine Shop. Its return for 1959 disclosed taxable income in the 1967 U.S. Tax Ct. LEXIS 93">*94 amount of $ 142,655.06. In 1960, Associated Machine Shop was merged into another California corporation, J & M Engineering, which simultaneously changed its name to Associated Machine, the petitioner here. In 1962, Associated Machine sustained a net operating loss. The respondent tentatively allowed, but later disallowed, the carryback of Associated Machine's 1962 loss of $ 82,863.30 to reduce the 1959 income of the former corporation, Associated Machine Shop. Since respondent's tentative allowance of the claimed carryback of the loss resulted in a tax refund to Associated Machine, successor to Associated Machine Shop, his subsequent disallowance of the loss carryback resulted in a deficiency of $ 43,088.91 in the income tax liability of Associated Machine, the successor to Associated Machine Shop.

The sole issue is whether a deduction for 1959, for a carryback of a net operating loss of the Associated Machine corporation is or is not allowable under the provisions of section 381, 1954 Code, which, under certain circumstances, prohibits the carryback of a net operating loss. The narrow question is whether the merger in 1960 of Associated Machine Shop into the petitioner corporation 1967 U.S. Tax Ct. LEXIS 93">*95 (formerly J & M Engineering Corp.) came within the provisions of subparagraph (F) of section 368(a)(1), so as also to come within the provisions of section 381(b).

FINDINGS OF FACT

The stipulated facts are so found and are incorporated herein by reference.

The petitioner corporation, Associated Machine, filed its return for 1962 with the district director of internal revenue in San Francisco, Calif. The former corporation, Associated Machine Shop, filed its return for 1959 with the district director of internal revenue in San Francisco.

For the purposes of clarity and convenience, the corporation whose income tax liability for 1959 is at issue here is referred to throughout as Associated Machine Shop, its then corporate name, or as Machine Shop. The corporation into which Associated Machine Shop was merged in 1960 is referred to hereinafter as Associated Machine (formerly J & M Engineering). The petitioner's present name is "Associated Machine," but since the 1960 merger of the two California corporations is involved, it is necessary to refer to each corporation by the above names.

48 T.C. 318">*320 Associated Machine Shop, a Corporation. -- The business to which Associated Machine Shop succeeded was 1967 U.S. Tax Ct. LEXIS 93">*96 carried on originally by a partnership created on January 1, 1951, consisting of three partners, which later, in 1958, was conducted as a sole proprietorship. The three equal partners were Joseph, Frank, and John Schiavo. Joseph acquired, in May 1958, all of the interests of Frank and John and thereafter operated as a sole proprietor. Both the partnership and the proprietorship conducted business under the name "Associated Machine Shop."

On September 10, 1958, a California corporation was organized under the same name. All of its issued stock, 503 shares of common stock having a par value of $ 100 per share, was issued to Joseph Schiavo, who continued thereafter to be the sole stockholder. The corporation acquired and carried on the business formerly conducted by the sole proprietorship. However, only certain assets of the proprietorship were transferred to the corporation in exchange for the 503 shares of stock, namely, work in process, accounts receivable, small tools, automobiles, and office equipment. Joseph retained the ownership of the land and building (where the business was operated) at 1061 Richard Street, Santa Clara, Calif. as well as the major equipment and machinery; 1967 U.S. Tax Ct. LEXIS 93">*97 he leased the building, machinery, and equipment to the corporation under a written lease.

Associated Machine Shop, the corporation, kept its books and reported its income on the basis of a calendar year and employed an accrual method of accounting.

The officers of Associated Machine Shop were: Joseph Schiavo, president; Marcella Schiavo, vice president; and Fred Abildgaard, secretary-treasurer. All of the officers were directors.

At the time of its incorporation and thereafter the principal business of Associated Machine Shop was the operation of a general machine shop business. More particularly, it fabricated by machining processes metal parts for use in the manufacture of aircraft, missiles, and computers.

In its return for 1959, Associated Machine Shop reported the following amounts of gross receipts, gross profit, deductions, and taxable income:

The respondent adjusted the amount of the taxable income for 1959, upon audit, to $ 142,655.06, about which there is no dispute here.

48 T.C. 318">*321 In the spring of 1959, Associated Machine Shop moved from 1061 Richard Street 1967 U.S. Tax Ct. LEXIS 93">*98 to a building located at 2222 Ronald Street in Santa Clara. The properties located at 2218 and 2222 Ronald Street were owned by Joseph Schiavo. He leased 2222 Ronald Street to Associated Machine Shop.

