Alumax Inc. and Consolidated Subsidiaries v. Commissioner

109 T.C. No. 8

• Court: United States Tax Court
• Decided: September 30, 1997
• Docket: 7779-95
• Status: Unknown

Opinion

109 T.C. No. 8

UNITED STATES TAX COURT

ALUMAX INC. AND CONSOLIDATED SUBSIDIARIES, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 7779-95. Filed September 30, 1997.

For certain years prior to the period at issue, petitioners, company A (A) and its subsidiaries (A group), were members of an affiliated group of corpora- tions within the meaning of sec. 1504(a)1 that had A as its common parent, which filed consolidated returns for those corporations. During that time, A had issued and outstanding two classes of stock, each of which pos- sessed 50 percent of the voting power of all classes of its stock, one class of which was held by certain corporations (B group stockholders) who were members of an affiliated group of corporations (B group) within the meaning of sec. 1504(a), and the other class of which was held by certain other corporations (C group stockholders). Company B (B) filed consolidated re-

1 Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years at issue. All Rule references are to the Tax Court Rules of Practice and Procedure. - 2 -

turns for years preceding the period at issue as the common parent of the B group.

Around the beginning of the period at issue, A amended its certificate of incorporation (certificate) and thereby effected certain changes in its capital structure and in the rights of its capital stock. Around the same time, A and its stockholders executed a stockholders agreement (agreement) that also effected certain changes in the rights of A's capital stock. Thereafter, A had two classes of stock outstanding that had the rights stated in the certificate and the agree- ment and that were held by the B group stockholders and the C group stockholders, respectively.

For each year during the period at issue, B filed a consolidated return in which it claimed to be the common parent of an affiliated group within the meaning of sec. 1504(a) that consisted of corporations in both the A group and the B group. During the course of the examination by the Internal Revenue Service of those consolidated returns, either B or its successor exe- cuted written agreements extending the period of limi- tations under sec. 6501 for each year during the period at issue for the assessment of tax due from the corpo- rations that were included in those returns.

Held: For each year during the period at issue, petitioners were not members of the affiliated group within the meaning of sec. 1504(a) that had B as its common parent, and, consequently, they are not entitled to join in the consolidated return that B filed for each of those years in which it claimed to be the common parent of a group of corporations that included petitioners. Held, further, the period of limitations under sec. 6501 for each of the years during the period at issue for the assessment of tax due from the A group has not expired.

Willard B. Taylor, Michael Lacovara, Philip L. Graham, Jr.,

and Michael W. Martin, for petitioners.

Lewis R. Mandel and Robert E. Marum, for respondent. - 3 -

OPINION2

CHIECHI, Judge: Respondent determined the following defi-

ciencies in petitioners' Federal income tax:

Taxable Year Ended Deficiency Dec. 31, 1981 $5,663,086 Dec. 31, 1983 11,454,565 Dec. 31, 1984 40,433,142 Dec. 31, 1985 48,511,681 Nov. 24, 19861 23,175,558

1 We shall refer to the taxable year ended Nov. 24, 1986, as 1986.

The principal issues for decision are:3

(1) Were petitioners members of the affiliated group within

the meaning of section 1504(a) that had Amax Inc. (Amax) as its

common parent, which filed a consolidated Federal income tax

return (consolidated return) for each of the years 1984, 1985,

and 1986 that included petitioners?4 We hold that they were not

2 Unless otherwise indicated, our Opinion pertains to the years 1984, 1985, and 1986 (period at issue). 3 Correlative issues also remain as to whether petitioners are entitled for 1981 and 1983 to general business credits that they carried back (1) from 1984 to 1981 and (2) from 1985 and 1986 to 1983. Respondent claims, and petitioners do not dispute, that resolution of those correlative issues is governed by the Court's holdings on the principal issues presented. 4 We shall sometimes refer (1) to the corporations that are petitioners in this case and that were included in the consoli- dated returns filed by Amax as the common parent of an affiliated group for the years 1984, 1985, and 1986 as petitioners' group and (2) to Amax and its subsidiaries, excluding petitioners' group, that were included in those consolidated returns as the Amax group. - 4 -

and that therefore petitioners may not join in any of those

consolidated returns.

(2) Has the period of limitations under section 6501 for

each of the years 1984, 1985, and 1986 for the assessment of tax

due from petitioners' group expired? We hold that it has not.

This case was submitted fully stipulated. All of the facts

that have been stipulated are so found unless otherwise stated

herein.

General

Alumax Inc. (Alumax), a Delaware corporation organized by

Amax on October 17, 1973, had its principal place of business in

Norcross, Georgia, at the time the petition was filed.5 At all

relevant times Alumax has been an integrated aluminum company

engaged in the production and sale of primary aluminum, semi-

fabricated products, and diverse fabricated products.

Amax, a New York corporation organized in 1887, has been at

all relevant times a worldwide supplier of metals and energy, as

well as a manufacturer and distributor of metals-related products

and chemicals.6 Prior to December 5, 1973, Amax' principal

businesses were in aluminum, coal, gold, and molybdenum. Amax

conducted the aluminum business, which it had entered during

5 Since its incorporation, Alumax has operated under different names. 6 Since its incorporation, Amax has operated under different names. - 5 -

1962, through certain domestic and foreign subsidiaries (Amax

Aluminum Group).

On December 5, 1973, Amax caused Amax Realty Corp. (Amax

Realty), Bemax Realty Corp. (Bemax), and Cemax Corporation

(Cemax), three of its wholly owned subsidiaries that were part of

the Amax Aluminum Group, to transfer to Alumax substantially all

of their respective assets. In consideration for those trans-

fers, Alumax assumed substantially all of the respective liabili-

ties of those corporations and issued to them 70, 58, and 52

shares, respectively, of its common stock. On the same date,

Amax transferred to Alumax the capital stock of substantially all

of its other subsidiaries that were part of the Amax Aluminum

Group. In consideration for those transfers, Alumax issued to

Amax 320 shares of its common stock. After the transfers on

December 5, 1973, Alumax had 500 shares of common stock issued

and outstanding.

The 1974 Restructuring of Alumax

The 1974 Restated Certificate of Incorporation and the 1974 Stockholders Agreement

On January 15, 1974, Alumax filed with the Office of the

Secretary of State of Delaware (Delaware Secretary of State) a

restated certificate of incorporation (1974 restated certificate

of incorporation) that was effective as of that date (1974

restructuring). On a date not specified in the record, Alumax

and certain of its stockholders executed a stockholders agreement - 6 -

dated as of January 16, 1974 (1974 stockholders agreement) that

contained certain of the provisions that were contained in the

1974 restated certificate of incorporation. Unless otherwise

indicated, the 1974 restated certificate of incorporation ef-

fected, inter alia, the following.

Alumax was authorized to issue (1) 500 shares of class A

common stock (class A common stock) that had a par value of $100

a share and (2) 500 shares of class B common stock (class B

common stock) that had a par value of $100 a share. As a result

of the 1974 restructuring, (1) the 320 shares of the Alumax

common stock that Amax held as of January 15, 1974, were changed

into 70 shares of the class A common stock and 250 shares of the

class B common stock, and (2) the 70, 58, and 52 shares of the

Alumax common stock that Amax Realty, Bemax, and Cemax, respec-

tively, held as of that date were changed into 70, 58, and 52

shares of the class A common stock.

On January 30, 1974, pursuant to an agreement between Amax

and Mitsui & Co. Ltd. (Mitsui Japan), a Japanese general trading

company engaged at all relevant times, inter alia, in the trading

of base and refined metals including aluminum and the manufactur-

ing of consumer and industrial products in Japan, Amax sold to

Mitsui Japan all 250 shares of the class B common stock that it

held for $125 million in cash.

Each share of each class of Alumax common stock had one

vote, and any action of the Alumax stockholders required an - 7 -

affirmative vote of a majority of the outstanding shares of each

such class. The affirmative action of a majority of the out-

standing shares of each class of Alumax common stock was required

(1) to amend, modify, or repeal the 1974 restated certificate of

incorporation and (2) to amend or repeal the Alumax bylaws.

The 1974 stockholders agreement provided that Alumax was to

pay dividends on or with respect to its stock at such times and

in such amounts as its board of directors (Alumax board) deter-

mined was appropriate in light of its earnings, cash flow, and

capital requirements. Each share of each class of Alumax common

stock participated equally in all dividends and other distribu-

tions on or with respect to such stock, including distributions

in liquidation or dissolution and dividends or other distribu-

tions as may have been duly declared by the Alumax board.

The Alumax board, which consisted of 10 voting and 2 nonvot-

ing members, exercised all corporate powers (Alumax board corpo-

rate powers) unless otherwise expressly provided by law, the 1974

restated certificate of incorporation, and/or the Alumax bylaws.

Except as not pertinent here, the class A common stock and the

class B common stock had the following voting rights with respect

to the Alumax board membership: (1) The class A common stock had

the right by affirmative vote of a majority of the outstanding

shares of that stock entitled to vote to elect, remove with or

without cause, accept resignations of, and fill vacancies in the

offices of one-half of the voting members of the Alumax board; - 8 -

(2) the class B common stock had the right by affirmative vote of

a majority of the outstanding shares of that stock to elect,

remove with or without cause, accept resignations of, and fill

vacancies in the offices of the remaining half of those voting

members; and (3) both classes of Alumax common stock had the

right by affirmative vote of a majority of the outstanding shares

of each such class of stock to elect, remove with or without

cause, accept resignations of, and fill vacancies in the offices

of any of the nonvoting members of the board and to increase or

decrease the number of those Alumax board members.

In exercising the Alumax board corporate powers,

(1) each voting member of the Alumax board had one vote;

(2) a majority of the five voting members of the Alumax

board who were elected by the class A common stock and a majority

of the five voting members of that board who were elected by the

class B common stock were necessary to constitute a quorum for

transacting business at any meeting of that board; and

(3) any action by the Alumax board required an affirmative

vote of a majority of each of the five voting members of that

board who were elected by the class A common stock and a majority

of the five voting members of that board who were elected by the

class B common stock, who were present and voting.

Amendments to the 1974 Restated Certificate of Incorporation and the 1974 Stockholders Agreement

On April 29, 1974, the 1974 restated certificate of incor- - 9 -

poration was amended in order, inter alia, to restate (1) Article

Fourth (d) to provide that the Alumax board had 12, instead of

10, voting members and 3, instead of 2, nonvoting members and

(2) Article Fifth to provide that at any meeting of the Alumax

board 3 of the 6 voting members of that board who were elected by

the class A common stock and 3 of the 6 voting members of that

board who were elected by the class B common stock were necessary

to constitute a quorum for transacting business.

On June 26, 1974, the 1974 stockholders agreement was

amended to incorporate the amendments made to the 1974 restated

certificate of incorporation on April 29, 1974.

Transfers of Certain Alumax Stock During 1975

During 1975, Amax transferred the 70 shares of the class A

common stock that it held to its wholly owned subsidiary, Amax

Securities, Inc. (Amax Securities), a Delaware corporation and a

member of the Amax group. Thereafter, small numbers of the

shares of the class A common stock were from time to time trans-

ferred to certain unidentified subsidiaries of Amax that were

members of the Amax group.

On March 31, 1975, Mitsui Japan sold 25 of the 250 shares of

the class B common stock that it held to Nippon Steel Corporation

(Nippon Steel), a Japanese corporation engaged at all relevant

times in a wide range of manufacturing, product development and

service activities in the metals, chemicals, ceramics, electron-

ics, information, communications, environmental preservation, - 10 -

engineering, and construction fields. On February 27, 1980,

Mitsui Japan sold 175 of the 225 shares of the class B common

stock that it held to its wholly owned subsidiary Mitsui & Co.

(U.S.A.), Inc. (Mitsui USA), a New York corporation that con-

ducted Mitsui Japan's principal trading activities in the United

States. (We shall sometimes refer collectively to Mitsui Japan

and Mitsui USA as the Mitsui group or as the Mitsui group stock-

holders.)

The 1984 Restructuring of Alumax

On March 9, 1984, Alumax filed with the Delaware Secretary

of State a restated certificate of incorporation (1984 restated

certificate of incorporation) that was effective as of January 1,

1984 (1984 restructuring). Also on March 9, 1984, Alumax and its

stockholders executed a stockholders agreement that also was

effective as of January 1, 1984 (1984 stockholders agreement) and

that contained certain of the provisions that were contained in

the 1984 restated certificate of incorporation. Unless otherwise

indicated, the 1984 restated certificate of incorporation ef-

Alumax was authorized to issue (1) 250 shares of class A

common stock (Alumax class A common stock) that had a par value

of $100 a share, (2) 250 shares of class B common stock (Alumax

class B common stock) that had a par value of $100 a share, and

(3) 250 shares of class C common stock (Alumax class C common

stock) that had a par value of $100 a share. However, no share - 11 -

of the Alumax class A common stock could be issued and outstand-

ing at any time that any share of the Alumax class C common stock

was issued and outstanding, and no share of the Alumax class C

common stock could be issued and outstanding at any time that any

share of the Alumax class A common stock was issued and outstand-

ing. As a result of the 1984 restructuring, (1) the 250 shares

of the class A common stock that Amax Realty, Bemax, Cemax, and

Amax Securities held were exchanged for 250 shares of the Alumax

class C common stock; (2) all shares of the class A common stock

were retired and became authorized and unissued shares of the

Alumax class A common stock; and (3) the 250 shares of the class

B common stock that Mitsui Japan, Mitsui USA, and Nippon Steel

held became 250 shares of the Alumax class B common stock. (We

shall sometimes refer (1) to the holders of the Alumax class C

common stock as the class C stockholders or the Amax group

stockholders and (2) to the holders of the Alumax class B common

stock as the class B stockholders or the Mitsui/Nippon group

stockholders.) On or about March 31, 1984, Mitsui Japan sold to

Mitsui USA the 50 shares of the Alumax class B common stock that

it held. Accordingly, all 250 shares of the Alumax class B

common stock were thereafter held by Mitsui USA and Nippon Steel.

Throughout any period during which any Alumax class C common

stock was outstanding, (1) each share of the Alumax class B

common stock had one vote, and each share of the Alumax class C

common stock had four votes on each matter submitted to the - 12 -

Alumax stockholders; and (2) at each meeting of the Alumax

stockholders, or a class of those stockholders, the holders of a

majority of the outstanding shares of the Alumax common stock

entitled to vote, present in person or by proxy, constituted a

quorum. Throughout that period, at each meeting of the Alumax

stockholders, the Alumax stockholders were entitled to vote in

the aggregate (stockholder aggregate voting requirement), and not

by class, on all matters submitted to them (stockholder

nonrestricted matters) except certain stockholder restricted

matters discussed below, and the affirmative vote of a majority

of votes cast on the stockholder nonrestricted matters was

required to effect any stockholder action. However, (1) any

stockholder action on any stockholder nonrestricted matter was

not to take effect for 14 calendar days if it was taken over the

express objection of the Mitsui group--the holder of a majority

of the outstanding shares of the Alumax class B common stock, and

(2) any such stockholder action was not to take effect at all if,

as a result of the Mitsui group stockholders' objection and

certain other events discussed below, shares of the Alumax class

C common stock were purchased by the Mitsui group or converted at

the election of the Amax group stockholders into shares of the

Alumax class A common stock.

An affirmative vote of a majority of the outstanding shares

of each class of Alumax common stock, voting by class and not in

the aggregate (stockholder class voting requirement), was re- - 13 -

quired (1) to amend, modify, or repeal the 1984 restated certifi-

cate of incorporation; (2) to make, amend, or repeal the bylaws

(1984 bylaws); and (3) to effect any stockholder action on the

following matters (stockholder restricted matters) throughout the

period during which any Alumax class C common stock was outstand-

ing:

(a) A merger of Alumax;

(b) an acquisition or a disposition of any material asset

(i.e., an asset which had, or would have upon acquisition, an

aggregate net book value on Alumax' books equal to at least 5

percent of its net worth as shown in its consolidated balance

sheet, prepared in accordance with generally accepted accounting

principles subject to modification to reflect Alumax and its

subsidiaries as a consolidated group separate from the Amax

group) (material asset);

(c) a partial or complete liquidation or dissolution of

Alumax;

(d) a capital appropriation or an asset disposition request

of $30 million or more;

(e) the election or any other selection or dismissal of any

chief executive officer of Alumax (CEO);

(f) any transaction involving Alumax and any affiliate of

Alumax (i.e., any stockholder of Alumax, any holder of a 20

percent or greater equity interest in such a stockholder, or any

entity in which any of the foregoing persons held a 20 percent or - 14 -

greater equity interest) in which Alumax made a loan to the

affiliate or that was not in the ordinary course of business.

During 1984, 1985, and 1986, Alumax' net worth as shown in

its consolidated balance sheets was $738 million, $736 million,

and $783 million, respectively. Accordingly, an asset consti-

tuted a material asset and its acquisition or disposition consti-

tuted a restricted matter that was subject to the stockholder

class voting requirement if it had a book value of at least $36

million; i.e., 5 percent of Alumax' net worth.

During the period at issue, Alumax had total assets of $1.7

billion. Accordingly, a capital appropriation or an asset

disposition request of approximately 1.8 percent of Alumax' total

assets; i.e., $30 million, constituted a restricted matter that

was subject to the stockholder class voting requirement.

stock was outstanding, the Alumax board was required to declare

and pay dividends to the extent of 35 percent of Alumax' net

income to the extent permitted by law (mandatory dividend provi-

sion).

The 1984 restated certificate of incorporation contained two

facially inconsistent provisions relating to the manner in which

dividends were to be allocated between the Alumax class B common

stock and the Alumax class C common stock. Paragraph (b)(i)(A)

of Article Fifth stated: "Dividends on Class C Common Stock

shall be declared and paid at a rate per share equal to one- - 15 -

quarter (1/4) the rate per share then declared on Class B Common

Stock". Paragraph (b)(i)(C) of Article Fifth stated:

Except as otherwise provided in this subparagraph (i), each share of Common Stock outstanding shall partici- pate equally, share and share alike, in all dividends and other distributions on or with respect to the corporation's Common Stock, including distributions in liquidation or dissolution.

All the dividends that were declared and paid by the Alumax

board pursuant to the mandatory dividend provision during the

period April 20, 1984, through April 25, 1986, were allocated 80

percent to the class B stockholders and 20 percent to the class C

stockholders. On October 26, 1984, the one occasion during the

period April 20, 1984, through July 10, 1986, on which the Alumax

board declared dividends in excess of the amount required by the

mandatory dividend provision (excess dividends), it allocated

those excess dividends 50 percent to the class B stockholders and

50 percent to the class C stockholders.

