Court Opinion

ID: 8597133
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:04:28.859586+00
Date Added: 2024-06-11T16:55:00.771442
License: Public Domain

SMITH, Judge,
dissenting:
That Treas. Reg. § 1.1563-1(a)(3) (1972) must be sustained unless it is "unreasonable and plainly inconsistent with” I.R.C. § 1563(a)(2) is incontrovertible.1 The majority admits that the interpretation of section 1563(a)(2) espoused by the regulation "is not wholly unreasonable as a construction of the words appearing in” the statute. Moreover, the majority acknowledges that "[t]he statute itself has been fairly criticized as being open to at least four different constructions.” (Emphasis added.) Hence, the majority appears to concede that the regulation is not plainly inconsistent with the text of the statute. The majority believes, however, that the regulation is "clearly inconsistent with the legislative history [of the statute] and unreasonable when the purpose, as well as the bare words, of the statute are considered.”
The "legislative history” which the majority has in mind consists not of congressional committee reports but of the two explanations prepared by the Treasury Department to *46accompany its 1969 proposal to Congress that section 1563(a)(2) be amended.2 The majority derives its holding that the regulation is invalid almost exclusively from its reading of these explanations. Hence, assuming that the Treasury explanations are more than a possible admission against interest, and can be regarded as persuasive evidence of what Congress intended the amended section 1563(a)(2) to mean, the test of whether the majority is correct can be stated as follows: Is the regulation plainly inconsistent with the meaning of the statute as that meaning has been clarified by the Treasury explanations?
I have read the Treasury explanations carefully. say that they are contradicted by the regulation.3 Indeed, they can reasonably be read as supportive of the regulation. That being the case, the issue is not whether plaintiffs interpretation is as reasonable as defendant’s; clearly that will be true in certain given factual situations. The issue is whether plaintiff has carried its heavy burden of showing the regulation to be unreasonable and plainly inconsistent with the statute. This plaintiff cannot do or at least has not done.
The regulation interprets the 80-percent test in section 1563(a)(2)(A) to mandate only that the same group of five or fewer persons own 80 percent of the stock of each corporation. In other words, the regulation interprets the 80-percent test not to require that each member of the group have a stock interest in each corporation.4 Support for the regulation’s interpretation of the 80-percent test can be found in both of the Treasury explanations. The Technical Explanation states:
Part (1) of this test [namely, section 1563(a)(2)(A)] is satisfied if the group of five or fewer persons as a whole owns at least 80 percent of the voting stock or value of *47shares of each corporation, regardless of the size of the individual holdings of each person. Thus, for example, part (1) (but not necessarily part (2) [the 50-percent identical ownership requirement of section 1563(a)(2)(B)]) is met whether one person owns 80 percent of the voting stock of each corporation, four persons each own 20 percent of the voting stock of each corporation, * * *. [Emphasis added.]
The General Explanation states:
Expanding the 80-percent ownership test from one person to five will close the present opportunity for easy avoidance of that 80-percent test. However, adding the 50-percent identical ownership test will 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. [Emphasis added.]
The quoted portions of the Treasury explanations suggest a reading of the explanations which is both reasonable and harmonious with the regulation. The suggested reading is as follows. The amendment of section 1563(a)(2) was intended, with respect to the 80-percent test, to expand the reference point of voting control or financial interest from the same single person to the same group of five or fewer persons. As long as the same group of five or fewer persons possessed 80 percent voting control of or financial interest in each corporation, the 80-percent test would be satisfied regardless of whether each member of the group had an interest in each corporation. However, to insure that there would be adequate common ownership of all the corporations, the more than 50 percent identical ownership requirement was added. Its effect would be (a) to insure that one or more members of the group would be shareholders of all the corporations and (b) to insure that these members’ aggregate identical stock interests in all the corporations would représent greater than 50 percent voting control of or financial interest in each of the corporations.5
Under this reading of the Treasury explanations, the 80-percent test and the more-than-50-percent test each have an independent significance. The more-than-50-percent test *48insures that everyday control of all the corporations emanates from the same source, i.e., from the same shareholder or shareholders who have a greater than 50 percent stock interest in all the corporations. The 80-percent test insures that, in those instances where a greater interest, as, for example, 66% percent or 75 percent voting control or financial interest, is needed, the more-than-50percent shareholder control group can obtain this additional necessary voting control or financial interest without experiencing the difficulty and attendant delay of dealing with a large number of other shareholders.6
Even though a reasonable person can read the Treasury explanations to impute the just described meaning to the 80-percent and more-than-50-percent tests and even though this meaning is the meaning of the tests which is espoused by the regulation, the majority holds the regulation invalid. The majority interprets section 1563(a)(2) to require that each shareholder counted in applying the 80-percent test have a stock interest in each corporation. According to the majority, the stock interest is not required to be any specific minimum amount. Hence, the ownership of 1 share in a corporation would, as to that corporation and as to the shareholder owning that 1 share, satisfy the requirement.
The majority’s requirement gives rise in the instant case to a result which is inconsistent with the purpose underlying section 1563(a)(2). Arthur Vogel owned during the tax years in question 77.49 percent of the only class of stock of Vogel Fertilizer Company. During the same years, his stock in Vogel Popcorn Company provided him with 87.5 percent voting control of that corporation. Hence, using his stock alone, he could muster at least 75 percent voting control of both corporations.7 Possessing this voting control, he had the power to direct the operations of both corporations and to cause the corporations to operate as a unified economic enterprise. Yet the majority holds that the two corporations *49were not brother-sister and, hence, were each entitled to a full surtax exemption.
The majority’s requirement will give rise in other situations to equally unreasonable and inconsistent results. Consider, for example, the situation in which X owns 100 percent of the stock of corporation A and 79.9 percent of the only class of stock of corporation B. The remaining 20.1 percent of the stock of B is owned by Y. Under the majority’s interpretation of section 1563(a)(2), A and B are not brother-sister corporations because the 80-percent test is failed.8 However, if this example is changed merely by having X own all the stock of A except 1 share and having Y own this 1 share, A and B are brother-sister corporations even under the majority’s interpretation of section 1563(a)(2).
There is absolutely no rational basis for differentiating the treatment to be accorded to A and B in the second example from the treatment to be accorded to them in the first example.9 Yet this is precisely what the majority’s interpretation does. • I realize, of course, that section 1563(a)(2) is a mechanical test, but unfortunately the proof does not exist that Congress intended the mechanical test which the majority has in mind and which leads to the unreasonable results just described.
Therefore, I respectfully dissent.
In accordance with the opinion of the court and a memorandum report of the trial judge, it was ordered on November 28, 1980 that judgment for the plaintiff be entered for the tax years ending
*50November 30, 1973 $4,000.00
November 30, 1974 4,834.00
November 30, 1975 12,905.00
together with interest on these amounts as allowed by law.

 Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948). Hence, the issue in this case is not whether the majority’s interpretation of section 1563(a)(2) is more reasonable than the interpretation espoused by the regulation; the issue is whether the regulation is a reasonable interpretation of the statute.

 Technical Explanation and General Explanation of Treasury Tax Reform Proposals, Hearings Before the House Comm, on Ways and Means on Tax Reform, 91st Cong., 1st Sess. 5168-70, 5394-96 (1969). It is recalled that Congress enacted without change, as part of the Tax Reform Act of 1969, the amendment of section 1563(a)(2) proposed by the Treasury Department.

 In Allen Oil Co. v. Commissioner, 614 F.2d 336 (2d Cir. 1980), the second circuit reached the same conclusion.

 The regulation is consistent with the text text thereof can be read to require that each member of the group have an interest in each corporation.

 Greater than 50 percent voting control provides, generally speaking, the power to determine everyday corporate activities.

 The 80-percent test insures, in short, that all the corporations are closely held. Their being closely held is important because it facilitates their operation as a unified economic enterprise.

 If he were to need 80 percent could negotiate with a single shareholder, Richard Crain, for the additional necessary voting power.

 Yet, using merely his stock, X has 75 percent voting control of both corporations and, hence, can cause the corporations to operate as a unified economic enterprise.

 In both examples, the fact that A and B can be operated as a single economic enterprise is attributable to the stockholdings of X, not to those of Y. Thus, Y’s 1 share in A in the second example should not be significant.