
    GLOVER PACKING COMPANY OF TEXAS v. THE UNITED STATES
    [No. 187-61.
    Decided February 14, 1964]
    
      
      Arthur Glover for plaintiff.
    
      Thomas A. Troyer, with whom was Assistant Attorney General Louis F. Ol>erdorfer, for defendant. Edward 8. Smith, Lyle M. Turner, and Philip R. Miller were on the brief.
    
      Before JONES, Ghief Judge, WhxtakeR, Laramore, Durfee and Davis, Judges.
    
   Whitaker, Judge,

delivered the opinion of the court:

This is a suit for the refund of income taxes based on plaintiff’s claim that it is entitled to deduct from its 1957 income losses sustained in prior years. It is entitled to do so unless section 382(a) of the Internal Revenue Code of 1954 pro-Mbits it. So far as this case is concerned that section provides that if the person who owned the greatest percentage of the market value of plaintiff’s stock at the end of 1957 had acquired it by purchase during the current year or the prior year, and if the kind of business carried on by the corporation changed after such acquisition, then the deduction is prohibited.

Plaintiff, a Texas corporation, was organized in September 1950 to carry on a slaughterhouse and meat-packing business. During the following year, it completed construction of a slaughterhouse in the City of Amarillo. In October of 1951, plaintiff began active operations. To raise working capital, it borrowed $500,000 from two banks. Most of its principal shareholders personally guaranteed the loans.

From the start, plaintiff’s business was unsuccessful. In May 1952, having incurred large operating losses, it ceased actively to operate the abattoir, purchased no more animals for slaughter, sold off its inventory of meat, and reduced its staff to a single maintenance employee. Thereafter, until January of 1957, plaintiff did not resume the slaughterhouse business. In the meantime plaintiff undertook to locate a new manager for the business. Failing in that, it sought to lease the abattoir or to sell the business or its assets upon terms which would relieve the shareholders of their heavy personal liabilities.

For a 4-month period, from April 1, 1953 to July 31, 1953, the building was leased to the Air Force for food storage. During the last few months of that year, it was rented by a local slaughterer. In 1954, plaintiff negotiated a long-term lease of the building to Path Meat Packing Co., a large meat-packer. The lease ran for 16 months from September 1, 1954, and it was subsequently extended to December 31, 1956. Under the terms of the 'lease, Path was given the option to purchase the plaintiff, either by buying the 5,000 outstanding shares of stock at $100 per share or by paying $500,000 for all of the corporate assets. Plaintiff gave Rath, a relatively low rental in the hope that the lessee would find it financially attractive to exercise its option. But Rath chose not to purchase the corporation, and it surrendered the building in December of 1956.

When plaintiff’s stockholders learned that Rath would neither renew its lease nor purchase the corporation, they claimed and were allowed deductions on their 1956 income tax returns for the worthlessness of their stock.

After the expiration of the Rath lease, the shareholders entered into negotiations for the sale of plaintiff to an experienced meat-packer by the name of Homer F. Glover. Glover was the owner and operator of a slaughtering and meat-packing business in Roswell, New Mexico. Previously, in 1952, the shareholders had tried to induce him to operate plaintiff in the position of General Manager, but the parties could not agree on terms. The later negotiations were more successful, and Glover undertook to purchase the plaintiff.

He addressed to plaintiff’s shareholders a memorandum setting out the terms upon which he was willing to purchase a portion of their stock. He proposed to operate the packing plant and to pay off the corporate indebtedness, if he were given full control over plaintiff’s operations and eventual ownership of all of plaintiff’s stock. In conclusion he said that the sale must be made in a way that would comply with section 382, which he understood would permit plaintiff to carry over its tax losses incurred in prior years and thereby give it a period of tax-free operation.

These negotiations bore fruit in a document entitled a “Sales Agreement” which was dated January 1, 1957, but was executed in February, by Glover, plaintiff, and plaintiff’s principal shareholders and guarantors. The agreement, which is set out in full in finding 23, provided that Glover would immediately receive 10 percent of the corporation’s outstanding stock. In return, he would immediately discharge 10 percent of the corporate indebtedness. The remainder of the stock would be placed in escrow. The corporation agreed to liquidate one-seventh of the remaining indebtedness in each of the succeeding 7 years, in return for which the escrow agent would, each year, transfer one-seventh of the stock in its hands to the corporate treasury. Thus, it was anticipated that, at the end of the 7-year period, Glover would own all of the outstanding stock, the remaining 90 percent having become treasury stock. At the end of that period, the corporate debt would be eliminated, and the guarantors would be free of their liabilities.

It was agreed that Glover would immediately assume full management of the corporation. He was also given the right to nominate the directors for whom the escrowed stock would be voted. Glover, in turn, promised to declare no dividends and to limit salaries to himself and his nominees to a total of $3,000 per year during the term of the contract.

As contemplated by the sales agreement, the shareholders made an escrow arrangement with a local 'bank under which all of the shares in the corporation left in their hands were endorsed in blank and given to the bank. The bank agreed to vote the stock and deliver it in accord with the purposes of the sales agreement.

In January 1957, Glover took over the active management of the plaintiff and resumed slaughterhouse operations in its building. He and his nominees were elected a majority of the officers and directors. Glover received 10 percent of the stock. Pursuant to a supplementary agreement with the shareholders, he did not immediately liquidate 10 percent of the indebtedness, as had been agreed, but instead contributed between $30,000 and $35,000 to plaintiff’s working capital. In all other respects, the agreement went into full effect.

Glover integrated plaintiff’s operations with those of his New Mexico meat-packing business. Under his management, plaintiff thrived. During 1957, the first year that Glover was in control, plaintiff had a net income of $77,486.51. Its losses during the preceding 5 years had totaled $559,199.78. Plaintiff claimed the right, under section 172 of the Internal Revenue Code, to carry forward an amount of the loss sufficient to offset this income; it thereby would have no tax liability at all for 1957. Relying upon the prohibition against loss carryovers contained in section 382(a), defendant disallowed the deduction. Plaintiff paid the resultant $34,792.79 deficiency and filed a timely claim for a refund. The claim was denied, and this suit followed.

Since Glover owned no stock at the beginning of 1957 or 1956, the first question is whether he owned 50 percent of the market value of the “outstanding stock” at the end of 1957. If he did, plaintiff falls within the first requirement of section 382 (a).

Glover purchased in February 1957 only 10 percent of the stock outstanding at that time, but the sales agreement provided that the remainder of the stock would be endorsed in blank and put in escrow. During this time no dividends were to be paid on it and it was to be voted only by the escrow agent, and by the escrow agent only as Glover should direct. Over a period of seven years, one-seventh of the stock was to be turned into the treasury of the company each year and was not to be reissued, sold, or hypothecated; provided that the company or Glover each year paid or otherwise relieved the stockholders from liability on a pro rata part of the corporation’s indebtedness which had been guaranteed by them. That they would be so relieved was guaranteed by Glover, who assumed personal liability therefor.

The result of this agreement was that all of the shares of stock in the corporation, except the 10 percent transferred to Glover, were in what might be called a state of suspended animation during the period of the escrow agreement. They became puppets and the wires that controlled their movements were in the hands of Glover. As the years passed they would gradually go down into the tomb of the treasury. After the agreement had been fully performed, they could in no sense be considered as “outstanding.” Pending their demise, while they were in a state of suspended animation, we do not think they can be considered to have been “outstanding,” in the sense the word was used in the statute.

This is so because the evident purpose of the statute was to prevent the deduction of prior losses by a corporation where control of it bad been acquired during tlie last two years and the character of the business had changed. It was control with which Congress was concerned. That is the reason the increase in percentage of stock ownership was fixed by statute at 50 percent. So, when Congress spoke of an acquisition of 50 percent of the “outstanding” stock and its ownership at the end of the taxable year, it had in mind stock that gave control of the corporation.

