Delta Metalforming Co., Inc. v. Commissioner of Internal Revenue

mаjor part to affirmed remanded policy agent to an is tantamount deliv- opin- ery principal. part minor in accordance with this ion.48 that, the facts of this conclude under We

case, accurately Ellis is more Fairfield & PART; IN REMANDED AFFIRMED rather agent characterized as for Insurer IN PART. Kearney46 conclu- agent than as sole —a also reached the Dis- undoubtedly sion finding policy that the trict Court in broker, Delivery by a

delivered in Florida. insurer, or at most acting on behalf of insured, on behalf of both underwriter and clearly policy of an insurance in Florida delivery require- sufficient to ment of Florida law. argues appli Insurer further CO., INC., DELTA METALFORMING attorneys’ fees law in this case cation of the Petitiоner-Appellee, principles as contravenes constitutional there was no contact between the insured the forum. We do not transaction and REV- COMMISSIONER OF INTERNAL overarching ques reach the constitutional ENUE, Respondent-Appellant. there were in fact tion as we find that No. 78-3699. itself ample Although contacts. the urea Flori shipped not have been or to Appeals, Court of United States da, Morrison, the sales transaction with Fifth Circuit. Insurer, policy pack insurance and the aging shipping terms for the urea were 8, 1980. Dec. negotiated all by Kearney, with its headquarters in Florida. Insurer’s

claim of no contact between the insured is, therefore,

transaction and the form with out merit.

There was no error in the award of attоr- ney’s fees to Morrison.

Dropping Anchor shipped Much of the urea on the AIDA 1974 never survived to fertilize the fruited plains Although of this fair land. we are

powerless consequential to correct all the

damages which have been occasioned

by*the loss damage unfortunate of and urea,47perhaps opinion will enable

Morrison pecuniary to be made whole for its loss. The opinion of the District Court is example relationship ponent 46. As an between of inflation which has not caused Utica, damage average Fairfield & Ellis and the record shows American consumer agent that an for Fairfield & Ellis contacted the this nation’s bal- has also exacerbated surveyor perform survey of the AIDA on payments problem ance as well. behalf of Utica. appeal taxed 48. The costs of this Damage causing damage crops to soil F.R.App.P. 39. Insurer and to Morrison. causing higher prices significant food corn- —a

I. dispute. taxpay- The are not

The facts Company, Metalforming Delta company, er Three individuals is a Texas Those three outstanding its stock. own person, also with a fourth persons, together two voting stock of other all own of Buildings Steel and Del- Delta corporations, represents following chart Engcon. The ta three percentage of 1975: companies for Delta Taxpayer Corp. Delta Identical Delta Delta Steel Stockhоlder Engcon Metalforming Percent Percent Percent Percent 26.4 26.7 26.4 36.4 Slayton W. T. 20.8 19.9 19.9 L. Eddins 27.2 L. Gen., Atty. Ferguson, Tax M. Carr Asst. 26.4 26.7 26.4 36.4 G. J. Ellis -0- 26.7 26.4 -0- Sharp T.P. Justice, ‍‌‌‌​‌‌​​‌​‌‌‌‌‌​‌‌‌‌‌‌‌​‌​‌​​​​‌‌​​‌‌‌​‌​‌‌‌​​‌​‍Div., Gilbert E. An- Dept, U. S. Jerold drews, nue ley S. Justice appellant. Tex., for petitioner-appellee. Wynne Service, Shaw, Cohen, Acting Washington, Jaffe, Neil William Jr., Chief Chief, Attys., Tax Counsel, D. Appellate A. C., J. Friedlander, O’Brien, Dallas, Internal Div., Dept, respondent- Section, Reve- Stan- N. corporate income on taxable tax ceeding imposed a Steel.1 In 1975 Delta Total exemption At that time § the surtax corporate allowed Metalforming took the sur- tax exemption. income. surtax on income return, 11(a) § imposed а as did Delta Section 11(d) The surtax 11(c) 72.7 tax ex- its $25,000, ex- 11(d) was

