Legal Document

455 U.S. 16 102 Supreme Court Reporter 821 70 United States Reports Lawyer’s Edition 2d Series KF101.8 U54 792 UNITED STATES, Petitioner,v.VOGEL FERTILIZER COMPANY. Number 80-1251. Argued Nov. 3, 1981. Decided Jan. 13, 1982. Syllabus Section 1561(a) of the Internal Revenue Code 1954 limits a "controlled group corporations" to single surtax exemption. 1563(a)(2) provides that includes "brother-sister controlled group," defined as "[t]wo or more corporations if 5 fewer persons . own stock possessing (A) at least 80 percent total combined voting power value each corporation, and (B) than 50 taking into account ownership such person only extent is identical with respect corporation." An implementing Treasury Regulation interprets statutory term group" mean two same five "singly in combination" prescribed percentages value. One shareholder, Vogel, owned 77.49 outstanding respondent Vogel Fertilizer company Another Crain, remaining 22.51 percent. also 87.5 Popcorn 90.66-93.42 its stock. Crain no Popcorn. Respondent claimed refunds for taxes paid certain tax years which it did not claim full exemption, asserting were members was therefore entitled exemption taxable year. When Service disallowed refund claims, filed suit Claims, held refund. Held : The invalid being reasonable interpretation statute, which, indicated by language, structure, legislative history, intended apply where whose taken purposes 80-percent requirement owns corporation group. Pp. 22-35. (a) Since promulgated under Commissioner Revenue's general authority prescribe all needful rules regulations, owed less deference regulation issued specific grant define term. Moreover, purports do add clarifying gloss on already specifically Congress. 24-25. (b) language closer harmony respondent's question. statute defines—"brother-sister group"—connotes close horizontal relationship between corporations, suggesting indivisible must represent corporation. This strengthened structure suggests precisely shareholders satisfy both 50-percent requirements. Part (B)'s requirement, "identical," part test clearly common requirement. And mere fact there are words explicitly requiring shareholder does Regulation's interpretation, combination," be accepted reasonable. 25-26. (c) statute's history makes plain appears targets § groups interrelated corporations—corporations characterized control ownership—and Congress an expanded version former primary defining interrelationship additional proviso necessary light number overlapping interests considered. provision incompatible this intent. 26-32. 225 Ct.Cl. 15, 634 Federal Reporter, 2nd 497, affirmed. Stuart Atlantic Smith, Washington, D. C., petitioner. Ronald C. Jensen, Omaha, Neb., respondent. Justice BRENNAN delivered opinion Court. 1 1954, 26 KF62 1561(a), corporate exemption.1 corporation."2 Treas.Reg. 1.1563-1(a)(3), Regulations 1.1563-1(a)(3) (1981), "term 'brother-sister group' means singly combination " value.3 question presented whether regulatory interpretation—that definition met combination"—is implementation 2 * (Vogel Fertilizer), Iowa sells farm fertilizer products. During question—1973, 1974, 1975—Vogel had Arthur (Vogel) Richard (Crain), who unrelated Popcorn), another popcorn wholesale retail markets. For however, power, 90.66 93.42 Popcorn's stock.4 3 returns question,5 believing barred claim. But when Tax Court, 1976, because permit take person's unless within brother-sister group, Fairfax Auto Parts Northern Virginia, Incorporated versus Commissioner, 65 KF6280 A2 U55 798 (1976), rev'd, 548 501 (CA4 1977), timely claims refunds, brought Claims. Claims constitute meaning 1563(a)(2)(A); takes account, one group; was, accordingly, 497 (1980). We granted certiorari resolve conflict among Circuits issue, 450 994, 101 1693, 68 192 (1981),6 now affirm. II 4 Vogel's satisfies test—the identical-ownership controversy centers argues construed including common-ownership requirement—Congress attempting identify reality subdivided