Kaufman, Chief Judge, Lumbard and Timbers, Circuit Judges.
Although we agree with the result reached by the Tax Court, unfortunately we cannot abide by the course taken to arrive at that decision. Accordingly, we are constrained to enter the labyrinthine structured tax laws, knowing full well the difficult and tortuous path that may lie ahead. Learned Hand so eloquently observed:
In my own case the words of such an act as the Income Tax, for example, merely dance before my eyes in a meaningless procession: cross-reference to cross-reference, exception upon exception . . . leave in my mind only a confused sense of some vitally important, but successfully concealed purport, which it is my duty to extract, but which is within my power, if at all, only after the most inordinate expenditure of time.*fn1
In its consolidated federal income tax return for the taxable year ending December 31, 1965, AMBAC Industries, Inc. reported a loss on its investment in stock and debt of its subsidiary, Space Equipment Corporation, in the amount of $396,464.92. In computing this loss, AMBAC failed to reduce the basis of its aggregate investment in Space by the sum of $293,075.58, the net operating loss sustained by Space in 1965, which amount AMBAC had also used to offset its own income through consolidation. In 1969, the Commissioner of Internal Revenue asserted a deficiency of $140,676.28 against AMBAC in order to prevent this alleged double deduction or "double tax benefit" gained through AMBAC's use of Space's 1965 net operating loss both to offset AMBAC's separate income and to increase its worthless investment deduction. AMBAC petitioned the Tax Court for a redetermination of this deficiency and the Court sustained the Commissioner's determination in full. Since we find nothing in the Code or the governing regulations which authorizes the double deduction sought by AMBAC, and in fact construe those regulations to prohibit such deduction, we affirm.
The facts as stipulated below*fn2 are quite straightforward. AMBAC is a manufacturer of automotive parts and electronic guidance systems and devices. During 1964,*fn3 AMBAC acquired 96.48% of the outstanding common stock of Space, a company engaged in the manufacture and sale of plastic parts for use in the aerospace industry. The total cost of the stock acquisition was $74,289.31. Thereafter, AMBAC loaned Space $892,899.50, of which a total of $50,201 was repaid by Space in October and November of 1964.
From March 31, 1964, to December 31, 1964, Space sustained a net operating loss of $153,079.88, which AMBAC offset against its income in computing the consolidated taxable income of the affiliated group for the taxable year ending December 31, 1964. Because of this loss, however, the board of directors of AMBAC and Space, at their January, 1965 meetings, resolved to discontinue the operations of Space and proceed to wind up its business. Pursuant to the plan of liquidation then adopted, Space disposed of its operating assets and ceased business activities. By June, 1965, its assets consisted solely of cash and accounts receivable and by November, 1965, all its creditors other than AMBAC had been paid in full. AMBAC received a total repayment of $367,442.91 from Space during 1965.
Space was liquidated on December 22, 1965. At that time AMBAC's cost basis for its Space stock remained $74,289.31, while the outstanding balance on its loans to Space totaled $475,255.59. In reporting this investment loss on its 1965 consolidated federal income tax return, AMBAC reduced its aggregate investment of $549,544.90 by Space's 1964 net operating loss of $153,079.88 but failed to make a similar adjustment for Space's 1965 net operating loss of $293,075.58, which sum had already been utilized to reduce consolidated taxable income on the tax return filed jointly by AMBAC and Space for that year. As a result of this omission, the Commissioner assessed the contested deficiency. We now turn to the Tax Court's analysis of the Commissioner's determination.
Before the Tax Court, all parties agreed that Treas. Reg. § 1.1502 -- 34A(b) (2) (i)*fn4 governed the computation of AMBAC's basis in the stock and debt of Space for purposes of determining the amount of AMBAC's worthless investment deduction. This regulation provides that AMBAC's basis in the stock and debt of Space must be reduced by the sum of:
all losses of such issuing corporation (Space) sustained during taxable years for which consolidated income tax returns were made or were required . . . after such corporation became a member of the affiliated group and prior to the sale of the stock (of the affiliate) . . . .
Moreover, where, as in this case, the taxable event requiring an adjustment in basis under § 1.1502-34A(b) (2) (i) is a worthless investment deduction and not a sale of the affiliate's stock, the regulation has been construed to read:
all losses of the issuing corporation (Space) sustained during taxable years for which consolidated income tax returns were made or were required . . . after such corporation became a member of the affiliated group and prior to the time when the ...