Fairfax Auto Parts of Northern Virginia, Inc. v. Comm'r of Internal Revenue
| Decision Date | 26 January 1976 |
| Docket Number | Docket Nos. 1458-74,1459-74. |
| Citation | 65 T.C. 798 |
| Parties | FAIRFAX AUTO PARTS OF NORTHERN VIRGINIA, INCORPORATED, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTFAIRFAX AUTO PARTS, INCORPORATED, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT1 |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
James M. Rees and Jonathan J. Broome, Jr., for the petitioners.
William Herbert owned all of the stock of petitioner, Fairfax Auto Parts, Inc., and 55 percent of the outstanding stock of petitioner, Fairfax Auto Parts of Northern Virginia, Inc. The remaining stock of Fairfax Auto Parts of Northern Virginia was owned by Joseph Ofano. Held, for a person's stock ownership to be taken into account in determining whether the ownership tests of sec. 1563(a)(2) have been satisfied, that person must own stock in each member of the controlled group. Held, further, since the 80-percent test has not been satisfied, petitioners do not constitute a brother-sister controlled group.
Respondent determined deficiencies in petitioners' Federal income taxes as follows:
The deficiencies are based solely upon the disallowance by respondent of a full $25,000 surtax exemption to each petitioner during each of the taxable years at issue pursuant to section 1561, I.R.C. 1954,2 as in effect for those years. The only issue for our decision is whether petitioners were component members of a controlled group thereby making the provisions of section 1561 applicable.
The case was submitted under Rule 122, Tax Court Rules of Practice and Procedure. Hence, all of the facts have been stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioner Fairfax Auto Parts of Northern Virginia, Inc. (hereinafter NOVA), is a Virginia corporation. Its principal office was located in Fairfax, Va., at the time it filed its petition herein. NOVA'S corporate income tax returns for the taxable years ended December 31, 1971, and December 31, 1972, were filed with the District Director of Internal Revenue, Richmond, Va.
Petitioner Fairfax Auto Parts, Inc. (hereinafter FAP), is a Virginia corporation and had its principal office in Fairfax, Va., at the time of the filing of its petition herein. Its corporate income tax returns for the taxable years ended December 31, 1971, and December 31, 1972, were filed with the District Director of Internal Revenue, Richmond, Va.
NOVA was incorporated under the laws of the State of Virginia on February 23, 1968. During the years 1971 and 1972 Joseph W. Ofano was primarily responsible for the actual operation of NOVA, which was engaged in the business of wholesaling auto parts. During this period he was not involved in the management of FAP.
The following persons were the officers of NOVA during the years in issue: William P. Herbert, president; Joseph W. Ofano, vice president; Katherine L. Herbert, treasurer; and Barbara E. Ofano, secretary. Barbara E. Ofano is the wife of Joseph W. Ofano and the sister of Katherine L. Herbert. William P. Herbert and Katherine L. Herbert are husband and wife. The board of directors of NOVA comprised these four persons during these years.
One December 31, 1971, and December 31, 1972, William P. Herbert owned 55 percent of all NOVA stock entitled to vote and 55 percent of the total value of all NOVA stock. On the same dates Joseph W. Ofano owned 45 percent of all NOVA stock entitled to vote and 45 percent of the total value of all NOVA stock.
FAP was incorporated under the laws of the State of Virginia on May 28, 1961. Although approximately 5 percent of its business activity was the customizing of auto parts, the principal business activity of FAP during the years 1971 and 1972 was the wholesaling of auto parts.
During the years at issue, William P. Herbert owned 100 percent of all FAP stock entitled to vote and 100 percent of the total value of all FAP stock, was president of FAP, and served on the board of directors thereof. Katherine L. Herbert was secretary-treasurer of FAP and was the only other member of its board of directors. There was no vice president of FAP during 1971 and 1972.
In computing their respective tax liabilities for 1971 and 1972 petitioners each utilized a full surtax exemption in the amount of $25,000 pursuant to section 11(d). Respondent determined that petitioners were component members of a brother-sister controlled group as defined in section 1563(a)(2) and in his notices of deficiency allocated to each a surtax exemption of $12,500 for each taxable year involved herein. We must decide the correctness of respondent's determination.
