Pepi, Inc. v. Commissioner

PEPI, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent Pepi, Inc. v. Commissioner Docket No. 276-67 United States Tax Court 52 T.C. 854; 1969 U.S. Tax Ct. LEXIS 70; August 25, 1969, Filed *70 Decision will be entered under Rule 50. The Industrial Expansion Committee of a group of American Philips corporations decided in March of 1957 to have one of the corporations in the group merge with A. Hollander & Son, Inc. in such a way that the Philips companies would acquire control of Hollander. This merger was effected in July 1957. Hollander had a two-million-dollar-plus net operating loss carryover. The loss resulted from a fur business which it had disposed of in the latter half of 1956. Respondent determined the principal purpose for the acquisition was to secure the benefit of a deduction for the loss carryover. In October of 1956 Hollander purchased a profitable chemical business. Petitioner asserts that the purpose for the acquisition of Hollander by Philips was business motivated in that Hollander was a public corporation listed on the New York Stock Exchange and it had the chemical business which was a business in an industry in which Philips was interested. Long prior to the disposition of Hollander's fur business and its acquisition of the chemical business, contact and association existed between Hollander's top management and Philips' company men and *71 Philips' men had aided Hollander in disposing of its losing fur business and financing its purchase of Brook Chemical Co. Held, that petitioner has failed to show that the acquisition of Hollander was not for the "principal purpose" of evasion or avoidance of income tax within the meaning of sec. 269, I.R.C. 1954, and that the net operating losses of Hollander used by the postmerger corporation in its 1958 and 1959 returns were properly denied as deductions. Ben Herzberg, Sherwin Kamin, and Robert J. Wolpert, for the petitioner. William F. Chapman and Larry Kars, for the respondent. Mulroney, Judge. MULRONEY *854 Respondent asserted *72 transferee liability against petitioner as transferee of Philips Electronics, Inc., for which he determined deficiencies in its income tax for the calendar year 1958 in the amount of $ 692,598.36 and for the taxable period January 1, 1959, through October 19, 1959, in the amount of $ 578,430.96. It is stipulated that if any income tax deficiencies exist against Philips for said years petitioner is liable for them as transferee. After concessions by both parties, the sole issue left for decision is whether Philips is entitled to deduct for the years in issue net operating losses sustained in prior years by a corporation to which petitioner (under its former name) is the successor by merger. FINDINGS OF FACT Some of the facts have been stipulated and they are found accordingly. This case involves the merger of a corporation in the group of American Philips companies with a corporation known as A. Hollander *855 & Son, Inc. We feel it will be helpful if we first give a short sketch of the corporations and corporate interests in this group of American Philips companies. The Hartford National Bank & Trust Co. of Hartford, Conn., was trustee for a trust established in 1938 for the*73 benefit of the shareholders of N. V. Philips associated companies of Eindhoven, Netherlands, which we will call Dutch Philips. This trust owned all of the stock of a holding company named Philips Industries, Inc. This holding company, which we will refer to as Industries, owned all of the stock of a company named Philips Electronics, Inc., which was an operating company in existence prior to the July 1957 merger which is involved in this case. This company operated two divisions manufacturing electronic sealing devices and other electronic instruments. This is the first company named Philips Electronics, Inc., and we will refer to it as Old Philips to distinguish it from a later company by the same name. In July of 1957 Old Philips was merged into A. Hollander & Son, Inc. (hereinafter called Hollander), a publicly held company whose stock was traded on the New York Stock Exchange, with the result that Hollander was the surviving company. This merger was accomplished by the conversion of all of the stock held by Industries in Old Philips into shares of Hollander with the result that Industries, after an additional adjustment, thereafter owned approximately 64 percent of the stock*74 of Hollander, the surviving company. After the merger Hollander changed its name to Philips Electronics, Inc. It continued to conduct the electrical business and the chemical business operated by Old Philips and Hollander before the merger. We will refer to this postmerger corporation as Philips to distinguish it from the premerger corporation of the same name that we are calling Old Philips. The petitioner in this case, Philips Electronics and Pharmaceutical