On July 10, 1986, the Alumax board adopted a resolution

amending the 1984 restated certificate of incorporation that was

approved by the Alumax stockholders and that restated Paragraph

(b)(i)(A) of Article Fifth of that certificate to state: "Divi-

dends on Class C Common Stock pursuant to * * * [the mandatory

dividend provision] shall be declared and paid at a rate per

share equal to one-quarter (1/4) the rate per share then declared

on Class B Common Stock."

Dividends that were declared and paid by the Alumax board - 16 -

pursuant to the mandatory dividend provision on July 25, 1986,

and on October 24, 1986, were allocated 80 percent to the class B

stockholders and 20 percent to the class C stockholders. On July

11, 1986, and on September 26, 1986, the two occasions after July

10, 1986, on which the Alumax board declared excess dividends, it

allocated such dividends 50 percent to the class B stockholders

and 50 percent to the class C stockholders.

On November 17, 1986, the Alumax board adopted a resolution

amending the 1984 restated certificate of incorporation that was

approved by the Alumax stockholders and that added the following

paragraph (b)(i)(D) to Article Fifth of that certificate:

Anything contained in this Article FIFTH to the con- trary notwithstanding, a dividend of $4,532 per share for each share outstanding of Class B Common Stock and a dividend of $1,133 per share for each share outstand- ing of Class C Common Stock shall be declared payable on or before * * * [a specified date] * * * to stock- holders of record at the close of business on the business day immediately preceding * * * [a specified date] in respect of the portion of the corporation's fiscal quarter ending on December 31, 1986 that shall have elapsed up to and including * * * [that] date.

On November 20, 1986, the Alumax board declared dividends pursu-

ant to paragraph (b)(i)(D) of Article Fifth of the 1984 restated

certificate of incorporation.

The Alumax board, which consisted of six voting members and

two nonvoting members (special class directors) throughout any

period during which any share of the Alumax class C common stock

was outstanding, exercised all corporate powers unless otherwise

expressly provided by law, the 1984 restated certificate of - 17 -

incorporation, and/or the Alumax 1984 bylaws. The Alumax class B

common stock and the Alumax class C common stock had the follow-

ing voting rights with respect to the Alumax board membership:

(1) The Alumax class B common stock had the right by affirmative

vote of a majority of the outstanding shares of that stock to

elect, remove with or without cause, accept resignations of, and

to fill vacancies in the offices of two of those voting members

(class B directors); and (2) the Alumax class C common stock had

the right by affirmative vote of a majority of the outstanding

shares of that stock to elect, remove with or without cause,

accept resignations of, and fill vacancies in the offices of the

remaining four of those voting members (class C directors).

The class B directors and the class C directors, voting in

the aggregate and not by class, had the right to elect one of the

two special class directors (elected special class director).

That director was required to be any full-time employee of Alumax

other than the CEO of Alumax, who was required to be the other

special class director (CEO special class director). Pursuant to

a side letter agreement dated and effective as of March 9, 1984,

among Mitsui Japan, Mitsui USA, and Amax, the class B directors

were to nominate a person to serve as the elected special class

director, and the class C directors were required to vote for

that person in the election of the elected special class director

and were not allowed to remove that person from that office

unless a majority of the class B directors voted in favor of such - 18 -

removal.

The class B stockholders were entitled to appoint no more

than two observers at each Alumax board meeting. Notices of

meetings of the Alumax board were sent to those observers who

were permitted to attend and participate in all discussions, but

not vote, at those meetings.

stock was outstanding, (1) each of the two class B directors had

one vote and each of the four class C directors had two votes on

each matter submitted to the Alumax board for a vote, and (2) a

majority of the total number of directors constituted a quorum.

Throughout that period, at each meeting of the Alumax board, the

Alumax directors were entitled to vote in the aggregate (director

aggregate voting requirement), and not by class, on all matters

submitted to them (director nonrestricted matters) except certain

director restricted matters discussed below, and the affirmative

vote of a majority of votes cast on the director nonrestricted

matters by the directors present and voting at a meeting at which

a quorum was present and voting was required to effect any board

action. However, (1) any board action on any director

nonrestricted matter was not to take effect for 14 calendar days

if it was taken over the express objection of any class B direc-

tor, and (2) any such board action was not to take effect at all

if, as a result of that class B director's objection and certain

other events discussed below, shares of the Alumax class C common - 19 -

stock were purchased by the Mitsui group or converted at the

election of the Amax group stockholders into shares of the Alumax

class A common stock.

An affirmative vote of a majority of the class B directors

and class C directors, voting by class and not in the aggregate

(director class voting requirement), was required to effect board

action on six director restricted matters (director restricted

matters) that were identical to the six stockholder restricted

matters.

During 1984, 1985, and 1986, the Alumax board voted on

various matters at regular quarterly meetings that were held in

January, April, July, and October of each such year. In addition

to the matters on which the Alumax board voted at those meetings,

the Alumax board voted (1) on various matters at a special

meeting that was held in September 1986, (2) on various matters

by unanimous consent in lieu of a board meeting on four separate

occasions, and (3) by unanimous consent either in lieu of a board

meeting or at a special board meeting on 10 separate occasions.

During the period at issue, the Alumax board voted on a total of

approximately 134 matters.

The Alumax board held a regular quarterly meeting on January

27, 1984, prior to the date (i.e., March 9, 1984) on which Alumax

filed the 1984 restated certificate of incorporation with the

Delaware Secretary of State but after the date (i.e., January 1,

1984) on which that certificate, once filed, was to be effective. - 20 -

At that meeting, the Alumax board, which consisted of 12 voting

members, one-half of whom were elected by the class A common

stock and one-half of whom were elected by the class B common

stock, voted by class on the following 11 matters: (1) The

election of new officers; (2) three capital appropriations for

the expansion of two different facilities and the construction of

a plant in amounts not in excess of $15,864,000, $2,413,000, and

$250,686,000, respectively, that totaled $268,963,000 and that

represented, by value, approximately 57 percent of the

$469,159,525 of total capital appropriations and asset disposi-

tions of Alumax during the period at issue; (3) the Alumax 5-year

forecast for 1984 through 1988; (4) the Alumax capital expendi-

ture plan for that 5-year period; (5) the Alumax 1984 profit

plan; (6) the Alumax 1984 capital expenditure proposal; (7) the

declaration of dividends; and (8) two matters relating to em-

ployee compensation plans.

On March 8, 1984, which also was prior to the date on which

the 1984 restated certificate of incorporation was filed with the

Delaware Secretary of State and was one of the occasions on which

the Alumax board acted by unanimous consent either in lieu of a

board meeting or at a special board meeting, the Alumax board, as

it was structured prior to the 1984 restructuring, voted by class

on certain matters relating to that restructuring (e.g., the

amendment and restatement in the 1984 restated certificate of

incorporation of the 1974 restated certificate of incorporation, - 21 -

the amendment of the Alumax bylaws, the amendment in the 1984

stockholders agreement of the 1974 stockholders agreement, and

the approval of the issuance of the Alumax class C common stock

that was authorized by the 1984 restated certificate of incorpo-

ration). The holders of the class A common stock and the class B

common stock also voted by class on the first two of the forego-

ing matters before the 1984 restated certificate of incorporation

was filed with the Delaware Secretary of State.

During the period at issue, the director restricted matters

on which the Alumax board voted pursuant to the director class

voting requirement were: (1) The approval of a $100 million

sale-leaseback transaction that represented, by value, approxi-

mately 21 percent of the $469,159,525 of total capital appropria-

tions and asset dispositions of Alumax during the period at

issue; (2) the reelection of Robert Marcus (Mr. Marcus) as the

CEO and president of Alumax at Alumax board meetings held on

April 20, 1984, April 26, 1985, and April 25, 1986; (3) the

election of Paul Drack as interim president of Alumax on August

14, 1986, to succeed Mr. Marcus who resigned on August 12, 1986,

effective as of August 15, 1986; and (4) the approval of a loan

not in excess of $22,680,000 to Mitsui Japan and/or Mitsui USA.

During 1986, certain other matters on which the Alumax board

voted by class were: (1) The amendments to the 1984 restated

certificate on July 10, 1986, and on November 17, 1986, that

related to the dividend provisions contained therein and that are - 22 -

discussed above, and (2) the amendment and restatement of the

1984 restated certificate of incorporation and the Alumax 1984

bylaws and certain other matters, all of which occurred on

November 21, 1986, and all of which related to the 1986 restruc-

turing of Alumax discussed below. The foregoing amendments

and/or restatements of the 1984 restated certificate of incorpo-

ration and the 1984 bylaws were required to be, and were, ap-

proved by the Alumax stockholders voting by class on those

During the period at issue, the director nonrestricted

matters on which the Alumax board voted pursuant to the director

aggregate voting requirement included: (1) The election of

officers other than the CEO; (2) a total of 28 capital appropria-

tions and asset dispositions ranging from $1,300,000 to

$9,798,000 that totaled $100,196,525 and that represented, by

value, approximately 21 percent of the $469,159,525 of total

capital appropriations and asset dispositions of Alumax during

the period at issue; (3) the authorization of officers to enter

into on behalf of Alumax (a) agreements with banks for commercial

paper programs and/or lines of credit not in excess of $275

million and (b) long-term debt and/or swaps in excess of $100

million; (4) amendments to Alumax' thrift plans and retirement

plans; (5) a $50 million contribution to a subsidiary of Alumax;

and (6) the appointment of independent auditors.

Pursuant to a resolution that was adopted on April 21, 1983, - 23 -

and that was in effect during the period at issue, the Alumax

board delegated to the president of Alumax the authority to

approve expenditures, within the approved capital expenditure

budget, in an amount not exceeding an aggregate of $1.5 million

per project, of which amount expenditures for capital assets

could not exceed $1 million and expenditures for working capital

could not exceed $500,000.

In connection with the 1984 restructuring, the Alumax bylaws

were amended. Those amended bylaws (i.e., the 1984 bylaws)

provided in pertinent part:

In the absence of the Chairman of the Board and Vice Chairman of the Board, the President shall preside at all meetings of the Board of Directors and of the stockholders at which he shall be present; he shall be the chief executive officer and, except as herein provided, shall have general charge and supervision of the business of the corporation; and, in general, he shall perform all duties incident to the office of president of a corporation, and such other duties as, from time to time, may be assigned to him by the Board of Directors or as may be provided by law. At any time that any share of Class C Common Stock is outstanding, the President shall serve as a Special Class Director.

Thus, the individual who served as president of Alumax also

served as its CEO (president/CEO).

In connection with the 1984 restructuring, the Mitsui group

was granted certain rights that were expressly set forth in the

1984 stockholders agreement and either expressly set forth in the

1984 restated certificate of incorporation or incorporated into

that certificate by its reference to the 1984 stockholders agree- - 24 -

ment.7 The Mitsui group's rights were triggered at anytime on or

before December 31, 1988, by the occurrence of any of certain

specified events (specified events) that could have jeopardized

the investment of that group in Alumax.8 One of the specified

events that would trigger those rights was the following:

The Directors or stockholders of Alumax * * * take any action over the express objections of any Class B Director or the holder or holders of a majority of the outstanding shares of Class B Common Stock [viz., the Mitsui group], respectively, and within 14 calendar days after the taking of such action the Board of Directors of Mitsui Japan (or, if Mitsui Japan does not then own any shares of Class B Common Stock of Alumax, the Board of Directors of Mitsui U.S.A.) * * * re- view[s] such action and * * * adopt[s] a resolution stating that it has determined that such action could have a material and adverse impact on the value of such stockholder's stockholding in Alumax if it were to become effective.

If the resolution referred to in the foregoing provision were

adopted, the action of the Alumax board to which a class B

director objected or the action of the Alumax stockholders to

which the Mitsui group stockholders objected would not become

effective unless (1) Amax challenged the determination by the

board of directors of Mitsui Japan or Mitsui USA that such an

action could have a material and adverse impact on its investment

in Alumax by notifying the Mitsui group of its challenge within 5

7 Although Nippon Steel held 25 shares of the Alumax class B common stock, the 1984 stockholders agreement did not grant Nippon Steel rights similar to those granted to the Mitsui group. 8 The Mitsui group's rights could be exercised by the Mitsui group at anytime after Dec. 31, 1988, without the occurrence of any of the specified events. - 25 -

business days of its receipt of a notice that such a resolution

had been adopted, and (2) Amax was successful in its challenge.

If Amax timely provided the requisite notice of its challenge, a

panel of three arbitrators (panel), each of whom was named in the

1984 stockholders agreement, was to determine by majority vote

within 14 calendar days of that notice whether any action of the

Alumax board to which a class B director objected or any action

of the Alumax stockholders to which the Mitsui group stockholders

objected could have a material and adverse impact on the value of

the Mitsui group's stock in Alumax if it were to become effec-

tive.

If the panel were to decide that Amax' challenge was suc-

cessful, the action of the Alumax board to which the class B

director objected or the action of the Alumax stockholders to

which the Mitsui group stockholders objected would become effec-

tive immediately, and the Mitsui group would not have the right

to purchase any shares of the Alumax class C common stock.

However, if for any reason the panel were not to reach a decision

on Amax' challenge within the prescribed 14-day period, it would

be deemed to have decided that Amax' challenge was unsuccessful.

If the panel were deemed to have decided or were to decide that

Amax' challenge was unsuccessful, the action of the Alumax board

to which a class B director objected or the action of the Alumax

stockholders to which the Mitsui group stockholders objected

would not become effective, and the Mitsui group would have the - 26 -

right to purchase between 51 and 100 percent of the outstanding

shares of the Alumax class C common stock from Amax and/or its

subsidiaries at a price equal to 50 percent of the stockholder's

equity attributable to that stock (Mitsui's purchase right). In

the event that the Mitsui group were to exercise the right to

purchase some or all of the Alumax class C common stock, the Amax

group stockholders would have the right to prevent such purchase

and to convert 100 percent of the Alumax class C common stock

into the Alumax class A common stock which was to have the same

rights as the class A common stock had prior to the 1984 restruc-

turing (Amax' conversion right).9 In the event that the Amax

group stockholders were to exercise that conversion right, the

Mitsui group would no longer have the right to purchase any of

the Alumax class C common stock held by Amax and/or its subsid-

iaries. (We shall refer to the provisions in the 1984 stockhold-

ers agreement and in the 1984 restated certificate of incorpora-

tion relating to the rights granted to the Mitsui group with

respect to actions of the Alumax board and the Alumax stockhold-

ers that the Mitsui group determined could have a material and

adverse effect on its investment in Alumax as the objectionable

action provision.)

The remaining specified events that would trigger the Mitsui

9 The Amax group stockholders had the right to exercise Amax' conversion right at any time after Dec. 31, 1988, without any prior action by the Mitsui group. - 27 -

group's right under the 1984 stockholders agreement and the 1984

restated certificate of incorporation to purchase the Alumax

class C common stock, subject to Amax' conversion right, were:

(1) A downgrading below certain specified levels in the credit

rating of certain securities of Amax or Alumax; (2) specified

events triggering acceleration of certain indebtedness of Amax or

Alumax; (3) certain events of bankruptcy or insolvency of any

"significant subsidiary" of Amax; (4) certain changes in the

ownership of Amax and/or the subsidiaries through which Amax held

its shares of Alumax' stock; (5) a breach by Amax or Alumax of

the 1984 stockholders agreement, the then effective certificate

of incorporation of Alumax, the then effective bylaws of Alumax,

the pledge and indemnity agreement, and/or the tax-sharing

agreement (the last two of which are discussed below) "in a way

materially adverse to" the class B stockholders' stock in Alumax;

(6) a change that would cause the amount of obligations under the

pledge and indemnity agreement to exceed the foreclosure value of

the collateral pledged by Amax pursuant to that agreement; and

(7) a change in generally accepted accounting principles that

would prohibit Mitsui Japan and/or Mitsui USA from recording the

net income of Alumax in its financial statements.

In connection with the 1984 restructuring, Amax and Alumax

entered into an undated tax-sharing agreement (tax-sharing agree-

ment) that was effective as of January 30, 1984. That agreement

provided that for Federal income tax purposes: (1) Alumax was - 28 -

required to pay Amax 90 percent of the tax liability of petition-

ers' group, determined as if petitioners' group were a separate

consolidated group; (2) Amax was required to compensate Alumax if

Alumax were adversely affected by the inclusion of petitioners'

group in the Amax group; and (3) Alumax was required to compen-

sate Amax if Alumax were to derive tax savings from the inclusion

of petitioners' group in the Amax group.

