dissenting: I agree with the majority that the warrants constitute stock of Investors Trust Ltd., but disagree with the conclusion that under the provisions of sections 331(a) (2) and 333(a) (2) of the Internal Revenue Code of 1939, Investors Trust Ltd. was not a foreign personal holding company. The language of section 333(a) (2) is precise. It states that for the purpose of determining whether a foreign corporation is a foreign personal holding company under section 331(a) (2), an individual shall be considered as owning the stock owned by his sisters. In this case it is stipulated that Eaton is an American citizen and that his two sisters owned the bearer warrants. When considered to be stock, these warrants constitute over 50 percent of the stock of Investors Trust Ltd. Therefore, the language of the statute, literally construed, states that Eaton is considered, for the purposes of section 331(a) (2), as owning over 50 percent of the stock of Investors Trust Ltd. In my opinion we should construe this statute to mean exactly what its language says unless the congressional intent is otherwise. In my opinion the congressional intent in the enactment of this statute was that it be given a literal construction.
The committee reports with respect to the original enactment of the foreign personal holding company act in 1937 specify that it is not necessary that an individual actually own any stock in order to be counted in the five individuals who constitute the company’s stock ownership. The Senate committee report (S. Rept. No. 1242, 75th Cong., 1st Sess., p. 22 (1937), 1937-2 C.B. 609) with respect to this bill (with exceptions not here pertinent) stated that the Senate committee agreed with the bill as proposed by the Ways and Means Committee of the House of Representatives, and quoted the House report in full. In the House report (H. Rept. No. 1546, 75th Cong., 1st Sess., 1937-2 C.B. 620), the following appears under “New Section 333 — Stock Ownership in a Foreign Personal Holding Company”:
Section 333 sets forth the provisions governing the determination of stock ownership for the purposes of ascertaining whether a foreign personal holding company’s stock is owned by a United States group, and whether amounts receivable from personal service contracts or for the use of corporation property are includible as foreign personal holding company income. These provisions are the same as those provided in the case of personal holding companies subject to Title IA. See discussion “New Section 384.” [1] [Emphasis supplied.]
The discussion in this same report under “New Section 354, 1936 A.ct — Stock Ownership” (1937-2 C.B. 614), includes the following:
The provisions discussed below establish, methods of bringing into the ownership of an individual stock actually or constructively owned by others. As under Title IA of the present law, it is not necessary that the individual who may be counted to make five individuals, under the constructive ownership rules, actually own stock himself. To exclude the case where he owned no stock would permit avoidance by the employment of the device of placing the stock in others whose actions would 'be subject to the individual’s control 'because of the family or other relationship existing between him and the actual owner.
In my opinion the majority in this case is reading out of the statute a provision against avoidance which Congress specifically placed in the statute. I do not agree with the majority that to apply the statute as written and as Congress intended it should he applied as shown by the committee reports, reaches an absurd result.
Even though all of the facts in the instant case were submitted by stipulation, the burden of proof is still upon petitioners and they have not shown that Eaton did not transfer the bearer warrants to his sisters for the specific purpose of tax avoidance for himself and the minority stockholders. The only intimation in the record in this regard is a letter written to the representatives of the two petitioners at the time their stock was purchased with Eaton acting as broker. In that letter Eaton stated with respect to Investors Trust Ltd., “My children and I will have a very substantial investment in the company. I plan to give it my personal attention.”
The very nature of the warrants which carry the presumption of ownership in the bearer facilitates “avoidance by the employment of the device of placing the stock in others whose actions would be subject to the individual’s control.” The majority opinion recognizes that “It is obvious that to implement the purpose for which the statute was enacted it was necessary to have a constructive stock ownership provision” for otherwise “a United States shareholder could split his holdings amongst members of his family and increase the shareholders to more than five United States individuals while retaining effective control by reason of the family relationship.” In my opinion it is likewise necessary that the constructive stock ownership provisions prohibit a U.S. citizen from transferring his entire holdings to members of his family who are citizens and residents of a foreign country while retaining effective control by reason of the family relationship, thus permitting income to accumulate for the family benefit without 'being subject to U.S. tax and avoiding tax for those selected U.S. stockholders whose participation in his controlled foreign corporation is mutually agreeable. The importance to the controlling U.S. citizen of having other citizens or residents of the United States participate as stockholders in his controlled foreign corporation might well of itself be a coercive influence to have dividends distributed to them if they are to be subject to U.S. tax under the foreign personal holding company act absent such distribution.
