58 T.C. 918">*919 The Commissioner determined deficiencies in income tax as follows:

The only issue for decision is whether the three petitioners were component members of a brother-sister controlled group of corporations within the meaning of section 1563(a)(2), I.R.C. 1954, and therefore each entitled under section 1561(a) to only one-third of a full $ 25,000 surtax exemption for each of the years 1966, 1967, and 1968.

FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with accompanying exhibits, is incorporated herein by this reference.

Petitioners Superior Beverage Co. of Redding and Red Bluff, Inc. (the "Redding Co." or "Redding"), Superior Beverage Co. of Chico, Inc. (the "Chico Co." or "Chico"), and Superior Beverage Co. of Marysville, Inc. (the "Marysville Co." or "Marysville"), are California1972 U.S. Tax Ct. LEXIS 68">*70 corporations principally engaged in the business of distributing alcoholic beverages. Each petitioner filed a Federal corporate income tax return for each of the calendar years 1966, 1967, and 1968 with the district director of internal revenue at San Francisco, Calif. At the time their petitions herein were filed, the corporations' principal places of business were at Redding, Chico, and Marysville, Calif., respectively.

Prior to their respective dates of incorporation, the petitioners' businesses had been operated by the Lakeside Distributing Co., a partnership in which one A. E. Huckins held an 80-percent interest, Wallace W. Campbell held a 10-percent interest, and J. Harley Allbritton held a 10-percent interest. The Lakeside partnership had distributed alcoholic beverages in three areas of California: Redding and Red Bluff; Chico and Willows; and Marysville-Yuba City. The Redding Co. was organized on March 2, 1956, after the partners, none of whom lived in the Redding and Red Bluff area, decided that it would be necessary to have local management there. The remaining portion of the partnership's business was incorporated on March 4, 1957, under 58 T.C. 918">*920 the name of Superior Beverage 1972 U.S. Tax Ct. LEXIS 68">*71 Co. of Chico, Inc., at the insistence of the manufacturer of the principal beer the partnership was then distributing. The Marysville Co. was separately organized on March 29, 1957, in order to capitalize on a new business opportunity which had presented itself in the Marysville-Yuba City region and in the hope of reversing a loss situation which had previously been experienced in that area.

At all relevant times petitioners were controlled by a group of persons consisting of A. E. Huckins and the following members of his family: His wife, Alice B. Huckins; his children, D. Pete Huckins and Diann Huckins Allen; his sister, Lucille Huckins; his brother, Donald E. Huckins; and Donald's children, Donna Rose, Lisa Ann, and Jeffrey A. Huckins. A. E. Huckins' children were both more than 21 years old on January 1, 1966. A. E. Huckins was an employee of all three petitioners during the years at issue, but his children, nieces and nephew, who held stock in Redding and Chico during such years, were not then employed by any of the companies. Alice B. Huckins has never participated in the management or operations of the petitioners.

On December 31 of 1966, 1967, and 1968, the outstanding stock 1972 U.S. Tax Ct. LEXIS 68">*72 of Redding and Chico was owned as follows:

The following schedule shows transactions in the Redding Co. stock prior to December 31, 1966: 58 T.C. 918">*921

58 T.C. 918">*922 The following schedule shows transactions in the Chico Co. stock prior to December 31, 1966:

³ Sale of Mrs. Campbell's entire shareholdings in the company.

^{41972 U.S. Tax Ct. LEXIS 68">*81} Sale of shares by Lucille Huckins to each of the children of Donald Huckins.

⁵ Shareholdings on Dec. 31 of each of the years at issue.

The Marysville Co., upon its incorporation, issued a total of 1,000 shares of its common stock, 500 shares to the Chico Co. and 500 shares to Bowman Beverages Co. The Bowman Beverages Co. sold its 500 shares of common to the Redding Co. on January 20, 1958. Thereafter there were no further transfers of the Marysville Co.'s stock at least through the year 1968. At all relevant times each petitioner has had only one class of stock.

