Garber Industries Holding Co., Inc. v. Commissioner , 124 T.C. No. 1 ( 2005 )

124 T.C. No. 1UNITED STATES TAX COURT
GARBER INDUSTRIES HOLDING CO., INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 10871-01. Filed January 25, 2005.
P, a closely held corporation, is the parent of an
affiliated group that files consolidated Federal income
tax returns. In April 1998, A sold all of his P shares
to his brother, B. As a result of that sale, B’s
percentage ownership of P increased by more than 50
percentage points.
On its consolidated income tax return for 1998, P
claimed a net operating loss (NOL) deduction of
$808,935 for regular tax purposes and $735,783 for
alternative minimum tax (AMT) purposes. R determined
that the 1998 transaction between A and B resulted in
an ownership change with respect to P within the
meaning of sec. 382(g), I.R.C. In accordance with sec.
382(b), I.R.C., R reduced P’s 1998 NOL deduction, for
both regular tax and AMT purposes, to $121,258.
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1. Held: Sec. 382(l)(3)(A)(i), I.R.C., which
provides that an “individual” and all members of his
family described in sec. 318(a)(1), I.R.C. (i.e., his
spouse, children, grandchildren, and parents) are
treated as one individual for purposes of applying sec.
382, applies solely from the perspective of individuals
who are shareholders (as determined under applicable
attribution rules) of the loss corporation.
2. Held, further, A and B are not treated as one
individual under sec. 382(l)(3)(A)(i), I.R.C.
3. Held, further, A’s sale of his P shares to B
resulted in an ownership change with respect to P
within the meaning of sec. 382(g), I.R.C.
George W. Connelly, Jr., Linda S. Paine, and Phyllis A.
Guillory, for petitioner.
Susan K. Greene and Marilyn S. Ames, for respondent.
HALPERN, Judge: By notice of deficiency dated June 21,
2001, respondent determined deficiencies in petitioner’s Federal
income taxes for petitioner’s 1997 and 1998 taxable (calendar)
years in the amounts of $4,916 and $301,835, respectively. The
parties have settled all issues save one, leaving for our
decision only the question of whether a 1998 stock sale between
siblings that increased one sibling’s percentage ownership of
petitioner by more than 50 percentage points resulted in an
ownership change for purposes of section 382, triggering that
section’s limitation on net operating loss (NOL) carryovers.1
1
The parties have stipulated that (1) if the sec. 382
(continued...)
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That issue turns on the interpretation of section
382(l)(3)(A)(i), a matter of first impression for this Court.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for 1998, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
For the sake of convenience, all percentages are rounded to the
nearest full percent.
FINDINGS OF FACT
The parties submitted this case fully stipulated pursuant to
Rule 122. The stipulation of facts, stipulation of settled
issues, and accompanying exhibits are incorporated herein by this
reference. At the time the petition was filed, petitioner’s
mailing address was in Lafayette, Louisiana.
At the time of petitioner’s incorporation in December 1982,
Charles M. Garber, Sr. (Charles), and his brother, Kenneth R.
Garber, Sr. (Kenneth) (collectively, sometimes, the Garber
brothers), owned 68 percent and 26 percent, respectively, of
petitioner’s common stock. The spouses, children, and other
siblings of the Garber brothers owned the remaining shares of
1
(...continued)
limitation applies to petitioner’s 1998 net operating loss (NOL)
deduction, there is a deficiency in petitioner’s income tax for
that year in the amount of $311,188, and (2) if the sec. 382
limitation does not apply to petitioner’s 1998 NOL deduction,
there is a deficiency in petitioner’s income tax for that year in
the amount of $5,070.
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such stock. The Garber brothers’ parents, who are deceased,
never owned any of petitioner’s stock.
On or about July 10, 1996, petitioner underwent a
reorganization described in section 368(a)(1)(D) (the
reorganization). Pursuant to the reorganization, petitioner
canceled Charles’s original stock certificate for 3,492.85 shares
and issued a new certificate to him for 386 shares. As a result,
Charles’s percentage ownership of petitioner decreased from 68
percent to 19 percent, and Kenneth’s percentage ownership of
petitioner increased from 26 percent to 65 percent.2
On April 1, 1998, Kenneth sold all of his shares in
petitioner to Charles (the 1998 transaction). As a result of the
1998 transaction, Charles’s percentage ownership of petitioner
increased from 19 percent to 84 percent.