This is evident from the fact that an increase of 50 percent in the purchaser’s holdings might be brought about by a decrease in the outstanding stock. Indeed, that is just what happened in this case: All the stock not owned by Glover was put in a state of innocuous desuetude; it was rendered powerless to interfere with the control Glover demanded as consideration for his agreement to liquidate the indebtedness of the corporation.

This is further evident from the fact that section 382(c) provides that “For purposes of this section, ‘stock’ means all shares except nonvoting stock which is limited and preferred as to dividends.” [Emphasis added.] Preferred stock was not to be excluded from consideration if it had voting rights. If it had such rights it entered into control of the corporation. If it had none, it had no effect on control and, hence, was disregarded.

No matter how many shares Glover actually possessed, there is no doubt that, after the 1957 agreement went into effect, he obtained sole and absolute control over plaintiff’s fortunes. The fact that his ostensible ownership was limited to a small number of shares is immaterial; for the question which the statute asks is not, who owned the largest number of shares, but, rather, who owned the stock that had the greatest market value. Since the 1957 agreement stripped the escrowed stock of the incidents which create value, it follows that the shares that came into Glover’s hands constituted a majority of the value of the outstanding stock. Looking to the substance of the transaction and its aftereffects, it is clear that this was the case.

We now come to the final and the most troublesome issue in this case: whether plaintiff has failed to comply with the continuity-of-business test set up by subparagraph (C) of section 882 (a). Under that provision, plaintiff, even though it has undergone a change in ownership by a purchase of a majority of the value of its shares, is still entitled to deduct its operating loss carryover unless it “has not continued to carry on a trade or business substantially the same as that conducted before any change” in the ownership of its stock. The parties agree that this is so.

The slaughterhouse and meat-packing enterprise which plaintiff conducted, after the Glover acquisition, was in substance the same operation as it carried on between October 1951, when its plant was completed, and May 1952, when it ceased to operate an abattoir. The changes that Glover instituted necessary to integrate plaintiff’s business with that of his New Mexico meat-packing plant would not, standing alone, be sufficient to bring plaintiff within the terms of subparagraph (C). See Goodwyn Crockery Co., 37 T.C. 355 (1961), aff'd, 315 F. 2d 110 (6th Cir. 1963). But after the cessation of operations in May of 1952 plaintiff did not actively engage in the slaughterhouse business until after nearly 5 years had passed. During the interval, it bought no animals, dressed no carcasses, and, with the exception of an inventory liquidation, sold no meat. It had no operating employees, and completely discontinued the operation of an abattoir. During the 5-year period its activities consisted of leasing its plant to the Air Force, earning $29,865.58 in rent, and to a local slaughterer, who paid a rental that was barely sufficient to cover utility costs during his term, and the leasing of the building to a large meat-packer for something over two years, for a total of $64,833.33 in rent. Plaintiff’s sole business during the period of four or five years prior to Glover’s acquisition was the leasing of its building.

Plaintiff says that these rental activities never were or could have been profitable, that they were merely makeshift activities until it could get its slaughterhouse going again; it says that the losses it seeks to offset against its income from slaughterhouse operations were also incurred in the slaughterhouse operations. To permit such an offset in the circumstances, plaintiff argues, would not violate the fundamental policy behind subparagraph (C), to prohibit losses from one type of business from being deducted from gains in a different type of business.

This presents a problem not easy of resolution. The subsection reads, “Such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change * * *” in ownership. This seems to convey the idea of continuous operation, without any substantial break. It hardly envisages the resumption of an operation carried on in the distant past, with intervening operations of a different kind. Nor does it envisage the resuscitation of a business long since discontinued. Does it mean one discontinued four or five years previously?

That some break is tolerable seems to be indicated by the legislative history. When section 382(a) was originally drafted and passed by the House of Representatives, it did not contain a continuity-of-business test. Subparagraph (C) in its present form was added to the section by the Senate Finance Committee. The Committee Report explained the additional provision as follows:

It provides that if the corporation has not continued to carry on a trade or business substantially the same as that conducted immediately before any change in the percentage ownership of the fair market value of the stock, the condition in subparagraph (C) is met. S. Rept. No. 1622, 83d Cong., 2d Sess. 285, 3 U.S. Code Cong. & Ad. News (1954) 4923. [Emphasis added.]
However, when the Conference Committee reported out the section, including the Senate amendment, its report omitted the use of the word “immediately.” See H.R. Rept. No. 2543, 83d Cong., 2d Sess. 19, 3 U.S. Code Cong. & Ad. News (1954) 5299.
The Treasury Department recognizes that some break is tolerable under some circumstances. Example (2) under section 1.382(a)-l(h) (6) of the Treasury Regulations deals with the case of a corporate taxpayer whose plant is destroyed bv fire shortly before the purchase of all of its stock.

The resultant suspension of business does not bring the corporation within subparagraph (C). The example states that “the fact that the corporation’s normal activities are temporarily suspended at the time of an increase in ownership does not of itself constitute a failure to carry on a trade or business substantially the same as that conducted before the increase in stock ownership.”

It would seem that a break of a temporary nature does not destroy the continuity required by the statute. But here the hiatus was between 4 and 5 years. This is quite different irom what the Senate Finance Committee had in mind when it used the word “immediately.” Could the conferees have intended a discontinuance of operations for 4 or 5 years?

In the case at bar there was not a mere temporary suspension of operations. It was a discontinuance of them, without any firm purpose to resume them in the future. For a year or two the corporation was on the lookout for a man who knew how to run a slaughterhouse, and if one had been found it would probably have resumed operations; but this effort was abandoned after awhile, and then it tried to find a purchaser. When the Bath Company decided it did not want to buy plaintiff’s property or to buy the stockholders’ shares, the stockholders gave up, and charged off their stock as worthless. This was evidence of an intention to abandon the enterprise as hopeless. A resumption of it later could hardly be called a continuation of it.

Glover’s appearance on the scene and the subsequent agreement with him was not the continuation of an old enterprise, but the inauguration of a new one, although of the same or similar kind. The old enterprise died in May 1952. It was not a going business in 1957, when Glover acquired his stock. It had not been resumed before he acquired it. Operations under Glover cannot be considered a continuation of the business that had been discontinued in May 1952. It was the inauguration of a new business of the same kind.

What authorities there are support this view.

Treasury Begulations, Section 1.382(a)-l(h) (6) (1962) read as follows:

(6) A corporation has not continued to carry on a trade or business substantially the same as that conducted before any increase in the ownership of its stock if the corporation is not carrying on an active trade or business at the time of such increase in ownership. Thus, if the corporation is inactive at the time of such an increase and. subsequently is reactivated in the same line of business as that originally conducted, the corporation has not continued to carry on a trade or business substantially the same as that conducted before such increase in stock ownership. * * *

Eev. Eul. 58-9, 1958 Cum. Bull. 190 is to the same effect.

In Cohen, Phillips, Surrey, Tarleau, and Warren, The Internal Revenue Code of 195J¡.: Carryovers and the Accumulated Earnings Tax, 10 Tax L. Eev. 277,285 (1954 — 55), the authors adopt the view that this subsection “looks to the continuity of an enterprise.” See also, Bittker, eederal INCOME TAXATION OF CORPORATIONS AND SHAREHOLDERS 63, 64 (1959 ed.).

The Tax Court expressed the same opinion in Fawn Fashions, Inc., 41 T.C. 205 (1963) (alternative holding).

