Alumax Inc. v. C.I.R.

• Decision Date: 21 January 1999
• Docket Number: No. 98-8005,98-8005
• Citation: 165 F.3d 822
• Parties: -505, 99-1 USTC P 50,210, 12 Fla. L. Weekly Fed. C 451 ALUMAX INC. and Consolidated Subsidiaries, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 822

165 F.3d 822

83 A.F.T.R.2d 99-505, 99-1 USTC P 50,210,

12 Fla. L. Weekly Fed. C 451

ALUMAX INC. and Consolidated Subsidiaries, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 98-8005.

United States Court of Appeals Eleventh Circuit.

Jan. 21, 1999.

Willard B. Taylor, Philip L. Graham, Jr., Sullivan & Cromwell, New York City, Martin D. Ginsburg, Georgetown University Law Center, Washington, DC, for Petitioners-Appellants.

Thomas J. Clark, Richard Farber, U.S. Dept. of Justice, Tax Div., Washington, DC, for Respondent-Appellee.

Appeal from a Decision of the United States Tax Court.

Before COX, CARNES and HULL, Circuit Judges.

COX, Circuit Judge:

Alumax Inc. appeals a tax court decision concluding that Alumax owes about $129,000,000 in taxes for the years 1981-86. The tax court's decision rested on its ruling that for the years 1984-86 Alumax could not join the consolidated return of one of its shareholders, AMAX Inc., under Internal Revenue Code §§ 1501 and 1504(a). We affirm.

I. Background

No one challenges the tax court's findings of fact, and it is on those that we rely. Alumax is a Delaware corporation and Atlanta-based manufacturer of aluminum products. Since 1974, Alumax's voting stock has belonged to Amax and to a changing group of Japanese interests that has included at various times Mitsui & Co., Ltd., and Nippon Steel Corporation. From 1974 until 1984, Amax and the Japanese interests shared power equally: in shareholder matters, board election, and board voting, each controlled 50% of the votes. Amax and the Japanese interests also shared dividends equally.

At the beginning of 1984, however, Alumax underwent a significant restructuring. First, shareholder votes were redistributed. While Amax and the Japanese interests continued to hold equal numbers of common shares, Amax held stock of a class that had four votes per share while the Japanese-interest stock belonged to a class with only one vote per share. Amax thus had a four-to-one advantage over the Japanese interests in most shareholder matters. But Amax's voting power had its limits. A majority of each class of stock had to approve any action touching any of the following six matters:

* any merger;

* purchase or sale of any asset worth at least 5% of Alumax's net worth (about $36 million between 1984 and 1986);

* partial or complete liquidation or dissolution of Alumax;

* capital appropriation or asset disposition worth more than $30 million (about 1.8% of Alumax's total assets);

* election or dismissal of Alumax's chief executive officer; and

* loans to affiliated corporations not in the ordinary course of business.

Amax's voting advantage did, however, extend to the election of Alumax's board of directors: the Amax shares were entitled to elect four of the board's six voting members, while the Japanese interests could select only two. The Amax-elected directors each held two votes, moreover, while the Japanese-interest directors had only one each. ¹ While this arrangement gave the Amax-elected directors 80% voting power over most matters, the Amax-elected directors suffered the same limitations on their powers as Amax did as a shareholder: in the same six matters listed above, any action had to be approved by a majority of the Amax-elected directors and a majority of the Japanese-interest directors.

There was yet another restriction on the Amax directors' authority. If any Japanese-interest director objected to a board action, and that objection was ratified within fourteen days by the Japanese corporation, then the Alumax board vote would become ineffective. Amax had an out: upon notice within five days, Amax could challenge the "veto," and the vote would become effective if Amax persuaded a panel of arbitrators (who had fourteen days to rule) that the vote would not have a material and adverse effect on the Japanese interests' investment. On the other hand, if Amax challenged the "veto," but lost before the panel of arbitrators, the vote would remain ineffective. ² In that situation furthermore, the Japanese interests could buy all or part of Amax's Alumax stock at a discount. ³

Besides these limitations on the voting authority of the Amax-elected directors, Alumax's board itself suffered a significant limitation on its traditional authority. Absent contrary provision in corporate documents, under Delaware law the board of directors determines when and in what amount distributions will be made, subject to priorities awarded to certain classes of stock. See, e.g., Del.Code Ann. tit. 8, § 170; see also Model Business Corp. Act § 6.40(a); 11 Timothy P. Bjur & James Solheim, Fletcher Cyclopedia of the Law of Private Corporations § 5320, at 633 (perm. ed.1995). Alumax's certificate of incorporation, however, required Alumax to pay dividends amounting to 35% of its net income. Those dividends were not divided equally: the Japanese interests received 80%, Amax only 20%.

