69 T.C. 650">*650 Respondent determined the following deficiencies in petitioners' income taxes: 69 T.C. 650">*651

There are two issues remaining for our resolution. First, we must decide whether notes distributed by Ozark Supply Co. (hereinafter Ozark) to its shareholders on the first day following the termination of its subchapter S status, pursuant to a declaration of dividend adopted prior to the termination of Ozark's subchapter S status, constituted a return of capital or whether it constituted distributions of current and accumulated earnings and profits. If we conclude, as petitioners argue, that the distributions were a return of capital, petitioners in docket Nos. 6653-74 and 6655-74 will not be required to include dividend income from Ozark in their 1970 income.

Second, we must decide if the purchase of Benton County 1978 U.S. Tax Ct. LEXIS 185">*187 Enterprises, Inc. (hereinafter referred to as Benton), stock by Ozark, followed by a merger of Benton into Ozark constituted an F reorganization as contended by petitioners or whether it constituted a liquidation under section 332, ³ to which section 334(b)(2) applies as contended by respondent. Should we hold for petitioners on this issue, Ozark will be entitled, under sections 381(a) and 381(c)(1), to use Benton's net operating loss carryover to offset post-merger income. Further, under section 362(b), Ozark will have a carryover basis in the assets acquired from Benton.

69 T.C. 650">*652 FINDINGS OF FACT

All of the facts were stipulated and are found accordingly.

Ozark, an Arkansas corporation, had its principal place of business in Rogers, Ark., when it filed its petition herein. For its tax years ended September 30, 1971, and September 30, 1972, Ozark filed its Federal income tax returns with the Internal Revenue Service Center, Austin, Tex.

W. T. McWhorter and his wife Gladys, both of whom are now deceased, were residents of Rogers, Ark., when they timely filed their 1970 1978 U.S. Tax Ct. LEXIS 185">*188 and 1971 Federal income tax returns with the District Director of Internal Revenue at Little Rock, Ark. W. T. McWhorter resided in Rogers, Ark., when he filed his petition herein. ⁴

Clayton W. McWhorter and Michael S. McWhorter, husband and wife, timely filed their 1970 and 1971 joint Federal income tax returns with the District Director at Little Rock, Ark. Clayton and Michael McWhorter resided in Rogers, Ark., when they filed their petition herein.

Ozark was organized in 1965 and since that time has engaged in the distribution of veterinary supplies in Arkansas. From the time of its organization through its tax year ended September 30, 1970, Ozark had 800 shares of common stock issued and outstanding. During this period, Gladys McWhorter owned 120 shares, W. T. McWhorter owned 230 shares, and their son, Clayton McWhorter, owned 450 shares. From its inception through September 30, 1970, Ozark was operated as an electing small business corporation, or subchapter S corporation, under the provisions of sections 1371 through 1379.

At the close of each 1978 U.S. Tax Ct. LEXIS 185">*189 tax year Ozark, by journal entry, credited each shareholder with his respective share of the corporation's income. For the 3 years ending September 30, 1968, 1969, and 1970, Ozark credited the shareholders with the following total amounts of income: W. T., $ 38,159.14; Gladys, $ 19,909.13; and Clayton, $ 74,659.21. During the same period Ozark paid cash dividends of $ 24,483.15 to W. T.; $ 6,200.83 to Gladys; and $ 18,085.96 to Clayton. At the close of each tax year Ozark calculated each shareholder's undistributed taxable income (hereinafter referred to as UTI) and by journal entry credited it 69 T.C. 650">*653 to the shareholder's UTI account. On September 30, 1970, the corporation had $ 130,856.54 of UTI allocated to the shareholders as follows: W. T., $ 35,449.58; Gladys, $ 24,113.04; and Clayton, $ 71,293.92. On October 1, 1970, Ozark had $ 26,712.14 cash on hand.

On August 28, 1970, Ozark held a regular directors meeting at which the directors noted their desire to pay dividends to shareholders as of September 30, 1970, from the shareholders' UTI accounts. Because the company did not have adequate cash available from which to pay dividends, however, the following resolution was adopted:

Resolved, 1978 U.S. Tax Ct. LEXIS 185">*190 to issue unsecured promissory notes to the shareholders dated October 1, 1970, due on October 1973 and bearing interest at the rate of six (6) percent per annum in amounts equal to the shareholders undistributed taxable income as determined on the Company's books and records as of September 30, 1970 in consideration for and for payment of dividends declared this date by this board of directors, and be it further

Resolved, that this Board hereby declares a dividend equal to all shareholders' undistributed taxable income as determined on the books and records of the Company as of September 30, 1970, payable October 1, 1970 to stockholders of record on September 30, 1970.

