Petition — Commissioner v. Delta Metalforming Co.
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80-1499 || Me 4 war
ALEXANDER L. STEVaS,
SeteRK
Iu the Supreme Court of the United States
OCTOBER TERM, 1980
COMMISSIONER OF INTERNAL REVENUE, PETITIONER
Vv.
DELTA METALFORMING Co., INC.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
WADE H. McCREE, JR.
Solicitor General
Department of Justice
Washington, D.C. 20530
(202) 683-2217
In the Supreme Court of the United States
OCTOBER TERM, 1980
No.
COMMISSIONER OF INTERNAL REVENUE, PETITIONER
Vv.
DELTA METALFORMING Co., INC.
PETITION FOR A WRIT OF CERTIORARI TO
THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
QUESTION PRESENTED
Section 1561(a) of the Internal Revenue Code of
1954 (26 U.S.C.) provides that a “controlled group
of corporations” shall be limited to a single corporate
surtax exemption. Under Section 1563 (a) (2), a “con-
trolled group of corporations” includes a “brother-
sister controlled group,” which is defined as “[t]wo or
more corporations if 5 or fewer persons who are indi-
viduals * * * own * * * stock” possessing two pre-
scribed and differing percentages of the total com-
bined voting power of all classes of voting stock or of
the total value of all classes of the stock of each
corporation.
The question presented is whether the statutory
definition is met if the “5 or fewer persons” own
the prescribed stock singly or in combination, as the
governing Treasury Regulations provide, or whether
each person whose stock is to be taken into account
must own stock in each corporation of the group, as
the decision below held.
(1)
The Solicitor General, on behalf of the Commis-
sioner of Internal Revenue, petitions for a writ of
certiorari to review the judgment of the United States
Court of Appeals for the Fifth Circuit entered in this
case.
OPINIONS BELOW
The opinion of the court of appeals (App. A, infra,
la-22a) is reported at 632 F.2d 442. The opinion of
the Tax Court (App. C, infra, 25a-36a) is not offi-
cially reported.
JURISDICTION
The judgment of the court of appeals was entered
on December 8, 1980 (App. B, infra, 23a-24a). The
jurisdiction of this Court is invoked under 28 U.S.C.
1254(1).
STATUTES AND REGULATIONS INVOLVED
The relevant provisions of Sections 11(d), 1561(a)
and 1563(a)(2) of the Internal Revenue Code of
1954 (26 U.S.C. (1970 ed.)) and of the Treasury
Regulations, Section 1.1563-1(a) (3) (26 C.F.R.), are
set forth at App. D, infra, 37a-40a.
STATEMENT
Respondent Delta Metalforming Company is a
Texas corporation. The stock of respondent is owned
by three individuals who, together with F.T. Sharp,
own all of the stock of two other corporations, Delta
Steel Buildings and Delta Engcon (App. A, infra,
la-2a). During 1975, the stock of the three cor-
porations was owned as follows (App. A, infra,
2a):
(1)
Respondent
Delta Delta Delta
Shareholder Metalforming Steel Engcon
W.T. Slayton 86.4% 26.7% 26.4%
L.L. Eddins 27.2% 19.9% 20.8%
J.G. Ellis 36.4% 26.7% 26.4%
F.T. Sharp —o— 26.7 % 26.4%
Totals 100.0% 100.0% 100.0%
On audit for 1975, the Commissioner of Internal
Revenue determined that the three corporations con-
stituted a brother-sister controlled group within the
meaning of Section 1563(a) (2) of the Internal Reve:
nue Code of 1954. He therefore disallowed the sepa-
rate corporate surtax exemption claimed by respond-
ent and allowed only the single surtax exemption
claimed by Delta Steel (App. A, infra, 3a).
In this proceeding brought by respondent in the
Tax Court for redetermination of the ensuing defi-
ciencies, the Tax Court held that respondent was not
a member of a “brother-sister controlled group”
within the meaning of Section 1563(a)(2)(A)_be-
cause F.T. Sharp did not own any stock in respond-
ent. Hence, the Tax Court upheld respondent’s claim
to a separate corporate surtax exemption (App. C,
infra, 33a-36a).
The court of appeals affirmed (App. A, infra, 1a-
22a). In so holding, the court acknowledged that its
decision squarely conflicted with Fairfax Auto Parts
of Northern Virginia, Inc. v. Commissioner, 548 F.2d
501 (4th Cir. 1977), rev’g 65 T.C. 798 (1976), cert.
denied, 434 U.S. 904 (1977); T. L. Hunt, Ine. v.
Commissioner, 562 F.2d 532 (8th Cir. 1977), rev’g
35 T.C.M. 966 (1976); and Allen Oil Co. v. Com-
missioner, 614 F.2d 336 (2d Cir. 1980), rev’g 38
T.C.M. 355 (1979) (App. A, infra, 5a-7a). The court
noted, however, that its decision was in accord with
Vogel Fertilizer Co. v. United States, 634 F.2d 497
(Ct. Cl. 1980), petition for a writ of certiorari pend-
ing, No. 80-1251 (filed Jan. 23, 1981) (see App. A,
infra, 21a).
REASONS FOR GRANTING THE PETITION
The question presented in this case is before the
Court in our petition for a writ of certiorari in
Vogel Fertilizer Co. v. United States, No. 80-1251.
The Court should therefore hold this case pending its
disposition in that case.
CONCLUSION
Consideration of this petition should be deferred
pending the Court’s disposition in No. 80-1251.
Respectfully submitted.
WADE H. McCREE, Jk.
Solicitor General
FEBRUARY 1981
la
APPENDIX A
UNITED STATES COURT OF APPEALS
FIFTH CIRCUIT
No. 78-3699
DELTA METALFORMING Co., INC.,
PETITIONER-APPELLEE
Vv.
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT-APPELLANT
Dec. 8, 1980
Appeal from the Decision of the
United States Tax Court
Before BROWN, HENDERSON and SAM D.
JOHNSON, Circuit Judges.
JOHN R. BROWN, Circuit Judge:
Today we decide an issue of corporate income tax
reaching a result contrary to majorities of the Sec-
ond, Fourth and Eighth Circuit Courts of Appeal.
Unlike our respected brethren and sisters, we hold
with the Tax Court, the persuasive dissent of Judge
William Webster, and more recently the decision of
the Court of Claims, that a person must own stock
in each member of an alleged brother-sister controlled
group to satisfy the 80% test under § 1563 (a) (2) (A)
and so be denied its own separate surtax exemption.
I.
The facts are not in dispute. The taxpayer com-
pany, Delta Metalforming Company, is a Texas cor-
2a
poration. Three individuals own its outstanding
stock. Those three persons, together with a fourth
person, also own all of the voting stock of two other
corporations, Delta Steel Buildings and Delta Engcon.
The following chart represents the percentage of
ownership of the three Delta companies for 1975:
Taxpayer
Corp. Delta Delta Delta Identical
Stockholder Metalforming Steel Engcon ownership
Percent Percent Percent Percent
W. T. Slayton 86.4 26.7 26.4 26.4
L. L. Eddins 27.2 19.9 20.8 19.9
J. G. Ellis 86.4 26.7 26.4 26.4
F. T. Sharp -0- 26.7 26.4 -0-
Total 100 100 100 72.7
In 1975 Delta Metalforming took the surtax ex-
emption allowed by § 11(d) on its corporate income
tax return, as did Delta Steel.’ At that time § 11(a)
imposed a tax on taxable corporate income. Section
11(c) imposed a 26 percent surtax on income exceed-
ing the surtax exemption. The surtax exemption un-
der §11(d) was $25,000, except as provided in
§ 1561. Section 1561 provided that members of a
controlled group of corporations were limited to one
$25,000 exemption, which they could share. Section
1563(a)(2) defined a “brother-sister controlled
group” by two tests of stock membership, a 50% test
and a 80% test.