In order to determine the separate Federal income tax

liability of petitioners' group for purposes of the tax-sharing

agreement, Alumax was required to, and did, prepare pro forma

Forms 1120, U.S. Corporation Income Tax Returns (pro forma

returns), for each of the years 1984, 1985, and 1986. Alumax was

required to prepare those pro forma returns as the common parent

of petitioners' group. Each such pro forma return was to be

prepared by Alumax in such a manner as it deemed to be in its

best interest as the common parent of petitioners' group, deter-

mined as if Alumax filed a consolidated return on behalf of that

group for each of the years 1984, 1985, and 1986 and all prior

taxable years (including taxable years prior to the inclusion of

petitioners' group in the combined Amax group and petitioners'

group), without regard to the tax position or interests of Amax

or the Amax group. In this connection, the tax-sharing agreement

Notwithstanding the inclusion of the Alumax Consoli- dated Group [petitioners' group] in the Combined Con- solidated Group [defined in paragraph D of the tax- - 29 -

sharing agreement as the Amax group and petitioners' group together], for purposes of preparing such Pro Forma Alumax Return, Alumax shall be entitled to any and all elections, positions, and methods that would have been available to it in the computation of the tax liability of the Alumax Consolidated Group had it continued to file separate consolidated returns as common parent of the Alumax Consolidated Group. The Pro Forma Alumax Return will be delivered to Amax and to Mitsui U.S.A. together with a written description of the significant elections used in the preparation of such return no later than 30 days prior to the due date for the Combined Consolidated Return [defined in sec- tion 2 of the tax-sharing agreement as the consolidated Federal income tax return filed by Amax that included petitioners' group] (taking into account any extensions thereof that have been granted to AMAX). * * *

The tax-sharing agreement provided as follows with respect

to the filing of certain tax returns and documents and the

examination of those returns by the Internal Revenue Service

(IRS):

AMAX shall prepare and file the Combined Consoli- dated Returns [defined in section 2 of the tax-sharing agreement as a consolidated Federal income tax return filed by Amax that included petitioners' group] and any other returns, amended returns and other documents or statements required to be filed with the Internal Revenue Service in connection with the determination of the federal income tax liability of the Combined Con- solidated Group [defined in paragraph D of the tax- sharing agreement as the Amax group and petitioners' group together]. AMAX shall provide Alumax with copies of the portions of all such returns, documents and statements which are related to Alumax Consolidated Return Items [defined in section 6(a) of the tax-shar- ing agreement as items of income, deduction, gain, loss, and credit of petitioners' group] promptly upon filing thereof, and all calculations of the earnings and profits of the members of the Alumax Consolidated Group [petitioners' group] on an annual basis. * * *

While the parties recognize that AMAX will have primary responsibility with respect to the conduct of Internal Revenue Service examinations of the returns - 30 -

filed by the Combined Consolidated Group and the AMAX Consolidated Group [the Amax group], Alumax shall have the sole and exclusive authority to contest, compromise or settle any proposed adjustment or assessed or as- serted deficiency relating to or resulting from any Alumax Consolidated Return Item. AMAX shall with respect to each taxable year for which a Combined Consolidated Return is filed and each Post-Consolida- tion Year for which the tax liability of the AMAX Consolidated Group is affected by Alumax Consolidated Return Items provide Alumax with an executed power of attorney, in a form satisfactory to Alumax, appointing persons designated by Alumax as attorneys-in-fact to represent AMAX before the Internal Revenue Service in connection with any examination of the return or initi- ation or conduct of any refund claim for that taxable year, to the extent related to Alumax Consolidated Return Items, and shall not revoke the power without first obtaining the written consent of Alumax. AMAX shall promptly notify Alumax of and shall not object to any requests by the Internal Revenue Service to deal directly with any member of the Alumax Consolidated Group in the course of an audit. AMAX shall not con- test, compromise or settle any proposed adjustment or assessed or asserted deficiency relating to or result- ing from an Alumax Consolidated Return Item or that would affect the Pro Forma Alumax Return [pro forma returns] * * * or the actual federal income tax liabil- ity of the Alumax Consolidated Group for any taxable year or seek a refund relating to an Alumax Consoli- dated Return Item without first obtaining the written consent of Alumax. Alumax shall keep AMAX fully in- formed of the status of any contest concerning an Alumax Consolidated Return Item.

The tax-sharing agreement provided that it was to be binding

upon and was to inure to the benefit of any successor, by merger,

acquisition of assets, or otherwise, to any of the parties to the

same extent as if the successor had been an original party to

that agreement.

Also in connection with the 1984 restructuring, on or about

March 9, 1984, (1) a pledge and indemnity agreement (pledge and - 31 -

indemnity agreement) was entered into among the class B stock-

holders, the class C stockholders, and The Bank of New York as

trustee, and (2) a letter agreement (letter agreement) was

entered into among Amax, Amax Realty, Bemax, Cemax, Amax Securi-

ties, Mitsui Japan, and Mitsui USA.

Pursuant to the pledge and indemnity agreement, the class C

stockholders pledged their Alumax class C common stock, and, in

the event that their Alumax class C common stock were converted

into the Alumax class A common stock, their Alumax class A common

stock, to be held in trust as security for the obligation of Amax

to indemnify Alumax and the class B stockholders against certain

tax and other costs that might arise out of the 1984 restated

certificate of incorporation, the 1984 stockholders agreement,

the tax-sharing agreement, and the transactions contemplated by

any such agreements. Amax' obligation to indemnify Alumax

against certain tax and other costs as set forth in section 1 of

the pledge and indemnity agreement was as follows:

Amax shall indemnify and hold harmless Alumax in the event that the Internal Revenue Service determines on examination of the federal income tax liability of the Alumax Consolidated Group [petitioners' group] or the Combined Consolidated Group [the Amax group and petitioners' group together] * * * for any taxable year (an "Examination Year") that the inclusion of the Alumax Consolidated Group in the Combined Consolidated Group in the Examination Year or any other taxable year was improper (an "Adverse Determination"). In the event of an Adverse Determination, * * * [Amax] shall repay as an indemnity to Alumax (i) the amount of any payments made by Alumax to Amax pursuant to the Tax Sharing Agreement with respect to the federal income tax liability of the Alumax Consolidated Group for such - 32 -

Examination Year * * *, reduced by (ii) the amount of any payments made by Amax to Alumax pursuant to the Tax Sharing Agreement with respect to the federal income tax liability of the Alumax Consolidated Group for such Examination Year * * * plus interest thereon * * *. Amax shall further pay to Alumax the amount of any penalties or additions to tax paid by the Alumax Con- solidated Group as a result of such Adverse Determina- tion, including any interest payable by Alumax with respect thereto * * *. * * *

This Section 1 shall apply with equal force and effect to any state or local tax based on or measured by net income with respect to which Alumax makes pay- ments to Amax pursuant to the * * * Tax Sharing Agree- ment.

Amax' obligation to indemnify the class B stockholders

against certain tax and other costs as set forth in section 2 of

Amax shall indemnify and hold harmless Mitsui U.S.A., Mitsui Japan and Nippon [Steel] jointly and severally against any federal, state or local taxes based on or measured by income, which would not have applied, or which are in excess of those which would have been imposed, if the * * * [1984 restructuring] had not occurred (other than: * * * [inter alia, Federal income taxes relating to certain distributions by Alumax that were subject to the dividends-received deduction in the case of Mitsui USA and certain distri- butions of dividends that were taxed at a specified rate under the Income Tax Treaty between Japan and the United States]), including set-offs, expenses (includ- ing attorneys' fees), penalties, additions to tax, or interest to which any such indemnitee may become sub- ject or for which any such indemnitee may become liable * * * with respect to or arising out of, directly or indirectly, * * * [the 1984 restructuring], the [1984] Stockholders agreement, the Tax Sharing Agreement, or any transaction contemplated by either of the above- named Agreements.

Pursuant to the pledge and indemnity agreement, Amax, and

not Alumax or any other member of petitioners' group, was to have - 33 -

control over any challenges by the IRS to the inclusion of

petitioners in the consolidated return filed by Amax for each of

the years 1984, 1985, and 1986. That agreement stated:

(a)(i) If the Internal Revenue Service shall propose an adjustment in the tax liability of the Alumax Consolidated Group [petitioners' group] for which Amax would be required to pay an indemnity pursu- ant to Section 1 of this Agreement (a "Challenge to Consolidation"), then Alumax or Amax, whichever shall receive notice of the Challenge to Consolidation from the Internal Revenue Service, shall give prompt notice to the other of the Challenge to Consolidation. Amax shall determine in its sole discretion whether to contest the Challenge to Consolidation, and, with respect to any such contest, shall determine the nature of all action to be taken to contest such Challenge to Consolidation including (A) whether any action to contest such Challenge to Consolidation shall be by way of judicial or administrative proceedings, or both, (B) whether any such Challenge to Consolidation shall be contested by resisting payment of the proposed adjust- ment or by paying the same and seeking a refund there- of, and (C) if Amax chooses to proceed through judicial proceedings, the court or other judicial body before which judicial action shall be commenced. Amax shall have full control over any contest pursuant to this Section 3(a), but shall keep Alumax and the Mitsui Group informed of the status thereof and shall consider in good faith requests by them concerning the contest of the claim.

(ii) Notwithstanding paragraph (i) above, Alumax shall retain the rights specified in Section 6 of the Tax Sharing Agreement with respect to issues described therein other than whether the inclusion of the Alumax Consolidated Group in the Combined Consolidated Group [the Amax group and petitioners' group together] was proper. * * *

The pledge and indemnity agreement further provided, inter

alia, that it was to terminate upon the earliest date on which

all of the following conditions were met: (1) No taxing author-

ity was any longer entitled to propose an adjustment to any tax - 34 -

liability of any party to the pledge and indemnity agreement

(other than the trustee) for any year that could result in any

amount's becoming due and payable pursuant to an obligation under

that agreement; (2) no contest of any such proposed adjustment

was pending; and (3) Amax did not have any obligations under the

pledge and indemnity agreement to Alumax or the class B stock-

holders.

The pledge and indemnity agreement provided that it and the

rights and remedies thereunder were to inure to the benefit of

and were to be binding upon the heirs, successors, and assignees

to the parties thereto.

The letter agreement provided in pertinent part:

If the change currently proposed in Section 61 of H.R. 4170 (Tax Reform Act of 1984) is enacted, or if other United States federal tax legislation is enacted relat- ing to the relationship between voting power and equity ownership and having a similar effect on Amax's ability to include the Alumax Consolidated Group * * * in Amax's consolidated federal income tax returns, and as a result either * * * [of the parties to the letter agreement] determine * * * that the likelihood of successfully contesting a possible challenge by the Internal Revenue Service to the inclusion by Amax of the Alumax Consolidated Group * * * in Amax's consoli- dated federal income tax return for any period is materially reduced, * * * [the parties to the agree- ment] agree to take such action as is necessary (in- cluding without limitation making appropriate amend- ments of Alumax's [1984] Restated Certificate of Incor- poration) to convert all outstanding shares of Alumax Class C Common Stock into shares of Alumax Class A Common Stock upon the date which is the later of (i) the date of such determination (or as soon as practica- ble thereafter), or (ii) the last day preceding such period. - 35 -

During August 1986, Amax Realty and Cemax were liquidated,

and their respective assets, including the Alumax class C common

stock, were distributed to Amax. Accordingly, all 250 shares of

the Alumax class C common stock were thereafter held by Amax,

Bemax, and Amax Securities.

The 1986 Restructuring and Subsequent Events

On November 24, 1986, Alumax filed with the Delaware Secre-

tary of State a restated certificate of incorporation (1986

restated certificate of incorporation) that was effective as of

that date (1986 restructuring). Alumax and its stockholders

executed an agreement dated as of November 24, 1986, that, inter

alia, terminated the 1984 stockholders agreement.

Pursuant to the 1986 restated certificate of incorporation,

Alumax was authorized to issue (1) 750 shares of Alumax voting

common stock with a par value of $100 a share and (2) 10 million

shares of Alumax preferred stock (Alumax preferred stock) with a

par value of $25 a share, which were to be issued from time to

time by the Alumax board as shares of one or more series of stock

with rights, preferences, and limitations as determined by the

Alumax board. Four million shares of the Alumax preferred stock

were designated by the Alumax board as series A nonvoting pre-

ferred stock (Alumax series A nonvoting preferred stock) and were

exchangeable for the common stock of Amax.

On November 24, 1986, pursuant to a recapitalization and

stock purchase agreement that was entered into among Amax, - 36 -

Alumax, Mitsui USA, and Nippon Steel on or about November 13,

1986: (1) Mitsui USA exchanged 57 shares of the Alumax class B

common stock that it held for 4 million shares of the Alumax

series A nonvoting preferred stock; (2) Mitsui USA sold to Amax

for $291,500,000 the remaining 168 shares of the Alumax class B

common stock that it held; and (3) Nippon Steel sold to Amax for

$43,500,000 the 25 shares of the Alumax class B common stock that

it held. As a result of the 1986 restructuring, the outstanding

shares of the Alumax class B common stock and the outstanding

shares of the Alumax class C common stock were converted into a

single class of Alumax common stock that was held entirely by

members of the Amax group.10

During 1987 and 1988, Mitsui USA exchanged the 4 million

shares of the Alumax series A nonvoting preferred stock that it

held for an unspecified number of shares of the common stock of

Amax. Amax contributed that preferred stock to Alumax, which

then canceled it. During 1988, Mitsui USA sold in secondary

public offerings all of the common stock of Amax that it held.

On November 15, 1993, Amax, which since the 1986 restructur-

10 Although the parties stipulated that, pursuant to the 1986 restated certificate of incorporation, "the Class A and Class B Common Stock of * * * [Alumax] was converted into a single class of common stock", we shall disregard that stipulation insofar as it refers to the Alumax class A common stock, rather than the Alumax class C common stock, because such reference is clearly contrary to the facts established by the record that, pursuant to that certificate, the Alumax class B common stock and the Alumax class C common stock were converted into a single class of Alumax stock. See Cal-Maine Foods, Inc. v. Commissioner, 93 T.C. 181, 195 (1989). - 37 -

ing had owned 100 percent of the outstanding shares of the Alumax

common stock, distributed to its common stockholders all of the

Alumax common stock that it held, and Alumax has been publicly

held since that time. Immediately thereafter, Amax was merged

into Cyprus Minerals Company, and the surviving company and

successor to Amax was renamed Cyprus Amax Minerals Company

(Cyprus Amax).

Filing and Examination of the Consolidated Returns

Alumax filed consolidated returns for the calendar years

1981 and 1983 as the common parent of petitioners' group, an

affiliated group within the meaning of section 1504(a).

Amax filed consolidated returns for 1984, 1985, and 1986 on

September 15, 1985, September 15, 1986, and September 15, 1987,

respectively, in which it claimed to be the common parent of an

affiliated group within the meaning of section 1504(a) that

consisted of corporations in both the Amax group and petitioners'

group. As part of the 1984 consolidated return that it filed,

Amax included the following documents: (1) Form 851 (Affilia-

tions Schedule) that listed the corporations that were included

in the 1984 consolidated return, including the corporations in

petitioners' group; (2) a document dated August 12, 1985, enti-

tled "ELECTION TO BE A MEMBER AS OF JANUARY 1, 1984" (election

document), that was signed by John A. Brader as vice president of

Alumax, and that provided: - 38 -

Based on an Agreement dated January 30, 1984 by and among Alumax Inc., AMAX Inc., Mitsui and Co., Ltd. and Mitsui and Co. (U.S.A.) Inc. as amended that gives AMAX Inc. 80% of the voting power of all classes of Alumax stock entitled to vote, Alumax and each of its subsid- iaries hereby elects under United States Treasury Regulations Section 1.1502-76(b)(5)(i) to become a member of the group of which AMAX Inc. is the common parent as of January 1, 1984[;]

and (3) a "Disclosure Statement under Section 6661 of the Inter-

nal Revenue Code" that was required to be filed as part of that

return in accordance with an agreement between Amax and Mitsui

USA and that provided:

An Agreement dated January 30, 1984 by and among Alumax Inc., AMAX Inc., Mitsui & Co. Ltd. and Mitsui & Co. (U.S.A.), Inc. as amended (a copy of which is attached hereto) gives AMAX Inc. 80% of the voting power of all classes of Alumax stock entitled to vote. * * * Based on the Agreement Alumax and each of its subsidiaries has elected under United States Treasury Regulations Section 1.1502-76(b)(5)(i) to become a member of the group of which AMAX Inc. is the common parent as of January 1, 1984. Accordingly, Alumax and each of its subsidiaries is included as of January 1, 1984 in the AMAX Inc. Consolidated Income Tax Return filed for the year ended December 31, 1984.

As a result of the inclusion of petitioners' group in the

consolidated returns filed by Amax for 1984, 1985, and 1986,

(1) the taxable income of petitioners' group for each of those

years was offset in the computation in those returns of the

consolidated taxable income by net operating losses of members of

the Amax group; and (2) general business credits (credits) under

section 38 of petitioners' group for each of the years 1984,

1985, and 1986 (consisting of investment tax credits for those

years and jobs credits for 1984 and 1985) were carried back - 39 -

pursuant to section 39 to 1981 and 1983 in the respective amounts

of $5,663,086 and $11,454,565, resulting in Alumax' receipt of

tax refunds in those amounts pursuant to section 6411.

The consolidated return filed by Amax for each of the years

1984, 1985, and 1986 constituted the return of each member of

petitioners’ group for each such year, regardless whether the

inclusion of petitioners in each of those consolidated returns

was proper. The respective periods of limitations on the assess-

ment of tax against petitioners’ group for each of the years

1984, 1985, and 1986 began to run on the date on which Amax filed

the consolidated return for each such year.

Respondent commenced an examination of the consolidated

returns that Amax filed for 1984, 1985, and 1986. Prior to the

expiration of the time prescribed by section 6501 for the assess-

ment of income tax due for each of those years from the corpora-

tions that were included, whether properly or improperly, in

those consolidated returns (Amax consolidated group), Amax and

respondent executed the following 11 separate written agreements

on Forms 872 (Consent to Extend the Time to Assess Tax) to extend

the period of time during which any such assessment could be made

by respondent:

Date through which Period of Date Signed by Taxable Year(s) to which Limitations Was Date Signed by Of- Representative Form 872 Applied Extended ficer of Amax of Respondent

1984 Dec. 31, 1988 Dec. 24, 1987 Mar. 3, 1988 1983 through 1985 Dec. 31, 1989 Aug. 1, 1988 Aug. 15, 1988 1983 through 1985 June 30, 1990 June 20, 1989 July 5, 1989 1984 June 30, 1991 Undated Mar. 30, 1990 - 40 -

1985 June 30, 1991 Undated Mar. 30, 1990 1986 June 30, 1991 Undated Mar. 30, 1990 1983 through 1986 June 30, 1992 Undated May 6, 1991 1983 through 1986 Dec. 31, 1992 Undated Jan. 24, 1992 1983 through 1986 June 30, 1993 Aug. 31, 1992 Sept. 3, 1992 1983 through 1986 Dec. 31, 1993 Jan. 28, 1993 Jan. 29, 1993 1983 through 1986 Dec. 31, 1994 Sept. 14, 1993 Sept. 15, 1993

Each of the above-listed Forms 872 identified the "tax-

payer(s)" as "Amax Inc. and Consolidated Subsidiaries" or "Amax

Inc. and Consolidated Subs" and stated in pertinent part that the

taxpayers so identified and a designated representative of

respondent "consent and agree to the following:"

(1) The amount of any Federal [income] tax due on any return(s) made by or for the above taxpayer(s) for the period(s) ended [December 31, 1983, December 31, 1984, December 31, 1985, and/or December 31, 1986] may be assessed at any time on or before [one of the dates stated on the Form 872 and listed above]. * * *

After the merger of Amax into Cyprus Minerals Company on or

around November 15, 1993, and before the expiration of the time

prescribed by section 6501 for the assessment of income tax due

for 1984, 1985, and 1986 from the corporations in the Amax

consolidated group, Cyprus Amax, the surviving company of that

merger and the successor to Amax, and respondent executed a

written agreement on Form 872 to extend the period of time

through June 30, 1995, during which any such assessment could be

made by respondent. That Form 872 identified the "taxpayer(s)"

as "Amax, Inc. and Consolidated Subsidiaries" and stated in

pertinent part that the taxpayers so identified and a designated

representative of respondent "consent and agree" that the "amount - 41 -

of any Federal INCOME tax due on any return(s) made by or for the

above taxpayer(s) for the period(s) ended December 31, 1983,

December 31, 1984, December 31, 1985 and December 31, 1986 may be

assessed at any time on or before June 30, 1995." That Form 872

was signed on June 23, 1994, by an officer of Cyprus Amax, and on

June 27, 1994, by a representative of respondent.

