Court Opinion

ID: 4483049
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:51.538806+00
Date Added: 2024-06-11T14:38:47.954900
License: Public Domain

Simpson, J., dissenting: In its opinion, the majority invalidates provisions of the Treasury regulations which deal with a highly complex and technical statute and which constitute a contemporaneous construction of the statute by those charged with the administration of the revenue laws. The cases are legion in which the Supreme Court has, time and again, held that such regulations are entitled to great weight and will be declared invalid only if they are unreasonable and clearly inconsistent with the statute. Bingler v. Johnson, 394 U.S. 741, 749-750 (1969); Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948); Fawcus Machine Co. v. United States, 282 U.S. 375, 378 (1931); Estate of Whitlock v. Commissioner, 494 F. 2d 1297, 1300-1301 (10th Cir. 1974), revg. on this issue 59 T.C. 490 (1972); Griswold, “A Summary of the Regulations Problem,” 54 Harv. L. Rev. 398, 405-408, 416, 417 (1941); see also United States v. Correll, 389 U.S. 299, 307 (1967); Colgate Co. v. United States, 320 U.S. 422, 426 (1943); Brewster v. Gage, 280 U.S. 327, 336 (1930). The majority declares that the regulations are “unrealistic and unreasonable” and that they are “clearly inconsistent with the thrust of the statutory language.” However, they failed to establish, in the statute or legislative history, any basis for their assertions, and a careful reading of the statute reveals that the regulations are, in fact, entirely consistent with the statute and legislative history. Thus, there is no basis in law for this Court to refuse to apply the regulations. What is more, the regulations, now rejected by the majority of this Court, have been impliedly approved by the Congress in subsequent legislation. Section 1563(a)(2) provides: (a) Controlled Group of Corporations. — For purposes of this part, the term “controlled group of corporations” means any group of— [[Image here]] (2) Brother-sister controlled group — Two or more corporations if five 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. [Emphasis supplied.] Although, on a quick reading, the statute appears complex, an analysis of subparagraph (A), containing the 80-percent test, and subparagraph (B), containing the 50-percent test, shows that the only substantive difference is the underscored language in sub-paragraph (B), which places a limitation on the application of the 50-percent test not applicable to the 80-percent test. The stock owned by any or all of the five persons may be taken into consideration in determining whether the 80-percent test has been satisfied, but in determining whether the 50-percent test has been met, it is necessary to find out which of such persons owns stock in both of the corporations and how much each of them owns. Only to the extent that a person owned stock in each of the corporations is his stock taken into consideration for purposes of the 50-percent test; thus, a person who owned no stock in one of the corporations under scrutiny would be excluded from consideration for purposes of that test. Yet, since. Mr. Herbert owned more than 50 percent of the stock in each of the corporations involved in this controversy, it is clear that the 50-percent test has been satisfied, and since the common ownership requirement is applicable only for that test, and not the 80-percent test, the ownership of both Mr. Herbert and Mr. Ofano should be taken into consideration in applying the 80-percent test. Obviously, together, their ownership satisfies that test. Thus, when the statute is read carefully, there can be no doubt that it applies in this case and that the regulations are entirely consistent with it. The purpose and operation of the 80-percent and 50-percent tests are illuminated by the legislative history. As originally enacted by the Revenue Act of 1964, section 235(a), 78 Stat. 116, section 1563(a)(2) defined a brother-sister controlled group to be two or more corporations, if 80 percent of the total combined voting power, or 80 percent of the total combined value of the shares, were owned by one person. Apparently, the Treasury Department and the Congress found such rule failed to prevent the abuses at which it was aimed, and the Tax Reform Act of 1969, sec. 401(c), 83 Stat. 599, changed the rule. To make thev rule applicable in more situations, the stock ownership of up to five persons is to be taken into consideration for purposes of applying the 80-percent test, but to assure that there was common control of each of the corporations by some of such persons, the 50-percent test was added. The general explanation of the Treasury Tax Reform Proposals contained in Hearings on the Subject of Tax Reform Before the House Comm, on Ways and Means, 91st Cong., 1st Sess. 5394 (1969), sets forth the reasons for the new provisions: (2) Brother-sister groups. — A group of corporations 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. This provision expands present law by considering the combined stock ownership of five individuals, rather than one individual, in applying the 80-percent test. Even the mild 6-percent penalty under existing law for brother-sister corporations claiming multiple surtax exemptions is largely ineffectual because of the present requirement that one person own 80 percent of the stock of each corporation before the group of corporations is subject to the penalty. 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. [Fn. ref. omitted; emphasis supplied.] Such explanation supports the interpretation adopted by the regulations. The second paragraph of the explanation, which has been underscored, makes clear that different persons may be taken into consideration in applying the 80-percent and the 50-percent tests and that the common ownership requirement is only applicable for purposes of the 50-percent test. Moreover, the underscored words in the first sentence of the explanation merely indicate that there will be common ownership “to a large extent” among those persons whose ownership is considered for purposes of the 80-percent test. That statement recognizes that there need not be common ownership among all those persons taken into consideration for purposes of the 80-percent test, and the common ownership that is requred is specified by the 50-percent test. In addition, when in 1969 Congress decided to expand the coverage of section 1563, it used exactly the same words to describe the brother-sister corporations to be covered as were used in section 1551(b)(2) and indicated that it intended for such provisions to have the same meaning. H. Rept. No. 91-413 (1969), 1969-3 C.B. 200, 384. At that time, section 1.1551-1(g)(4) of the Income Tax Regulations included an example indicating that the ownership of a person