1Section references are to the Internal Revenue Code of
1954, effective for the year in question, 1975. Section 11(d)
was repealed in 1978 by P.L. 95-600, Nov. 6, 1978, but the
basic statutory scheme remains. See, § 1561(a) as amended
by P.L. 95-600, Nov. 6, 1978.
8a
In 1977 the Commissioner assessed a tax deficiency
against Delta Metalforming. The Commissioner de-
termined that, under § 1563(a) (2), Delta Metalform-
ing was a member of a brother-sister controlled
group of corporations with Delta Steel and Delta
Engcon. Since the surtax exemption had already
been claimed by Delta Steel, the Commissioner found
that Delta Metalforming was not entitled to its own
separate surtax exemption.
Delta Metalforming filed a petition with the U. S.
Tax Court to redetermine the asserted deficiency.
The parties stipulated that Delta Steel and Delta
Engcon met the 50% test in § 1563(a)(2)(B), but
disagreed on whether Delta Metalforming satisfied
the 80% test. The Tax Court, following its earlier
decisions and declining to follow contrary results by
three Circuit Courts of Appeal, held that Delta Metal-
forming did not come within the 80% test, and so
held for the taxpayer. Delta Metalforming Co. v.
Commissioner, T.C.M. 1978-354. The Government
appeals. We affirm.”
II.
This appeal concerns the meaning of the 80% test
in § 1563(a)(2)(A). Section 1563(a) (2) provides:
§ 1563. Definitions and special rules
(a) Controlled group of corporations.—For
purposes of this part, the term “controlled group
of corporations” means any group of—
* * * * *
*
2The taxpayer also has the same issue pending for the
years 1972-74 in the U.S. District Court for the Northern
District of Texas. Delta Metalforming Co. v. United States,
No. CA 8-78-1469-G (filed Dec. 7, 1978).
4a
(2) Brother-sister controlled group.--Two
or more corporations if 5 or fewer per-
sons... own... stock possessing—
(A) at least 80 percent... of the total
value of shares of all classes of the stock
of each corporation, and
(B) more than 50 percent ... of the
total value of shares of all classes of
stock of each corporation, taking into
account the stock ownership of each
such person only to the extent such
stock ownership is identical with respect
to each such corporation.
The 80% requirement is met only if the stock of one
stockholder, F. T. Sharp, who owns shares in Delta
Engcon and Delta Steel but not in Delta Metalform-
ing, may be counted.
The Government argues, as it did in the Tax Court,
that for the purposes of determining whether a group
of corporations meets the 80% ownership require-
ments of § 1563(a)(2)(A) and so constitutes a
brother-sister controlled group, an individual 1aust
merely be one of the five or fewer individuals who
collectively own at least 80% of the stock of all the
corporations. Thus, an individual need not own stock
in each of the two or more corporations to have his
stock ownership tabulated toward the 80%. The
Government relies in part on Income Tax Regu-
lation 1.1563-1(a) (3) which defines a brother-sister
controlled group as two or more corporations if, “the
same five or fewer persons ... own... singly or
in combination,” stock satisfying the 80 and 50 per-
cent tests.°
Delta Metalforming, however, says that an indi-
vidual’s stock ownership can be added into the 80%
ownership requirement only when that individual
owns stock in each and every member of the alleged
brother-sister controlled group. Since Sharp owned
no stock in Delta Metalforming, his stock in Delta
Steel and Delta Engcon could not then be taken into
consideration for the 80% test, the percentage of
stock ownership falls below 80, Delta Metalforming
is not a member of a controlled group, § 1561 would
not apply, and Delta Metalforming would be entitled
to its own separate surtax exemption.
Several Courts have grappled with these arguments
with inconsistent results. The Tax Court first con-
sidered the meaning of the 80% test in Fairfaw Auto
Parts of Northern Virginia, Inc. v. Commission,
65 T.C. 798 (1976). In Fairfax the Court, with
four Judges dissenting, held that a person must own
stock in each member of the controlled group in order
for its stock ownership to be taken into account to
satisfy the ownership tests of § 1563(a)(2). The
Court examined Income Tax Regulation 1.1563-
§ Treas. Reg. § 1.1563-1 (a) (3)
“(3) Brother-sister controlled group-(i) The term
“brother-sister controlled group” means two or more
corporations if the same five or fewer persons .. . own
... singly or in combination, stock possessing—
(a) ...at least 80 percent of the total value of shares
of all classes of the stock of each corporation; and
(b) ... more than 50 percent of the total value of
shares of all classes of stock of each corporation, taking
into account the stock ownership of each such person
only to the extent such stock ownership is identical with
respect to each such corporation.”
1(a)(8) but found it an “unrealistic and unreason-
able interpretation of the statutory language.” 65
T.C. at 802. The Court also analyzed the language
of the statute itself, its legislative history, and basic
purpose to conclude that each person must own stock
in each controlled group corporation. In a brief per
curiam opinion the Fourth Circuit reversed, uphold-
ing the Regulation. Fairfax Auto Parts of Northern
Virginia v. Commissioner, 548 F.2d 501 (4th Cir.),
cert. denied, 434 U.S. 904, 98 S.Ct. 300, 54 L.Ed.2d
190 (1977), noted and criticized, 1976, Brigham
Young U.L.Rev. 1000.
Meanwhile the Tax Court had already followed its
position to hold for the taxpayer in C.L. Hunt, Inc.
v. Commissioner, T.C.M. 1976-221. The Eighth Cir-
cuit also reversed, 7.L. Hunt, Inc. v. Commissioner,
562 F.2d 5382 (8th Cir. 1977), this time, over a
vigorous dissent. Dissenting Judge William Webster
would invalidate Regulation 1.1563-1(a)(3) as an
improper and unintentional penalty on closely held
corporations. Despite Judge Webster’s dissent, the
Eighth Circuit subsequently followed Hunt in Yaffe
Iron and Metal Corp. v. United States, 593 F.2d 832
(8th Cir. 1979).
The Tax Court again adhered to Fairfax in Allen
Oil Co. v. Commissioner, T.C.M. 1979-88,* which the
* As the Tax Court explained in the opinion below, T.C.M.
at —, the Tax Court has national jurisdiction and, despite
reversals by Courts of Appeals, should, except in cases geo-
graphically destined for a disapproving Circuit, follow its
conviction that its original result was correct until decided
otherwise by the Supreme Court. Lawrence v. Commissioner,
27 T.C. 718 (1957). Although a series of reversals may in-
cline the Tax Court to bow to higher authority, see Bankers
Union Life Insurance Co. v. Commissioner, 62 T.C. 661, 675
(1974), the switching of positions by the Tax Court may
Ta
Second Circuit overturned. Allen Oil Co. v. Com-
missioner, 614 F.2d 886 (2d Cir. 1980). Ever deter-
mined, despite reversals by the Second, Fourth and
Eighth Circuits, the Tax Court followed Fairfax in
Charles Baloian Co. v. Commissioner, 68 T.C. 620
(1977), now pending on appeal in the Ninth Cir-
cuit [78-2488 & 78-2508, appeal argued July 10,
1980] as did the Court of Claims in Vogel Fertilizer
Company v. United States [69-78, August 13, 1980]
(Ct.Cl.1980).
In our case the Tax Court again upheld Fairfax
and ruled for the taxpayer. Delta Metalforming Co.
v. Commissioner, T.C.M. 1978-354.
III.
We begin, as we must and should, with the lan-
guage of the statute itself. Southern Community
College v. Davis, 442 U.S. 397, 405, 99 S.Ct. 2361,
2366, 60 L.Ed.2d 980, 987-88 (1979) (“It is ele-
mentary that ‘[t]he starting point in every case in-
volving the construction of a statute is the language
itself.’”) See also Touche Ross & Co. v. Redington,
442 U.S. 560, 568, 99 S.Ct. 2479, 2485, 61 L.Ed.2d
82, 91 (1979). The critical words of § 1563(a) (2)
define a “controlled group of corporations.” <A
“brother-sister controlled group” is one of:
Two or more corporations if 5 or fewer persons
who are individuals, estates, or trusts own...
stock possessing—
lead to confusion or may constitute an improper performance
of the Court’s function. See Bradford v. Commissioner, 60
T.C. 258, 261 (1978) (Drennan, J., dissenting).