The officers of Amax and Cyprus Amax who signed the Forms

872 in question were not at any relevant times officers of Alumax

or of any other member of petitioners' group. Neither Alumax nor

any other member of petitioners' group executed at any relevant

times a written power of attorney or any other document explic-

itly referring to a power of attorney, which specifically autho-

rized any of those officers to represent Alumax or any other

member of petitioners' group with respect to the years 1984,

1985, and 1986.

On March 15, 1995, respondent issued a notice of deficiency

(notice) to Alumax, Incorporated and Consolidated Subsidiaries.

In the notice, respondent determined, inter alia:

you are not qualified for inclusion in Amax, Inc.'s affiliated group for the taxable years ended December 31, 1984, December 31, 1985 and November 24, 1986, because Amax, Inc. did not satisfy the requirements of I.R.C. §1504(a) during any portion of said taxable years.

* * * * * * * *

Accordingly, you are treated as filing separate income tax returns for the years ended December 31, 1984, December 31, 1985 and November 24, 1986. Your income is figured as disclosed by the consolidated returns of - 42 -

Amax, Inc. and subsidiaries, and by reference to pro forma returns (Form 1120), prepared by you and submit- ted to Amax, Inc., as if you were separate from Amax, Inc., and still the common parent of your own consoli- dated group.

Because of the determination that Alumax, Inc. and consolidated subsidiaries, are not included in the consolidated returns of Amax, Inc. for the taxable years ended December 31, 1984, December 31, 1985, and November 24, 1986, there is sufficient tax available to absorb * * * [the] credits. Therefore, the credits are not allowed as carrybacks.

Petitioners bear the burden of establishing that respon-

dent's determinations in the notice are erroneous. Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933). That this case was

submitted fully stipulated does not change that burden or the

effect of a failure of proof. Rule 122(b); Borchers v. Commis-

sioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir. 1991).

Consolidation

Section 1501 grants an affiliated group of corporations the

privilege of filing a consolidated return. The dispute here

centers on whether for each of the years 1984, 1985, and 1986

petitioners were members of the affiliated group that had Amax as

its common parent, which filed a consolidated return for each of

those years that included petitioners. The term "affiliated

group" is defined in section 1504(a). The Deficit Reduction Act

of 1984 (1984 Act), Pub. L. 98-369, sec. 60(a), 98 Stat. 577-579,

amended the definition of an "affiliated group" in section

1504(a) (amended section 1504(a)). Amended section 1504(a) is - 43 -

generally effective for taxable years beginning after December

31, 1984. 1984 Act, sec. 60(b)(1), 98 Stat. 579.

Prior to its amendment by the 1984 Act, section 1504(a), as

pertinent here, defined the term "affiliated group" to mean

one or more chains of includible corporations connected through stock ownership with a common parent corpora- tion which is an includible corporation if--

(1) Stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each of the includible corporations (ex- cept the common parent corporation) is owned di- rectly by one or more of the other includible corporations; and

(2) The common parent corporation owns di- rectly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations.

After its amendment by the 1984 Act, section 1504(a), as

pertinent here, defined the term "affiliated group" as follows:

(1) In General.--The term "affiliated group" means--

(A) 1 or more chains of includible corpora- tions connected through stock ownership with a common parent corporation which is an includible corporation, but only if--

(B)(i) the common parent owns directly stock meeting the requirements of paragraph (2) in at least 1 of the other includible corporations, and

(ii) stock meeting the requirements of paragraph (2) in each of the includible cor- porations (except the common parent) is owned directly by 1 or more of the other includible corporations. - 44 -

(2) 80-percent voting and value test.--The owner- ship of stock of any corporation meets the requirements of this paragraph if it--

(A) possesses at least 80 percent of the total voting power of the stock of such corpora- tion, and

(B) has a value equal to at least 80 percent of the total value of the stock of such corpora- tion.

As pertinent here, the principal difference between section

1504(a) and amended section 1504(a) is that the definition of the

term "affiliated group" in the latter provision imposes an 80-

percent value test in addition to the 80-percent voting power

test that is imposed by both provisions. Compare sec. 1504(a)

with amended sec. 1504(a).

Section 60(b)(2) of the 1984 Act, 98 Stat. 579, as amended

retroactively by section 1804(e)(2) of the Tax Reform Act of

1986, Pub. L. 99-514, 100 Stat. 2800, provides the following

special rule for the effective date of amended section 1504(a)

(special effective date rule):

(2) Special Rule for Corporations Affiliated on June 22, 1984--In the case of a corporation which on June 22, 1984, is a member of an affiliated group which files a consolidated return for such corporation's taxable year which includes June 22, 1984, for purposes of determining whether such corporation continues to be a member of such group for taxable years beginning before January 1, 1988, the amendment made by subsection (a) [viz, amended section 1504(a)] shall not apply. The preceding sentence shall cease to apply as of the first day after June 22, 1984, on which such corporation does not qualify as a member of such group under section 1504(a) the Internal Revenue Code of 1954 (as in effect on the day before the enactment of this [1984] Act). - 45 -

On brief, the parties proceed on the assumption that section

1504(a) applies not only for 1984 but also for 1985 and 1986 and

that amended section 1504(a) does not apply for 1985 and 1986.

Consequently, they make no argument, and presumably they did not

present all the evidence that they might have, with respect to

the 80-percent value test in amended section 1504(a)(1)(B) and

(2)(B). While we agree that section 1504(a) is applicable for

1984, we disagree that that section applies for 1985 and 1986.

That is because we find below that for 1984 petitioners were not

members of the affiliated group within the meaning of section

1504(a) that had Amax as its common parent. Accordingly, the

special effective date rule does not apply, and the question

whether for 1985 and 1986 petitioners were members of the affili-

ated group that had Amax as its common parent must be resolved

under amended section 1504(a).

Since the parties address for each of the years 1984, 1985,

and 1986 only the 80-percent voting power test of section 1504(a)

before its amendment by the 1984 Act, and since that test, as

pertinent here, is essentially the same as the 80-percent voting

power test of section 1504(a) after its amendment by the 1984

Act, compare sec. 1504(a) with amended sec. 1504(a)(1)(B) and

(2)(A), we generally shall do the same. However, we are in no

way suggesting that that is the only test that petitioners must

satisfy for 1985 and 1986 in order to be members of the affili- - 46 -

ated group that had Amax as its common parent. Nor are we

suggesting that petitioners have carried their burden of showing

that they satisfy the 80-percent value test of amended section

1504(a)(1)(B) and (2)(B). To the contrary, on the record before

us, we find that they have not.

The dispute as framed by the parties is whether the Alumax

class C common stock owned by the Amax group stockholders pos-

sessed "at least 80 percent of the voting power of all classes of

stock" of Alumax within the meaning of section 1504(a)(1).11

It is petitioners' position that at all relevant times the

Alumax class C common stock possessed 80 percent of the voting

power of all classes of Alumax stock within the meaning of

section 1504(a)(1). It is significant to our resolution of the

question presented under section 1504(a)(1) and amended section

1504(a) that petitioners do not contend that that stock possessed

more than 80 percent of the voting power of all classes of Alumax

stock. Petitioners argue that "all judicial and administrative

11 Each party, and in particular petitioners, appears to have misconstrued in material respects the arguments on brief of the opposing party on the issue under sec. 1504(a)(1). As a result, the briefs, and in particular petitioners' briefs, often address arguments and contentions that we do not believe are even being advanced by the opposing party. In any event, we shall resolve the issue presented to us under sec. 1504(a)(1) and amended sec. 1504(a) by following the path mandated by the facts established by the record and the applicable law. - 47 -

authorities"12 that have construed the meaning of the terms

"voting stock" and/or "voting power" for purposes of section

1504(a) and its predecessor provisions in the Internal Revenue

laws support their position under section 1504(a)(1). According

to petitioners, those cases and rulings

consistently have defined "voting stock" as stock that has the right to vote in the election of directors and have measured a stock's "voting power" by reference to the voting power of the directors such stock elects. They have specifically not taken into account voting rights with respect to matters other than the right to vote in the election of directors, no matter how exten- sive such rights may be, and have never measured voting power other than by reference to the voting power of directors. * * *

(We shall refer to the test that petitioners contend all perti-

nent case law and rulings require us to apply in resolving the

question presented under section 1504(a)(1) as the mechanical

test.)

According to petitioners, application of their mechanical

test mandates the following conclusions:

12 The so-called "administrative authorities" on which petition- ers, as well as respondent, rely include various rulings, both published and private, that the IRS has issued. (We shall refer collectively to those rulings as rulings.) Revenue rulings are not regarded as precedent in this Court. They merely represent the position of the Commissioner of Internal Revenue (Commis- sioner) on a particular issue. Lucky Stores, Inc. and Subs. v. Commissioner, 105 T.C. 420, 433 (1995). However, the public generally has the right to rely on positions taken by the Commis- sioner in revenue rulings. Nissho Iwai Am. Corp. v. Commis- sioner, 89 T.C. 765, 778 (1987). Private letter rulings are not regarded as precedent in this Court, and the public may not rely on them. See sec. 6110(j)(3); Shelton v. Commissioner, 105 T.C. 114, 119 (1995). - 48 -

The Class C stock owned by the Amax Group entitled the Amax Group to elect four directors who could cast 8 out of 10 votes cast on matters put to the Board. The Amax Group, therefore, had 80 percent of the "voting power" of the stock of Petitioner.

In reaching the foregoing conclusions about the voting power

of the class C directors and the Alumax class C common stock that

elected those directors, petitioners must, and do, carve out an

exception to the application of their mechanical test. Instead

of assigning to the Alumax class C common stock, as their mechan-

ical test would require, the voting power of the class C direc-

tors on all matters on which the Alumax board was to vote,

petitioners assign to that stock the voting power of those

directors only on the director nonrestricted matters on which the

Alumax board voted in the aggregate, and not by class. Petition-

ers thus ignore the reduced voting power of the class C directors

and the increased voting power of the class B directors on the

director restricted matters that required a class vote, and

consequently a 50/50 vote, by the class C directors who were

elected by the Amax group stockholders and by the class B direc-

tors who were elected by the Mitsui/Nippon group stockholders.13

13 Petitioners also disregard the voting power of the Alumax class B common stock and the Alumax class C common stock on the stockholder restricted matters, which are identical to the director restricted matters and on which a class vote was re- quired by each of those two classes of stock. Indeed, petition- ers do not even refer to that stockholder class voting require- ment in advancing their arguments under sec. 1504(a)(1) in their opening brief. It is only in their reply brief that petitioners (continued...) - 49 -

In support of the exception that they carve out of their mechani-

cal test, petitioners assert:

The six matters requiring approval of each class of directors in the case of Alumax covered a narrow set of actions, such as mergers, material acquisitions and dispositions and transactions with affiliates, that frequently are the subjects of mechanisms, such as class voting, intended to protect minority stockhold- ers. * * * They fall far short of the unlimited list of matters on which the preferred stockholders could have voted in Erie Lighting [Co. v. Commissioner, 93 F.2d 883 (1st Cir.), revg. 35 B.T.A. 906 (1937)], or would have been prevented from voting on in [Rudolph] Wurlitzer [Co. v. Commissioner, 81 F.2d 971 (1936), affg. 29 B.T.A. 443 (1933)], had those stockholders known of and tried to exercise their voting rights.

In urging application of their mechanical test, petitioners

not only contend that the Court should ignore the respective di-

rector and stockholder class voting that was required on the

director and stockholder restricted matters, they also assert

that we should disregard (1) the mandatory dividend provision and

(2) the objectionable action provision. That is because, accord-

13 (...continued) appear to address that requirement. Although not altogether clear to us, it appears, and we shall assume, that petitioners contend in their reply brief that the stockholder class voting requirement should be ignored for purposes of sec. 1504(a)(1) for the same reasons that petitioners claim the director class voting requirement should be ignored. Apparently, petitioners' position with respect to the stockholder class voting requirement also was difficult for the IRS to grasp. We draw this conclusion because in Tech. Adv. Mem. 94-52-002 (Aug. 26, 1994), which was issued by the IRS to petitioners on the question under sec. 1504(a)(1) presented here, the IRS noted that petitioners had taken incon- sistent positions as to whether "the Charter required each class of shareholders to approve the Restricted Matters, at times seeming to acknowledge the existence of this requirement and most recently disputing its existence." - 50 -

ing to petitioners, all the pertinent cases and rulings (1) re-

ject any "argument that a preferential right to dividends [like

that which petitioners maintain was granted by the mandatory

dividend provision] gives the holders of the stock some of the

'voting power' of the stock not entitled to that preference" and

(2) determined voting power

on the basis of actual voting power at the time of measurement, and * * * any possibility that voting power might change as a result of an event, such as the conversion of non-voting stock into voting stock or a purchase or redemption of stock [like that which peti- tioners contend might occur under the objectionable action provision], even if scheduled to occur, was irrelevant [under those cases and rulings]. * * *

Petitioners further argue, in the alternative, that even if

the Court were to consider the director and stockholder class

voting requirements, the mandatory dividend provision, and the

objectionable action provision in resolving the issue presented

under section 1504(a)(1), the voting power of the Alumax class C

common stock would not be reduced below the 80-percent voting

power which petitioners contend that stock possessed. That is

because, according to petitioners, those requirements and provi-

sions did not "meaningfully impair the power of the [Alumax]

Board, operating through the Class C Directors, to manage the

business and affairs of Petitioner [Alumax]."

Respondent counters that at all relevant times the Alumax

class C common stock did not possess at least 80 percent of the

voting power of all classes of Alumax stock within the meaning of - 51 -

section 1504(a)(1). Respondent contends that although in

the vast majority of cases applying section 1504(a), voting power can and should be measured by reference to the election of directors * * *, in an aggressively structured transaction like the instant case, election of directors is not an appropriate measure of voting power. In such a case, the Service will look beyond the election of directors to determine voting power.

Respondent argues that "all judicial and administrative

authorities" that have construed the meaning of the terms "voting

stock" and/or "voting power" for purposes of section 1504(a) and

its predecessor provisions in the Internal Revenue laws support

respondent's position in the present case. According to respon-

dent, those cases and rulings "disavow [petitioners'] * * *

purely mechanical test as the proper standard for voting power

under section 1504(a)." While acknowledging that the pertinent

case law and rulings require the Court in the present case to

consider the right of the Alumax class C common stock to elect

the class C directors and the voting power of those directors in

resolving the issue presented under section 1504(a)(1), respon-

dent contends that those cases and rulings also permit us in the

instant case to examine the voting power of the class C directors

on all board matters, not, as petitioners urge, just on those

board matters on which the directors were to vote in the aggre-

gate, and not by class. Respondent further contends that we must

also consider the impact of the class voting required by the

Alumax stockholders on the same restricted matters on which the - 52 -

Alumax directors were required to vote by class, since that

stockholder class voting requirement gave the Alumax class B

common stock veto power over both the Alumax class C common stock

and the class C directors whom that class C stock elected.

Respondent also urges the Court to examine the impact of the

mandatory dividend provision and the objectionable action provi-

sion in resolving the issue presented under section 1504(a)(1).

That is because, according to respondent, those provisions placed

restrictions on the power of the Alumax board to act on certain

board matters and, consequently, on the voting power of the

Alumax class C common stock, which elected the class C directors

on that board, to participate in the management of Alumax through

those directors.

It is respondent's position that the cumulative effect of

the director class voting requirement, the stockholder class

voting requirement, the mandatory dividend provision, and the

objectionable action provision was to reduce the voting power of

the Alumax class C common stock well below 80 percent for pur-

poses of section 1504(a)(1).

Since both parties rely on essentially the same case law and

rulings to support their divergent positions, it is obvious that

one of the parties is misconstruing them. We conclude that

petitioners are incorrectly interpreting the cases and rulings in

question. The only issue presented in the cases (viz, Erie

Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir.), revg. 35 - 53 -

B.T.A. 906 (1937), and Rudolph Wurlitzer Co. v. Commissioner, 81

F.2d 971 (6th Cir. 1936), affg. 29 B.T.A. 443 (1933)), on which

both parties rely was whether the stock in question was voting

stock or nonvoting stock for purposes of the applicable consoli-

dation provisions. Those cases did not even address how to

measure the voting power possessed by different classes of voting

stock for purposes of those provisions. The questions presented

in certain of the rulings on which both parties rely (viz, Rev.

Rul. 69-126, 1969-1 C.B. 218; I.T. 3896, 1948-1 C.B. 72) were

whether the stock in question was voting stock or nonvoting stock

for purposes of the applicable consolidation provisions and how

to measure the voting power possessed by different classes of

voting stock for purposes of those provisions. One or both of

those issues also were involved in certain of the other rulings

on which petitioners rely (e.g., Rev. Rul. 71-83, 1971-1 C.B.

268; Priv. Ltr. Rul. 90-26-047 (Mar. 30, 1990); Priv. Ltr. Rul.

83-42-014 (July 10, 1983); Priv. Ltr. Rul. 82-21-112 (Feb. 26,

1982)).

None of the cases or rulings on which petitioners rely

involved the facts presented in the instant case. Nor does any

of them mandate that we adopt petitioners' espoused mechanical

test, let alone their application of that test, in determining in

the present case whether the Alumax class C common stock owned by

the Amax group stockholders satisfies the voting power require-

ment of section 1504(a)(1) and amended section 1504(a)(1)(B) and - 54 -

(2)(A).14 To the contrary, Erie Lighting Co. v. Commissioner,

supra, the principal case on which both parties rely, supports

respondent's position that, in the present case, this Court

should examine all of the facts surrounding the management of

Alumax and the voting rights of the Alumax class B common stock,

the Alumax class C common stock, the Alumax board, and the

members of that board in order to determine whether the Alumax

class C common stock owned by the Amax group stockholders pos-

sessed "at least 80 percent of the voting power of all classes of

[Alumax] stock" within the meaning of section 1504(a)(1).