On its 1998 consolidated Federal income tax return,
petitioner claimed an NOL deduction in the amount of $808,935 for
regular tax purposes and $728,041 for alternative minimum tax
(AMT) purposes. As one of the adjustments giving rise to the
deficiencies here in question, respondent adjusted the amount of
petitioner’s 1998 NOL deduction, for both regular tax and AMT
purposes, to $121,258 pursuant to section 382(b). Petitioner
assigns error to that adjustment.
2
The parties provided no information regarding the
reorganization other than the fact of its occurrence and the
resulting changes in percentage ownership interests.
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OPINION
I. Substantive Law
A. Overview of Section 382
Section 382(a) limits the amount of “pre-change losses” that
a corporation (referred to as a loss corporation) may use to
offset taxable income in the taxable years or periods following
an ownership change.3 “Pre-change losses” include NOL carryovers
to the taxable year in which the ownership change occurs and any
NOL incurred during that taxable year to the extent such NOL is
allocable to the portion of the year ending on the date of the
ownership change.4 Sec. 382(d)(1). An ownership change is
deemed to have occurred if, on a required measurement date (a
testing date), the aggregate percentage ownership interest of one
or more 5-percent shareholders of the loss corporation is more
than 50 percentage points greater than the lowest percentage
ownership interest of such shareholder(s) during the (generally)
3-year period immediately preceding such testing date (the
testing period). Sec. 382(g)(1) and (2), (i); sec. 1.382-
2(a)(4), Income Tax Regs.
3
Sec. 382(b) prescribes a formula for calculating the
amount of the sec. 382 limitation. See also sec. 382(e) and (f).
4
A net operating loss, as defined in sec. 172(c), is an
NOL carryover to the extent it is carried forward to years
following the year of the loss under rules set forth in sec.
172(b).
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B. Determining Stock Ownership for Purposes of Section 382
Section 382(l)(3)(A) provides that, with certain exceptions,
the constructive ownership rules of section 318 apply in
determining stock ownership. Under the first of those
exceptions, set forth in section 382(l)(3)(A)(i), the family
attribution rules of section 318(a)(1) and (5)(B) do not apply;5
instead, an individual and all members of his family described in
section 318(a)(1) (spouse, children, grandchildren, and parents)
are treated as one individual.
C. Regulations
The family aggregation rule of section 382(l)(3)(A)(i) is
further addressed in section 1.382-2T(h)(6), Temporary Income Tax
Regs., 52 Fed. Reg. 29686 (Aug. 11, 1987). Paragraph (h)(6)(ii)
of that section repeats the general rule that, for purposes of
section 382, an individual and all members of his family
described in section 318(a)(1) are treated as one individual.6
5
Sec. 318(a)(1) provides that an individual is treated as
owning the stock owned by his spouse, his children, his
grandchildren, and his parents. Sec. 318(a)(5)(B) provides that
stock constructively owned by an individual by operation of the
family attribution rule of sec. 318(a)(1) is not reattributed
from such individual to other individuals under that rule. For
example, stock constructively owned by an individual through
attribution from his spouse under sec. 318(a)(1) is not
reattributed from that individual to his parent under that
provision.
6
The family aggregation rule does not apply, however, to
any family member who, without regard to aggregation, would not
be a 5-percent shareholder. Sec. 1.382-2T(h)(6)(iii), Temporary
(continued...)
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Paragraph (h)(6)(iv) provides further that, if an individual may
be treated as a member of more than one family under paragraph
(h)(6)(ii), such individual will be treated as a member of the
family with the smallest increase in percentage ownership (to the
exclusion of all other families).
II. Arguments of the Parties
A. Petitioner’s Argument
Petitioner argues that, although siblings are not family
members described in section 318(a)(1), Charles and Kenneth are
nonetheless members of the same family when such determination is
made by reference to their parents and grandparents. That is, as
sons, they are both members of each family consisting of a parent
and that parent’s family members described in section 318(a)(1).