Associated Machine Shop's customers in 1960 included the following: IBM, Lockheed, Dumont, Aerojet-General, and Food Machinery Corp. The following list shows, for the period January 1 to November 30, 1960, the customers and the respective amounts of Machine Shop's sales to each customer:

J & M Engineering, a Corporation. -- Joseph Schiavo organized another California corporation on December 14, 1959, J & M Engineering. The primary purpose was to have J & M conduct a sheet metal fabrication business, which, for example, consisted of making cabinets and other such items out of sheet metal. All of its issued stock, 50 shares of common stock having 1967 U.S. Tax Ct. LEXIS 93">*99 a par value of $ 100 per share, was issued to Joseph. The officers and directors at all times were Joseph, president, Marcella Schiavo, vice president, and F. Abildgaard, secretary-treasurer. J & M reported its income on the basis of a fiscal year from December 1 to November 30. Its first taxable period began on December 14, 1959.

On November 30, 1960, Associated Machine Shop was merged into J & M Engineering.

Joseph constructed, in the spring of 1960, a building at 2218 Ronald Street, Santa Clara, on land owned by him. This property is adjacent to the property where the plant of Associated Machine Shop was located. Joseph leased the building to J & M; and he also leased to J & M sheet metal fabrication equipment consisting of heliarc equipment, rolls, brakes, punch presses, and shears. In order to use up space in the new building at 2218 Ronald Street, Associated Machine Shop leased to J & M some of the pieces of machine shop equipment which Joseph had leased to Machine Shop.

J & M began production in the spring of 1960. Its sheetmetal business was directed to producing cabinetry for companies that built computers. During its first taxable period, ending November 30, 1960, about 1967 U.S. Tax Ct. LEXIS 93">*100 25 percent of J & M's business was derived from sheetmetal 48 T.C. 318">*322 fabrication. In operating its sheetmetal business, J & M hired trained individuals and a foreman to take charge of the sheetmetal operations.

During the period December 14, 1959, to November 30, 1960, both Machine Shop and J & M maintained separate bookkeeping and accounting records. During the same period, Machine Shop and J & M purchased materials, supplies, and services in their respective names and capacities, and paid for them with their own funds. During the same period, Machine Shop and J & M held separate shareholders and directors meetings; each corporation had its own separate employees; and each corporation contracted with its own customers.

At various times, Machine Shop and J & M would work on the same job order, and when that was done, an allocation of costs, including labor, was made between the two corporations for both accounting and billing purposes.

At all times, J & M and Machine Shop maintained its own separate corporate seal, minute book, stock register book, and bank account.

From the time of its incorporation until its merger with J & M on November 30, 1960, Machine Shop was engaged in the active conduct 1967 U.S. Tax Ct. LEXIS 93">*101 of its own separate business. During the period December 14, 1959, to November 30, 1960, J & M was engaged in the active conduct of its own separate business.

The customers of J & M from December 14, 1959, to November 30, 1960, and its sales to them were as follows:

In its income tax return for the period December 14, 1959, to November 30, 1960, J & M reported gross receipts, deductions, and a loss, as follows:

48 T.C. 318">*323 The Merger of Machine Shop into J & M -- On November 5, 1960, Joseph and F. Abildgaard, as the officers of J & M and Machine Shop, respectively, pursuant to the authority of the directors and the sole stockholder of each corporation, entered into a written agreement for each corporation which provided, inter alia, for the merger of Machine Shop into J & M. It was provided in this agreement that J & M would be the surviving corporation 1967 U.S. Tax Ct. LEXIS 93">*102 and that Machine Shop would be the disappearing corporation, and that the effective date of the merger would be the date of the filing of the executed merger agreement with the secretary of state of California; and that as of the effective date of the merger, the name of the J & M Engineering corporation would be changed to Associated Machine (without the word "Shop"); and that the articles of incorporation of J & M would be so amended. This merger was to be effected under section 4100 et seq. of the California Corporation Code. As part of the proceedings, Joseph and Abildgaard, as officers, filed under Cal. Corp. Code sec. 4113, an application for a permit to issue stock in exchange for stock on November 5, 1960, with the Division of Corporations of California, along with the executed merger agreement, and the financial statement of each corporation.

On November 21, 1960, the commissioner of corporations certified, under section 4113, that in his opinion a permit was not required under the Corporate Securities Law in the matter of the proposed merger between Machine Shop and J & M. The merger became effective on December 1, 1960. Pursuant to the agreement, J & M changed its name 1967 U.S. Tax Ct. LEXIS 93">*103 to Associated Machine.