In Erie Lighting Co. v. Commissioner, supra, the court

addressed whether the preferred stock issued by the Erie Lighting

Company (ELC) was voting stock or nonvoting stock for purposes of

the applicable consolidation provisions. In resolving that

issue, the court observed:

The purpose of the provisions relating to affili- ated companies was to enable corporations under one management to make a consolidated return as though they were a unit in transacting business, and to avoid such a manipulation of intercompany transactions as would

14 Petitioners do not cite Hermes Consol., Inc. v. United States, 14 Cl. Ct. 398 (1988), even though they contend that if respondent's position were adopted in the present case, the application of many other Code provisions requiring "precise, percentage determinations of voting power" would be called into question. In Hermes, the court determined the voting power of certain stock for purposes of sec. 269(a) by examining its right to vote in the election of directors and its right to approve or disapprove fundamental changes in corporate structure, although the court acknowledged that the former factor was "more indica- tive" of that voting power than the latter factor. Id. at 405- 407. - 55 -

prevent the government from correctly ascertaining and collecting the sums as taxes that are justly due it. Schlafly v. United States, * * * [4 F.2d 195 (8th Cir. 1925)] 8 Cir., 4 F.2d 195 at page 200; Atlantic City Electric Co. v. Commissioner, 288 U.S. 152, 154, 53 S.Ct. 383, 384, 77 L.Ed. 667.

The Commissioner and the Board, in the construc- tion of the acts prior to 1926, generally, whenever the question was raised, followed this rule, that the stock which must be taken into consideration in determining whether grounds for affiliation exist, was stock having a right to control the management of a corporation, as in the election of directors.

With such an established and recognized construc- tion by the Department, Congress in enacting the 1926 and 1928 acts should be held to mean by "nonvoting stock" stock not having the right to vote for directors who control the management of the corporation. * * *

* * * * * * *

"Voting stock may very properly be termed manage- ment stock." * * * [Erie Lighting Co. v. Commissioner, supra at 884-885.]

The court in the Erie Lighting Co. case also quoted with approval

the following statement in Commissioner v. Shillito Realty Co.,

39 F.2d 830, 832 (6th Cir. 1930), affg. 8 B.T.A. 665 (1927):15

15 Petitioners contend on brief that the analysis in Commis- sioner v. Shillito Realty Co., 39 F.2d 830 (6th Cir. 1930), affg. 8 B.T.A. 665 (1927), "conflicts with, and must therefore yield to, [the analysis] * * * of two subsequent decisions of the Supreme Court," viz, Atlantic City Elec. Co. v. Commissioner, 288 U.S. 152 (1933), and Burnet v. Howes Bros. Hide Co., 284 U.S. 583 (1931) (per curiam). Not only did the court in Erie Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir.), revg. 35 B.T.A. 906 (1937), the principal case on which petitioners rely to support their mechanical test, quote with approval the above statement from the Shillito case, it expressly found that that statement was "in no way opposed" to the Supreme Court decision in Handy & Harman v. Burnet, 284 U.S. 136 (1931), the controlling authority on which the Supreme Court relied in deciding the Atlantic City (continued...) - 56 -

We think the term "stock," as used in the [consolida- tion] statute, is clearly intended to mean stock with a potential voting power which, if asserted, will be effective in the management or control of the corpora- tion. [Erie Lighting Co. v. Commissioner, supra at 886.]

With the foregoing in mind, the court in Erie Lighting Co.

v. Commissioner, supra, proceeded to examine the facts before it,

including the nature of the matters on which the preferred stock

of ELC had the right to vote, and made certain judgments about

the nature of those various matters. Based on that examination,

the court found that the ELC preferred stock had the right to

vote on many matters that it determined were "usually reserved to

the stockholders" (stockholder matters) but that it did not have

the right to vote in the election of ELC's board of directors,

unless dividends with respect to that preferred stock remained

unpaid for two quarterly periods, a condition that had not arisen

during the years in question. Id. at 883, 885. The matters that

the court in Erie Lighting Co. determined were "usually reserved

to the stockholders" included increases or reductions of capital

stock of the company, increases in its capital indebtedness, the

number of directors serving on ELC's board of directors, the

place of its principal office, and the time of its stockholder

15 (...continued) Elec. Co. and Howes Bros. Hide Co. cases. Erie Lighting Co. v. Commissioner, supra at 886. - 57 -

meetings.16 Id. at 885. The court in Erie Lighting Co. did not

indicate that any of those stockholder matters on which the

preferred stockholders of ELC had the right to vote restricted

ELC's board of directors with respect to that board's management

of ELC's business and affairs. Nor did it make mention of any

management matter that it believed was taken away from ELC's

board of directors by those stockholder matters. To the con-

trary, the court in Erie Lighting Co. examined applicable State

law and the bylaws of ELC, found that under that law and those

bylaws the board of directors of ELC was entrusted with the

management of its business and affairs, and distinguished the

management matters that were entrusted to ELC's board of direc-

tors from the stockholder matters on which the preferred stock-

holders of ELC had the right to vote. The court in Erie Lighting

Co. v. Commissioner, 93 F.2d at 885, concluded that those stock-

holder matters

are not a basis for holding that two corporations do business as a single unit, or that the preferred stock- holders control the management of the business enter- prise. That is left to the board of directors.

16 It appears to us that (1) certain of the matters that the court in Erie Lighting Co. v. Commissioner, supra, determined were "usually reserved to the stockholders" were the types of matters that under the laws of all States required a stockholder vote or stockholder approval, and (2) the remainder of those matters were the types of matters that under the laws of certain States required a stockholder vote or stockholder approval. See 2 Fletcher Cyclopedia of Corporations, secs. 276, 543, 547 (perm. ed. 1990 rev.); 5 Fletcher Cyclopedia of Corporations, supra secs. 2001, 2105 (perm. ed. 1996 rev.). - 58 -

The court held in Erie Lighting Co. v. Commissioner, supra at

885-886, that the preferred stock of ELC was not voting stock for

purposes of the applicable consolidation provisions because that

stock did not have the right to vote in the election of the board

of directors of ELC, which was entrusted with the management of

its business affairs, and therefore that stock did not have the

right to control that management.

Since Erie Lighting Co. v. Commissioner, supra, was decided,

pertinent rulings have, consistent with the rationale of the Erie

Lighting Co. case, considered the ability of stock to participate

in the management of a corporation through the election of one or

more directors in determining the existence of voting stock

and/or the extent of voting power for purposes of the consolida-

tion provisions. See, e.g., Rev. Rul. 69-126, 1969-1 C.B. 218;

I.T. 3896, 1948-1 C.B. 72. However, none of those rulings

involved the facts presented here. Nor did any of them suggest

that the power of the boards of directors involved in those

rulings, or of the members of those boards, was restricted or

limited, such as by completely taking away from those boards the

power to vote on certain matters relating to the management of

corporate business and affairs that were entrusted to those

boards under the applicable State law or by requiring a class

vote by different members of those boards on such board manage-

ment matters. - 59 -

Based on our examination of Erie Lighting Co. v. Commis-

sioner, supra, and other pertinent authorities, we conclude that,

in the present case, we are not precluded from examining the

impact, if any, of the respective director and stockholder class

voting requirements, the mandatory dividend provision, and the

objectionable action provision on the power of the Alumax class C

common stock to participate in the management of Alumax, directly

and/or indirectly through the class C directors whom that stock

elected, and, therefore, on the voting power of that stock for

1984 for purposes of section 1504(a)(1) and for 1985 and 1986 for

purposes of amended section 1504(a)(1)(B) and (2)(A). See Erie

Lighting Co. v. Commissioner, supra; see also Rev. Rul. 69-126,

supra; I.T. 3896, supra.

Before turning to an examination of those matters, we shall

set forth our views about the experts on whom the parties rely.

Petitioners rely on the opinions of R. Franklin Balotti (Mr.

Balotti) who is qualified as an expert on the general corporation

law of the State of Delaware and on the corporate governance and

capital structure of Delaware corporations and business organiza-

tions and who prepared an opening report and a rebuttal report

(collectively referred to as Mr. Balotti's reports). Respondent

relies on the opinion of Bernard S. Black (Mr. Black) who is

qualified as an expert on corporate law, mergers and acquisi-

tions, and corporate finance and who also prepared an opening - 60 -

report and a rebuttal report (collectively referred to as Mr.

Black's reports).

We evaluate the opinions of experts in light of the qualifi-

cations of each expert and all other evidence in the record.

Estate of Christ v. Commissioner, 480 F.2d 171, 174 (9th Cir.

1973), affg. 54 T.C. 493 (1970); IT&S of Iowa, Inc. v. Commis-

sioner, 97 T.C. 496, 508 (1991); Parker v. Commissioner, 86 T.C.

547, 561 (1986). We have broad discretion to evaluate "'the

overall cogency of each expert's analysis.'" Sammons v. Commis-

sioner, 838 F.2d 330, 334 (9th Cir. 1988) (quoting Ebben v.

Commissioner, 783 F.2d 906, 909 (9th Cir. 1986), affg. in part

and remanding in part T.C. Memo. 1983-200). We shall disregard

any opinion of an expert that constitutes nothing more than that

expert's legal opinion or conclusion about a particular matter.

See Marx & Co. v. Diners' Club Inc., 550 F.2d 505, 508-512 (2d

Cir. 1977); Laureys v. Commissioner, 92 T.C. 101, 127-129 (1989).

We are not bound by the formulae and opinions proffered by an

expert, especially when they are contrary to our own judgment.

Orth v. Commissioner, 813 F.2d 837, 842 (7th Cir. 1987), affg.

Lio v. Commissioner, 85 T.C. 56 (1985); Silverman v. Commis-

sioner, 538 F.2d 927, 933 (2d Cir. 1976), affg. T.C. Memo. 1974-

285; Estate of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir.

1955), affg. T.C. Memo. 1954-139. Instead, we may reach a

decision based on our own analysis of all the evidence in the - 61 -

record. Silverman v. Commissioner, supra at 933. The persua-

siveness of an expert's opinion depends largely upon the dis-

closed facts on which it is based. See Tripp v. Commissioner,

337 F.2d 432, 434 (7th Cir. 1964), affg. T.C. Memo. 1963-244.

While we may accept the opinion of an expert in its entirety,

Buffalo Tool & Die Manufacturing Co. v. Commissioner, 74 T.C.

441, 452 (1980), we may be selective in the use of any portion of

such an opinion. Parker v. Commissioner, supra at 562. We also

may reject the opinion of an expert witness in its entirety. See

Palmer v. Commissioner, 523 F.2d 1308, 1310 (8th Cir. 1975),

affg. 62 T.C. 684 (1974); Parker v. Commissioner, supra at 562-

565.

Mr. Balotti's Reports

We found the focus of Mr. Balotti's reports to be in large

part misdirected. Mr. Balotti's reports focus primarily on

whether the director class voting requirement, the stockholder

class voting requirement, the mandatory dividend provision, and

the objectionable action provision prevented the board of Alumax

from managing its business and affairs. He concludes that those

requirements and provisions did not "significantly alter or

impair" the power of the Alumax board to manage the business and

affairs of Alumax or the exercise of such power. However, it is

respondent's position that the director class voting requirement

caused the Alumax board's power with respect to the restricted - 62 -

matters to be divided equally between the class B directors and

the class C directors, not that that requirement impaired the

Alumax board's power to manage the business and affairs of

Alumax. Moreover, it is not respondent's position that the

stockholder class voting requirement, the mandatory dividend

provision, and the objectionable action provision completely

prevented the Alumax board from managing the business and affairs

of Alumax; rather, it is respondent's position that the Alumax

board's power to manage any matter that was subject to that

requirement and those provisions was restricted.

We found certain of Mr. Balotti's opinions to be qualified

in material respects. To illustrate, Mr. Balotti concedes that

the Alumax board's power was impaired by the director and stock-

holder class voting requirements, the mandatory dividend provi-

sion, and the objectionable action provision, albeit, in his

opinion, not "significantly". By way of further illustration,

Mr. Balotti qualifies his opinion relating to the voting power of

the class C directors by stating that those directors "generally"

had 80 percent of the voting power of the Alumax board and by

concluding that in "most" circumstances the class C directors

could effectuate their will if they chose to do so. Mr. Balotti

thus acknowledges, as he must on the facts presented in this

case, that the class C directors could not cast 80 percent of the

votes entitled to be cast by the Alumax board on all matters that - 63 -

were submitted to it and that the power of the Alumax board was

"impaired", albeit, in his opinion, such impairment was not

"significant".

We also found certain of Mr. Balotti's opinions to be

internally inconsistent in material respects and/or to have been

reached by disregarding certain material facts to which the

parties have stipulated. To illustrate, although Mr. Balotti

qualifiedly concludes that the director class voting requirement,

the stockholder class voting requirement, the mandatory dividend

provision, and the objectionable action provision did not "sig-

nificantly" impair the power of the Alumax board to manage the

business and affairs of Alumax or the exercise of such power, he

nonetheless concludes unqualifiedly that the Alumax board managed

the business and affairs of Alumax. By way of further illustra-

tion, although Mr. Balotti qualifiedly concludes that the class C

directors "generally" had 80 percent of the voting power of the

Alumax board and refers to the director class voting requirement

and the stockholder class voting requirement as "limitations on

the exercise of majority power by Amax", he nonetheless concludes

unqualifiedly that the class C directors had the right to, and

did exercise, 80 percent of the voting power of the Alumax board.

It is also noteworthy that Mr. Balotti's opinions appear to

have been based in large part on his view that the limitations on

the Alumax board resulting from the director and stockholder - 64 -

class voting requirements, the mandatory dividend provision, and

the objectionable action provision are "similar" to the restric-

tions that are "commonly" imposed on the boards of directors of

other Delaware corporations "having analogous investor profiles"

in order to protect the interests of minority stockholders of

those corporations. In a number of instances, Mr. Balotti's

reports do not disclose sufficient facts and data for us to be

satisfied that the boards of other Delaware corporations that do,

in fact, have investor profiles analogous to that of Alumax are,

in fact, commonly limited by all of the restrictions involved in

this case or by restrictions that are, in fact, similar to all of

those restrictions.17 See Rule 143(f)(1).

17 Indeed, to the extent that Mr. Balotti's reports do disclose some facts describing what he concludes are restrictions that are "similar" to the director and stockholder class voting require- ments involved here, we disagree that such restrictions are similar. By way of illustration, Mr. Balotti states that the director and stockholder class voting requirements with respect to all of the restricted matters presented here are comparable to voting rights that are given to minority stockholders on events such as a merger, an amendment to the certificate of incorpora- tion, a sale of substantially all the assets of a corporation, and a dissolution of a corporation. However, minority stockhold- ers have voting rights on all of the matters mentioned by Mr. Balotti because State law gives them such rights. See 2 Fletcher Cyclopedia of Corporations, secs. 542, 544, 545, 546 (perm. ed. 1990 rev.). None of those matters relates to the management of corporate business and affairs which are entrusted to its board of directors under the applicable State law and on which the vote or approval of the stockholders is not required by that law. In contrast, most of the restricted matters on which the Alumax directors and stockholders, respectively, were required to vote by class were the types of matters relating to the management of the business and affairs of Alumax that were entrusted under (continued...) - 65 -

In any event, even assuming arguendo that Mr. Balotti were

correct in his view that all of the restrictions involved in this

case, or similar restrictions, are common in Delaware corpora-

tions with investor profiles analogous to that of Alumax, in the

instant case, we nonetheless would determine the impact, if any,

of the director and stockholder class voting requirements, the

mandatory dividend provision, and the objectionable action

provision on the voting power of the Alumax class C common stock

for purposes of section 1504(a)(1) and amended section

1504(a)(1)(B) and (2)(A), just as we would consider the impact,

if any, of such facts on the voting power of the stock of any

17 (...continued) Delaware law to the Alumax board except as provided in the 1984 restated certificate of incorporation and were matters on which under Delaware law and that certificate the Alumax board was to vote and on which the vote or approval of the Alumax stockholders was not required by Delaware law, although it was required by that certificate. By way of further illustration, Mr. Balotti concludes that the mandatory dividend provision, which he de- scribes as giving the Mitsui group "80 percent of the first 35% of income distributed by dividends", is comparable to provisions that grant superior dividend rights to preferred stockholders. We disagree. Although the parties agree that the mandatory dividend provision gave the Alumax class B common stock superior dividend rights with respect to 35 percent of Alumax' net income, that provision also required the Alumax board to declare and pay dividends to all the Alumax stockholders to the extent of 35 percent of Alumax' net income. In contrast, the preferential dividend provisions to which Mr. Balotti compares the mandatory dividend provision usually do not obligate a company's board of directors to declare and pay dividends, see 12 Fletcher Cyclopedia of Corporations, secs. 5443-5446 (perm. ed. 1996 rev.), although once the board decides to declare dividends, preferred stockholders with preferential dividend rights have superior rights to such dividends. - 66 -

other corporation which presented to us the same issue as is

presented here. That is because neither the pervasiveness of

such class voting requirements and such dividend and objection-

able action provisions in other corporations with analogous

investor profiles to that of Alumax nor the underlying reason for

their presence controls whether and/or how those requirements and

provisions affect the determination of whether the Alumax class C

common stock satisfies the 80-percent voting power test of

section 1504(a)(1) and amended section 1504(a)(1)(B) and (2)(A).

We did not find Mr. Balotti's reports to be helpful in

resolving the issue presented here under section 1504(a)(1) and

amended section 1504(a), and we do not rely on those reports in

making our findings and reaching our conclusions herein. See

Fed. R. Evid. 702.

Mr. Black's Reports

We found certain statements in Mr. Black's reports to be

legal opinions that are beyond the proper scope of expert opin-

ions. See Marx & Co. v. Diners' Club Inc., 550 F.2d at 508-512;

Laureys v. Commissioner, 92 T.C. at 127-129. By way of illustra-

tion, Mr. Black, whose reports focus primarily on whether the

director and stockholder class voting requirements, the mandatory

dividend provision, and the objectionable action provision

affected the voting power of the Alumax class C common stock for

purposes of section 1504(a), concludes that the "consolidation - 67 -

rules in IRC § 1504 and related regulations were intended to en-

sure that the enterprises that are eligible for consolidation are

operated as a single 'business unit' and that this "purpose was

not achieved by Amax and Alumax between 1984 and 1986". By way

of further illustration, Mr. Black concludes that the analysis

that he, as a corporate lawyer, applies in reaching his conclu-

sions relating to the "total voting power" of the Alumax class C

common stock is the analysis that should be applied in interpret-

ing "total voting power" under section 1504. He also opines that

under section 1504: (1) Generally, "the holder of 51% of the

voting power of a corporation's shares has (almost) 100% control

over the corporation's actions, both at the management/board of

directors level and at the shareholder level"; (2) where a class

of stockholders may elect 75 percent of the members of a com-

pany's board of directors, they have "close to 100% effective

voting power because those directors completely controlled * * *

the decisions * * * [of the] board" and do not have "less than

80% * * * voting power merely because they elected only 75% of *

* * [the] board"; and (3) "Amax had 80% voting control, and thus

(almost) 100% effective control," over certain actions that were

taken by Alumax.