Similarly, as grandsons, they are both members of each family
consisting of a grandparent and that grandparent’s family members
described in section 318(a)(1). Accordingly, petitioner argues,
Charles and Kenneth are treated as one individual under section
382(l)(3)(A)(i), with the result that transactions between them
are disregarded for purposes of section 382.
6
(...continued)
Income Tax Regs., 52 Fed. Reg. 29686 (Aug. 11, 1987). That
exception in turn does not apply if the loss corporation has
actual knowledge of such family member’s stock ownership. Id.;
sec. 1.382-2T(k)(2), Temporary Income Tax Regs., supra at 29694.
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B. Respondent’s Argument
Respondent maintains that the family aggregation rule
applies solely with reference to living individuals. Under that
view, inasmuch as none of the parents and grandparents of the
Garber brothers was alive at the commencement of the 3-year
testing period immediately preceding the 1998 transaction, from
that point forward there was no individual, within the meaning of
section 382(l)(3)(A)(i), whose family members (as described in
section 318(a)(1)) included both Charles and Kenneth. It
follows, respondent argues, that Charles and Kenneth are not
treated as one individual for purposes of section 382 and that
the 1998 transaction resulted in an ownership change with respect
to petitioner under section 382.
III. Analysis
A. General Principles of Statutory Construction
As a general matter, if the language of a statute is
unambiguous on its face, we apply the statute in accordance with
its terms, without resort to extrinsic interpretive aids such as
legislative history. E.g., Fed. Home Loan Mortgage Corp. v.
Commissioner, 121 T.C. 129, 134 (2003) (citing United States v.
Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)). Accordingly,
our initial inquiry is whether the language of section
382(l)(3)(A)(i) is so plain as to permit only one reasonable
interpretation insofar as the question presented in this case is
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concerned. See, e.g., Robinson v. Shell Oil Co., 519 U.S. 337,
340 (1997). That threshold determination must be made with
reference to the context in which such language appears. Id.B. Language of Section 382(l)(3)(A)(i)
Section 382(l)(3)(A)(i) provides as follows:
(A) Constructive ownership.–-Section 318 (relating
to constructive ownership of stock) shall apply in
determining ownership of stock, except that–-
(i) paragraphs (1) and (5)(B) of section
318(a) shall not apply and an individual and all
members of his family described in paragraph (1)
of section 318(a) shall be treated as 1 individual
for purposes of applying this section * * *
Respondent apparently would limit our textual analysis to a
single word. According to respondent, Charles and Kenneth are
not common members of any individual’s family under section
382(l)(3)(A)(i) “[b]ecause the commonly used meaning of the term
‘individual’ does not include a deceased parent”. We believe
respondent’s focus is too narrow. As stated by the Court of
Appeals for the Fifth Circuit:
However, even apparently plain words, divorced from the
context in which they arise and in which their creators
intended them to function, may not accurately convey
the meaning the creators intended to impart. It is
only, therefore, within a context that a word, any
word, can communicate an idea.
Leach v. FDIC, 860 F.2d 1266, 1270 (5th Cir. 1988). In our view,
the question is not whether the noun “individual”, standing
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alone, typically denotes a living person–-typically it does.7
The question, rather, is whether the language of section
382(l)(3)(A)(i) as a whole definitively establishes, one way or
the other, that the identification of a (living) individual whose
family members are aggregated thereunder must be made, as
respondent maintains (or need not be made, as petitioner
maintains), coincident with the determination of stock ownership
under section 382 (i.e., on a testing date or at any point during
a testing period).8 Stated negatively, is the language of
section 382(l)(3)(A)(i) so plain as to preclude either party’s
position, as so identified?
We are satisfied that the language of section
382(l)(3)(A)(i) can variably (and reasonably) be interpreted as
being consistent with each party’s position in this case. That
is, there is nothing in the language of the statute that would
make either party’s position patently untenable. While a rule
attributing stock owned by an individual on a measurement date to
members of his family presupposes that the individual is alive,
7
Cf. Jonson v. Commissioner, 353 F.3d 1181, 1184 (10th
Cir. 2003)(decedent’s estate is not an “individual” eligible for
innocent spouse relief under sec. 6015(c)), affg. 118 T.C. 106(2002).
