dissenting.
I respectfully dissent. In my view, Reg. § 1.1563-l(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As originally enacted in 1964, § 1563 defined a controlled group as two or more corporations in which any one person controlled at least 80 per cent of the total combined voting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 *537economic 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-l(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.
. Thomas, Brother-Sister Multiple Corporations — The Tax Reform Act of 1969 Reformed by Regulation, 28 Tax L.Rev. 65, 83 (1972). See also, Bonovitz, Brother-Sister Controlled Groups Under Section 1563: The 80 Percent Ownership Test, 28 Tax Law 511 (1975). Note, Disallowance of Surtax Exemption to Brother-Sister Corporations — Stock Ownership Test Under Sections 1551 and 1563, 1976 B.Y.U.L. Rev. 1000.