This practice at one time was severely criticized by one
or more Judges of this Court.
Ba
(A) at least 80 percent ... of each corpora-
tion, and
(B) more than 50 percent... of each cor-
poration, taking into account the stock owner-
ship of each such person only to the extent such
stock ownership is identical with respect to each
such corporation.
We look for the plain meaning of these words as
our threshold inquiry. Yet the statute does not plainly
say that there may be only one group of “5 or fewer
persons” for a contrulled group. Nor does the statute
plainly say that there may be more than one such
group. However, in our view, while the language
may be a little short on plainness, the words of the
statute, its purpose, and legislative history compel
a reading requiring that for the 80% test each share-
holder must own stock in each of the corporations.
Although in the quest for plain meaning dictionary
definitions may be deficient, in the lexicon of a statu-
tory framework as complex and diverse as the Inter-
nal Revenue Code these meanings are helpful here.
Section 1563(a) defines a “controlled group” of cor-
porations. The concept of “control” is the “[p]ower
or authority to manage, direct, superintend, restrict,
regulate, direct, govern, administer, or oversee,”
Black’s Law Dictionary 399 (4th ed. 1951), or the
act or fact or power “[t]o exercise restraining or
directing influence over; to dominate; regulate; hence,
to hold from action; to curb; subject. .. .”” Webster’s
Nev’ International Dictionary of the English Lan-
guage 580 (2d ed. 1958) (definition 4). A group is
an “assemblage of persons or things regarded as a
unit because of their comparative segregation from
others; a cluster; aggregation; ... [a]n assemblage
of objects in a certain order or relation, or having
9a
some resemblance or common characteristic.” Id. at
1104 (definitions 2 and 3). Thus, a controlled group
of corporations is an assemblage of corporations with
a common characteristic and the power or authority
to manage, regulate or oversee the other(s). More-
over, subsection 1563(a) (2) defines a kind of “con-
trolled group” entitled “brother-sister.” This subtitle
contemplates a relationship of close ties and common
qualities. Hence, both the title and subtitle of the
statute in question underscore the common connec-
tions, interrelationships and mutual influences of the
group.
Moreover, subsection 1563(a)(2) defines a kind
of “controlled group” entitied “brother-sister.” A
“brother” is defined as “[o]ne related or closely
united to another by some common tie or interest,
as of ... profession, .. . toil, etc.,” and “[o]ne that
resembles another in qualities or traits,” id. at 343
(definitions 4 and 5), while a “sister” refers to “one
of the same kind, or of the same condition, regarded
as nearly related... .” Jd. at 2349 (definition 3).
Hence the brother-sister subtitle of the statute, like
the title, contemplates a relationship of close ties and
common qualities and underscores the common con-
nections and mutual influences of the prescribed
group.
This “brother-sister controlled group” is then de-
fined in more precise detail. The group must have
two or more corporations where “five or fewer per-
sons” own stock satisfying the 80% test and the 50%
test. The statute does not say specifically that the
very same five or fewer persons must satisfy both
tests and it is possible that unrelated sets of five or
fewer persons could do. Yet, that reading would do
violence to the common control introduced and em-
10a
phasized by the statutory title and subtitle of § 1563
and the underlying congressional policies.
Moreover, the term made up of the words “five or
fewer persons” applies to both 80% and 50% tests.
These words constitute, as the Fairfax majority put
it, the “conjunctive subject” of the two tests which
follow. 65 T.C. at 803. Since the same words apply
to both tests, and the tests are characterized by sib-
ling kinship, it would then make sense that the very
same five or fewer persons should satisfy both tests.
Further, the 50% test uses the language “each such
person” in describing the nature of the group. The
grammatical antecedent for “each such person” is
“five or fewer persons.” Since the phrase “five or
fewer persons” is the antecedent for the 80% test
as well as the 50% test, it is reasonable to conclude
that “each such person” in the second test would also
apply to the first test. Accord, Fairfax Auto Parts
of Northern Virginia, Inc. v. Commissioner, 65 T.C.
at 803; T. L. Hunt v. Commissioner, 562 F.2d at 536
(Webster, J., dissenting).
Common sense also suggests that a person should
not be considered part of a group that controls a
corporation where the person has no interest in, in-
fluence over, or control of the corporation. Sharp
should not be included in the controlled group because
he had no connection with Delta Metalforming. Nor
should Sharp be penalized because some of his co-
shareholders control another corporation, in which he
has no interest, unless the co-shareholders own 80%
of Sharp’s corporation.°
5 In addition, a common ownership requirement is consist-
ent with what seems to be the natural meaning of the phrase
“5 or fewer” in this context. We think the phrase “5 or
fewer” refers to numbers five, four, three, two and one but
not to zero.
lla
Our reading of the statute is also consistent with
its purpose. The 50% test was enacted as one of
control. Hearings on the Subject of Tax Reform Be-
fore the House Comm. on Ways and Means, 91st
Cong., 1st Sess. 5894 (1969). Identical interest in-
sures a degree of control necessary for the corpora-
tions to operate as one economic entity. The 80%
test, however, is one of financial interest. The 80%
financial interest test makes sense when those with
financial interest are also those with control of the
corporations. In the words of the commenta ors, “to
interpret the statute so that the 80 percent test can
be met by persons having ownership in only one cor-
poration ignores the obvious relationship between the
50 percent test and the 80 percent test, 7.¢., the exer-
cise of control by persons with a substantial financial
interest in the corporations.” Thomas, “Brother-
Sister Multiple Corporations—The Tax Reform Act
of 1969 Reformed By Regulation, 28 Tax. L. Rev. 65,
82 (1972). The General Explanation of Treasury
Tax Reform Proposals underscores that element of
identity and connecting links. A brother-sister group
isa
group of corporations in which five or fewer per-
sons own, to a large extent in identical propor-
tions, at least 80 percent of the stock of each
of the corporations.
Treasury Department’s General Explanation Hear-
ings on the Subject of Tax Reform Before the House
Comm. on Ways and Means, at 5394 (emphasis
added). The Treasury also explains:
[I]n order to insure that this expanded defini-
tion of brother-sister controlled group applies
only to those cases where the five or fewer in-
12a
dividuals hold their 80 percent in a way which
allows them to operate the corporations as one
economic entity, the proposal would add an ad-
ditional rule that the ownership of the five or
fewer individuals must constitute more than 50
percent of the stock of each corporation. .. .
Expanding the 80-percent ownership test from
one person to five will close the present oppor-
tunity for easy avoidance of that 80-percent test.
However, adding the 50-percent identical owner-
ship test will insure that the new expanded defi-
nition is limited to cases where the brother-sister
corporations are, in fact, controlled by the group
of stockholders as one economic enterprise.
Id. (emphasis added). While our brother-sister
Courts have gleaned different guidance from these
words, see Fairfax, dissent, 65 T.C. at 809-10; Allen
Oil Co. v. Commissioner, 614 F.2d at 340 n.4 (in-
terpreting the explanation to mean that common own-
ershin is not necessary), we read the explanation to
mean that the same economic entity was intended to
be required. See also Hearings on the Subject of Tax
Reform Before the House Comm. on Ways and Means,
at 5050. Indeed, when the Treasury presented its
Tax Reform Proposals in April 1969 it explained that
the “same” five or fewer persons must own stock in
“each” corporation before their stock ownership will
be counted, and “these” same five or fewer persons
must own over 50% of the stock identically regard-
ing each corporation.°
* The Treasury stated:
Present law defines a brother-sister controlled group as
a group of corporations in which the voting stock or
value of shares of each member is owned 80 percent by
the same person (i.¢., individual, estate or trust). Under
13a
Similarly, the Senate and House Reports explain
that the very same five or fewer persons must satisfy
the 50% and 80% tests. The House Report, which
contains substantially the same language as the Sen-
ate Report on this point, states:
This bill expands this definition to include two
or more corporations which are owned 80 per-
cent or more... by five or fewer persons...
provided that these five or fewer persons own
more than 50 percent of each corporation when
the stock of each person is considered only to the
extent it is owned identically with respect to each
corporation.
