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109 T.C. No. 8
UNITED STATES TAX COURT
ALUMAX INC. AND CONSOLIDATED SUBSIDIARIES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7779-95.
Filed September 30, 1997.
For certain years prior to the period at issue,
petitioners, company A (A) and its subsidiaries (A
group), were members of an affiliated group of corporations within the meaning of sec. 1504(a)1 that had A as
its common parent, which filed consolidated returns for
those corporations. During that time, A had issued and
outstanding two classes of stock, each of which possessed 50 percent of the voting power of all classes of
its stock, one class of which was held by certain
corporations (B group stockholders) who were members of
an affiliated group of corporations (B group) within
the meaning of sec. 1504(a), and the other class of
which was held by certain other corporations (C group
stockholders). Company B (B) filed consolidated re1
Unless otherwise indicated, all section references are to the
Internal Revenue Code (Code) in effect for the years at issue.
All Rule references are to the Tax Court Rules of Practice and
Procedure.
- 2 turns for years preceding the period at issue as the
common parent of the B group.
Around the beginning of the period at issue, A
amended its certificate of incorporation (certificate)
and thereby effected certain changes in its capital
structure and in the rights of its capital stock.
Around the same time, A and its stockholders executed a
stockholders agreement (agreement) that also effected
certain changes in the rights of A's capital stock.
Thereafter, A had two classes of stock outstanding that
had the rights stated in the certificate and the agreement and that were held by the B group stockholders and
the C group stockholders, respectively.
For each year during the period at issue, B filed
a consolidated return in which it claimed to be the
common parent of an affiliated group within the meaning
of sec. 1504(a) that consisted of corporations in both
the A group and the B group. During the course of the
examination by the Internal Revenue Service of those
consolidated returns, either B or its successor executed written agreements extending the period of limitations under sec. 6501 for each year during the period
at issue for the assessment of tax due from the corporations that were included in those returns.
Held: For each year during the period at issue,
petitioners were not members of the affiliated group
within the meaning of sec. 1504(a) that had B as its
common parent, and, consequently, they are not entitled
to join in the consolidated return that B filed for
each of those years in which it claimed to be the
common parent of a group of corporations that included
petitioners. Held, further, the period of limitations
under sec. 6501 for each of the years during the period
at issue for the assessment of tax due from the A group
has not expired.
Willard B. Taylor, Michael Lacovara, Philip L. Graham, Jr.,
and Michael W. Martin, for petitioners.
Lewis R. Mandel and Robert E. Marum, for respondent.
- 3 OPINION2
CHIECHI, Judge:
Respondent determined the following defi-
ciencies in petitioners' Federal income tax:
Taxable Year Ended
Dec. 31, 1981
Dec. 31, 1983
Dec. 31, 1984
Dec. 31, 1985
Nov. 24, 19861
Deficiency
$5,663,086
11,454,565
40,433,142
48,511,681
23,175,558
1
We shall refer to the taxable year ended Nov. 24, 1986, as
1986.
The principal issues for decision are:3
(1) Were petitioners members of the affiliated group within
the meaning of section 1504(a) that had Amax Inc. (Amax) as its
common parent, which filed a consolidated Federal income tax
return (consolidated return) for each of the years 1984, 1985,
and 1986 that included petitioners?4
We hold that they were not
2
Unless otherwise indicated, our Opinion pertains to the years
1984, 1985, and 1986 (period at issue).
3
Correlative issues also remain as to whether petitioners are
entitled for 1981 and 1983 to general business credits that they
carried back (1) from 1984 to 1981 and (2) from 1985 and 1986 to
1983. Respondent claims, and petitioners do not dispute, that
resolution of those correlative issues is governed by the Court's
holdings on the principal issues presented.
4
We shall sometimes refer (1) to the corporations that are
petitioners in this case and that were included in the consolidated returns filed by Amax as the common parent of an affiliated
group for the years 1984, 1985, and 1986 as petitioners' group
and (2) to Amax and its subsidiaries, excluding petitioners'
group, that were included in those consolidated returns as the
Amax group.
- 4 and that therefore petitioners may not join in any of those
consolidated returns.
(2) Has the period of limitations under section 6501 for
each of the years 1984, 1985, and 1986 for the assessment of tax
due from petitioners' group expired?
We hold that it has not.
This case was submitted fully stipulated.
All of the facts
that have been stipulated are so found unless otherwise stated
herein.
General
Alumax Inc. (Alumax), a Delaware corporation organized by
Amax on October 17, 1973, had its principal place of business in
Norcross, Georgia, at the time the petition was filed.5
At all
relevant times Alumax has been an integrated aluminum company
engaged in the production and sale of primary aluminum, semifabricated products, and diverse fabricated products.
Amax, a New York corporation organized in 1887, has been at
all relevant times a worldwide supplier of metals and energy, as
well as a manufacturer and distributor of metals-related products
and chemicals.6
Prior to December 5, 1973, Amax' principal
businesses were in aluminum, coal, gold, and molybdenum.
Amax
conducted the aluminum business, which it had entered during
5
Since its incorporation, Alumax has operated under different
names.
6
Since its incorporation, Amax has operated under different
names.
- 5 1962, through certain domestic and foreign subsidiaries (Amax
Aluminum Group).
On December 5, 1973, Amax caused Amax Realty Corp. (Amax
Realty), Bemax Realty Corp. (Bemax), and Cemax Corporation
(Cemax), three of its wholly owned subsidiaries that were part of
the Amax Aluminum Group, to transfer to Alumax substantially all
of their respective assets.
In consideration for those trans-
fers, Alumax assumed substantially all of the respective liabilities of those corporations and issued to them 70, 58, and 52
shares, respectively, of its common stock.
On the same date,
Amax transferred to Alumax the capital stock of substantially all
of its other subsidiaries that were part of the Amax Aluminum
Group.
In consideration for those transfers, Alumax issued to
Amax 320 shares of its common stock.
After the transfers on
December 5, 1973, Alumax had 500 shares of common stock issued
and outstanding.
The 1974 Restructuring of Alumax
The 1974 Restated Certificate of Incorporation
and the 1974 Stockholders Agreement
On January 15, 1974, Alumax filed with the Office of the
Secretary of State of Delaware (Delaware Secretary of State) a
restated certificate of incorporation (1974 restated certificate
of incorporation) that was effective as of that date (1974
restructuring).
On a date not specified in the record, Alumax
and certain of its stockholders executed a stockholders agreement
- 6 dated as of January 16, 1974 (1974 stockholders agreement) that
contained certain of the provisions that were contained in the
1974 restated certificate of incorporation.
Unless otherwise
indicated, the 1974 restated certificate of incorporation effected, inter alia, the following.
Alumax was authorized to issue (1) 500 shares of class A
common stock (class A common stock) that had a par value of $100
a share and (2) 500 shares of class B common stock (class B
common stock) that had a par value of $100 a share.
As a result
of the 1974 restructuring, (1) the 320 shares of the Alumax
common stock that Amax held as of January 15, 1974, were changed
into 70 shares of the class A common stock and 250 shares of the
class B common stock, and (2) the 70, 58, and 52 shares of the
Alumax common stock that Amax Realty, Bemax, and Cemax, respectively, held as of that date were changed into 70, 58, and 52
shares of the class A common stock.
On January 30, 1974, pursuant to an agreement between Amax
and Mitsui & Co. Ltd. (Mitsui Japan), a Japanese general trading
company engaged at all relevant times, inter alia, in the trading
of base and refined metals including aluminum and the manufacturing of consumer and industrial products in Japan, Amax sold to
Mitsui Japan all 250 shares of the class B common stock that it
held for $125 million in cash.
Each share of each class of Alumax common stock had one
vote, and any action of the Alumax stockholders required an
- 7 affirmative vote of a majority of the outstanding shares of each
such class.
The affirmative action of a majority of the out-
standing shares of each class of Alumax common stock was required
(1) to amend, modify, or repeal the 1974 restated certificate of
incorporation and (2) to amend or repeal the Alumax bylaws.
The 1974 stockholders agreement provided that Alumax was to
pay dividends on or with respect to its stock at such times and
in such amounts as its board of directors (Alumax board) determined was appropriate in light of its earnings, cash flow, and
capital requirements.
Each share of each class of Alumax common
stock participated equally in all dividends and other distributions on or with respect to such stock, including distributions
in liquidation or dissolution and dividends or other distributions as may have been duly declared by the Alumax board.
The Alumax board, which consisted of 10 voting and 2 nonvoting members, exercised all corporate powers (Alumax board corporate powers) unless otherwise expressly provided by law, the 1974
restated certificate of incorporation, and/or the Alumax bylaws.
Except as not pertinent here, the class A common stock and the
class B common stock had the following voting rights with respect
to the Alumax board membership:
(1) The class A common stock had
the right by affirmative vote of a majority of the outstanding
shares of that stock entitled to vote to elect, remove with or
without cause, accept resignations of, and fill vacancies in the
offices of one-half of the voting members of the Alumax board;
- 8 (2) the class B common stock had the right by affirmative vote of
a majority of the outstanding shares of that stock to elect,
remove with or without cause, accept resignations of, and fill
vacancies in the offices of the remaining half of those voting
members; and (3) both classes of Alumax common stock had the
right by affirmative vote of a majority of the outstanding shares
of each such class of stock to elect, remove with or without
cause, accept resignations of, and fill vacancies in the offices
of any of the nonvoting members of the board and to increase or
decrease the number of those Alumax board members.
In exercising the Alumax board corporate powers,
(1) each voting member of the Alumax board had one vote;
(2) a majority of the five voting members of the Alumax
board who were elected by the class A common stock and a majority
of the five voting members of that board who were elected by the
class B common stock were necessary to constitute a quorum for
transacting business at any meeting of that board; and
(3) any action by the Alumax board required an affirmative
vote of a majority of each of the five voting members of that
board who were elected by the class A common stock and a majority
of the five voting members of that board who were elected by the
class B common stock, who were present and voting.
Amendments to the 1974 Restated
Certificate of Incorporation and
the 1974 Stockholders Agreement
On April 29, 1974, the 1974 restated certificate of incor-
- 9 poration was amended in order, inter alia, to restate (1) Article
Fourth (d) to provide that the Alumax board had 12, instead of
10, voting members and 3, instead of 2, nonvoting members and
(2) Article Fifth to provide that at any meeting of the Alumax
board 3 of the 6 voting members of that board who were elected by
the class A common stock and 3 of the 6 voting members of that
board who were elected by the class B common stock were necessary
to constitute a quorum for transacting business.
On June 26, 1974, the 1974 stockholders agreement was
amended to incorporate the amendments made to the 1974 restated
certificate of incorporation on April 29, 1974.
Transfers of Certain Alumax Stock During 1975
During 1975, Amax transferred the 70 shares of the class A
common stock that it held to its wholly owned subsidiary, Amax
Securities, Inc. (Amax Securities), a Delaware corporation and a
member of the Amax group.
Thereafter, small numbers of the
shares of the class A common stock were from time to time transferred to certain unidentified subsidiaries of Amax that were
members of the Amax group.
On March 31, 1975, Mitsui Japan sold 25 of the 250 shares of
the class B common stock that it held to Nippon Steel Corporation
(Nippon Steel), a Japanese corporation engaged at all relevant
times in a wide range of manufacturing, product development and
service activities in the metals, chemicals, ceramics, electronics, information, communications, environmental preservation,
- 10 engineering, and construction fields.
On February 27, 1980,
Mitsui Japan sold 175 of the 225 shares of the class B common
stock that it held to its wholly owned subsidiary Mitsui & Co.
(U.S.A.), Inc. (Mitsui USA), a New York corporation that conducted Mitsui Japan's principal trading activities in the United
States.
(We shall sometimes refer collectively to Mitsui Japan
and Mitsui USA as the Mitsui group or as the Mitsui group stockholders.)
The 1984 Restructuring of Alumax
On March 9, 1984, Alumax filed with the Delaware Secretary
of State a restated certificate of incorporation (1984 restated
certificate of incorporation) that was effective as of January 1,
1984 (1984 restructuring).
Also on March 9, 1984, Alumax and its
stockholders executed a stockholders agreement that also was
effective as of January 1, 1984 (1984 stockholders agreement) and
that contained certain of the provisions that were contained in
the 1984 restated certificate of incorporation.
Unless otherwise
indicated, the 1984 restated certificate of incorporation effected, inter alia, the following.
Alumax was authorized to issue (1) 250 shares of class A
common stock (Alumax class A common stock) that had a par value
of $100 a share, (2) 250 shares of class B common stock (Alumax
class B common stock) that had a par value of $100 a share, and
(3) 250 shares of class C common stock (Alumax class C common
stock) that had a par value of $100 a share.
However, no share
- 11 of the Alumax class A common stock could be issued and outstanding at any time that any share of the Alumax class C common stock
was issued and outstanding, and no share of the Alumax class C
common stock could be issued and outstanding at any time that any
share of the Alumax class A common stock was issued and outstanding.
As a result of the 1984 restructuring, (1) the 250 shares
of the class A common stock that Amax Realty, Bemax, Cemax, and
Amax Securities held were exchanged for 250 shares of the Alumax
class C common stock; (2) all shares of the class A common stock
were retired and became authorized and unissued shares of the
Alumax class A common stock; and (3) the 250 shares of the class
B common stock that Mitsui Japan, Mitsui USA, and Nippon Steel
held became 250 shares of the Alumax class B common stock.
(We
shall sometimes refer (1) to the holders of the Alumax class C
common stock as the class C stockholders or the Amax group
stockholders and (2) to the holders of the Alumax class B common
stock as the class B stockholders or the Mitsui/Nippon group
stockholders.)
On or about March 31, 1984, Mitsui Japan sold to
Mitsui USA the 50 shares of the Alumax class B common stock that
it held.
Accordingly, all 250 shares of the Alumax class B
common stock were thereafter held by Mitsui USA and Nippon Steel.
Throughout any period during which any Alumax class C common
stock was outstanding, (1) each share of the Alumax class B
common stock had one vote, and each share of the Alumax class C
common stock had four votes on each matter submitted to the
- 12 Alumax stockholders; and (2) at each meeting of the Alumax
stockholders, or a class of those stockholders, the holders of a
majority of the outstanding shares of the Alumax common stock
entitled to vote, present in person or by proxy, constituted a
quorum.
Throughout that period, at each meeting of the Alumax
stockholders, the Alumax stockholders were entitled to vote in
the aggregate (stockholder aggregate voting requirement), and not
by class, on all matters submitted to them (stockholder
nonrestricted matters) except certain stockholder restricted
matters discussed below, and the affirmative vote of a majority
of votes cast on the stockholder nonrestricted matters was
required to effect any stockholder action.
However, (1) any
stockholder action on any stockholder nonrestricted matter was
not to take effect for 14 calendar days if it was taken over the
express objection of the Mitsui group--the holder of a majority
of the outstanding shares of the Alumax class B common stock, and
(2) any such stockholder action was not to take effect at all if,
as a result of the Mitsui group stockholders' objection and
certain other events discussed below, shares of the Alumax class
C common stock were purchased by the Mitsui group or converted at
the election of the Amax group stockholders into shares of the
Alumax class A common stock.
An affirmative vote of a majority of the outstanding shares
of each class of Alumax common stock, voting by class and not in
the aggregate (stockholder class voting requirement), was re-
- 13 quired (1) to amend, modify, or repeal the 1984 restated certificate of incorporation; (2) to make, amend, or repeal the bylaws
(1984 bylaws); and (3) to effect any stockholder action on the
following matters (stockholder restricted matters) throughout the
period during which any Alumax class C common stock was outstanding:
(a) A merger of Alumax;
(b) an acquisition or a disposition of any material asset
(i.e., an asset which had, or would have upon acquisition, an
aggregate net book value on Alumax' books equal to at least 5
percent of its net worth as shown in its consolidated balance
sheet, prepared in accordance with generally accepted accounting
principles subject to modification to reflect Alumax and its
subsidiaries as a consolidated group separate from the Amax
group) (material asset);
(c) a partial or complete liquidation or dissolution of
Alumax;
(d) a capital appropriation or an asset disposition request
of $30 million or more;
(e) the election or any other selection or dismissal of any
chief executive officer of Alumax (CEO);
(f) any transaction involving Alumax and any affiliate of
Alumax (i.e., any stockholder of Alumax, any holder of a 20
percent or greater equity interest in such a stockholder, or any
entity in which any of the foregoing persons held a 20 percent or
- 14 greater equity interest) in which Alumax made a loan to the
affiliate or that was not in the ordinary course of business.
During 1984, 1985, and 1986, Alumax' net worth as shown in
its consolidated balance sheets was $738 million, $736 million,
and $783 million, respectively.