portions larger entity. In taxpayer's view, thus intend "5 fewer" individuals cannot said his added 1563(a)(2)(A). position, reflected addition requirement—various subgroups persons" can requisite different acknowledges (A)'s measures corporations. Commissioner's view interrelationship. He contends "continues have independent significance" "insures will closely held," so "the more-than-50-percent obtain those instances greater interest needed without necessity dealing large other shareholders." Brief 35.7 6 Our role limited determining validity 1.1563-1(a)(3). Deference ordinarily owing agency construction we conclude "implement[s] congressional mandate some manner." Correll, 389 299, 307, 88 445, 450, 19 537 (1967). principle deference, while fundamental, sets framework judicial analysis; displace it." Cartwright, 411 546, 550, 93 1713, 1716, 36 528 (1973). 7 analysis refined consideration source promulgate issue. has interpreting "prescribe regulations." 7805(a). Accordingly, "we owe method executing provision." Rowan Cos. States, 452 247, 253, 2288, 2292, 814 (1981). addition, term—"brother-sister group"—that been considerable specificity consequently circumscribed would case used 'so render interpretive appropriate.' National Muffler Dealers Assn., Inc., 440 472, 476, 99 1304, 1306, 59 519 (1979), quoting Helvering R. Judge Reynolds Co., 306 110, 114, 423, 425, 83 L.Ed. 536 (1939). See supra. B 8 consider first harmonizes language. supra, U.S., 477, S.Ct., 1307. That set forth n. 2, completely unambiguous, Regulation. connotes 9 statute. defines controlling ("5 fewer"), then requirements (80 percent). As stated it, "conjunctive subject" T.C., 803. If, suggests, holdings considered (B), requires ownership.8 Of course, simply support contrary interpretation. firmly rejected suggestion sustained "technically inconsistent" fundamentally odds manifest design. 557, 1719. challenged "origin purpose." Contract 10 resolves any ambiguity Through controlled-group test, curb abuse multiple incorporation—large organizations subdividing smaller receiving unintended benefits from use exemptions, accumulated earnings credits, various provisions designed aid small businesses. S.Rep.No. 91-552, Page 134 (1969), U.S.Code Cong. & Admin.News 1969, 1645. House Ways Means Committee Report noted: "Large able substantial dividing organization's income related Your committee believe operate through should allowed receive resulting present law." H.R.Rep.No. 91-413, pt. 1, 98 Pages 1746-1747. ownership. Although measures, lesser degree, overlap enactment illustrates 11 Until 1964, incorporation subjective: Multiple exemptions depending reasons actions.9 Act 1964 changed approach, adding §§ 1561-1563 Code. Public Law 88-272, 235(a), 78 Statutes-at-Large 116-125. These sections application mechanical, objective tests thereby restricted original, was: 12 "Two classes vote shares individual, estate, trust." (1964 ed.). 13 Because included 14 1969 adopted two-part percentage codified 1563(a)(2). 91-172, 401(c), 602. change proposed Department extensive package reform proposals. Hearings Before Subject Reform, 91st Cong., 1st Sess., 14, 5050-5478 (1969) (hereinafter Hearings). proposed, inter alia, "be broadened include persons, rather person," existing law. Id., 5166. setting "Technical Explanation" new groups, most explicit like ownership: "[T]he [must] these individuals" (B). 5168 (emphasis except "five "). 