See, H.R. Rep. No. 91-418, 91st Cong., Ist Sess.
(1969), reprinted in [1969] U.S. Code Cong. & Ad.
News, pp. 1645, 1748; S. Rep. No. 91-552, 91st Cong.,
Ist Sess. (1969), reprinted in [1969] U.S. Code
Cong. & Ad. News, pp. 2027, 2167 (emphasis added).
“These” very same five or fewer persons—only one
combination with the same members—one economic
entity—must comprise the asserted controlled group.
the proposal, the present definition would be changed so
that a group of corporations would constitute a brother-
sister controlled group if (1) the same five or fewer per-
sons own at least 80 percent of the voting stock, or value
of shares of each corporation, and (2) these five or fewer
individuals own more than 50 percent of the voting power
or value of shares of each corporation considering a par-
ticular person’s stock only to the extent that it is owned
identically with respect to each corporation.
See discussion in Bonovitz, Brother-Sister Controlled Groups
under Section 1563: The 80 Percent Ownership Test, 28 Tax
Law 511, 515 (1975); Weisman, Brother-Sister Controlled
Corporations: On and Off the Road To the Supreme Court
With an Edsel, 1978 Taxes 475, 480-81.
l4a
A closer look at the reasons for the adoption of
§ 1563 also suggests that common ownership is re-
quired. The sur-tax exemption was enacted to bene-
fit small corporations. S. Rep., U.S. Code Cong. &
Admin. News 1969 at 2155; H.R. Rep., U.S. Code
Cong. & Admin. News 1969 at 1745. The controlled
group exception to the exemption was adopted in
1964 to prevent the proliferation of multicorporate
structures by a single business to take undue advan-
tage of the sur-tax exemption. Rev. Act of 1964, 78
Stat. 116, § 235(a). Jt. Comm. on Internal Revenue
Taxation, 88th Cong., lst Sess. Summary of the
President’s 1963 Tax Message 45 (April 1963) ; H.R.
Rep. No. 749, 88th Cong., 1st Sess. (1963), 1964-1
C.B. (Part II) 240-41; S. Rep. No. 830, 88th Cong.,
2d Sess. (1964), 1964-1 C.B. (Part II) 653-55.
Originally a brother-sister controlled group applied
only to one individual, inherently, the “same” person.
The statute was amended in 1969 to enlarge the group
from one individual to five or fewer to prevent tax
benefits through multiple corporations. Tax Reform
Act of 1969, 83 Stat. 599, § 401; S. Rep., U.S. Code
Cong. & Admin. News 1969 at 2165; H.R. Rep., U.S.
Code Cong. & Admin. News 1969 at 1745 (“[L]arge
organizations which operate through multiple corpora-
tions and which are not in reality ‘small businesses’
should not. be allowed to receive the substantial and
unintended tax benefits resulting from the multiple
use of the surtax exemption and these other provi-
sions.”) The definition of a brother-sister controlled
group was expanded to include “the combined stock
ownership of five individuals, rather than one individ-
ual, in applying the 80 percent test,” H.R. Rep., U.S.
Code Cong. & Admin. News 1969 at 1956, and the
50% test was added. There is nothing in the legislative
history to suggest that the kind of group which would
15a
and would not be entitled to the exemption—the
“sameness”—was to be altered. Absent a clear in-
dication to the contrary, it is reasonable to assume
that the persons within the control group would con-
tinue to constitute the ownership group of each cor-
poration. The House and Senate Reports do not in-
dicate any intention to change the constituents of
the ownership group. Indeed, all of the examples
submitted to Congress by the Treasury to illustrate
the operation of the exemption involve shareholders
who own stock in each corporation. The absence of
contrary examples strongly suggest that the Treasury
did not contemplate the definition of the 80% test
group by strangers to the 50% test group.
Further, if Congress had intended to change the
requirement of sameness or common ownership, it
certainly knew how to do so. See Thomas, 28 Tax
L. Rev. at 79 (“One thing is certain: If Congress
had intended the interpretation adopted by the reg-
ulation, it could have drafted a statute which stated
it more accurately.”) Indeed, it seems to us that the
Treasury—who originally endorsed the 1969 amend-
ment and on whom congressional committees exten-
sively rely—would have suggested language (such as
that used in their subsequent corollary regulation)
had it intended to reject the common ownership
requirement.
As we read § 1563(a) (2) and its related authority,
we cannot but conclude that Treasury Regulation
1.1563-1(a) (8) comprises an unwarranted extension.
The Regulation defines a brother-sister controlled
group as two or more corporations
if the same five or fewer persons ... own.
singly or in = etal stock possessing [the
requisite amounts]. .
16a
(Emphasis added). We are well aware that great
weight must be afforded to “contemporaneous con-
structions by those charged with administration” of
the Internal Revenue Code. Bingler v. Johnson, 394
U.S. 741, 749-50, 89 S.Ct. 1439, 1445, 22 L.Ed.2d
695, 703-04 (1969). We may invalidate a revenue
regulation only if it is unreasonable and clearly in-
consistent with the statute. Id. National Muffler
Dealers Association, Inc. v. United States, 440 U.S.
472, 488, 99 S.Ct. 1304, 1312, 59 L.Ed.2d 519,
519, 581 (1979) (“the [taxpayer] . .. needs more
than a plausible policy argument to prevail here. ...
The choice among reasonable interpretations is for
the Commissioner, not the Courts.”) See also Arthur
Fulman vy. United States, 434 U.S. 528, 533, 98 S.Ct.
841, 845, 55 L.Ed.2d 1, 8 (1978). Nonetheless, where
a regulation is unreasonable, the Courts do not ex-
tend the Treasury unfettered authority and have not
hesitated to invalidate the errant regulation. United
States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct.
1712, 1716, 36 L.Ed.2d 528, 529 (1973). “ ‘[I]t does
not follow that, because [the Commissioner] has a
choice of alternatives, his choice should be sustained
where the alternative chosen is unrealistic. In such a
situation the regulations embodying that choice should
be held to be unreasonable.’” (quoting authority).
Id. at 557, 93 S.Ct. at 1720, 36 L.Ed.2d at 537;
Texas Instruments v. United States, 551 F.2d 599,
610 (5th Cir. 1977).’
7 According to at least one commentator, traditional defer-
ence to the Treasury’s interpretation is unavailing here.
Weisman, 1978 Taxes at 482. He argues that (1) the statute
is definitional and should not be extended beyond its narrow
meaning without Congressional approval, (2) there are fun-
damental inconsistencies between the Treasury’s interpreta-
17a
With all deference due treasury regulations, we
cannot accept Reg. 1.1563-1(a)(3)(i). What the
Treasury has done is unjustifiably expand the statute
without basis in legislative intent, history or logic.
The words “singly or in combination” are meaning-
less when applied to the 50% test since an identity
of ownership is already statutorily mandated. See
Bonovitz, 28 Tax Lawyer at 530 (“The legislative
history of § 1563(a)2) unequivocably requires com-
mon ownership for purposes of the section’s 80 per-
cent test. The 80 percent test, which is a financial
interest test, and the 50 percent test, which is a con-
trol test, only have independent significance if the 80
percent test requires common ownership.”) Indeed,
from the initial promulgation of the Treasury regula-
tions, there was a ground swell of critical protest
from the commentators. Considering that commenta-
tors’ criticism is neutral in the sense that in tax law
what today is sauce for the goose turns out to be
sauce for the gander, the overwhelming opposition
has special significance.*®
tion of the statutory language and Congressional intent, and
(3) the tax policy and functions underlying the purpose of
the statute constitute “weighty reasons” for a Court to de-
cline to defer to the administrative interpretation of the
Treasury. Id.