Accordingly, an asset consti-
tuted a material asset and its acquisition or disposition constituted a restricted matter that was subject to the stockholder
class voting requirement if it had a book value of at least $36
million; i.e., 5 percent of Alumax' net worth.
During the period at issue, Alumax had total assets of $1.7
billion.
Accordingly, a capital appropriation or an asset
disposition request of approximately 1.8 percent of Alumax' total
assets; i.e., $30 million, constituted a restricted matter that
was subject to the stockholder class voting requirement.
Throughout any period during which any Alumax class C common
stock was outstanding, the Alumax board was required to declare
and pay dividends to the extent of 35 percent of Alumax' net
income to the extent permitted by law (mandatory dividend provision).
The 1984 restated certificate of incorporation contained two
facially inconsistent provisions relating to the manner in which
dividends were to be allocated between the Alumax class B common
stock and the Alumax class C common stock.
of Article Fifth stated:
Paragraph (b)(i)(A)
"Dividends on Class C Common Stock
shall be declared and paid at a rate per share equal to one-
- 15 quarter (1/4) the rate per share then declared on Class B Common
Stock".
Paragraph (b)(i)(C) of Article Fifth stated:
Except as otherwise provided in this subparagraph (i),
each share of Common Stock outstanding shall participate equally, share and share alike, in all dividends
and other distributions on or with respect to the
corporation's Common Stock, including distributions in
liquidation or dissolution.
All the dividends that were declared and paid by the Alumax
board pursuant to the mandatory dividend provision during the
period April 20, 1984, through April 25, 1986, were allocated 80
percent to the class B stockholders and 20 percent to the class C
stockholders.
On October 26, 1984, the one occasion during the
period April 20, 1984, through July 10, 1986, on which the Alumax
board declared dividends in excess of the amount required by the
mandatory dividend provision (excess dividends), it allocated
those excess dividends 50 percent to the class B stockholders and
50 percent to the class C stockholders.
On July 10, 1986, the Alumax board adopted a resolution
amending the 1984 restated certificate of incorporation that was
approved by the Alumax stockholders and that restated Paragraph
(b)(i)(A) of Article Fifth of that certificate to state:
"Divi-
dends on Class C Common Stock pursuant to * * * [the mandatory
dividend provision] shall be declared and paid at a rate per
share equal to one-quarter (1/4) the rate per share then declared
on Class B Common Stock."
Dividends that were declared and paid by the Alumax board
- 16 pursuant to the mandatory dividend provision on July 25, 1986,
and on October 24, 1986, were allocated 80 percent to the class B
stockholders and 20 percent to the class C stockholders.
On July
11, 1986, and on September 26, 1986, the two occasions after July
10, 1986, on which the Alumax board declared excess dividends, it
allocated such dividends 50 percent to the class B stockholders
and 50 percent to the class C stockholders.
On November 17, 1986, the Alumax board adopted a resolution
amending the 1984 restated certificate of incorporation that was
approved by the Alumax stockholders and that added the following
paragraph (b)(i)(D) to Article Fifth of that certificate:
Anything contained in this Article FIFTH to the contrary notwithstanding, a dividend of $4,532 per share
for each share outstanding of Class B Common Stock and
a dividend of $1,133 per share for each share outstanding of Class C Common Stock shall be declared payable
on or before * * * [a specified date] * * * to stockholders of record at the close of business on the
business day immediately preceding * * * [a specified
date] in respect of the portion of the corporation's
fiscal quarter ending on December 31, 1986 that shall
have elapsed up to and including * * * [that] date.
On November 20, 1986, the Alumax board declared dividends pursuant to paragraph (b)(i)(D) of Article Fifth of the 1984 restated
certificate of incorporation.
The Alumax board, which consisted of six voting members and
two nonvoting members (special class directors) throughout any
period during which any share of the Alumax class C common stock
was outstanding, exercised all corporate powers unless otherwise
expressly provided by law, the 1984 restated certificate of
- 17 incorporation, and/or the Alumax 1984 bylaws.
The Alumax class B
common stock and the Alumax class C common stock had the following voting rights with respect to the Alumax board membership:
(1) The Alumax class B common stock had the right by affirmative
vote of a majority of the outstanding shares of that stock to
elect, remove with or without cause, accept resignations of, and
to fill vacancies in the offices of two of those voting members
(class B directors); and (2) the Alumax class C common stock had
the right by affirmative vote of a majority of the outstanding
shares of that stock to elect, remove with or without cause,
accept resignations of, and fill vacancies in the offices of the
remaining four of those voting members (class C directors).
The class B directors and the class C directors, voting in
the aggregate and not by class, had the right to elect one of the
two special class directors (elected special class director).
That director was required to be any full-time employee of Alumax
other than the CEO of Alumax, who was required to be the other
special class director (CEO special class director).
Pursuant to
a side letter agreement dated and effective as of March 9, 1984,
among Mitsui Japan, Mitsui USA, and Amax, the class B directors
were to nominate a person to serve as the elected special class
director, and the class C directors were required to vote for
that person in the election of the elected special class director
and were not allowed to remove that person from that office
unless a majority of the class B directors voted in favor of such
- 18 removal.
The class B stockholders were entitled to appoint no more
than two observers at each Alumax board meeting.
Notices of
meetings of the Alumax board were sent to those observers who
were permitted to attend and participate in all discussions, but
not vote, at those meetings.
Throughout any period during which any Alumax class C common
stock was outstanding, (1) each of the two class B directors had
one vote and each of the four class C directors had two votes on
each matter submitted to the Alumax board for a vote, and (2) a
majority of the total number of directors constituted a quorum.
Throughout that period, at each meeting of the Alumax board, the
Alumax directors were entitled to vote in the aggregate (director
aggregate voting requirement), and not by class, on all matters
submitted to them (director nonrestricted matters) except certain
director restricted matters discussed below, and the affirmative
vote of a majority of votes cast on the director nonrestricted
matters by the directors present and voting at a meeting at which
a quorum was present and voting was required to effect any board
action.
However, (1) any board action on any director
nonrestricted matter was not to take effect for 14 calendar days
if it was taken over the express objection of any class B director, and (2) any such board action was not to take effect at all
if, as a result of that class B director's objection and certain
other events discussed below, shares of the Alumax class C common
- 19 stock were purchased by the Mitsui group or converted at the
election of the Amax group stockholders into shares of the Alumax
class A common stock.
An affirmative vote of a majority of the class B directors
and class C directors, voting by class and not in the aggregate
(director class voting requirement), was required to effect board
action on six director restricted matters (director restricted
matters) that were identical to the six stockholder restricted
matters.
During 1984, 1985, and 1986, the Alumax board voted on
various matters at regular quarterly meetings that were held in
January, April, July, and October of each such year.
In addition
to the matters on which the Alumax board voted at those meetings,
the Alumax board voted (1) on various matters at a special
meeting that was held in September 1986, (2) on various matters
by unanimous consent in lieu of a board meeting on four separate
occasions, and (3) by unanimous consent either in lieu of a board
meeting or at a special board meeting on 10 separate occasions.
During the period at issue, the Alumax board voted on a total of
approximately 134 matters.
The Alumax board held a regular quarterly meeting on January
27, 1984, prior to the date (i.e., March 9, 1984) on which Alumax
filed the 1984 restated certificate of incorporation with the
Delaware Secretary of State but after the date (i.e., January 1,
1984) on which that certificate, once filed, was to be effective.
- 20 At that meeting, the Alumax board, which consisted of 12 voting
members, one-half of whom were elected by the class A common
stock and one-half of whom were elected by the class B common
stock, voted by class on the following 11 matters:
(1) The
election of new officers; (2) three capital appropriations for
the expansion of two different facilities and the construction of
a plant in amounts not in excess of $15,864,000, $2,413,000, and
$250,686,000, respectively, that totaled $268,963,000 and that
represented, by value, approximately 57 percent of the
$469,159,525 of total capital appropriations and asset dispositions of Alumax during the period at issue; (3) the Alumax 5-year
forecast for 1984 through 1988; (4) the Alumax capital expenditure plan for that 5-year period; (5) the Alumax 1984 profit
plan; (6) the Alumax 1984 capital expenditure proposal; (7) the
declaration of dividends; and (8) two matters relating to employee compensation plans.
On March 8, 1984, which also was prior to the date on which
the 1984 restated certificate of incorporation was filed with the
Delaware Secretary of State and was one of the occasions on which
the Alumax board acted by unanimous consent either in lieu of a
board meeting or at a special board meeting, the Alumax board, as
it was structured prior to the 1984 restructuring, voted by class
on certain matters relating to that restructuring (e.g., the
amendment and restatement in the 1984 restated certificate of
incorporation of the 1974 restated certificate of incorporation,
- 21 the amendment of the Alumax bylaws, the amendment in the 1984
stockholders agreement of the 1974 stockholders agreement, and
the approval of the issuance of the Alumax class C common stock
that was authorized by the 1984 restated certificate of incorporation).
The holders of the class A common stock and the class B
common stock also voted by class on the first two of the foregoing matters before the 1984 restated certificate of incorporation
was filed with the Delaware Secretary of State.
During the period at issue, the director restricted matters
on which the Alumax board voted pursuant to the director class
voting requirement were:
(1) The approval of a $100 million
sale-leaseback transaction that represented, by value, approximately 21 percent of the $469,159,525 of total capital appropriations and asset dispositions of Alumax during the period at
issue; (2) the reelection of Robert Marcus (Mr. Marcus) as the
CEO and president of Alumax at Alumax board meetings held on
April 20, 1984, April 26, 1985, and April 25, 1986; (3) the
election of Paul Drack as interim president of Alumax on August
14, 1986, to succeed Mr. Marcus who resigned on August 12, 1986,
effective as of August 15, 1986; and (4) the approval of a loan
not in excess of $22,680,000 to Mitsui Japan and/or Mitsui USA.
During 1986, certain other matters on which the Alumax board
voted by class were:
(1) The amendments to the 1984 restated
certificate on July 10, 1986, and on November 17, 1986, that
related to the dividend provisions contained therein and that are
- 22 discussed above, and (2) the amendment and restatement of the
1984 restated certificate of incorporation and the Alumax 1984
bylaws and certain other matters, all of which occurred on
November 21, 1986, and all of which related to the 1986 restructuring of Alumax discussed below.
The foregoing amendments
and/or restatements of the 1984 restated certificate of incorporation and the 1984 bylaws were required to be, and were, approved by the Alumax stockholders voting by class on those
matters.
During the period at issue, the director nonrestricted
matters on which the Alumax board voted pursuant to the director
aggregate voting requirement included:
(1) The election of
officers other than the CEO; (2) a total of 28 capital appropriations and asset dispositions ranging from $1,300,000 to
$9,798,000 that totaled $100,196,525 and that represented, by
value, approximately 21 percent of the $469,159,525 of total
capital appropriations and asset dispositions of Alumax during
the period at issue; (3) the authorization of officers to enter
into on behalf of Alumax (a) agreements with banks for commercial
paper programs and/or lines of credit not in excess of $275
million and (b) long-term debt and/or swaps in excess of $100
million; (4) amendments to Alumax' thrift plans and retirement
plans; (5) a $50 million contribution to a subsidiary of Alumax;
and (6) the appointment of independent auditors.
Pursuant to a resolution that was adopted on April 21, 1983,
- 23 and that was in effect during the period at issue, the Alumax
board delegated to the president of Alumax the authority to
approve expenditures, within the approved capital expenditure
budget, in an amount not exceeding an aggregate of $1.5 million
per project, of which amount expenditures for capital assets
could not exceed $1 million and expenditures for working capital
could not exceed $500,000.
In connection with the 1984 restructuring, the Alumax bylaws
were amended.
Those amended bylaws (i.e., the 1984 bylaws)
provided in pertinent part:
In the absence of the Chairman of the Board and Vice
Chairman of the Board, the President shall preside at
all meetings of the Board of Directors and of the
stockholders at which he shall be present; he shall be
the chief executive officer and, except as herein
provided, shall have general charge and supervision of
the business of the corporation; and, in general, he
shall perform all duties incident to the office of
president of a corporation, and such other duties as,
from time to time, may be assigned to him by the Board
of Directors or as may be provided by law. At any time
that any share of Class C Common Stock is outstanding,
the President shall serve as a Special Class Director.
Thus, the individual who served as president of Alumax also
served as its CEO (president/CEO).
In connection with the 1984 restructuring, the Mitsui group
was granted certain rights that were expressly set forth in the
1984 stockholders agreement and either expressly set forth in the
1984 restated certificate of incorporation or incorporated into
that certificate by its reference to the 1984 stockholders agree-
- 24 ment.7
The Mitsui group's rights were triggered at anytime on or
before December 31, 1988, by the occurrence of any of certain
specified events (specified events) that could have jeopardized
the investment of that group in Alumax.8
One of the specified
events that would trigger those rights was the following:
The Directors or stockholders of Alumax * * * take any
action over the express objections of any Class B
Director or the holder or holders of a majority of the
outstanding shares of Class B Common Stock [viz., the
Mitsui group], respectively, and within 14 calendar
days after the taking of such action the Board of
Directors of Mitsui Japan (or, if Mitsui Japan does not
then own any shares of Class B Common Stock of Alumax,
the Board of Directors of Mitsui U.S.A.) * * * review[s] such action and * * * adopt[s] a resolution
stating that it has determined that such action could
have a material and adverse impact on the value of such
stockholder's stockholding in Alumax if it were to
become effective.
If the resolution referred to in the foregoing provision were
adopted, the action of the Alumax board to which a class B
director objected or the action of the Alumax stockholders to
which the Mitsui group stockholders objected would not become
effective unless (1) Amax challenged the determination by the
board of directors of Mitsui Japan or Mitsui USA that such an
action could have a material and adverse impact on its investment
in Alumax by notifying the Mitsui group of its challenge within 5
7
Although Nippon Steel held 25 shares of the Alumax class B
common stock, the 1984 stockholders agreement did not grant
Nippon Steel rights similar to those granted to the Mitsui group.
8
The Mitsui group's rights could be exercised by the Mitsui
group at anytime after Dec. 31, 1988, without the occurrence of
any of the specified events.
- 25 business days of its receipt of a notice that such a resolution
had been adopted, and (2) Amax was successful in its challenge.
If Amax timely provided the requisite notice of its challenge, a
panel of three arbitrators (panel), each of whom was named in the
1984 stockholders agreement, was to determine by majority vote
within 14 calendar days of that notice whether any action of the
Alumax board to which a class B director objected or any action
of the Alumax stockholders to which the Mitsui group stockholders
objected could have a material and adverse impact on the value of
the Mitsui group's stock in Alumax if it were to become effective.
If the panel were to decide that Amax' challenge was successful, the action of the Alumax board to which the class B
director objected or the action of the Alumax stockholders to
which the Mitsui group stockholders objected would become effective immediately, and the Mitsui group would not have the right
to purchase any shares of the Alumax class C common stock.
However, if for any reason the panel were not to reach a decision
on Amax' challenge within the prescribed 14-day period, it would
be deemed to have decided that Amax' challenge was unsuccessful.
If the panel were deemed to have decided or were to decide that
Amax' challenge was unsuccessful, the action of the Alumax board
to which a class B director objected or the action of the Alumax
stockholders to which the Mitsui group stockholders objected
would not become effective, and the Mitsui group would have the
- 26 right to purchase between 51 and 100 percent of the outstanding
shares of the Alumax class C common stock from Amax and/or its
subsidiaries at a price equal to 50 percent of the stockholder's
equity attributable to that stock (Mitsui's purchase right).
In
the event that the Mitsui group were to exercise the right to
purchase some or all of the Alumax class C common stock, the Amax
group stockholders would have the right to prevent such purchase
and to convert 100 percent of the Alumax class C common stock
into the Alumax class A common stock which was to have the same
rights as the class A common stock had prior to the 1984 restructuring (Amax' conversion right).9
In the event that the Amax
group stockholders were to exercise that conversion right, the
Mitsui group would no longer have the right to purchase any of
the Alumax class C common stock held by Amax and/or its subsidiaries.
(We shall refer to the provisions in the 1984 stockhold-
ers agreement and in the 1984 restated certificate of incorporation relating to the rights granted to the Mitsui group with
respect to actions of the Alumax board and the Alumax stockholders that the Mitsui group determined could have a material and
adverse effect on its investment in Alumax as the objectionable
action provision.)
The remaining specified events that would trigger the Mitsui
9
The Amax group stockholders had the right to exercise Amax'
conversion right at any time after Dec. 31, 1988, without any
prior action by the Mitsui group.