exemption under § as 1561. cept provided Section § of a controlled provided that members corporations were limited to group of $25,000 exemption, they could share. BROWN, HENDERSON and Before a “brother-sister 1563(a)(2) defined JOHNSON, Section Judges. D. Circuit SAM stock by two tests of and a 80% test. membership, a 50% test BROWN, Judge: Circuit R. JOHN taxa In 1977 the assessed Commissioner corporate Today we decide an issue Metalforming. against deficiency Delta reaching contrary tax a result income that, under Commissioner determined Second, Fourth and majorities Metalforming was 1563(a)(2), Delta § Appeal. Circuit Courts of Unlike Eighth member of a brother-sister sisters, we hold respected our brethren corporations with Delta Steel group of Court, persuasive dissent Tax exemption the surtax Engcon. Delta Since Webster, Judge William Steel, Delta claimed had been Claims, decision of the Court recently the Delta Metal- found that Commissioner own in each mem- that a sepa- own forming was not entitled alleged ber of exemption. surtax rate the 80% test under Metalforming petition with filed a 1563(a)(2)(A) so its own Delta be denied U. to redetermine separate exemption. S. Tax Court 95-600, 6, 1978, basic P.L. Nov. but the 1. the Internal Reve- Section references See, 1561(a) year statutory scheme remains. nue Code of effective 95-600, 11(d) repealed Nov. question, amended P.L. deficiency. parties stipulated argues, asserted The Government did in the Engcon that Delta Steel and Delta met the Court, that for the deter- 1563(a)(2)(B), disagreed on mining whether whether Delta Metalforming satisfied the ownership requirements meets the 80% Court, 80% test. The Tax following its 1563(a)(2)(A) so constitutes a broth- earlier declining decisions and follow con- group, er-sister controlled an individual trary results three Ap- Circuit Courts of merely be one the five peal, Metalforming held Delta did not collectively individuals who own at least come within the 80% so hеld corporations. 80% of the stock of all the taxpayer. Metalforming Delta Co. v. Thus, an individual need not own stock in Commissioner, T.C.M. 1978-354. The corporations each of the two or more appeals. Government We affirm.2 ownership have his stock tabulated toward part The 80%. Government relies II. Regulation 1.1563-l(a)(3) Income Tax appeal meaning This concerns the of the defines brother-sister controlled 80% test 1563(a)(2)(A). § if, group corporations as two or more “the 1563(a)(2) provides: same five or fewer ... own ... special 1563. Definitions and rules combination,” singly satisfying stock (a) group corporations.- Controlled percent 80 and 50 tests.3 For purposes part, of this the term “con- however, Metalforming, says Delta corporations” trolled means any ownership individual’s stock can be add- of- persons ... own ... Two more ^[*] account the stock stock stock of each total value of shares of all classes of the stock such total value of shares of all classes of (A) at (B) (2) Brother-sister more than 50 person only ^[*] least of each ^[*] 80 percent corporation, is identical with re- to the extent such controlled ^[*] stock possessing- corporation, if 5 or fewer ^[*] taking into ... of the ... of the group- of each ^[*] tion. apply, entitled test, the ber of a then be taken into below Delta stock in Delta Metalforming, his stock in controlled when that individual owns stоck in each and ed every into the 80% member of the Steel and Delta percentage controlled Delta its own and Delta Metalforming ownership requirement consideration Metalforming group, separate Since alleged stock Engcon Sharp 1561 would not ownership owned no could not would be the 80% a mem- exemp- falls spect to each such corporation. grappled Several Courts have with these arguments with inconsistent results. The The requirement met if the Tax Court first considered stockholder, stock of one Sharp, F. T. who owns in Fairfax Engcon shares in Delta Auto Parts of and Delta Steel but not in Delta Metаlforming, Virginia, Northern Inc. v.

