United States v. Vogel Fertilizer Co.
455 U.S. 16 (1982)

Annotate this Case

U.S. Supreme Court

United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982)

United States v. Vogel Fertilizer Co.

No. 80-1251

Argued November 3, 1981

Decided January 13, 1982

455 U.S. 16

CERTIORARI TO THE UNITED STATES COURT OF CLAIMS

Syllabus

Section 1561(a) of the Internal Revenue Code of 1954 limits a "controlled group of corporations" to a single surtax exemption. Section 1563(a)(2) provides that a "controlled group of corporations" includes a "brother-sister controlled group," defined as

"[t]wo or more corporations if 5 or fewer persons . . . own . . . stock possessing (A) at least 80 percent of the total combined voting power . . . or at least 80 percent of the total value . . . of each corporation, and (B) more than 50 percent of the total combined voting power . . . or more than 50 percent of the total value . . . 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."

An implementing Treasury Regulation interprets the statutory term "brother-sister controlled group" to mean two or more corporations if the same five or fewer persons own "singly or in combination" the two prescribed percentages of voting power or total value. One shareholder, Vogel, owned 77.49 percent of the outstanding stock of respondent Vogel Fertilizer Co. Another shareholder, Crain, owned the remaining 22.51 percent. Vogel also owned 87.5 percent of the voting power in Vogel Popcorn Co. and 90.66-93.42 percent of the value of its stock. Crain owned no stock in Vogel Popcorn. Respondent claimed refunds for taxes paid in certain tax years for which it did not claim a full surtax exemption, asserting that respondent and Vogel Popcorn were not members of a controlled group and respondent was therefore entitled to a full surtax exemption for each taxable year. When the Internal Revenue Service disallowed the refund claims, respondent filed suit for a refund in the Court of Claims, which held that respondent was entitled to a refund.

Held: The implementing Treasury Regulation is invalid as not being a reasonable interpretation of the statute, which, as indicated by its language, structure, and legislative history, was intended to apply only where each person whose stock is taken into account for purposes of the 80-percent requirement owns stock in each corporation of the group. Pp. 455 U. S. 22-35.

(a) Since the Regulation was promulgated only under the Commissioner of Internal Revenue's general authority to prescribe all needful rules and regulations, it is owed less deference than a regulation issued under a specific grant of authority to define a statutory term. Moreover, the Regulation purports to do no more than add a clarifying gloss on a term already specifically defined by Congress. Pp. 455 U. S. 24-25.

Page 455 U. S. 17

(b) The statutory language is in closer harmony with respondent's interpretation than with the Regulation in question. The term the statute defines -- "brother-sister controlled group" -- connotes a close horizontal relationship between two or more corporations, suggesting that the same indivisible group of five or fewer persons must represent 80 percent of the ownership of each corporation. This interpretation is strengthened by the structure of the statute, which suggests that precisely the same shareholders must satisfy both the 80-percent and 50-percent requirements. Since, under Part (B)'s 50-percent requirement, stock ownership is taken into account only to the extent it is "identical," that part of the statutory test clearly includes a common ownership requirement. And the mere fact that there are no words in Part (A) explicitly requiring each shareholder to own stock in each corporation does not mean that the Regulation's interpretation, "singly or in combination," must be accepted as reasonable. Pp. 455 U. S. 226.

(c) The statute's legislative history makes it plain that the Regulation is not a reasonable statutory interpretation, where it appears that the intended targets of § 1563(a)(2) were groups of interrelated corporation -- corporations characterized by common control and ownership, and that Congress intended the 80-percent requirement, as an expanded version of the former statute, to be the primary requirement for defining the interrelationship between two or more corporations, the 50-percent requirement being an additional proviso necessary in light of the expanded number of shareholders whose overlapping interests were to be considered. The "singly or in combination" provision of the Regulation is clearly incompatible with this intent. Pp. 455 U. S. 26-32.