- 27 group's right under the 1984 stockholders agreement and the 1984
restated certificate of incorporation to purchase the Alumax
class C common stock, subject to Amax' conversion right, were:
(1) A downgrading below certain specified levels in the credit
rating of certain securities of Amax or Alumax; (2) specified
events triggering acceleration of certain indebtedness of Amax or
Alumax; (3) certain events of bankruptcy or insolvency of any
"significant subsidiary" of Amax; (4) certain changes in the
ownership of Amax and/or the subsidiaries through which Amax held
its shares of Alumax' stock; (5) a breach by Amax or Alumax of
the 1984 stockholders agreement, the then effective certificate
of incorporation of Alumax, the then effective bylaws of Alumax,
the pledge and indemnity agreement, and/or the tax-sharing
agreement (the last two of which are discussed below) "in a way
materially adverse to" the class B stockholders' stock in Alumax;
(6) a change that would cause the amount of obligations under the
pledge and indemnity agreement to exceed the foreclosure value of
the collateral pledged by Amax pursuant to that agreement; and
(7) a change in generally accepted accounting principles that
would prohibit Mitsui Japan and/or Mitsui USA from recording the
net income of Alumax in its financial statements.
In connection with the 1984 restructuring, Amax and Alumax
entered into an undated tax-sharing agreement (tax-sharing agreement) that was effective as of January 30, 1984.
provided that for Federal income tax purposes:
That agreement
(1) Alumax was
- 28 required to pay Amax 90 percent of the tax liability of petitioners' group, determined as if petitioners' group were a separate
consolidated group; (2) Amax was required to compensate Alumax if
Alumax were adversely affected by the inclusion of petitioners'
group in the Amax group; and (3) Alumax was required to compensate Amax if Alumax were to derive tax savings from the inclusion
of petitioners' group in the Amax group.
In order to determine the separate Federal income tax
liability of petitioners' group for purposes of the tax-sharing
agreement, Alumax was required to, and did, prepare pro forma
Forms 1120, U.S. Corporation Income Tax Returns (pro forma
returns), for each of the years 1984, 1985, and 1986.
Alumax was
required to prepare those pro forma returns as the common parent
of petitioners' group.
Each such pro forma return was to be
prepared by Alumax in such a manner as it deemed to be in its
best interest as the common parent of petitioners' group, determined as if Alumax filed a consolidated return on behalf of that
group for each of the years 1984, 1985, and 1986 and all prior
taxable years (including taxable years prior to the inclusion of
petitioners' group in the combined Amax group and petitioners'
group), without regard to the tax position or interests of Amax
or the Amax group.
In this connection, the tax-sharing agreement
provided in pertinent part:
Notwithstanding the inclusion of the Alumax Consolidated Group [petitioners' group] in the Combined Consolidated Group [defined in paragraph D of the tax-
- 29 sharing agreement as the Amax group and petitioners'
group together], for purposes of preparing such Pro
Forma Alumax Return, Alumax shall be entitled to any
and all elections, positions, and methods that would
have been available to it in the computation of the tax
liability of the Alumax Consolidated Group had it
continued to file separate consolidated returns as
common parent of the Alumax Consolidated Group. The
Pro Forma Alumax Return will be delivered to Amax and
to Mitsui U.S.A. together with a written description of
the significant elections used in the preparation of
such return no later than 30 days prior to the due date
for the Combined Consolidated Return [defined in section 2 of the tax-sharing agreement as the consolidated
Federal income tax return filed by Amax that included
petitioners' group] (taking into account any extensions
thereof that have been granted to AMAX). * * *
The tax-sharing agreement provided as follows with respect
to the filing of certain tax returns and documents and the
examination of those returns by the Internal Revenue Service
(IRS):
AMAX shall prepare and file the Combined Consolidated Returns [defined in section 2 of the tax-sharing
agreement as a consolidated Federal income tax return
filed by Amax that included petitioners' group] and any
other returns, amended returns and other documents or
statements required to be filed with the Internal
Revenue Service in connection with the determination of
the federal income tax liability of the Combined Consolidated Group [defined in paragraph D of the taxsharing agreement as the Amax group and petitioners'
group together]. AMAX shall provide Alumax with copies
of the portions of all such returns, documents and
statements which are related to Alumax Consolidated
Return Items [defined in section 6(a) of the tax-sharing agreement as items of income, deduction, gain,
loss, and credit of petitioners' group] promptly upon
filing thereof, and all calculations of the earnings
and profits of the members of the Alumax Consolidated
Group [petitioners' group] on an annual basis. * * *
While the parties recognize that AMAX will have
primary responsibility with respect to the conduct of
Internal Revenue Service examinations of the returns
- 30 filed by the Combined Consolidated Group and the AMAX
Consolidated Group [the Amax group], Alumax shall have
the sole and exclusive authority to contest, compromise
or settle any proposed adjustment or assessed or asserted deficiency relating to or resulting from any
Alumax Consolidated Return Item. AMAX shall with
respect to each taxable year for which a Combined
Consolidated Return is filed and each Post-Consolidation Year for which the tax liability of the AMAX
Consolidated Group is affected by Alumax Consolidated
Return Items provide Alumax with an executed power of
attorney, in a form satisfactory to Alumax, appointing
persons designated by Alumax as attorneys-in-fact to
represent AMAX before the Internal Revenue Service in
connection with any examination of the return or initiation or conduct of any refund claim for that taxable
year, to the extent related to Alumax Consolidated
Return Items, and shall not revoke the power without
first obtaining the written consent of Alumax. AMAX
shall promptly notify Alumax of and shall not object to
any requests by the Internal Revenue Service to deal
directly with any member of the Alumax Consolidated
Group in the course of an audit. AMAX shall not contest, compromise or settle any proposed adjustment or
assessed or asserted deficiency relating to or resulting from an Alumax Consolidated Return Item or that
would affect the Pro Forma Alumax Return [pro forma
returns] * * * or the actual federal income tax liability of the Alumax Consolidated Group for any taxable
year or seek a refund relating to an Alumax Consolidated Return Item without first obtaining the written
consent of Alumax. Alumax shall keep AMAX fully informed of the status of any contest concerning an
Alumax Consolidated Return Item.
The tax-sharing agreement provided that it was to be binding
upon and was to inure to the benefit of any successor, by merger,
acquisition of assets, or otherwise, to any of the parties to the
same extent as if the successor had been an original party to
that agreement.
Also in connection with the 1984 restructuring, on or about
March 9, 1984, (1) a pledge and indemnity agreement (pledge and
- 31 indemnity agreement) was entered into among the class B stockholders, the class C stockholders, and The Bank of New York as
trustee, and (2) a letter agreement (letter agreement) was
entered into among Amax, Amax Realty, Bemax, Cemax, Amax Securities, Mitsui Japan, and Mitsui USA.
Pursuant to the pledge and indemnity agreement, the class C
stockholders pledged their Alumax class C common stock, and, in
the event that their Alumax class C common stock were converted
into the Alumax class A common stock, their Alumax class A common
stock, to be held in trust as security for the obligation of Amax
to indemnify Alumax and the class B stockholders against certain
tax and other costs that might arise out of the 1984 restated
certificate of incorporation, the 1984 stockholders agreement,
the tax-sharing agreement, and the transactions contemplated by
any such agreements.
Amax' obligation to indemnify Alumax
against certain tax and other costs as set forth in section 1 of
the pledge and indemnity agreement was as follows:
Amax shall indemnify and hold harmless Alumax in
the event that the Internal Revenue Service determines
on examination of the federal income tax liability of
the Alumax Consolidated Group [petitioners' group] or
the Combined Consolidated Group [the Amax group and
petitioners' group together] * * * for any taxable year
(an "Examination Year") that the inclusion of the
Alumax Consolidated Group in the Combined Consolidated
Group in the Examination Year or any other taxable year
was improper (an "Adverse Determination"). In the
event of an Adverse Determination, * * * [Amax] shall
repay as an indemnity to Alumax (i) the amount of any
payments made by Alumax to Amax pursuant to the Tax
Sharing Agreement with respect to the federal income
tax liability of the Alumax Consolidated Group for such
- 32 Examination Year * * *, reduced by (ii) the amount of
any payments made by Amax to Alumax pursuant to the Tax
Sharing Agreement with respect to the federal income
tax liability of the Alumax Consolidated Group for such
Examination Year * * * plus interest thereon * * *.
Amax shall further pay to Alumax the amount of any
penalties or additions to tax paid by the Alumax Consolidated Group as a result of such Adverse Determination, including any interest payable by Alumax with
respect thereto * * *. * * *
This Section 1 shall apply with equal force and
effect to any state or local tax based on or measured
by net income with respect to which Alumax makes payments to Amax pursuant to the * * * Tax Sharing Agreement.
Amax' obligation to indemnify the class B stockholders
against certain tax and other costs as set forth in section 2 of
the pledge and indemnity agreement was as follows:
Amax shall indemnify and hold harmless Mitsui
U.S.A., Mitsui Japan and Nippon [Steel] jointly and
severally against any federal, state or local taxes
based on or measured by income, which would not have
applied, or which are in excess of those which would
have been imposed, if the * * * [1984 restructuring]
had not occurred (other than: * * * [inter alia,
Federal income taxes relating to certain distributions
by Alumax that were subject to the dividends-received
deduction in the case of Mitsui USA and certain distributions of dividends that were taxed at a specified
rate under the Income Tax Treaty between Japan and the
United States]), including set-offs, expenses (including attorneys' fees), penalties, additions to tax, or
interest to which any such indemnitee may become subject or for which any such indemnitee may become liable
* * * with respect to or arising out of, directly or
indirectly, * * * [the 1984 restructuring], the [1984]
Stockholders agreement, the Tax Sharing Agreement, or
any transaction contemplated by either of the abovenamed Agreements.
Pursuant to the pledge and indemnity agreement, Amax, and
not Alumax or any other member of petitioners' group, was to have
- 33 control over any challenges by the IRS to the inclusion of
petitioners in the consolidated return filed by Amax for each of
the years 1984, 1985, and 1986.
That agreement stated:
(a)(i) If the Internal Revenue Service shall
propose an adjustment in the tax liability of the
Alumax Consolidated Group [petitioners' group] for
which Amax would be required to pay an indemnity pursuant to Section 1 of this Agreement (a "Challenge to
Consolidation"), then Alumax or Amax, whichever shall
receive notice of the Challenge to Consolidation from
the Internal Revenue Service, shall give prompt notice
to the other of the Challenge to Consolidation. Amax
shall determine in its sole discretion whether to
contest the Challenge to Consolidation, and, with
respect to any such contest, shall determine the nature
of all action to be taken to contest such Challenge to
Consolidation including (A) whether any action to
contest such Challenge to Consolidation shall be by way
of judicial or administrative proceedings, or both, (B)
whether any such Challenge to Consolidation shall be
contested by resisting payment of the proposed adjustment or by paying the same and seeking a refund thereof, and (C) if Amax chooses to proceed through judicial
proceedings, the court or other judicial body before
which judicial action shall be commenced. Amax shall
have full control over any contest pursuant to this
Section 3(a), but shall keep Alumax and the Mitsui
Group informed of the status thereof and shall consider
in good faith requests by them concerning the contest
of the claim.
(ii) Notwithstanding paragraph (i) above, Alumax
shall retain the rights specified in Section 6 of the
Tax Sharing Agreement with respect to issues described
therein other than whether the inclusion of the Alumax
Consolidated Group in the Combined Consolidated Group
[the Amax group and petitioners' group together] was
proper. * * *
The pledge and indemnity agreement further provided, inter
alia, that it was to terminate upon the earliest date on which
all of the following conditions were met:
(1) No taxing author-
ity was any longer entitled to propose an adjustment to any tax
- 34 liability of any party to the pledge and indemnity agreement
(other than the trustee) for any year that could result in any
amount's becoming due and payable pursuant to an obligation under
that agreement; (2) no contest of any such proposed adjustment
was pending; and (3) Amax did not have any obligations under the
pledge and indemnity agreement to Alumax or the class B stockholders.
The pledge and indemnity agreement provided that it and the
rights and remedies thereunder were to inure to the benefit of
and were to be binding upon the heirs, successors, and assignees
to the parties thereto.
The letter agreement provided in pertinent part:
If the change currently proposed in Section 61 of H.R.
4170 (Tax Reform Act of 1984) is enacted, or if other
United States federal tax legislation is enacted relating to the relationship between voting power and equity
ownership and having a similar effect on Amax's ability
to include the Alumax Consolidated Group * * * in
Amax's consolidated federal income tax returns, and as
a result either * * * [of the parties to the letter
agreement] determine * * * that the likelihood of
successfully contesting a possible challenge by the
Internal Revenue Service to the inclusion by Amax of
the Alumax Consolidated Group * * * in Amax's consolidated federal income tax return for any period is
materially reduced, * * * [the parties to the agreement] agree to take such action as is necessary (including without limitation making appropriate amendments of Alumax's [1984] Restated Certificate of Incorporation) to convert all outstanding shares of Alumax
Class C Common Stock into shares of Alumax Class A
Common Stock upon the date which is the later of (i)
the date of such determination (or as soon as practicable thereafter), or (ii) the last day preceding such
period.
- 35 During August 1986, Amax Realty and Cemax were liquidated,
and their respective assets, including the Alumax class C common
stock, were distributed to Amax.
Accordingly, all 250 shares of
the Alumax class C common stock were thereafter held by Amax,
Bemax, and Amax Securities.
The 1986 Restructuring and Subsequent Events
On November 24, 1986, Alumax filed with the Delaware Secretary of State a restated certificate of incorporation (1986
restated certificate of incorporation) that was effective as of
that date (1986 restructuring).
Alumax and its stockholders
executed an agreement dated as of November 24, 1986, that, inter
alia, terminated the 1984 stockholders agreement.
Pursuant to the 1986 restated certificate of incorporation,
Alumax was authorized to issue (1) 750 shares of Alumax voting
common stock with a par value of $100 a share and (2) 10 million
shares of Alumax preferred stock (Alumax preferred stock) with a
par value of $25 a share, which were to be issued from time to
time by the Alumax board as shares of one or more series of stock
with rights, preferences, and limitations as determined by the
Alumax board.
Four million shares of the Alumax preferred stock
were designated by the Alumax board as series A nonvoting preferred stock (Alumax series A nonvoting preferred stock) and were
exchangeable for the common stock of Amax.
On November 24, 1986, pursuant to a recapitalization and
stock purchase agreement that was entered into among Amax,
- 36 Alumax, Mitsui USA, and Nippon Steel on or about November 13,
1986:
(1) Mitsui USA exchanged 57 shares of the Alumax class B
common stock that it held for 4 million shares of the Alumax
series A nonvoting preferred stock; (2) Mitsui USA sold to Amax
for $291,500,000 the remaining 168 shares of the Alumax class B
common stock that it held; and (3) Nippon Steel sold to Amax for
$43,500,000 the 25 shares of the Alumax class B common stock that
it held.
As a result of the 1986 restructuring, the outstanding
shares of the Alumax class B common stock and the outstanding
shares of the Alumax class C common stock were converted into a
single class of Alumax common stock that was held entirely by
members of the Amax group.10
During 1987 and 1988, Mitsui USA exchanged the 4 million
shares of the Alumax series A nonvoting preferred stock that it
held for an unspecified number of shares of the common stock of
Amax.
Amax contributed that preferred stock to Alumax, which
then canceled it.
During 1988, Mitsui USA sold in secondary
public offerings all of the common stock of Amax that it held.
On November 15, 1993, Amax, which since the 1986 restructur-
10
Although the parties stipulated that, pursuant to the 1986
restated certificate of incorporation, "the Class A and Class B
Common Stock of * * * [Alumax] was converted into a single class
of common stock", we shall disregard that stipulation insofar as
it refers to the Alumax class A common stock, rather than the
Alumax class C common stock, because such reference is clearly
contrary to the facts established by the record that, pursuant to
that certificate, the Alumax class B common stock and the Alumax
class C common stock were converted into a single class of Alumax
stock. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181,
195 (1989).
- 37 ing had owned 100 percent of the outstanding shares of the Alumax
common stock, distributed to its common stockholders all of the
Alumax common stock that it held, and Alumax has been publicly
held since that time.
Immediately thereafter, Amax was merged
into Cyprus Minerals Company, and the surviving company and
successor to Amax was renamed Cyprus Amax Minerals Company
(Cyprus Amax).
Filing and Examination of the Consolidated Returns
Alumax filed consolidated returns for the calendar years
1981 and 1983 as the common parent of petitioners' group, an
affiliated group within the meaning of section 1504(a).
Amax filed consolidated returns for 1984, 1985, and 1986 on
September 15, 1985, September 15, 1986, and September 15, 1987,
respectively, in which it claimed to be the common parent of an
affiliated group within the meaning of section 1504(a) that
consisted of corporations in both the Amax group and petitioners'
group.
