not here relevant, by 1955 petitioner's only asset was 80 percent of the stock of Old Eastern. From 1955 to 1960 petitioner owned 80 percent of the stock of Old Eastern and 20 percent was owned by third parties. In December 1960 Old Eastern redeemed the 20 percent of the shares not owned by petitioner, and thereafter was a wholly owned subsidiary of petitioner. From the time of its incorporation to October 1, 1966, petitioner was a holding company and its only assets were cash, its corporate name, and stock of Old Eastern or of the predecessor of Old Eastern. Petitioner's sole source of income prior to October 1, 1966, consisted of two dividends of $50,400 each paid to it by its subsidiary, Old Eastern, in 1964 and 1965. Old Eastern was engaged in the printing business, specializing in color printing for the periodical market.

On October 1, 1966, Old Eastern was merged into its parent, petitioner, pursuant to the laws of the State of Connecticut. After the merger petitioner continued the business conducted by Old Eastern prior to the merger. There was no change in the assets, location, or in the personnel or management of Old Eastern. With minor exceptions the directors and officers of Old Eastern and petitioner prior to the merger were the same individuals and after the merger these same individuals, with the exception of one director of Old Eastern, were the officers and directors of petitioner.

In early 1966 petitioner's president requested a ruling from the Internal Revenue Service that the proposed merger of Old Eastern into petitioner would constitute a liquidation under the provisions of section 332, I.R.C. 1954,1 and would be governed by the relevant provisions of that section for the purposes of determining gain or loss, the basis of assets, and the treatment of earnings and profits. On July 20, 1966, petitioner received a letter from the Acting Chief, Reorganization Branch of the Internal Revenue Service, containing a ruling that provided the requirements of section 332(b) were met, (1) no gain or loss would be recognized to petitioner on its receipt of property distributed in complete liquidation of Old Eastern; (2) that under section 336, no gain or loss would be recognized to Old Eastern on the distribution of its property in complete liquidation; (3) that the basis of the property of Old Eastern

1 All references are to the Internal Revenue Code of 1954.

received by petitioner would be the same as the basis of such property in the hands of Old Eastern; and (4) that the earnings and profits of Old Eastern as of the effective date of the liquidation would retain their character as earnings and profits in the hands of petitioner. This letter contained the further statement:

No opinion is expressed as to the tax treatment of the transaction under the provisions of any of the other sections of the Code and Regulations which may also be applicable thereto or to the tax treatment of any conditions existing at the time of, or effects resulting from, the transaction which are not specifically covered by the above ruling.

On July 25, 1966, Old Eastern held a meeting of its board of directors at which the letter from the Acting Chief of the Reorganization Branch of the Internal Revenue Service was presented. At that meeting the directors of Old Eastern voted that their counsel be instructed to proceed with the proposed merger.

On September 26, 1966, the proposed merger was approved by the shareholders of Old Eastern and on that same date was also approved by its board of directors. On September 28, 1966, the stockholders and board of directors of petitioner approved the merger of Old Eastern into petitioner, and on that date the certificate of merger between Old Eastern and petitioner was executed. On October 1, 1966, the certificate of merger was filed with the secretary of state of Connecticut. Pursuant to this certificate Old Eastern ceased to exist and its property became that of petitioner. All shares of Old Eastern which were owned by petitioner were canceled.

Petitioner filed a consolidated income tax return reporting a consolidated net loss of $39,547.19 for the calendar year 1966 with its subsidiary, Old Eastern. This return contained a statement by petitioner's president to the effect that the 1966 merger of Old Eastern into petitioner was a liquidation of a subsidiary under section 332. On this return no gain or loss was recognized by petitioner on receipt of Old Eastern's assets, and petitioner used as the basis of the assets the basis they had had in the hands of Old Eastern.

In 1967 and 1968 petitioner sustained net losses in the amounts of $83,379.99 and $400,150.89, respectively.

On July 10, 1969, petitioner filed an amended return for the taxable year 1966 and attached a statement thereto that the

1966 merger of Old Eastern into petitioner constituted a reorganization under section 368(a)(1)(F).

Based on this amended return, petitioner filed on July 9, 1969, a claim for a tentative carryback of its net operating losses from 1968 to the years 1965, 1966, and 1967. Prior thereto petitioner had filed a claim for a tentative carryback of unused investment credit from 1966 to 1964, claiming a refund of 1964 taxes of Old Eastern of $10,386.31, which tentative carryback claim had been allowed. The tentative carryback claim filed on July 9, 1969, of net operating loss to 1965 was likewise allowed in the amount of $74,076.11. Also, on July 9, 1969, petitioner filed a claim on Form 843 seeking refund of $50,126.29 of taxes paid by Old Eastern for its calendar year 1964.

Respondent in his notice of deficiency determined the deficiencies here in issue with the explanation that the investment credit of $10,386.31 carried back from the taxable year 1966 to the taxable year 1964, and previously tentatively allowed, resulted in the deficiency because the credit was not allowable since there was a liquidation under section 332. For this same reason respondent determined a deficiency in the amount of the refund made on the basis of the tentative carryback claim of net operating loss from the taxable year 1968 to the taxable year 1965. Also, in the notice of deficiency respondent stated that if a petition were filed with the Tax Court, the issue set forth in the claim for refund filed by petitioner should be raised before this Court and the issue of the validity of this claim has been raised in this case by petitioner.