15 Department's "General amendment "in own, proportions, corporations." Hearings, 5394 (footnote omitted). General Explanation respective roles requirement: "This expands law considering individuals, applying test. 17 "However, order insure applies cases hold their way allows them economic entity, proposal rule considering, ownership, particular identically Ibid. 18 made clear that, 1563(a)(2), remain basis financial interests. expansion "expansion" "close opportunity easy avoidance" 5396. played previously one, required safeguard—the requirement—to "insure are, fact, stockholders enterprise." added).10 explanation offered statement "each" remained indicia Regulation, held. held, absent irrelevant purpose identifying interrelationship: "It smallness triggers 1563; sameness number." T. L. Hunt, 562 532, (CA8 1977) (Webster, dissenting).11 20 explanations not, dissent suggested, "admission against interest" Commissioner. Ct.Cl., 44, F.2d, 514. form presented. Congress' understanding what enacting ultimately controls. necessarily attach "great weight" representations administrators "participated drafting directly known views hearings." Zuber Allen, 396 168, 192, 90 314, 327, 24 345 (1969). subsequent confirms Department, but wholly stated: 21 bill [of group] (by value) (individuals, estates, trusts) provided 1748. 22 reflects explanations—the interests, considered.12 Defendant 23 further sustaining unpersuasive. relies expanding coverage expressly 1551(b)(2) describe transfer "controlled" individuals. approved placed 1551(b)(2). Even could assume aware 1551, before 1563 enacted, see 32 Fed.Reg. 3214-3216 (1967), regulations 1551 contain similar found they interpreted having 1.1551-1(e), 1.1551-1(e) (1981).13 25 Also unpersuasive reliance referred 1015 Employee Retirement Income Security 414.14 From infers approval issue case. intent amended 1563(a), enacted 414, controlling. Teamsters 431 324, 354, 39, 97 1843, 1864, 52 (1977). event, passing reference 414(b), after promulgated, 37 8068-8070 (1972), hardly constitutes longstanding administrative infer acceptance. Cf. 305-306, 448-449. Finally, seeks uphold ground leads assertedly nonsensical result share determinative. example, Popcorn, taxpayer even argument merit, several reasons. First, purposefully substituted mechanical formula subjective, case-by-case prevailed. Inherent sharp line crossed incremental changes obvious buy amount create since advantage "mere" plays important operation It insures representing bulk actually knows putative Under membership catch surprise, construction. 27 Affirmed. 28 BLACKMUN, whom WHITE joins, dissenting. 29 N Dec. Immigration Nationality Decisions deny Court's persuasively defends possible my totally failed establish incorrect. certainty about ambiguous, defer judgment. 30 begins declaring "while Regulation" group'—connotes Ante, original). assumes conclusion. ensures nothing serve purpose. At most, read require 50- tests; entirely silent member And, unlike difficulty inferring conclusion phrase heading subsection household intuitively meaning. 31 Similar problems attend structure. "suggests requirements." 25. true, corporation; relation may exceed five. requirement—which "into corporation," 1563(a)(2)(B)—is embedded simpler normal reading restriction test.1 reading, then, seemingly runs counter approach "tend swallow 50% requirement." Allen Oil 614 336, 339 (CA2 1980). confusing nature text rely principally 1563(a)(2)'s cheerfully reads "resolv[ing] language." 26. seems me substantially overstated. undoubtedly observes, aimed curbing abuses incorporation. beside point, for—as notes—the itself serves "measur[e] 27. "that corporations," ibid. original), history.2 Certainly, nowhere Reports. echo definition, "two Accord, 135 2167. Again, documents prove 80- easily every 33 Ironically, bottom forced rationale advanced legislation eventually proposal, explores detail, ante, 28-30, certainly credible. material contains essential ambiguity.3 Neither nor "Technical" addresses excluded calculation he nevertheless long relevant suggested corporation" (A), "these despite contrary—need To contrary, Technical declares "is satisfied whole regardless size indi- vidual person." 5169 added). obviously crucial inquiry given tests, individual 34 suggest compelled materials. putting much effort lines, lost sight ambiguities neatly finally resolved. Here, "unreasonable meaningless," "it held." 340. situation, "[t]he choice interpretations courts." 488, 1312, (1979). 449, reason, respectfully dissent. case—the ending November 30, 1973 1974—the exempted $25,000 federal income, 11(d) (1970 ed.), third year—ending 1975—the $50,000. 