Pursuant to this resolution, promissory notes were issued to the three shareholders on October 1, 1970. The face amount of these promissory notes, representing an amount equal to the undistributed taxable income credited to each shareholder's account was as follows: $ 35,449.58 payable to W. T. McWhorter; $ 71,293.92 payable to Clayton W. McWhorter; and $ 24,113.04 payable to Gladys McWhorter. Ozark's shareholders did not have a regular practice of loaning the corporation amounts equal to the shareholders' UTI.

During 1978 U.S. Tax Ct. LEXIS 185">*191 its tax years ending September 30, 1971, and September 30, 1972, Ozark made the following payments on the notes issued October 1, 1970:

Also, on October 1, 1970, Ozark voluntarily revoked its subchapter S election. On October 28, 1970, as part of the process of ending its subchapter S election, Clayton W. McWhorter, Ozark's president, wrote to the Internal Revenue Service stating 69 T.C. 650">*654 that Ozark revoked its election under section 1372(a) and the revocation was effective for the tax year beginning October 1, 1970. All shareholders consented to this revocation. On December 31, 1970, Ozark received a response from the Internal Revenue Service stating that Ozark's revocation of its election to be treated as a small business corporation was effective October 1, 1970.

On October 2, 1970, Gladys and W. T. McWhorter sold their entire interest in Ozark to Clayton and Michael McWhorter. Since October 2, 1970, Clayton McWhorter has owned 450 shares of the total 800 outstanding shares of Ozark stock, and Clayton and Michael 1978 U.S. Tax Ct. LEXIS 185">*192 have jointly owned the remaining 350 outstanding shares of Ozark stock.

On April 12, 1971, Clayton McWhorter, in his capacity as Ozark's president, entered into an agreement with the shareholders of Benton County Enterprises, Inc., to purchase all of Benton's issued and outstanding stock. The purchase price of the Benton stock totaled $ 75,000, plus the assumption of certain liabilities. Pursuant to the purchase agreement Ozark became Benton's sole shareholder as of April 12, 1971. Prior to that time Ozark owned no stock in Benton. The parties have stipulated that the transaction between Ozark and Benton's shareholders constituted a purchase within the meaning of section 334(b)(3).

Benton, an Arkansas corporation, was engaged in the production of hogs for market in northwest Arkansas. On April 30, 1971, the book value of all of Benton's assets, other than cash or its equivalent, was $ 194,759.92. As of April 30, 1971, Benton had a net operating loss of $ 141,777.16.

On April 30, 1971, Ozark and Benton adopted a plan of merger. Under the merger agreement Ozark continued in existence, Benton's assets were transferred to Ozark, Benton's obligations were assumed by Ozark, and Benton's 1978 U.S. Tax Ct. LEXIS 185">*193 capital stock was canceled on May 1, 1971. It was intended that the merger would be governed by the corporate laws of the State of Arkansas and would constitute a statutory merger within the meaning of section 368(a)(1)(A). As contemplated, the merger occurred on April 30, 1971. As a result of the merger, Ozark, on its Federal income tax return for the year ending September 30, 1971, reported a net operating loss carryover from its merged subsidiary, Benton, in the amount of $ 141,777.16. Of this amount, Ozark deducted $ 29,260.19 on its income tax return for 69 T.C. 650">*655 the tax year ending September 30, 1971, and carried over $ 112,516.97 to its tax year ending September 30, 1972. On its Federal income tax return for the period ending September 30, 1972, Ozark deducted the remaining $ 112,516.97.

In the notice of deficiency issued to Ozark, respondent disallowed Ozark's net operating loss deduction claimed in 1971 and 1972.

In the notices of deficiency issued to Ozark's shareholders, respondent determined that the distributions occurring on October 1, 1970, were dividends to the extent of current and accumulated earnings and profits and not distributions of previously taxed income.