The merger of Machine Shop into J & M was effected by J & M's issuance of 503 shares of its authorized common stock, $ 100 par value per share, in exchange for all of the outstanding 503 shares of common stock of Machine Shop, at the rate of 1 share for 1 share.

Subsequent to the merger, Associated Machine (formerly J & M) continued to operate both a general machine shop business and a sheet metal fabrication business.

For income tax purposes, J & M, and later Associated Machine, employed an accrual method of accounting.

In its final income tax return, for the period January 1 to November 30, 1960, Associated Machine Shop showed income of $ 26,790.66. In 1962, respondent audited both Machine Shop's final tax return, and J & M's tax return for the period December 14, 1959, to November 30, 1960, and made an agreed allocation of $ 3,540 of expenses claimed by Machine Shop on its return, to J & M, pursuant to section 482, 1954 Code. The $ 3,540 allocation increased J & M's loss for the period ending November 30, 1960, from $ 101.70 to $ 3,641.70. Associated Machine 48 T.C. 318">*324 (formerly J & M) carried this loss of $ 3,641.70 forward as a carryover of a net operating loss deduction 1967 U.S. Tax Ct. LEXIS 93">*104 on its return for the fiscal year ended November 30, 1961; respondent allowed this loss carryover deduction.

For its fiscal year ended November 30, 1962, petitioner (formerly J & M) reported a loss of $ 82,863.30.

On February 18, 1963, Associated Machine (formerly J & M), the petitioner, filed an "Application for Tentative Carryback Adjustment," carrying back the $ 82,863.30 loss for its fiscal year ended November 30, 1962, to offset Associated Machine Shop's taxable income, as adjusted, for the calendar year 1959. On this application, petitioner noted, "Associated Machine Shop merged with Associated Machine 11-30-60. This application is being filed by Associated Machine, but the carryback pertains to Associated Machine Shop for the calendar year 1959."

On March 12, 1963, respondent allowed the tentative carryback adjustment in the full amount claimed, and he refunded $ 43,088.91, plus interest, to the petitioner, Associated Machine.

In his statutory notice of deficiency (from which this case arose), dated June 2, 1965, the respondent determined that the net operating loss of Associated Machine, (which actually was J & M Engineering before its corporate name was changed to Associated 1967 U.S. Tax Ct. LEXIS 93">*105 Machine), for the fiscal year ended November 30, 1962, in the amount of $ 82,863.30, (which respondent had allowed tentatively as a loss carryback), could "not be carried back and applied against the premerger income of Associated Machine Shop" for its calendar year 1959. Respondent disallowed the claimed deduction for an operating loss carryback to 1959, and the income tax deficiency for 1959, in respect to the premerger income of Machine Shop, was the result of the final determination, namely, a tax deficiency of $ 43,088.91 for 1959, which is in issue here. Respondent addressed his statutory deficiency notice, as follows, "Associated Machine (Formerly Associated Machine Shop)." That designation meant that the deficiency related to the premerger income of Associated Machine Shop for its taxable period, the 1959 calendar year. J & M Engineering Corp. was the former name of the petitioner, Associated Machine.

OPINION

The parties are agreed that the merger of Associated Machine Shop into J & M Engineering in 1960 qualified as a tax-free reorganization under section 368(a)(1)(A), 1954 Code; it was a statutory merger within section 4100 of the California Corporation Code. The question 1967 U.S. Tax Ct. LEXIS 93">*106 is whether the "reorganization" represented and involved "a mere change in identity, form, or place of organization" within the meaning 48 T.C. 318">*325 of section 368(a)(1)(F). ¹ The respondent determined and contends that the merger involved changes in the structure of more than one corporation (two corporations were merged) and, therefore, the merger does not qualify as a subparagraph (F) reorganization.

The plain purport of the petitioner's claim is this: If it is held that the reorganization comes within subparagraph (F) of section 368(a)(1), the net operating loss in 1962 of Associated Machine (formerly J & M Engineering) in the amount of $ 82,863.30 will be carried back as an offset, or deduction, against the taxable income of the other corporation in the reorganization, Associated Machine Shop, for 1959, which amounted to $ 142,655.06, as adjusted. Although the name of the petitioner 1967 U.S. Tax Ct. LEXIS 93">*107 was formerly J & M Engineering, and its present name is Associated Machine, it must be kept in mind that the petitioner (formerly J & M) originally was a separate corporation from the other corporation having the closely similar name "Associated Machine Shop." The latter corporation was the "disappearing" corporation, and J & M Engineering (now called Associated Machine), the petitioner, was the "surviving" corporation. Associated Machine Shop was organized on September 10, 1958; J & M Engineering was organized on December 14, 1959; after the statutory merger of these two corporations on November 30, 1960, the name of J & M was changed to Associated Machine (without the word "Shop"), but in order to keep the two original corporations separate (in thought), in considering the issue, it may be said that the problem in this case relates to the merger of Associated Machine Shop into J & M Engineering.