11(d). years, 1561 shared Amendments 1978 replaced graduated five-step rate income. (1976 ed., Supp.III). Now schedule. is: "Brother-sister trusts (within (d)(2)) possessing— "(A) "(B) "(i) (directly contained paragraph 1.1563-3), combination, "(a) "(b) More "(ii) principles subparagraph illustrated following examples: "Example (1). P, Q, R, S, T, class outstanding, individuals: ------------------------------------------------------------------- ------------------- Corporations Individuals-------------------------------------------------------- --Identical P Q Rex Regina S T 60% 100% baron 40%...... C....40%..... D..... 40%.... E...... 40%... ------- Total (2). U V, ------------------------------- Identical Individuals V KF105 F3 5%... G. 10%... Haw. Hawai‘i KFH45 I. 20%... 55% K.... 10% L.... M.... N.... O.... 5% Total. persons." remainder stock—voting preferred stock—was trustee Alex Family Trust. attribution 1563(d)(2), (e), deemed purposes. 18, 499 original 1561-1563, retained option paying penalty. 1562 gradually phased out. 1564. 1974 utilized 1564(a), penalty imposed 1562(b) year 1975, elected allocate Appeals Fifth Circuit agreement insofar permits Delta Metalforming 632 442 adhered invalid. e.g., Charles Baloian 620, 629-631 (1977); Davidson Chevrolet 39 TCM 299 [¶ 79,414] P-H Memo TC; 38 355 79,088] 1485 (1978), 78,354] 35 966 76,221] TC. adherence persisted face reversals Courts Second, Fourth, Eighth Circuits. 336 1980); Virginia (per curiam); 532 1977). difference positions example: ------ Ownership W X Y 51% 45%. 49%....(45% U&V) C.....45%... D...... 45%.. E....... [Footnote continued 24] parties agree A's 51 find well, position controlled" presence "each person" pointed out: "The 'each person' appearing therein refer 'five persons' constituting tests. import usage person—and just counted test." Government justification singling out transporting context (A). argument, mischaracterizes reasoning court merely show refers back antecedent persons," precedes strengthening fixed, throughout prevent taxpayers using organization avoid 269, 482, 1551. 749, 88th 117 (1964), 1313, 1636. 269 gives Secretary disallow deduction, credit, allowance acquisition tax. 482 deductions, allowances determines allocation evasion reflect taxpayers. credit property occurs, "major purpose" securing benefits. All still effect, longer weapons employed Rather, purely proved effective. Thomas, Brother-Sister Corporations—The Reform Reformed L.Rev. 65, 66-67 (1972). examples examples, 5169, 5170, 5395-5396. strains explanations. points "group omitted, emphasis italicized need position. If "to proportions" proportions—there shareholder's effort, relying Post, 38-39 opinion). supports assumption demonstrated three follow illustrate it: four 60 40 another, second." 5169. Senate almost Report. (1969); Finance, Summary H.R. 13270, 49 (Comm. Print 1969). "transfer" 1551—a concept 1.1551-1(g)(4), 1.1551-1(g)(4). example provides: "Individual A 55 X. X's aggregate B, C, D, E. On June 1963, transfers (newly created acquiring property) exchange Y, acquire Y. scope section 1551(a)(3)." Example (4), (4) transferor "controls," 1551(b)(2), transferee although owning transferee, inapplicable because, out, regarded transferee. 807. Bonovitz, Controlled Groups 1563: Percent Test, Lawyer 511, 524, 528-530 (1975). 414(b) "all employees determined regard 1563(a)(4) (e)(3)(C) ) shall treated employer." concludes "strengthening (B)." 26, 8. proves five; Indeed, along absence analogous write apparently derives pre-1969 scheme, 28. five, retaining interrelatedness. problem speculative. intention obvious: declared "expand[ed] law" insure" credibly history. materials inconsistent newly devised indicium somewhat surprising. course litigation over involved drawn Compare 798, 803-804 (CA4), cert. denied, 434 904, 300, 54 190 (1977), 809-810 (dissenting 340,

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