OPINION 1978 U.S. Tax Ct. LEXIS 185">*194 ⁵

There are two issues we must resolve. First, we must decide whether distributions to Ozark's shareholders were a return of capital or whether they were distributions of earnings and profits. If the former, the distributions will reduce the basis of the shareholders' stock. ^{61978 U.S. Tax Ct. LEXIS 185">*195} If the latter, the shareholders will be required to include additional dividend income in their 1970 Federal income tax returns.

The second issue we must decide is whether the purchase of Benton stock followed by the merger of Benton into Ozark constituted an F reorganization as alleged by petitioners ^{71978 U.S. Tax Ct. LEXIS 185">*196} or whether it constituted a liquidation under section 332, in which the basis of the distributed assets is determined under section 334(b)(2). If the transaction constituted a reorganization, 69 T.C. 650">*656 petitioners will be allowed to use Benton's net operating losses, incurred prior to the merger of Benton into Ozark, to reduce Ozark's 1971 and 1972 income.

From its inception until its tax year ending September 30, 1970, Ozark was an electing small business corporation under the provisions of sections 1371 through 1379. Through October 1, 1970, its only shareholders were W. T. McWhorter, his wife Gladys, and their son Clayton. Beginning October 1, 1970, Ozark's election to be treated as a subchapter S corporation was voluntarily terminated.

On September 30, 1970, the last day Ozark qualified as an electing corporation, Ozark had UTI of $ 130,856.54. Prior to the termination of its subchapter S status, Ozark's board of directors, at a regular directors meeting held August 28, 1970, noted that they wanted to pay dividends from the shareholders' UTI accounts. They further noted, however, that the corporation, which had $ 26,712.14 cash on hand, did not have sufficient money available from which to pay dividends equal to the full amount of each shareholder's UTI account. Having made the decision to pay dividends from the shareholders' UTI accounts, yet lacking sufficient cash reserves from which to pay such dividends, 1978 U.S. Tax Ct. LEXIS 185">*197 the board of directors resolved --

to issue unsecured promissory notes to the shareholders dated October 1, 1970, due on October, 1973 * * * in amounts equal to the shareholders undistributed taxable income as determined on the Company's books and records as of September 30, 1970 in consideration for and for payment of dividends declared this date * * *

Following this resolution notes were issued to Ozark's three shareholders on October 1, 1970, in amounts equal to the balances in their UTI accounts.

As a result of this transaction, respondent alleges that, on October 1, 1970, Ozark's shareholders received property distributions that in part constituted dividends which they failed to report on their 1970 Federal income tax returns. ^{81978 U.S. Tax Ct. LEXIS 185">*198}

In contrast, petitioners contend the declaration of dividend on 69 T.C. 650">*657 August 28, 1970, created a debtor-creditor relationship between Ozark and its shareholders as of September 30, 1970. The distributions, which petitioners argue constructively occurred on September 30, 1970, were distributions of property equal in amount to each shareholder's UTI account. Further, argue petitioners, since Ozark had no earnings and profits, either accumulated or current as of September 30, 1970, the distributions occurring on September 30, 1970, acted, under section 301(c)(2), merely to reduce the shareholders' bases in their stock. ^{91978 U.S. Tax Ct. LEXIS 185">*199} Petitioners explain the promissory notes, dated October 1, 1970, as a loan to the corporation of amounts constructively distributed to the shareholders on September 30, 1970.

The resolution of this first issue therefore turns on whether Ozark made property distributions on October 1, 1970, as contended by respondent, or whether the property distributions constructively occurred on September 30, 1970.

In support of their argument that the property distributions occurred on September 30, 1970, petitioners point to the following facts: Each shareholder had a UTI account that, at the end of each tax year, was brought up to date by crediting the shareholder's account with his share of the corporation's income for that year, and was debited by the amount of actual distributions occurring during that year. These journal entries occurring at yearend, 1978 U.S. Tax Ct. LEXIS 185">*200 combined with the declaration of dividend on August 28, 1970, and the subsequent delivery on October 1, 1970, of the promissory note, indicate the distributions constructively occurred no later than September 30, 1970, the close of Ozark's taxable year.