be counted. Court, T.C. 798 In Fairfax the with taxpayer (a) pending also has the same issue ... at least 80 of the total value years the U.S. District Court of shares of all classes the stock of each for the Northern corporation; District Texas. Delta Met- alforming Co. v. United No. (b) CA 3-78- ... more than 50 of the total (filed 7, 1978). 1469-G Dec. value of shares of all classes of stock of each corporation, taking into account the stock own- Treas.Reg. 1.1563-1(a)(3) ership person only each such to the extent “(3) group-(i) Brother-sister respect such stock term “brother-sister corporation.” means such two or more if the sаme five or singly ... own ... or in combi- nation, possessing- 78- appeal in the Ninth Circuit Judges dissenting, person held that a four [78-2438 July as did appeal argued stock in each member of must own 1980] Vogel in order for its stock own Fertilizer the Court of Claims [69-78, August taken into account ership to be Company v. United States 1563(a)(2). The ownership tests of (Ct.C1.1980). 1980] Regulation Court examined Income upheld again Tax Court In our case the found an “unrealistic 1.1563- Delta taxpayer. Fairfax and ruled for the interpretation of the stat and unreasonable T.C.M. Metalforming Co. language.” 65 T.C. at 802. The utory 1978-354. analyzed the Court also itself, legislative history, and ba statute III. to conclude that eaсh purpose sic should, begin, We as we must and in each controlled must own stock itself. language with of the statute per corporation. opinion In a brief curiam Davis, Community v. College Southeastern reversed, upholding the the Fourth Circuit 2361, 2366, 397, 405, 442 99 S.Ct. 60 U.S. Fairfax Auto Parts of North Regulation. 980, (“It L.Ed.2d is elementa Commissioner, F.2d 501 Virginia ern v. 548 point starting every in case ry that ‘[t]he denied, 904, (4th Cir.), 434 cert. U.S. 98 S.Ct. of a statute is involving the construction 300, (1977), 190 noted and criti 54 L.Ed.2d ”) language itself.’ See also Touche cized, 1976, Brigham Young U.L.Rev. 1000. 560, 568, Redington, 442 Ross & Co. v. U.S. Meanwhile the Tax Court had 91 61 L.Ed.2d 99 S.Ct. taxpay its position followed to hold 1563(a)(2) The critical words define a Hunt, Commissioner, er C.L. Inc. v. A corporations.” “contrоlled Eighth T.C.M. 1976-221. The Circuit also group” is one of: “brother-sister reversed, Hunt, Commissioner, v. T.L. Inc. or if 5 or Two more fewer time, (8th 1977), 532 562 F.2d Cir. over individuals, estates, who persons are or Dissenting Judge vigorous dissent. Wil possessing- trusts own ... Regulation liam Webster would invalidate (A) least 80 ... of each as improper 1.1563- an and uninten corporation, and closely corporations. tional held penalty (B) more than ... of each dissent, Eighth Despite Judge Webster’s corporation, taking into account the stock subsequently followed Hunt Circuit each such Corp. Yaffe Iron and Metal v. United ownership is identical extent such stock (8th 1979). 593 F.2d 832 Cir. respect to each such again The Tax Court adhered to Fairfax plain We look for the of these Commissioner, in Allen Oil Co. v. T.C.M. inquiry. as threshold Yet the 1979-88,4 words our over- Second Circuit may there Commissioner, plainly say statute does not that Oil v. turned. Allen Co. determined, ‍‌‌‌​‌‌​​‌​‌‌‌‌‌​‌‌‌‌‌‌‌​‌​‌​​​​‌‌​​‌‌‌​‌​‌‌‌​​‌​‍persons’’ be one of “5 or fewer 1980). Ever F.2d 336 Second, Nor group. Fourth and for does stat- despite reversals Circuits, plainly say may there more than Eighth the Tax Court followed ute that be However, view, in our Fairfax Charles Baloian Co. v. Commis- one such sioner, (1977), 68 T.C. 620 pending may now on while be a little short on ty, explained opinion 4. As the Tax Court in the see Bankers Union Life v. insurance Co. at_, Commissioner, below, (1974), T.C.M. the Tax Court has nation- T.C. and, jurisdictiоn switching despite positions by may al reversals Courts Tax Court should, Appeals, except geographi- may improp- lead in cases to confusion or constitute Circuit, cally performance disapproving er destined for a follow Court’s function. original its Bradford its conviction that result was cor- v. T.C. J., (1973) (Drennan, Supreme dissenting). rect until decided otherwise Court. Lawrence 27 T.C. 713 practice severely This at one time criti- (1957). Although a series of reversals Judges or cized of this Court. higher incline the Tax bow to Court to authori- statute, statute, pur- the words of the er-sister subtitle like the plainness, compel pose, legislative history title, a rеad- relationship of contemplates a close ing requiring that the 80% test each qualities and ties and common underscores shareholder must own stock the common connections and mutual influ- corporations. prescribed group. ences of the quest Although plain meaning group” This “brother-sister deficient, dictionary definitions then precise defined in more detail. The lexicon of statutory framework must have two or more complex and diverse the Internal Reve- persons” where or own stock “five meanings helpful nue Code these here. satisfying the 80% test and the 50% test. 1563(a) defines a “controlled specifically stаtute not say does corporations. concept “control” is very same five “[pjower direct, or authority manage, possible both tests restrict, direct, superintend, regulate, gov- unrelated sets of five or fewer ern, administer, oversee,” Black’s Law Yet, reading could do. would do vio- Dictionary 1951), ed. or the act or lence to the common control introduced and power fact or restraining exercise “[t]o emphasized by statutory title and subti- over; dominate; directing influence reg- underlying congres- tle of ulate; hence, action; curb; hold policies. sional subject....” Webster’s New