As part of the 1984 consolidated return that it filed,
Amax included the following documents:
(1) Form 851 (Affilia-
tions Schedule) that listed the corporations that were included
in the 1984 consolidated return, including the corporations in
petitioners' group; (2) a document dated August 12, 1985, entitled "ELECTION TO BE A MEMBER AS OF JANUARY 1, 1984" (election
document), that was signed by John A. Brader as vice president of
Alumax, and that provided:
- 38 Based on an Agreement dated January 30, 1984 by and
among Alumax Inc., AMAX Inc., Mitsui and Co., Ltd. and
Mitsui and Co. (U.S.A.) Inc. as amended that gives AMAX
Inc. 80% of the voting power of all classes of Alumax
stock entitled to vote, Alumax and each of its subsidiaries hereby elects under United States Treasury
Regulations Section 1.1502-76(b)(5)(i) to become a
member of the group of which AMAX Inc. is the common
parent as of January 1, 1984[;]
and (3) a "Disclosure Statement under Section 6661 of the Internal Revenue Code" that was required to be filed as part of that
return in accordance with an agreement between Amax and Mitsui
USA and that provided:
An Agreement dated January 30, 1984 by and among
Alumax Inc., AMAX Inc., Mitsui & Co. Ltd. and Mitsui &
Co. (U.S.A.), Inc. as amended (a copy of which is
attached hereto) gives AMAX Inc. 80% of the voting
power of all classes of Alumax stock entitled to vote.
* * * Based on the Agreement Alumax and each of its
subsidiaries has elected under United States Treasury
Regulations Section 1.1502-76(b)(5)(i) to become a
member of the group of which AMAX Inc. is the common
parent as of January 1, 1984. Accordingly, Alumax and
each of its subsidiaries is included as of January 1,
1984 in the AMAX Inc. Consolidated Income Tax Return
filed for the year ended December 31, 1984.
As a result of the inclusion of petitioners' group in the
consolidated returns filed by Amax for 1984, 1985, and 1986,
(1) the taxable income of petitioners' group for each of those
years was offset in the computation in those returns of the
consolidated taxable income by net operating losses of members of
the Amax group; and (2) general business credits (credits) under
section 38 of petitioners' group for each of the years 1984,
1985, and 1986 (consisting of investment tax credits for those
years and jobs credits for 1984 and 1985) were carried back
- 39 pursuant to section 39 to 1981 and 1983 in the respective amounts
of $5,663,086 and $11,454,565, resulting in Alumax' receipt of
tax refunds in those amounts pursuant to section 6411.
The consolidated return filed by Amax for each of the years
1984, 1985, and 1986 constituted the return of each member of
petitioners’ group for each such year, regardless whether the
inclusion of petitioners in each of those consolidated returns
was proper.
The respective periods of limitations on the assess-
ment of tax against petitioners’ group for each of the years
1984, 1985, and 1986 began to run on the date on which Amax filed
the consolidated return for each such year.
Respondent commenced an examination of the consolidated
returns that Amax filed for 1984, 1985, and 1986.
Prior to the
expiration of the time prescribed by section 6501 for the assessment of income tax due for each of those years from the corporations that were included, whether properly or improperly, in
those consolidated returns (Amax consolidated group), Amax and
respondent executed the following 11 separate written agreements
on Forms 872 (Consent to Extend the Time to Assess Tax) to extend
the period of time during which any such assessment could be made
by respondent:
Taxable Year(s) to which
Form 872 Applied
Date through
which Period of
Limitations Was
Extended
Date Signed by Officer of Amax
Date Signed by
Representative
of Respondent
1984
1983 through 1985
1983 through 1985
1984
Dec. 31, 1988
Dec. 31, 1989
June 30, 1990
June 30, 1991
Dec. 24, 1987
Aug. 1, 1988
June 20, 1989
Undated
Mar. 3, 1988
Aug. 15, 1988
July 5, 1989
Mar. 30, 1990
- 40 1985
1986
1983 through 1986
1983 through 1986
1983 through 1986
1983 through 1986
1983 through 1986
June 30, 1991
June 30, 1991
June 30, 1992
Dec. 31, 1992
June 30, 1993
Dec. 31, 1993
Dec. 31, 1994
Undated
Undated
Undated
Undated
Aug. 31, 1992
Jan. 28, 1993
Sept. 14, 1993
Mar. 30, 1990
Mar. 30, 1990
May 6, 1991
Jan. 24, 1992
Sept. 3, 1992
Jan. 29, 1993
Sept. 15, 1993
Each of the above-listed Forms 872 identified the "taxpayer(s)" as "Amax Inc. and Consolidated Subsidiaries" or "Amax
Inc. and Consolidated Subs" and stated in pertinent part that the
taxpayers so identified and a designated representative of
respondent "consent and agree to the following:"
(1) The amount of any Federal [income] tax due on
any return(s) made by or for the above taxpayer(s) for
the period(s) ended [December 31, 1983, December 31,
1984, December 31, 1985, and/or December 31, 1986] may
be assessed at any time on or before [one of the dates
stated on the Form 872 and listed above]. * * *
After the merger of Amax into Cyprus Minerals Company on or
around November 15, 1993, and before the expiration of the time
prescribed by section 6501 for the assessment of income tax due
for 1984, 1985, and 1986 from the corporations in the Amax
consolidated group, Cyprus Amax, the surviving company of that
merger and the successor to Amax, and respondent executed a
written agreement on Form 872 to extend the period of time
through June 30, 1995, during which any such assessment could be
made by respondent.
That Form 872 identified the "taxpayer(s)"
as "Amax, Inc. and Consolidated Subsidiaries" and stated in
pertinent part that the taxpayers so identified and a designated
representative of respondent "consent and agree" that the "amount
- 41 of any Federal INCOME tax due on any return(s) made by or for the
above taxpayer(s) for the period(s) ended December 31, 1983,
December 31, 1984, December 31, 1985 and December 31, 1986 may be
assessed at any time on or before June 30, 1995."
That Form 872
was signed on June 23, 1994, by an officer of Cyprus Amax, and on
June 27, 1994, by a representative of respondent.
The officers of Amax and Cyprus Amax who signed the Forms
872 in question were not at any relevant times officers of Alumax
or of any other member of petitioners' group.
Neither Alumax nor
any other member of petitioners' group executed at any relevant
times a written power of attorney or any other document explicitly referring to a power of attorney, which specifically authorized any of those officers to represent Alumax or any other
member of petitioners' group with respect to the years 1984,
1985, and 1986.
On March 15, 1995, respondent issued a notice of deficiency
(notice) to Alumax, Incorporated and Consolidated Subsidiaries.
In the notice, respondent determined, inter alia:
you are not qualified for inclusion in Amax, Inc.'s
affiliated group for the taxable years ended December
31, 1984, December 31, 1985 and November 24, 1986,
because Amax, Inc. did not satisfy the requirements of
I.R.C. §1504(a) during any portion of said taxable
years.
*
*
*
*
*
*
*
*
Accordingly, you are treated as filing separate income
tax returns for the years ended December 31, 1984,
December 31, 1985 and November 24, 1986. Your income
is figured as disclosed by the consolidated returns of
- 42 Amax, Inc. and subsidiaries, and by reference to pro
forma returns (Form 1120), prepared by you and submitted to Amax, Inc., as if you were separate from Amax,
Inc., and still the common parent of your own consolidated group.
*
*
*
*
*
*
*
*
Because of the determination that Alumax, Inc. and
consolidated subsidiaries, are not included in the
consolidated returns of Amax, Inc. for the taxable
years ended December 31, 1984, December 31, 1985, and
November 24, 1986, there is sufficient tax available to
absorb * * * [the] credits. Therefore, the credits are
not allowed as carrybacks.
Petitioners bear the burden of establishing that respondent's determinations in the notice are erroneous.
Welch v. Helvering, 290 U.S. 111, 115 (1933).
Rule 142(a);
That this case was
submitted fully stipulated does not change that burden or the
effect of a failure of proof.
Rule 122(b); Borchers v. Commis-
sioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir. 1991).
Consolidation
Section 1501 grants an affiliated group of corporations the
privilege of filing a consolidated return.
The dispute here
centers on whether for each of the years 1984, 1985, and 1986
petitioners were members of the affiliated group that had Amax as
its common parent, which filed a consolidated return for each of
those years that included petitioners.
The term "affiliated
group" is defined in section 1504(a).
The Deficit Reduction Act
of 1984 (1984 Act), Pub. L. 98-369, sec. 60(a), 98 Stat. 577-579,
amended the definition of an "affiliated group" in section
1504(a) (amended section 1504(a)).
Amended section 1504(a) is
- 43 generally effective for taxable years beginning after December
31, 1984.
1984 Act, sec. 60(b)(1), 98 Stat. 579.
Prior to its amendment by the 1984 Act, section 1504(a), as
pertinent here, defined the term "affiliated group" to mean
one or more chains of includible corporations connected
through stock ownership with a common parent corporation which is an includible corporation if-(1) Stock possessing at least 80 percent of
the voting power of all classes of stock and at
least 80 percent of each class of the nonvoting
stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible
corporations; and
(2) The common parent corporation owns directly stock possessing at least 80 percent of the
voting power of all classes of stock and at least
80 percent of each class of the nonvoting stock of
at least one of the other includible corporations.
After its amendment by the 1984 Act, section 1504(a), as
pertinent here, defined the term "affiliated group" as follows:
(1) In General.--The term "affiliated group"
means-(A) 1 or more chains of includible corporations connected through stock ownership with a
common parent corporation which is an includible
corporation, but only if-(B)(i) the common parent owns directly stock
meeting the requirements of paragraph (2) in at
least 1 of the other includible corporations, and
(ii) stock meeting the requirements of
paragraph (2) in each of the includible corporations (except the common parent) is owned
directly by 1 or more of the other includible
corporations.
- 44 (2) 80-percent voting and value test.--The ownership of stock of any corporation meets the requirements
of this paragraph if it-(A) possesses at least 80 percent of the
total voting power of the stock of such corporation, and
(B) has a value equal to at least 80 percent
of the total value of the stock of such corporation.
As pertinent here, the principal difference between section
1504(a) and amended section 1504(a) is that the definition of the
term "affiliated group" in the latter provision imposes an 80percent value test in addition to the 80-percent voting power
test that is imposed by both provisions.
Compare sec. 1504(a)
with amended sec. 1504(a).
Section 60(b)(2) of the 1984 Act, 98 Stat. 579, as amended
retroactively by section 1804(e)(2) of the Tax Reform Act of
1986, Pub. L. 99-514, 100 Stat. 2800, provides the following
special rule for the effective date of amended section 1504(a)
(special effective date rule):
(2) Special Rule for Corporations Affiliated on June
22, 1984--In the case of a corporation which on June 22,
1984, is a member of an affiliated group which files a
consolidated return for such corporation's taxable year
which includes June 22, 1984, for purposes of determining
whether such corporation continues to be a member of such
group for taxable years beginning before January 1, 1988,
the amendment made by subsection (a) [viz, amended section
1504(a)] shall not apply. The preceding sentence shall
cease to apply as of the first day after June 22, 1984, on
which such corporation does not qualify as a member of
such group under section 1504(a) the Internal Revenue Code
of 1954 (as in effect on the day before the enactment of
this [1984] Act).
- 45 On brief, the parties proceed on the assumption that section
1504(a) applies not only for 1984 but also for 1985 and 1986 and
that amended section 1504(a) does not apply for 1985 and 1986.
Consequently, they make no argument, and presumably they did not
present all the evidence that they might have, with respect to
the 80-percent value test in amended section 1504(a)(1)(B) and
(2)(B).
While we agree that section 1504(a) is applicable for
1984, we disagree that that section applies for 1985 and 1986.
That is because we find below that for 1984 petitioners were not
members of the affiliated group within the meaning of section
1504(a) that had Amax as its common parent.
Accordingly, the
special effective date rule does not apply, and the question
whether for 1985 and 1986 petitioners were members of the affiliated group that had Amax as its common parent must be resolved
under amended section 1504(a).
Since the parties address for each of the years 1984, 1985,
and 1986 only the 80-percent voting power test of section 1504(a)
before its amendment by the 1984 Act, and since that test, as
pertinent here, is essentially the same as the 80-percent voting
power test of section 1504(a) after its amendment by the 1984
Act, compare sec. 1504(a) with amended sec. 1504(a)(1)(B) and
(2)(A), we generally shall do the same.
However, we are in no
way suggesting that that is the only test that petitioners must
satisfy for 1985 and 1986 in order to be members of the affili-
- 46 ated group that had Amax as its common parent.
Nor are we
suggesting that petitioners have carried their burden of showing
that they satisfy the 80-percent value test of amended section
1504(a)(1)(B) and (2)(B).
To the contrary, on the record before
us, we find that they have not.
The dispute as framed by the parties is whether the Alumax
class C common stock owned by the Amax group stockholders possessed "at least 80 percent of the voting power of all classes of
stock" of Alumax within the meaning of section 1504(a)(1).11
It is petitioners' position that at all relevant times the
Alumax class C common stock possessed 80 percent of the voting
power of all classes of Alumax stock within the meaning of
section 1504(a)(1).
It is significant to our resolution of the
question presented under section 1504(a)(1) and amended section
1504(a) that petitioners do not contend that that stock possessed
more than 80 percent of the voting power of all classes of Alumax
stock.
11
Petitioners argue that "all judicial and administrative
Each party, and in particular petitioners, appears to have
misconstrued in material respects the arguments on brief of the
opposing party on the issue under sec. 1504(a)(1). As a result,
the briefs, and in particular petitioners' briefs, often address
arguments and contentions that we do not believe are even being
advanced by the opposing party. In any event, we shall resolve
the issue presented to us under sec. 1504(a)(1) and amended sec.
1504(a) by following the path mandated by the facts established
by the record and the applicable law.
- 47 authorities"12 that have construed the meaning of the terms
"voting stock" and/or "voting power" for purposes of section
1504(a) and its predecessor provisions in the Internal Revenue
laws support their position under section 1504(a)(1).
According
to petitioners, those cases and rulings
consistently have defined "voting stock" as stock that
has the right to vote in the election of directors and
have measured a stock's "voting power" by reference to
the voting power of the directors such stock elects.
They have specifically not taken into account voting
rights with respect to matters other than the right to
vote in the election of directors, no matter how extensive such rights may be, and have never measured voting
power other than by reference to the voting power of
directors. * * *
(We shall refer to the test that petitioners contend all pertinent case law and rulings require us to apply in resolving the
question presented under section 1504(a)(1) as the mechanical
test.)
According to petitioners, application of their mechanical
test mandates the following conclusions:
12
The so-called "administrative authorities" on which petitioners, as well as respondent, rely include various rulings, both
published and private, that the IRS has issued. (We shall refer
collectively to those rulings as rulings.) Revenue rulings are
not regarded as precedent in this Court. They merely represent
the position of the Commissioner of Internal Revenue (Commissioner) on a particular issue. Lucky Stores, Inc. and Subs. v.
Commissioner, 105 T.C. 420, 433 (1995). However, the public
generally has the right to rely on positions taken by the Commissioner in revenue rulings. Nissho Iwai Am. Corp. v. Commissioner, 89 T.C. 765, 778 (1987). Private letter rulings are not
regarded as precedent in this Court, and the public may not rely
on them. See sec. 6110(j)(3); Shelton v. Commissioner, 105 T.C.
114, 119 (1995).
- 48 The Class C stock owned by the Amax Group entitled the
Amax Group to elect four directors who could cast 8 out
of 10 votes cast on matters put to the Board. The Amax
Group, therefore, had 80 percent of the "voting power"
of the stock of Petitioner.
In reaching the foregoing conclusions about the voting power
of the class C directors and the Alumax class C common stock that
elected those directors, petitioners must, and do, carve out an
exception to the application of their mechanical test.
Instead
of assigning to the Alumax class C common stock, as their mechanical test would require, the voting power of the class C directors on all matters on which the Alumax board was to vote,
petitioners assign to that stock the voting power of those
directors only on the director nonrestricted matters on which the
Alumax board voted in the aggregate, and not by class.
Petition-
ers thus ignore the reduced voting power of the class C directors
and the increased voting power of the class B directors on the
director restricted matters that required a class vote, and
consequently a 50/50 vote, by the class C directors who were
elected by the Amax group stockholders and by the class B directors who were elected by the Mitsui/Nippon group stockholders.13
13
Petitioners also disregard the voting power of the Alumax
class B common stock and the Alumax class C common stock on the
stockholder restricted matters, which are identical to the
director restricted matters and on which a class vote was required by each of those two classes of stock. Indeed, petitioners do not even refer to that stockholder class voting requirement in advancing their arguments under sec. 1504(a)(1) in their
opening brief. It is only in their reply brief that petitioners
(continued...)