8
Putting the question somewhat differently, at the time
stock ownership is to be determined, must the individual
referenced in sec. 382(l)(3)(A)(i) be available (alive) for a
family portrait, or need he or she only occupy a place in the
family tree?
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the same need not be said of a rule (such as that contained in
section 382(l)(3)(A)(i)) that identifies (by reference to an
individual) the members of a family that, on some measurement
date, are to be treated as a single shareholder. By the same
token, the language of section 382(l)(3)(A)(i) certainly does not
compel the conclusion that the individual whose family members
are so aggregated need not be alive on that measurement date.
Because the answer to our inquiry is not apparent from the face
of the statute, we may look beyond the language of section
382(l)(3)(A)(i) for interpretive guidance.
C. Legislative History of Section 382(l)(3)(A)(i)
Congress enacted the family aggregation rule of section
382(l)(3)(A)(i) as part of its overhaul of section 382 included
in the Tax Reform Act of 1986, Pub. L. 99-514, sec. 621, 100
Stat. 2085, 2254 (hereafter, cited simply as 1986 Act or 1986 Act
sec. x.). The rule first appeared in the conference committee
bill.9 The conference committee report that accompanied that
bill (the 1986 conference report) does not address the temporal
aspect of family aggregation identified above: “The family
9
Both the House and Senate versions of revised sec. 382
contained family attribution provisions rather than a family
aggregation rule. See H.R. 3838, 99th Cong., 1st Sess. sec.
321(a) (1985) (provision designated as sec. 382(n)(3)(A)); H.R.
3838, 99th Cong., 2d Sess. sec. 621(a) (1986) (provision
designated as sec. 382(k)(3)(A)).
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attribution rules of sections 318(a)(1) and 318(a)(5)(B) do not
apply, but an individual, his spouse, his parents, his children,
and his grandparents are treated as a single shareholder.” H.
Conf. Rept. 99-841 (Vol. II), at II-182 (1986), 1986-3 C.B. (Vol.
4) 1, 182.10
D. Other Considerations
1. Family Aggregation Under Pre-1986 Act Section 382
a. General Structure of the Statute
Prior to the amendment of section 382 by the 1986 Act,
section 382 contained separate rules for ownership changes
resulting from purchases and redemptions, see former sec. 382(a),
and those resulting from corporate reorganizations, see former
sec. 382(b). Under the “purchase” rules of former section
382(a), ownership changes were ascertained by reference to the
holdings of the 10 largest shareholders at the end of the
corporation’s taxable year (as compared to their holdings at the
beginning of such taxable year or the preceding taxable year).
Former sec. 382(a)(1) and (2).
10
As noted supra part I.B., the members of an individual’s
family described in sec. 318(a)(1) (to which sec. 382(l)(3)(A)(i)
refers) are his spouse, children, grandchildren, and parents.
Regarding the possible significance of the conferees’ reference
to “grandparents” in lieu of “grandchildren”, see infra part
III.E.4.
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b. Family Attribution and Aggregation
Intrafamily sales were excluded from the operation of former
section 382(a) by means of stock attribution (as opposed to
shareholder aggregation) rules. Specifically, purchases of stock
from persons whose stock ownership would be attributed to the
purchaser under the family attribution rules of section 318 were
ignored for purposes of determining whether an ownership change
by “purchase” had occurred. See former sec. 382(a)(3) and (4).
Although family members were potentially subject to aggregation
for purposes of determining the 10 largest shareholders at
yearend, that rule applied only if loss corporation stock owned
by one was attributed to the other under the family attribution
rules of section 318.11 Former sec. 382(a)(2) and (3). For that
reason, the aggregation rule of former section 382(a)(2), unlike
the aggregation rule of section 382(l)(3)(A)(i), necessarily
applied as of the date on which stock ownership was measured (in
the case of former section 382(a)(2), at yearend). Accordingly,
no inference can be drawn from former section 382(a)(2) as to
whether, as respondent maintains, the identification of the
individuals whose family members are aggregated under section
11
Persons aggregated under former sec. 382(a)(2) were then
disaggregated for purposes of measuring changes in stock
ownership. See former sec. 1.382(a)-1(d)(3)(i), Income Tax Regs.