International English Dictionary Lаnguage 580 Moreover, up the term made of the words 1958) (definition 4). ed. A group an “five persons” applies or fewer 80% both “assemblage things of regarded or constitute, and 50% tests. These words as a comparative seg- as unit because of their it, majority put the “conjunc- Fairfax the others; cluster; regation from a aggrega- subject” tive of the two tests which follow. tion; assemblage objects ... of in a [a]n 65 T.C. at 803. the apply Since same words relation, certain or having order or some tests, to both and the tests characteriz- resemblance or common characteristic.” Id. by sibling kinship, ed it would then make (definitions 2 3). Thus, at 1104 a con- vеry sense that the same five or fewer group corporations trolled of is an assem- persons Further, should both tests. blage corporations of with a char- common the 50% test the uses “each such acteristic power authority and the or person” describing nature manage, regulate other(s). or oversee the grammatical antecedent Moreover, 1563(a)(2) subsection defines a person” “each such is “five or per- fewer kind of group” “controlled entitled “broth- sons.” or phrase per- Since “five er-sister.” This contemplates subtitle a re- sons” is the antecedent for the test as lationship of quali- clоse ties and common test, well as the 50% it is reasonable Hence, ties. both the title and subtitle of person” conclude that “each such question statute in underscore com- second test also apply would to the first connections, interrelationships mu- Accord, test. Fairfax Auto Parts of North- tual influences of the group. Virginia, ern Inc. v. 65 T.C. Moreover, subsection defines a at T.L. Hunt v. kind of “controlled entitled “broth- (Webster, J., F.2d at 536 dissenting). er-sister.” A “brother” defined as “[o]ne suggests per- Common sense also that related closely or united to another some part son should be considered of interest, or tie as profes- of ... corpоration that controls a per- where the sion, toil, etc.,” ... that resem- “[o]ne in, over, son has no interest influence or traits,” bles in qualities another id. at 343 (definitions Sharp control of the 5), should while a “sister” refers kind, to “one not be of the same included in be- ” condition, regarded as cause he had no nearly related.... connection Delta Met- (definition at 3). Id. Hence the alforming. Sharp penalized broth- Nor should expanded order insure control of his co-shareholders [I]n because some in which he has no of brother-sister definition corporation, another those cases where interest, applies only the co-shareholders own unless corporation.5 hold their 80 Sharp’s 80% of or fewer individuals five n which allows them to percent way statute is also consist- reading of the Our one operate economic test was purpose. The 50% ent with its would add addi- proposal entity, Hearings on the as one of control. enacted five tional rule Before the House Subject of Tax Reform individuals must constitute more Comm, Means, Cong., 1st Ways 91st the stock of each cor- percent than 50 (1969). Identical interest insures Sess. 80-percent Expanding the poration .... necessary corpo- degree control to five test from one entity. onе economic operate rations to opportunity for present will close the test, however, is one financial The 80% 80-percent test. easy avoidance of financial interest interest. However, 50-percent adding the in- when those with financial makes sense insure that the new ownership test will with control terest are also those is limited to cases expanded definition commen- corporations. In the words where the brother-sister tators, so that the interpret “to the statute fact, are, by persons test can be met hav- enterprise. as one economic stockholders ig- ing ownership relationship between the nores the obvious added). While our brother- (emphasis Id. e., i. the 80 test and guid- gleaned sister have different Courts of control with a the exercise Fairfax, dissent, words, see ance from these corpora- substantial financial interest 809-10; Allen Oil v. Commis- T.C. Co. Thomas, Multiple “Brother-Sister tions.” sioner, (interpreting the 614 F.2d at 340 n.4 Corporations-The Tax Reform Act to mean that common owner- explanation Regulation, 28 By Tax.L.Rev. Reformed ship explana- we necessary), is not read Explanation The General entity the same economic tion to mean that Proposals under- Treasury Reform required. also was intended to be Seе identity and connect- scores that element of Subject the of Tax Hearings on Reform is ing group A a links. brother-sister Comm, Ways the House on and Before corporations in which five or group of Indeed, Means, Treasury the at 5050. when own, a extent in persons large fewer to April in Proposals its Tax Reform presented percent proportions, at least 80 that the “same” five or explained 1969 it the corporations. stock of each of the must own stock “each” persons fewer ownership Explana- corporation before their stock Department’s General Treasury counted, “these” five or Subject on of Tax will same Hearings tion Re- be Comm, Ways fewer must own over 50% the persons form Before the House corpora- Means, added). identically regarding each (emphasis at 5394 stock explains: tion.6 Treasury also addition, corpora- ownership require- group changed In be that a would so to be ment is consistent with what seems tions would constitute brother-sister con- phrase (1) natural of the “5 or fewer” in group five or trolled persons if the same fewer phrase this context. We think the “5 or fewer” percent voting own of the at least five, four, three, refers to numbers two stock, corporation, or value of shares each but not to zero. fewer these five or individuals own voting power than 50 or Treasury