225 Ct.Cl. 15, 634 F.2d 497, affirmed.

BRENNAN, J., delivered the opinion of the Court, in which BURGER, C.J., and MARSHALL, POWELL, REHNQUIST, STEVENS, and O'CONNOR, JJ., joined. BLACKMUN, J., filed a dissenting opinion, in which WHITE, J., joined, post, p. 455 U. S. 35.

Page 455 U. S. 18

JUSTICE BRENNAN delivered the opinion of the Court.

Section 1561(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 1561(a), limits a "controlled group of corporations" to a single corporate surtax exemption. [Footnote 1] Section 1563(a)(2) provides that a "controlled group of corporations" includes a "brother-sister controlled group," defined as

"[t]wo or more corporations if 5 or fewer persons . . . own . . . stock possessing (A) at least 80 percent of the total combined voting power . . . or at least 80 percent of the total value . . . of each corporation, and (B) more than 50 percent of the total combined voting power . . . or more than 50 percent of the total value . . . 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. [Footnote 2]

Page 455 U. S. 19

The interpretation of the statutory provision by Treas.Reg. § 1.1561(a)(3), 26 CFR § 1.1563-1(a)(3) (1981), is that the "term brother-sister controlled group' means two or more corporations if the same five or fewer persons . . . own . . . singly or in combination" the two prescribed percentages of voting power or total value. [Footnote 3] The question presented is whether the regulatory interpretation -- that the statutory definition is met by the ownership of the prescribed stock by five or fewer persons "singly or in combination" -- is a reasonable implementation of the statute, or whether Congress intended the statute to apply only where each person whose stock is taken into account owns stock in each corporation of the group."

I

Respondent Vogel Fertilizer Co. (Vogel Fertilizer), an Iowa corporation, sells farm fertilizer products. During the tax years in question -- 1973, 1974, and 1975 -- Vogel Fertilizer

Page 455 U. S. 20

had only common stock issued and outstanding and Arthur Vogel (Vogel) owned 77.49 percent of that stock. Richard Crain (Crain), who is unrelated to Arthur Vogel, owned the remaining 22.51 percent. Vogel Popcorn Co. (Vogel Popcorn), another Iowa corporation, sells popcorn in both

Page 455 U. S. 21

the wholesale and retail markets. For the tax years in question, Crain owned no stock in Vogel Popcorn. Vogel, however, held 87.5 percent of the voting power, and between 90.66 percent and 93.42 percent of the value of Vogel Popcorn's stock. [Footnote 4]

Vogel Fertilizer did not claim a full surtax exemption on its tax returns for the years in question, [Footnote 5] believing that Treas.Reg. § 1.1561(a)(3) barred such a claim. But when the United States Tax Court, in 1976, held that Treas.Reg. § 1.1561(a)(3) was invalid because the statute did not permit the Commissioner to take a person's stock ownership into account for purposes of the 80-percent requirement unless that person owned stock in each corporation within the brother-sister controlled group, Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798 (1976), rev'd, 548 F.2d 501 (CA4 1977), Vogel Fertilizer filed timely clams for refunds, asserting that Vogel Fertilizer and Vogel Popcorn were not members of a controlled group, and that Vogel Fertilizer was therefore entitled to a full surtax exemption for each taxable year. The Internal Revenue Service disallowed the claims, and respondent brought this suit for a refund in the United States Court of Claims. The Court of Claims held that Vogel Fertilizer and Vogel Popcorn did not

Page 455 U. S. 22

constitute a brother-sister controlled group within the meaning of § 1563(a)(2)(A); that Treas.Reg. § 1.1561(a)(3) is invalid to the extent that it takes into account, with respect to the 80-percent requirement, stock held by a shareholder who owns stock in only one corporation of the controlled group; and that respondent was, accordingly, entitled to a refund. 22 Ct.Cl. 15, 634 F.2d 497 (1980). We granted certiorari to resolve a conflict among the Circuits on this issue, 450 U.S. 994 (1981), [Footnote 6] and now affirm.

II

Vogel's ownership of more than 50 percent of both Vogel Fertilizer and Vogel Popcorn satisfies Part (B) of the statutory test -- the 50-percent identical ownership requirement. The controversy centers on Part (A) of the test -- the 80-percent requirement.