Section 172 specifically permits the carryover and carryback of net operating loss. In continuing the provision for the carryover and carryback of net operating loss in the 1954 Code, the Congress for the first time made provisions for extending this privilege where there has been a change 1967 U.S. Tax Ct. LEXIS 93">*108 in entities. Thus, section 381 authorizes the carry over of 22 identified items (including net operating losses) of a transferor corporation in certain tax-free reorganizations, including statutory mergers. However, the Congress also provided that the surviving corporation in the described reorganizations in section 381(b), is not entitled to carry back a postreorganization net operating loss to a pre-reorganization year of the disappearing or transferor corporation. The exception to this statutory scheme is "an acquisition in connection with a reorganization described in subparagraph (F) of section 48 T.C. 318">*326 368(a)(1)" sometimes called "an (F) reorganization." See sec. 381(b). See also Newmarket Manufacturing Co. v. United States, 233 F.2d 493 (C.A. 1, 1956); and Long Corporation v. United States, 298 F.2d 450 (Ct. Cl. 1962). Stated simply, in the case of an (F) reorganization, the acquiring corporation is not subject to the restrictions of section 381(b), and it may carry back, under section 172(b), section 381(b), and the 1967 U.S. Tax Ct. LEXIS 93">*109 regulations thereunder, a net operating loss for a taxable year ending after the reorganization to a taxable year of the transferor corporation ending before the reorganization.

Petitioner contends that it is the acquiring corporation in an (F) reorganization and that it may carry back its loss for its taxable year ended November 30, 1962, in computing Associated Machine Shop's taxable income for 1959.

Respondent contends that petitioner's basic premise is incorrect, namely that the merger of Shop into J & M (the petitioner) constituted an (F) reorganization. Respondent contends that Shop and J & M were two active brother-sister corporations and that a statutory merger of two active brother-sister corporations does not come within the scope of "A mere change in identity, form, or place of organization, however effected," as set forth in subparagraph (F). Stated differently, it is respondent's understanding of the wording of subparagraph (F) that it envisions a corporate rearrangement involving changes in the structure of only one corporation -- a transaction where both prior to and after the reorganization there is only one corporation. Respondent points out that in this case, prior 1967 U.S. Tax Ct. LEXIS 93">*110 to the 1960 merger, there were two corporations present, each one being actively engaged in the conduct of its own separate business, and each having its own separate assets and liabilities.

We agree with the determination and view of the respondent. It is held that although there was, in the statutory merger of Shop and J & M, a reorganization, the statutory merger effected more than, and was not limited to "a mere change in identity, form, or place of organization," to which the terms of (F) are limited. Accordingly, section 381(b)(3) precluded the carryback of J & M's net operating loss for 1962 to a prior taxable year of the disappearing corporation, Shop.

The wording of subparagraph (F) is simple and clear. "Mere" means "nothing more or other than." (Webster's New World Dictionary, 1964 ed.) In this case, we are not concerned with the words in (F), "change in place of organization." Both corporations were organized in California and the statutory merger was under California law. The dispute in this case revolves about the meaning of the words "identity" and "form," as used in (F).

48 T.C. 318">*327 In Hyman H. Berghash, 43 T.C. 743">43 T.C. 743, 43 T.C. 743">752, affd. 361 F.2d 257 (C.A. 2), this Court said the following 1967 U.S. Tax Ct. LEXIS 93">*111 about the scope of an (F) reorganization:

Although the exact function and scope of the (F) reorganization in the scheme of tax-deferred transactions described in section 368(a)(1) have never been clearly defined, it is apparent from the language of subparagraph (F) that it is distinguishable from the five preceding types of reorganizations as encompassing only the simplest and least significant of corporate changes. The (F)-type reorganization presumes that the surviving corporation is the same corporation as the predecessor in every respect, except for minor or technical differences. * * * For instance, the (F) reorganization typically has been understood to comprehend only such insignificant modifications as the reincorporation of the same corporate business with the same assets and the same stockholders surviving under a new charter either in the same n3 or in a different state, n4 the renewal of a corporate charter having a limited life, n5 or the conversion of a U.S.-chartered savings and loan association to a State-chartered institution. n6 [Footnotes omitted. Emphasis ours.]