Industries Corp., is the successor by a later merger to Philips. This previously mentioned trust, of which the Hartford National Bank & Trust Co. was trustee for the benefit of the shareholders of two Dutch companies, also owned all of the stock of North American Philips Co., Inc. This company operated various divisions mainly for the manufacture of electrical equipment and it owned all of the stock of other corporations. In 1954 North American Philips Co., Inc., secured 49 percent of the stock of Reynolds Spring Co., hereinafter called Reynolds, a publicly held company whose stock was traded on the New York Stock Exchange. This acquisition was accomplished by means of selling or transferring to Reynolds Spring Co. a division*75 and subsidiary corporation (A. W. Haydon Co.) then owned by North American Philips Co., Inc., for 279,000 shares of Reynolds stock which aggregated 49.9 *856 percent. Before this acquisition Reynolds sold its operating assets and business in the automotive cushion-spring business activity because North American Philips, Inc., had no interest in acquiring this business. This spring business had in fact produced losses and in the year of the transfer the carryover loss was around $ 750,000. After this merger the Reynolds Spring Co. changed its name to Consolidated Electronics Industries Corp. The surviving company attempted to use this loss as a deduction from income in its income tax returns but the loss was disallowed by the Commissioner under section 269, I.R.C. 1954. 1 When it appeared North American Philips had not acquired 50 percent of Reynolds the disallowance was determined under section 382. Petitioner, Philips*76 Electronics & Pharmaceutical Industries Corp., which, as we have stated, is successor by a later merger of Philips, is a Maryland corporation with its principal place of business in New York, N.Y. Philips filed corporate income tax returns for the calendar year 1958 and fiscal year 1959 with the district director of internal revenue for Upper Manhattan, New York. The American group of Philips companies had a committee, formed in early 1954, which was called the Industrial Expansion Committee. The regular members of this committee were four men who were each officers and directors of all or several American Philips companies. The chairman of the committee was Pieter van den Berg, who was president of all of the Philips companies. The other members of the committee were Arie Vernes, who was vice president of all of the Philips companies, Robert G. Dettmer, who was secretary or assistant secretary of all of the operating Philips companies, and Paul Utermohlen, who was an executive of various Philips companies. Utermohlen had been with the American group of Philips companies since the early 1930's and he possessed special skills as a financial technician and evaluator of corporations, *77 and he was the financial and economic advisor of all of the Philips companies. This committee concerned itself with acquisitions of other corporations by mergers of such corporations with various companies in the American Philips group. It had recommended the merger whereby North American Philips Co., Inc., had acquired 49.9-percent control of publicly listed Reynolds, later named Consolidated Electronics Industries Corp., after the latter corporation had first sold off its operating assets. Hollander was a Delaware corporation listed on the New York Stock Exchange. It was engaged primarily in the fur-processing business and in 1955 and for several years prior thereto it had suffered large losses. *857 Sometime in the first half of 1956 Paul Utermohlen, the aforementioned financial advisor to the Philips group of companies, recommended to Hollander that it engage Wallace A. Collins, a New York attorney. Collins had been counsel for the Philips group in the 1954 Reynolds merger and also other 1955 acquisitions wherein Consolidated Electronics, Inc., acquired the Alliance Division (manufacturer of small motors) from the Alliance Manufacturing Co. and all of the stock of Price*78 Electric Corp. Sometime later in May of 1956, the president of Hollander, James J. Colt, engaged Collins as counsel and full-time secretary of the company. It was decided to get rid of the company's fur business. During the next few months Collins was engaged in Hollander's spin-off of its operating assets to a new Delaware corporation it had formed for the purpose of taking over its fur business. This work was completed in September or October of 1956. At that time Hollander was little more than a corporate shell in that it had no operating business assets. It did, however, have real estate and other assets (some of its assets were in the stock of the newly formed Delaware corporation) of about a million and a half dollars. Sometime in August of 1956 Collins heard of a business corporation named the Brook Chemical Co. (hereinafter called