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Matched Legal Cases: ['§ 1563', '§ 1561', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1563', '§ 1', '§ 1', '§ 1', '§ 1561', '§ 235', '§ 1', '§ 1563', '§ 1563', '§ 1551', '§ 1563', '§ 1563', '§ 1551', '§ 1', '§ 1551', '§ 1', '§ 1', '§ 1563', '§ 1015', '§ 414', '§ 1563', '§ 1563', '§ 414', '§ 414', '§ 1', '§ 1', '§ 1', '§ 1563', '§ 1563', '§ 1563', '§ 1563', '§ 1563', '§ 1563']

United States Vs Vogel Fertilizer Co - Citation 105309 - Court Judgment | LegalCrystal
United States Vs. Vogel Fertilizer Co. - Court Judgment
LegalCrystal Citation legalcrystal.com/105309
Case Number 455 U.S. 16
Respondent Vogel Fertilizer Co.
united states v. vogel fertilizer co. - 455 u.s. 16 (1982) 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.....
United States v. Vogel Fertilizer Co. - 455 U.S. 16 (1982)
U.S. Supreme Court United States v. Vogel Fertilizer Co., 455 U.S. 16 (1982)
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.
(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.
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 .
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 ]
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."
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
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.
Brief for United States 35. [ Footnote 7 ]
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).
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.,
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.
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 ]
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 .
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
must satisfy the 50-percent requirement in Part (B). Id. at 5168 (emphasis added except for " five ").
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 ]
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
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 ]
§ 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 ]
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.
" Brother-sister controlled group. "
"( 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."
" 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:"
" 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:"
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), [Ś 79,414] P-H Memo TC; Allen Oil Co. v. Commissioner, 38 TCM 355 (1979), [Ś 79,088] P-H Memo TC; Delta Metalforming Co. v. Commissioner, 37 TCM 1485 (1978), [Ś 78,354] P-H Memo TC; T. L. Hunt, Inc. v. Commissioner, 35 TCM 966 (1976), [Ś 76,221] P-H Memo TC. This adherence has persisted in the face of reversals by the Courts of Appeals for the Second, Fourth, and Eighth Circuits. Allen Oil Co. v. Commissioner, 614 F.2d 336 (CA2 1980); Fairfax Auto Parts of Northern Virginia v. Commissioner, 548 F.2d 501 (CA4 1977) (per curiam); T. L. Hunt, Inc. v. Commissioner, 562 F.2d 532 (CA8 1977).
"is satisfied if the group of five or more persons as a whole owns at least 80 percent of the voting stock or value of shares of each corporation, regardless of the size of the individual holdings of each person. "
Post at 455 U. S. 38 -39 (emphasis in opinion). This language, however, also supports the taxpayer's interpretation, since it appears to assume that "each person" has holdings in each corporation. This assumption is demonstrated by the three examples which directly follow this language and are used to illustrate it: the 80-percent requirement
The Court begins by declaring that the statutory language, "while not completely unambiguous, is in closer harmony with the taxpayer's interpretation than with the Commissioner's Regulation" because the term " brother-sister controlled group' -- connotes a close horizontal relationship between two or more corporations." Ante at 455 U. S. 25 (emphasis in original). In taking this approach, however, the Court simply assumes its conclusion. The 50-percent test of Part (B) already ensures a horizontal relationship between the corporations that constitute the controlled group; nothing in the language of the statute suggests that Part (A) was designed directly to serve the same purpose. At most, 1563(a)(2) can be read to require that the same set of five or fewer persons must satisfy the 50- and 80-percent tests; the statute is entirely silent as to whether each member of the set must own stock in each corporation. And, unlike the Court, I have difficulty inferring this conclusion from the term "brother-sister controlled group," a phrase that appears only in the heading of the subsection, and that is hardly a household term with an intuitively obvious meaning.
same shareholders must satisfy both the 80-percent and 50-percent requirements." Ante at 455 U. S. 25 . Even if this were true, however, it would not mean that each member of the set of five or fewer shareholders must own stock in each corporation; it suggests only that the total number of shareholders considered in relation to both tests may not exceed five. In any event, the common ownership requirement -- which takes
§ 1563(a)(2)(B) -- is embedded in Part (B), and the simpler and normal reading of the statute therefore would apply the common ownership restriction only to Part (B)'s 50-percent test. [ Footnote 2/1 ] It is the Court's reading, then, that seemingly runs counter to the structure of the statute, for under its approach, the 80-percent test would "tend to overlap or swallow the 50% identical ownership requirement." Allen Oil Co. v. Commissioner, 614 F.2d 336, 339 (CA2 1980).