6. The stated: corporation shares of each consider- value of law con- Present defines brother-sister ing particular person’s stock as a trolled identically owned with re- extent is voting which the stock or value of shares of spect corporation. each to is each member owned Bonovitz, Brother-Sister Con- discussion individual, e., trust). (i. or same estate Groups The 80 Per- under Section 1563: trolled present proposal, definition Under Similarly, the Reports Senate and House one individual to five or prevent fewer to explain very same five fewer tax through multiple corporations. benefits persons the 50% and 80% tests. Tax Reform Act of Stat. Report, 401; The House which contains substan- S.Rep., Cong. Admin. U.S.Code & tially as the Re- 2165; Senate H.R.Rep., News 1969 at U.S.Code port point, on this states: Cong. & Admin.News 1969 at This bill expands this definition to in- (“[L]arge organizations operate clude two more which are through multiple corporations and which owned 80 more ... five or reality ‘small should businesses’ persons . .. provided that these not be allowed to receive substantial five or own more than 50 resulting and unintended tax benefits percent each when the multiple exemption use of stock each person considered provisions.”) and these other The defini- the extent it is identically owned tion of a respect to corporation. expanded was to include “the combined See, H.R.Rep.No.91-413, individuals, Cong., 91st five rather 1st Sess. Cong. (1969), reprinted & Ad.News, pp. ^[1969] 1748; U.S.Code S.Rep. than one cent test,” ‍‌‌‌​‌‌​​‌​‌‌‌‌‌​‌‌‌‌‌‌‌​‌​‌​​​​‌‌​​‌‌‌​‌​‌‌‌​​‌​‍individual, in applying H.R.Rep., U.S.Code Cong. & Ad- per- No.91-552, Cong., (1969), 91st 1st Sess. re- min.News 1969 at and the 50% test printed in News, pp. ^[1969] U.S.Code (emphasis added). Cong. Ad. was added. There tive history suggest nothing in the the kind of legisla- very “These” persons- same five or fewer group which would would not enti- only one combination with the same mem- exemption-the tled “sameness”-was bеrs-one economic entity-must comprise to be altered. Absent a clear indication the asserted controlled group. contrary, it is reasonable to assume that within the control would