Upon careful consideration of the purpose of Congress and the means by which Congress sought to accomplish that purpose, we think it must be concluded that the enterprise after Glover came into it in 1951 was not a continuation of the enterprise discontinued in 1952. Section 382(a) was intended to prevent “trafficking in corporations with operating loss carryovers.” H.E. Eep. No. 1337, 83d Cong., 2d Sess. 42 (1954), 3 U.S. Code Cong. & Ad. News (1954) 4067. Under section 129 of the 1939 Internal Eevenue Code, which was added by the Eevenue Act of 1943, 58 Stat. 21, 47 (1944), a newly-acquired corporation was prohibited from deducting operating loss carryovers where the principal purpose of the acquisition was to use the losses to evade or avoid the payment of income taxes. Because corporate acquisitions were, and continue to be, made from a complex variety of economic motives, the test of section 129 created virtually insurmountable difficulties of limning the state of mind of the parties to the transfer and, therefore, proved unworkable in practice. For this reason Congress, in enacting section 382(a), abandoned any attempt to discern the purpose behind such a change in ownership and created a mechanical standard for determining the circumstances in which the loss carryover would be unavailable, but the purpose was to prevent the buying of corporations in order to take advantage of their prior losses. Plaintiff cannot do so because the business after Glover’s acquisition of it was not a continuation of the former business.

By reason of the foregoing, plaintiff is barred by section 382(a) of the Internal Revenue Code from carrying over a net operating loss to its taxable year 1957. It follows that defendant’s deficiency notice properly assessed the correct amount of plaintiff’s income tax for that year. Plaintiff is not entitled to recover, and its petition is dismissed.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. The plaintiff is a corporation duly organized under the laws of the State of Texas, with its principal office and place of business at Amarillo, Texas.

2. The plaintiff was organized in 1950 for the following corporate purposes (among others) :

* * * to deal in * * * dairy products and livestock, and to buy, sell, and deal in such * * * dairy products and livestock; to slaughter such livestock, to refrigerate, can, cure, render, pack, and sell meat, and to prepare such commodities and their by-products for market and to sell the same; to finance the carrying and orderly marketing of such * * * dairy products and livestock; to operate cold storage plants, warehouses and locker plants; * * * to buy and sell foodstuffs * * * of every kind and character; and the transaction of all business heretofore set out.

3. The plaintiff’s name from the time of its organization in 1950 until 1957 (see finding 33) was Tri-State Packing Company.

4. The plaintiff’s capitalization consists of a single class of stock, of which 5,000 shares, having a par value of $100 each, are authorized and outstanding.

5. The plaintiff keeps its books and files its Federal income tax returns on a calendar year basis of accounting.

6.From 1950 until June 3,1952, the officers and directors of the plaintiff were as follows:

Date of election Capacity
9-27-50.. Paul J. Walsh_ President and Director.
9-27-50. Elmer Rabin_ Vice President and Director.
9-27-50. E. B. Johnson_ Secretary-Treasurer and Director.
9-27-50. L. R. Hagy. Director.
9-27-50. Jay Taylor. Director.
10-20-51. Earle H. Christian, Jr_. Assistant Secretary-Treasurer.

7. After being organized in 1950, the plaintiff undertook the construction of a slaughterhouse in Amarillo, Texas. The construction of the slaughterhouse was completed in 1951 at a cost in excess of $550,000.

8. (a) In October 1951, the plaintiff’s board of directors authorized the plaintiff to borrow $200,000 from The First National Bank of Amarillo and $300,000 from the Mercantile National Bank at Dallas, Texas. Both of these loans were completed through The First National Bank of Amarillo. The $300,000 loan from the Mercantile National Bank at Dallas was subsequently turned over to the First National Bank and Trust Co. of Oklahoma City, Oklahoma. This indebtedness was still owed by the plaintiff on December 31,1956.

(b) Many of the plaintiff’s shareholders were personal endorsers of proportionate shares of the $500,000 bank indebtedness referred to in paragraph (a) of this finding.

9. (a) The plaintiff commenced business as a slaughterhouse in 1951. In operating the business, the plaintiff purchased cattle from cattlemen, feed lots, and auction companies in the Panhandle of Texas. The cattle were then trucked or shipped by rail to the plaintiff’s establishment. The cattle were killed, the hides and the offal were removed, and the carcasses were sold after a period of refrigeration. Most of the carcasses were placed in refrigerated trucks and sold throughout the United States. Very little of the beef was sold locally in Amarillo.

(b) The hides were also sold by the plaintiff. Some were sold green and some were cured and sold.

(c) The plaintiff operated a rendering plant in connection with the slaughterhouse operations.

10. Due at least in part to the fact that the plaintiff’s officers were inexperienced in the slaughterhouse business, the plaintiff sustained heavy financial losses in 1951 and in the early months of 1952. Because of such losses, the plaintiff discontinued the slaughtering of cattle sometime in May of 1952. Thereafter, until January of 1957, the plaintiff did not conduct any slaughterhouse operations, except for the disposition of the inventory of meat that was on hand at the time of the discontinuance of slaughtering operations in May of 1952.

11. After the discontinuance of slaughterhouse operations by the plaintiff in May 1952, the plaintiff continued to maintain its slaughterhouse, including the refrigeration facilities, in a standby condition for the resumption of operations. An engineer was employed by the plaintiff until about August 1954 to perform the necessary maintenance work. In addition, the plaintiff employed a bookkeeper for a time after the discontinuance of slaughtering operations, while the inventory of meat on hand was being sold. No other personnel was employed by the plaintiff from the time of the discontinuance of slaughtering operations in May 1952 until January 1957.

12. The plaintiff’s officers and directors were very anxious for active operations at the slaughterhouse to be resumed. Among other reasons for their concern was the fact that the establishment was regarded as a civic asset. For a period of approximately 2 years after the discontinuance by the plaintiff of its slaughterhouse operations in May 1952, the officers and directors of the plaintiff made extensive efforts to obtain a new manager whose background of experience and reputation for competence in the slaughterhouse business would give promise of a successful operation. Many persons were interviewed in an unsuccessful quest for a new manager. One of the first persons sought by the plaintiff at the time for the position of manager was Homer F. Glover, of Boswell, New Mexico. Mr. Glover indicated that he would be interested in the proffered position only if the plaintiff would agree to expand its facilities by the construction of a kitchen for the manufacture of sausage, and if the plaintiff would furnish him a Cadillac automobile to use in commuting between Roswell and Amarillo. The plaintiff was unwilling at the time to meet these conditions imposed by Mr. Glover.

13. Following a fire which destroyed a refrigeration plant at an Air Force base near Amarillo, the Air Force temporarily leased the refrigeration facilities at the plaintiff’s slaughterhouse from April 1 to July 31,1953, for the storage of perishable foods. The Air Force paid the plaintiff a total rental of $29,865.58 'under this short-term lease.

14. After the expiration of the short-term Air Force lease referred to in finding 13, the plaintiff permitted a local slaughterer to use the plaintiff’s establishment during a period of 4 or 5 months in the last half of 1953 for the killing of cattle and the sale of beef in Amarillo. The plaintiff maintained the refrigeration at its slaughterhouse during this period, and the local slaughterer paid the plaintiff a small rental that was merely sufficient to cover the cost of the utilities during the period. This arrangement ended sometime in the latter part of December 1953.

15. Having been unable to employ a competent and experienced manager, the plaintiff in 1954 undertook to interest an established meat packing company in taking over the operation of the plaintiff’s slaughterhouse on a lease basis. Two such companies, the Rath Packing Company and Geo. A. Hormel & Co., evinced interest in such a proposal; and serious negotiations with these two companies were conducted by the plaintiff.