Brook) and he heard of its availability for acquisition but only by a purchase of all of its stock for cash. After the spin-off of its fur business Hollander entered into negotiations for the purchase of Brook. This required Hollander to raise about $ 2,800,000 cash. Since Hollander was not at that time operating any business all of such *79 financing could not be secured through ordinary banking channels. It needed about a million and a half more security for a loan of $ 2,500,000. Collins worked with Paul Utermohlen to secure the loan for Hollander of a convertible debenture worth $ 1,600,000 which could be used in financing Hollander's purchase of Brook. Paul Utermohlen was essentially the business manager of a Delaware corporation known as the Schuyler Corp. All of the stock of this corporation was owned by a foundation that had been established as a welfare fund for employees of Dutch Philips. The business of this corporation was to seek and make investments in the United States for the benefit of the welfare fund. Paul Utermohlen had Schuyler lend a debenture it owned to Hollander. This debenture was in the face amount of $ 1,600,000. By using this debenture as collateral security Hollander was able to borrow $ 2,500,000 from two investment companies. Hollander bought all of the Brook stock. However, the primary consideration for Schuyler making this loan of the debenture to Hollander was that Hollander execute an agreement with Schuyler with respect to a future merger or acquisition. *858 The contract*80 under which Schuyler made the debenture available to Hollander for use as collateral security contained three relevant provisions: (a) It gave Schuyler the right to require Hollander, subject to the approval of the holders of a majority of the issued and outstanding capital stock, to acquire the capital stock or assets of, or merge with, a business enterprise offered or specified by Schuyler on or before September 1, 1957, meeting certain requirements. The requirements were that the corporation offered by Schuyler have a net worth of not less than $ 5 million and not more than $ 6 million and that it have a demonstrated earning power in each of the 3 preceding years of not less than $ 600,000 a year. (b) It provided that if the stockholders of Hollander approved, Hollander would exchange one share of its stock for each $ 10 of net worth of the business to be acquired, and (c) It provided further that if Hollander did not effect an acquisition by September 1, 1957, Schuyler had the right to require Hollander to purchase the collateral which it had furnished for $ 1,600,000 payable in cash or stock of Hollander. After the acquisition of Brook in October of 1956, Hollander dissolved*81 Brook and continued its business as a division. In March of 1957 the Industrial Expansion Committee of the Philips group of companies favorably recommended the merging of Old Philips into Hollander. This was accomplished by Schuyler in April of 1957, assigning the Schuyler-Hollander contract to Industries, the sole stockholder of Old Philips, and the execution of an agreement with respect to the merger between Industries and Hollander. On June 20, 1957, Industries and Hollander entered into an agreement and plan of reorganization and the boards of directors of Hollander and Old Philips entered into a merger agreement. On July 5, 1957, Hollander sent a proxy statement to its shareholders advising them of a special meeting called for July 25, 1957, to consider the merger agreement. The agreement was approved by the stockholders of Hollander on July 25, 1957, and by Old Philips' sole stockholder (Industries) on July 31, 1957. The merger was effective July 31, 1957. Pursuant to the merger the 243,921 shares of Hollander held by the public remained unchanged and the shares of Old Philips held by Industries were converted into 652,951 shares of the merged corporation. After the merger*82 of Old Philips into Hollander the surviving corporation changed its name to Philips Electronics, Inc. (Philips). Hollander continued after the merger (under its new name) to be listed on the New York Stock Exchange during the third quarter of 1957 and after that, Philips was listed on the American Stock Exchange. *859 As a result of the merger, Industries received approximately a 64-percent interest in the business of the merged companies and parted with about a 36-percent interest in Old Philips valued at somewhere between $ 2,700,000 and $ 4 million. The proxy statement sent by Hollander to its shareholders on July 5, 1957, concerning the proposed merger stated, in reference to Hollander's net operating losses: In view of the present status of the law on this subject, no determination has been made as to the availability of these net operating loss carryovers as a carry-over credit to offset future tax liability of the Company, and no representation has been made by