Tribune Pub. Co. v. C.I.R.
| Decision Date | 26 April 1984 |
| Docket Number | No. 83-7218,83-7218 |
| Citation | 731 F.2d 1401 |
| Parties | 84-1 USTC P 9424 TRIBUNE PUBLISHING CO. and News Review Publishing Co., Inc., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Thomas D. Cockran, Witherspoon, Kelly, Davenport & Toole, Spokane, Wash., for petitioners-appellants.
Thomas Preston, Washington, D.C., for respondent-appellee.
Appeal from the United States Tax Court.
Before WRIGHT, ANDERSON and FLETCHER, Circuit Judges.
This is an appeal of a decision by the United States Tax Court, 79 T.C. 1029, affirming a determination by the Commissioner of Internal Revenue (Commissioner) that the appellants were deficient in their federal income taxes for the years 1976, 1977, and 1978.
Appellants Tribune Publishing Co. (Tribune) and News Review Publishing Co., Inc. (News) are two Idaho corporations which operate daily newspapers out of Lewiston, Idaho, and Moscow, Idaho, respectively. Both appellants filed federal corporate income tax returns for the years in question. Tribune publishes a morning newspaper in Lewiston, named the Lewiston Tribune. News publishes an afternoon newspaper in Moscow, about 30 miles away, named the Daily Idahonian. Both papers serve the same general area and there are a significant number of readers who subscribe to both.
During the years in issue, Tribune was owned primarily by the members of the Alford family, several of whom served as corporate officers. Prior to 1967, News was owned and operated by the Marineau family. William Marineau (William) was the president and publisher and A.J. Marineau (A.J.) was the vice-president and general manager.
The Alfords and Marineaus enjoyed cordial relations with one another. There was a long-established relationship of friendly competition between the two papers.
In 1967, the shareholders of News received an offer for their stock from a large national newspaper chain. All of the shareholders except the two Marineaus wished to accept the offer. William became concerned about the prospect of the control of the paper leaving the community. He contacted the Alford family at the offices of the Tribune, and expressed his concern. He pointed out that it would be to Tribune's disadvantage for a chain newspaper to be located only 30 miles away from Lewiston. William proposed that the Tribune might buy the stock of News that was up for sale to the national chain. The Alford family shared William's concern and agreed to purchase some of the shares. The remaining shares were purchased by E. Russell Short and Reta S. Tate. Following the sale, the outstanding News stock was owned as follows:
Stockholder Number of Shares
----------- .................... ----------------
Tribune Publishing Co..................... 100
A.J. Marineau ............................ 50
William T. Marineau ...................... 25
E. Russell Short and Reta S. Tate ........ 75
----
Total ......................... 250
The day after the sale of stock, the shareholders of News entered into an agreement (the 1967 Agreement). A.L. Alford, Jr. and Charles Alford were also parties to the agreement even though they had not, as individuals, purchased any stock in News. The agreement provided that certain conditions were required to be met before a shareholder could sell his shares. Under the agreement, Tribune and the two Alfords were granted "the sole and exclusive first option to meet any bona fide offer of sale" to be received by any of the remaining shareholders for their stock. This is commonly known as a "right of first refusal," whereby one party has the first right to another's stock if he can match the offer made by a third party. If Tribune desired to sell its stock in News, the agreement similarly gave the remaining shareholders the right to "meet the terms" of the proposed sale. The terms of the agreement were never printed on the stock certificates themselves. Neither was the agreement ever incorporated into the Articles of Incorporation or the corporate bylaws.
In 1972, Russell Short and Reta S. Tate decided to sell their interest in News. William contacted A.L. Alford, Jr. and informed him of the proposed sale, and Tribune bought the shares. However, Tribune did not formally invoke its right of first refusal when it acquired the Short/Tate shares. Following the purchase of the Short/Tate shares, the stock of News was owned as follows:
Stockholder Number of Shares
----------- ......... ----------------
Tribune Publishing Co.......... 175
A.J. Marineau ................. 50
William T. Marineau ........... 25
--
Total ............... 250
Tribune now owned 70% of the outstanding stock of News. However, the Alfords did not attempt to control the day-to-day operations of that company.