16. (a) On or about August 13, 1954, the plaintiff leased its facilities to the Rath Packing Company for a period commencing September 1, 1954, and ending December 31, 1955. The aggregate rental payable and paid under this lease for the period mentioned was $33,333.33. The lease contained an option whereby the lessee was entitled to purchase all of the plaintiff’s stock at $100 per share or all of the plaintiff’s property (free of debt) for $500,000, if it desired to do so.

(b) The lease and option agreement referred to in paragraph (a) of this finding was later extended to December 31, 1956. The agreed rental for the year 1956 was $31,500. Under the extension, the option could be exercised by the Rath Packing Company at any time up to and including October 2,1956.

(c) Plaintiff permitted Rath Packing Company to pay a relatively low rental in order to induce Rath Packing Company to exercise its option to purchase.

17. (a) The Rath Packing Company took possession of the plaintiff’s slaughterhouse under the lease and option agreement referred to in finding 16, and began slaughterhouse operations there on or about September 1, 1954. The Rath Packing Company did not make any changes in the plaintiff’s building or equipment. In conducting the slaughterhouse operations, the Rath Packing Company, acting through commission buyers, purchased cattle at public auctions and directly from ranchers and farmers. The cattle were transported by truck to the slaughterhouse in Amarillo, where the cattle were slaughtered and the carcasses were dressed. Dressing was a process whereby the hides and offal (both edible and inedible) were removed, and the carcasses were cleaned. The carcasses Avere then placed in the cooler. After being graded and refrigerated, the carcasses were sold to customers throughout the United States. The Rath Packing Company used both truck and rail transportation in shipping the carcasses, but most of the shipments were transported by truck.

(b) The Rath Packing Company also sold the hides. Most of the hides were cured before being sold, the curing process taking from 3 to 4 weeks.

(c) The Rath Packing Company, in connection with its slaughterhouse business, operated the rendering plant referred to in finding 9(c).

18. The Rath Packing Company did not exercise the option referred to in finding 16. Instead, the Rath Packing Company discontinued its operations in the plaintiff’s slaughterhouse about the middle of December 1956, and surrendered possession of the premises by the end of that month.

19. Under the lease and option agreement referred to in finding 16, the plaintiff did not retain any right of possession respecting its slaughterhouse, or any right to control or participate in the operations conducted by the Rath Packing Company in the plaintiff’s slaughterhouse during the period from September 1,1954, until December 1956.

20. Sometime prior to January 1,1957, the plaintiff’s stockholders claimed, and were allowed, Federal income tax deductions for the worthlessness of their stock in the plaintiff.

21. After it was learned that the Path Packing Company did not intend to exercise the purchase option referred to in finding 16, negotiations were entered into on behalf of the plaintiff’s shareholders with Homer F. Glover and two of his associates, J. Raymond Harris and William R. Wing-field, with a view to the sale of the plaintiff corporation or its assets. Mr. Glover was and is the president, the majority shareholder, and a director of a New Mexico corporation known as the Glover Packing Company of New Mexico, which was then conducting, and which continues to conduct, a slaughtering and packing business at Roswell, New Mexico. Mr. Harris was and is vice president, and Mr. Wingfield was and is secretary, of the Glover Packing Company of New Mexico. (Messrs. Glover, Harris, and Wingfield will sometimes be referred to in subsequent findings as the “Glover group.”)

22. During the course of the negotiations referred to in finding 21, the Glover group submitted to the plaintiff’s shareholders a document that was entitled, “Outline of Proposed Plan of Operation of Tri-State Packing Company.” This document contained the following paragraphs (among others) :

Tri-State Packing Company is a Texas Corporation, organized in about the year 1951.
Operating as a packing plant, the corporation sustained a series of net operating losses. Finally, the plant operations were abandoned and the plant was rented. The last tenant was Rath Packing Co.
_ The corporation shows a large deficit. The corporation owes about $500,000.00 to two local banks, and this indebtedness is guaranteed by a number, if not all, of the stockholders. The stockholders are interested in having someone take over the plant, pay off the $500,000.00 for which they are contingently liable, and they, in turn, will willingly contribute their stock to the corporation or anyone else that can handle this particular job of getting them released from their contingent liability. These stockholders have written off their basis in the stock as being worthless and have claimed a tax deduction therefor.
Homer Glover and associates of Roswell, New Mexico are interested in taking over the Tri-State Packing Company, putting it on a sound financial basis, paying off the indebtedness and having the stockholders contribute the majority of their stock to the Treasury of the corporation. The remainder of the stock, Glover, et al, would purchase. To handle this job, the benefits of the net operating loss carryover of the corporation must be available to the corporation. All parties have been fully advised of the provisions of Section 382 of the Internal Revenue Code of 1954.

23. As a result of the negotiations mentioned in. findings 21 and 22, the following document, designated a “Sales Agreement,” was entered into under the date of January 1, 1957:

This contract and agreement entered into this 1st day of January 1957, by and between those persons listed in Exhibit “A”, hereinafter called “Stockholders”, those persons set forth in Exhibit “B” hereinafter called “Guarantors”, Tri-State Packing Co., Inc., a corporation organized under the laws of the State of Texas, hereinafter called “Corporation”, and Homer Glover, Raymond Harris and William Wingfield, hereinafter referred to as “Glover, et al.”
WITNESSETH
WHEREAS, the Corporation is indebted to the First National Bank of Amarillo, Texas, in the principal sum of $200,000.00, the same being evidenced by a promissory note executed by said Corporation as maker, and being dated the 15 day of July, 1954, and said Corporation is indebted to the First National Bank & Trust Company of Oklahoma City, Oklahoma, in the principal sum of $300,000.00, said indebtedness evidenced by a promissory note payable to said bank and executed by said Corporation as maker, same being dated the 22 day of June, 1956; and whereas the Guarantors have guaranteed the payment by said Corporation of the above described indebtedness; and
WHEREAS, Homer Glover, et al, desire to acquire 10% of the capital stock of said Tri-State Packing Company, and
WHEREAS, the Guarantors desire to be relieved of their respective liabilities upon their respective guarantees of the indebtedness hereinbefore described, and
WHEREAS, the Stockholders desire to further the release of the Guarantors from their respective liabilities upon said indebtedness.
NOW, THEREFORE, all of the parties hereto agree as follows:
1. Homer Glover, et al, agree to immediately secure the complete release of said Guarantors from 10% of the indebtedness for which said Guarantors now stand liable in consideration for which the Stockholders will immediately cause to be transferred and assigned to Glover, et al, 10% of the total capital stock of said corporation.
2. Tri-State Packing Company covenants and agrees to secure the complete release of the said Guarantors from the remaining indebtedness for which said Guarantors now stand liable as follows:
(a) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1, 1958.
(b) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1, 1959.
(c) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1, 1960.
(d) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1,1961.
(e) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1, 1962.
(f) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1.1963.
(g) A release of the guaranty of one-seventh (%th) of said indebtedness to be secured on or before February 1, 1964.
3. In consideration for the Corporation securing the release of said Guarantors in the manner outlined in the preceding paragraph, the Stockholders agree to transfer to the Corporation such percentage of the now outstanding stock as the indebtedness released bears to the total indebtedness now guaranteed by said Guarantors, it being understood that when said Guarantors are fully released from their guaranties of said indebtedness, all of the capital stock of said Corporation shall be owned as follows:
Glover, et al, tbeir beirs and assigns_10%
Tri-State Packing Company, its successors and assigns_90%
4. To insure the performance of this contract, Glover, et al, agree to act and become liable as sureties, of the obligation of said Corporation described in Paragraph 2, above to secure the release of said Guarantors from the indebtedness for which said Guarantors now stand liable, and in the event of failure of said Corporation to perform its obligations hereunder, Glover, et al, shall be liable, jointly and severally for the performance of the obligation of said Corporation hereunder. It is the purpose and intention of this provision that if said Corporation does not acomplish the release of said Guarantors of their respective guaranties, for the years and in the amounts as set forth in Paragraph 2 above, then Glover, et al, covenant that they will secure such release, whether it be by payment of the obligation, by loan to the Corporation, or otherwise. In the event said Corporation fails to secure such releases as provided in Paragraph 2 above, and upon said Corporation’s failure, should Glover, et al, fail to immediately procure such release, then Glover, et al, shall become obligated to Guarantors for the amount necesary to obtain and secure such release. As set forth in Paragraph 5 below, it is herein contemplated that said First National Bank of Amarillo, Texas, and the said First National Bank & Trust Company of Oklahoma City, Oklahoma, will renew and extend the present indebtedness owed to them by said Corporation so that the principal of said indebtedness may be paid in installments over a period of seven (7) years; it is further contemplated by the parties hereto that said renewal notes to said Banks may contain the usual acceleration of maturity clauses. It is hereby further agreed that if said Corporation should fail to make the payment of said installments upon said renewal notes, both principal and interest, as the same become due, and should in such instance Glover, et al, fail to cause payment of said renewal obligations to be made, and should in such instances, either or both of said Banks declare the balance of the indebtedness due under said acceleration clauses, then in such, events Glover, et al, shall thereupon become personally liable, jointly and sevei’ally, for the entire amount of said indebtedness of the Corporation so declared by said Bant or Banks to be due.
5. It is contemplated by the parties to this contract, and is hereby made a condition to the same, that the First National Bank of Amarillo, Tesas, and the First National Bank & Trust Company of Oklahoma City, Oklahoma, will each renew and extend the indebtedness now owed to it by said Corporation. It is contemplated that the principal indebtedness due each bank will be renewed and extended so as to be payable as follows:
(a) One-seventh (l/7th) due on or before February 1, 1958
(b) One-seventh (l/7th) due on or before February 1,1959
(e)One-seventh (l/7th) due on or before February 1,1960
(d) One-seventh (l/7th) due on or before February 1, 1961
(e) One-seventh (l/7th) due on or before February 1, 1962
(f) One-seventh (l/7th) due on or before February 1, 1963
(g) One-seventh (l/7th) due on or before February 1,1964
The renewal indebtedness to be represented either by an installment note or a series of notes, being a separate note for the amount of principal maturing each year; that said notes will bear interest at the rate of 4% per annum; will contain the usual ten percent attorneys fee clauses and acceleration of maturity clauses, in the event of default in payment of principal or interest. It is contemplated that each of said Banks will require, and that they will be given, the same mortgages, guaranties, security and endorsements for securing the renewal notes which now secures and guarantees the present indebtedness.
6. During the period for performance of this contract, Stockholders hereby agree that they will elect as directors of said Corporation such persons as Glover, et al, shall nominate, and will vote to amend the Charter of said Corporation to change its name to “Glover Packing Company” or other similar name, should Glover, et al, so request. It is hereby agreed that Homer Glover shall be the President and General Manager of said Corporation.
7. During the period for the performance of this contract, and while persons of Glover, et al’s nomination are serving as directors of said Corporation, Glover, et al, agree that the Corporation will do the following:
(a) Maintain and keep the physical properties in a good state of repair, suffer no waste, and will make no material alterations of said properties.
(b) Will properly and in a good businesslike manner operate tlie properties as a meat packing plant and its related activities.
(c) Will keep a proper set of books of account fully and accurately reflecting the business transactions of said Corporation, and will make said books available at all reasonable times on reasonable notice for inspection by said Stockholders and said Guarantors or their authorized representatives.
(d) Will declare no dividends, nor make any distributions of funds or assets to Glover, et al, except the payment of salary mentioned in sub-paragraph (e) below, and will not permit the stock transferred to the Corporation under this contract or any treasury stock to be reissued, sold or hypothecated.
(e) Will not pay any salaries to Glover, et al, in excess of an aggregate sum of $3,000.00 per year. _
_ (f) Will comply with all laws, regulations and ordinances relating to the operation hereby undertaken.
(g) Will pay all ad valorem, excise, income and franchise taxes as the same become due and payable.
(h) Will carry fire and extended insurance on all physical property belonging to said Corporation, and adequate liability insurance; the amount of all insurance to be carried to be determined by the appraisal of a competent insurance appraiser. Should a loss occur, the proceeds of the insurance may be used to repair or restore the property to its former condition, if Glover, et al, so elects. Should Glover, et al, not so elect, then the proceeds are to be paid to the respective interested persons as their interests may appear, including all lien-holders of said Corporation.
8. Inasmuch as the plan herein called for may take several years for completion and as a method of facilitating the handling of the transfer of the stock from each of said stockholders to said Corporation, it is agreed that the transfer of said stock shall be handled in the following manner: The First National Bank of Amarillo, Texas, shall be named as Escrow Agent. Simultaneously with the execution and delivery of this contract all of the Stockholders herein shall endorse in blank their said stock and the same shall be delivered to said bank under an Escrow Agreement, the terms and provisions of which shall, among other things, authorize said bank, upon the release of said Guarantors as described in Paragraph 2 above, to transfer and deliver a percentage of said stock now owned by said Stockholders equal to the percentage of the amount of said indebtedness from which said Guarantors are released and all as further described in Paragraph 3, hereof.
In order to expedite and facilitate the handling by the Escrow Agent of the transfer of said shares of stock to said Corporation upon the release each year of said indebtedness, and to avoid the surrendering each time of all of said certificates of stock and re-issuing by the Corporation of certificates representing shares to equal the difference, the Stockholders hereby mutually agree among themselves that said Escrow Agent may use the certificates of any one or more of said Stockholders in his possession under the Escrow Agreement to be transferred to said Corporation, and each of the Stockholders shall receive credit for such transfer of any certificate in the same manner and to the same legal effect as if his individual certificate had been surrendered and a new certificate issued back to him by said Corporation for the difference. That is to say, the surrender of any particular certificate to said Corporation by said Escrow Agent in the fulfillment of the. terms of said Escrow Agreement shall inure percentagewise to the benefit of each of the stockholders and each Stockholder shall be given credit for the same in the same manner as if his own certificate had been turned into [sic] said Corporation and a new certificate for the difference in number of shares had been reissued to him.
Said Escrow Agreement shall further provide that should this Sales Contract for any reason fail to be consummated, all of the shares remaining in the hands of said Escrow Agent at such time shall be turned into [sic] said Corporation for transfer and reissuance to each of said Stockholders in the proportion to the shares that he would be entitled to under and by virtue of the terms of the percentage called for in this paragraph.
It is hereby understood that certain Stockholders own shares of stock in the corporation for which certificates representing such shares have not been issued by the Corporation. These numbers of shares and the owners of the same are listed in Exhibit “A” hereof. These shares arose out of two certificates of stock endorsed and turned in to the Corporation for transfer and re-issuance of proper certificates to the rightful owners who have paid for the same. One certificate so endorsed and delivered to the Corporation, was Certificate No. 17 for 605 shares, formerly issued to one Elmer Rabin, and the other certificate, so endorsed and delivered to the Corporation was Certificate No. 76, for 555 shares, formerly issued to one Paul Walsh. These two certificates represented a total of 1160 shares. Out of this 1160 shares so represented by these two certificates only 35 shares of the same have been issued to the rightful owners; this 35 shares is represented by Certificate No. 79, issued to Bernita Bivins, the remaining 1125 shares remain unissued to the respective owners. It is agreed hereby among the parties hereto that said shares are owned by the Stockholders as reflected in Exhibit “A”, to the same extent as if separate certificates representing said shares had been issued to the owners.
In order to facilitate the transfer of these shares without issuing new and separate certificates, it is mutually agreed by and among the Stockholders that these remaining 1125 shares may be transferred as follows:
(a) Said Corporation may issue a certificate representing 500 shares to Glover, et al, in fulfillment of Stockholders obligation to transfer and assign to Glover, et al, 10% of the capital stock of said Corporation upon the execution and delivery of this contract, as provided in Paragraph 1, above. It is agreed that although these shares belong to certain of the stockholders, but not to all, nevertheless the transfer of this 500 shares shall in legal effect be treated as if each individual Stockholder had contributed a proportionate number of his shares to equal said 500 shares. The Escrow Agent shall so treat such transfer, and said Escrow Agent shall so credit each Stockholder accordingly.
(b) A certificate for the remaining 625 shares, for which certificates have not been issued, shall be issued to said Escrow Agent as trustee, and said shares so represented by this Certificate shall be handled in the same manner and shall be subject to the same terms and provisions as herein provided for in the case of other shares of stock which Stockholders have endorsed in blank and delivered to said Escrow Agent.
The Stockholders hereby agree that during the period for performance of this contract, and until revoked bv instrument in writing and delivered to said Escrow Agent, Said Escrow Agent shall have the power and authority to vote all shares of stock, certificates to which are possessed and held by it under this contract. Escrow Agent shall not, however, vote said shares in a manner inconsistent with the terms and provisions of this contract.
9. Should said Corporation or Glover, et al, at any time fail to consummate this contract according to its terms and provisions, and at such time, Stockholders and Guarantors are not in default, then in addition to any other remedies which the Guarantors and Stockholders may have, at Guarantors and Stockholders election, Corporation and Glover, et al, agree that the possession and management of said Corporation shall be returned to such persons as Stockholders may nominate.
Should Stockholders fail to vote for persons of Glover, et al’s nomination as Directors of the Corporation, then said Corporation and Glover may at their election, in addition to any other remedies available to them, declare the contract terminated and shall not be further obligated under the terms and provisions of same.
10. This contract may be executed in counterparts, and when any counterpart is signed by any party or parties hereto, the same shall be valid and binding when all parties hereto have signed this instrument or counterparts of the same.
EXECUTED this 1st day of January, A.D. 1957.
Stockholders Guarantors
(S) E. B. Johnson (S) E. B. Johnson
(S) C. L. Killgore (S) C. L. Killgore
(S) Jay R. Taylor (S) M. H. Freeman
(S) M. H. Freeman
ATTEST: TRI-STATE PACKING COMPANY, INC.
(S) E. B. Johnson Secretary
By (S) L. R. Hagy Its President
(S) H. F. Glover Homer Glover
(S) Raymond Harris (S) William Wingfield
Exhibit “B”
Guarantors of indebtedness of Tri-State Packing Company to First National Bank of Amarillo, Texas, and First National Bank and Trust Company, of Oklahoma City, Oklahoma, on Page 1 of Contract between this list of persons and others, dated January 1, 1957.
This Exhibit B, hereby contains a list of all the names of the guarantors of said indebtedness, and the amounts of said indebtedness for which each person is liable set opposite the name:
L. R. Hagy, E. B. Jolmson, and Jay Taylor, jointly
and severally-$305,100.00
Robert Alexander_ 3, 200. 00
H. E. Atkinson_ 16,100. 00
Ralph Bagwell_ 1,000. 00
T. R. Benedum_ 3,200. 00
Wm. Q. Boyce_ 1, 000. 00
W. I. Bennett_ 600. 00
Winston H. Carter_ 1,600.00
M. H. Freeman_ 600. 00
' D. R. Hagy- 21,200.00
D. B. Hawpe_ 3,200. 00
H. B. Hart- 1, 600. 00
E. B. Johnson_ 21, 800. 00
G. B. Johnson_ 6,400. 00
Jean Johnson Brander_ 1, 600. 00
Jean Johnson Shelton_ 1,600.00
M. T. Johnson_ 6, 400. 00
M. T. Johnson, Jr_ 3,200. 00
O. L. Kilgore_ 3,200. 00
Benton King_ 400. 00
Elsie G. Kingsley_ 1, 600.00
David Kritser_ 3, 200. 00
Emmett LeFors_ 1, 600. 00
Stanley Marsh, Jr_ 32,200.00
B. E. McCormick_ 3,200. 00
Erlis Pittman_ 3,200. 00
Henry Reid_ 3,200. 00
J. Malcolm Shelton_ 1, 900. 00
John M. Shelton, III_ 2, 600.00
Beaumont Stinnett_ 1,300. 00
Jay Taylor- 16, 000. 00
Henry Thomson_ 300.00
Robert E. Underwood, Jr_ 600. 00
A. D. Weatherly_ 6,400. 00
Kif£ White_ 700. 00
Betty Wooldridge_ 3,200.00
John B. Wooten_ 16,000. 00
Total _$500,000.00