the Company as to such availability. Neither the Company, Philips Industries or Philips Electronics gave consideration to the availability of this operating loss carryover in their determinations as to the advisibility*83 of the merger. After the merger, Philips, and later petitioner, continued the former chemical business of Hollander. This business was conducted for the first 6 years as a separate division or subsidiary. In the year 1958 the profits of this chemical division (and factoring subsidiaries) exceeded $ 564,000 before taxes. The corresponding figures for the next 5 years were: 1959, $ 725,000; 1960, $ 630,000; 1961, $ 1,048,000; 1962, $ 1,067,000; and 1963, $ 1,050,000. In 1968, petitioner, the successor to Hollander after the merger, had some 2 million more shares outstanding than Hollander had had after the merger in July 1957. Also, over the same period, the sales rose from $ 14 million to $ 160 million a year. Hollander and its wholly owned subsidiaries, Hollanderizing Corp. of America, Inc., and Competent Fur Dressers, Inc., sustained substantial losses during the years 1953, 1954, 1955, and 1956. Their income tax returns for said years reported the following net operating losses: Year Hollander Hollanderizing Competent 2 Total [1953] $ 332,357.57 $ 117,272.66 $ 449,630.23 [1954] 230,653.86 283,466.44 $ 3,257.54 517,377.84 [1955] 133,192.26 143,806.68 51,919.39 328,918.33 [1956] 837,323.63 837,323.63 Totals 1,533,527.32 544,545.78 55,176.93 2,133,250.03 *84 Hollanderizing and Competent were wholly owned subsidiaries of Hollander from prior to 1950, and both subsidiaries reported their income on a calendar year basis. On December 31, 1955, Hollanderizing and Competent were completely liquidated, and their assets were distributed to, and their liabilities assumed by, Hollander. *860 In its return for calendar 1958, the first of the years here involved, Philips took a net operating loss deduction, on account of the net operating loss carryovers from 1953 through 1956, of $ 2,015,354.73. 3 The taxable income reported for 1958 (before that deduction) was $ 1,242,766.50, leaving a balance of net operating loss carryovers, on the basis of the foregoing amounts, of $ 772,588.23, which Philips*85 deducted in its return for fiscal 1959. Respondent disallowed the net operating loss carryover deductions for both calendar 1958 and fiscal 1959, pursuant to section 269, as applicable to the years in issue. He asserted transferee liability against the petitioner and, as stated, petitioner has conceded that if any income tax deficiencies exist against Philips for calendar 1958 and fiscal 1959 that it is liable for them as transferee. OPINION The issue is whether petitioner is entitled to net operating loss deductions sustained in prior years under its former name. The resolution of that issue depends upon whether the principal purpose*86 of Industries in effecting the 1957 merger of Old Philips and Hollander was to secure the tax benefit of Hollander's carryover losses. Respondent determined that the losses were not deductible pursuant to section 269 because the "principal purpose" for the acquisition of Hollander was to secure a tax benefit not otherwise enjoyable. Section 269 as applicable to the years in issue provides that if "any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation * * * and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed." Since the determination of respondent is presumptively correct, petitioner has the burden of showing that the acquisition of Hollander was to serve a business purpose and that the principal purpose for such acquisition was not the evasion or avoidance of income tax. American Pipe & Steel Corporation, 25 T.C. 351 (1955), affd. 243 F. 2d 125*87 (C.A.9, 1957), certiorari denied 355 U.S. 906 (1957); Naeter Brothers Publishing Co., 42 T.C. 1 (1964). See also sec. 1.269-3(b), Income Tax Regs., and example (1) stating the basic facts of a merger that brings the acquired loss corporation's deductions into conjunction with the income of the acquirer corporation *861 will, in the absence of additional evidence to the contrary, be "indicative that the principal purpose for acquiring control was evasion or avoidance of Federal income tax." In order for the tax purpose to be found to be the principal purpose under section 269 it must exceed in importance all other purposes. Sec. 1.269-3(a)(2), Income Tax Regs.; Hawaiian Trust Co. v. United States, 291 F. 2d 761 (C.A. 9, 1961). Petitioner argues that the evidence establishes its acquisition of control of Hollander was not tax motivated and it had other sound business reasons for acquiring control of Hollander. Petitioner points to the evidence that Philips wanted Hollander because it was a public corporation with listed stock on the New York Stock Exchange and it had a profitable chemical*88 business which was a business in an industry in which