A closer look at the reasons for the continue to constitute the ownership group adoption of suggests 1563 also that com- corporation. of each The House and Senate required. The surtax ex- Reports do not indicate emption any intention to was enacted to benefit corpo- small change the constituents of the S.Rep., rations. Cong. U.S.Code & Admin. Indeed, all of the examples News sub- 1969 at H.R.Rep., U.S.Codе Congress mitted to Cong. Treasury to illus- & Admin.News 1969 at 1745. The operation exemption trate in- group exception exemption volve shareholders who own stock in each adopted to prevent prolifer- contrary ation of absence of ex- multicorporate structures a sin- amples strongly gle suggest Treasury advantage business to take undue of the contemplate did not the definition of the exemption. 1964, Rev.Act of 78 Comm, test 116, by strangers to the 235(a). Stat. Jt. on Internal Taxation, Sess., Revenue 88th Cong., 1st Summary the President’s 1963 Tax Mes- Further, Congress if had intended to sage 1963); 45 April H.R.Rep.No.749, 88th change requirement of sameness or Cong., (1963), (Part 1st Sess. II) 1964-1 C.B. common ownership, certainly knew how

240-41; S.Rep.No.830, Cong., 88th 2d Sess. Thomas, to do so. See 28 Tax at L.Rev. 79 (1964), (Part II) 1964-1 C.B. 653-55. (“One is thing Congress certain: If had Originally a intended interpretation adopted by individual, applied one regulation, inher- it could have drafted a statute ently, the person. “same” The statute accurately.”) Indeed, was which stated it more amended in 1969 enlarge from it Treasury-who origi- seems to us that the Test, Ownership 511, Edsel,

cent Supreme 475, 28 Tax Law 515 Court With an 1978 Taxes (1975); Weisman, Brother-Sister Controlled 480-81. Corporations: On and Off Road To the