(as revised in 1968). Thus, the actual number of persons whose
stock ownership was subject to scrutiny at yearend could be
greater than 10.
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382(l)(3)(A)(i) occurs as of the date on which stock ownership is
measured.
2. Practical Consequences of Each Party’s
Interpretation of Section 382(l)(3)(A)(i)
a. Petitioner’s Interpretation
Under petitioner’s interpretation of section
382(l)(3)(A)(i), an individual would be aggregated with (and
therefore could, without any section 382 consequences, sell loss
corporation shares to) not only his spouse, children,
grandchildren, and parents, but also his siblings, nephews,
nieces, grandparents, in-laws, great-grandchildren, aunts,
uncles, first cousins, and great-grandparents.12 It is difficult
to believe that Congress intended to expand the scope of exempted
intrafamily sales so significantly (as compared to both the then-
existing version of section 382, see supra part III.D.1.b., and
the House and Senate versions of revised section 382, see supra
12
As a member of each parent’s family (i.e., in his
capacity as a child of those parents), an individual would be
aggregated with his parents’ children (his siblings),
grandchildren (his nephews and nieces), and parents (his
grandparents). As a member of his spouse’s family (i.e., in his
capacity as her spouse), an individual would be aggregated with
his spouse’s parents (his mother- and father-in-law). As a
member of each child’s family (i.e., in his capacity as a parent
of those children), an individual would be aggregated with each
child’s spouse (his sons- and daughters-in-law) and grandchildren
(his great-grandchildren). As a member of each grandparent’s
family (i.e., in his capacity as a grandchild of those
grandparents), an individual would be aggregated with his
grandparents’ children (his aunts and uncles), grandchildren (his
first cousins), and parents (his great-grandparents). See secs.
382(l)(3)(A)(i), 318(a)(1).
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note 9) with nary a mention of that objective in the 27 pages
devoted to section 382 in the 1986 conference report.
b. Respondent’s Interpretation
Respondent’s interpretation of section 382(l)(3)(A)(i) is
perhaps even more troubling than petitioner’s. First, it has the
potential for being just as expansive as petitioner’s
interpretation.13 More importantly, respondent’s interpretation
leads to arbitrary distinctions. As relevant to this case,
respondent would have us believe that the ability of siblings to
sell loss corporation shares among themselves without any section
382 consequences is wholly dependent on the continued good health
of their parents. We see no rational basis for Congress’s having
drawn a distinction in this context between siblings whose
parents happen to be living and those whose parents happen to be
deceased; the former are no more related than the latter.
E. A Third Interpretation
1. Introduction
Our own analysis of the legislative evolution of section
382(l)(3)(A)(i) leads us to believe that both parties have
erroneously interpreted that provision. For the reasons
discussed below, we conclude that Congress most likely intended
13
Respondent’s interpretation of the statute differs from
petitioner’s in that respondent would require that the relevant
parent, spouse, child, or grandparent of the individual in
question be living when stock ownership is measured. See supra
note 12.
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the aggregation rule of section 382(l)(3)(A)(i) to apply solely
from the perspective of individuals who are shareholders (as
determined under the attribution rules of section 382(l)(3)(A))
of the loss corporation.14 In practical terms, our conclusion
dictates that we sustain respondent’s determination in this case,
even though we disagree with his interpretation of the statute.
2. 1986 Act Revisions to Section 382
a. Relevant Fundamental Changes to the Statute
Among other things, section 621(a) of the 1986 Act replaced
the “purchase” rules of former section 382(a) with the concept of
the “owner shift”, defined broadly to include any change in the
respective ownership of the stock of a corporation. Sec.