Respondent argues that the statute must be construed as including a common ownership requirement -- Congress was attempting to identify interrelated corporations that are, in reality, subdivided portions of a larger entity. In the taxpayer's view, Congress thus did not intend that a person's stock ownership be taken into account for purposes of the 80-percent requirement unless that shareholder owned stock in all

Page 455 U. S. 23

of the corporations within the controlled group. The same "5 or fewer" individuals cannot be said to control 80 percent of both Vogel Fertilizer and Vogel Popcorn, because Crain owns no stock in Vogel Popcorn, and therefore his 22.51 percent of Vogel Fertilizer cannot be added to Vogel's 77.49 percent of that corporation to satisfy § 1563(a)(2)(A). The Commissioner takes the position, however, reflected in his addition of the words "singly or in combination" in Treas.Reg. § 1.1563-1(a)(3) to the statutory language, that there is no common ownership requirement -- various subgroups of "5 or fewer persons" can own the requisite 80 percent of the different corporations within the controlled group. The Commissioner acknowledges that, under this interpretation, Part (A)'s 80-percent requirement in no respect measures the interrelationship between two corporations. The Commissioner's view is that only the 50-percent requirement measures this interrelationship. He contends the 80-percent requirement "continues to have independent significance" in that it "insures that all the members of the corporate group will be closely held," so that

"the more than 50-percent shareholder control group can obtain additional control in those instances where a greater interest is needed without the necessity of dealing with a large number of other shareholders."

Brief for United States 35. [Footnote 7]

Page 455 U. S. 24

A

Our role is limited to determining the validity of Treas.Reg. § 1.1563-1(a)(3). Deference is ordinarily owing to the agency construction if we can conclude that the regulation "implement[s] the congressional mandate in some reasonable manner." United States v. Correll,389 U. S. 299, 389 U. S. 307 (1967). But this general principle of deference, while fundamental, only sets "the framework for judicial analysis; it does not displace it." United States v. Cartwright,411 U. S. 546, 411 U. S. 550 (1973).

The framework for analysis is refined by consideration of the source of the authority to promulgate the regulation at issue. The Commissioner has promulgated Treas.Reg. § 1.1563-1(a)(3) interpreting this statute only under his general authority to "prescribe all needful rules and regulations." 26 U.S.C. § 7805(a). Accordingly,

"we owe the interpretation less deference than a regulation issued under a specific grant of authority to define a statutory term or prescribe a method of executing a statutory provision."

Rowan Cos. v. United States,452 U. S. 247, 452 U. S. 253 (1981). In addition, Treas.Reg. § 1.1563-1(a)(3) purports to do no more than add a clarifying gloss on a term -- "brother-sister controlled group" -- that has already been defined with considerable specificity by Congress. The Commissioner's authority is consequently more circumscribed than would be the case if Congress had used a term "so general . . . as to render an interpretive regulation appropriate.'" National Muffler Dealers Assn.,

Page 455 U. S. 25

Inc. v. United States,440 U. S. 472, 440 U. S. 476 (1979), quoting Helvering v. R. J. Reynolds Co.,306 U. S. 110, 306 U. S. 114 (1939). See also Rowan Cos. v. United States, supra.

B

We consider first whether the Regulation harmonizes with the statutory language. National Muffler Dealers Assn., Inc. v. United States, supra, at 440 U. S. 477. That language, set forth supra at 455 U. S. 18, and n. 2, while not completely unambiguous, is in closer harmony with the taxpayer's interpretation than with the Commissioner's Regulation. The term that the statute defines -- "brother-sister controlled group" -- connotes a close horizontal relationship between two or more corporations, suggesting that the same indivisible group of five or fewer persons must represent 80 percent of the ownership of each corporation.