Each outstanding share of stock of the respective companies was entitled to one vote upon each matter submitted to a stockholders' vote, but none of the bylaws specified a number or percentage of votes required to pass a resolution. In regard to the election of directors, petitioners' respective bylaws gave shareholders the standard cumulative-voting options, in conformity with section 2235 of the California Corporations Code. At least one meeting of the shareholders of each 1972 U.S. Tax Ct. LEXIS 68">*75 petitioner was to be held every year, and the bylaws of each company required its president to call a special shareholders meeting "for any purpose or purposes" upon the request of the holders of not less than one-tenth of all the outstanding shares of the corporation entitled to vote.

The following persons were petitioners' directors and officers during 1966, 1967, and 1968:

58 T.C. 918">*923 Only four directors of the Chico Co. were elected for the years 1966, 1967, and 1968, although the articles of incorporation and bylaws of each of the petitioners provided that there should be five directors. Paragraph Sixth of petitioners' respective articles of incorporation granted authority to the holders of the voting stock of each corporation to 1972 U.S. Tax Ct. LEXIS 68">*76 change the authorized number of directors by a duly adopted amendment to the corporation's bylaws. Apart from the provisions of the bylaws pertaining to the voting of shares which are stated above, nothing in the articles or bylaws of the corporations indicated the number of assenting votes required to adopt such an amendment. The stockholders were granted no express authority by either the articles or the bylaws of the companies to amend the bylaws in any other respect. General authority to alter, amend, or repeal the bylaws, and to adopt new bylaws, was vested in the respective boards of directors.

Directorships to be filled by reason of increases in the number of directors were to be filled by election at an annual or special stockholders meeting. In the event that a vacancy was created in one of the petitioners' boards of directors, the majority of the remaining directors of that company were empowered to fill such vacancy. Directors were to hold office until their successors were qualified pursuant to their election at an annual stockholders meeting. None of petitioners' bylaws contained an express provision regarding the removal of directors.

At least one regular meeting of 1972 U.S. Tax Ct. LEXIS 68">*77 the board of directors of each company was to be held each year. Special meetings of petitioners' boards of directors could be called by or at the request of their respective presidents or any two directors. A majority of the number of directors fixed by the bylaws constituted a quorum in each case, and the assent of a majority of the number of directors present at a meeting was necessary to pass a resolution.

Article VI, section 3, of the bylaws of each company gave it a right of first refusal in respect of the transfer of its stock, as follows:

Option to Purchase. No transfer of stock shall be valid, until 10 days after the company, through its secretary, shall have had written notice of the proposed sale, the number of shares proposed to be sold, the price at which the proposed sale is to be made, and the name of the prospective buyers; and during said 10 days the company shall have the option to buy, at the price set by seller, any shares of outstanding stock before its owner or person in whose name it stands on its books, may transfer them. Should the company not have the funds to buy the shares or should it deem it undesirable to purchase them for any other reason, the other 1972 U.S. Tax Ct. LEXIS 68">*78 existing shareholders shall have the option for an additional 10 days of purchasing the shares at the price set by the seller in proportion to the number of shares then held by said shareholder. If not exercised within this time, any sale to third persons shall be valid.

This provision was endorsed upon each stock certificate issued by each of the petitioners and designated thereon as a section of the bylaws. There were no other agreements or understandings between 58 T.C. 918">*924 the stockholders and any of the companies or between the stockholders inter sese regarding the transfer of the companies' outstanding stock. The written notice required by the foregoing provision was not given prior to any of the transfers of petitioners' stock set forth in the two schedules appearing above, and all sales of petitioners' stock were made at prices negotiated by the parties involved.