could be taken into consideration for purposes of the 80-percent test although he did not own stock in some of the corporations and was therefore not considered for the purposes of the 50-percent test. Under these circumstances, it is reasonable to assume that the draftsmen of section 1563 were aware of such regulations and therefore intended for the definition to include the situation described in it. Since sections 1551(b)(2) and 1563(a)(2) define brother-sister groups of corporations by use of the same words, and since Congress indicated that the two definitions should have the same meaning, we should interpret them to include the same groups of corporations, and for this purpose, it is immaterial that section 1551 applies when there is a transfer of property and that section 1563 applies without a showing of a transfer of property. Moreover, when Congress enacted the Employee Retirement Income Security Act of 1974, sec. 1015, 88 Stat. 925, it added section 414 to the Code, providing in subsections (b) and (c): (b) Employees of Controlled Group of Corporations. — For purposes of sections 401, 410, 411, and 415, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), determined without regard to section 1563(a)(4) and (e)(3)(C)) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the minimum funding standard of section 412, the tax imposed by section 4971, and the applicable limitations provided by section 404(a) shall be determined as if all such employers were a single employer, and allocated to each employer in accordance with regulations prescribed by the Secretary or his delegate. (c) Employees of Partnerships, Proprietorships, Etc., Which Are Under Common Control. — For purposes of sections 401,410,411, and 415, under regulations prescribed by the Secretary or his delegate, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations prescribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b). At the time of such enactment, certain legal writers had criticized the regulations under section 1563 which the majority now invalidates. Bonovitz, “Brother-Sister Controlled Groups under Section 1563: The 80 Percent Ownership Test,” 28 Tax Lawyer '511 (1975); Thomas, “Brother-Sister Multiple Corporations — The Tax Reform Act of 1969 Reformed by Regulation,” 28 Tax L. Rev. 65 (1972); but see White, “The Tax Reform Act of 1969: Demise of Multiple Surtax Exemptions— When Too Much of A Good Thing Proved Its Own Undoing,” 16 Wayne L. Rev. 1353 (1970). Nevertheless, Congress adopted the meaning of a controlled group of corporations set forth in section 1563 and even decided that the same principles should be made applicable to unincorporated businesses. By such action, Congress clearly indicated its approval of the manner in which section 1563 was being interpreted and applied by the Treasury regulations. Cf. United States v. Correll, 389 U.S. 299, 305-306 (1967); Commissioner v. Flowers, 326 U.S. 465, 469 (1946); Boehm v. Commissioner, 326 U.S. 287, 291-292 (1945); Helvering v. Winmill, 305 U.S. 79, 83 (1938); Bernard McMenamy, 54 T.C. 1057, 1062 (1970), affd. 442 F. 2d 359 (8th Cir. 1971). The majority attempts to create an ambiguity by overlooking the obvious meaning of the words of the statute. They point to the words “the stock ownership of each such person” and suggest that these words indicate that each of the persons who is considered in applying the 80-percent test must own stock in each of the corporations. They recognize that the identical ownership requirement is applicable only for purposes of the 50-percent test, but they claim that those words also serve to place some limitation on the applicability of the 80-percent test. Such interpretation of the statute overlooks the obvious fact that those words are contained in subparagraph (B); they restrict the applicability of the 50-percent test but have absolutely nothing to do with the 80-percent test. Although there is no basis in the statute or legislative history for doing so, the majority assumes that the legislation was not intended to cover such a situation as the one now before us. They, like some of the legal writers, disagree with the results of the regulations. Bonovitz, supra; Thomas, supra; but see White, supra. They believe that since Mr. Ofano owned none of the stock of FAP, it would be unfair to him to apply section 1563 and limit the surtax exemption of NOVA. They recognize that if he owned as little as 1 share of FAP, the limitation would apply. They also admit that if his ownership of NOVA was less than 20 percent, NOVA would have to share its surtax exemption even though he owned none of the stock of FAP and was surprised to learn that Mr. Herbert had another wholly owned corporation. Thus, without any authorization in the statute or legislative history, the majority is attempting to define when section 1563 should be applied, and when it should not be. In this situation, it is well to remind the majority of the words of the Supreme Court in United States v. Correll, 389 U.S. at 306-307: we do.not sit as a committee of revision t'o perfect the administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the task of prescribing “all needful rules and regulations for the enforcement” of the Internal Revenue Code. 26 U.S.C. § 7805(a). In this area of limitless factual variations, “it is the province of Congress and the Commissioner, not the courts, to make the appropriate adjustments. ”* * * [Emphasis supplied.] For many years, Congress has been concerned about the use of multiple corporations to secure additional surtax exemptions. Sections 269 and 1551 were designed to limit such use, but their applicability depends upon a showing as to the purpose of the creation or acquisition of a corporation. Neither Congress nor the Treasury was satisfied with the results achieved by those provisions, and when section 1563 was enacted, they decided to adopt a mechanical or objective test. As a result of the 50-percent test, the applicability of the provision is restricted to situations in which a small group of persons has actual control of each of the several corporations, and as a result of the 80-percent test, the applicability of the provision is restricted to situations in which substantially all of the stock of each of the corporations is held by a small group of persons. For my part, I cannot say that those provisions are arbitrary or irrational, and as a court, it seems to me that we should refrain from adopting an interpretation of them which will limit their applicability. If the reach of the statute is too broad, the remedy lies with Congress. Although some of my colleagues may be firmly convinced that the statute should have been written more narrowly, it is not for us to usurp the policymaking responsibilities of the Congress. Raum, Tannenwald, and Wilbur, JJ., agree with this dissent.