This interpretation is strengthened by the structure of the statute. Section 1563(a)(2) defines the controlling group of shareholders ("5 or fewer"), and then sets forth the two ownership requirements (80 percent and 50 percent). This structure suggests that precisely the same shareholders must satisfy both the 80-percent and 50-percent requirements. As the Tax Court stated it, "5 or fewer persons" is the "conjunctive subject" of both requirements. Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. at 803. Since under Part (B)'s 50-percent requirement, stock ownership is taken into account only to the extent it is "identical," that part of the statutory test clearly includes a common ownership requirement. If, as the statutory structure suggests, the shareholders whose holdings are considered for purposes of Part (A) must be precisely the same shareholders as those whose holdings are considered for purposes of Part (B), the former also requires common ownership. [Footnote 8]

Page 455 U. S. 26

Of course, a Treasury Regulation is not invalid simply because the statutory language will support a contrary interpretation. But the mere fact that there are no words in Part (A) explicitly requiring that each shareholder own stock in each corporation does not mean that the Regulation's interpretation, "singly or in combination," must be accepted as reasonable. This Court has firmly rejected the suggestion that a regulation is to be sustained simply because it is not "technically inconsistent" with the statutory language when that regulation is fundamentally at odds with the manifest congressional design. United States v. Cartwright, supra, at 411 U. S. 557. The challenged Regulation is not a reasonable statutory interpretation unless it harmonizes with the statute's "origin and purpose." National Muffler Dealers Assn., Inc. v. United States, supra, at 440 U. S. 477.

C

The legislative history of § 1563(a)(2) resolves any ambiguity in the statutory language and makes it plain that Treas.Reg. § 1.1563-1(a)(3) is not a reasonable statutory interpretation. Through the controlled group test, Congress intended to curb the abuse of multiple incorporation -- large organizations subdividing into smaller corporations and receiving unintended

Page 455 U. S. 27

tax benefits from the multiple use of surtax exemptions, accumulated earnings credits, and various other tax provisions designed to aid small businesses. S.Rep. No. 91-552, p. 134 (1969). The House Ways and Means Committee Report noted:

"[L]arge organizations have been able to obtain substantial benefits . . . by dividing the organization's income among a number of related corporations. Your committee does not believe that large organizations which operate through multiple corporations should be allowed to receive the substantial and unintended tax benefits resulting from the multiple use of the surtax exemption and the other provisions of present law."

H.R.Rep. No. 91-413, pt. 1, p. 98 (1969). The intended targets of § 1563(a)(2) were groups of interrelated corporations -- corporations characterized by common control and ownership. Although the 50-percent requirement measures, to a lesser degree, the overlap between two corporations, the history of the enactment of § 1563(a)(2) illustrates that Congress intended that the 80-percent requirement be the primary requirement for defining the interrelationship between two or more corporations.

Until 1964, the method prescribed by the Code to curb the abuse of multiple incorporation was subjective: multiple exemptions or benefits were allowed or disallowed depending on the reasons for the taxpayer's actions. [Footnote 9] The Revenue Act of 1964 changed this approach, adding §§ 1561-1563 to the Code. Pub.L. 88-272, § 235(a), 78 Stat. 116-125. These sections prescribed the application of mechanical, objective

Page 455 U. S. 28

tests for determining whether two corporations were a "controlled group," and thereby restricted to one surtax exemption. The original, 1964, definition of a "brother-sister controlled group" was:

"Two or more corporations if stock possessing at least 80 percent of the total combined 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 stock of each of the corporations is owned . . . by one person who is an individual, estate, or trust."

26 U.S.C. § 1563(a)(2) (1964 ed.). Because corporations were not part of a controlled group unless the same person owned 80 percent of all corporations within the group, the 1964 provision clearly included a common ownership requirement.

