Allen Oil Co., Inc. v. C. I. R.
| Decision Date | 11 January 1980 |
| Docket Number | No. 180,No. 79-4117,D,180,79-4117 |
| Citation | 614 F.2d 336 |
| Parties | 80-1 USTC P 9156 ALLEN OIL COMPANY, INC., Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. ocket |
| Court | U.S. Court of Appeals — Second Circuit |
William A. Friedlander, Atty., Tax Division, Dept. of Justice, Washington, D.C. (M. Carr Ferguson, Asst. Atty. Gen., Gilbert E. Andrews, Stanley S. Shaw, Jr., Attys., Tax Division, Dept. of Justice, Washington, D.C., of counsel), for respondent-appellant.
Richard C. Bishop, Greenfield, Mass. (Levy, Winer, Hodos & Berson, P. C., Greenfield, Mass., of counsel), for petitioner-appellee.
Before MEDINA, MANSFIELD and MESKILL, Circuit Judges.
The Commissioner of Internal Revenue appeals from a decision of the United States Tax Court filed March 15, 1979, holding that appellee taxpayer, Allen Oil Company, Inc. (Allen), is not a member of a "brother-sister controlled group" of corporations within the meaning of 26 U.S.C. § 1563(a)(2) and therefore is not liable for a tax deficiency asserted for its 1976 tax year by the Commissioner who disallowed a separate surtax exemption claimed by the taxpayer. We hold that the taxpayer and another corporation, Pioneer Petroleum Products, Inc. (Pioneer), are members of a brother-sister controlled group and hence are entitled to only a single surtax exemption between them. Accordingly, we reverse.
The taxpayer Allen is in the business of wholesale and retail distribution of fuel oil and related oil products. Its two shareholders are John J. Drago, who owns 150 shares or 30% of the taxpayer, and Francis D. Shanahan who owns 350 shares or 70%. Pioneer is also involved in the fuel oil distribution business and is wholly owned for the purposes of § 1563 by Francis D. Shanahan. 1 Allen and Pioneer each claimed separately a full surtax exemption for its taxable years ending July 31, 1976, and May 31, 1976, respectively. The Commissioner disallowed the taxpayer any surtax exemption on the ground that the taxpayer and Pioneer were members of a controlled group of corporations within the meaning of § 1563(a)(2) of the 1954 Code and that since only one of the group could receive the benefit of the exemption (in this case apparently Pioneer) Allen's claim to an exemption must be denied. The Tax Court reversed the Commissioner's finding of a deficiency, from which the Commissioner appeals.
The issue turns on the interpretation to be given to §§ 1561-1564 of the Internal Revenue Code, which restrict the situations in which multiple corporations may secure additional surtax exemptions, limiting a "controlled group of corporations" to only one surtax exemption. A "controlled group of corporations" is defined by § 1563, which reads in pertinent part as follows:
The stock ownership of the taxpayer and Pioneer is as follows:
50 Percent
80 Percent Test Test
----------------- ----------
Taxpayer Pioneer Identical
Francis D. Shanahan 70% 100% 70%
John J. Drago 30% 0% 0%
-------- ------- ----------
100% or 100% 70%
70%
The parties have stipulated that the 50% control test of § 1563(a)(2)(B) is met by Shanahan's holding of 70% identical ownership of both corporations. The controversy, then, is whether the 80% test of subparagraph (2)(A) is met, and specifically whether Drago's stock ownership in the taxpayer may be counted for the purpose of meeting the 80% test even though he does not own any stock in Pioneer, the other member of the controlled group. If Drago's stock ownership is counted, the 80% test is met since "five or fewer" persons will own 100% of both corporations. On the other hand, if Drago's stock is not counted, the 80% test is not met. The issue, in short, is whether the 80% test fixed by subparagraph (2)(A) is limited by a common ownership requirement. 2
The taxpayer contends that it cannot be considered part of a controlled group of corporations with Pioneer because Shanahan owns less than 80% of the taxpayer's stock and Drago's 30% stock ownership of the taxpayer cannot be counted for the purposes of the 80% test because he owns no Pioneer stock. According to the taxpayer, only persons owning stock in both corporations may be members of the groups of "five or fewer persons" for the purpose of the 80% test.
