The controlling issue presented by these appeals from the decision of the Tax Court1 in these five consolidated cases is whether the Tax Court erred in determining that Section 1.1563-1(a)(3), Income Tax Regulations, is invalid on the basis that the regulation is inconsistent with 26 U.S.C. § 1563(a)(2).

The taxpayers in this case are five corporations, each of which is owned by T. L. Hunt, his relatives and associates, or by Hunt Dry Goods Co., Inc., in which Hunt and his wife own a controlling interest. The Commissioner determined that each of the taxpayers was a member of one of three "brother-sister groups" within the meaning of 26 U.S.C. § 1563(a)(2). As a result the Commissioner disallowed the $25,000 surtax exemption each taxpayer had used for the years 1973 and 1974 and instead allocated to each taxpayer a pro rata share of the single surtax exemption, which pursuant to 26 U.S.C. § 1561 was all that was allowable to each of the three groups, and assessed the resulting deficiency in income tax payments.

The taxpayers in this case are five corporations, all of which are closely held by a small number of persons. The stipulated percentage of stock ownership owned by each member of the three groups is as follows:

                            GROUP I
                   PERCENTAGE OF STOCK OWNED
                   -------------------------
                        80% Test                  50% Test
                  (Sec. 1563(a)(2)(A))      (Sec. 1563(a)(2)(B))
               ---------------------------  --------------------
               Hunt Dry  Hunt's  T.L. Hunt
                Goods,   Grand    Inc. of
                 Inc.    Plaza     Texas
               --------  ------  ---------
T. L. Hunt      51.70    45.67     66.67           45.67
Linda Cravens   15.52    29.33     11.11           11.11
Sara Hauert     10.11     -0-      11.11            -0-
R. T. Gregg      -0-      8.33      -0-             -0-
R. T. Hunt      13.93     -0-       -0-             -0-
                -----    -----     -----           -----
    TOTAL       91.26    83.33     88.89           56.78
                -----    -----     -----           -----
                              GROUP II
                     PERCENTAGE OF STOCK OWNED
                     -------------------------
                          80% Test                    50% Test
                    (Sec. 1563(a)(2)(A))        (Sec. 1563(a)(2)(B))
               -------------------------------  --------------------
               Hunt's Village      Chester
                Store, Inc.    Patterson, Inc.
               --------------  ---------------
T. L. Hunt         37.086          40.843              37.086
Byron Cravens      16.248          14.559              14.559
Samuel Hauert      14.702           7.985               7.985
Phil Deal          14.285            -0-                -0-
Mae Patterson       -0-            21.000               -0-
                   ------          ------              ------
    TOTAL          82.321          84.387              59.630
                   ------          ------              ------
                            GROUP III
                    PERCENTAGE OF STOCK OWNED
                    -------------------------
                         80% Test                  50% Test
                   (Sec. 1563(a)(2)(A))      (Sec. 1563(a)(2)(B))
                ---------------------------  --------------------
                   Hunt's of     Hunt's of
                Phoenix Village  Pocahontas
                ---------------  ----------
T. L. Hunt          12.925         12.925           12.925
Byron Cravens       28.879         28.879           28.879
Samuel Hauert       12.527         27.527           12.527
C. E. Higgins       20.000         25.000           20.000
Kenneth Taylor      10.000          -0-              -0-
                    ------         ------           ------
  TOTAL             84.331         94.331           74.331
                    ------         ------           ------

The Tax Court held that the stock interests of any shareholder who owned no stock in one or more corporate members of the group could not be counted for the purpose of meeting the 80% test of § 1563(a)(2)(A). Accordingly, the court held that the 80% test had not been met in any instance and decision was entered for the taxpayers. In so doing, the Tax Court followed the majority opinion in Fairfax Auto Parts of Northern Virginia, Inc., v. Commissioner of Internal Revenue, 65 T.C. 798 (1976). The Tax Court's decision in Fairfax was reversed by the Fourth Circuit subsequent to the filing of the decision in the present case. Fairfax Auto Parts of Northern Virginia, Inc., v. Commissioner of Internal Revenue, 548 F.2d 501 (4th Cir. 1977).