In 1969, Congress adopted the present two-part percentage test codified in § 1563(a)(2). Pub.L. 91-172, § 401(c), 83 Stat. 602. This change was proposed by the Treasury Department as part of an extensive package of tax reform proposals. See Hearings Before the House Committee on Ways and Means on the Subject of Tax Reform, 91st Cong., 1st Sess., pt. 14, pp. 5050-5478 (1969) (hereinafter Hearings). The Treasury Department proposed, inter alia, that the definition of a brother-sister controlled group

"be broadened to include groups of corporations owned and controlled by five or fewer persons, rather than only those owned and controlled by one person,"

as was the case under then existing law. Id. at 5166. In setting forth the "Technical Explanation"

Page 455 U. S. 29

for this new definition of brother-sister controlled groups, the Treasury Department was most explicit that the 80-percent requirement, like the 50-percent requirement, included common ownership:

"[T]he same five or fewer persons [must] own at least 80 percent of the voting stock or value of shares of each corporation and . . . these five or fewer individuals"

must satisfy the 50-percent requirement in Part (B). Id. at 5168 (emphasis added except for "five").

The Treasury Department's "General Explanation" of the amendment to § 1563(a)(2) defined a brother-sister controlled group as one "in which five or fewer persons own, to a large extent in identical proportions, at least 80 percent of the stock of each of the corporations." Hearings, at 5394 (footnote omitted). The General Explanation then set forth the respective roles of the expanded 80-percent requirement and the new 50-percent requirement:

"This provision expands present law by considering the combined stock ownership of five individuals, rather than one individual, in applying the 80-percent test. . . ."

"However, in order to insure that this expanded definition of brother-sister controlled group applies only to those cases where the five or fewer individuals hold their 80 percent in a way which allows them to operate the corporations as one economic entity, the proposal would add an additional rule that the ownership of the five or fewer individuals must constitute more than 50 percent of the stock of each corporation considering, in this test of ownership, stock of a particular person only to the extent that it is owned identically with respect to each corporation."

Ibid.

The General Explanation made it clear that, under the 1969 amendment to § 1563(a)(2), the 80-percent requirement would remain the primary basis for determining whether two or more corporations represent the same financial interests. Part (A) of the 1969 test was simply an expansion of the 1964 test, which considered the two or more corporations to be a

Page 455 U. S. 30

brother-sister controlled group only when one person owned 80 percent of all of the corporations. This "expansion" was necessary to "close the present opportunity for easy avoidance" of the 80-percent test. Hearings at 5396. Because five persons now played the role previously played by one, this expanded version of the test required a new safeguard -- the 50-percent requirement -- to

"insure that the new expanded definition is limited to cases where the brother-sister corporations are, in fact, controlled by the group of stockholders as one economic enterprise."

Ibid. (emphasis added). [Footnote 10]

The "singly or in combination" provision of Treas.Reg. § 1.1563 1(a)(3) is clearly incompatible with the explanation offered by the Treasury Department when it proposed the statute. In addition to the explicit statement that the members of the controlling group must own stock in "each" corporation, the Treasury Department presented a test in which the 80-percent requirement remained the primary indicia of interrelationship. But under the challenged Regulation, the 80-percent requirement measures only whether or not the brother-sister corporations are closely held. The fact that a corporation is closely held, absent common ownership, is irrelevant to the congressional purpose of identifying interrelationship: "It is not the smallness of the number of persons in each company that triggers § 1563; it is the sameness of that small number." T. L. Hunt, Inc. v. Commissioner, 562 F.2d 532, 537 (CA8 1977) (Webster, J. dissenting). [Footnote 11]

Page 455 U. S. 31

The Treasury Department's explanations of the proposed statute are not, as the dissent in the Court of Claims suggested, a mere "admission against interest" by the Commissioner. 225 Ct.Cl. at 44, 634 F.2d at 514. The expanded definition of "brother-sister controlled group" was proposed by the Treasury Department, and adopted in the same form in which it was presented. Of course, it is Congress' understanding of what it was enacting that ultimately controls. But we necessarily attach "great weight" to agency representations to Congress when the administrators "participated in drafting and directly made known their views to Congress in committee hearings." Zuber v. Allen,396 U. S. 168, 396 U. S. 192 (1969). The subsequent legislative history of § 1563(a)(2) confirms that Congress adopted not only the proposal of the Treasury Department, but also the Department's explanation

Page 455 U. S. 32

and interpretation which are wholly incompatible with the "singly or in combination" interpretation of the Regulation. The Ways and Means Committee Report stated:

"This bill expands the definition [of a brother-sister controlled group] to include two or more corporations which are owned 80 percent or more (by voting power or value) by five or fewer persons (individuals, estates, or trusts) 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."