Mr. Black further opines that the Alumax class C common

stock possessed slightly more than 50 percent, but less than 80

percent, of the "total voting power" of all classes of Alumax - 68 -

stock. The analysis that he used in reaching that conclusion

involved the following three steps: (1) A division into four

categories of the range of actions that could be taken by Alumax;

(2) a determination of the "relative importance" of each such

class of actions; and (3) a determination of the degree of

"control" exercised by the Amax group stockholders and the

Mitsui/Nippon group stockholders over each such class of actions.

Mr. Black does not define or explain in his reports certain key

components of that analysis, such as his definition of "control".

In fact, he uses the term "control", as well as the terms "total

voting power", "voting power", "effective voting power", "effec-

tive control", "voting control", and "relative voting power",

without giving any of those terms a defined meaning; at times he

uses them as though they have the same meaning, and at other

times he uses them as though they have different meanings.

Assuming arguendo that Mr. Black's analysis were the proper

analysis to be applied in determining whether the Alumax class C

common stock satisfied the 80-percent voting power test of

section 1504(a)(1) and amended section 1504(a)(1)(B) and (2)(B),

we nonetheless would not find that analysis useful in making that

determination. That is because some of the key steps in Mr.

Black's analysis require that he make qualitative judgments, but

at times he does not explain the bases for those judgments. See

Rule 143(f)(1). By way of illustration, Mr. Black concludes, - 69 -

without providing any explanation, (1) that Alumax actions that

were subject to the director and stockholder class voting re-

quirements were the “most important” type of actions to be taken

by Alumax and (2) that Alumax actions to be taken by the Alumax

board that were not subject to those requirements and that could

not possibly trigger the rights of Mitsui Japan and/or Mitsui USA

under the objectionable action provision were the "least impor-

tant" type of actions to be taken by Alumax.

Certain of the conclusions that Mr. Black reaches in his

reports also are based on internally inconsistent statements.

For example, although Mr. Black proposes that "total voting

power" be measured by analyzing "the full range of actions to be

taken by Alumax and the degree of control Amax and Mitsui had

over those actions", he also proposes that "total voting power"

be measured based on "the voting power in fact exercised by each

class of the shares".

We did not find Mr. Black's reports to be helpful in resolv-

ing the issue presented here under section 1504(a)(1) and amended

section 1504(a), and we do not rely on them in making our find-

ings and reaching our conclusions herein. See Fed. R. Evid. 702.

The Class Voting Requirements

As a result of the stockholder class voting requirement with

respect to the stockholder restricted matters and the director

class voting requirement with respect to the director restricted - 70 -

matters, each of the two classes of Alumax stock (viz, the Alumax

class B common stock and the Alumax class C common stock),

directly and indirectly through the respective directors whom

each class elected (viz, the class B directors and the class C

directors, respectively), had 50-percent voting power as to any

of those restricted matters. That is because each class had the

power to cast 50 percent of the votes entitled to be cast on any

such matter. (We shall sometimes refer collectively to the

stockholder restricted matters and the director restricted

matters as the restricted matters.)

Respondent generally contends that the director and stock-

holder class voting requirements as to each of the six restricted

matters affected the voting power of the Alumax class C common

stock for purposes of section 1504(a)(1). However, in advancing

specific arguments in support of that contention, respondent

addresses only certain restricted matters that respondent claims,

and petitioners do not dispute, were (1) the types of matters

relating to the business and affairs of Alumax which under

Delaware law were to be managed by or under the direction of the

Alumax board except as provided in the 1984 restated certificate

of incorporation (Alumax board management matters); (2) matters

on which under Delaware law and the 1984 restated certificate of

incorporation the Alumax board was required to vote, and under

that certificate that vote was required to be a class vote of the - 71 -

Alumax class B directors and the Alumax class C directors; and

(3) matters on which under the 1984 restated certificate of

incorporation but not under Delaware law the Alumax stockholders

were required to vote, and under that certificate that vote was

to be a class vote of the Alumax class B common stock and the

Alumax class C stock. The restricted matters specifically

addressed by respondent are: (1) Mergers of Alumax that would

not cause Alumax as the acquiring corporation to increase its

outstanding stock by more than 20 percent; (2)(a) Alumax' acqui-

sition of a material asset (i.e., an asset with a net book value

of at least 5 percent of Alumax' net worth, viz, at least $36

million) or (b) a capital appropriation by Alumax of $30 million

or more (viz, 1.8 percent of its total assets); (3)(a) Alumax'

disposition of such a material asset or (b) an asset disposition

request of Alumax of $30 million or more, neither of which would

constitute a sale, lease, or exchange of "all or substantially

all" of its assets; and (4) the election, selection, or dismissal

of the Alumax CEO/president. Since respondent addresses only the

foregoing restricted matters, petitioners limit their arguments

to those matters in their reply brief. We also shall address

only those restricted matters (restricted matters at issue) in

resolving the issue presented under section 1504(a)(1) and

amended section 1504(a). In this connection, we shall restate

petitioners' arguments under section 1504(a)(1) about the respec- - 72 -

tive director and stockholder class votes required on the re-

stricted matters at issue as they were presented on brief by

petitioners, even though certain of those arguments address only

the director class voting requirement, and not the stockholder

class voting requirement. See supra note 13.

Petitioners contend that the 50-percent voting power of the

class B directors and, consequently, of the Alumax class B common

stock on the restricted matters at issue did not reduce the

voting power of the Alumax class C common stock for purposes of

section 1504(a)(1) "any more than the power of preferred stock in

Erie Lighting [Co. v. Commissioner, 93 F.2d 883] to vote on a

much larger group of matters transformed that preferred [stock]

into voting stock." We disagree.

We find significant distinctions between the restricted

matters at issue and the matters on which the preferred stock-

holders in Erie Lighting Co. v. Commissioner, supra, had the

right to vote. In Erie Lighting Co., the preferred stockholders

had the right to vote on certain matters (e.g., increases or

reductions of capital stock of ELC, increases in its capital

indebtedness, the number of directors serving on ELC's board of

directors, the place of its principal office, and the time of its

stockholder meetings) that the court found were "matters usually - 73 -

reserved to the stockholders",18 as distinguished from the man-

agement matters that the court found were entrusted to the board

of directors of ELC. Erie Lighting Co. v. Commissioner, supra at

885. In deciding whether the preferred stock in Erie Lighting

Co. was voting stock or nonvoting stock for purposes of the

consolidation provisions involved there, the court found that

distinction to be significant. The court stated that:

matters usually reserved to the stockholders * * * [on which the preferred stockholders had the right to vote] are not a basis for holding that two corporations do business as a single unit, or that the preferred stock- holders control the management of the business enter- prise. That is left [in the Erie Lighting Co. case] to the board of directors. [Id.]

In contrast to the matters "usually reserved to the stockholders"

on which the preferred stockholders had the right to vote in Erie

Lighting Co. v. Commissioner, supra, in the instant case, respon-

dent contends, and petitioners do not dispute, that the re-

stricted matters at issue on which the Alumax board and the

Alumax stockholders, respectively, were required to vote by class

were Alumax board management matters on which under Delaware law

the Alumax board was required to vote, but on which the vote or

approval of the Alumax stockholders was not required under

Delaware law, although it was required by the 1984 restated

Petitioners also contend that the director and stockholder

18 See supra note 16. - 74 -

class voting requirements should be ignored in determining

whether the Alumax class C common stock satisfies the 80-percent

voting power test of section 1504(a)(1) because those require-

ments applied only to a limited number of "extraordinary" or

"highly unusual" matters, and not to the "vast majority" of

"ordinary", "routine", or "day-to-day" matters on which the

Alumax board could, and did, vote during the period at issue.19

According to petitioners, because the restricted matters at issue

involved extraordinary or highly unusual situations, the respec-

tive class votes required by the Alumax board and the Alumax

stockholders on those restricted matters did not "meaningfully

impair the power of the [Alumax] Board, operating through the

Class C Directors, to manage the business and affairs of Peti-

tioner [Alumax]" and, therefore, did not "in any meaningful way"

or "significantly affect the voting power" of the Alumax class C

common stock. Accordingly, petitioners conclude, the required

director and stockholder class voting should be ignored in

19 To support their position that most of the restricted matters at issue were extraordinary or highly unusual, petitioners point to how infrequently during the period at issue the Alumax board voted on any of those matters compared to how often during that period that board voted on matters that did not require a class vote. They also point to the significant dollar amounts involved in most of the restricted matters at issue (e.g., an acquisition or a disposition of an asset with a book value of at least $36 million and a capital appropriation or an asset disposition request of $30 million or more) as compared to the much smaller dollar amounts involved in the matters on which the Alumax board voted during the period at issue that did not require such a class vote. - 75 -

deciding the issue presented under section 1504(a)(1).20

Initially, we note that, to the extent that it is petition-

ers' position that it is the actual exercise of voting power

which controls the question presented to us under section

1504(a)(1) and amended section 1504(a)(1)(B) and (2)(A), we

disagree. It is the legal right to exercise voting power that is

determinative under those provisions. See Atlantic City Elec.

Co. v. Commissioner, 288 U.S. 152, 153-154 (1933); Handy & Harman

v. Burnet, 284 U.S. 136, 141 (1931); Rudolph Wurlitzer Co. v.

Commissioner, 81 F.2d at 974.

Furthermore, even if the restricted matters at issue on

which the Alumax board and the Alumax stockholders had the power

to vote by class were, as petitioners claim, extraordinary or

highly unusual, those matters, like the ordinary or day-to-day

20 The reasons advanced by petitioners (as well as their expert) for ignoring the director and stockholder class voting required on the restricted matters at issue (and for ignoring the manda- tory dividend provision and the objectionable action provision discussed below) in resolving the question presented under sec. 1504(a)(1) and amended sec. 1504(a) are based on certain qualita- tive and/or quantitative judgments that they (as well as their expert) have made about those matters. In making those judg- ments, petitioners have done precisely what they argue "all judicial and administrative authorities" preclude us from doing in deciding that issue. Petitioners seek to impose their judg- ments on this Court and criticize respondent for asking this Court to make its own judgments about the impact of the director and stockholder class voting requirements (as well as the manda- tory dividend provision and the objectionable action provision) on the resolution of the issue before us under sec. 1504(a)(1). We, of course, are not bound by petitioners', or respondent's, judgments. - 76 -

business matters on which the Alumax board had the power to vote

in the aggregate, and not by class, were nonetheless Alumax board

management matters on which under Delaware law the Alumax board

was to vote, but on which the vote or approval of the Alumax

stockholders, although required by the 1984 restated certificate

of incorporation, was not required under Delaware law.

With respect to petitioners' claim that most of the re-

stricted matters at issue were unusual in that they involved

significant dollar amounts, we agree. However, that fact does

not aid petitioners' position under section 1504(a); it only

serves to emphasize that those matters, as well as the election,

selection, or dismissal of the Alumax CEO/president, were signif-

icant, important Alumax board management matters on which the

Alumax board and the Alumax stockholders, respectively, had the

right to vote by class.21

21 It is also significant that during the period Jan. 1 through Mar. 8, 1984, which was prior to the date (viz, Mar. 9, 1984) on which Alumax filed the 1984 restated certificate of incorporation with Delaware but after the date (viz, Jan. 1, 1984) on which that certificate, once filed, was to be effective, the 1974 restated certificate of incorporation required that any action by the Alumax board be by an affirmative class vote of the voting members of that board who were elected by the class A common stock and the voting members of that board who were elected by the class B common stock, who were present and voting. In addition, during that same period, any action of the Alumax stockholders required an affirmative class vote of a majority of the outstanding shares of each of the two classes of Alumax common stock. Not only were the Alumax board and the Alumax stockholders required to vote, respectively, by class during the period in 1984 preceding Mar. 9, 1984, the date on which Alumax (continued...) - 77 -

Petitioners advance additional arguments with respect to

certain of the restricted matters at issue in order to support

their position that the respective class votes required by the

Alumax board and the Alumax stockholders on those matters did not

"significantly affect the voting power" of the Alumax class C

common stock and, therefore, should be ignored in resolving the

issue presented under section 1504(a)(1). With respect to the

restricted matter at issue relating to a merger of Alumax that

would not cause Alumax as the acquiring corporation to increase

its outstanding stock by more than 20 percent, petitioners claim

that various rulings (e.g., I.T. 3896, 1948-1 C.B. 72; Priv. Ltr.

Rul. 90-26-047 (Mar. 30, 1990); Priv. Ltr. Rul. 87-53-005 (Sept.

30, 1987); Priv. Ltr. Rul. 83-49-048 (Sept. 2, 1983)) "regard

class voting rights on mergers of any size as having no effect

whatsoever on whether stock is 'voting stock' or on the measure-

ment of the 'voting power' of voting stock." We disagree. As we

read those rulings, none of them involved a class vote by the

21 (...continued) filed the 1984 restated certificate of incorporation with Dela- ware, that board and those stockholders did in fact vote by class on various matters during that period, including (1) the election of new officers; (2) three capital appropriations of Alumax in amounts not exceeding $2,413,000, $15,864,000, and $250,686,000, respectively; (3) Alumax' 5-year forecast for the period 1984 through 1988; (4) Alumax' capital expenditure plan for that 5- year period; (5) Alumax' 1984 profit plan; (6) Alumax' 1984 capital expenditure proposal; (7) the declaration of dividends; and (8) two matters relating to Alumax' employee compensation plans. - 78 -

stockholders therein with respect to the mergers in question.

Moreover, as we construe the rulings on which petitioners rely,

the stockholder vote involved in those rulings applied only to

certain, rather than all, types of mergers. None of those

rulings indicated that the stockholder vote involved therein

applied to mergers, such as those that are part of the restricted

matters at issue here, which were entrusted to the board of

directors under the applicable State law and on which a stock-

holder vote was not required under such law. In any event, none

of the rulings cited by petitioners considered the impact on the

voting power of stock for purposes of section 1504(a)(1) or

amended section 1504(a)(1)(B) and (2)(A) of a requirement imposed

by the certificate of incorporation for a director class vote, as

well as a stockholder class vote, on a merger on which under the

applicable State law the board of directors was required to vote

but not the stockholders.

With respect to the restricted matter at issue relating to

the election, selection, or dismissal of the Alumax

CEO/president, petitioners contend that the "CEO had limited

powers; notably, he could affect only those transactions that

were both within the business plan (which the Class C Directors

could establish) and not in excess of $1.5 million". Petitioners

appear to be arguing that, because limitations were placed on the

CEO/president's ability to approve certain expenditures, that - 79 -

officer did not have a significant role in the management of the

business and affairs of Alumax and that therefore the power of

the Alumax stockholders and the Alumax directors to vote by class

with respect to his or her election, selection, or dismissal is

not significant to the resolution of the issue presented under

section 1504(a)(1).22 We disagree. Petitioners fail to acknowl-

edge that the 1984 bylaws required the CEO/president to "have

general charge and supervision of the business of the corpora-

tion" and "perform all duties incident to the office of president

of a corporation, and such other duties as, from time to time,

may be assigned to him by the Board of Directors or as may be

provided by law." Accordingly, despite any limitation on the

powers of the Alumax CEO/president to approve an expenditure in

excess of a stated amount, that officer nonetheless had broad

discretion over, and a significant role in, the management of the

business and affairs of Alumax.

On the record before us, we find that the director and

stockholder class voting requirements with respect to the re-

stricted matters at issue impact the voting power of the Alumax

class C common stock for 1984 for purposes of section 1504(a)(1)

22 Petitioners' argument regarding the director and stockholder class voting required as to the election, selection, or dismissal of the Alumax CEO/president appears to us to be inconsistent with their argument regarding the other restricted matters at issue that they claim are unusual or extraordinary. See discussion supra. - 80 -

and for 1985 and 1986 for purposes of amended section

1504(a)(1)(B) and (2)(A). See generally Anderson-Clayton Securi-

ties Corp. v. Commissioner, 35 B.T.A. 795 (1937).

The Mandatory Dividend Provision

Respondent contends that the mandatory dividend provision,

which was contained in the 1984 restated certificate of

incorporation, affected the voting power of the Alumax class C

common stock for purposes of section 1504(a)(1). In support of

that contention, respondent asserts, and petitioners do not

dispute, that the determination of whether or not to declare and

pay dividends was one of the Alumax board management matters on

which the Alumax board would have had the power to vote if it had

not been for the mandatory dividend provision, which removed from

that board the power to determine whether or not to declare and

pay dividends to the extent of 35 percent of Alumax' net

income.23

Petitioners contend that the mandatory dividend provision

did not reduce the voting power of the Alumax class C common

stock or detract from the power of the class C directors to man-

age the business and affairs of Alumax or from the exercise of

23 The mandatory dividend provision required that dividends to the extent of 35 percent of Alumax' net income be declared by the Alumax board and paid by Alumax "to the extent permitted by law." The parties do not suggest that such dividends were not mandatory because they were to be declared and paid "to the extent permit- ted by law." - 81 -

that power. Consequently, according to petitioners, that provi-

sion did not reduce the voting power of the Alumax class C common

stock for purposes of section 1504(a)(1) below the 80 percent

which petitioners claim that stock possessed. In support of

their position regarding the mandatory dividend provision, peti-

tioners advance arguments which are based on the premises that

the restrictions placed on the power of the Alumax board as a re-

sult of that provision are similar to the restrictions placed on

the power of other boards of directors as a result of (1) "fixed

payment" provisions contained in "debt instruments" requiring the

payment of principal and/or interest and (2) "preferential

dividend" provisions contained in "preferred stock * * * instru-

ments". We disagree with the premises on which petitioners'

position regarding the mandatory dividend provision is based. We

therefore reject their position.

The power to incur debt and to enter into debt instruments

that fix the terms for the repayment of principal and any payment

of interest are powers relating to the management of the business

and affairs of a company that are entrusted to its board of

directors and that the board may delegate to others like corpo-

rate officers.24 See 2 Fletcher Cyclopedia of Corporations, sec.