The controlling statute, 26 U.S.C. § 1563, in pertinent part reads:

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

* * *NTR

(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.

Section 1.1563-1(a)(3), Income Tax Regulations, 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.

The majority and minority opinions in Fairfax and the parties are in agreement that both the 80% test and the 50% test of § 1563 must be met, and also are in agreement that the 50% test of § 1563(a)(2)(B) has been met. In Fairfax the Tax Court majority concedes that the case before it falls within the definition and the example set out in the regulation just quoted. Similarly, the facts here fall within the definition, particularly in view of the words "singly or in combination" used in the regulation.

The Fourth Circuit in reversing the Tax Court in Fairfax states:

A majority of the Tax Court held that "one must own stock in each corporation before his stock can be taken into account for purposes of the 80 percent test." Accordingly, it invalidated the regulation upon which the Commissioner had relied in assessing the deficiency.

The dissenting members of the court concluded that "stock owned by any or all of the five persons may be taken into consideration in determining whether the 80-percent test has been satisfied. . . ." Under this interpretation, the deficiency was lawfully assessed.

The majority and the dissenting opinions fully set out the arguments supporting both interpretations of the statute, and there is no need to repeat them here. We conclude that the dissent's interpretation of the statute accords with the text of the statute and its legislative history. Accordingly, for the reasons set forth in the dissenting opinion, we reverse the Tax Court, uphold the validity of the regulation, and remand the case for entry of judgment in favor of the Commissioner. (Footnote omitted.) 548 F.2d at 502-03.

We agree with the view of the Fourth Circuit that the excellent dissenting opinion of the Tax Court in Fairfax clearly establishes that 26 U.S.C. § 1563(a)(2)(A) makes no requirement with respect to the 80% test that each of the five or fewer stockholders own stock in the controlled corporations as a prerequisite to counting his stock in making up the 80% requirement. As stated by the Fairfax majority, § 1563(a)(2)(A) is a financial interest test, while § 1563(a)(2)(B) is a control test.

Section 1563(a)(2)(B) relating to the 50% test specifically contains a provision reading: "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." Such language or its equivalent is not contained in § 1563(a)(2)(A). Thus it is apparent that Congress was aware of the language necessary to require that each person whose holdings are considered in applying the 80% test must own stock in each of the controlled corporations. We find nothing in the plain words of the statute which warrants applying such standard with respect to the § 1563(a)(2)(A) test.

The holding of the Tax Court in this case constitutes an unwarranted addition to the statute of a requirement not reflected in the plain terms and language of the statute. As we stated in United States v. Kelly, 519 F.2d 251, 256 (8th Cir. 1975), citing supporting authorities: "If that wording is plain and simple and straightforward, the words employed must be accorded their normal meaning."

We join the Fourth Circuit in holding that the Fairfax dissent accords with the text of the statute and its legislative history.

If contrary to what we have just held, the statute could be considered ambiguous, we hold for the reasons set out in the Fairfax dissent that the legislative history does not support the view of the Tax Court majority.

It reasonably follows that § 1.1563(a)(3), Income Tax Regulations, is not inconsistent with the statute and is not unreasonable for the reasons pointed out in the Fairfax dissent.

The Fairfax dissent, citing strong supporting authorities, correctly holds that the contemporaneous construction of a statute by those charged with its administration is entitled to great respect and should be held invalid only if the regulations are unreasonable and inconsistent with the statute. We hold that the regulation here under attack is not unreasonable and is not inconsistent with the applicable statute.2

We reverse the Tax Court, uphold the validity of the regulation, and remand the case for entry of judgment in favor of the Commissioner.

Reversed.

WEBSTER, Circuit Judge, dissenting.