the Philips companies were interested. Petitioner argues these business reasons constituted the principal purpose for Philips acquiring Hollander and not the expectation of using the latter's $ 2-million-plus loss carryover. Petitioner introduced two witnesses who were members of the Industrial Expansion Committee of the American Philips companies and who were present during the committee's consideration of the possible acquisition of Hollander. Robert Dettmer, the coordinator of growth and expansion on the committee, testified that when he first heard about Hollander in January of 1957 he realized that it fit the needs of the acquisition program of Philips. He stated in summary that (1) it was not so large that control could not be effected, (2) that it was a listed stock which would provide for the issuance of marketable securities for further expansion, and (3) that it had a profitable chemical business which would provide for an opening into the pharmaceutical field in which Philips was interested. He testified that these purposes were the only motivating factors that existed for the acquisition and control of Hollander. *89 Arie Vernes, who was vice president of the Philips companies and a member of the committee, stated that he agreed with the testimony of Dettmer. Petitioner argues that the corporate purpose of Philips is to be determined from the facts and circumstances as they existed in March of 1957 when the Industrial Expansion Committee made its decision to have Philips acquire Hollander. Petitioner felt no necessity to explain the earlier events and conduct of American Philips corporations' men beginning in May of 1956, indicating the existence of some informal understanding between Hollander's top management and American Philips corporations' men with regard to a possible merger with an American Philips company. Respondent argues these earlier circumstances must be scrutinized, and, when given due consideration, they show a series of coordinated moves whereby Philips planned to *862 acquire Hollander for the principal purpose of using Hollander's losses as a deduction against Old Philips income. We agree that the circumstances and events prior to the decision of the committee in March of 1957 must be examined. Section 1.269-3(a) (2), Income Tax Regs., provides, in part: The determination*90 of the purpose for which an acquisition was made requires a scrutiny of the entire circumstances in which the transaction or course of conduct occurred, * * * See also J. T. Slocomb Co., 38 T.C. 752, 764, where the inquiry was the business purpose of a merger, and we said: "The [business] purpose can more readily be determined by a thorough evaluation of the entire record and the inferences to be drawn therefrom." Any scrutiny of the circumstances surrounding this merger to determine the purpose of this acquisition must include the events that occurred in 1956. Respondent's theory is that the merger was plotted or planned in the fore part of that year when Hollander still had its losing fur business and its large carryover losses. Petitioner points out that there is just no evidence at all of any such plot or plan in 1956. It is true that there is no direct evidence of 1956 merger negotiations between Hollander and Philips. However, there is evidence by the testimony of petitioner's witness, Collins, that indicates some contact by a merger man of Philips companies with the top management of Hollander in the first half of 1956. Collins was the New*91 York lawyer who had represented the Philips companies in the Reynolds acquisition in 1954, the Alliance department acquisition in May and June of 1955, and the Price Electric Co. acquisition late in 1955. He testified that he was "called in" to Hollander around the last of May of 1956 and from that time on he worked full time on the activities of Hollander with respect to disposing of Hollander's fur business and its purchase of Brook, including the financing of that purchase. 4 The significant part of his testimony is that when has was asked on cross-examination who had called him in to the Hollander Company, he replied: "I believe it was Mr. Utermohlen who had recommended me to the Hollander Company. The actual request that I become counsel to the company came from Mr. Colt [the president of Hollander]." Petitioner's witnesses *92 describe Utermohlen as a longtime executive of American Philips companies, with some connection with the Dutch Philips companies at an earlier time. He is described by petitioner's witnesses as the financial and economic advisor of the Philips cluster of corporations, with special skills as a financial technician and evaluator *863 of corporations. He was also a member of the Industrial Expansion Committee whose concern was the acquisition of other corporations by mergers of such corporations with various companies in the Philips group. Thus we have the evidence