To support their position that the property distributions constructively occurred on September 30, 1970, petitioners rely on Roe v. Commissioner, 192 F.2d 398">192 F.2d 398 (5th Cir. 1951); and Zimco Electric Supply Co. v. Commissioner, T.C. Memo. 1971-215. Petitioners' reliance on Roe and Zimco is misplaced.

The pertinent facts in Roe are distinguishable from the facts before us. In Roe, Cummer Lime's board of directors declared a 69 T.C. 650">*658 dividend of $ 1,800,000 on February 9, 1926. At that time the corporation's surplus account was charged in the amount of $ 1,800,000, individual shareholder's accounts were credited with their pro rata shares, and the corporation carried the shareholder balances as "accounts payable" on the company books. Thereafter, payments on these accounts payable were made from time to time. The issue involved in Roe was whether payments in 1943 to 1945, pursuant to the 1926 resolution, should be treated as dividends received in 1978 U.S. Tax Ct. LEXIS 185">*201 1943 through 1945, or whether they were payments made on debts due the shareholders since 1926 when the dividend was declared and constructively paid.

The United States Court of Appeals for the Fifth Circuit, in holding the payments were on a debt created by the 1926 declaration of dividend, recognized that resolution of the problem was "not without difficulty." Nevertheless, the court concluded that the facts established a debtor-creditor relationship created in 1926. Of particular importance to that court's decision was the finding that credits were made to the shareholder accounts "and at all times since have appeared on the books of the company as 'accounts payable' to the stockholders, and that thereafter from time to time Cummer Lime made payments to the stockholders on these accounts payable and has at all times and for all purposes looked upon and treated them as accounts payable." Roe v. Commissioner, 192 F.2d 398">192 F.2d 398, 192 F.2d 398">402 n. 8 (5th Cir. 1951). See also 192 F.2d 398">Roe v. Commissioner, supra at 400 n. 3. We have no similar facts in the case before us that establish a debtor-creditor relationship.

Although there was a declaration of dividend on August 28, 1970, payment did not occur until October 1978 U.S. Tax Ct. LEXIS 185">*202 1, 1970. There is no evidence as in Roe that Ozark carried a dividend liability as "accounts payable" on its books commencing September 30, 1970, as petitioners would like us to believe. Without such an acknowledged liability similar to accounts payable, it is impossible for us to conclude that Ozark and its shareholders entered into a creditor-debtor relationship on September 30, 1970. ¹⁰ Our conclusion in this matter is further supported by Ozark's failure to issue promissory notes to its shareholders until October 1, 69 T.C. 650">*659 1970. Had Ozark intended to enter into a creditor-debtor relationship on September 30, 1970, it could easily have distributed the notes on that date rather than the following day.

Petitioners' reliance on Zimco is also unfounded. Zimco, a subchapter S corporation, had its election terminated on November 1, 1963. On January 4, 1964, Zimco executed a 1-year promissory note to J. B. Zimmerman, Jr. The Commissioner argued Zimmerman received a dividend on January 4, 1964. Zimmerman argued that 1978 U.S. Tax Ct. LEXIS 185">*203 on October 31, 1963, he received a constructive distribution which he then immediately loaned to Zimco. The January 4, 1964, promissory note merely evidenced the debt created on October 31, 1963.

In Zimco we relied heavily on Zimco's history of borrowing money from its shareholders. Corporate minutes indicated that undistributed earnings were the source of these loans, and in each case promissory notes were issued. Further, on December 5, 1963, the shareholders clearly adopted a policy of continuing to lend the corporation UTI. We have no similar facts before us. The parties have stipulated that Ozark's shareholders did not have a regular practice of loaning the corporation their UTI. Indeed, petitioners do not contend that any other such loans were ever made to the corporation.

Rather than follow petitioners' unsupported and complicated interpretation of the events occurring between August 28, 1970, and October 1, 1970, we choose to follow a much more simplified interpretation: On August 28, 1970, Ozark declared a dividend to the shareholders of record on September 30, 1970, payable October 1, 1970. Following this interpretation, the corporate distribution occurred, as argued 1978 U.S. Tax Ct. LEXIS 185">*204 by respondent, on October 1, 1970, when promissory notes were issued.

