JOE ESCO SOUTH-WEST v. United States
| Decision Date | 21 December 1983 |
| Docket Number | CIV-80-1378.,No. CIV-80-1377,CIV-80-1377 |
| Citation | 582 F. Supp. 993 |
| Court | U.S. District Court — Western District of Oklahoma |
| Parties | JOE ESCO SOUTH-WEST TIRE COMPANY, Plaintiff, v. UNITED STATES of America, Defendant. OKLAHOMA BANDAG & SUPPLY CO., Plaintiff, v. UNITED STATES of America, Defendant. |
George F. Saunders, Oklahoma City, Okl., for plaintiff.
William W. Guild and Rick K. Disney, Tax Div., Dept. of Justice, Dallas, Tex., and Eleanor D. Thompson, Asst. U.S. Atty., Oklahoma City, Okl., for defendant.
Plaintiff-taxpayers filed these consolidated actions for refunds of taxes paid for their fiscal years ending in 1973, 1974 and 1975. Generally, a corporation was entitled for those tax years to a "surtax exemption." However, if two or more corporations were members of a "controlled group of corporations," they would be taxed as if they were a single corporation and they would have to share a single surtax exemption. In this case, the United States contends that the two Plaintiffs are members of a "controlled group of corporations" because they are members of a "brother-sister controlled group." The statute, 26 U.S.C. § 1563, defines these terms as follows:
The ownership of the Plaintiffs, each of which has only one class of stock, voting common, is as follows:
Joe Esco
South-West Oklahoma Bandag
Shareholder Tire Co. & Supply Co
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Joe W. Esco 79% 79%
George Saunders 14% -0-
John Holcomb 7% -0-
Hanna Byrd -0- 7%
C. L. Welch -0- 7%
Don Wilson -0- 7%
Also included with the Plaintiffs in the alleged controlled group are Joe Esco Tire Co. and 89'er Petroleum Co., both of which are 100 percent owned by Joe W. Esco.
Plaintiffs admit that Joe Esco Tire Co. and 89'er Petroleum Co. are, by themselves, a brother-sister controlled group, but they deny that the two Plaintiffs herein are also in that group. The parties agree that the 50 percent test of 26 U.S.C. § 1563(a)(2)(B) applies to the Plaintiffs. But before the Court may find the Plaintiffs to be members of the "group," it must also find that the 80 percent test of 26 U.S.C. § 1563(a)(2)(A) applies to them. The United States concedes that the "80% of voting power" test does not apply, but it asserts that the "80% of value" test does apply. The Plaintiffs assert that the "value" of a stockholder's shares is in direct proportion to the number of shares which he holds and that therefore Joe Esco owns only 79 percent of the "value." The United States, on the other hand, contends that there is a "control premium" which adds value to Esco's 79 percent and that it raises the "value" of Esco's shares to at least 80 percent of the total value of each Plaintiff-corporation.
Both of the Plaintiffs have already litigated the issue of their "brother-sister controlled group" status for their taxable years 1976 in the U.S. Tax Court in Joe Esco South-West Tire Co. v. Commissioner, T.C.Memo No. 82083 (February 18, 1982). The Plaintiffs assert that they conceded the 50 percent test in the Tax Court case and that therefore, under the statute, they could not have avoided a finding that they were members of a brother-sister controlled group unless they won both the "80% of voting power" and the "80% of value" tests. The United States contends, however, that in the Tax Court case only the "80% of voting power" test was actually litigated, to the exclusion of the "80% of value" test.
The parties have briefed these questions, which, in the order in which they should be decided, are:
As the Court determines the question of collateral estoppel in the affirmative in favor of the taxpayers, it does not reach the substantive question or express any opinion thereon.
The doctrine of collateral estoppel is based on four identities. The prior and subsequent actions must have the same parties (or their privies), facts, applicable law, and issues. These identities are applied to tax cases. C.I.R. v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948). The parties in the instant case were parties in the Tax Court case, and the applicable statutory law has not changed and there has been no significant case law development since the Tax Court decision. C.I.R. v. Sunnen, 333 U.S. at 600, 68 S.Ct. at 720.
The facts relevant to the collateral estoppel issue have been fully stipulated, and the issue has been submitted for decision. The stipulation states inter alia that neither party wishes to present any further evidence on the collateral estoppel issue. It also states (1) that the percentages of stockholdings in the Plaintiffs were as recited above for the tax years involved herein, (2) that the constructive ownership provisions of Section 1563(e) of the Internal Revenue Code of 1954 did not apply to the Plaintiffs, and (3) that the persons owning stock in the Plaintiffs and the relative percentages of their ownership did not change from the tax years involved herein (1973, 1974, and 1975) to the tax year involved in the Tax Court case (1976). The parties also stipulate to the record of the Tax Court proceedings, that the parties presented no evidence regarding any control premiums to the Tax Court, and that:
6. The total value of each corporation changes from time to time, and most particularly from year to year, as the result of operations.
The question is whether there was any significant change in the controlling facts from the taxable years involved herein to the taxable year involved in the Tax Court case, or whether the "inseparable facts" test of C.I.R. v. Sunnen,1 333 U.S. at 601, 68 S.Ct. at 721, is satisfied. If the value percentage of shares and any control premium stayed constant, although their dollar values changed (proportionally) with any yearly changes in the total values of the corporations, then the value percentages of the shareholders' shares also stayed the same and the controlling facts of the two cases are the same. How is stipulation number 6 relevant to the value percentage of Mr. Esco's shares?
The United States argues2 that the "all relevant factors affecting the fair market value" approach to valuing the stock of closely held corporations, under Rev.Rul. 59-60, 1959-1 Cum.Bull. 237, applies to the instant question of the Plaintiffs' status as brother-sister corporations. From this and the stipulated fact that the total value of the corporations changes from year to year, the United States argues that the facts involved in 1976 were not identical to the facts existing in earlier tax years. However, assuming that Rev.Rul. 59-60, which expressly applies to valuations for estate and gift tax purposes, applies in cases such as the instant one, and assuming that it reasonably interpreted the word "value" as used in Section 1563(a)(2), its limited references to controlling interests and the idea of control premiums in Section 4(e) and (g) simply do not even suggest that the percentage size of a control premium varies, either up or down, with the varying value of the whole corporation. The Court concludes that the fact that the total value of a corporation changes from year to year, by itself, without evidence showing how that affects the value percentage of the control premium and therefore the value percentages of the shareholders' holdings, is not probative as to whether such value percentages change from year to year.
However, the stipulation does contain evidence relevant to whether the facts herein are identical to the facts involved in the Tax Court case. That evidence is in the fact that the stockholders and their percentages of ownership stayed the same during the relevant years. The evidence herein as to the percentages of Mr. Esco's ownership of the value of the Plaintiff corporations is the same as the evidence on that issue before the Tax Court, and the Court therefore finds that the controlling facts are the same herein as they were in the Tax Court case.3
In so ruling, the Court does not neglect the burden of proof. As the proponents of the doctrine of collateral estoppel, the Plaintiffs have the burden to prove by a preponderance of the evidence the elements to sustain the application of that doctrine. See Lea, Inc. v. C.I.R., 69 T.C. 762, 765 (1978). The Court finds and concludes that by entering into the stipulation herein, the Plaintiffs have satisfied that element of the doctrine...
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