I would not interpret Alvord v. Commissioner, 277 F. 2d 713 (C.A. 4, 1960), reversing 32 T.C. 1, relied on by the majority, as supporting the 'conclusion that the “compulsive force of the tax” is not to be exerted on minority shareholders because they “cannot command” the declaration of a dividend. As I interpret that opinion, it was the fact that the Government, which was attempting to exact the tax, prohibited the distribution of a dividend with which to pay the tax which persuaded the Court of Appeals to conclude that the statute did not there apply. A lack of ability to “command” because of Government prohibition of the action, creates a very different situation from that of the minority stockholder who acquires his stock knowing that the majority stockholder or stockholders will be able to control the corporation.
Certainly, as the majority points out, there is some inequity in taxing a minority shareholder who is not in control of the corporation and thereby able to force a declaration of a dividend. In my opinion this inequity exists no more in a case like the present, where all of the stock of an American citizen is held by him constructively because of being actually owned by his foreign relatives, than in the situation where the majority of su'ch stock is held actually by an American citizen who might for reasons of benefit only to him, such as a loss during a particular year from other business endeavors, prefer to leave the corporate income in the foreign corporation even though he is required to include in his taxable income his proportion of the undistributed foreign personal holding company supplement P net income.
That it was the intent of the statute to require that minority shareholders who were not in control of the corporation include in their taxable income their proportionate share of such foreign personal holding company net income is likewise made specifically clear in the committee reports (1937-2 CJB. 624) :
In its application, section 337 reaches all United States shareholders who own stock in the foreign personal holding company on the specified day. The section may, therefore, reach individuals having only a minority interest in the foreign company. However, that is not considered very likely to happen. In the ordinary course of events, strangers do not hold stock in a family owned “incorporated poeketbook,” whether incorporated under foreign or domestic law. Moreover, the definition placed upon the term “foreign personal holding company” should exclude foreign corporations whose securities are listed on any exchange so that Americans generally might purchase such securities as investments. If any individual is a minority shareholder of a foreign personal holding company, it is more than likely that such individual is a member of, or is in some way connected with, the family owning and controlling the foreign company. If by chance an individual should be a minority shareholder in a foreign corporation under such circumstances that he would not be aware of the company’s classification as a foreign personal holding company, he would not be subjected to any penalties for failing to comply with section 337. At most, his failure would stay the tolling of the statutory period of limitations upon assessment and collection for a period of seven years and he'would, within such period, be subjected to a deficiency assessment when the fact became known.
The present record does not show that the two petitioners in this case were not aware of the complete situation with respect to Investors Trust Ltd., including the fact that under the strict application of the provisions of the foreign personal holding company act they might be taxable on their proportionate share of the undistributed supplement P net income of that corporation. Even if such a lack of knowledge were to be assumed without proof, the committee report shows that the intent of Congress was that shareholders come within the provisions of the statute.
In my opinion it is totally unjustified, under the facts of this case, to read out of the statute not only the ordinary meaning of the words used therein, but the intent of the statute as shown in the committee reports accompanying the act. To construe the statute as the ma j ority in this case does, provides a pattern which those individuals so fortunate as to have close foreign relatives may follow to avoid the application of the foreign personal holding company statute to U.S. citizens selected to be minority shareholders.
The evil at which the foreign personal holding company act was directed was the accumulation of income by U.S. citizens or residents through investment in foreign holding companies, the investment income of which would not be subject to U.S. tax. The statute was not directed only to the shareholder or shareholders who actually owned a majority of the stock, but to each U.S. shareholder, so long as five or less U.S. shareholders were the “controlling” shareholders within the definition of sections 331(a) (2) and 333(a) (2). Under these sections “actual ownership” is not necessary for “control.” The statute was intended to force the “controlling” shareholders as defined therein to have annual distributions made so that each U.S. shareholder, and not just those shareholders who owned a majority of the stock, would be subject to tax.
I would hold Investors Trust Ltd. to be a foreign personal holding company.
AtkiNS, A, agrees with this dissent.“New Section 354” was an amendment to the provisions of the personal holding companies act respecting domestic personal holding companies which became sec. 503, I.R.C. 1939. The provisions of sec. 503, I.R.C. 1939, are identical with the provisions of sec. 333, I.R.C. 1939.