Each petitioner claimed a surtax exemption in the amount of $ 25,000, and reported taxable income in excess of such amount, on its income tax return for each of the years 1966, 1967, and 1968. In his notices of deficiency to the respective petitioners, the Commissioner determined that together the petitioners constituted "a controlled 1972 U.S. Tax Ct. LEXIS 68">*79 group of corporations, as defined in section 1563 of the Internal Revenue Code, and therefore the provisions of section 1561 of the Code are applicable for the apportionment of a single surtax exemption of $ 25,000.00 among * * * the * * * members of the controlled group" for each of the years 1966, 1967, and 1968. The petitioners have timely filed an election to claim multiple surtax exemptions under section 1562, I.R.C. 1954, for the year 1968, but such election was not reflected in the Commissioner's recomputation of petitioners' respective income tax liabilities. Petitioners have made no such election for either of the years 1966 or 1967, and they have at no time consented to an apportionment plan within the meaning of section 1561(a)(2), I.R.C. 1954.

OPINION

Section 1561(a), I.R.C. 1954, 4 provides that if a group of corporations constitutes a "controlled group of corporations" on a December 31, the component members of such group are entitled to only one surtax exemption of $ 25,000 to be apportioned among them for their respective taxable years which include such December 31. The Commissioner contends that petitioners constituted a "controlled group of corporations" in accordance 1972 U.S. Tax Ct. LEXIS 68">*80 with section 156358 T.C. 918">*925 (a)(2), 5 which in substance defines that term to include a "brother-sister controlled group," and that definition in turn is applicable here by its terms if A. E. Huckins owned, directly or constructively, at least 80 percent of the outstanding stock of all three petitioners on December 31 of 1966, 1967, and 1968. In the absence of petitioners' consent to a plan for an uneven apportionment of such exemption, the Commissioner has allocated one-third of $ 25,000 to each petitioner for each of the years at issue. The petitioners object to the Commissioner's determination that A. E. Huckins owned more than 80 percent of each company's stock. We think that his determination must be approved.

Section 1563(e)^{61972 U.S. Tax Ct. LEXIS 68">*84} prescribes a 1972 U.S. Tax Ct. LEXIS 68">*82 set of attribution rules for determining whether one person possesses the requisite 80-percent ownership in several corporations which qualifies them as component members 58 T.C. 918">*926 of a brother-sister controlled group. These rules are made applicable to section 1563(a)(2) by section 1563(d)(2). ^{71972 U.S. Tax Ct. LEXIS 68">*85} There is no dispute that A. E. Huckins is deemed to have owned his wife's interest in the couple's commonly held stock in Redding and Chico (2,070 and 2,750 shares, respectively), pursuant to section 1563(e)(5). In addition, under sections 1563(e)(6)(B) and 1563(f)(2)(A), ⁸ Huckins constructively owned the shares belonging to his adult children, Diann Huckins Allen and D. Pete Huckins, which amounted to 300 shares of Redding Co. stock and 400 shares of Chico Co. stock. Thus, A. E. Huckins is treated as owning at least 79 percent ((2,070 + 300) /3,000) and 78.75 percent ((2,750 + 400) /4,000) of the total number of outstanding shares of the Redding and Chico companies, respectively, on December 31 of 1966, 1967, and 1968. Since these companies each owned 50 percent of the outstanding stock of the Marysville Co., the ownership of at least 78.88 percent (1/2 X (79 percent + 78.75 percent)) of that 1972 U.S. Tax Ct. LEXIS 68">*83 company's stock is also attributed to A. E. Huckins under section 1563 (e)(4). This much of the computation is not in dispute.

However, section 1563(c)(1)(C)^{91972 U.S. Tax Ct. LEXIS 68">*87} provides in substance that, for the purpose of determining whether several corporations constitute a controlled group, certain stock is to be treated as "excluded stock" and not counted in computing a common owner's percentage of ownership in such corporations. Prior to its amendment by section 401 (d)(2) of the Tax Reform Act of 1969, 83 Stat. 487, section 1563(c)(2)(B) provided as follows in respect of such excluded stock:

SEC. 1563. DEFINITIONS AND SPECIAL RULES.

(c) Certain Stock Excluded. --

* * * *

58 T.C. 918">*927 (2) Stock treated as "excluded stock". --

* * * *