8 See Bonovitz, 28 Tax Lawyer 511; Pearlman, “Recasting
the Multiple Corporate Group After the Multiple Surtax Ex-
emption Ends,” 41 J. Taxation 194 (1974) ; Thomas, “Broth-
er-Sister Multiple Corporations—The Tax Reform Act of
1969 Reformed by Regulation,” 28 Tax L. Rev. 65 (1972) ;
Kringel, “Multiple Corporation Proposed Regulations Raise
More Questions Than They Answer,” 36 J. Taxation 358
(1972); Libin & Abramowitz, “Multiple Corporations: A
Surprising Interpretation of Sec. 1563(a)(2) and Tempo-
rary Regulations,” 3 Tax Advisor 326 (1971). See also Note,
18a
And Judge Webster cogently expiained,
It is not the smallness of the number of per-
sons in each company that triggers § 1563; it is
the sameness of that small number. The 80 per
cent financial interest requirement is meaning-
less unless it is the same group of five or fewer
persons that own 80 per cent of each company
within the controlled group. It is this require-
ment of “economic entity” which is entirely
eviscerated by Reg. § 1-1563-1(a) (3).
562 F.2d at 5387 (emphasis in original).
The Government argues that the Tax Court im-
permissibly reads the entire qualification of the 50%
test, subparagraph (B) into the 80% test, subpara-
graph (A). This is incorrect. The 50% test requires
identity of controlling ownership. We do not in any
way engraft this identical interest requirement to
the 80% test. However, what we do apply to the 80%
test—which, as we explain, the statute requires us to
do—is to apply the principle of common ownership
to both 50 and 80% tests.
Moreover, the meaning of § 1563(a) (2) which the
Government urges renders the 80% test superflous.
As Judge Webster pointed out, if control is already
satisfied by 50% ownership, little if anything is
added to require an additional 30% ownership by
someone else. Hunt dissent, 562 F.2d at 537. See
also Thomas, 28 Tax L.Rev. at 82-83. Nor does our
“Disallowance of Surtax Exemption to Brother-Sister Corpo-
rations—Stock Ownership Test Under Sections 1551 and
1563, 1976 Brigham Young L. Rev. 1000, 1017. But see
White, “The Tax Reform Act of 1969: Demise of Multiple
Surtax Exemptions—When Too Much of a Good Thing Proved
its Own Undoing,” 16 Wayne L. Rev. 1353 (1970).
19a
reading improperly tend to “overlap or swallow” the
50% test as the Second Circuit has suggested. Allen
Oil Co. v. Commissioner, 614 F.2d at 339. As we
see it, the 80% ownership requirement in conjunction
with the 50% identical ownership requirement work
best in tandem. Each has a significant congressional
purpose and the stockholding requirements should
be interpreted to ascribe to each a function that
makes neither test superflous, dominant or subord-
inate.
So we reject the contention that the common owner-
ship requirement in the 80% test is “hardly a mean-
ingful test,” “trifling,” and turning upon the “hap-
peninstance of symbolic but factually meaningless
ownership of a single share.” We refuse to rewrite
the numerical requirements of the statute. Particu-
larly in the area of federal taxation, we should not
ignore percentage requirements obviosly and spe-
cifically fixed by Congress. While the result may
seem “arbitrary”—ownership of a single share may
be critical—79% will not suffice while 80% will—
revenue laws necessarily encompass maximums, mini-
mums, cutoffs and the like. In that sense all specific
standards expressed in numbers or percentages are
arbitrary. One side of the line is IN, and the other
side OUT.
- Moreover, stock ownership—or lack of ownership—
or even a single share entails significant rights, op-
portunities and disabilities. The shareholder may
vote to elect and remove directors, adopt, amend and
repeal bylaws, adopt resolutions, affect extraordinary
corporate matters, and see corporate books and rec-
ords. See Henn, Law of Corporations §§ 188, 189,
192, 193, 194, 195 & 199 (2d ed 1970). He also has
standing to bring suit against an officer or director
20a
of the corporation who breaches his fiduciary duties
to the entity, or under the Securities Act of 1934.
See id. at § 200; Rekant v. Desser, 425 F.2d 872,
876 (5th Cir. 1970).°
Nor do we find the 80% test of § 1551 inconsistent
with our position.” Since we do not have a transfer
situation we have neither a transferee nor a transfer-
or corporation and the § 1551 test provides us with
little guidance. Moreover, in 1969, when the 50-80%
control tests were adopted in § 1563, the § 1551 regu-
lations did not use the words “singly or in combina-
® Rekant held that shareholder with six shares of “prac-
tically worthless” stock had standing to sue under § 10(b).
“It is a disconcerting thought that a shareholder with his
tiny holding should have access to as powerful a weapon as
§ 10(b). The plaintiff, however, is in a fiduciary relationship
to the other shareholders as a consequence of bringing a de-
rivative action in a class action.” 425 F.2d at 876 n.7 (Wis-
dom, J.).
10 Section 1551(b) (2) reads:
DISALLOWANCE OF SURTAX EXEMPTION AND
ACCUMULATED EARNINGS CREDIT.
(b) CONTROL.—For purposes of subsection (a), the
term “control” means—
* * . ~ *
(2) With respect to each corporation described in
subsection (a) (3), the ownership by the five or fewer
individuals described in such subsection of stock possess-
ing—
(A) at least 80 percent . . . of each corporation,
and
(B) more than 50 percent . . . of each corpora-
tion, taking into account the stock ownership of each
such individual only to the extent such stock owner-
ship is identical with respect to each such corpora-
tion.
2la
tion,” which were the critical words for the § 1563
regulation.”
IV.
Death, tide, time and taxes wait for no man.
Neither do opinions. How unfortunate that in our
verbal search for the non-biological tax-wise brother-
sister the words and deeds of the Court of Claims in
Vogel Fertilizer Company v. The United States [69-
78, Aug. 13, 1980] (Ct.Cl.1980) came too late to
spare us the labor of (and eager tax readers the
task of reading and purchasing) this opinion. For
we approve not only the result, but expressly adopt
the opinion of that Court by Judge Bennett and the
concurring opinion of Chief Judge Friedman.
The score for Fairfax is now 2 to 3. All eyes must
now focus northward or westward.
AFFIRMED.
SAM D. JOHNSON, Circuit Judge, dissenting:
Without exception, the other Circuit Courts that
have considered the meaning of the 80% test under
Section 1563(a) (2) (A) have decided contrary to the
majority opinion expressed here. At present, three
Circuits have held that the 80% test, which consti-
tutes part of the definition of a brother-sister con-
trolled group, is not limited by a common ownership
requirement. Thus, a person’s stock ownership in
4 According to one commentator, the legislative history of
§ 1551(b) (2) unequivocally requires common ownership for
the 80% test, which the regulations, when construed as a
whole, also so require. Bonovitz, 28 Tax Lawyer at 522-31.
See also Weisman, 1978 Taxes at 481.
22a
a corporation may be counted for purposes of satis-
fying the 80% test, even if that person does not
own stock in each member of the controlled group.
Allen Oil Co. v. Commissioner, 614 F.2d 336 (2d Cir.
1980); Yaffe Iron & Metal Corp. v. United States,
593 F.2d 832 (8th Cir.), cert. denied, 444 U.S. 343,
100 S.Ct. 85, 62 L.Ed.2d 55 (1979); T.L. Hunt,
Inc. v. Comnvissioner, 562 F.2d 532 (8th Cir. 1977);
Fairfax Auto Parts of Northern Vrginia, Inc. v.
