United States v. Vogel Fertilizer
Facts:
Vogel Fertilizer is a corporation in Iowa that had only common stock issued and outstanding for the tax years from 1973-1975. Arthur Vogel owned 77.49 percent of the stock for these tax years, while Richard Crain owned the remaining 22.51 percent. In addition to Vogel Fertilizer, Mr. Vogel also owned a corporation by the name of Vogel Popcorn Company. Vogel owned 87.5 percent of the voting power of Vogel Popcorn and between 90.66 and 93.42 percent of its value. Originally, Vogel Fertilizer did not claim a full surtax exemption on its tax return from 1973-1975. Later Vogel Fertilizer filed a timely claim for the refunds asserting that Vogel Fertilizer and Vogel Popcorn were not part of a controlled group. The IRS disallowed the claims, prompting Vogel Fertilizer to take the case to the United States Court of Claims for a refund.

Issue: Specifically, the issue for Vogel Fertilizer and Vogel Popcorn is whether or not the two corporations are considered a controlled group under section 153(a)(2). The IRS argued that the two corporations were a brother-sister controlled group while Vogel Fertilizer argued that the corporations were separate entities. The issue at hand is whether Congress intended the regulation to include only the same five or fewer persons holding stock in each corporation of a group, or whether the ownership of the stock by five or fewer persons includes ownership singly or in combination.

Analysis: Vogel Fertilizer and Vogel Popcorn did not meet the requirements of a controlled group in regards to the same five or fewer people possessing at least 80 percent of the total value. Crain and Vogel cannot be construed as having a controlled group as Crain has no interest or ownership in Vogel Popcorn. In order for the two corporations to be considered a controlled group, “the same indivisible group of five or fewer persons must represent 80 percent of the ownership of each corporation.” The controlled group test was originally implemented to stem the abuse of multiple incorporation to receive unintended tax benefits. Congress originally intended the 80 percent requirement from section 1563(a)(2) to be the main provision to determine if a group of corporations was a controlled group. Though Vogel Fertilizer and Vogel Popcorn met the 50 percent requirement of the regulation, the requirement is an additional provision to the 80 percent requirement and cannot be used alone to determine a controlled group. In order for a group of corporations to be established as a controlled group, the exact same shareholders must meet both the 80 percent and 50 percent requirements.

Holding: The Court of Claims determined that Vogel Fertilizer be issued a refund and that Vogel Fertilizer and Vogel Popcorn Co. were not a brother-sister controlled group according to section 1563(a)(2)(A). Because Crain owned no stock in Vogel Popcorn, the same five or fewer individuals did not own more than 80 percent of both corporations. Crain’s percentage of ownership cannot be added to Vogel’s to fulfill the requirements of section 1563(a)(2)(A) to make the two corporations a controlled group.