that Utermohlen, who can be described as a Philips company merger expert, recommended the lawyer who had handled the Philips group's 1954 and 1955 mergers, to Hollander sometime in May or the earlier months of 1956. The record also shows that the S. D. Leidersdorf firm of accountants had been auditors for Hollander through 1955 and that in 1956 Hollander switched to Smith and Harder firm of accountants who were also the auditors for all of the American Philips companies. In the light of what we know occurred later in 1956, and in the complete absence of any explanation or any evidence to the contrary by petitioner, *93 there is a natural inference that this early contact resulted at least in informal merger talks between Utermohlen speaking for Philips and top management speaking for Hollander. And at that time, when its only business was the losing fur business, about the only thing that would be attractive to Philips would be Hollander's large carryover loss that might be used to offset Philips' substantial income. This inference that these early negotiations led toward merger and Philips' use of the loss becomes stronger by reason of what occurred in the remaining months of 1956. It is obvious Philips did not want the losing fur business. To merge and get rid of it later would indicate the principal purpose of the merger was the use of the loss carryover. See Arthur T. Beckett, 41 T.C. 386 (1963). The losing fur business had to be disposed of before the merger just as North American Philips had seen to it that Reynolds disposed of the losing spring business before the 1954 merger. During the next few months Collins performed services for Hollander in the matter of its spin-off of its fur business assets to a newly formed corporation. This work was completed*94 around September or October of 1956. When the spin-off was completed Hollander was little more than a corporate shell in that it had no operating business assets. It did have real estate and other assets of about a million and a half dollars. It was in the same position as Reynolds in 1954, after it had disposed of its losing spring business, just prior to its merger with North American Philips Co. It was a listed company with an attractive loss carryover of over $ 2 million but no operating assets. Anyone acquiring such a company would be quite vulnerable to the charge that the acquisition was for the primary purpose of using the loss carryover. Naeter Brothers Publishing Co., supra; and Fawn Fashions, Inc., 41 T.C. 205 (1963). In October Collins handled Hollander's purchase of Brook. Collins testified he had heard about Brook and the fact it might be acquired the previous August. This chemical company could only be acquired *864 for cash. The purchase of this company required Hollander to borrow a large amount of money. Since Hollander at that time was not operating any business it could not secure the *95 necessary financing through ordinary banking channels to make this purchase. Again Paul Utermohlen, the longtime employee and executive of the Philips group, and the financial adviser of the Philips companies and the exceptionally clever financial technician, helped Hollander. He worked with Collins in securing the loan of the debenture in the face amount of $ 1,600,000 needed by Hollander to finance its purchase of Brook. Utermohlen secured the help of a Delaware corporation known as the Schuyler Corp. All of the stock of this corporation was owned by a foundation that had been established as a welfare fund for employees, and their beneficiaries, of Dutch Philips. Paul Utermohlen was described by petitioner's witnesses as "almost a business manager for Schuyler Corporation." He arranged the required financing to enable Hollander to buy Brook by having Schuyler lend a $ 1,600,000 convertible debenture to Hollander which was used by Hollander as collateral security for a loan from two investment companies. A condition for the making of this loan of the debenture by Schuyler was that Hollander execute a strange sort of agreement with Schuyler which, in effect, gave Schuyler the *96 right to insist that Hollander enter into an acquisition or merger, not with Schuyler which was not an operating company, but with another company "offered or specified by Schuyler" meeting certain requirements. 