The Commissioner, on the other hand, contends that Drago's stock ownership can be counted even though he owns no Pioneer stock because Drago and Shanahan as a two-person group own at least 80% of the taxpayer and Pioneer. Indeed, the Commissioner has promulgated regulations in support of its position that each shareholder in the "five or fewer" group need not own stock in each of the corporations in order for its stock ownership to be counted. 3 Regs. 1.1563-1(a)(3).
The issue has been litigated and decided in two other circuits and is being litigated in two more. In 1976 the Tax Court invalidated the Commissioner's regulation on the grounds that the stock interests of a shareholder who owned no stock in one or more corporate members of the group could not be counted for the purpose of meeting the 80% test. Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798 (1976); T.L. Hunt, Inc. v. Commissioner, T.C.M. 1976-221. The Fourth Circuit, however, reversed the Fairfax decision, 548 F.2d 501 (4th Cir.), cert. denied, 434 U.S. 904, 98 S.Ct. 300, 54 L.Ed.2d 190 (1977). The Eighth Circuit then reversed the Tax Court's decision in Hunt, 562 F.2d 532 (8th Cir.). In Baloian v. Commissioner, 68 T.C. 620 (1977), the Tax Court reconsidered the issue but declined to change its position. The Baloian case is currently on appeal to the Ninth Circuit while Delta Metal Forming Co. Inc., T.C.M. 1978-354, another case in which the Tax Court declined to change its position, is on appeal to the Fifth Circuit. And in this case the Tax Court again adhered to its position.
Nothing in the legislative history of § 1563(a)(2) or in its application points in favor of the Tax Court's interpretation as against that of the Commissioner. In such a situation we favor applying literally the plain language of § 1563(a)(2)(A) as Congress wrote it, which, unlike the provision of subparagraph (2)(B) with respect to the 50% test, does not limit the 80% stock ownership requirement to stockholders owning stock in each corporation. In contrast, § 1563(a)(2)(B) clearly imposes a common ownership requirement. Indeed it requires that only each stockholder's identically owned percentage in each corporation may be counted in determining whether the 50% requirement is met by adding the clause "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."
Absent some illumination from the legislative history, we must conclude that if Congress had intended to limit the 80% test to situations where each stockholder owns shares in each member of the corporate group, it would have explicitly provided for it. Instead, it expressly required that only identically owned stock be counted for the 50% test and imposed no common ownership condition upon computation of stock ownership for the 80% test.
The taxpayer first contends that since the phrase "five or fewer persons" is the subject of both subparagraphs (2)(A) and (2)(B) both the 80% test and the 50% test must be satisfied by the same "five or fewer persons." Next the taxpayer argues that the phrase "each such person" in subparagraph (2)(B) refers to the same "five or fewer persons" who own at least 80% of each corporation so that each person counted for the purpose of the 80% test must also be counted for the purpose of the 50% test. According to the taxpayer, then, a common ownership requirement must be applied to the 80% test of subparagraph (2)(A).
We must reject the taxpayer's argument as a highly strained and convoluted reading of the statute. Moreover, it proves too much. To read such a requirement into the 80% test would seriously weaken subparagraph (2)(B) and its 50% test since the 80% requirement if subjected to common ownership on the part of the group of five or fewer, would then tend to overlap or swallow the 50% identical ownership requirement. Normally, a statute must, if reasonably possible, be construed in a way that will give force and effect to each of its provisions rather than render some of them meaningless. FTC v. Manager, Retail Credit Co., 169 U.S.App.D.C. 271, 277, 515 F.2d 988, 994 (D.C.Cir.1975); United States v. Blasius, 397 F.2d 203, 207 (2d Cir. 1968), cert. dismissed, 393 U.S. 1008, 89 S.Ct. 615, 21 L.Ed.2d 557 (1969). The taxpayer's interpretation here would, as a practical matter, come close to eliminating the 50% test...
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