449 wright, 546, 550, 1713, 93 411 U.S. S.Ct. 1969 amendment and on nally endorsed the “ 528, 1716, (1973). does 36 533 extensively committees L.Ed.2d congressional whom ‘[I]t (such that, not follow because suggested language Commissioner] have rely-would [the alternatives, choice his subsequent corollary has choice that used in their the alternative reject should be sustained where it intended to regulation) had a situation unrealistic. In such requirement. chosen is common choice regulations embodying 1563(a)(2) and its relat As we read § ” (quot- to be unreasonable.’ should be held cannot but conclude that authority, we ed 1720, 557, 93 Id. at at ing authority). S.Ct. 1.1563-l(a)(3) compris Treasury Regulation Instruments v. Texas at 36 L.Ed.2d Regula extension. es an unwarranted States, 599, 551 610 United F.2d tion defines a brother-sister 1977).7 two or treasury regula- With due all deference if five or fewer ... tiоns, Reg. accept cannot 1.1563- we combination, or in singly own ... l(a)(3)(i). has is Treasury What done requisite possessing amounts].... [the expand statute without unjustifiably added). We are aware that (Emphasis well intent, history logic. legislative basis in weight must be afforded “contem great “singly The words or in combination” are charged those constructions poraneous when to the 50% test meaningless applied Internal Reve administration” is identity since an Johnson, 741, Bingler v. U.S. 394 nue Code. Bonovitz, 28 statutorily mandated. 695, 749-50, 1439, 1445, 89 22 L.Ed.2d S.Ct. (“The legislative history 530 Lawyer Tax (1969). mayWe invalidate reve requires com- 1563(a)(2) unequivocably of § if it is regulation only nue unreasonable and section’s Id.; with the statute. сlearly inconsistent test, which 80 test. The 80 Association, Dealers Inc. National Muffler test, per- the 50 is a interest financial States, 472, 488, v. United 99 U.S. S.Ct. test, have cent which is a control 1312, (“the (1979) 59 L.Ed.2d independent significance if the plausible . [taxpayer] .. needs more than Indeed, ownership.”) requires argument prevail here.... policy promulgation of the Trea- from the initial among interpretations choice reasonable ground was a swell sury regulations, there Courts.”) the commentators. protest of critical Fulman United See also Arthur Considering criticism is that commentators’ 528, 533, 434 U.S. S.Ct. in tax what neutral in the sense that law Nonetheless, L.Ed.2d where today goosе turns out to be is sauce unreasonable, regulation the Courts do op- gander, overwhelming sauce for the Treasury not extend the unfettered author special significance.8 position has ity and have not hesitated to invalidate the United v. Cart- explained, States regulation. Judge cogently And Webster errant 511; Pearlman, commentator, Bonovitz, Lawyer According 8. See to at least tradi- Multiple Treasury’s interpreta- “Recasting Corporate Group After tional deference Ends,” Multiple Exemption Weisman, 41 J. Surtax (1974); unavailing tion here. Taxes Thomas, “Brother-Sister Taxation argues at 482. He the statute is defini- Corporations-The Multiple of Tax Reform Act beyond and not be tional should extended by Regulation,” 28 Tax L.Rev. Reformed Congressional ap- narrow without Corporation (1972); Kringel, “Multiple Pro- proval, (2) are inconsisten- there fundamental posed Regulations Than More Raise Questions Treasury’s interpretation between the of cies Answer,” They (1972); J. Libin 36 Taxation 358 Congressional statutory in- the tent, and Abramowitz, “Multiple Corporations: A Sur- policy and functions un- the tax and 1563(a)(2) prising Interpretation of Sec. derlying purpose of the statute constitute Temporary Regulations,” Advisor 326 3 Tax “weighty for a to decline to reasons” Court Note, (1971). Sur- See also “Disallowancе of interpretation defer to the administrative Exemption Corporations- tax to Brother-Sister Treasury. Id. Ownership ‍‌‌‌​‌‌​​‌​‌‌‌‌‌​‌‌‌‌‌‌‌​‌​‌​​​​‌‌​​‌‌‌​‌​‌‌‌​​‌​‍Stock Sections 1551 and Test Under Brigham Young L.Rev. It is be interpreted smallness the number of should to ascribe to each a each company triggers superflu- that makes test function neither 1563; is the sameness of that small ous, § dominant or subordinate. cent per number. The 80 financial inter- reject the contention So we that the com- requirement meaningless est is unless isit ownership requirement in the 80%test of five or fewer test,” “hardly is meaningful “trifling,” per company that own cent “happenstance turning upon within the controlled It is this symbolic meaningless factually owner- requirement entity” of “economic which We ship single of a share.” refuse to re- is entirely Reg. eviscerated 1-1563- write the requirements numerical 1(a)(3). Particularly area statute. in the of federal (emphasis original). 562 F.2d at 537 taxation, ignore we percentage should not argues The Government the Tax requirements obviously specifically impermissibly Court quali- reads the entire Congress. may fixed While result test, subparagraph (B) fication of the 50% “arbitrary”-ownership single seem of a (A). into the subparagraph 80% This will share not suffice critical-79% test requires incorrect. 50% identity necessarily while 80%will-revenue laws en- ownership. оf controlling We do not in any máximums, mínimums, compass cutoffs and way engraft this identical require- interest specific the like. In that all stan- sense However, ment the 80% test. what we expressed in percentages dards numbers or apply do test-which, 80% as we ex- arbitrary. IN, One side of the line is plain, requires the statute us to do-is to the other side OUT. apply principle Moreover, ownership-or lack of both 50 and 80% tests. ownership-or even a single share entails Moreover, the meaning of § significant rights, opportunities and disabil- urges the Government renders the ities. The shareholder vote to elect superfluous. 80% test As Judge Webster directors, adoрt, and remove amend and pointed out, if control satisfied repeal bylaws, resolutions, adopt affect ex- ownership, 50% little if anything added to matters, traordinary corporate cor- see require an additional 30% porate Henn, books and records. See Law dissent, someone else. Hunt 562 F.2d at Corporations 192, 193, 194, §§ Thomas, 537. See also 28 Tax L.Rev. at 1970). 195 199& ed. He also has stand- 82-83. Nor does our reading improperly ing bring against suit an officer or di- tend to “overlap or swallow” the rector who breaches his as the suggested. Second Circuit has Allen fiduciary entity, duties or under the Co. Oil v. F.2d Act Securities of 1934. id. at § it, As we see require- Desser, Rеkant 425 F.2d conjunction ment in with the 50% identical 1970).9 ownership requirement work best in tan- dem. Each has a significant congressional do Nor we find the purpose the stockholding requirements inconsistent position.10 with our Since we White, But see “The Tax Reform Act of 1969: tion in a class action.” 425 F.2d at 876 n.7 Multiple Exemptions-When