H.R.Rep. No. 91-413, pt. 1, p. 99 (1969). The House Committee Report thus reflects the Treasury Department's explanations -- the 80-percent requirement is an expanded version of the 1964 statute and measures overlapping interests, while the 50-percent requirement is an additional proviso necessary in light of the expanded number of shareholders whose overlapping interests were to be considered. [Footnote 12]

D

The Commissioner's further reasons for sustaining his interpretation are unpersuasive.

The Commissioner relies on the fact that, in expanding the coverage of § 1563(a)(2), Congress expressly adopted part of the language used in § 1551(b)(2) of the Code to describe a transfer from one corporation to another "controlled" by the same "five or fewer" individuals. The Commissioner contends that Congress thereby approved the interpretation the Commissioner had placed on § 1551(b)(2). Even if we could assume that Congress was aware of Treasury Regulations interpreting

Page 455 U. S. 33

§ 1551, promulgated only two years before § 1563 was enacted, see 32 Fed.Reg. 3214-3216 (1967), the promulgated regulations do not support the Commissioner's present interpretation of the statutory language in § 1563(a)(2). The Regulations defining control under § 1551 contain no language similar to the words "singly or in combination" found in Treas.Reg. § 1.1563-1(a)(3), and they contain no suggestion that the Treasury Department had interpreted § 1551(b)(2) as not having a common ownership requirement. See Treas.Reg. § 1.1551-1(e), 26 CFR § 1.1551-1(e) (1981). [Footnote 13]

Also unpersuasive is the Commissioner's reliance on the fact that § 1563(a)(2) is referred to in § 1015 of the Employee Retirement Income Security Act of 1974, 26 U.S.C. § 414. [Footnote 14]

Page 455 U. S. 34

From this, the Commissioner infers congressional approval of all the Regulations promulgated under § 1563(a)(2), including the Regulation at issue in this case. But it is the intent of the Congress that amended § 1563(a), not the views of the subsequent Congress that enacted § 414, that are controlling. See Teamsters v. United States,431 U. S. 324, 431 U. S. 354, n. 39 (1977). In any event, this passing reference in 26 U.S.C. § 414(b), enacted only two years after Treas.Reg. § 1.1563-1(a)(3) was promulgated, 37 Fed.Reg. 8068-8070 (1972), hardly constitutes legislative approval of a longstanding administrative interpretation, from which we could infer any congressional acceptance. Cf. United States v. Correll, 389 U.S. at 389 U. S. 305-306.

Finally, the Commissioner seeks to uphold the Regulation on the ground that a common ownership requirement leads to the assertedly nonsensical result that ownership of only one share could be determinative. For example, if Crain owned but one share of Vogel Popcorn, then the 80-percent requirement would be met and the taxpayer corporation would be part of a controlled group even under the taxpayer's interpretation of the statute. This argument is without merit for several reasons. First, Congress purposefully substituted the mechanical formula of § 1563(a)(2) for the subjective, case-by-case analysis that had previously prevailed. Inherent in such an objective test is a sharp dividing line that is crossed by incremental changes in ownership. Moreover, it is obvious that a shareholder would not buy a small amount of stock in order to create a controlled group, since it is to the taxpayer's advantage not to be part of such a group. Finally, a person's "mere" ownership of one share of stock plays an important role in the operation of the test. It insures that each of the "5 or fewer" shareholders representing the bulk of the financial interest of the corporations actually knows of the other corporations within the putative brother-sister controlled group. Under this construction of the statute, controlled group membership cannot

Page 455 U. S. 35

catch such a shareholder by surprise, as it could under the Commissioner's construction.

Affirmed.