The confusing nature of the statutory text leads the Court to rely principally on § 1563(a)(2)'s legislative history, which it cheerfully reads as "resolv[ing] any ambiguity in the statutory language." Ante at 455 U. S. 26 . It seems to me that this conclusion is substantially overstated. It is undoubtedly true, as the Court observes, that § 1563(a)(2) was aimed at curbing the abuses of multiple incorporation. But this is beside the
point, for -- as the Court notes -- the 50-percent test of Part (B) itself serves to "measur[e] . . . the overlap between two corporations." Ante at 455 U. S. 27 . The Court's further conclusion
ibid. (emphasis in original), is entirely without support in the legislative history. [ Footnote 2/2 ] Certainly, such a view appears nowhere in the congressional Reports. These simply echo the statutory definition, declaring that a controlled group includes
Ironically, then, the Court, at bottom, is forced to rely on the rationale advanced by the Treasury Department when it proposed the legislation eventually adopted as § 1563(a)(2). The Court's analysis of this proposal, which it explores in some detail, ante at 455 U. S. 280 , is certainly credible. But even this legislative material contains an essential ambiguity. [ Footnote 2/3 ] Neither the "General Explanation" nor the "Technical" one addresses whether the 80-percent test requires common ownership, or whether a person excluded from the 50-percent calculation because he owns no stock in one of the controlled corporations may nevertheless be included in the 80-percent test, so long as the total number of relevant shareholders does not exceed five. For example, while the Treasury Department suggested that "the same five or fewer persons [must] own at least 80 percent of the voting stock or value of shares of each corporation" to satisfy Part (A), and that "these five or fewer individuals" must satisfy the 50-percent test of Part (B), Hearings Before the House Committee on Ways and Means on the Subject of Tax Reform, 91st Cong., 1st Sess., pt. 14, p. 5168 (1969) (emphasis in original), the Department's explanation -- despite the Court's suggestion to the contrary -- need not be read as requiring that each of the five own stock in every controlled corporation. To the contrary, the Technical Explanation declares that the 80-percent test
holdings of each person. "
Certainly, I do not suggest that the Commissioner's interpretation is compelled by the legislative materials. But the Court, by putting so much effort into reading between the lines, has lost sight of the fact that certain statutory ambiguities cannot be neatly and finally resolved. Here, the Commissioner's interpretation is not "unreasonable or meaningless," for "it insures that the stock is closely held." Allen Oil Co. v. Commissioner, 614 F.2d at 340. In such a situation, "[t]he choice among reasonable interpretations is for the Commissioner, not the courts." National Muffler Dealers Assn., Inc. v. United States, 440 U. S. 472 , 440 U. S. 488 (1979). See United States v. Correll, 389 U. S. 299 , 389 U. S. 307 (1967). For that reason, I respectfully dissent.
Ante at 455 U. S. 26 , n. 8. But this language proves only that the total number of shareholders considered may not exceed five; it need not be read to require that each 80-percent shareholder own stock in each corporation. Indeed, the presence of an explicit common ownership requirement in Part (B), along with the absence of analogous language in Part (A), suggests that Congress did not intend to write such a requirement into the 80-percent test.
The Court apparently derives this conclusion from the nature of the pre-1969 statutory scheme, under which corporations were considered to be part of a controlled group only if the same person owned 80 percent of the stock in each controlled corporation. Ante at 455 U. S. 28 . In the Court's view, § 1563(a)(2) simply expanded the ownership group to five, retaining the 80-percent requirement as the primary test for interrelatedness. The problem with this approach is that it is entirely speculative. Congress nowhere stated that it had any such intention with regard to the 80-percent test. And the Treasury Department, when it proposed § 1563(a)(2), simply stated the obvious: it declared that the new statute "expand[ed] present law" by considering the ownership interests of five individuals, while adding a 50-percent test "to insure" that controlled corporations operate as one economic entity. Hearings Before the House Committee on Ways and Means on the Subject of Tax Reform, 91st Cong., 1st Sess., pt. 14, p. 5394 (1969). Certainly, the Court can credibly read its conclusion into this history. But the legislative materials are not inconsistent with the Commissioner's contrary view that the newly devised 50-percent test was to serve as the primary indicium of interrelatedness. Because of the absence of any explicit statement on the question in the legislative history, I find the Court's certainty somewhat surprising.