Commissioner, 548 F.2d 501 (4th Cir.), cert. denied,
434 U.S. 904, 98 S.Ct. 300, 54 L.Ed.2d 190 (1977).
As recognized by the majority opinion, this Court
may not invalidate Treasury Regulation 1.1563—1
(a) (3), which specifically disclaims any common
ownership requirement for the 80% test, unless it is
unreasonable and clearly inconsistent with the stat-
ute. Although imposing a common ownership re-
quirement upon the 80% test might be viewed as the
better result, it is by no means mandated by the
wording of Section 1563(a) (2) (A) or by the legisla-
tive history. Both the language of the statute and the
legislative history can be interpreted so as to sup-
port the Treasury Regulation. See Vogel Fertilizer
Co. v. United States, No. 69—78 (Ct.Cl. Aug. 13,
1980) (Smith, J., dissenting). Consequently, the
Treasury Regulation is neither unreasonable nor
plainly inconsistent with the statute.
For the reasons stated in Allen Oil, and those ad-
ditional reasons expressed by Judge Smith in his
dissent in Vogel Fertilizer, I respectfully dissent.
23a
APPENDIX B
UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
October Term, 19
No. 78-3699
T. C. Docket No. 6606-77
DELTA METALFORMING COMPANY, INC.,
PETITIONER-APPELLEE
versus
COMMISSIONER OF INTERNAL REVENUE,
RESPONDENT-APPELLANT
Appeal from the Decision of the
United States Tax Court
Before BROWN, HENDERSON and SAM D.
JOHNSON, Circuit Judges.
JUDGMENT
This cause came on to be heard on the transcript
of the record of the Tax Court of the United States,
and was argued by counsel;
ON CONSIDERATION WHEREOF, It is now
here ordered and adjudged by this Court that the
decision of the said Tax Court in this cause be, and
the same is hereby, affirmed;
24a
It is further ordered that appellant pay to appel-
lee, the costs on appeal to be taxed by the Clerk of
this Court.
December 8, 1980
Sam D. Johnson, Circuit Judge, dissenting.
Issued as Mandate: Jan. 6, 1981
A true copy
Test GILBERT F. GANUCHEAU
Clerk, U.S. Court of Appeals,
Fifth Circuit
By /s/ Linda Johnson
Deputy
Jan. 6, 1981
New Orleans, Louisiana
25a
APPENDIX C
UNITED STATES TAX COURT
T.C. Memo. 1978-354
DELTA METALFORMING Co., INC., PETITIONER
uv.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Docket No. 6606-77 Filed September 7, 1978
MEMORANDUM OPINION
DRENNEN, Judge: Respondent determined a
deficiency in petitioner’s income tax for 1975 in the
amount of $13,500. Petitioner filed a timely peti-
tion in this Court and respondent filed his answer.
Respondent then filed a Motion for Judgment on the
Pleadings and petitioner also filed a Motion for Judg-
ment on the Pleadings. When the case was called for
argument on the two motions the parties filed a stip-
ulation of all the relevant facts. After hearing oral
arguments the Court took the motions under advise-
ment and the parties were offered the opportunity to
file briefs, which they have done.
The only issue for decision is whether petitioner is
a member of a controlled group of corporations as
defined by section 1563(a)(2), I.R.C. 1954,’ thus
permitting respondent to deny petitioner a surtax
exemption under section 1561(a). This in turn de-
1 All section references are to the Internai Revenue Code
of 1954, effective for the year 1975, unless otherwise indi-
cated.
26a
pends, in this case, on whether a person’s stock
ownership can be taken into account for purposes of
the 80-percent test under section 1563(a) (2) (A)
when that person does not own stock in each corp-
oration in the alleged brother-sister controlled group.
The relevant facts are as follows.
Petitioner, Delta Metalforming Co., Inc., is a corp-
oration doing business in Dallas, Tex., and now
having its principal place of business at 10848 Lunar
Road, Dallas, Tex.
Petitioner filed a Form 1120 Corporate Income
Tax return for the calendar year 1975 with the
director, Internal Revenue Service Center, Austin,
Tex.
A statutory notice of deficiency was sent to peti-
tioner on April 27, 1977. The only adjustment de-
termined by respondent was the disallowance of the
$25,000 surtax exemption claimed by petitioner, for
the reason that petitioner was a member of a con-
trolled group of corporations and the surtax exemp-
tion had been allowed to another member of the con-
trolled group.
The outstanding voting stock of petitioner is owned
by three individuals, W. T. Slayton, L. L. Edens,
and J. G. Ellis, who owns 36.4 percent, 27.2 percent
and 36.4 percent of the stock, respectively.
The above three individuals, together with F.T.
Sharp, collectively own 100 percent of the voting
stock of two other corporations, Delta Steel Build-
ings, and Delta Engcon.
Percentage ownership of the stock of petitioner,
Delta Steel, and Delta Engcon is represented by the
following chart:
27a
Delta Delta Identical
Stockholder Petitioner Steel Engeosn ownership
Percent Percent Percent Percent
W. T. Slayton 36.4 26.7 26.4 26.4
L. L. Eddins 27.2 19.9 20.8 19.9
J. G. Ellis 86.4 26.7 26.4 26.4
F. T. Sharp -0- 26.7 26.4 -0-
Total 100 100 100 72.7
On its 1975 corporation income tax return peti-
tioner took the full surtax exemption as allowed by
section 11(d) of the Code. The full surtax exemp-
tion was also taken by Delta Steel on its 1975 corp-
orate income tax return.
The parties agree that the stock ownership of peti-
tioner, Delta Steel, and Delta Engcon, as represented
in the table above, meets the “50 percent test” of
section 1563(a) (2) (B).
Section 11(a) imposes a tax on the taxable income
of corporations consisting of a normal tax computed
under subsection (b) and a surtax computed under
subsection (c). Subsection (c) imposes a surtax of 26
percent of the amount by which the taxable income
exceeds the surtax exemption for the taxable year.
Under subsection (d) the surtax exemption was
$25,000 except as otherwise provided in section 1561.
Section 1561(a)(1) provides that the component
members of a controlled group of corporations shall
be limited to one surtax exemption under section
11(d), to be divided equally among the component
members of the group unless all such component
members consent to an apportionment plan providing
for an unequal allocation of such amount.’
2 No issue has been raised about the unequal allocation of
the surtax exemption in this case so we assume it was agreed
28a
Section 1563(a) (2) defines a brother-sister group
of controlled corporations as:
Two or more corporations if 5 or fewer per-
sons who are individuals, estates, or trusts own
* * * stock possessing—
(A) at least 80 percent of the total com-
bined voting power of all classes of stock
entitled to vote or at least 80 percent of the
total value of shares of all classes of the
stock of each corporation; and
(B) more than 50 percent of the total
combined voting power of all classes of stock
entitled to vote or more than 50 percent of
the total value of shares of all classes of
stock of each corporation, taking into ac-
count the stock ownership of each such per-
son only to the extent such stock ownership
is identical with respect to each such corp-
oration.
Petitioner contends that a person’s stock owner-
ship can be taken into account for purposes of the
80 percent test under section 1563(a)(2)(A) only
when that person owns stock in each member of the
alleged brother-sister controlled group, relying on the
decisions of this Court in Fairfax Auto Parts of No.
Va., Inc. v. Commissioner, 65 T.C. 798 (1976), rev’d.
548 F.2d 501 (4th Cir. 1977), and Charles Baloian
Co. v. Commissioner, 68 T.C. 620 (1977), on appeal
(9th Cir. Apr. 19, 1978). And since F. T. Sharp
to by petitioner. Nor is there any dispute about respondent’s
right to disallow the surtax exemption to petitioner if peti-
tioner was a member of a controlled group of corporations
as defined in sec. 1563 (a) (2).
29a
owned no stock of petitioner his stock ownership in
Delta Steel and Delta Engcon cannot be taken into
consideration for purposes of the 80 percent test and
that test is not met; thus petitioner is not a member
of a controlled group of corporations and section 1561
(a) (1) does not apply.