- 49 In support of the exception that they carve out of their mechanical test, petitioners assert:
The six matters requiring approval of each class
of directors in the case of Alumax covered a narrow set
of actions, such as mergers, material acquisitions and
dispositions and transactions with affiliates, that
frequently are the subjects of mechanisms, such as
class voting, intended to protect minority stockholders. * * * They fall far short of the unlimited list
of matters on which the preferred stockholders could
have voted in Erie Lighting [Co. v. Commissioner, 93
F.2d 883 (1st Cir.), revg. 35 B.T.A. 906 (1937)], or
would have been prevented from voting on in [Rudolph]
Wurlitzer [Co. v. Commissioner, 81 F.2d 971 (1936),
affg. 29 B.T.A. 443 (1933)], had those stockholders
known of and tried to exercise their voting rights.
In urging application of their mechanical test, petitioners
not only contend that the Court should ignore the respective director and stockholder class voting that was required on the
director and stockholder restricted matters, they also assert
that we should disregard (1) the mandatory dividend provision and
(2) the objectionable action provision.
13
That is because, accord-
(...continued)
appear to address that requirement. Although not altogether
clear to us, it appears, and we shall assume, that petitioners
contend in their reply brief that the stockholder class voting
requirement should be ignored for purposes of sec. 1504(a)(1) for
the same reasons that petitioners claim the director class voting
requirement should be ignored. Apparently, petitioners' position
with respect to the stockholder class voting requirement also was
difficult for the IRS to grasp. We draw this conclusion because
in Tech. Adv. Mem. 94-52-002 (Aug. 26, 1994), which was issued by
the IRS to petitioners on the question under sec. 1504(a)(1)
presented here, the IRS noted that petitioners had taken inconsistent positions as to whether "the Charter required each class
of shareholders to approve the Restricted Matters, at times
seeming to acknowledge the existence of this requirement and most
recently disputing its existence."
- 50 ing to petitioners, all the pertinent cases and rulings (1) reject any "argument that a preferential right to dividends [like
that which petitioners maintain was granted by the mandatory
dividend provision] gives the holders of the stock some of the
'voting power' of the stock not entitled to that preference" and
(2) determined voting power
on the basis of actual voting power at the time of
measurement, and * * * any possibility that voting
power might change as a result of an event, such as the
conversion of non-voting stock into voting stock or a
purchase or redemption of stock [like that which petitioners contend might occur under the objectionable
action provision], even if scheduled to occur, was
irrelevant [under those cases and rulings]. * * *
Petitioners further argue, in the alternative, that even if
the Court were to consider the director and stockholder class
voting requirements, the mandatory dividend provision, and the
objectionable action provision in resolving the issue presented
under section 1504(a)(1), the voting power of the Alumax class C
common stock would not be reduced below the 80-percent voting
power which petitioners contend that stock possessed.
That is
because, according to petitioners, those requirements and provisions did not "meaningfully impair the power of the [Alumax]
Board, operating through the Class C Directors, to manage the
business and affairs of Petitioner [Alumax]."
Respondent counters that at all relevant times the Alumax
class C common stock did not possess at least 80 percent of the
voting power of all classes of Alumax stock within the meaning of
- 51 section 1504(a)(1).
Respondent contends that although in
the vast majority of cases applying section 1504(a),
voting power can and should be measured by reference to
the election of directors * * *, in an aggressively
structured transaction like the instant case, election
of directors is not an appropriate measure of voting
power. In such a case, the Service will look beyond
the election of directors to determine voting power.
Respondent argues that "all judicial and administrative
authorities" that have construed the meaning of the terms "voting
stock" and/or "voting power" for purposes of section 1504(a) and
its predecessor provisions in the Internal Revenue laws support
respondent's position in the present case.
According to respon-
dent, those cases and rulings "disavow [petitioners'] * * *
purely mechanical test as the proper standard for voting power
under section 1504(a)."
While acknowledging that the pertinent
case law and rulings require the Court in the present case to
consider the right of the Alumax class C common stock to elect
the class C directors and the voting power of those directors in
resolving the issue presented under section 1504(a)(1), respondent contends that those cases and rulings also permit us in the
instant case to examine the voting power of the class C directors
on all board matters, not, as petitioners urge, just on those
board matters on which the directors were to vote in the aggregate, and not by class.
Respondent further contends that we must
also consider the impact of the class voting required by the
Alumax stockholders on the same restricted matters on which the
- 52 Alumax directors were required to vote by class, since that
stockholder class voting requirement gave the Alumax class B
common stock veto power over both the Alumax class C common stock
and the class C directors whom that class C stock elected.
Respondent also urges the Court to examine the impact of the
mandatory dividend provision and the objectionable action provision in resolving the issue presented under section 1504(a)(1).
That is because, according to respondent, those provisions placed
restrictions on the power of the Alumax board to act on certain
board matters and, consequently, on the voting power of the
Alumax class C common stock, which elected the class C directors
on that board, to participate in the management of Alumax through
those directors.
It is respondent's position that the cumulative effect of
the director class voting requirement, the stockholder class
voting requirement, the mandatory dividend provision, and the
objectionable action provision was to reduce the voting power of
the Alumax class C common stock well below 80 percent for purposes of section 1504(a)(1).
Since both parties rely on essentially the same case law and
rulings to support their divergent positions, it is obvious that
one of the parties is misconstruing them.
We conclude that
petitioners are incorrectly interpreting the cases and rulings in
question.
The only issue presented in the cases (viz, Erie
Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir.), revg. 35
- 53 B.T.A. 906 (1937), and Rudolph Wurlitzer Co. v. Commissioner, 81
F.2d 971 (6th Cir. 1936), affg. 29 B.T.A. 443 (1933)), on which
both parties rely was whether the stock in question was voting
stock or nonvoting stock for purposes of the applicable consolidation provisions.
Those cases did not even address how to
measure the voting power possessed by different classes of voting
stock for purposes of those provisions.
The questions presented
in certain of the rulings on which both parties rely (viz, Rev.
Rul. 69-126, 1969-1 C.B. 218; I.T. 3896, 1948-1 C.B. 72) were
whether the stock in question was voting stock or nonvoting stock
for purposes of the applicable consolidation provisions and how
to measure the voting power possessed by different classes of
voting stock for purposes of those provisions.
One or both of
those issues also were involved in certain of the other rulings
on which petitioners rely (e.g., Rev. Rul. 71-83, 1971-1 C.B.
268; Priv. Ltr. Rul. 90-26-047 (Mar. 30, 1990); Priv. Ltr. Rul.
83-42-014 (July 10, 1983); Priv. Ltr. Rul. 82-21-112 (Feb. 26,
1982)).
None of the cases or rulings on which petitioners rely
involved the facts presented in the instant case.
Nor does any
of them mandate that we adopt petitioners' espoused mechanical
test, let alone their application of that test, in determining in
the present case whether the Alumax class C common stock owned by
the Amax group stockholders satisfies the voting power requirement of section 1504(a)(1) and amended section 1504(a)(1)(B) and
- 54 (2)(A).14
To the contrary, Erie Lighting Co. v. Commissioner,
supra, the principal case on which both parties rely, supports
respondent's position that, in the present case, this Court
should examine all of the facts surrounding the management of
Alumax and the voting rights of the Alumax class B common stock,
the Alumax class C common stock, the Alumax board, and the
members of that board in order to determine whether the Alumax
class C common stock owned by the Amax group stockholders possessed "at least 80 percent of the voting power of all classes of
[Alumax] stock" within the meaning of section 1504(a)(1).
In Erie Lighting Co. v. Commissioner, supra, the court
addressed whether the preferred stock issued by the Erie Lighting
Company (ELC) was voting stock or nonvoting stock for purposes of
the applicable consolidation provisions.
In resolving that
issue, the court observed:
The purpose of the provisions relating to affiliated companies was to enable corporations under one
management to make a consolidated return as though they
were a unit in transacting business, and to avoid such
a manipulation of intercompany transactions as would
14
Petitioners do not cite Hermes Consol., Inc. v. United
States, 14 Cl. Ct. 398 (1988), even though they contend that if
respondent's position were adopted in the present case, the
application of many other Code provisions requiring "precise,
percentage determinations of voting power" would be called into
question. In Hermes, the court determined the voting power of
certain stock for purposes of sec. 269(a) by examining its right
to vote in the election of directors and its right to approve or
disapprove fundamental changes in corporate structure, although
the court acknowledged that the former factor was "more indicative" of that voting power than the latter factor. Id. at 405407.
- 55 prevent the government from correctly ascertaining and
collecting the sums as taxes that are justly due it.
Schlafly v. United States, * * * [4 F.2d 195 (8th Cir.
1925)] 8 Cir., 4 F.2d 195 at page 200; Atlantic City
Electric Co. v. Commissioner, 288 U.S. 152, 154, 53
S.Ct. 383, 384, 77 L.Ed. 667.
The Commissioner and the Board, in the construction of the acts prior to 1926, generally, whenever the
question was raised, followed this rule, that the stock
which must be taken into consideration in determining
whether grounds for affiliation exist, was stock having
a right to control the management of a corporation, as
in the election of directors.
With such an established and recognized construction by the Department, Congress in enacting the 1926
and 1928 acts should be held to mean by "nonvoting
stock" stock not having the right to vote for directors
who control the management of the corporation. * * *
*
*
*
*
*
*
*
"Voting stock may very properly be termed management stock." * * * [Erie Lighting Co. v. Commissioner,
supra at 884-885.]
The court in the Erie Lighting Co. case also quoted with approval
the following statement in Commissioner v. Shillito Realty Co.,
39 F.2d 830, 832 (6th Cir. 1930), affg. 8 B.T.A. 665 (1927):15
15
Petitioners contend on brief that the analysis in Commissioner v. Shillito Realty Co., 39 F.2d 830 (6th Cir. 1930), affg.
8 B.T.A. 665 (1927), "conflicts with, and must therefore yield
to, [the analysis] * * * of two subsequent decisions of the
Supreme Court," viz, Atlantic City Elec. Co. v. Commissioner, 288
U.S. 152 (1933), and Burnet v. Howes Bros. Hide Co., 284 U.S. 583
(1931) (per curiam). Not only did the court in Erie Lighting Co.
v. Commissioner, 93 F.2d 883 (1st Cir.), revg. 35 B.T.A. 906
(1937), the principal case on which petitioners rely to support
their mechanical test, quote with approval the above statement
from the Shillito case, it expressly found that that statement
was "in no way opposed" to the Supreme Court decision in Handy &
Harman v. Burnet, 284 U.S. 136 (1931), the controlling authority
on which the Supreme Court relied in deciding the Atlantic City
(continued...)
- 56 We think the term "stock," as used in the [consolidation] statute, is clearly intended to mean stock with a
potential voting power which, if asserted, will be
effective in the management or control of the corporation. [Erie Lighting Co. v. Commissioner, supra at
886.]
With the foregoing in mind, the court in Erie Lighting Co.
v. Commissioner, supra, proceeded to examine the facts before it,
including the nature of the matters on which the preferred stock
of ELC had the right to vote, and made certain judgments about
the nature of those various matters.
Based on that examination,
the court found that the ELC preferred stock had the right to
vote on many matters that it determined were "usually reserved to
the stockholders" (stockholder matters) but that it did not have
the right to vote in the election of ELC's board of directors,
unless dividends with respect to that preferred stock remained
unpaid for two quarterly periods, a condition that had not arisen
during the years in question.
Id. at 883, 885.
The matters that
the court in Erie Lighting Co. determined were "usually reserved
to the stockholders" included increases or reductions of capital
stock of the company, increases in its capital indebtedness, the
number of directors serving on ELC's board of directors, the
place of its principal office, and the time of its stockholder
15
(...continued)
Elec. Co. and Howes Bros. Hide Co. cases.
Commissioner, supra at 886.
Erie Lighting Co. v.
- 57 meetings.16
Id. at 885.
The court in Erie Lighting Co. did not
indicate that any of those stockholder matters on which the
preferred stockholders of ELC had the right to vote restricted
ELC's board of directors with respect to that board's management
of ELC's business and affairs.
Nor did it make mention of any
management matter that it believed was taken away from ELC's
board of directors by those stockholder matters.
To the con-
trary, the court in Erie Lighting Co. examined applicable State
law and the bylaws of ELC, found that under that law and those
bylaws the board of directors of ELC was entrusted with the
management of its business and affairs, and distinguished the
management matters that were entrusted to ELC's board of directors from the stockholder matters on which the preferred stockholders of ELC had the right to vote.
The court in Erie Lighting
Co. v. Commissioner, 93 F.2d at 885, concluded that those stockholder matters
are not a basis for holding that two corporations do
business as a single unit, or that the preferred stockholders control the management of the business enterprise. That is left to the board of directors.
16
It appears to us that (1) certain of the matters that the
court in Erie Lighting Co. v. Commissioner, supra, determined
were "usually reserved to the stockholders" were the types of
matters that under the laws of all States required a stockholder
vote or stockholder approval, and (2) the remainder of those
matters were the types of matters that under the laws of certain
States required a stockholder vote or stockholder approval. See
2 Fletcher Cyclopedia of Corporations, secs. 276, 543, 547 (perm.
ed. 1990 rev.); 5 Fletcher Cyclopedia of Corporations, supra
secs. 2001, 2105 (perm. ed. 1996 rev.).
- 58 The court held in Erie Lighting Co. v. Commissioner, supra at
885-886, that the preferred stock of ELC was not voting stock for
purposes of the applicable consolidation provisions because that
stock did not have the right to vote in the election of the board
of directors of ELC, which was entrusted with the management of
its business affairs, and therefore that stock did not have the
right to control that management.
Since Erie Lighting Co. v. Commissioner, supra, was decided,
pertinent rulings have, consistent with the rationale of the Erie
Lighting Co. case, considered the ability of stock to participate
in the management of a corporation through the election of one or
more directors in determining the existence of voting stock
and/or the extent of voting power for purposes of the consolidation provisions.
See, e.g., Rev. Rul. 69-126, 1969-1 C.B. 218;
I.T. 3896, 1948-1 C.B. 72.
However, none of those rulings
involved the facts presented here.
Nor did any of them suggest
that the power of the boards of directors involved in those
rulings, or of the members of those boards, was restricted or
limited, such as by completely taking away from those boards the
power to vote on certain matters relating to the management of
corporate business and affairs that were entrusted to those
boards under the applicable State law or by requiring a class
vote by different members of those boards on such board management matters.
- 59 Based on our examination of Erie Lighting Co. v. Commissioner, supra, and other pertinent authorities, we conclude that,
in the present case, we are not precluded from examining the
impact, if any, of the respective director and stockholder class
voting requirements, the mandatory dividend provision, and the
objectionable action provision on the power of the Alumax class C
common stock to participate in the management of Alumax, directly
and/or indirectly through the class C directors whom that stock
elected, and, therefore, on the voting power of that stock for
1984 for purposes of section 1504(a)(1) and for 1985 and 1986 for
purposes of amended section 1504(a)(1)(B) and (2)(A).
See Erie
Lighting Co. v. Commissioner, supra; see also Rev. Rul. 69-126,
supra; I.T. 3896, supra.
Before turning to an examination of those matters, we shall
set forth our views about the experts on whom the parties rely.
Petitioners rely on the opinions of R. Franklin Balotti (Mr.
Balotti) who is qualified as an expert on the general corporation
law of the State of Delaware and on the corporate governance and
capital structure of Delaware corporations and business organizations and who prepared an opening report and a rebuttal report
(collectively referred to as Mr. Balotti's reports).
Respondent
relies on the opinion of Bernard S. Black (Mr. Black) who is
qualified as an expert on corporate law, mergers and acquisitions, and corporate finance and who also prepared an opening
- 60 report and a rebuttal report (collectively referred to as Mr.
Black's reports).
We evaluate the opinions of experts in light of the qualifications of each expert and all other evidence in the record.
Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir.
1973), affg. 54 T.C. 493 (1970); IT&S of Iowa, Inc. v. Commissioner, 97 T.C. 496, 508 (1991); Parker v. Commissioner, 86 T.C.
547, 561 (1986).
We have broad discretion to evaluate "'the
overall cogency of each expert's analysis.'"
Sammons v. Commis-
sioner, 838 F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v.
Commissioner, 783 F.2d 906, 909 (9th Cir. 1986), affg. in part
and remanding in part T.C. Memo. 1983-200).
We shall disregard
any opinion of an expert that constitutes nothing more than that
expert's legal opinion or conclusion about a particular matter.
See Marx & Co. v. Diners' Club Inc., 550 F.2d 505, 508-512 (2d
Cir. 1977); Laureys v. Commissioner, 92 T.C. 101, 127-129 (1989).