In 1976, the two Marineaus decided to transfer some of their stock to other members of their family. A.J. contacted A.L. Alford, Jr. to make sure that Tribune and the Alfords would agree to the proposed transfers within the Marineau family. Neither Tribune nor the Alfords had any desire to purchase the Marineau stock and the Marineaus were informed that they were free to dispose of it as they desired. Subsequently, at the meeting of the board of directors of News, it was resolved to allow the Marineaus to convey their stock in News to any member of their family, and that those members would, thereafter, hold the stock free of any restrictions. Then, in 1979, the Marineaus decided to offer their stock to Tribune and the Alfords under the terms of the 1967 agreement. However, they declined to purchase the stock and it was ultimately sold to an outside party.
During the years in question, every corporation was allowed one surtax exemption when filing yearly federal income tax returns, pursuant to section 11(d) of the Internal Revenue Code. 26 U.S.C. Sec. 11(d) (1976), amended by 26 U.S.C. Sec. 11 (Supp. II 1978) (imposing graduated surtax) (amended 1981). However, sections 1561-1563 of the Code placed a limitation on surtax exemptions when corporations were part of a "controlled group." 26 U.S.C. Sec. 1561 (1976) (); 26 U.S.C. Sec. 1563 (1976). One type of controlled group of corporations is a "parent-subsidiary controlled group," which is defined in section 1563(a)(1) as:
One or more chains of corporations connected through stock ownership with a common parent corporation if
(A) stock possessing 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 stock of each of the corporations, except the common parent corporation, is owned ... by one or more of the other corporations; and
(B) the common parent corporation owns ... stock possessing at least 80 per cent 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 stock of at least one of the other corporations, excluding, in computing such voting power or value, stock owned directly by such other corporations.
In determining whether the stock ownership tests of section 1563(a)(1) are satisfied, some of the outstanding stock of the subsidiary corporations in the group is disregarded in certain circumstances. Section 1563(c), in pertinent part, provides as follows:
(1) General Rule.--For purposes of this part, the term "stock" does not include--
* * *
* * *
(C) stock which is treated as "excluded stock" under paragraph (2).
(2) Stock Treated as Excluded Stock.--
(A) Parent-subsidiary controlled group.--
For purposes of subsection (a)(1), if a corporation ... owns ... 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock in another corporation, ... the following stock of the subsidiary corporation shall be treated as excluded stock
* * *
* * *
(iii) stock in the subsidiary corporation owned ... by an employee of the subsidiary corporation if such stock is subject to conditions which run in favor of such parent ... corporation and which substantially restrict or limit the employee's right ... to dispose of such stock.
During 1976 through 1978, Tribune owned more than 50 percent of News' outstanding stock, satisfying the ownership requirement of section 1563(c)(2)(A). Because of the 1967 Agreement, the Commissioner determined that the Marineau stock was "excluded stock" within the meaning of section 1563(c)(2)(A)(iii) and, therefore, Tribune and News were a "controlled group" under the Code since Tribune owned more than 80 percent of News with the Marineau stock excluded from the calculation. Therefore, they were entitled to only one surtax exemption between them. Since they each took an exemption for the years in question, the Commissioner determined Tribune deficient in the amount of $18,392.00 and News deficient in the amount of $40,608.00 on their federal income taxes. The Tax Court entered a decision in accordance with this determination.
The appellants' first contention is that section 1563 was designed for circumstances other than those existing here. They cite the legislative history of section 1563 which states: "[T]he Internal Revenue Code contains several provisions designed to prevent taxpayers from using the multiple form of corporate organization, to avoid taxes." H.R.Rep. No. 749, 88th Cong. 1st Sess., reprinted in 1964 U.S.Code Cong. & Ad.News, 1313, 1425. But, "there are legitimate business reasons for the use of separate corporations and, therefore, the separate corporations should generally...
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