Respondent contends that for purposes of the 80
percent test a person’s stock ownership in any one or
all of the members of the alleged controlled group of
corporations may be taken into consideration if he is
one of the five or fewer group of persons who col-
lectively own at least 80 percent of the stock of all of
the corporations in the group even though he may not
own any stock in one or more of the corporations. Re-
spondent relies on the dissenting opinion of Judge
Simpson of this Court in Fairfax Auto Parts, the de-
cision of the Fourth Circuit in Fairfax Auto Parts
of No. Va., Inc. v. Commissioner, supra, the decision
of the Eighth Circuit in 7. L. Hunt, Inc. v. Commis-
sioner, 562 F.2d 532 (8th Cir. 1977), reversing a
Memorandum Opinion of this Court, and sec. 1.1563-
1(a), Income Tax Regs., and Example 1 contained
therein.* If respondent’s interpretation of section
®Sec. 1.1563-1(a) (3) (i), Income Tax Regs., defines a
brother-sister controlled group as two or more corporations
if:
“the same five or fewer persons * * * own * * * singly
or in combination, stock possessing—
(a) At least 80 percent * * * [same as the statu-
tory language] ; and
(b) More than 50 percent * * * [same as the statu-
tory language].
(ii) The principles of this subparagraph may be
illustrated by the following examples:
Example (1). The outstanding stock of corporations
P, Q, R, S, and T, which have only one class of stock
80a
1563(a) (2) is correct petitioner was a member of a
brother-sister controlled group of corporations and his
disallowance of the surtax exemption must be upheld.
This difficult but clear-cut legal issue has been
considered by this Court on several occasions before.
We first considered it in Fairfax Auto Parts of No.
Va., Inc. v. Commissioner, supra, in a Court-reviewed
opinion released in January of 1976. The majority
opinion held that in order for a person’s stock owner-
ship to be counted for purposes of the 80 percent test
under section 1563(a)(2)(A) such person must own
stock in each of the corporations included in the a!»
leged controlled group. In doing so the majority in
effect found respondent’s regulation to the contrary
to be invalid. Judge Simpson filed an extensive
dissenting opinion, which was joined by thrve other
judges, in which he concluded that the statutory
language of section 1563(a)(2) and the legislative
history thereof supported respondent’s interpreta-
tion of the law, that in subsequent legislrion (ERISA
outstanding, is owned by the following unrelated indi-
viduals:
Corporations Identical
Individuals P Q R s T Ownership
60% 60% 60% 60% 100% 60%
40%
— 40% —
ae, jean
40%
Tota! 100% 100% 100% 100% 100% 60%
Hoan >
Corporations P, Q, R, S, and T are members of a brother-
sister controlled group.”
3la
of 1974) Congress indicated its approval of respond-
ent’s interpretation and application of section 1563,
and that under the circumstances respondent’s regula-
tions were neither unreasonable nor clearly inconsist-
ent with the statute and consequently there was no
basis in the law for this Court to refuse to apply the
regulations.
The decision of this Court in Fairfax Auto Parts of
No. Va., Inc. v. Commissioner, supra, was reversed
on appeal by the Court of Appeals for the Fourth
Circuit in January of 1977. In the per curiam opinion
of that court, 548 F.2d 501, the issue was not dis-
cussed in detail; the court said that the majority and
dissenting opinions of the Tax Court set out the argu-
ments supporting both interpretations of the statute
and there was no need to repeat them. It concluded
that the dissent’s interpretation of the statute accords
with the text of the statute and its legislative history
and reversed for the reasons set forth in the dissent-
ing opinion of the Tax Court.
Prior to the reversal of Fairfax Auto Parts this is-
sue again came before this Court in 7. L. Hunt v.
Commissioner, T.C.Memo. 1976-221. In that case re-
spondent admitted that if the Tax Court continued to
follow the Fairfax case he would lose but urged the
Court to reconsider its conclusion in Fairfax. In a
brief Memorandum Opinion this Court said:
Although Fairfax was promulgated only a few
months ago, we have carefully reviewed it. We
remain impressed by its cogent reasoning.
Consequently the Tax Court affirmed its position in
Fairfax and held for the taxpayer.
The Hunt case was appealed to the Court of Ap-
peals for the Eighth Circuit which also reversed the
82a
Tax Court in a divided opinion issued in September
of 1977, 562 F.2d 532. The majority opinion agreed
with the Fourth Circuit that the dissenting opinion in
the Tax Court correctly interpreted and applied the
law and that there was no statutory requirement in
applying the 80 percent test that each of the five
or fewer persons who owned 80 percent of the stock
of the corporations in the group own stock in each of
the corporations. Consequently, the holding of the
Tax Court constituted an unwarranted addition to
the statute of a requirement not reflected in the plain
language of the statute. While the majority opin-
ion discussed the language of the statute, its legisla-
tive history, and the regulations, it reiterated the
arguments in the dissenting opinion of the Tax Court
in Fairfax and relied thereon in upholding the va-
lidity of the regulations. Judge Webster filed a
strong dissenting opinion in which he pointed out that
it was not consistent with the purpose of Congress
to permit use of different groups to meet the two
tests, and that to give the statute any meaning the
same group that has 50 percent control of the corp-
orations must also have at least an 80 percent finan-
cial interest in the corporations. He concluded that
the regulation was an unwarranted extension of the
statute and therefore invalid.
Prior to the reversal of the Hunt case by the
Eighth Circuit, the issue again came before this
Court in Charles Baloian Co. v. Commissioner, supra.
Since the Tax Court had been reversed in Fairfax, the
opinion in Baloian was Court reviewed. The major-
ity opinion, written by Judge Forester, a recalled
judge who heard the case, again rejected respondent’s
interpretation of the statute and held for the peti-
tioner. The opinion said:
* * * We fully recognize that section 1.1563-
1(a)(3), Income Tax Regs., dictates a holding
in favor of respondent; however, in a reviewed
opinion, Fairfax Auto Parts of No. Va., Ine. v.
Commissioner, supra, we held this regulation to
be “plainly inconsistent with the thrust of the
statutory language” (65 T.C. at 803) and, there-
fore, to be invalid. * * *
Respondent’s substantive arguments on this is-
sue are in large part drawn from the views ex-
pressed by the dissenting opinion filed in Fair-
fax Auto Parts of No. Va., Inc. v. Commisioner,
supra. We had the benefit of those views and
arguments during our initial consideration of
that case, and we do not find them to be any
more persuasive today than we did at that time.
Notwithstanding the Fourth Circuit’s disagree-
ment with our position on this question, we re-
main convinced of its correctness.
A dissenting opinion was again filed by Judge Simp-
son and this time he was joined by four other judges.
We now have the same issue before us again in
this case with the benefit of the opinion of the Eighth
Circuit in the Hunt case. We have carefully con-
sidered the majority opinion in that case and, with
all due respect, we do not believe it adds any argu-
ments in favor of respondent’s position and the
validity of his regulations that have not been pre-
sented and considered by this Court before. The
fuli Tax Court having considered these arguments
twice before in the last 2-% years, and there being
no changes in the law, we will adhere to our conclu-
sions in the Fairfax, Hunt, and Baloian cases for
the reasons stated in the majority opinion in the
Fairfax case and decide the issue in this case for
petitioner. We see no reason to repeat those reasons
84a
here. We might add that we believe the arguments of
Judge Webster in his dissenting opinion in the Hunt
case strengthens our conclusion.
We do not take lightly the reversal by another
Circuit Court on this issue. But as we said in Law-
rence v. Commissioner, 27 T.C. 713 (1957), the Tax
Court is a court of national jurisdiction and to avoid
confusion should thoroughly consider the reasoning
of the reversing appellate court but if it is still of the
opinion that its original result was right, it should
follow its honest beliefs until the Supreme Court de-
cides the point. It was pointed out that if the Tax
Court changed its position each time it was reversed
by a Circuit Court it would only lead to confusion
and the Court would not be properly performing its
function.* We have since recognized that after a
series of reversals with no affirmances we might
promote uniformity better by bowing to higher au-
thority, see Bankers Union Life Insurance Co. v.
Commissioner, 62 T.C. 661, 675 (1974), but as
pointed out in Lawrence the change of position some-
times backfires.’
*See the dissenting opinion of Drennen, J., in Bradford v.