5 With Utermohlen's position with American Philips companies and his position with Schuyler, it is not hard to guess the company that Utermohlen would "offer or specify." The agreement Utermohlen negotiated was in effect tailor made to require Hollander to merge with another Utermohlen alter ego, namely, a company in the Philips group. *97 Hollander executed the required agreement and after Brook was purchased by Hollander it was immediately dissolved and its chemical business was operated as a department of Hollander. Now Hollander was a corporation with a promising business as well as an attractive loss carryover. And the promising business had been infused into the Hollander shell by those who could only be called American Philips corporations' men. And these men had seen to it that Hollander could be required to merge into the Philips group. It fairly appears from the record that the fact that the merger proposal was to be submitted to the Hollander stockholders was not *865 considered much of a problem. Hollander was not a large company and its top management, with whom Utermohlen and Collins were dealing, owned or controlled 29 percent of its stock. The inference is strong that Utermohlen and Hollander's top management had long been in basic agreement on the advisability of the merger. We are not impressed with the recitation in the proxy statement sent by Hollander to its stockholders to the effect that the Philips companies gave no consideration to the availability of the operating loss carryover in*98 determining the advisability of the merger. There is a slight semblance of contrivance in this statement that tells Hollander's stockholders what Philips considered. The evidence is that the decision to acquire Hollander was taken by the committee in March of 1957 and the merger was completed in July of 1957. But this decision was only the final step which was contemplated in 1956 when Utermohlen, another member of the committee, started his contact with Hollander. When the evidence of these earlier events, which stands undisputed, is scrutinized we see the formation of a corporate purpose on the part of Philips in 1956 to acquire Hollander for the primary purpose of utilizing its carryover losses. It fairly appears that it was to be a step acquisition with the first step to have Hollander dispose of its losing fur business. It was the American Philips corporations' men who engineered this spin-off. The second step was to aid Hollander to get a new profitable business. It was the American Philips corporations' men who engineered Hollander's acquisition of Brook; and they did it in such a way as to preclude Hollander from refusing to merge with another company of their selection. *99 Petitioner's evidence is based on the circumstances as they existed in March of 1957 when the committee took what might be called the final step or the formal decision to acquire Hollander. But, as we have stated, the course of conduct that preceded this decision must be considered on the issue of the principal purpose for the acquisition. Temple Square Mfg. Co., 36 T.C. 88 (1961); Swiss Colony, Inc., 52 T.C. 25 (1969). When the earlier events are considered the obvious conclusion is that they are but steps in a plan designed to achieve the use of Hollander's large loss carryover by Philips. Petitioner's argument that it acquired Hollander in order to get its profitable chemical business is not very persuasive. This was a business that could be bought for cash and the financing of a direct purchase by a company in the American Philips group would have been simple. The American Philips companies' men did not need to go to all the work of helping Hollander, then almost a corporate shell, finance the purchase of Brook and then have Philips acquire Hollander. We think it was the goal of Philips' use of the loss carryover*100 that prompted this round-about acquisition of the chemical business. *866 We do not feel that petitioner established that its primary purpose in the merger was not the use of the loss carryover. It may well be that the fact Hollander was a public company made the merger more desirable. But we cannot allot to that desire the primary purpose for the merger. Dettmer testified that the desire to secure a public company for the Philips group was the sole and only purpose for the 1954 merger of North American Philips Co. with Reynolds. There the postmerger use of the approximately $ 750,000 carryover loss was disallowed. Besides the argument is weaker now for at the time of this merger the American Philips group had one public company whose stock was traded on the New York Stock Exchange, namely, Consolidated Electronics Industries Corp. The activities of Utermohlen, a member of the Industrial Expansion Committee, with respect to this merger stand completely unexplained. With no evidence to the contrary the only conclusion to be drawn from his conduct is the tax saving motive that might result from the merger he was attempting to secure for Philips. Petitioner did not see fit*101 to have Utermohlen testify though petitioner's counsel states on brief he was available. He suggests counsel for respondent should have subpoenaed him as a witness if his testimony was desired. The point is the burden was on petitioner and the record shows that Utermohlen was an active man in this merger. Dettmer, who was petitioner's chief witness and also a member of the Industrial Expansion Committee, was relied upon by petitioner to give