24. The Supplemental Escrow Agreement referred to in paragraph 8 of the'Sales Agreement that is quoted in finding 23 provided as follows:

Reference is hereby made to a Contract of Sale designated “Sales Agreement”, dated January 1, 1957, entered into by and between Tri-State Packing Company, Inc., therein and herein referred to as “Corporation”, certain individuals therein and herein referred to as “Stockholders”, certain individuals therein and herein referred to as “Guarantors”, Plomer Glover, Raymond Harris and William Wingfield, therein and hereinafter referred to as “Glover, et al.” said contract being referred to and made a part hereof for all intents and purposes as if copied and set out herein.
I
This Supplemental Escrow Agreement, entered into by and between those persons listed in said Sales Agreement as Stockholders, The First National Bank of Amarillo, Texas, herein referred to as “Bank”, Tri-State Packing Company, Inc., and Glover, et al., is to set forth the manner and methods by which said Bank is to perform its functions as Escrow Agent.
II
The signing of this contract by any Stockholder shall constitute an acknowledgment by him that all shares owned by said stockholder in said Corporation and in the custody of said Bank is held by said First National Bank under the terms and provisions of this Supplemental Escrow Agreement, and the said Sales Agreement whether said stock certificate is actually delivered to said Bank or whether said Bank already has custody of said stock under some previous agreement, it being intended that this Supplemental Escrow Agreement and said Sales Agreement is to supersede all other contracts and agreements with reference to said Bank’s custody of said stock and the disposition of same by the Bank and the certificates evidencing the ownership thereof.
Ill
All certificates of stock in said Corporation placed in the custody of said Bank under this Escrow Agreement, except one certificate for 625 shares, shall be endorsed by said stockholders in blank. One certificate for 625 shares shall be issued by said Corporation to said First National Bank of Amarillo, Texas, as trustee, the same to be held under the terms of this agreement. All said certificates so placed in escrow shall remain in the custody of said Bank, the same to be transferred to said Corporation upon the following conditions: Upon said Corporation or Glover, et al, obtaining the release of said Guarantors from a percentage of their respective liabilities to the First National Bank of Amarillo, Texas, and the First National Bank & Trust Company of Oklahoma City, Oklahoma, as described in Exhibit “C”, attached hereto, said Bank shall transfer to said Corporation certificates representing a sufficient number of shares so that said number of shares transferred to said Corporation shall equal the same percentage of the total shares originally placed in escrow under this Agreement; that is to say, upon the release of Guarantors of a given percent of their respective liabilities a like percentage of the total number of shares originally coming into the custody of the Escrow Agent shall be transferred to said Corporation. In determining whether said Guarantors have been released and the amount, said Bank shall be given a written statement of such release and the amount by E. B. Johnson, Lawrence B. Hagy and Jay Taylor, or any one of them. Such statement in writing signed by any one such three persons shall be said Escrow Agent’s authority for transferring the proper number of shares to said Corporation; said Escrow Agent, herein, being entitled to rely entirely upon such written statement. In performing its function of transferring said shares of stock to said Corporation upon said release of the Guarantors from their respective guaranties as herein provided, said Bank as Escrow Agent shall be guided by the terms and provisions contained in the paragraphs under Number 8, of said Sales Agreement. The indebtedness guaranteed is described in Exhibit “C” hereto attached.
IY
During the period for the performance of this contract, and until revoked by an instrument in writing and delivered to said Escrow Agent, the First National Bank of Amarillo, Texas, shall have and is hereby given power, authority and proxy at annual or special meetings of the stockholders of said Corporation and at any adjournment of said meetings, to vote all stock in said Corporation, certificates to which are at such time in the custody of said Bank as Escrow Agent, to the same effect that any stockholder, a party hereto, could do if personally present. Stockholders hereby waive notice of both annual and special meetings of the Stockholders, and direct that notice of such meetings made to said Bank shall be sufficient as notice to said Stockholders. Said Bank under this proxy given to it shall not vote in in a manner inconsistent with the provisions of said Sales Agreement.
Y
It is agreed that said Bank shall not be liable to any of the parties hereto for any acts done by it hereunder, except for its willful misconduct. Except as modified hereby, the original sales Agreement herein referred to shall remain in force and effect.
VI
This contract may be executed in counterparts, and when any counterpart is signed by any party or parties hereto, the same shall be valid and binding when all the parties hereto have signed this instrument or counterparts of the same.
EXECUTED this __ day of February, A.D., 1957.
Stockholders
[No signatures.]
ATTEST:
Secretary
ATTEST:
TRI-STATE PACKING COMPANY By-
Its President
THE FIRST NATIONAL BANK OF AMARILLO, TEXAS
By-
Its President
(S) Homer Glover Homer GloveR (S) Raymond Harris
RAYMOND HARRIS
(S) William Wingfield William Wingfield