Commissioner, 60 T.C. 253, 261 (19738).
5 An interesting illustration of how the switching of posi-
tions because of reversals sometimes backfires occurred re-
cently in a series of cases involving certain aspects of the
taxation of life insurance companies. The issue that was
common in each of the cases mentioned was whether the load-
ing portion of deferred and uncollected premiums should be
included in assets for purposes of computing the phase I tax
on life insurance companies under secs. 804 and 805 of the
Code as enacted by the Life Insurance Company Income Tax
Act of 1959.
The issue was first presented to this Court (and this Judge)
in Western National Life Insurance Co. of Texas v. Commis-
sioner, a Court-reviewed case, 50 T.C. 285 (1968), modified
85a
51 T.C. 824 (1969), revd. 482 F.2d 298 (5th Cir. 1970). In
the second opinion this Court held that the loading factor in
the deferred and uncollected premiums should not be included
in the company’s assets for purposes of computing the phase
I tax. This conclusion was contrary to the position taken by
respondent in his regulations on the subject and to the opin-
ion of the Seventh Circuit in Franklin Life Insurance Com-
pany V. United States, 399 F.2d 757 (1968). Our decision
was reversed by the Fifth Circuit, supra. The Fourth Circuit
had also adopted respondent’s position in Jefferson Standard
Life Insurance Co. v. United States, 408 F.2d 842 (1969).
Nevertheless, in Western & Southern Life Insurance Co. Vv.
Commissioner, 55 T.C. 1086 (1971), we adhered to the posi-
tion we had taken in Western National. The Sixth Circuit
reversed. 469 F.2d 8 (1972).
The issue again came before the Tax Court (and this
Judge) in Banker’s Union Life Insurance Co. v. Commis-
sioner, 62 T.C. 661 (1974). Being faced with the contrary
views of four Circuit Courts, and the regulations, and no
appellate decisions supporting our views, in a Court-reviewed
opinion we concluded that under the circumstances the best
way for us to promote uniformity was to bow to higher au-
thority. So, because of the decisions of the Court of Appeals
mentioned above, we changed our position and held that the
loading factor in the premiums was includable in assets for
purposes of computing the tax.
Shortly thereafter in Standard Life and Accident Insur-
ance Co. V. Commissioner, T.C. Memo. 1974-242 (1974), a
Memorandum Opinion, we followed our decision in Banker’s
Union, which also followed the four circuits. On appeal the
Tenth Circuit, 525 F.2d 786 (1975), reversed this Court in
Standard Life and became the first Court of Appeals to affirm
our conclusion in Western National. Certiorari was granted
by the Supreme Court and in its opinion in Commissioner V.
Standard Life & Acc. Ins. Co., 483 U.S. 148 (1977), the Court
affirmed the Tenth Circuit and approved the position we had
taken in our modified opinion in Western National Life In-
surance Co. of Texas Vv. Commissioner, 51 T.C. 824 (1969),
and Western & Southern Life Insurance Co. v. Commissioner,
55 T.C. 1086 (1971), and held that the loading factor in the
deferred and uncollected premiums should not be included
in assets for purposes of computing the tax.
86a
While we modified the position we took in Lawrence
in our opinion in Golsen v. Commissioner, 54 T.C. 742
(1970), to the extent that if the Circuit Court in
which an appeal of the case would normally lie has
already expressed its views on the issue in an opinion
that is “squarely in point” we will follow the views
of the Circuit Court in that particular case, our re-
fusal to follow the Fourth and Eighth Circuits in
this case is not controlled by Golsen. An appeal of
this case will normally lie in the Fifth Circuit which
has not yet expressed its views on the issue.
Decision will be entered
for the petitioner.
87a
APPENDIX D
Internal Revenue Code of 1954 (26 U.S.C. (1970
ed.) ):
SEC. 11 [as amended by Revenue Act of 1964,
Pub. L. No. 88-272, Section 121, 78 Stat.
25, and Tax Reform Act of 1969, Pub. L.
No. 91-172, Section 401(b)(2)(B), 83
Stat. 602]. TAX IMPOSED.
* * * * *
(d) Surtax Exemption—For purposes of this
subtitle, the surtax exemption for any taxable
year is * * *, except that, with respect to a corpo-
ration to which section 1561 or 1564 (relating to
surtax exemptions in case of certain controlled
corporations) applies for the taxable year, the
surtax exemption for the taxable year is the
amount determined under such section.
SEC. 1561 [as added by Revenue Act of 1964,
Pub. L. No. 88-272, Section 235(a), 78
Stat. 116, and amended by Tax Reform Act
of 1969, Pub. L. No. 91-172, Section 401
(a) (1), 83 Stat. 599]. LIMITATIONS ON
CERTAIN MULTIPLE TAX BENEFITS
IN THE CASE OF CERTAIN CON-
TROLLED CORPORATIONS.
(a) General Rule.—The component members
of a controlled group of corporations on a De-
cember 31 shall, for their taxable years which
include such December 31, be limited for pur-
poses of this subtitle to—
(1) one * * * surtax exemption under
section 11(d).
88a
(2) one $100,000 amount for purposes of
computing the accumulated earnings credit
under section 535(c)(2) and (3), and
(3) one $25,000 amount for purposes
of computing the limitation on the small
business deduction of life insurance com-
panies under sections 804(a)(4) and 809
(d) (10).
The amount specified in paragraph (1) shall be
divided equally among the component members
of such group on such December 31 unless all
of such component members consent (at such
time and in such manner as the Secretary or his
delegate shall by regulations prescribe) to an
apportionment plan providing for an unequal al-
location of such amount. The amounts specified
a paragraphs (2) and (3) shall be divided equal-
ly among the component members of such group
on such December 31 unless the Secretary or
his delegate prescribes regulations permitting an
unequal allocation of such amounts.
SEC. 1563[as added by Revenue Act of 1964,
Pub. L. No. 88-272, Section 235 (a), 78
Stat. 120, and amended by Tax Reform
Act of 1969, Pub. L. No. 91-172, Section
401(c), 83 Stat. 602]. DEFINITIONS
AND SPECIAL RULES
(a) Controlled Group of Corporations.—For
purposes of this part, the term “controlled group
of corporations” means any group of—
* * * * *
(2) Brother-Sister Controlled Group.—
Two or more corporations if 5 or fewer per-
39a
sons who are individuals, estates, or trusts
own (within the meaning of subsection (d)
(2)) stock possessing—
(A) at least 80 percent of the total
combined voting power of all classes of
stock entitled to vote or at least 80 per-
cent of the total value of shares of all
classes of the stock of each corporation,
and
(B) more than 50 percent of the
total combined voting power of all
classes of stock entitled to vote or more
than 50 percent of the total value of
shares of all classes of stock of each
corporation, taking into account the
stock ownership of each such person
only to the extent such stock ownership
is identical with respect to each such
corporation.
Treasury Regulations on Income Tax (26 C.F.R.):
§ 1.1563-1 Definition of controlled group of cor-
porations and component members.
(a) Controlled group of corporations.—(1)
In general. For purposes of sections 1561
through 1563 and the regulations thereunder,
the term “controlled group of corporations”
means any group of corporations which is either
a “parent-subsidiary controlled group” (as de-
fined in subparagraph (2) of this paragraph),
a “brother-sister controlled group” (as defined in
subparagraph 3 of this paragraph), a “combined
group” (as defined in subparagraph (4) of this
paragraph), or an “insurance group” (as de-
402
fined in subparagraph (5) of this paragraph).
For the exclusion of certain stock for purposes
of applying the definitions contained in this
paragraph, see section 1563(c) and § 1.1563-2.
* * * * *
(3) Brother-sister controlled group. (i) The
term “brother-sister controlled group” means two
or more corporations if the same five or fewer
persons who are individuals, estates, or trusts
own (directly and with the application of the
rules contained in paragraph (b) of § 1.1563-3)
singly or in combination, stock possessing—
* * * * *
W ov. 6. covennment painting orrice; 1961 930677 272
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