the corporate purpose for the merger. He said he did not learn about the possibility of acquiring Hollander until January of 1957, though he said he was constantly looking for other companies suitable for merger and he saw both Utermohlen and Collins frequently. This was long after Utermohlen had started his activities that were obviously designed to accomplish the merger that ultimately resulted. One other comment should be made with respect to petitioner's evidence in this case. It would seem that corporate purpose should be established by a corporation's top officers or by those who shape the policy of the corporation -- the group often called the corporation's "top management." We do not have stockholder-officers of these American Philips*102 companies. All of the stock of Old Philips was owned by Industries and all of the stock of Industries was owned by the trust in Hartford for the benefit of the stockholders of the Dutch companies. However, each American company did have its complement of officers and some of them were stockholders in the Dutch companies. Dettmer, on whom petitioner chiefly relied, was not an officer in Industries that owned all of the stock of Old Philips. He was a stockholder in the Dutch companies. He said the policy of the American Philips companies with respect to acquisitions would be set by the *867 committee but van den Berg was the president of Industries and Dettmer went on to say: "van den Berg was ultimately responsible as the senior executive, and therefore he had without any question the right of veto over decisions." Dettmer also said Vernes was the senior vice president and in the absence of van den Berg "would have had that right of veto." van den Berg did not testify. The only explanation is that he left for Europe 8 days before the trial. Vernes, who was retired at the time of trial, said he was a stockholder in the Dutch companies. As stated, he testified that Dettmer's*103 testimony concerning the committee meeting on March 27, 1957, when the acquisition of Hollander was discussed and recommended, was correct. However, it appeared he had but little independent recollection of the meeting. He could not remember whether the fact that Hollander had a loss carryover was discussed but he thought it must have been discussed for as he said, "it is an integral part of the financial situation that you are considering." Thus the record shows that the role of Dettmer, petitioner's chief witness, was that of a subordinate advisor and also the collective decision of the committee was subject to the veto of van den Berg. He was the senior officer of the interlocking directors of the Philips group of American companies. Since van den Berg was the officer of Philips who determined and shaped the policy of the corporation, the testimony of Dettmer becomes little more than advice which was subject to the decisive will of others. We hold petitioner failed to carry its burden in this case. The evidence it presented fails to establish that the principal purpose of the merger was not to secure the benefit of Hollander's losses as a deduction from Old Philips' earnings. *104 We uphold the Commissioner's determination that Philips was not entitled to the claimed net operating loss carry-forward. Decision will be entered under Rule 50. Footnotes 1. All section references are to the Internal Revenue Code of 1954, unless otherwise noted.↩ 2. Competent sustained additional losses in 1953 and 1954 which were carried back to 1952. Since the carrybacks from 1953 and 1954 do not affect calendar 1958 or fiscal 1959, for convenience they have been ignored and the schedule sets forth only the losses available as carryovers.↩ 3. The returns for calendar 1958 and fiscal 1959 did not fully reflect the net operating loss deductions in that the deduction for calendar 1958 should have been $ 2,133,250.03 (instead of the lower amount erroneously stated in the return for 1958 of $ 2,015,354.73). In addition, the net operating losses should be increased, as the Commissioner has conceded, by the further sum of $ 2,056.↩ 4. At the time of trial Collins testified that he was secretary and manager of the Legal Department of Consolidated Electronics, Inc., and petitioner and a number of their subsidiaries.↩ 5. Collins testified: "But much more important is, Schuyler insisted that as the primary consideration for making this collateral available [the $ 1,600,000 debenture], that it get an option * * * to bring to Hollander a business, a business enterprise, * * * which would have certain financial charactics [sic], on the understanding that in the event Schuyler presented such a business enterprise to Hollander, that Hollander, subject to the approval of its stockholders, would acquire such business enterprise on the basis of issuing shares of Hollander at ten dollars a share against the net worth of the business enterprise so produced."↩