During the tax years 1984 through 1986, Alumax was included on Amax's consolidated tax return. This consolidation yielded a tax benefit to Alumax, which was able to offset its profits with losses from other Amax subsidiaries and to carry back general business credits to previous years. The Internal Revenue Service determined that consolidation was not allowed for the years 1984-86 under I.R.C. §§ 1501 and 1504(a) because Amax did not have 80% of the voting power in Alumax. Alumax challenged this determination in tax court, lost, and now appeals, arguing that it is entitled to join the consolidated return of Amax's family of corporations. Because the issue presented is solely one of law, our review is de novo. See Blohm v. Commissioner, 994 F.2d 1542, 1548 (11th Cir.1993).

II. Discussion

Under I.R.C. § 1501, corporations belonging to an "affiliated group" may file a consolidated return. In 1984 (the relevant year for our purposes), I.R.C. § 1504(a)(2) defined "affiliated group" to mean a member of a chain of corporations in which a parent "owns directly stock possessing at least 80 percent of the voting power of all classes of stock." Congress amended § 1504(a) in 1984 to create a two-pronged test for "affiliated group": loosely stated, a subsidiary may now join the return of a parent that holds both 80% of the voting power in the subsidiary and 80% of the subsidiary's stock, measured by value. Deficit Reduction Act of 1984 § 60(a), Pub.L. No. 98-369, § 60(a), 98 Stat. 494, 577-79. This amendment contained a grandfather clause, however, that extended the pre-1984 test through 1988 for all corporations that met the old test on June 22, 1984. See id. § 60(b)(2). Alumax completed its 1984 restructuring before that date. Hence, if the restructured Alumax was entitled to join the consolidated return under the pre-1984 standard, it was entitled to do so through 1986. Because Alumax's right to consolidation thus turns simply on whether Amax held 80% of the voting power in Alumax, the central question is what 80% voting power means.

According to Alumax, 80% voting power is a bright line: it means nothing but the power to elect directors who hold 80% of the total board votes. Alumax accordingly argues that the power of the Amax-elected directors, or of the board itself, to manage corporate affairs is irrelevant. The IRS, on the other hand, rejects this mechanical test and argues that 80% voting power must mean not only the power to elect a certain percentage of the board votes, but also the actual power to run the corporation that would normally accompany control of such a supermajority of the board.

This is a question of statutory construction. The statute's language would control, of course, if it were plain. See Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382, 118 S.Ct. 1413, 1417, 140 L.Ed.2d 542 (1998). But it is not: the naked phrase "80 percent of the voting power" does not answer the question "Power to do what?" We do not, moreover, have the benefit of on-point Treasury regulations that, if reasonable, would control. See id. at 1418. The analysis must therefore rely on extrinsic sources of congressional intent. See, e.g., O'Gilvie v. United States, 66 F.3d 1550, 1558 (10th Cir.1995), aff'd, 519 U.S. 79, 117 S.Ct. 452, 136 L.Ed.2d 454 (1996).

The parties here agree that § 1504's history tells all. Section 1504 is merely the most recent in a series of statutes, dating back to the 1920s, that define affiliation for purposes of the consolidated return privilege. Each of these statutes has relied on voting power in some way to determine affiliation. See Revenue Act of 1924 § 240(c), Pub.L. No. 68-176, § 240(c), 43 Stat. 253, 288; Revenue Act of 1926 § 240(d), Pub.L. No. 69-20, § 240(d), 44 Stat. 9, 46; Revenue Act of 1928 §§ 141(d), 142(c), Pub.L. No. 70-562, §§ 141(d), 142(c), 45 Stat. 791, 831-32. Beginning in the 1930s, the courts and the IRS have refined the raw statutory language by delineating what it means to have a certain level of voting power. In amendments to the statute since the 1930s, Congress has not disturbed this refinement in any way relevant here. See Revenue Act of 1942 § 159(a), Pub.L. No. 77-753, § 159(a), 56 Stat. 798, 859; Internal Revenue Code of 1954 § 1504(a), Pub.L. No. 83-591, § 1504(a), 68A Stat. 3, 369-70. Thus, the parties seem to agree, Congress's acquiescence has imbued this judicial and agency interpretation with the significance of congressional intent. Cf. United States v. Leslie Salt Co., 350 U.S. 383, 389-95, 76 S.Ct. 416, 420-23, 100 L.Ed. 441 (1956) (applying analogous historical analysis to another tax statute).

This historical judicial and IRS interpretation is that "voting power" means the power to control the corporation's business through the election of the board of directors. See, e.g., Erie Lighting Co. v. Commissioner, 93 F.2d 883, 885 (1st Cir.1937); Rev. Rul. 69-126, 1969-1 C.B. 218, 218 ("[P]articipation in the management of the subsidiary through election...