[Footnote 1]

For two of the tax years in question in this case -- the years ending November 30, 1973 and 1977 -- the Code exempted the first 25,000 of corporate earnings from the federal surtax on corporate income, 26 U.S.C. § 11(d) (1970 ed.), and for the third year -- ending November 30, 1975 -- the Code exempted the first 50,000. 26 U.S.C. § 11(d). For each of these tax years, however, § 1561 of the Code limited the members of a "controlled group" of corporations to a single shared surtax exemption. Amendments to the Code in 1978 replaced the surtax exemption with a graduated five-step tax rate structure on taxable corporate income. 26 U.S.C. § 11 (1976 ed., Supp. III). Now members of a controlled group must share a single rate schedule. 26 U.S.C. § 1561(a) (1976 ed., and Supp. III).

[Footnote 2]

The full text of § 1563(a)(2) is:

"Brother-sister controlled group"

"Two or more corporations if 5 or fewer persons 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 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 account the stock ownership of each such person only to the extent such stock ownership is identical with respect to each such corporation."

[Footnote 3]

The full text of the Treasury Regulation is:

"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 -- "

"(a) At least 80 percent of the total combined 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 in 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."

"(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 outstanding, is owned by the following unrelated individuals:"

------------------------------------------------

Corporations Iden-

Individuals ----------------------------tical

own-

P Q R S T ership

------------------------------------------------

A ............ 60% 60% 60% 60% 100% 60%

B ............ 40% .... .... .... .... ....

C ............ .... 40% .... .... .... ....

D ............ .... .... 40% ... .... ....

E ............ .... .... .... 40% .... ....

------------------------------

Total ........ 100% 100% 100% 100% 100% 60%

------------------------------------------------

"Corporations P, Q, R, S, and T are members of a brother-sister controlled group."

"Example (2). The outstanding stock of corporations U and V, which have only one class of stock outstanding, is owned by the following unrelated individuals:"

------------------------------------------------

Corporations

Individuals -------------- identical

ownership

U V

------------------------------------------------

F ............. 5% ...........................

G ............. 10% ...........................

H ............. 10% ...........................

I ............. 20% ...........................

J ............. 55% 55% 55%

K ............. 10% ................

L ............. 10% ................

M ............. 10% ................

N ............. 10% ................

O ............. 5% ................

---------------------------------

Total.......... 100% 100% 55%

------------------------------------------------

"Corporations U and V are not members of a brother-sister controlled group because at least 80 percent of the stock of each corporation is not owned by the same five or fewer persons."

[Footnote 4]

The remainder of the Vogel Popcorn stock -- voting preferred stock -- was owned by Vogel as trustee of the Alex Vogel Family Trust. Under the attribution rules of 26 U.S.C. §§ 1563(d)(2), (e), Vogel is not deemed to own this stock for tax purposes. See 225 Ct.Cl. 15, 18, 634 F.2d 497, 499 (1980).

[Footnote 5]

In the original version of §§ 1561-1563, controlled groups retained the option of taking multiple surtax exemptions and paying a penalty. See 26 U.S.C. § 1562 (1964 ed.). During the tax years in question, this option was being gradually phased out. 26 U.S.C. § 1564. For 1973 and 1974, respondent utilized the multiple surtax exemption under 26 U.S.C. § 1564(a), and paid the penalty imposed by § 1562(b) (1970 ed.). For the tax year ending November 30, 1975, respondent elected to allocate entirely to Vogel Popcorn the single surtax exemption then allowed to members of a controlled group of corporations.

[Footnote 6]

The Court of Appeals for the Fifth Circuit is in agreement with the Court of Claims and the Tax Court that Treas.Reg. § 1.1563-1(a)(3), 26 CFR § 1.1563-1(a)(3) (1981), is invalid insofar as it permits the 80-percent requirement to be satisfied without common ownership. Delta Metalforming Co. v. Commissioner, 632 F.2d 442 (1980). The Tax Court has adhered to its view that the Regulation is invalid. See, e.g., Charles Baloian Co. v. Commissioner, 68 T.C. 620, 629-631 (1977); Davidson Chevrolet Co. v. Commissioner, 39 TCM 299 (1979), [

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