Demise (Wisdom, J.). Surtax Thing Too Much aof Good Proved its Own Undoing,” Wayne, L.Rev. 1353 1551(b)(2) 10. reads: 9. Rekant held that shareholder with six shares thought ing fiduciary relationship to sue “practically should have access to as consequence under 10(b). shareholder with his worthless” stock had 10(b). plaintiff, to bringing the “It is a other shareholders powerful weap- however, a derivative ac- disconcerting tiny standing is in a hold- TION AND ACCUMULATED EARNINGS ed in subsection (a), CREDIT. (b) DISALLOWANCE OF SURTAX EXEMP- With CONTROL.-For ^[******] term respect “control” means- (a)(3), to each the corporation ownership of subsection describ- by the test, if that does not 80% even the we have situation not have transfer do member of stock in each the corpo- transferor own transferee nor a neither a Commissioner, 614 v. Oil Co. provides us with Allen and the 1551 test ration 1969, 1980); Yaffe Iron & Metal Moreover, in when F.2d Cir. guidance. little States, (8th 593 F.2d 832 adopted Corp. v. were United tests the 50-80% control 843,100 denied, Cir.), S.Ct. cert. U.S. did not use regulations the Hunt, v. (1979); T.L. Inc. combination,” which 62 L.Ed.2d 55 “singly the words (8th 1977); F.2d regu- for the critical words were Virginia, Northern Parts of Fairfax Auto lation.11 548 F.2d 501 Inc. IV. denied, Cir.), 434 U.S. 98 S.Ct. cert. 54 L.Ed.2d 190 Death, tide, wait for no and taxes time How do unfortu- opinions. man. Neither opinion, recognized by majority As for the non- that in our verbal search nate Treasury not invalidate this Court biological tax-wise 1.1563-1(a)(3), specifically which Regulation Court Claims and deeds of the words require ownership common any disclaims v. The Company United Vogel Fertilizer test, unless is unreason 80% ment (Ct.Cl.1980) [69-78, Aug. States 1980] with the stat clearly inconsistent able (and the labor of spare too late to us came owner imposing common Although ute. reading eager tax readers the task might ship requirement upon approve For we opinion. purchasing) result, no by it is be viewed as thе better result, expressly adopt wording of Section means mandated Judge Bennett and of that Court opinion 1563(a)(2)(A) legislative history. Judge concurring of Chief opinion of the statute and Both Friedman. so as history interpreted can be legislative 2 to All Regulation. is now 3. support Treasury The score Fairfax or west- now northward No. eyes Vogel focus Fertilizer Co. v. United J., 13, 1980) (Smith, (Ct.Cl. Aug. dis ward. Reg Treasury senting). Consequently, AFFIRMED. plainly nor is neither unreasonable ulation the statute. inconsistent with JOHNSON, Judge, D. dis- Circuit SAM senting: Oil, stated Allen For reasons expressed by Judge reasons exception, other those additional

Without Circuit Fertilizer, Vogel I considered, in his dissent that have Smith Courts 1563(a)(2)(A) respectfully ‍‌‌‌​‌‌​​‌​‌‌‌‌‌​‌‌‌‌‌‌‌​‌​‌​​​​‌‌​​‌‌‌​‌​‌‌‌​​‌​‍dissent. test under the 80% opin- contrary majority to the have decided expressed present, At three Cir-

ion here. test, held the 80% cuits have of a part of the definition broth- constitutes is not limited group, er-sister controlled Thus, requirement. a common in a person’s satisfying be counted for commentator, legisla- According described such sub- five or individuals 1551(b)(2) unequivocally history re- possessing- tive of § section of stock quires (A) corpo- at least ... of each ration, regulations, as a when construed which the whole, Bonovitz, require. Law- (B) 28 Tax so ... of each cor- also than 50 Weisman, yer taking Taxes See also poration, at 522-31. account the stock own- into ership of each such individual ownership is extent such stock respect to each such

Case Details

Case Name: Delta Metalforming Co., Inc. v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the Fifth Circuit

Date Published: Dec 8, 1980

Citation: 632 F.2d 442

Docket Number: 78-3699

Court Abbreviation: 5th Cir.