24 In the case of certain debt (e.g., "bonded indebtedness"), a stockholder vote or approval is required under certain State laws. See 5 Fletcher Cyclopedia of Corporations, sec. 2105 (perm. ed. 1996 rev.). - 82 -

473 (perm. ed. 1990 rev.). Once a company's board of directors

(or its delegates) has exercised its power to incur debt, any

fixed payments of principal and interest on that debt that are

set forth in the debt instrument are not matters relating to that

board's management of the company's business and affairs. They

are matters relating to the contractual obligation that was

imposed on the company when its board of directors (or delegates)

decided to exercise its power to incur the debt. Unlike the

mandatory dividend provision which obligated the Alumax board to

declare and pay dividends to its stockholders to the extent of 35

percent of its net income and therefore restricted that board's

power to act with respect to one of the Alumax board management

matters, fixed-payment provisions in debt instruments do not

restrict the powers of a company's board of directors with

respect to management matters entrusted to it. We find that the

fixed-payment provisions in debt instruments to which petitioners

refer are materially different from the mandatory dividend

provision involved here.

As examples of preferential dividend provisions in preferred

stock certificates that petitioners claim are similar to the

mandatory dividend provision, they point to preferential dividend

provisions described in various cases and rulings (e.g., Rudolph

Wurlitzer Co. v. Commissioner, 81 F.2d 971 (6th Cir. 1936); Rev.

Rul. 71-83, 1971-1 C.B. 268; Priv. Ltr. Rul. 79-38-060 (June 21, - 83 -

1979)) and in certain documents that are part of the instant

record under which certain Delaware corporations gave their

preferred stockholders preferential dividend rights. None of the

preferential dividend provisions described in the cases and

rulings and in the documents that are part of the instant record

to which petitioners refer restricted the power of a company's

board of directors to determine whether to declare and pay

dividends by requiring it to do so. Instead, those provisions

merely indicated that, once a board exercised its power to

declare and pay dividends, it was required to pay a certain

amount of dividends with respect to one class of stock before it

could pay any dividends with respect to another class of stock.

See 12 Fletcher Cyclopedia of Corporations, secs. 5443-5446

(perm. ed. 1996 rev.). In contrast, the mandatory dividend

provision restricted the power of the Alumax board to determine

whether or not to declare and pay dividends to the extent of 35

percent of Alumax' net income by requiring it to declare and pay

dividends to that extent to both classes of the Alumax stock.25

We find that the preferential dividend provisions in the pre-

ferred stock certificates to which petitioners refer are materi-

ally different from the mandatory dividend provision.

25 The parties agree that the mandatory dividend provision also gave the Alumax class B common stock a preferential right to receive 80 percent of the dividends that the Alumax board was required to declare and pay to all Alumax stockholders. - 84 -

Petitioners also contend that the preferential dividend

rights of the preferred stockholders in Erie Lighting Co. v.

Commissioner, 93 F.2d 883 (1st Cir. 1937), are similar to the

mandatory dividend provision involved here. We disagree. The

preferential dividend provision in Erie Lighting Co. stated:

"The holders of preference shares shall be enti- tled to receive out of the surplus or net profits of the said corporation, and the said corporation shall be bound to pay, quarterly cumulative dividends at the rate of $2.00 per share per annum, which quarterly dividends shall be paid, or set aside for payment, for each quarter before any dividend shall be declared or paid upon any other stock of said corporation; * * * After all accumulated and accrued dividends on the preference shares have been declared and paid, or set aside for payment, dividends may be declared and paid out of the remaining surplus or net profits to holders of common shares at the rate of $2.00 per share per annum, and all additional distribution of surplus or net profits as dividends shall be made at the same rate per share to holders of stock of both classes. * * *

The holders of said preference shares shall have no power to vote the same at any election for directors unless the dividends on the said preference shares for two quarterly periods, whether consecutive or not, shall remain unpaid." [Id. at 884.]

We do not construe the preferential dividend provision

involved in Erie Lighting Co. v. Commissioner, supra, as limiting

the discretion of ELC's board of directors by requiring it to

declare and pay dividends to the extent of a specified amount of

ELC's net income with respect to its two classes of outstanding

stock (viz, ELC preferred stock and ELC common stock). Rather,

pursuant to the preferential dividend provision involved in Erie

Lighting Co., once the ELC board of directors exercised its power - 85 -

to declare and pay dividends, it had to pay prescribed amounts of

dividends with respect to the ELC preferred stock, which amounts

were cumulative, before it could pay any dividends with respect

to the ELC common stock. We find that the preferential dividend

provision involved in Erie Lighting Co. v. Commissioner, supra,

was not mandatory,26 see 12 Fletcher Cyclopedia of Corporations,

sec. 5445 (perm. ed. 1986), and that it is materially different

from the mandatory dividend provision involved in the present

case. In so finding, we have not only relied on and construed

the language of the preferential dividend provision as set forth

by the court in Erie Lighting Co. v. Commissioner, supra, we also

have been mindful that that court found that under the applicable

State law and ELC's bylaws the management of the business and

affairs of ELC, and thus, inter alia, the power to determine

whether or not to declare and pay dividends, were entrusted to

its board of directors. Petitioners, however, appear to dispute

that finding of the court in Erie Lighting Co. They contend that

26 Even assuming arguendo that the dividend provision in Erie Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir. 1937), had required the ELC board to declare and pay dividends, the parties in that case did not advance any arguments with respect to the impact of any such mandatory dividend provision on the classifi- cation of the preferred stock involved there as voting or nonvot- ing stock for purposes of the applicable consolidation provi- sions. Consequently, the court in Erie Lighting Co. did not have occasion to, and did not, address the effect of a preferred stock mandatory dividend provision on whether such stock was voting or nonvoting stock and did not reach its holding on the basis of any such alleged mandatory provision. - 86 -

the power of ELC's board of directors in Erie Lighting Co. v.

Commissioner, supra, was restricted not only because of the

preferential dividend provision involved there, but also because

the ELC

board * * * was prohibited from affecting any "invest- ment of surplus" or "increase of capital indebtedness" without the approval of the preferred stockholders. * * *

* * * the Erie Lighting board was more restricted than Petitioner's Board because the Erie preferred stock- holders could vote on any borrowings or reinvestment of undistributed earnings.

We disagree with petitioners' contentions.

Initially, we note that, contrary to petitioners' assertion,

the court in Erie Lighting Co. v. Commissioner, supra, did not

state that the preferred stock in question had a right to vote on

or approve "investment of surplus" or "any borrowings". Indeed,

that court did not even use the phrase "investment of surplus",

or any similar phrase, in its opinion.27 While the court in Erie

27 The Board of Tax Appeals in Erie Lighting Co. v. Commis- sioner, 35 B.T.A. 906, 910-911, revd. 93 F.2d 883 (1st Cir. 1937), found that the preferred stock in question "could by its vote affect and effect action in various ways, such as in regard to * * * approval of investment of surplus". However, in revers- ing the decision of the Board of Tax Appeals in that case, the Court of Appeals in Erie Lighting Co. v. Commissioner, supra, did not indicate in its opinion that the preferred stock in question had a right to vote on or to approve the "investment of surplus". Even assuming arguendo that the ELC preferred stock had a right to vote on or to approve the "investment of surplus", the Court of Appeals in the Erie Lighting Co. case did not address the (continued...) - 87 -

Lighting Co. v. Commissioner, supra, did find that the preferred

stock involved there had the right to vote on many matters,

including "any increase of the capital indebtedness", that matter

is not one of the matters involved in the present case. More-

over, unlike the Alumax board management matters over which the

parties disagree regarding their impact for purposes of section

1504(a)(1) and which did not require a stockholder vote or

approval under Delaware law, an increase in the capital indebted-

ness of ELC was, according to the court in Erie Lighting Co., one

of the matters that are "usually reserved to the stockholders".

Erie Lighting Co. v. Commissioner, 93 F.2d at 885. The court in

Erie Lighting Co. did not consider any of those stockholder

matters to be a restriction on the power of the ELC board. To

the contrary, that court found that under the applicable State

law and ELC's bylaws the board of directors of ELC was entrusted

with the management of its business and affairs, and it did not

mention any management matter that it believed was taken away

from that board by those stockholder matters. Id.

On the record before us, we find that the mandatory dividend

provision impacts the voting power of the Alumax class C common

stock for 1984 for purposes of section 1504(a)(1) and for 1985

27 (...continued) effect of any such right on whether the ELC preferred stock was voting or nonvoting stock and did not reach its holding on the basis of any such right. - 88 -

and 1986 for purposes of amended section 1504(a)(1)(B) and

(2)(A).

The Objectionable Action Provision

Respondent contends that the objectionable action provision

affected the voting power of the Alumax class C common stock for

purposes of section 1504(a)(1). In support of that contention,

respondent focuses on the objectionable action provision only

insofar as it applied to actions taken by the Alumax board

(director objectionable action provision), and not insofar as it

applied to actions taken by the Alumax stockholders. We also

shall address only the director objectionable action provision.

Respondent contends that the director objectionable action

provision prevented the Alumax board from taking any action that

could have had a material and adverse impact on the value of the

Alumax class B common stock which was held by the Mitsui group,

even though such action may have been in the best interests of

Alumax and/or Amax. According to respondent, that provision gave

the Mitsui group "virtual veto power" over any important action

that Alumax took.

Petitioners contend that the director objectionable action

provision did not detract from the power of the class C directors

to manage the business and affairs of Alumax or from the exercise

of that power and thus did not reduce the voting power of the

Alumax class C common stock for purposes of section 1504(a)(1) - 89 -

below the 80 percent which petitioners claim that stock pos-

sessed. According to petitioners, the director objectionable

action provision gave the Mitsui group a contingent right to

acquire additional voting power over future actions of Alumax,

which is comparable to the contingent rights held by the holders

of the preferred stock in Erie Lighting Co. v. Commissioner,

supra, and by the holders of convertible or exchangeable stock

and unexercised options or warrants. In this connection, peti-

tioners assert:

During the period at issue the law was clear that "voting power" was determined on the basis of actual voting power at the time of measurement, and that any possibility that voting power might change as a result of an event, such as the conversion of non-voting stock into voting stock or a purchase or redemption of stock, even if scheduled to occur, was irrelevant. * * *

To support their position with respect to the director objection-

able action provision, petitioners rely on, inter alia, the

following cases and rulings involving certain questions raised

under the consolidation provisions:

(1) Atlantic City Elec. Co. v. Commissioner, 288 U.S. 152

(1933), which held that preferred stock with certain voting

rights was voting stock even though it was redeemable by the

issuer at any time because the holders of that stock had voting

rights with respect to the "direction of * * * [the corporate]

undertaking", id. at 156, and their voting rights remained

unimpaired until actual redemption of that stock; - 90 -

(2) Erie Lighting Co. v. Commissioner, 93 F.2d 883 (1st Cir.

1937), which held that preferred stock was not voting stock even

though it was entitled to certain voting rights upon the occur-

rence of certain events because those events had not occurred

during the years involved there;

(3) Vermont Hydro-Electric Corp. v. Commissioner, 29 B.T.A.

1006 (1934), which held that preferred stock was not voting stock

even though it was entitled to certain voting rights upon the

occurrence of certain events that had not occurred during the

years involved there because (a) stock is not voting stock based

on the mere possibility that sometime in the future it might be

entitled to vote, and (b) it is the situation actually existing

during the period in controversy that is determinative, not a

situation that might have existed upon the happening of a contin-

gency; and

(4) Rev. Rul. 64-251, 1964-2 C.B. 338, which held that

unexercised warrants to purchase stock in a corporation do not

constitute "stock ownership" within the meaning of section

1504(a) of the Internal Revenue Code of 1954 (1954 Code) because

they do not confer upon the holder any rights or liabilities as a

stockholder of that corporation prior to their being exercised.

We reject petitioners' position regarding the director

objectionable action provision. We find significant distinctions

between the rights held by the Mitsui group under the director - 91 -

objectionable action provision and the rights held by the holders

of the stock, options, and warrants involved in the cases and

rulings on which petitioners rely. Contrary to petitioners'

claim, the director objectionable action provision did not give

the Mitsui group merely a contingent right to acquire additional

voting power over future actions of Alumax. That provision gave

the Mitsui group the legally enforceable right during the period

at issue to (1) negate the exercise of the power of the Alumax

board on any director nonrestricted matter,28 which the Mitsui

group believed could materially and adversely affect the value of

its investment in Alumax and to which one of the class B direc-

tors whom it elected objected and (2) permit a panel of arbitra-

tors to decide whether or not that board's exercise of its power

on any such matter was to become effective.29 Consequently,the

28 We have found that the director objectionable action provi- sion applied only to director nonrestricted matters on which the directors voted in the aggregate, and not by class. That is because any board action that required a class vote of the Alumax directors required, inter alia, an affirmative vote of the majority of the class B directors. Since there were only two class B directors, any such board action required the approval of both of those directors and could not be taken over the objection of either one of those directors. 29 Petitioners contend that the class C directors were not likely to take any action that would trigger the rights of the Alumax class B common stock under the director objectionable action provision and that the Mitsui group was not likely to exercise its rights under that provision. As we view it, the essence of petitioners' contention is that the director objec- tionable action provision is, in effect, a meaningless provision. We disagree. Moreover, petitioners concede on brief that that (continued...) - 92 -

Alumax board, and thus the class C directors of that board, did

not have any effective power to take action on any such director

nonrestricted matter.

On the record before us, we find that the director objec-

tionable action provision impacts the voting power of the Alumax

class C common stock for 1984 for purposes of section 1504(a)(1)

1504(a)(1)(B) and (2)(A).

Conclusion

Based on our review of the entire record before us, we find

that the respective director and stockholder class voting re-

quirements with respect to the restricted matters at issue, the

mandatory dividend provision, and the director objectionable

action provision reduced the voting power of the Alumax class C

common stock for 1984 for purposes of section 1504(a)(1) and for

1985 and 1986 for purposes of amended section 1504(a)(1)(B) and

(2)(A) below the 80 percent which petitioners claim that stock

possessed. We further find that petitioners have failed to

establish that the 80-percent value test of amended section

(...continued) provision gave the Mitsui group "the ability to protect the value of its investment in face of an extreme event." In addition, the record does not contain any evidence to suggest that the Mitsui group would not have exercised its rights under the director objectionable action provision to protect its investment in Alumax if and when, in its discretion, it became necessary to do so. - 93 -

1504(a)(1)(B) and (2)(B) was satisfied for 1985 and 1986.

Consequently, we hold that for 1984 and for 1985 and 1986 peti-

tioners were not members of the affiliated group within the

meaning of section 1504(a) and amended section 1504(a), respec-

tively, that had Amax as its common parent.30 Accordingly, we

sustain respondent's determination that petitioners are not

entitled to join in the consolidated return that Amax filed for

each of those years in which it claimed to be the common parent

of a group of corporations that included petitioners.31

Period of Limitations

Petitioners argue that even if the Court were to find that

petitioners are not entitled to join in the consolidated return

that Amax filed for each of the years 1984, 1985, and 1986, the

respective periods of limitations for those years for assessing

tax due from petitioners' group have expired. Respondent argues

that section 1.1502-77(c)(2), Income Tax Regs., rejects petition-

ers' contention. That regulation provides:

(c) Effect of waiver given by common parent.

30 We note that the issue presented here under sec. 1504(a) and amended sec. 1504(a) turns on the particular facts established by the record in this case, and nothing in this Opinion is intended to be, or should be read as, deciding or implying any finding or conclusion of this Court under that section in other cases involving facts that may appear to be similar to those presented in the present case. 31 In reaching our holding, we have considered all of petition- ers' arguments that are not discussed herein and found them to be without merit. - 94 -

Unless the district director agrees to the contrary, an agreement entered into by the common parent extending the time within which an assessment may be made or levy or proceeding in court begun in respect of the tax for a consolidated return year shall be applicable--

(2) To each corporation the income of which was included in the consolidated return for such taxable year, notwithstanding that the tax liability of any such corporation is subsequently computed on the basis of a separate return under the provisions of §1.1502- 75.

Petitioners counter that section 1.1502-77(c)(2), Income Tax

Regs., "is an invalid exercise of the Secretary's rule-making

authority."32 According to petitioners,

Nothing in section 1502 authorizes the Secretary to

32 In support of their contention that sec. 1.1502-77(c)(2), Income Tax Regs., is invalid, petitioners rely on J.A. Folger & Co. v. Commissioner, 27 B.T.A. 1 (1932), which involved a year that preceded the year (viz, 1929) in which art. 17(a)(2) of Regulations 75, the original predecessor of sec. 1.1502-77(c)(2), Income Tax Regs., first became effective. In J.A. Folger & Co., a parent corporation (parent corporation) filed consolidated returns for certain years for itself and two of its subsidiary corporations (subsidiary corporations). J.A. Folger & Co. v. Commissioner, supra at 3. The parent corporation entered into an agreement with the IRS extending the period of limitations for the "assessment of income and war profits tax due under any return made on behalf of that taxpayer" for one of those years. Id. (Emphasis added.) That agreement made no mention of the subsidiary corporations. Id. at 7-8. Under those facts, the Board of Tax Appeals held in J.A. Folger & Co. v. Commissioner, supra at 7-8, that the agreement that the parent corporation entered into with the IRS did not extend the period of limita- tions for the assessment of tax against the subsidiary corpora- tions. J.A. Folger & Co. is factually distinguishable from the instant case. The Forms 872 executed by Amax and Cyprus Amax, respectively, identified the "taxpayer(s)" as "Amax Inc. and Consolidated Subsidiaries" or "Amax Inc. and Consolidated Subs", and not just Amax. - 95 -

promulgate regulations that create agency relationships between corporations that never were part of the affil- iated group, yet this is precisely what the Secretary purports to have done in Treas. Reg. section 1.1502- 77(c)(2). The regulation thus is inconsistent with the "plain language of the statute" and cannot be valid.

Section 1.1502-77(c)(2), Income Tax Regs., is a legislative

regulation that was promulgated under section 150233 and that

appears in the portion of the regulations under that section

entitled "Administrative Provisions and Other Rules". As a

legislative regulation, section 1.1502-77(c)(2), Income Tax

Regs., must be upheld unless it is arbitrary, capricious, or

manifestly contrary to section 1502. Chevron U.S.A., Inc. v.

Natural Resources Defense Council Inc., 467 U.S. 837, 844 (1984).