On December 31, 1971, and December 31, 1972, petitioners' issued and outstanding stock was held as follows:
+-----------------------------+
¦ ¦NOVA ¦FAP ¦
+----------------+------+-----¦
¦ ¦ ¦ ¦
+----------------+------+-----¦
¦William Herbert ¦55% ¦100% ¦
+----------------+------+-----¦
¦Joseph Ofano ¦45% ¦--- ¦
+-----------------------------+
Respondent takes the position that this pattern of ownership brings petitioners squarely within the definition of a brother-sister controlled group contained in section 1563(a)(2). That section provides:
SEC. 1563. DEFINITIONS AND SPECIAL RULES.
(a) CONTROLLED GROUP OF CORPORATIONS.— For purposes of this part, the term ‘controlled group of corporations' means any group of—
(2) BROTHER-SISTER CONTROLLED GROUP.— Two or more corporations if 5 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.
In support thereof he cites section 1.1563-1(a)(3), Income Tax Regs., which defines a brother-sister controlled group as two or more corporations if,
the same five or fewer persons * * * own * * * singly or in combination, 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.
Respondent also points to example 13 of this regulation as being dispositive of the issue before us.
Petitioners concede that the ownership pattern involved herein satisfies the 50-percent test set forth in section 1563(a)(2)(B). They argue, however, that the 80-percent test contained in section 1563(a)(2)(A) has not been met, taking the position that a person's stock ownership cannot be taken into account for this purpose unless that person owns stock in each corporation involved. In this connection, petitioners agree that the ownership pattern in the instant case falls within the definition set forth in respondent's regulation and illustrated by the example contained therein but assert that the regulation constitutes a totally unwarranted extension of both the statutory language of section 1563(a)(2) and the underlying congressional intent. We agree with petitioners.
Respondent's regulation interprets the language of section 1563(a)(2)(A) to mean that if some combination of a particular group of (five or fewer) persons owns at least 80 percent of two or more corporations the 80-percent test is satisfied. The crucial language in this regard is the words ‘singly or in combination.’ Thus, while the ownership group (of five or fewer persons) must in the aggregate own at least 80 percent of each of the corporations constituting the controlled group, the same persons within the ownership group need not own 80 percent of each component member of the controlled group. We find the contest regulation to be an unrealistic and unreasonable interpretation of the statutory language.
The key words of the statute relevant to an analysis of the issue are:
if 5 or fewer persons * * * own * * *
(A) at least 80 percent * * * of each corporation, and (B) more than 50 percent * * * 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. (Sec. 1563(a)(2)).
Since the ‘five or fewer persons' is the conjunctive subject of both the 80-percent test and the 50-percent test, it cannot be gainsaid that both tests must be satisfied by the same ownership group. However, to gain entrance into the ownership group for purposes of the 50-percent test one must possess stock in each corporation involved since an absence of such stock ownership produces...
To continue reading
Request your trial
-
United States v. Vogel Fertilizer Company
...unless that person owned stock in each corporation within the brother-sister controlled group, Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798 (1976), rev'd, 548 F.2d 501 (CA4 1977), Vogel Fertilizer filed timely claims for refunds, asserting that Vogel Fertilizer......
-
Achiro v. Comm'r of Internal Revenue
...such corporation. 33. We are not presented in this case with the problem originally faced by this Court in Fairfax Auto Parts of Northern Virginia v. Commissioner, 65 T.C. 798 (1976), revd. 548 F.2d 501 (4th Cir. 1977), cert. denied 434 U.S. 904 (1977), and presently before the Supreme Cour......
-
Vogel Fertilizer Co. v. United States
...1.1563-1(a)(3) has already been extensively litigated. The first case brought under the regulation was Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798 (1976). The regulation was found to be invalid in a decision reviewed by the full Tax Court with four judges diss......
-
Delta Metalforming Co., Inc. v. C. I. R.
...arguments with inconsistent results. The Tax Court first considered the meaning of the 80% test in Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798 (1976). In Fairfax the Court, with four Judges dissenting, held that a person must own stock in each member of the co......