We are not bound by the formulae and opinions proffered by an
expert, especially when they are contrary to our own judgment.
Orth v. Commissioner, 813 F.2d 837, 842 (7th Cir. 1987), affg.
Lio v. Commissioner, 85 T.C. 56 (1985); Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974285; Estate of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir.
1955), affg. T.C. Memo. 1954-139.
Instead, we may reach a
decision based on our own analysis of all the evidence in the
- 61 record.
Silverman v. Commissioner, supra at 933.
The persua-
siveness of an expert's opinion depends largely upon the disclosed facts on which it is based.
See Tripp v. Commissioner,
337 F.2d 432, 434 (7th Cir. 1964), affg. T.C. Memo. 1963-244.
While we may accept the opinion of an expert in its entirety,
Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C.
441, 452 (1980), we may be selective in the use of any portion of
such an opinion.
Parker v. Commissioner, supra at 562.
We also
may reject the opinion of an expert witness in its entirety.
See
Palmer v. Commissioner, 523 F.2d 1308, 1310 (8th Cir. 1975),
affg. 62 T.C. 684 (1974); Parker v. Commissioner, supra at 562565.
Mr. Balotti's Reports
We found the focus of Mr. Balotti's reports to be in large
part misdirected.
Mr. Balotti's reports focus primarily on
whether the director class voting requirement, the stockholder
class voting requirement, the mandatory dividend provision, and
the objectionable action provision prevented the board of Alumax
from managing its business and affairs.
He concludes that those
requirements and provisions did not "significantly alter or
impair" the power of the Alumax board to manage the business and
affairs of Alumax or the exercise of such power.
However, it is
respondent's position that the director class voting requirement
caused the Alumax board's power with respect to the restricted
- 62 matters to be divided equally between the class B directors and
the class C directors, not that that requirement impaired the
Alumax board's power to manage the business and affairs of
Alumax.
Moreover, it is not respondent's position that the
stockholder class voting requirement, the mandatory dividend
provision, and the objectionable action provision completely
prevented the Alumax board from managing the business and affairs
of Alumax; rather, it is respondent's position that the Alumax
board's power to manage any matter that was subject to that
requirement and those provisions was restricted.
We found certain of Mr. Balotti's opinions to be qualified
in material respects.
To illustrate, Mr. Balotti concedes that
the Alumax board's power was impaired by the director and stockholder class voting requirements, the mandatory dividend provision, and the objectionable action provision, albeit, in his
opinion, not "significantly".
By way of further illustration,
Mr. Balotti qualifies his opinion relating to the voting power of
the class C directors by stating that those directors "generally"
had 80 percent of the voting power of the Alumax board and by
concluding that in "most" circumstances the class C directors
could effectuate their will if they chose to do so.
Mr. Balotti
thus acknowledges, as he must on the facts presented in this
case, that the class C directors could not cast 80 percent of the
votes entitled to be cast by the Alumax board on all matters that
- 63 were submitted to it and that the power of the Alumax board was
"impaired", albeit, in his opinion, such impairment was not
"significant".
We also found certain of Mr. Balotti's opinions to be
internally inconsistent in material respects and/or to have been
reached by disregarding certain material facts to which the
parties have stipulated.
To illustrate, although Mr. Balotti
qualifiedly concludes that the director class voting requirement,
the stockholder class voting requirement, the mandatory dividend
provision, and the objectionable action provision did not "significantly" impair the power of the Alumax board to manage the
business and affairs of Alumax or the exercise of such power, he
nonetheless concludes unqualifiedly that the Alumax board managed
the business and affairs of Alumax.
By way of further illustra-
tion, although Mr. Balotti qualifiedly concludes that the class C
directors "generally" had 80 percent of the voting power of the
Alumax board and refers to the director class voting requirement
and the stockholder class voting requirement as "limitations on
the exercise of majority power by Amax", he nonetheless concludes
unqualifiedly that the class C directors had the right to, and
did exercise, 80 percent of the voting power of the Alumax board.
It is also noteworthy that Mr. Balotti's opinions appear to
have been based in large part on his view that the limitations on
the Alumax board resulting from the director and stockholder
- 64 class voting requirements, the mandatory dividend provision, and
the objectionable action provision are "similar" to the restrictions that are "commonly" imposed on the boards of directors of
other Delaware corporations "having analogous investor profiles"
in order to protect the interests of minority stockholders of
those corporations.
In a number of instances, Mr. Balotti's
reports do not disclose sufficient facts and data for us to be
satisfied that the boards of other Delaware corporations that do,
in fact, have investor profiles analogous to that of Alumax are,
in fact, commonly limited by all of the restrictions involved in
this case or by restrictions that are, in fact, similar to all of
those restrictions.17
17
See Rule 143(f)(1).
Indeed, to the extent that Mr. Balotti's reports do disclose
some facts describing what he concludes are restrictions that are
"similar" to the director and stockholder class voting requirements involved here, we disagree that such restrictions are
similar. By way of illustration, Mr. Balotti states that the
director and stockholder class voting requirements with respect
to all of the restricted matters presented here are comparable to
voting rights that are given to minority stockholders on events
such as a merger, an amendment to the certificate of incorporation, a sale of substantially all the assets of a corporation,
and a dissolution of a corporation. However, minority stockholders have voting rights on all of the matters mentioned by Mr.
Balotti because State law gives them such rights. See 2 Fletcher
Cyclopedia of Corporations, secs. 542, 544, 545, 546 (perm. ed.
1990 rev.). None of those matters relates to the management of
corporate business and affairs which are entrusted to its board
of directors under the applicable State law and on which the vote
or approval of the stockholders is not required by that law. In
contrast, most of the restricted matters on which the Alumax
directors and stockholders, respectively, were required to vote
by class were the types of matters relating to the management of
the business and affairs of Alumax that were entrusted under
(continued...)
- 65 In any event, even assuming arguendo that Mr. Balotti were
correct in his view that all of the restrictions involved in this
case, or similar restrictions, are common in Delaware corporations with investor profiles analogous to that of Alumax, in the
instant case, we nonetheless would determine the impact, if any,
of the director and stockholder class voting requirements, the
mandatory dividend provision, and the objectionable action
provision on the voting power of the Alumax class C common stock
for purposes of section 1504(a)(1) and amended section
1504(a)(1)(B) and (2)(A), just as we would consider the impact,
if any, of such facts on the voting power of the stock of any
17
(...continued)
Delaware law to the Alumax board except as provided in the 1984
restated certificate of incorporation and were matters on which
under Delaware law and that certificate the Alumax board was to
vote and on which the vote or approval of the Alumax stockholders
was not required by Delaware law, although it was required by
that certificate. By way of further illustration, Mr. Balotti
concludes that the mandatory dividend provision, which he describes as giving the Mitsui group "80 percent of the first 35%
of income distributed by dividends", is comparable to provisions
that grant superior dividend rights to preferred stockholders.
We disagree. Although the parties agree that the mandatory
dividend provision gave the Alumax class B common stock superior
dividend rights with respect to 35 percent of Alumax' net income,
that provision also required the Alumax board to declare and pay
dividends to all the Alumax stockholders to the extent of 35
percent of Alumax' net income. In contrast, the preferential
dividend provisions to which Mr. Balotti compares the mandatory
dividend provision usually do not obligate a company's board of
directors to declare and pay dividends, see 12 Fletcher
Cyclopedia of Corporations, secs. 5443-5446 (perm. ed. 1996
rev.), although once the board decides to declare dividends,
preferred stockholders with preferential dividend rights have
superior rights to such dividends.
- 66 other corporation which presented to us the same issue as is
presented here.
That is because neither the pervasiveness of
such class voting requirements and such dividend and objectionable action provisions in other corporations with analogous
investor profiles to that of Alumax nor the underlying reason for
their presence controls whether and/or how those requirements and
provisions affect the determination of whether the Alumax class C
common stock satisfies the 80-percent voting power test of
section 1504(a)(1) and amended section 1504(a)(1)(B) and (2)(A).
We did not find Mr. Balotti's reports to be helpful in
resolving the issue presented here under section 1504(a)(1) and
amended section 1504(a), and we do not rely on those reports in
making our findings and reaching our conclusions herein.
See
Fed. R. Evid. 702.
Mr. Black's Reports
We found certain statements in Mr. Black's reports to be
legal opinions that are beyond the proper scope of expert opinions.
See Marx & Co. v. Diners' Club Inc., 550 F.2d at 508-512;
Laureys v. Commissioner, 92 T.C. at 127-129.
By way of illustra-
tion, Mr. Black, whose reports focus primarily on whether the
director and stockholder class voting requirements, the mandatory
dividend provision, and the objectionable action provision
affected the voting power of the Alumax class C common stock for
purposes of section 1504(a), concludes that the "consolidation
- 67 rules in IRC § 1504 and related regulations were intended to ensure that the enterprises that are eligible for consolidation are
operated as a single 'business unit' and that this "purpose was
not achieved by Amax and Alumax between 1984 and 1986".
By way
of further illustration, Mr. Black concludes that the analysis
that he, as a corporate lawyer, applies in reaching his conclusions relating to the "total voting power" of the Alumax class C
common stock is the analysis that should be applied in interpreting "total voting power" under section 1504.
under section 1504:
He also opines that
(1) Generally, "the holder of 51% of the
voting power of a corporation's shares has (almost) 100% control
over the corporation's actions, both at the management/board of
directors level and at the shareholder level"; (2) where a class
of stockholders may elect 75 percent of the members of a company's board of directors, they have "close to 100% effective
voting power because those directors completely controlled * * *
the decisions * * * [of the] board" and do not have "less than
80% * * * voting power merely because they elected only 75% of *
* * [the] board"; and (3) "Amax had 80% voting control, and thus
(almost) 100% effective control," over certain actions that were
taken by Alumax.
Mr. Black further opines that the Alumax class C common
stock possessed slightly more than 50 percent, but less than 80
percent, of the "total voting power" of all classes of Alumax
- 68 stock.
The analysis that he used in reaching that conclusion
involved the following three steps:
(1) A division into four
categories of the range of actions that could be taken by Alumax;
(2) a determination of the "relative importance" of each such
class of actions; and (3) a determination of the degree of
"control" exercised by the Amax group stockholders and the
Mitsui/Nippon group stockholders over each such class of actions.
Mr. Black does not define or explain in his reports certain key
components of that analysis, such as his definition of "control".
In fact, he uses the term "control", as well as the terms "total
voting power", "voting power", "effective voting power", "effective control", "voting control", and "relative voting power",
without giving any of those terms a defined meaning; at times he
uses them as though they have the same meaning, and at other
times he uses them as though they have different meanings.
Assuming arguendo that Mr. Black's analysis were the proper
analysis to be applied in determining whether the Alumax class C
common stock satisfied the 80-percent voting power test of
section 1504(a)(1) and amended section 1504(a)(1)(B) and (2)(B),
we nonetheless would not find that analysis useful in making that
determination.
That is because some of the key steps in Mr.
Black's analysis require that he make qualitative judgments, but
at times he does not explain the bases for those judgments.
Rule 143(f)(1).
By way of illustration, Mr. Black concludes,
See
- 69 without providing any explanation, (1) that Alumax actions that
were subject to the director and stockholder class voting requirements were the “most important” type of actions to be taken
by Alumax and (2) that Alumax actions to be taken by the Alumax
board that were not subject to those requirements and that could
not possibly trigger the rights of Mitsui Japan and/or Mitsui USA
under the objectionable action provision were the "least important" type of actions to be taken by Alumax.
Certain of the conclusions that Mr. Black reaches in his
reports also are based on internally inconsistent statements.
For example, although Mr. Black proposes that "total voting
power" be measured by analyzing "the full range of actions to be
taken by Alumax and the degree of control Amax and Mitsui had
over those actions", he also proposes that "total voting power"
be measured based on "the voting power in fact exercised by each
class of the shares".
We did not find Mr. Black's reports to be helpful in resolving the issue presented here under section 1504(a)(1) and amended
section 1504(a), and we do not rely on them in making our findings and reaching our conclusions herein.
See Fed. R. Evid. 702.
The Class Voting Requirements
As a result of the stockholder class voting requirement with
respect to the stockholder restricted matters and the director
class voting requirement with respect to the director restricted
- 70 matters, each of the two classes of Alumax stock (viz, the Alumax
class B common stock and the Alumax class C common stock),
directly and indirectly through the respective directors whom
each class elected (viz, the class B directors and the class C
directors, respectively), had 50-percent voting power as to any
of those restricted matters.
That is because each class had the
power to cast 50 percent of the votes entitled to be cast on any
such matter.
(We shall sometimes refer collectively to the
stockholder restricted matters and the director restricted
matters as the restricted matters.)
Respondent generally contends that the director and stockholder class voting requirements as to each of the six restricted
matters affected the voting power of the Alumax class C common
stock for purposes of section 1504(a)(1).
However, in advancing
specific arguments in support of that contention, respondent
addresses only certain restricted matters that respondent claims,
and petitioners do not dispute, were (1) the types of matters
relating to the business and affairs of Alumax which under
Delaware law were to be managed by or under the direction of the
Alumax board except as provided in the 1984 restated certificate
of incorporation (Alumax board management matters); (2) matters
on which under Delaware law and the 1984 restated certificate of
incorporation the Alumax board was required to vote, and under
that certificate that vote was required to be a class vote of the
- 71 Alumax class B directors and the Alumax class C directors; and
(3) matters on which under the 1984 restated certificate of
incorporation but not under Delaware law the Alumax stockholders
were required to vote, and under that certificate that vote was
to be a class vote of the Alumax class B common stock and the
Alumax class C stock.
The restricted matters specifically
addressed by respondent are:
(1) Mergers of Alumax that would
not cause Alumax as the acquiring corporation to increase its
outstanding stock by more than 20 percent; (2)(a) Alumax' acquisition of a material asset (i.e., an asset with a net book value
of at least 5 percent of Alumax' net worth, viz, at least $36
million) or (b) a capital appropriation by Alumax of $30 million
or more (viz, 1.8 percent of its total assets); (3)(a) Alumax'
disposition of such a material asset or (b) an asset disposition
request of Alumax of $30 million or more, neither of which would
constitute a sale, lease, or exchange of "all or substantially
all" of its assets; and (4) the election, selection, or dismissal
of the Alumax CEO/president.
Since respondent addresses only the
foregoing restricted matters, petitioners limit their arguments
to those matters in their reply brief.
We also shall address
only those restricted matters (restricted matters at issue) in
resolving the issue presented under section 1504(a)(1) and
amended section 1504(a).
In this connection, we shall restate
petitioners' arguments under section 1504(a)(1) about the respec-
- 72 tive director and stockholder class votes required on the restricted matters at issue as they were presented on brief by
petitioners, even though certain of those arguments address only
the director class voting requirement, and not the stockholder
class voting requirement.
See supra note 13.
Petitioners contend that the 50-percent voting power of the
class B directors and, consequently, of the Alumax class B common
stock on the restricted matters at issue did not reduce the
voting power of the Alumax class C common stock for purposes of
section 1504(a)(1) "any more than the power of preferred stock in
Erie Lighting [Co. v. Commissioner, 93 F.2d 883] to vote on a
much larger group of matters transformed that preferred [stock]
into voting stock."
We disagree.
We find significant distinctions between the restricted
matters at issue and the matters on which the preferred stockholders in Erie Lighting Co. v. Commissioner, supra, had the
right to vote.
In Erie Lighting Co., the preferred stockholders
had the right to vote on certain matters (e.g., increases or
reductions of capital stock of ELC, increases in its capital
indebtedness, the number of directors serving on ELC's board of
directors, the place of its principal office, and the time of its
stockholder meetings) that the court found were "matters usually
- 73 reserved to the stockholders",18 as distinguished from the management matters that the court found were entrusted to the board
of directors of ELC.
885.
Erie Lighting Co. v. Commissioner, supra at
In deciding whether the preferred stock in Erie Lighting
Co. was voting stock or nonvoting stock for purposes of the
consolidation provisions involved there, the court found that
distinction to be significant.
The court stated that:
matters usually reserved to the stockholders * * * [on
which the preferred stockholders had the right to vote]
are not a basis for holding that two corporations do
business as a single unit, or that the preferred stockholders control the management of the business enterprise. That is left [in the Erie Lighting Co. case] to
the board of directors. [Id.]
In contrast to the matters "usually reserved to the stockholders"
on which the preferred stockholders had the right to vote in Erie
Lighting Co. v. Commissioner, supra, in the instant case, respondent contends, and petitioners do not dispute, that the restricted matters at issue on which the Alumax board and the
Alumax stockholders, respectively, were required to vote by class
were Alumax board management matters on which under Delaware law
the Alumax board was required to vote, but on which the vote or
approval of the Alumax stockholders was not required under
Delaware law, although it was required by the 1984 restated
certificate of incorporation.