I respectfully dissent. In my view, Reg. § 1.1563-1(a)(3) effectively nullifies the 80 per cent ownership test of 26 U.S.C. § 1563 and is an extension, rather than an explanation or implementation, of the statute. This invalid regulation penalizes closely held corporations in a way never intended by Congress.

As originally enacted in 1964, § 1563 defined a controlled group as two or more corporations in which any one person controlled at least 80 per cent of the total combined voting power or 80 per cent of the total combined value of the shares. 78 Stat. 116. The test was expanded by the Tax Reform Act of 1969, 83 Stat. 487, 602, to include "the combined stock ownership of five individuals, rather than one individual, in applying the 80 percent test." Hearings on the Subject of Tax Reform Before the House Committee on Ways and Means, 91st Cong., 1st Sess. 5394 (1969). The 50 per cent test was added at the same time.

In my view, the only reasonable construction of § 1563(a)(2), as amended, is that both the 80 per cent (financial interest) test and the 50 per cent (control) test are applied to the same group of five or fewer persons. Thus, a brother-sister controlled group is defined as "two or more corporations if five or fewer persons * * * own stock possessing (A) at least 80 per cent of * * * each corporation, and (B) more than 50 per cent 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." (Emphasis supplied). As Judge Sterrett properly pointed out for the majority in Fairfax Auto Parts of Northern Virginia, Inc. v. Commissioner, 65 T.C. 798, 803 (1976), "each such person" could only refer to the same "five or fewer persons" who also own at least 80 per cent of each corporation.

This construction is fortified by the general explanation contained in the Hearings on the Subject of Tax Reform Before the House Committee on Ways and Means, supra, which explains that the 50 per cent test was added to insure that "this expanded definition of brother-sister controlled group applies only to those cases where the five or fewer individuals hold their 80 percent in a way which allows them to operate the corporations as one economic entity * * *." (Emphasis added). Both the statute and its official explanation speak only of one group of five or fewer persons; it does not expressly or by implication bring within the definition of brother-sister corporations (controlled group) two or more corporations that are not controlled by the same group of five or fewer persons.

The majority opinion draws significance from the fact that in applying the 50 per cent test only the stock of a particular person owned in identical amount in each corporation is considered, whereas the 80 per cent test is not so qualified. The 50 per cent test is, as the majority opinion notes, a test of control. The use of identical interests for purposes of this test is to identify the degree of control necessary to allow the corporations "to operate * * * as one economic entity." The 80 per cent test, on the other hand, is one of financial interest. To me, it makes little sense to depart from the language and purpose of this statute by permitting the financial interest test to be satisfied by a different group of five or fewer persons for each one of the companies within the controlled group. Such a construction renders meaningless the additional 80 per cent test. "If control (more than 50 per cent ownership) is in a few persons, what is added by a requirement that an additional 30 per cent be owned by someone else? The presence of the 80 per cent test only makes sense when viewed as a test of substantial financial interest by the persons in control of the corporations. In other words, the statute requires that five or fewer persons have common control of two or more corporations and that those same five or fewer persons have at least an 80 per cent financial interest in each corporation."1

The undisputed purpose of § 1563 was to prevent persons from using the device of multiple controlled corporations to achieve an unwarranted tax benefit wholly unrelated to the business of the enterprises involved. There is nothing in the legislative history to suggest that Congress intended to penalize companies in which there were five or fewer shareholders. It is not the smallness of the number of persons in each company that triggers § 1563; it is the sameness of that small number. The 80 per cent financial interest requirement is meaningless unless it is the same group of five or fewer persons that own 80 per cent of each company within the controlled group. It is this requirement of "economic entity" which is entirely eviscerated by Reg. § 1-1563-1(a)(3).

Because I conclude that Reg. § 1.1563-1(a)(3) is an unwarranted extension of the statute and therefore invalid, I conclude with the majority of the Tax Court that it should not be followed and that Judge Wiles' opinion in this case was in conformity with § 1563 and should be affirmed.