382(g)(2)(A). The occurrence of an owner shift involving a 5-
percent shareholder, see sec. 382(g)(2)(B), (k)(7), is one of two
occasions for opening the corporation’s stock transfer books to
determine whether the aggregate percentage ownership interest of
one or more such shareholders has increased by more than 50
percentage points within the relevant “lookback” (testing)
period.15 See sec. 382(g)(1), (i). While the owner shift
14
In other words, composite shareholders are to be
constructed only around individuals who directly or indirectly
(through an entity or by means of an option) own shares of the
loss corporation.
15
The other such occasion is the occurrence of an equity
structure shift (in general, most corporate reorganizations).
See sec. 382(g)(1), (3).
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“trigger” presupposes some type of transaction in the stock of
the loss corporation, see H. Conf. Rept. 99-841 (Vol. II), supra
at II-174, 1986-3 C.B. (Vol. 4) at 174, the requisite increase in
stock ownership within the resulting testing period need not be
attributable to a purchase, redemption, or, indeed, any
transaction in which shares actually change hands, see sec.
382(g)(1)(A) and (B).
b. Consequences for Family Attribution: Changes in
Family Status
Under a system in which an increase in one’s percentage
ownership of a corporation need not be associated with a
transaction in which shares actually change hands, a
straightforward application of the family attribution rules of
section 318(a) could produce “artificial” ownership increases;
i.e., ownership increases solely attributable to changes in
family status. For instance, under the attribution rules, the
ownership percentage of an individual who marries the sole
shareholder of a loss corporation would thereby increase from
zero to 100 percent. If the wedding occurred during a testing
period (which could be triggered, for instance, by the subsequent
issuance of a relatively small number of additional shares to a
key employee), then the increase in the nonshareholder spouse’s
deemed ownership percentage would result in an ownership
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change.16 A similar result presumably would occur if the
shareholder legally adopted someone during a testing period. See
sec. 318(a)(1)(B).
c. House Bill Provision Regarding Changes in Family
Status
The House version of revised section 382 provided that the
family attribution rule of section 318(a)(1) would apply “by
assuming that the family status as of the close of the testing
period was the same as the family status as of the beginning of
the testing period”. H.R. 3838, 99th Cong., 1st Sess. sec.
321(a) (1985) (provision designated as sec. 382(n)(3)(A)).
Although the report of the Committee on Ways and Means
accompanying the House bill provides no additional insight, see
H. Rept. 99-426, at 266 (1985), 1986-3 C.B. (Vol. 2) 1, 266, the
practical effect of that provision would have been to eliminate
the possibility that a change in family status during a testing
period could, in and of itself, contribute to an ownership
change.17 The conference committee, in addition to substituting
16
Note that the foregoing problem did not arise under
former sec. 382(a), since the nonshareholder spouse’s ownership
increase would not have been attributable to a purchase. See
former sec. 382(a)(1)(B)(i).
17
Returning to our marriage hypothetical, under the House
bill’s provision, the couple’s relationship on the testing date
would have been deemed to be the same as it was at the beginning
of the testing period (i.e., not married), with the result that
the nonshareholder spouse’s ownership percentage would have been
deemed to be zero throughout the testing period.
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family aggregation for family attribution, dropped the provision
in the House bill regarding changes in family status.18
d. Observations
In the context of the parties’ arguments in this case, the
conference committee’s excision of the House bill provision
regarding changes in family status is somewhat puzzling.
Specifically, under each party’s interpretation of section
382(l)(3)(A)(i), the family aggregation rule adopted by the
conferees would produce the same “artificial” ownership increases
that the House bill provision eliminated in the context of
attribution. In terms of our marriage hypothetical, the addition
of the shareholder spouse to the nonshareholder spouse’s family
unit during the testing period would increase the ownership
percentage of that family unit by 100 percentage points during
that period. If, however, the family aggregation rule applies
solely from the perspective of shareholders of the loss
corporation, there would be no separate family unit headed by the
nonshareholder spouse in our hypothetical and, consequently, (1)
no increase in ownership attributable to the marriage, and (2) no
need for the remedial provision contained in the House bill.
Under that interpretation of the family aggregation rule, the
18
The Senate version of the bill contained no such
provision, providing instead for the application of the family
attribution rules of sec. 318 without modification. H.R. 3838,
99th Cong., 2d Sess. sec. 621(a) (1986) (provision designated as
sec. 382(k)(3)(A)).