In arriving at our conclusion we are supported by McKelvy v. United States, 478 F.2d 1217">478 F.2d 1217, 478 F.2d 1217">1225-1229 (Ct. Cl. 1973); and Attebury v. United States, 430 F.2d 1162">430 F.2d 1162 (5th Cir. 1970). In both cases taxpayers made constructive receipt arguments similar to that made by petitioners, contending they had constructively received distributions which they loaned back to the corporation. Taxpayers argued that subsequent distributions were merely payments on previously established obligations. The courts in both McKelvy and Attebury refused to accept the constructive receipt arguments concluding that the constructive receipt doctrine was not available to shareholders of subchapter S 69 T.C. 650">*660 corporations. See 430 F.2d 1162">Attebury v. United States, supra at 1170-1171; and 478 F.2d 1217">McKelvy v. United States, supra at 1227. Indeed, the Fifth Circuit in Attebury distinguished its prior decision in Roe stating (430 F.2d 1162">430 F.2d at 1172):

Implicit in our decision in Roe, as well as the district court's holding in this case, is the inclusion in the shareholder's gross income, when the dividend is declared, of an amount equal to the declared dividends, pursuant to the constructive 1978 U.S. Tax Ct. LEXIS 185">*205 receipt doctrine. * * * Since we have concluded that the constructive receipt doctrine is inapplicable * * * the Roe decision is clearly distinguishable.

In light of the above, we conclude the distributions occurred on October 1, 1970, and were dividends to the extent of earnings and profits.

The second issue we must resolve is whether Ozark's acquisition of Benton followed by the merger of Benton into Ozark constituted an F reorganization. If so, Ozark will be entitled to deduct Benton's pre-merger net operating loss.

On April 12, 1971, Ozark purchased all of Benton's stock for $ 75,000 and the assumption of liabilities. Prior to that date, Ozark owned no interest in Benton. Ozark's business prior to and following the acquisition of Benton's stock was the distribution of veterinary supplies. Benton was engaged in the production of hogs for market. Following its acquisition by Ozark, Benton continued producing hogs for market.

On April 30, 1971, Benton was merged into Ozark under the laws of Arkansas, Benton's assets were transferred to Ozark, and Benton's stock was canceled. At this time, Benton had a net operating loss of $ 141,777.16. On its returns for the periods ending September 1978 U.S. Tax Ct. LEXIS 185">*206 30, 1971, and September 30, 1972, Ozark claimed net operating loss deductions of $ 29,260.19 and $ 112,516.97 as a result of carrying forward Benton's net operating loss. Ozark also carried over Benton's basis in the assets acquired. Petitioner contends this carryover treatment was proper under section 381 since the acquisition and merger of Benton into Ozark constituted an F reorganization. Respondent, however, contends that section 381 is not applicable because the transaction involved a distribution under section 332 in which the basis of the distributed assets was required to be determined under section 334(b)(2).

As authority for its position that the merger of Benton into 69 T.C. 650">*661 Ozark constituted an F reorganization, petitioner relies entirely on Rev. Rul. 75-561, 1975-2 C.B. 129, ^{111978 U.S. Tax Ct. LEXIS 185">*207 1978 U.S. Tax Ct. LEXIS 185">*208 1978 U.S. Tax Ct. LEXIS 185">*209 1978 U.S. Tax Ct. LEXIS 185">*210 1978 U.S. Tax Ct. LEXIS 185">*211} and the cases cited therein.

69 T.C. 650">*662 Petitioner's reliance on the Commissioner's revenue ruling is misplaced for several reasons. First, by definition ¹² a revenue ruling is merely the conclusion of the Internal Revenue Service and is not binding on a court. ¹³

Even were we required to follow the Commissioner's rulings, the one relied upon by petitioner simply does not apply to the facts before us. Rev. Rul. 75-561 describes when certain corporate combinations that qualify as A, C, or D reorganizations, or section 332 liquidations (to which section 334(b)(2) does not apply), will also qualify as F reorganizations for purposes of carrying back post-combination losses to pre-combination years under section 381(b)(3). 1978 U.S. Tax Ct. LEXIS 185">*212 As an initial, although minor point, petitioner does not rely on section 381(b)(3) to carry back post-combination losses, rather petitioner relies on section 381(a) and section 381(c)(1) for authority to carry forward pre-combination losses.

