Vogel Fertilizer Co. v. United States
| Decision Date | 13 August 1980 |
| Docket Number | No. 69-78.,69-78. |
| Citation | 634 F.2d 497 |
| Parties | VOGEL FERTILIZER COMPANY v. The UNITED STATES. |
| Court | U.S. Claims Court |
Ronald C. Jensen, Omaha, Neb., for plaintiff; Kent O. Littlejohn, Omaha, Neb., attorney of record; Baird, Holm, McEachen, Pedersen, Hamann & Haggart, Omaha, Neb., of counsel.
Mary M. Abate, Washington, D. C., with whom was Asst. Atty. Gen. M. Carr Ferguson, Washington, D. C., for defendant; Theodore D. Peyser and Robert S. Watkins, Washington, D. C., of counsel.
Before FRIEDMAN, Chief Judge, and BENNETT and SMITH, Judges.
ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND PLAINTIFF'S CROSS-MOTION FOR SUMMARY JUDGMENT
The issue in this case is the validity of Treas.Reg. § 1.1563-1(a)(3) (1972), which defines the term "brother-sister controlled group" for the purposes of the limited surtax exemption available to multiple corporations. Plaintiff has filed suit for the refund of income taxes for the taxable years ended November 30, 1973, 1974, and 1975. The case is now before the court on the parties' cross-motions for summary judgment. We hold that the regulation is an overly expansive interpretation of I.R.C. § 1563(a)(2) and that plaintiff is not a member of a "brother-sister controlled group" as that term is used in the statute. Therefore, we grant plaintiff's motion for summary judgment.
Plaintiff, Vogel Fertilizer Company, is an Iowa corporation in the business of selling farm fertilizer products at retail to local customers. Plaintiff has only common stock issued and outstanding, and for all relevant periods, Arthur Vogel held 113,575 shares (77.49 percent) and Richard Crain held 33,000 shares (22.51 percent) of such stock.
Vogel Popcorn Company (hereinafter Vogel Popcorn) is also an Iowa corporation, which is engaged in a business unrelated to plaintiff's. For all relevant periods, Vogel Popcorn had issued and outstanding 440,062 shares of common stock, all of which was held by Arthur Vogel, and 62,866 shares of voting preferred stock, all of which was held by Arthur Vogel as trustee of the Alex Vogel Family Trust. The relative value and voting power of this stock were as follows:
Voting %
of All Percent of Value of All
Classes Classes of Stock
Entitled -----------------------
Shareholder No. of Shares to Vote 1973 1974 1975
------------- ------------- -------- -------- -------- ------
Arthur Vogel, 440,062 87.5 90.66 91.42 93.42
individually Common Stock
Arthur Vogel, 62,866 Voting 12.5 9.34 8.58 6.58
as trustee Preferred
Stock
Richard Crain is not related to Arthur Vogel in any manner. Defendant makes no contention that the stock owned by either person may be attributed under I.R.C. § 1563(d) to the other. Moreover, defendant has expressly conceded that under the attribution rules Arthur Vogel could not be considered the constructive owner of the shares held by him as trustee.
Plaintiff timely filed corporate income tax returns for the years in question. In accordance with Treas.Reg. § 1.1563-1(a)(3), plaintiff originally treated itself and Vogel Popcorn as members of a controlled group of corporations. Plaintiff therefore did not claim the full surtax exemption provided by I.R.C. § 11(d). For the taxable years ended November 30, 1973 and 1974, plaintiff elected to utilize the multiple surtax exemption under I.R.C. §§ 1562 and 1564(a) and to pay the multiple surtax penalty imposed by I.R.C. § 1562(b).1 For the taxable year ended November 30, 1975, plaintiff elected under I.R.C. § 1561(a)(2)2 to allocate the single surtax exemption then allowed to members of a controlled group of corporations entirely to Vogel Popcorn.
On November 25, 1976, plaintiff filed timely claims for refund for each of the years in question. Plaintiff asserted that it and Vogel Popcorn were not members of a controlled group of corporations and that, therefore, plaintiff was entitled to a full surtax exemption for each taxable year. After plaintiff's claims were disallowed in full by the Internal Revenue Service, plaintiff timely filed suit in this court.
The legal question presented by this case is whether plaintiff and Vogel Popcorn are a "brother-sister controlled group" under section 1563(a)(2). If they are a controlled group, it is undisputed that the limitations imposed by sections 1561 through 1564 would prevent plaintiff from claiming a full surtax exemption.
Section 1563(a)(2) provides that the term "controlled group of corporations" includes:
Treas.Reg. § 1.1563-1(a)(3) explains the statute as follows:
* * * * * *
Thus, the regulation for the most part restates the statute. The regulation does, however, add that the stock ownership of the "same" five or fewer persons should be considered "singly or in combination." Example (1) of the regulation illustrates the meaning of this addition. The example indicates that for the purposes of the 80-percent test a person can be considered as one of the five or fewer members of the group of controlling shareholders even though such person holds stock only in one corporation.
In this case, there is no question that the 50-percent test in section 1563(a)(2)(B) is met. Arthur Vogel held 77.49 percent of the stock of plaintiff and 87.5 percent (in terms of voting power) of the stock of Vogel Popcorn. The stock ownership is taken into account to the extent that it is identical, i. e., 77.49 percent, which is more than the 50 percent required by section 1563(a)(2)(B).
The dispute here involves only the 80-percent test and specifically whether Richard Crain who holds no stock in Vogel Popcorn can be counted as one of the five or fewer persons who hold 80 percent of the stock of each corporation. Plaintiff concedes that if Example (1) of Treas.Reg. § 1.1563-1(a)(3)(ii) is valid, then Richard Crain's stock can be counted toward the required 80 percent. Plaintiff, however, argues that the regulation is unreasonable and clearly inconsistent with the statute. A person must hold some stock in both corporations, plaintiff contends, before his stock in any corporation can be counted in the 80-percent test.
The validity of Treas.Reg. § 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 dissenting. The United States Court of Appeals for the Fourth Circuit reversed the Tax Court in a short per curiam opinion agreeing with the four dissenting judges. 548 F.2d 501, cert. denied, 434 U.S. 904, 98 S.Ct. 300, 54 L.Ed.2d 190 (1977). The Tax Court has reaffirmed its majority view in a second court-reviewed decision, Charles Baloian Co. v. Commissioner, 68 T.C. 620 (1977),...
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United States v. Vogel Fertilizer Company
...to be considered. The "singly or in combination" provision of the Regulation is clearly incompatible with this intent. Pp. 26-32. 225 Ct.Cl. 15, 634 F.2d 497, Stuart A. Smith, Washington, D. C., for petitioner. Ronald C. Jensen, Omaha, Neb., for respondent. Justice BRENNAN delivered the opi......
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