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conference committee’s excision of the House bill’s family status
provision makes perfect sense.19
3. Revisiting the Language of the Statute
That our interpretation of section 382(l)(3)(A)(i) provides
a cogent explanation for the conference committee’s action is of
no consequence if a plain reading of the statute does not permit
that interpretation. See supra part III.A. The use of the term
“individual” in section 382(l)(3)(A)(i), however, does not
preclude a contextual interpretation pursuant to which the set of
individuals contemplated by Congress (i.e., individuals who own
shares of the loss corporation) is smaller than the universe of
all possible individuals (i.e., all living beings). More
importantly, we are satisfied that our interpretation proceeds
from an entirely natural reading of the statute. Given a stock
ownership rule that operates by reference to an individual and
other persons who are defined in terms of their relationship to
19
We recognize that, even if the family aggregation rule
were not limited to shareholders, the “tiebreaker” rule of sec.
1.382-2T(h)(6)(iv), Temporary Income Tax Regs., 52 Fed. Reg.
29686, would preclude the artificial ownership increase
illustrated above by treating the shareholder spouse as a member
of his own family rather than that of the nonshareholder spouse.
See supra part I.C. Of course, that regulation was not in
existence when the conference committee acted on H.R. 3838.
Accordingly, it is not relevant to our analysis of such committee
action. Regarding the remedial effect of the regulation under
our interpretation of the family aggregation rule, see infra part
III.E.5.
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that individual, it is hardly a stretch to surmise that the rule
presupposes the shareholder status of the referenced individual.
4. Revisiting the 1986 Conference Report
Having concluded that our interpretation of section
382(l)(3)(A)(i) does not do violence to the plain language of the
statute, we return to the legislative history to determine
whether it is any more supportive of our view than it is of the
views of the parties. As indicated above, see supra part III.C.
and note 10, the 1986 conference report contradicts the statutory
language by including an individual’s grandparents (rather than
his grandchildren) among the family members who are aggregated
for purposes of section 382. If that disconnect were
attributable to a simple typographical error, one might
reasonably expect that the subsequently issued report of the
Joint Committee on Taxation explaining the 1986 Act (the so-
called Blue Book) would point out the error. See, e.g., Staff of
Joint Comm. on Taxation, General Explanation of Tax Legislation
Enacted in the 104th Congress at 81 n.59 (J. Comm. Print 1996),
(noting that the conference report accompanying H.R. 3448, the
bill eventually enacted as the Small Business Job Protection Act
of 1996, mistakenly refers to the lessee rather than the lessor
in the context of new section 168(i)(8)). The Blue Book for the
1986 Act, however, retains the reference in the 1986 conference
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report to “grandparents” in the context of section
382(l)(3)(A)(i). Staff of Joint Comm. on Taxation, General
Explanation of the Tax Reform Act of 1986 at 311 (J. Comm. Print
1987).
As is the case with the conference committee’s excision of
the family status provision of the House bill, see supra part
III.E.2.d., the substitution of “grandparents” for
“grandchildren” in the 1986 conference report makes perfect sense
if the family aggregation rule applies solely from the
perspective of individuals who are shareholders of the loss
corporation. Section 318(a)(1) (to which section 382(l)(3)(A)(i)
refers) is phrased in terms of the family members (spouse,
children, grandchildren, and parents) from whom shares are
attributed. The converse of that rule is that shares owned by an
individual are attributed to that individual’s spouse, parents,
grandparents, and children. The substitution of “grandparents”
for “grandchildren” in the 1986 conference report (reiterated in
the 1986 Blue Book) therefore suggests that Congress intended
individuals to be aggregated with the same family members to whom
their shares would otherwise be attributed under section
318(a)(1), which in turn suggests that Congress intended the
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family aggregation rule to apply from the perspective of
individuals who are shareholders of the loss corporation.20
5. Revisiting the Regulations
Having concluded that our interpretation of the family
aggregation rule (1) does not violate the plain meaning rule, and
(2) arguably finds support in the legislative history of section
382(l)(3)(A)(i), we would nonetheless be hard pressed to adopt
that interpretation if it were inconsistent with respondent’s 17-
year-old “legislative” regulations. See, e.g., Chevron U.S.A.,
Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-844
(1984); see also sec. 382(m) (directing the Secretary to
“prescribe such regulations as may be necessary or appropriate to
carry out the purposes of this section”). As is the case with
the statute, see supra part III.E.3., the language of the
relevant regulation presents no such obstacle. See sec. 1.382-
2T(h)(6), Temporary Income Tax Regs, supra at 29686.