Of decisive importance, however, Rev. Rul. 75-561, and the cases cited therein, deal with corporate combinations that qualify as A, C, or D reorganizations, or qualify as section 332 liquidations to which the provisions of section 334(b)(2) do not apply. The issue discussed by the revenue ruling is when these transactions will also constitute F reorganizations. Petitioner, however, does not satisfy the fundamental requirements of the ruling: as hereinafter noted in the discussion of section 381, petitioner has failed to show the merger of Benton into Ozark satisfies any of the reorganization definitions or qualifies as a section 332 liquidation to which section 334(b)(2), does not apply.

Not only does petitioner fail to satisfy the underlying requirements of Rev. Rul. 75-561, more importantly, it fails to qualify for carryover treatment provided by section 381.

69 T.C. 650">*663 Basically, section 381 allows carryover treatment of net operating losses under two 1978 U.S. Tax Ct. LEXIS 185">*213 broad types of corporate combinations. Section 381(a)(1) notes that the first type of corporate combination to which section 381 will apply is a section 332 liquidation (relating to the liquidations of subsidiaries) "except in a case in which the basis of the assets distributed is determined under section 334(b)(2)." (Emphasis added.) On its face, the April 30, 1971, liquidation of Benton into Ozark was a liquidation in which the basis of the distributed assets is determined under section 334(b)(2). ^{141978 U.S. Tax Ct. LEXIS 185">*214 1978 U.S. Tax Ct. LEXIS 185">*215} Property was received by Ozark in complete liquidation of Benton, the distribution was pursuant to a plan of liquidation adopted within 2 years after Ozark purchased Benton's stock, and the Benton stock was acquired by purchase within a 12-month period. Having satisfied the requirements of section 334(b)(2), Ozark's basis in Benton's assets must be determined under that section. Therefore, the merger of Benton into Ozark is not the type of corporate combination contemplated by section 381(a)(1).

Additionally, the merger of Benton into Ozark does not fall within the second type of combination described in section 69 T.C. 650">*664 381(a)(2). Section 381(a)(2) refers to certain A, C, D, and F reorganizations. One underlying premise of these and all reorganizations is that there is a significant, continuing proprietary interest. Section 1.368-2(a), Income Tax Regs., 1978 U.S. Tax Ct. LEXIS 185">*216 specifically states, "The term [reorganization] does not embrace the mere purchase by one corporation of the properties of another corporation, for it imports a continuity of interest on the part of the transferor or its shareholders in the properties transferred." See Cortland Specialty Co. v. Commissioner, 60 F.2d 937">60 F.2d 937, 60 F.2d 937">940 (2d Cir. 1932), affg. 22 B.T.A. 808">22 B.T.A. 808 (1931), cert. denied 288 U.S. 599">288 U.S. 599 (1933).

Petitioner clearly has not presented us with facts that indicate a continuing proprietary interest. On April 12, 1971, Ozark, which had previously owned no Benton stock, purchased all of Benton's outstanding stock. Eighteen days later, Benton was liquidated into Ozark. We cannot view the purchase and liquidation as separate, independent steps. As we noted in Kass v. Commissioner, 60 T.C. 218">60 T.C. 218, 60 T.C. 218">223 (1973), affd. per order (3d Cir. Jan. 18, 1974), "In short, where the parent's stock interest is 'old and cold,' it may contribute to continuity-of-interest. Where the parent's interest is not 'old and cold,' the sale of shares by the majority of shareholders actually detracts from continuity-of-interest." In the facts before us Ozark's interest in Benton was recently acquired. Further, 1978 U.S. Tax Ct. LEXIS 185">*217 there has been no showing by petitioner that the stock was not acquired as the first step in a plan to acquire Benton's assets. In view of this, we conclude the underlying continuity-of-proprietary-interest requirement necessary to some extent in every reorganization has not been satisfied. See Yoc Heating Corp. v. Commissioner, 61 T.C. 168">61 T.C. 168, 61 T.C. 168">177-178 (1973). As such, it is impossible for petitioner to fall within the second type of corporate combination described in section 381(a)(2).

Since Ozark's purchase and subsequent liquidation of Benton fails to satisfy either of the types of corporate combinations described in sections 381(a)(1) and 381(a)(2), petitioner is not entitled to the net operating loss carryover it deducted on its 1971 and 1972 Federal income tax returns.

To reflect the foregoing,

Decisions will be entered for the respondent.