25. Immediately prior to tbe signing of tbe Sales Agreement mentioned in finding 23, no member of tbe Glover group owned any of tbe plaintiff’s stock, or bad ever been a shareholder, officer, director, or employee of the plaintiff. The owners of all the plaintiff’s stock at that time were persons whose ownership could not be attributed to any of the members of the Glover group under the rules set out in Section 318 of the Internal Revenue Code of 1954, as modified by Section 382(a) (3) of that Code.

26. The Glover group did not “immediately secure the complete release of said Guarantors from 10% of the indebtedness for which said Guarantors now stand liable,” as provided for in paragraph numbered 1 of the Sales Agreement quoted in finding 23. Instead, the Glover group, pursuant to an agreement with the selling shareholders, made a cash contribution of between $30,000 and $35,000 to the plaintiff’s working capital.

27. (a) As of January 1,1957, in accordance with the provisions of the Sales Agreement quoted in finding 23, 250 shares of the plaintiff’s stock were transferred to Homer Glover, 249 shares were transferred to Raymond Harris, and 1 share was transferred to William Wingfield. These transfers were reflected on the plaintiff’s books. The stock so transferred constituted 10 percent of the total number of the plaintiff’s shares of outstanding stock at the time, and title to it passed to the transferees at once.

(b) In accordance with the terms of the Sales Agreement quoted in finding 23 and of the Supplemental Escrow Agreement quoted in finding 24, all of the plaintiff’s outstanding-stock, other than the shares transferred to members of the Glover group as indicated in paragraph (a) of this finding, was endorsed in blank and placed in escrow with The First National Bank of Amarillo, Texas.

28. On or about January 15, 1951, the Glover group took over the active management of the plaintiff, began to assemble personnel, and otherwise began to prepare for the resumption of slaughterhouse operations. A working force of approximately 30 employees was assembled. Five of these persons, all of whom were assigned to key positions, had formerly been employed by the Glover Packing Company of New Mexico, and some 12 or 15 of the employees had formerly been employed by the Path Packing Company in connection with the operations conducted by that company under the lease referred to in findings 16 and 17.

29. (a) As soon as the necessary preparations could be made, the plaintiff resumed slaughterhouse operations under the management of the Glover group. In conducting such operations, the plaintiff purchased cattle directly from farmers and ranchers and from local sales rings (i.e., public auctions) in the territory, and transported the cattle by motor truck to the slaughterhouse in Amarillo. At the slaughterhouse, the cattle were killed under humane slaughtering permits, and then were skinned and dressed. The carcasses were placed in the cooler for chilling. Afterwards, the carcasses were sold to wholesalers throughout the United States, and were shipped in refrigerated trucks to the customers.

(b) The plaintiff operated its rendering plant in connection with the slaughterhouse operations referred to in paragraph (a) of this finding.

(c) The plaintiff, in connection with the slaughterhouse operations referred to in paragraph (a) of this finding, did not cure any of the hides, but sold all of them green.

30. The Rath Packing Company made available to the plaintiff a list of the customers that Rath had been serving from the Amarillo slaughterhouse. After resuming operations, the plaintiff used this list in attempting to get business, and did make sales to a number of the persons listed.

31.(a) On January 24, 1957, the following persons were elected to the plaintiff’s board of directors: Homer Glover, Raymond Harris, William Wingfield, Arthur Glover, Jay Taylor, E. B. Johnson, and L. R. Hagy.

(b) During the interval between June 3,1952 (see finding 6) and January 24, 1957, the officers and directors of the plaintiff had been as follows:

Date of election Capacity
6- 3-52.. L. R. Hagy. President and Director.
6- 3-52.. Earle H. Jr.. Vice President to 8-16-54.
6- 3-52.. E. B. Johnson_ Secretary-Treasurer and Director.
6-18-52.. H. Beck Atkinson_ Director.
6-18-52.. David Kritser_ Director and elected Vice President
8-16-54.
6-18-52.. Stanley Marsh, Jr.. Director.
6-18-52.. John B. Wooten_ Director.

(c) Messrs. Hagy, Kritser, and Johnson continued to serve as President, Vice President, and Secretary-Treasurer, respectively, of the plaintiff after January 24, 1957, until July 20,1957 (see finding 32).

32.(a) On July 20, 1957, the following persons were elected to serve as the officers and directors of the plaintiff:

Homer Glover_President and Director.
Raymond Harris_Vice President and Director.
WiHiam Wingfield_Secretary-Treasurer and Director.
Arthur Glover_Director.
Lawrence Hagy_Director.
E. B. Johnson___ Director.
Jay Taylor__ Director.

(b) The persons listed in paragraph (a) of this finding continued to serve as the officers and directors of the plaintiff until the date of the trial.

33. In July 1957, the plaintiff commenced the legal steps that were required to change its name to Glover Packing Company of Texas; and soon thereafter the change of name was. effected. It was believed by the Glover group that the change of name would be beneficial to the plaintiff.

34. No member of the Glover group received any compensation from the plaintiff in 1957.

35. The slaughterhouse operations described in finding 29 were continued by the plaintiff to the time of the trial. In addition to such operations, the plaintiff sometime after 1957 began to buy and sell cheese and canned meats. Also, since the latter part of July 1961, the plaintiff has purchased sausage items and pork products from the Glover Packing Company of New Mexico for resale. The plaintiff has sold offal items (the heart, liver, tongue, trimmings, and cheek meat) to the Glover Packing Company of New Mexico.