Regulations substantially the same as section 1.1502-

77(c)(2), Income Tax Regs., were first issued as article 17(a)(2)

of Regulations 7534 under the authority of section 141(b) of the

33 Section 1502 provides:

The Secretary shall prescribe such regulations as he may deem necessary in order that the tax liability of any affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be returned, determined, computed, assessed, collected, and adjusted, in such manner as clearly to reflect the income tax lia- bility and the various factors necessary for the determi- nation of such liability, and in order to prevent avoid- ance of such tax liability. 34 Art. 17(a)(2) of Regulations 75 provided:

(a) Effect of Waiver given by Parent.

Any consent given by the parent corporation * * * extending the time within which an assessment may be made (continued...) - 96 -

Revenue Act of 1928 (1928 Act), ch. 852, 45 Stat. 831,35 a provi-

sion that was substantially the same as section 1502. When

Congress was considering a revision of the revenue law that

ultimately became the 1928 Act it became aware of a broad range

of problems and potential abuses that had emerged in the adminis-

tration and interpretation of the consolidated return provisions.

Many of those problems and potential abuses were set forth in the

Staff of Joint Committee, Report of the Joint Committee on

Internal Revenue Taxation (Vol. I), 63-66 (1928) (Joint Committee

report). The Joint Committee report recommended that the consol-

idated return provisions be abolished and replaced with provi-

sions permitting the operating loss of any member of an affili-

ated group, as defined in the Joint Committee report proposal, to

be offset against the net income of one or more members of that

34 (...continued) or distraint or proceeding in court begun, in respect of the tax for a consolidated return period, shall be applica- ble * * * (2) to each corporation the income of which was included in the consolidated return, or which filed Form 1122, for such period, even though it is subsequently determined that such corporation was not a member of the group. 35 Sec. 141(b) of the Revenue Act of 1928 (1928 Act), ch. 852, 45 Stat. 831, provided:

Regulations.--The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affil- iated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability. - 97 -

group. Joint Committee report, supra at 66. After considering

the Joint Committee report, the House of Representatives (House)

in its bill that Congress considered in connection with passage

of the 1928 Act decided to deny the privilege of filing consoli-

dated returns after taxable year 1928, thereby compelling all

corporations to file separate returns. See H.R. 1, 70th Cong.,

1st Sess. sec. 141 (1927); see also H. Rept. 2, 70th Cong. 1st

Sess. (1927), 1939-1 C.B. (Part 2) 384, 397.

The Senate Finance Committee was not convinced that elimina-

tion of the privilege of filing consolidated returns was an

appropriate solution to the wide range of problems and potential

abuses to which the Joint Committee report alluded that had

emerged in the administration and interpretation of the consoli-

dated return provisions. Instead, the Senate Finance Committee

recommended retention of the consolidated return provisions but

coupled such retention with provisions authorizing the Commis-

sioner, with the approval of the Secretary of the Treasury

(Secretary), to promulgate special regulations that would deal

with the types of problems and potential abuses raised by the

Joint Committee report. The Senate Finance Committee stated in

pertinent part:

Many difficult and complicated problems * * * have arisen in the administration of the provisions permit- ting the filing of consolidated returns. It is, obvi- ously, of utmost importance that these questions be answered with certainty and a definite rule be pre- scribed. Frequently, the particular policy is compara- tively immaterial, so long as the rule to be applied is known. The committee believes it to be impracticable - 98 -

to attempt by legislation to prescribe the various detailed and complicated rules necessary to meet the many differing and complicated situations. Accord- ingly, it has found it necessary to delegate power to the Commissioner to prescribe regulations legislative in character covering them. * * * Furthermore, the section requires that all the corporations joining in the filing of a consolidated return must consent to the regulations prescribed prior to the date on which the return is filed.

Among the regulations which it is expected that the Commissioner will prescribe are: * * * (5) that the corporations filing the consolidated return must desig- nate one of their members as the agent for the group, in order that all notices may be mailed to the agent, deficiencies collected, refunds made, interest com- puted, and proceedings before the Board of Tax Appeals conducted as though the agent were the taxpayer. [S. Rept. 960, 70th Cong., 1st Sess. (1928), 1939-1 C.B. (Part 2) 409, 419.]

Congress ultimately accepted the Senate Finance Committee's

recommendations and enacted section 141(b) of the 1928 Act. The

Secretary responded to the enactment of section 141(b) of the

1928 Act and promulgated, inter alia, article 17(a) of Regula-

tions 75. That regulation, like its successor section 1.1502-

77(c), Income Tax Regs., designates the common parent of a group

of corporations that files a consolidated return as the agent for

those corporations in extending the period of limitations for the

assessment of tax against any of those corporations, regardless

whether any of them is required to file a separate return.

In connection with the enactment of the 1954 Code, the House

proposed incorporating into law the then extant regulations under - 99 -

the consolidated return provisions.36 See H. Rept. 1337, 83d

Cong., 2d Sess. 87 (1954). That proposal was rejected by the

Senate, S. Rept. 1622, 83d Cong., 2d Sess. 120 (1954), and by the

conference committee, H. Conf. Rept. 2543, 83d Cong., 2d Sess. 73

(1954), not because of any concern about the validity of those

regulations but because it was believed that it would inhibit the

flexibility of the Secretary to supplement and/or modify those

regulations as was deemed necessary. Subsequently, Congress

enacted section 1502 as part of the 1954 Code and continued to

grant in section 1502 specific legislative authority to the

Secretary to promulgate regulations as the Secretary may deem

necessary to deal with the difficult and complicated problems

relating to the administration of the consolidated return provi-

sions.37

36 After the Revenue Act of 1932 (1932 Act), ch. 209, 47 Stat. 169, and prior to the enactment of the 1954 Code, regulatory provisions substantially similar to art. 17(a)(2) of Regs. 75 appeared subsequently in art. 17(a)(2) of Regs. 78 under the 1932 Act; art. 17(a)(2) of Regs. 89 under the Revenue Act of 1934, ch. 277, 48 Stat. 680; art. 17(a)(2) of Regs. 97 under the Revenue Act of 1936, ch. 690, 49 Stat. 1648; art. 17(a)(2) of Regs. 102 under the Revenue Act of 1938, ch. 289, 52 Stat. 447; sec. 23.17(a)(2) of Regs. 104 under the Code of 1939 (1939 Code); sec. 33.17(a)(2) of Regs. 110 under the Second Revenue Act of 1940, ch. 757, 54 Stat. 974, relating to the excess profits tax; and sec. 24.17(a)(2) of Regs. 129 under the 1939 Code in respect of years after 1949 and before 1954. 37 After the enactment of the 1954 Code, regulations substan- tially similar to art. 17(a)(2) of Regs. 75 and its successor regulatory provisions were promulgated as sec. 1.1502-17(a)(2), Income Tax Regs., under the 1954 Code in respect of years before 1966; sec. 1.1502-77(c)(2), Income Tax Regs., under the 1954 Code in respect of years after 1965; and sec. 1.1502-77(c)(2), Income (continued...) - 100 -

Based on our examination of section 1502, its legislative

history, and section 1.1502-77(c)(2), Income Tax Regs., we find

that section 1.1502-77(c)(2), Income Tax Regs., is necessary in

order to avoid an undue administrative burden on the Commissioner

and protect the interests of the Government. If, as petitioners

urge, the Court were to hold section 1.1502-77(c)(2), Income Tax

Regs., to be invalid insofar as it applies to a corporation which

joined in the filing of a consolidated return but which is

subsequently determined to be required to file a separate return,

we would be insisting upon an administratively burdensome,

impractical, and unfair rule that is not manifestly required by

section 1502. Such a rule would require the IRS to obtain one or

more separate agreements extending the period of limitations from

each and every corporation that joins in the filing of a consoli-

dated return. We believe that the imposition of such an adminis-

trative burden on the IRS would be contrary to the legislative

history of section 141(b) of the 1928 Act, the predecessor of

section 1502, which directed the Commissioner to promulgate

regulations to address "difficult and complicated problems"

relating to the administration of the consolidated return provi-

sions. See S. Rept. 960, supra, 1939-1 C.B. (Part 2) at 419. We

conclude that a determination that a corporation which joined in

the filing of a consolidated return was improperly included in

37 (...continued) Tax Regs., under the Code of 1986. - 101 -

such a return does not alter the agency relationship established

under section 1.1502-77(c), Income Tax Regs. See Intervest

Enterprises, Inc. v. Commissioner, 59 T.C. 91, 96-97 (1972).

We reject petitioners' argument that section 1.1502-

77(c)(2), Income Tax Regs., is invalid. We do not find that

regulation to be arbitrary, capricious, or manifestly contrary to

the broad grant of authority to the Secretary under section 1502.

Consequently, we find that, pursuant to that regulation, the

Forms 872 executed by Amax and Cyprus Amax, respectively, ex-

tended the respective periods of limitations for 1984, 1985, and

1986 for the assessment of tax due from petitioners' group.38

Accordingly, we find that those respective periods of limitations

have not expired.

Our finding that the Forms 872 in question extended the

respective periods of limitations for 1984, 1985, and 1986 for

38 Petitioners also claim that "each Form [872] was invalid on its face, because the Service did not attach a rider, as required by Rev. Proc. 72-38, 1972-2 C.B. 813, 814, as modified by Rev. Proc. 82-6, 1982-1 C.B. 409, listing the name, address, and taxpayer identification number of each member of Petitioner's Group." We disagree. The revenue procedures on which petition- ers rely are applicable to a situation where a parent corporation and its subsidiary corporations file separate returns, and not to a situation such as that presented here where a parent corpora- tion and its subsidiary corporations join in the filing of a consolidated return. In any event, even if those revenue proce- dures were applicable in the present case, they are directory, and not mandatory. Accordingly, any failure by the IRS to follow the procedures set forth therein by attaching a "rider" to the Forms 872 in question would not affect the validity of those forms. See Cleveland Trust Co. v. United States, 421 F.2d 475, 481-482 (6th Cir. 1970); Luhring v. Glotzbach, 304 F.2d 560, 563 (4th Cir. 1962). - 102 -

the assessment of tax due from petitioners' group need not,

however, be based upon section 1.1502-77(c)(2), Income Tax Regs.,

and respondent so argues. Specifically, respondent contends

that, without regard to section 1.1502-77(c)(2), Income Tax

Regs., Amax and its successor Cyprus Amax had the authority under

Delaware law to act as the agent of petitioners' group when each

executed the Forms 872 in question extending the period of

limitations for "Amax and Consolidated Subsidiaries" for each of

the years 1984, 1985, and 1986. Furthermore, according to

respondent, not only did petitioners' group expressly consent to

the authority of Amax and its successor Cyprus Amax to act as its

agent in extending the periods of limitations in question, Amax

and Cyprus Amax also had apparent authority to execute the Forms

872 in question. Petitioners counter that Amax and Cyprus Amax

had neither express nor apparent authority to act as the agent of

petitioners' group in extending the periods of limitations in

question.

Actual agency or actual authority is defined as the author-

ity which a principal expressly or implicitly grants to an agent.

Billops v. Magness Constr. Co., 391 A.2d 196, 197 (Del. 1978).39

39 Although the pledge and indemnity agreement, the tax-sharing agreement, and other pertinent agreements entered into by, inter alia, Amax and Alumax provide that they are to be construed in accordance with and governed by the law of New York, where Amax was incorporated, respondent contends, and petitioners do not dispute, that the law of Delaware, where Alumax was incorporated, is the controlling law with respect to both the question of actual agency and apparent agency. In any event, the law on (continued...) - 103 -

Apparent agency or apparent authority "arises when the principal

creates by its words or conduct the reasonable impression in a

third party that the agent has authority to act." Guyer v. Haveg

Corp., 205 A.2d 176, 180 (Del. Super. Ct. 1964), affd. 211 A.2d

910 (Del. 1965). If apparent agency or apparent authority is

established, and it is shown that a third party relying on the

apparent authority did so rely in good faith and was justified in

so relying, the principal is bound to the same extent as with

actual authority. Finnegan Constr. Co. v. Robino-Ladd Co., 354

A.2d 142, 144 (Del. Super. Ct. 1976).

Based on our examination of the entire record in this case,

we find that Amax and its successor Cyprus Amax each had both

actual and apparent authority to act on behalf of petitioners'

group in all matters relating to the examination by the IRS of

the consolidated return that was filed by Amax for each of the

years 1984, 1985, and 1986, including the execution of the Forms

872 in question on behalf of the corporations in petitioners'

group. That record amply establishes the indicia of such author-

ity, including those described below.

The Forms 872 in question identified the taxpayers as "Amax,

Inc. and Consolidated Subsidiaries" or "Amax, Inc. and Consoli-

39 (...continued) those matters is the same in Delaware and New York. Compare Billops v. Magness Constr. Co., 391 A.2d 196, 197-198 (Del. 1978), with Doxsee Sea Clam Co. v. Brown, 13 F.3d 550, 553 (2d Cir. 1994), and Carte Blanche (Singapore) PTE., Ltd., v. Diners Club Intl., Inc., 758 F. Supp. 908, 919 (S.D.N.Y. 1991). - 104 -

dated Subs". We do not construe those forms to include only

those subsidiaries of Amax that were in fact members of the

affiliated group within the meaning of section 1504(a) that had

Amax as its common parent. Based on our examination of the

entire record in this case, we find that the reference to "con-

solidated subsidiaries" in the Forms 872 in question is to each

of the subsidiaries of Amax that joined in the consolidated

return that Amax filed for 1984, 1985, and 1986, regardless

whether each of those corporations was in fact a member of that

affiliated group. Petitioners, which have the burden of proof,

have not established to the contrary.

Petitioners were specifically identified and listed in the

Form 851 (Affiliations Schedule) that listed the corporations

that were included in the 1984 consolidated return.40

Alumax, on behalf of petitioners' group, executed a docu-

mented dated August 12, 1985, that was entitled "ELECTION TO BE A

MEMBER AS OF JANUARY 1, 1984" and that was signed by John A.

Brader as vice president of Alumax. That election document

provided:

Based on an Agreement dated January 30, 1984[41] by and among Alumax Inc., AMAX Inc., Mitsui and Co., Ltd. and Mitsui and Co. (U.S.A.) Inc. as amended that gives AMAX Inc. 80% of the voting power of all classes of Alumax stock entitled to vote, Alumax and each of its subsid- iaries hereby elects under United States Treasury

40 The record does not contain the Forms 851 for 1985 and 1986. 41 The record contains no document that purports to be an agree- ment dated Jan. 30, 1984. - 105 -

Regulations Section 1.1502-76(b)(5)(i) to become a member of the group of which AMAX Inc. is the common parent as of January 1, 1984.

Amax, on behalf of petitioners, filed tax information (e.g.,

income, deductions) relating to each of the petitioners for each

of the years 1984, 1985, and 1986 when it filed the consolidated

return for each of those years.

Pursuant to an agreement between Amax and Mitsui USA, Amax

included as part of the 1984 consolidated return that it filed a

"Disclosure Statement under Section 6661 of the Internal Revenue

Code".42 That disclosure statement provided:

An Agreement dated January 30, 1984[43] by and among Alumax Inc., AMAX Inc., Mitsui & Co. Ltd. and Mitsui & Co. (U.S.A.), Inc. as amended (a copy of which is attached hereto) gives AMAX Inc. 80% of the voting power of all classes of Alumax stock entitled to vote. * * * Based on the Agreement Alumax and each of its subsidiaries has elected under United States Treasury Regulations Section 1.1502-76(b)(5)(i) to become a member of the group of which AMAX Inc. is the common parent as of January 1, 1984. Accordingly, Alumax and each of its subsidiaries is included as of January 1, 1984 in the AMAX Inc. Consolidated Income Tax Return filed for the year ended December 31, 1984.

Pursuant to the pledge and indemnity agreement, Amax and its

42 We believe that the stockholders of Alumax required Amax to file the disclosure statement because of the potential tax liability of petitioners' group relating to the consolidation issue presented to this Court. Since the members of the Amax group had net operating losses for each of the years 1984, 1985, and 1986 and the members of petitioners' group had taxable income for each of those years, any tax that might result if petitioners ultimately were not allowed to join in the consolidated return filed by Amax for each of those years would be a tax against petitioners' group, and not the Amax group. 43 See supra note 41. - 106 -

successor Cyprus Amax, and not Alumax or any other petitioner,

was to have control over any challenges by the IRS to the inclu-

sion of petitioners in the consolidated return filed by Amax for

each of the years 1984, 1985, and 1986. That agreement stated:

(a)(i) If the Internal Revenue Service shall propose an adjustment in the tax liability of the Alumax Consolidated Group [petitioners' group] for which Amax would be required to pay an indemnity pursu- ant to Section 1 of this Agreement (a "Challenge to Consolidation"), then Alumax or Amax, whichever shall receive notice of the Challenge to Consolidation from the Internal Revenue Service, shall give prompt notice to the other of the Challenge to Consolidation. Amax shall determine in its sole discretion whether to contest the Challenge to Consolidation, and, with respect to any such contest, shall determine the nature of all action to be taken to contest such Challenge to Consolidation including (A) whether any action to contest such Challenge to Consolidation shall be by way of judicial or administrative proceedings, or both, (B) whether any such Challenge to Consolidation shall be contested by resisting payment of the proposed adjustment or by paying the same and seeking a refund thereof, and (C) if Amax chooses to proceed through judicial proceedings, the court or other judicial body before which judicial action shall be commenced. Amax shall have full control over any contest pursuant to this Section 3(a), but shall keep Alumax and the Mitsui Group informed of the status thereof and shall consider in good faith requests by them concerning the contest of the claim.

(ii) Notwithstanding paragraph (i) above, Alumax shall retain the rights specified in Section 6 of the Tax Sharing Agreement with respect to issues described therein other than whether the inclusion of the Alumax Consolidated Group in the Combined Consolidated Group [the Amax group and petitioners' group] was proper. * * * [Emphasis added.]

Based on our examination of the entire record before us, we

find that, regardless whether for each of the years 1984, 1985,

and 1986 petitioners were members of the affiliated group within - 107 -

the meaning of section 1504(a) or amended section 1504(a) that

had Amax as its common parent, Amax and its successor Cyprus Amax

each had both actual authority and apparent authority to act on

behalf of Alumax and the other members of petitioners' group when

each executed one or more of the Forms 872 in question. Accord-

ingly, we further find that the respective periods of limitations

for the years 1984, 1985, and 1986 for the assessment of tax due

from petitioners' group have not expired.

To reflect the foregoing,44

Decision will be entered

for respondent.

44 The correlative issues involving certain claimed general business credit carrybacks also are resolved against petitioners' group in light of our holdings on the principal issues presented. See supra note 3.