Petitioners also contend that the director and stockholder
18
See supra note 16.
- 74 class voting requirements should be ignored in determining
whether the Alumax class C common stock satisfies the 80-percent
voting power test of section 1504(a)(1) because those requirements applied only to a limited number of "extraordinary" or
"highly unusual" matters, and not to the "vast majority" of
"ordinary", "routine", or "day-to-day" matters on which the
Alumax board could, and did, vote during the period at issue.19
According to petitioners, because the restricted matters at issue
involved extraordinary or highly unusual situations, the respective class votes required by the Alumax board and the Alumax
stockholders on those restricted matters did not "meaningfully
impair the power of the [Alumax] Board, operating through the
Class C Directors, to manage the business and affairs of Petitioner [Alumax]" and, therefore, did not "in any meaningful way"
or "significantly affect the voting power" of the Alumax class C
common stock.
Accordingly, petitioners conclude, the required
director and stockholder class voting should be ignored in
19
To support their position that most of the restricted matters
at issue were extraordinary or highly unusual, petitioners point
to how infrequently during the period at issue the Alumax board
voted on any of those matters compared to how often during that
period that board voted on matters that did not require a class
vote. They also point to the significant dollar amounts involved
in most of the restricted matters at issue (e.g., an acquisition
or a disposition of an asset with a book value of at least $36
million and a capital appropriation or an asset disposition
request of $30 million or more) as compared to the much smaller
dollar amounts involved in the matters on which the Alumax board
voted during the period at issue that did not require such a
class vote.
- 75 deciding the issue presented under section 1504(a)(1).20
Initially, we note that, to the extent that it is petitioners' position that it is the actual exercise of voting power
which controls the question presented to us under section
1504(a)(1) and amended section 1504(a)(1)(B) and (2)(A), we
disagree.
It is the legal right to exercise voting power that is
determinative under those provisions.
See Atlantic City Elec.
Co. v. Commissioner, 288 U.S. 152, 153-154 (1933); Handy & Harman
v. Burnet, 284 U.S. 136, 141 (1931); Rudolph Wurlitzer Co. v.
Commissioner, 81 F.2d at 974.
Furthermore, even if the restricted matters at issue on
which the Alumax board and the Alumax stockholders had the power
to vote by class were, as petitioners claim, extraordinary or
highly unusual, those matters, like the ordinary or day-to-day
20
The reasons advanced by petitioners (as well as their expert)
for ignoring the director and stockholder class voting required
on the restricted matters at issue (and for ignoring the mandatory dividend provision and the objectionable action provision
discussed below) in resolving the question presented under sec.
1504(a)(1) and amended sec. 1504(a) are based on certain qualitative and/or quantitative judgments that they (as well as their
expert) have made about those matters. In making those judgments, petitioners have done precisely what they argue "all
judicial and administrative authorities" preclude us from doing
in deciding that issue. Petitioners seek to impose their judgments on this Court and criticize respondent for asking this
Court to make its own judgments about the impact of the director
and stockholder class voting requirements (as well as the mandatory dividend provision and the objectionable action provision)
on the resolution of the issue before us under sec. 1504(a)(1).
We, of course, are not bound by petitioners', or respondent's,
judgments.
- 76 business matters on which the Alumax board had the power to vote
in the aggregate, and not by class, were nonetheless Alumax board
management matters on which under Delaware law the Alumax board
was to vote, but on which the vote or approval of the Alumax
stockholders, although required by the 1984 restated certificate
of incorporation, was not required under Delaware law.
With respect to petitioners' claim that most of the restricted matters at issue were unusual in that they involved
significant dollar amounts, we agree.
However, that fact does
not aid petitioners' position under section 1504(a); it only
serves to emphasize that those matters, as well as the election,
selection, or dismissal of the Alumax CEO/president, were significant, important Alumax board management matters on which the
Alumax board and the Alumax stockholders, respectively, had the
right to vote by class.21
21
It is also significant that during the period Jan. 1 through
Mar. 8, 1984, which was prior to the date (viz, Mar. 9, 1984) on
which Alumax filed the 1984 restated certificate of incorporation
with Delaware but after the date (viz, Jan. 1, 1984) on which
that certificate, once filed, was to be effective, the 1974
restated certificate of incorporation required that any action by
the Alumax board be by an affirmative class vote of the voting
members of that board who were elected by the class A common
stock and the voting members of that board who were elected by
the class B common stock, who were present and voting. In
addition, during that same period, any action of the Alumax
stockholders required an affirmative class vote of a majority of
the outstanding shares of each of the two classes of Alumax
common stock. Not only were the Alumax board and the Alumax
stockholders required to vote, respectively, by class during the
period in 1984 preceding Mar. 9, 1984, the date on which Alumax
(continued...)
- 77 Petitioners advance additional arguments with respect to
certain of the restricted matters at issue in order to support
their position that the respective class votes required by the
Alumax board and the Alumax stockholders on those matters did not
"significantly affect the voting power" of the Alumax class C
common stock and, therefore, should be ignored in resolving the
issue presented under section 1504(a)(1).
With respect to the
restricted matter at issue relating to a merger of Alumax that
would not cause Alumax as the acquiring corporation to increase
its outstanding stock by more than 20 percent, petitioners claim
that various rulings (e.g., I.T. 3896, 1948-1 C.B. 72; Priv. Ltr.
Rul. 90-26-047 (Mar. 30, 1990); Priv. Ltr. Rul. 87-53-005 (Sept.
30, 1987); Priv. Ltr. Rul. 83-49-048 (Sept. 2, 1983)) "regard
class voting rights on mergers of any size as having no effect
whatsoever on whether stock is 'voting stock' or on the measurement of the 'voting power' of voting stock."
We disagree.
As we
read those rulings, none of them involved a class vote by the
21
(...continued)
filed the 1984 restated certificate of incorporation with Delaware, that board and those stockholders did in fact vote by class
on various matters during that period, including (1) the election
of new officers; (2) three capital appropriations of Alumax in
amounts not exceeding $2,413,000, $15,864,000, and $250,686,000,
respectively; (3) Alumax' 5-year forecast for the period 1984
through 1988; (4) Alumax' capital expenditure plan for that 5year period; (5) Alumax' 1984 profit plan; (6) Alumax' 1984
capital expenditure proposal; (7) the declaration of dividends;
and (8) two matters relating to Alumax' employee compensation
plans.
- 78 stockholders therein with respect to the mergers in question.
Moreover, as we construe the rulings on which petitioners rely,
the stockholder vote involved in those rulings applied only to
certain, rather than all, types of mergers.
None of those
rulings indicated that the stockholder vote involved therein
applied to mergers, such as those that are part of the restricted
matters at issue here, which were entrusted to the board of
directors under the applicable State law and on which a stockholder vote was not required under such law.
In any event, none
of the rulings cited by petitioners considered the impact on the
voting power of stock for purposes of section 1504(a)(1) or
amended section 1504(a)(1)(B) and (2)(A) of a requirement imposed
by the certificate of incorporation for a director class vote, as
well as a stockholder class vote, on a merger on which under the
applicable State law the board of directors was required to vote
but not the stockholders.
With respect to the restricted matter at issue relating to
the election, selection, or dismissal of the Alumax
CEO/president, petitioners contend that the "CEO had limited
powers; notably, he could affect only those transactions that
were both within the business plan (which the Class C Directors
could establish) and not in excess of $1.5 million".
Petitioners
appear to be arguing that, because limitations were placed on the
CEO/president's ability to approve certain expenditures, that
- 79 officer did not have a significant role in the management of the
business and affairs of Alumax and that therefore the power of
the Alumax stockholders and the Alumax directors to vote by class
with respect to his or her election, selection, or dismissal is
not significant to the resolution of the issue presented under
section 1504(a)(1).22
We disagree.
Petitioners fail to acknowl-
edge that the 1984 bylaws required the CEO/president to "have
general charge and supervision of the business of the corporation" and "perform all duties incident to the office of president
of a corporation, and such other duties as, from time to time,
may be assigned to him by the Board of Directors or as may be
provided by law."
Accordingly, despite any limitation on the
powers of the Alumax CEO/president to approve an expenditure in
excess of a stated amount, that officer nonetheless had broad
discretion over, and a significant role in, the management of the
business and affairs of Alumax.
On the record before us, we find that the director and
stockholder class voting requirements with respect to the restricted matters at issue impact the voting power of the Alumax
class C common stock for 1984 for purposes of section 1504(a)(1)
22
Petitioners' argument regarding the director and stockholder
class voting required as to the election, selection, or dismissal
of the Alumax CEO/president appears to us to be inconsistent with
their argument regarding the other restricted matters at issue
that they claim are unusual or extraordinary. See discussion
supra.
- 80 and for 1985 and 1986 for purposes of amended section
1504(a)(1)(B) and (2)(A).
See generally Anderson-Clayton Securi-
ties Corp. v. Commissioner, 35 B.T.A. 795 (1937).
The Mandatory Dividend Provision
Respondent contends that the mandatory dividend provision,
which was contained in the 1984 restated certificate of
incorporation, affected the voting power of the Alumax class C
common stock for purposes of section 1504(a)(1).
In support of
that contention, respondent asserts, and petitioners do not
dispute, that the determination of whether or not to declare and
pay dividends was one of the Alumax board management matters on
which the Alumax board would have had the power to vote if it had
not been for the mandatory dividend provision, which removed from
that board the power to determine whether or not to declare and
pay dividends to the extent of 35 percent of Alumax' net
income.23
Petitioners contend that the mandatory dividend provision
did not reduce the voting power of the Alumax class C common
stock or detract from the power of the class C directors to manage the business and affairs of Alumax or from the exercise of
23
The mandatory dividend provision required that dividends to
the extent of 35 percent of Alumax' net income be declared by the
Alumax board and paid by Alumax "to the extent permitted by law."
The parties do not suggest that such dividends were not mandatory
because they were to be declared and paid "to the extent permitted by law."
- 81 that power.
Consequently, according to petitioners, that provi-
sion did not reduce the voting power of the Alumax class C common
stock for purposes of section 1504(a)(1) below the 80 percent
which petitioners claim that stock possessed.
In support of
their position regarding the mandatory dividend provision, petitioners advance arguments which are based on the premises that
the restrictions placed on the power of the Alumax board as a result of that provision are similar to the restrictions placed on
the power of other boards of directors as a result of (1) "fixed
payment" provisions contained in "debt instruments" requiring the
payment of principal and/or interest and (2) "preferential
dividend" provisions contained in "preferred stock * * * instruments".
We disagree with the premises on which petitioners'
position regarding the mandatory dividend provision is based.
We
therefore reject their position.
The power to incur debt and to enter into debt instruments
that fix the terms for the repayment of principal and any payment
of interest are powers relating to the management of the business
and affairs of a company that are entrusted to its board of
directors and that the board may delegate to others like corporate officers.24
24
See 2 Fletcher Cyclopedia of Corporations, sec.
In the case of certain debt (e.g., "bonded indebtedness"), a
stockholder vote or approval is required under certain State
laws. See 5 Fletcher Cyclopedia of Corporations, sec. 2105
(perm. ed. 1996 rev.).
- 82 473 (perm. ed. 1990 rev.).
Once a company's board of directors
(or its delegates) has exercised its power to incur debt, any
fixed payments of principal and interest on that debt that are
set forth in the debt instrument are not matters relating to that
board's management of the company's business and affairs.
They
are matters relating to the contractual obligation that was
imposed on the company when its board of directors (or delegates)
decided to exercise its power to incur the debt.
Unlike the
mandatory dividend provision which obligated the Alumax board to
declare and pay dividends to its stockholders to the extent of 35
percent of its net income and therefore restricted that board's
power to act with respect to one of the Alumax board management
matters, fixed-payment provisions in debt instruments do not
restrict the powers of a company's board of directors with
respect to management matters entrusted to it.
We find that the
fixed-payment provisions in debt instruments to which petitioners
refer are materially different from the mandatory dividend
provision involved here.
As examples of preferential dividend provisions in preferred
stock certificates that petitioners claim are similar to the
mandatory dividend provision, they point to preferential dividend
provisions described in various cases and rulings (e.g., Rudolph
Wurlitzer Co. v. Commissioner, 81 F.2d 971 (6th Cir. 1936); Rev.
Rul. 71-83, 1971-1 C.B. 268; Priv. Ltr. Rul. 79-38-060 (June 21,
- 83 1979)) and in certain documents that are part of the instant
record under which certain Delaware corporations gave their
preferred stockholders preferential dividend rights.
None of the
preferential dividend provisions described in the cases and
rulings and in the documents that are part of the instant record
to which petitioners refer restricted the power of a company's
board of directors to determine whether to declare and pay
dividends by requiring it to do so.
Instead, those provisions
merely indicated that, once a board exercised its power to
declare and pay dividends, it was required to pay a certain
amount of dividends with respect to one class of stock before it
could pay any dividends with respect to another class of stock.
See 12 Fletcher Cyclopedia of Corporations, secs. 5443-5446
(perm. ed. 1996 rev.).
In contrast, the mandatory dividend
provision restricted the power of the Alumax board to determine
whether or not to declare and pay dividends to the extent of 35
percent of Alumax' net income by requiring it to declare and pay
dividends to that extent to both classes of the Alumax stock.25
We find that the preferential dividend provisions in the preferred stock certificates to which petitioners refer are materially different from the mandatory dividend provision.
25
The parties agree that the mandatory dividend provision also
gave the Alumax class B common stock a preferential right to
receive 80 percent of the dividends that the Alumax board was
required to declare and pay to all Alumax stockholders.
- 84 Petitioners also contend that the preferential dividend
rights of the preferred stockholders in Erie Lighting Co. v.
Commissioner, 93 F.2d 883 (1st Cir. 1937), are similar to the
mandatory dividend provision involved here.
We disagree.
The
preferential dividend provision in Erie Lighting Co. stated:
"The holders of preference shares shall be entitled to receive out of the surplus or net profits of
the said corporation, and the said corporation shall be
bound to pay, quarterly cumulative dividends at the
rate of $2.00 per share per annum, which quarterly
dividends shall be paid, or set aside for payment, for
each quarter before any dividend shall be declared or
paid upon any other stock of said corporation; * * *
After all accumulated and accrued dividends on the
preference shares have been declared and paid, or set
aside for payment, dividends may be declared and paid
out of the remaining surplus or net profits to holders
of common shares at the rate of $2.00 per share per
annum, and all additional distribution of surplus or
net profits as dividends shall be made at the same rate
per share to holders of stock of both classes. * * *
The holders of said preference shares shall have
no power to vote the same at any election for directors
unless the dividends on the said preference shares for
two quarterly periods, whether consecutive or not,
shall remain unpaid." [Id. at 884.]
We do not construe the preferential dividend provision
involved in Erie Lighting Co. v. Commissioner, supra, as limiting
the discretion of ELC's board of directors by requiring it to
declare and pay dividends to the extent of a specified amount of
ELC's net income with respect to its two classes of outstanding
stock (viz, ELC preferred stock and ELC common stock).
Rather,
pursuant to the preferential dividend provision involved in Erie
Lighting Co., once the ELC board of directors exercised its power
- 85 to declare and pay dividends, it had to pay prescribed amounts of
dividends with respect to the ELC preferred stock, which amounts
were cumulative, before it could pay any dividends with respect
to the ELC common stock.
We find that the preferential dividend
provision involved in Erie Lighting Co. v. Commissioner, supra,
was not mandatory,26 see 12 Fletcher Cyclopedia of Corporations,
sec. 5445 (perm. ed. 1986), and that it is materially different
from the mandatory dividend provision involved in the present
case.
In so finding, we have not only relied on and construed
the language of the preferential dividend provision as set forth
by the court in Erie Lighting Co. v. Commissioner, supra, we also
have been mindful that that court found that under the applicable
State law and ELC's bylaws the management of the business and
affairs of ELC, and thus, inter alia, the power to determine
whether or not to declare and pay dividends, were entrusted to
its board of directors.
Petitioners, however, appear to dispute
that finding of the court in Erie Lighting Co.
26
They contend that
Even assuming arguendo that the dividend provision in Erie
Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir. 1937), had
required the ELC board to declare and pay dividends, the parties
in that case did not advance any arguments with respect to the
impact of any such mandatory dividend provision on the classification of the preferred stock involved there as voting or nonvoting stock for purposes of the applicable consolidation provisions. Consequently, the court in Erie Lighting Co. did not have
occasion to, and did not, address the effect of a preferred stock
mandatory dividend provision on whether such stock was voting or
nonvoting stock and did not reach its holding on the basis of any
such alleged mandatory provision.