36. Under the management of the Glover group, the plaintiff has been active and successful.

37. On or before February 1,1958, one-seventh of the guaranteed corporate indebtedness specified by the Sales Agreement quoted in finding 23 had been released, and one-seventh of that indebtedness has been released each year thereafter.

38. (a) On February 12, 1959, the President of The First National Bank of Amarillo, Texas, transmitted certificates representing 1,285 shares of stock in the plaintiff to Homer F. Glover at Roswell, New Mexico. A transmittal letter stated as follows:

I think I have the Tri-State Packing Company escrow matter settled up now. Under the terms of the escrow agreement, you are to receive one-seventh of the remaining 4,500 shares each time you pay your annual payment on the notes. You have made two of these payments, so you are entitled to two-sevenths of the 4,500.
This would amount to 1,285 shares, but since the shares are in odd numbers, I am enclosing 1,285 shares as shown by the enclosed list. This leaves 3,215 shares which we will deliver to you as annual payments are made.
The reason for delivering these original certificates is that we only have one certificate left in the book, and I thought this would suit you just as well. You have complied fully with this Agreement and I believe this brings us up to date on our part.

(b) In February 1961, certificates representing an additional 1,285 shares of stock in the plaintiff were transmitted to Mr. Glover by the bank.

(c) When Mr. Glover received the stock certificates referred to in paragraphs (a) and (b) of this finding, he turned them over to William E. Wingfield, who has kept them in a safe in Eoswell. The certificates have never been transferred to the plantiff’s ofiiee in Amarillo.

39. No entry has ever been made on any of the plaintiff’s books or records indicating that any of the stock transferred by the escrow agent, an mentioned in finding 38, has been canceled, or is held in the plaintiff’s treasury, or is one of the plaintiff’s assets.

40. (a) The plaintiff’s Federal income tax return for the year 1957 showed net earnings of $77,486.51. This contrasted with the plaintiff’s income tax returns for prior years, which had shown net operating losses in the respective amounts indicated below:

Wei
Year operating loss
1951_$63, 387. 63
1952_ 349, 008. 59
1953_ 65,771.99
1954_ 45, 912. 86
1955_ 29,925.61
1956_ 68, 580. 73

(b) In computing its income tax liability for the year 1957, the plaintiff claimed as a deduction $77,486.51 of its accumulated net operating losses. Therefore, the plaintiff’s Federal income tax return for 1957 did not show any income tax liability.

41. On or about November 14, 1960, the District Director of Internal Eevenue at Dallas, Texas, disallowed the deduction for the year 1957 referred to in finding 40(b), and assessed against the plaintiff a deficiency in the amount of $34,792.79. This deficiency was paid by the plaintiff on or about November 15,1960.

42. On or about November 21,1960, the plaintiff duly filed with the District Director of Internal Eevenue at Dallas, Texas, a claim for refund of the $34,792.79 referred to in finding 41. The grounds for the claim were stated by the plaintiff as follows:

For the calendar year 1957 the taxpayer corporation had a net income of $77,486.51. During the period 1951 through 1956, the taxpayer corporation sustained net operating losses and the net operating loss carryover to the year 1957 amounted to $622,587.41.
For the calendar year 1957, taxpayer corporation applied $77,486.51 of said net operating loss carryover to the reduction of net income of the corporation for the calendar year 1957. As a result, the taxpayer corporation had no tax liability for the calendar year 1957.
The examining officer in error determined that under the provisions of Section 382 of the Internal Kevenue Code said operating loss was not available to the corporation for the year 1957. The taxpayer corporation here asserts that under the provisions of Section 382 of the Internal Kevenue Code that said net operating loss is available to the corporation in that at no time during the existence of the corporation has the corporation changed its principal business, nor has the ownership of the stock of the corporation changed in such manner as to deny the corporation the benefits of its net operating loss carryover.

43. On or about April 6,1961, the plaintiff’s claim for refund referred to in finding 42 was rejected in full by the Commissioner of Internal Kevenue, and the plaintiff was so informed by means of a registered letter.

44. The present action for the recovery of the $34,792.79 mentioned in findings 41-A3 (plus interest) was instituted within the time prescribed by the relevant statute of limitations.

45. The plaintiff is the owner of the claim for refund upon which this action is based, and has not assigned such claim.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is therefore dismissed. 
      
       Section 382 of the Internal Revenue Code of 1954 provides, in part:
      “Sec. 382. Special limitations on net operating loss carryovers.
      “(a) Purchase of a Corporation and, Change in Its Trade or Business.—
      
        “(1) In general. — If, at the end of a taxable year of a corporation—
      “(A) any one or more of those persons described in paragraph (2) own a percentage of the total fair market value of the outstanding stock of such corporation which is at least 50 percentage points more than such person or persons owned at—
      “(i) the beginning of such taxable year, or “(ii) the beginning of the prior taxable year,
      “(B) the increase in percentage points at the end of such taxable year is attributable to—
      “(i) a purchase by such person or persons of such stock, the stock of another corporation owning stock in such corporation, or an interest in a partnership or trust owning stock in such corporation, or
      “(ii) a decrease in the amount of such stock outstanding or the amount of stock outstanding of another corporation owning stock in such corporation, except a decrease resulting from a redemption to pay death taxes to which section 303 applies, and
      “(C) such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership of the fair market value of such stock, the net operating loss carryovers, if any, from prior taxable years of such corporation to such taxable year and subsequent taxable years shall not be included in the net operating loss deduction for such taxable year and subsequent taxable years.
      “(2) Description of person or persons. — The person or persons referred to in paragraph (1) shall be the 10 persons (or such lesser number as there are persons owning the outstanding stock at the end of such taxable year) who own the greatest percentage of the fair market value of such stock at the end of such taxable year; except that, if any other person owns the same percentage of such stock at such time as is owned by one of the 10 persons, such person shall also be included. If any of the persons are so related that such stock owned by one is attributed to the other under the rules specified in paragraph (3), such person shall be considered as only one person solely for the purpose of selecting the 10 persons (more or less) who own the greatest percentage of the fair market value of such outstanding stock.
      “(3) Attribution of ownership. — Section 318 (relating to constructive ownership of stock) shall apply in determining the ownership of stock, except that section 318(a) (2) (C) shall be applied without regard to the 50 percent limitation contained therein.
      “(4) Definition of purchase. — For purposes of this subsection, the term ‘purchase’ means the acquisition oí stock, the basis of which is determined solely by reference to its cost to the holder thereof, in a transaction from a person or persons other than the person or persons the ownership of whose stock would be attributed to the holder by application of paragraph (3).”
      
        “(c) Definition of 8tocTo. — For purposes of this section, ‘stock’ means all shares except nonvoting stock which is limited and preferred as to dividends.”
     
      
       From the date of its organization until 1957, plaintiff’s name was TriState Packing Company. The name was changed by the new owners in 1957.
     
      
       As a matter of fact, Glover acted on behalf of himself and two associates who received one-half of the shares that the former stockholders gave up. It appears from the record, however, that Glover was the prime mover on the side of the new owners and the person directly responsible for plaintiff's operations after the acquisition. His name will be used to refer to the purchasers of the corporation's stock.
     
      
       During the time the stock was in escrow and in the treasury of the company, no dividends could be paid on it, and it could not be sold or hypo-thecated, and, hence, it had no value, except to Glover. It had only the potential value of a resumption of control of the coloration by the original stockholders upon a default by Glover in the performance of his agreement. In case of default by Glover, it certainly had no value.
     
      
       The signing of the agreement was actually completed sometime in February 1957. The action of the plaintiff’s officers in signing the agreement was ratified by the plaintiff’s shareholders in. July 1957.
     
      
       Exhibit “A” was not introduced in evidence.
     