Petitioner's position is that the merger of Old Eastern into it on October 1, 1966, constituted a reorganization under section 368(a)(1)(F), and, therefore, in accordance with the provisions of section 381(b), it is entitled to the carrybacks of unused investment credit and net operating losses even though the merger might also constitute a liquidation within the provisions of section 332(a).

Respondent does not question the amount of unused investment credit and net operating losses claimed by petitioner. He also concedes (see fn. 4, p. 32 infra) that the transaction here involved falls within the description of a mere change in identity, form, or place of organization as set forth in section 368(a)(1)(F). He argues that petitioner is not entitled to the claimed carrybacks in that the merger of Old Eastern into petitioner

constituted a liquidation under section 332(a) and that where such a liquidation has occurred a taxpayer is not entitled to exclusion from the provision of section 381(b) prohibiting the carryback of a net operating loss even though the acquisition may also meet the description of a reorganization under section 368(a)(1)(F).

Respondent's first argument is that if a transaction is such that it amounts to a liquidation within the meaning of section 332, only the provisions of that section may govern the application of section 381(b)(3)2 to the transaction. He concludes that for this reason the provisions of section 381(b)(3) that in the case of an acquisition other than one described in section 368(a)(1)(F), the corporation acquiring property by a transfer shall not be entitled to carry back a net operating loss for a year ending after the date of the transfer to a taxable year of the transferor corporation prohibit petitioner from being entitled to the claimed carrybacks to the years 1964 and 1965 of Old Eastern even though the transaction whereby it acquired Old Eastern's assets meets the description of a reorganization in section 368(a)(1)(F) as well as that of a liquidation under section 332(a).

Respondent's second argument is that even if petitioner is entitled to consider the transfer of Old Eastern's assets to it to be both a liquidation under section 332 and a reorganization under section 368(a)(1)(F), the transaction does not fall within the provisions of section 381(a)(2) in that it is not a transfer to which section 361 applies because no stock or securities were issued by petitioner to Old Eastern in exchange for the property of Old Eastern. Respondent states that since the provisions of section 381(a)(2) are not applicable to the transfer of Old Eastern's property to petitioner, the only way in which section. 381 can be applicable to petitioner is because of the transaction

2 SEC. 381(b). OPERATING RULES.-Except in the case of an acquisition in connection with a reorganization described in subparagraph (F) of section 368(a)(1)—

(1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer.

(2) For purposes of this section, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary or his delegate, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.

(3) The corporation acquiring property in a distribution or transfer described in subsection (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribution or transfer to a taxable year of the distributor or transferor corporation.

meeting the provisions of section 381(a)(1) 3 because of being a liquidation under section 332. From this respondent concludes that it follows that even though petitioner received the property of Old Eastern in a reorganization described in section 368(a)(1)(F), it is not excepted from the provisions of section. 381(b) because this exception only applies to a reorganization under section 368(a)(1)(F) which meets the exchange of stock for property requirement of section 361.

In our view neither of respondent's positions is in accordance with the provisions of the statute. Therefore, if we accept respondent's concession that the transaction whereby petitioner acquired the assets of Old Eastern meets all the requirements of section 368(a)(1)(F), we would agree with petitioner that it is entitled to the claimed carrybacks of investment credit and net operating loss.1

In Estate of Bernard H. Stauffer, 48 T.C. 277 (1967), revd. 403 F. 2d 611 (C.A. 9, 1968), we held that a merger of three

SEC. 381(a). GENERAL RULE.-In the case of the acquisition of assets of a corporation by another corporation

(1) in a distribution to such other corporation to which section 332 (relating to liquidations of subsidiaries) applies, except in a case in which the basis of the assets distributed is determined under section 334(b)(2); or

(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to corporations) applies, but only if the transfer is in connection with a reorganization described in subparagraph (A), (C), (D) (but only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met), or (F) of section 368(a)(1),

the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in subsections (b) and (c).

• Respondent in his original brief did not discuss the cases dealing with the application of sec. 368(a)(1)(F) to a transfer by one corporation of all of its assets to another corporation, all of the stock of which is owned by the same individuals in the same proportion as the stock of the transferor corporation. See Davant v. Commissioner, 366 F. 2d 874, 879 (C.A. 5, 1966), modifying 43 T.C. 540 (1965); Estate of Stauffer v. Commissioner, 403 F. 2d 611 (C.A. 9, 1968), reversing 48 T.C. 277 (1967); Associated Machine, 48 T.C. 318 (1967), revd. 403 F. 2d 622 (C.A. 9, 1968). In his original brief, respondent made his argument assuming that the transaction here met the provisions of sec. 368(a)(1)(F) and made the final statement that "petitioner's failure to come within Code sec. 381(a)(2), eliminates it from contesting that it is not subject to the limitations of Code sec. 381(b) because the transaction herein meets the definition of Code sec. 368(a)(1)(F)." In his reply brief respondent mentions these cases and states that they are irrelevant to the issue here since they involve the "merger of two operating companies." He then pointed out that the parties in this case stipulated that prior to the merger, petitioner was a holding company and Old Eastern an operating company, and that after the merger petitioner carried on unchanged the business of Old Eastern and concluded, "Thus, although as petitioner contends the transaction herein meets the definition of a reorganization under Code sec. 368(a)(1)(F), a fact which respondent did not deny in his main brief, respondent submits that Code sec. 332 is likewise applicable and in the instant setting, Code sec. 332 is the sole operative section.”