Nor does our interpretation of the statute render
superfluous the “tiebreaker” rule of paragraph (h)(6)(iv) of the
above-cited regulation. See supra note 19. To the contrary,
that rule serves the useful purpose of precluding purely
“vicarious” ownership increases that could otherwise occur under
20
We do not mean to suggest that sec. 382(l)(3)(A)(i)
should be interpreted as incorporating a modified version of sec.
318(a)(1) (i.e., one that substitutes grandparents for
grandchildren); such an interpretation presumably would violate
the plain meaning rule. See supra part III.A.
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our interpretation of the statute (as well as those of the
parties). For instance, if a husband and wife each own shares of
a loss corporation, and the husband purchases additional shares
from his mother, the ownership percentage of the family unit
centered on the wife would increase as a result of the otherwise
exempt transaction.21 The tiebreaker rule precludes that result
by treating the wife as a member of the family unit centered on
her husband rather than a member of the family unit centered on
her, since such inclusion would result in the smallest increase
(zero) in percentage ownership.22 See supra part I.C.; supra note
21.
IV. Conclusion
We hold that the family aggregation rule of section
382(l)(3)(A)(i) applies solely from the perspective of
individuals who are shareholders (as determined under the
21
Since the purchased shares would be included in the
holdings of the family unit centered on the husband both before
and after the sale, the percentage ownership of the husband-
centric family unit would remain unchanged. However, since the
purchased shares would not be included in the holdings of the
family unit centered on the wife until after the sale, the
percentage ownership of the wife-centric family unit would
increase as a result of the sale. A similar result would occur
if the purchaser’s child (rather than his wife) were a
shareholder.
22
As is the case with changes in family status, see supra
note 16, this problem did not arise under former sec. 382(a),
since the “vicarious” ownership increase would not have been
attributable to a purchase by the wife. See former sec.
382(a)(1)(B)(i).
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attribution rules of section 382(l)(3)(A)) of the loss
corporation. Inasmuch as an individual shareholder’s family
consists solely of his spouse, children, grandchildren, and
parents for these purposes, sibling shareholders are not
aggregated under section 382(l)(3)(A)(i) if none of their parents
and grandparents is a shareholder of the loss corporation.23
Since Kenneth and Charles were not children or grandchildren of
an individual shareholder of petitioner at any relevant time,
they are not aggregated for purposes of applying section 382 to
the facts of this case. It follows that Charles’s purchase of
shares from Kenneth in 1998 resulted in an ownership change with
respect to petitioner as contemplated in section 382(g).
23
We recognize that our interpretation of the statute
suggests a distinction between siblings who are the children or
grandchildren of a shareholder and those who are not, a
distinction that is arguably just as arbitrary as the
distinctions resulting from respondent’s interpretation of the
statute. See supra part III.D.2.b. That problem would not arise
if the tiebreaker rule of sec. 1.382-2T(h)(6)(iv), Temporary
Income Tax Regs., supra at 29686, were inapplicable in any
instance in which such application would have the effect of
exempting a transaction (such as a sale between siblings) that
otherwise would have increased the percentage ownership of the
purchaser’s family unit. Cf. sec. 1.382-4(d)(6)(i), Income Tax
Regs. (rules treating an option as exercised do not apply if a
principal purpose of the option is to avoid an ownership change
by having it treated as exercised); T.D. 9063, 2003-2 C.B. 510,
511 (discussing the need for additional regulations dealing with
changes in family composition in the context of sec. 382).
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To reflect the foregoing,
Decision will be entered for
respondent and in accordance with
the parties’ stipulations as to the
correct amount of petitioner’s income
tax deficiencies.