- 86 the power of ELC's board of directors in Erie Lighting Co. v.
Commissioner, supra, was restricted not only because of the
preferential dividend provision involved there, but also because
the ELC
board * * * was prohibited from affecting any "investment of surplus" or "increase of capital indebtedness"
without the approval of the preferred stockholders. * *
*
*
*
*
*
*
*
*
* * * the Erie Lighting board was more restricted than
Petitioner's Board because the Erie preferred stockholders could vote on any borrowings or reinvestment of
undistributed earnings.
We disagree with petitioners' contentions.
Initially, we note that, contrary to petitioners' assertion,
the court in Erie Lighting Co. v. Commissioner, supra, did not
state that the preferred stock in question had a right to vote on
or approve "investment of surplus" or "any borrowings".
Indeed,
that court did not even use the phrase "investment of surplus",
or any similar phrase, in its opinion.27
27
While the court in Erie
The Board of Tax Appeals in Erie Lighting Co. v. Commissioner, 35 B.T.A. 906, 910-911, revd. 93 F.2d 883 (1st Cir.
1937), found that the preferred stock in question "could by its
vote affect and effect action in various ways, such as in regard
to * * * approval of investment of surplus". However, in reversing the decision of the Board of Tax Appeals in that case, the
Court of Appeals in Erie Lighting Co. v. Commissioner, supra, did
not indicate in its opinion that the preferred stock in question
had a right to vote on or to approve the "investment of surplus".
Even assuming arguendo that the ELC preferred stock had a right
to vote on or to approve the "investment of surplus", the Court
of Appeals in the Erie Lighting Co. case did not address the
(continued...)
- 87 Lighting Co. v. Commissioner, supra, did find that the preferred
stock involved there had the right to vote on many matters,
including "any increase of the capital indebtedness", that matter
is not one of the matters involved in the present case.
More-
over, unlike the Alumax board management matters over which the
parties disagree regarding their impact for purposes of section
1504(a)(1) and which did not require a stockholder vote or
approval under Delaware law, an increase in the capital indebtedness of ELC was, according to the court in Erie Lighting Co., one
of the matters that are "usually reserved to the stockholders".
Erie Lighting Co. v. Commissioner, 93 F.2d at 885.
The court in
Erie Lighting Co. did not consider any of those stockholder
matters to be a restriction on the power of the ELC board.
To
the contrary, that court found that under the applicable State
law and ELC's bylaws the board of directors of ELC was entrusted
with the management of its business and affairs, and it did not
mention any management matter that it believed was taken away
from that board by those stockholder matters.
Id.
On the record before us, we find that the mandatory dividend
provision impacts the voting power of the Alumax class C common
stock for 1984 for purposes of section 1504(a)(1) and for 1985
27
(...continued)
effect of any such right on whether the ELC preferred stock was
voting or nonvoting stock and did not reach its holding on the
basis of any such right.
- 88 and 1986 for purposes of amended section 1504(a)(1)(B) and
(2)(A).
The Objectionable Action Provision
Respondent contends that the objectionable action provision
affected the voting power of the Alumax class C common stock for
purposes of section 1504(a)(1).
In support of that contention,
respondent focuses on the objectionable action provision only
insofar as it applied to actions taken by the Alumax board
(director objectionable action provision), and not insofar as it
applied to actions taken by the Alumax stockholders.
We also
shall address only the director objectionable action provision.
Respondent contends that the director objectionable action
provision prevented the Alumax board from taking any action that
could have had a material and adverse impact on the value of the
Alumax class B common stock which was held by the Mitsui group,
even though such action may have been in the best interests of
Alumax and/or Amax.
According to respondent, that provision gave
the Mitsui group "virtual veto power" over any important action
that Alumax took.
Petitioners contend that the director objectionable action
provision did not detract from the power of the class C directors
to manage the business and affairs of Alumax or from the exercise
of that power and thus did not reduce the voting power of the
Alumax class C common stock for purposes of section 1504(a)(1)
- 89 below the 80 percent which petitioners claim that stock possessed.
According to petitioners, the director objectionable
action provision gave the Mitsui group a contingent right to
acquire additional voting power over future actions of Alumax,
which is comparable to the contingent rights held by the holders
of the preferred stock in Erie Lighting Co. v. Commissioner,
supra, and by the holders of convertible or exchangeable stock
and unexercised options or warrants.
In this connection, peti-
tioners assert:
During the period at issue the law was clear that
"voting power" was determined on the basis of actual
voting power at the time of measurement, and that any
possibility that voting power might change as a result
of an event, such as the conversion of non-voting stock
into voting stock or a purchase or redemption of stock,
even if scheduled to occur, was irrelevant. * * *
To support their position with respect to the director objectionable action provision, petitioners rely on, inter alia, the
following cases and rulings involving certain questions raised
under the consolidation provisions:
(1) Atlantic City Elec. Co. v. Commissioner, 288 U.S. 152
(1933), which held that preferred stock with certain voting
rights was voting stock even though it was redeemable by the
issuer at any time because the holders of that stock had voting
rights with respect to the "direction of * * * [the corporate]
undertaking", id. at 156, and their voting rights remained
unimpaired until actual redemption of that stock;
- 90 (2) Erie Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir.
1937), which held that preferred stock was not voting stock even
though it was entitled to certain voting rights upon the occurrence of certain events because those events had not occurred
during the years involved there;
(3) Vermont Hydro-Electric Corp. v. Commissioner, 29 B.T.A.
1006 (1934), which held that preferred stock was not voting stock
even though it was entitled to certain voting rights upon the
occurrence of certain events that had not occurred during the
years involved there because (a) stock is not voting stock based
on the mere possibility that sometime in the future it might be
entitled to vote, and (b) it is the situation actually existing
during the period in controversy that is determinative, not a
situation that might have existed upon the happening of a contingency; and
(4) Rev. Rul. 64-251, 1964-2 C.B. 338, which held that
unexercised warrants to purchase stock in a corporation do not
constitute "stock ownership" within the meaning of section
1504(a) of the Internal Revenue Code of 1954 (1954 Code) because
they do not confer upon the holder any rights or liabilities as a
stockholder of that corporation prior to their being exercised.
We reject petitioners' position regarding the director
objectionable action provision.
We find significant distinctions
between the rights held by the Mitsui group under the director
- 91 objectionable action provision and the rights held by the holders
of the stock, options, and warrants involved in the cases and
rulings on which petitioners rely.
Contrary to petitioners'
claim, the director objectionable action provision did not give
the Mitsui group merely a contingent right to acquire additional
voting power over future actions of Alumax.
That provision gave
the Mitsui group the legally enforceable right during the period
at issue to (1) negate the exercise of the power of the Alumax
board on any director nonrestricted matter,28 which the Mitsui
group believed could materially and adversely affect the value of
its investment in Alumax and to which one of the class B directors whom it elected objected and (2) permit a panel of arbitrators to decide whether or not that board's exercise of its power
on any such matter was to become effective.29
Consequently,the
28
We have found that the director objectionable action provision applied only to director nonrestricted matters on which the
directors voted in the aggregate, and not by class. That is
because any board action that required a class vote of the Alumax
directors required, inter alia, an affirmative vote of the
majority of the class B directors. Since there were only two
class B directors, any such board action required the approval of
both of those directors and could not be taken over the objection
of either one of those directors.
29
Petitioners contend that the class C directors were not
likely to take any action that would trigger the rights of the
Alumax class B common stock under the director objectionable
action provision and that the Mitsui group was not likely to
exercise its rights under that provision. As we view it, the
essence of petitioners' contention is that the director objectionable action provision is, in effect, a meaningless provision.
We disagree. Moreover, petitioners concede on brief that that
(continued...)
- 92 Alumax board, and thus the class C directors of that board, did
not have any effective power to take action on any such director
nonrestricted matter.
On the record before us, we find that the director objectionable action provision impacts the voting power of the Alumax
class C common stock for 1984 for purposes of section 1504(a)(1)
and for 1985 and 1986 for purposes of amended section
1504(a)(1)(B) and (2)(A).
Conclusion
Based on our review of the entire record before us, we find
that the respective director and stockholder class voting requirements with respect to the restricted matters at issue, the
mandatory dividend provision, and the director objectionable
action provision reduced the voting power of the Alumax class C
common stock for 1984 for purposes of section 1504(a)(1) and for
1985 and 1986 for purposes of amended section 1504(a)(1)(B) and
(2)(A) below the 80 percent which petitioners claim that stock
possessed.
We further find that petitioners have failed to
establish that the 80-percent value test of amended section
(...continued)
provision gave the Mitsui group "the ability to protect the value
of its investment in face of an extreme event." In addition, the
record does not contain any evidence to suggest that the Mitsui
group would not have exercised its rights under the director
objectionable action provision to protect its investment in
Alumax if and when, in its discretion, it became necessary to do
so.
- 93 1504(a)(1)(B) and (2)(B) was satisfied for 1985 and 1986.
Consequently, we hold that for 1984 and for 1985 and 1986 petitioners were not members of the affiliated group within the
meaning of section 1504(a) and amended section 1504(a), respectively, that had Amax as its common parent.30
Accordingly, we
sustain respondent's determination that petitioners are not
entitled to join in the consolidated return that Amax filed for
each of those years in which it claimed to be the common parent
of a group of corporations that included petitioners.31
Period of Limitations
Petitioners argue that even if the Court were to find that
petitioners are not entitled to join in the consolidated return
that Amax filed for each of the years 1984, 1985, and 1986, the
respective periods of limitations for those years for assessing
tax due from petitioners' group have expired.
Respondent argues
that section 1.1502-77(c)(2), Income Tax Regs., rejects petitioners' contention.
(c)
That regulation provides:
Effect of waiver given by common parent.
30
We note that the issue presented here under sec. 1504(a) and
amended sec. 1504(a) turns on the particular facts established by
the record in this case, and nothing in this Opinion is intended
to be, or should be read as, deciding or implying any finding or
conclusion of this Court under that section in other cases
involving facts that may appear to be similar to those presented
in the present case.
31
In reaching our holding, we have considered all of petitioners' arguments that are not discussed herein and found them to be
without merit.
- 94 Unless the district director agrees to the contrary, an
agreement entered into by the common parent extending
the time within which an assessment may be made or levy
or proceeding in court begun in respect of the tax for
a consolidated return year shall be applicable-*
*
*
*
*
*
*
(2) To each corporation the income of which was
included in the consolidated return for such taxable
year, notwithstanding that the tax liability of any
such corporation is subsequently computed on the basis
of a separate return under the provisions of §1.150275.
Petitioners counter that section 1.1502-77(c)(2), Income Tax
Regs., "is an invalid exercise of the Secretary's rule-making
authority."32
According to petitioners,
Nothing in section 1502 authorizes the Secretary to
32
In support of their contention that sec. 1.1502-77(c)(2),
Income Tax Regs., is invalid, petitioners rely on J.A. Folger &
Co. v. Commissioner, 27 B.T.A. 1 (1932), which involved a year
that preceded the year (viz, 1929) in which art. 17(a)(2) of
Regulations 75, the original predecessor of sec. 1.1502-77(c)(2),
Income Tax Regs., first became effective. In J.A. Folger & Co.,
a parent corporation (parent corporation) filed consolidated
returns for certain years for itself and two of its subsidiary
corporations (subsidiary corporations). J.A. Folger & Co. v.
Commissioner, supra at 3. The parent corporation entered into an
agreement with the IRS extending the period of limitations for
the "assessment of income and war profits tax due under any
return made on behalf of that taxpayer" for one of those years.
Id. (Emphasis added.) That agreement made no mention of the
subsidiary corporations. Id. at 7-8. Under those facts, the
Board of Tax Appeals held in J.A. Folger & Co. v. Commissioner,
supra at 7-8, that the agreement that the parent corporation
entered into with the IRS did not extend the period of limitations for the assessment of tax against the subsidiary corporations. J.A. Folger & Co. is factually distinguishable from the
instant case. The Forms 872 executed by Amax and Cyprus Amax,
respectively, identified the "taxpayer(s)" as "Amax Inc. and
Consolidated Subsidiaries" or "Amax Inc. and Consolidated Subs",
and not just Amax.
- 95 promulgate regulations that create agency relationships
between corporations that never were part of the affiliated group, yet this is precisely what the Secretary
purports to have done in Treas. Reg. section 1.150277(c)(2). The regulation thus is inconsistent with the
"plain language of the statute" and cannot be valid.
Section 1.1502-77(c)(2), Income Tax Regs., is a legislative
regulation that was promulgated under section 150233 and that
appears in the portion of the regulations under that section
entitled "Administrative Provisions and Other Rules".
As a
legislative regulation, section 1.1502-77(c)(2), Income Tax
Regs., must be upheld unless it is arbitrary, capricious, or
manifestly contrary to section 1502.
Chevron U.S.A., Inc. v.
Natural Resources Defense Council Inc., 467 U.S. 837, 844 (1984).
Regulations substantially the same as section 1.150277(c)(2), Income Tax Regs., were first issued as article 17(a)(2)
of Regulations 7534 under the authority of section 141(b) of the
33
Section 1502 provides:
The Secretary shall prescribe such regulations as he
may deem necessary in order that the tax liability of any
affiliated group of corporations making a consolidated
return and of each corporation in the group, both during
and after the period of affiliation, may be returned,
determined, computed, assessed, collected, and adjusted,
in such manner as clearly to reflect the income tax liability and the various factors necessary for the determination of such liability, and in order to prevent avoidance of such tax liability.
34
Art. 17(a)(2) of Regulations 75 provided:
(a) Effect of Waiver given by Parent.
Any consent given by the parent corporation * * *
extending the time within which an assessment may be made
(continued...)
- 96 Revenue Act of 1928 (1928 Act), ch. 852, 45 Stat. 831,35 a provision that was substantially the same as section 1502.
When
Congress was considering a revision of the revenue law that
ultimately became the 1928 Act it became aware of a broad range
of problems and potential abuses that had emerged in the administration and interpretation of the consolidated return provisions.
Many of those problems and potential abuses were set forth in the
Staff of Joint Committee, Report of the Joint Committee on
Internal Revenue Taxation (Vol. I), 63-66 (1928) (Joint Committee
report).
The Joint Committee report recommended that the consol-
idated return provisions be abolished and replaced with provisions permitting the operating loss of any member of an affiliated group, as defined in the Joint Committee report proposal, to
be offset against the net income of one or more members of that
34
(...continued)
or distraint or proceeding in court begun, in respect of
the tax for a consolidated return period, shall be applicable * * * (2) to each corporation the income of which was
included in the consolidated return, or which filed Form
1122, for such period, even though it is subsequently
determined that such corporation was not a member of the
group.
35
Sec. 141(b) of the Revenue Act of 1928 (1928 Act), ch. 852,
45 Stat. 831, provided:
Regulations.--The Commissioner, with the approval of
the Secretary, shall prescribe such regulations as he may
deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return
and of each corporation in the group, both during and after
the period of affiliation, may be determined, computed,
assessed, collected, and adjusted in such manner as clearly
to reflect the income and to prevent avoidance of tax
liability.
- 97 group.
Joint Committee report, supra at 66.
After considering
the Joint Committee report, the House of Representatives (House)
in its bill that Congress considered in connection with passage
of the 1928 Act decided to deny the privilege of filing consolidated returns after taxable year 1928, thereby compelling all
corporations to file separate returns.
See H.R. 1, 70th Cong.,
1st Sess. sec. 141 (1927); see also H. Rept. 2, 70th Cong. 1st
Sess. (1927), 1939-1 C.B. (Part 2) 384, 397.
The Senate Finance Committee was not convinced that elimination of the privilege of filing consolidated returns was an
appropriate solution to the wide range of problems and potential
abuses to which the Joint Committee report alluded that had
emerged in the administration and interpretation of the consolidated return provisions.
Instead, the Senate Finance Committee
recommended retention of the consolidated return provisions but
coupled such retention with provisions authorizing the Commissioner, with the approval of the Secretary of the Treasury
(Secretary), to promulgate special regulations that would deal
with the types of problems and potential abuses raised by the
Joint Committee report.
The Senate Finance Committee stated in
pertinent part:
Many difficult and complicated problems * * * have
arisen in the administration of the provisions permitting the filing of consolidated returns. It is, obviously, of utmost importance that these questions be
answered with certainty and a definite rule be prescribed. Frequently, the particular policy is comparatively immaterial, so long as the rule to be applied is
known. The committee believes it to be impracticable
- 98 to attempt by legislation to prescribe the various
detailed and complicated rules necessary to meet the
many differing and complicated situations. Accordingly, it has found it necessary to delegate power to
the Commissioner to prescribe regulations legislative
in character covering them. * * * Furthermore, the
s
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