*2248 Petitioner held not affiliated with the Empire Turst Co. during the taxable years 1921 and 1923.
*1137 These proceedings are for the redetermination of deficiencies for the calendar years 1921 and 1923 in the amounts of $1,301.19 and $2,283.51, respectively. The proceedings involving the identical issue, viz., affiliation, were consolidated for hearing and decision.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal office at 120 Broadway, New York City. It was organized in 1914 with a capital stock of $100,000 divided into 1,000 shares, par value $100 each. All of its capital stock was subscribed by and issued to the Empire Trust Co., hereinafter referred to as the Trust Co., a New York corporation engaged in the banking business. The petitioner was organized for the purpose of taking over a safe-deposit business acquired by the Trust Co. in March, 1913, through a merger with the Windsor Trust Co. The safe-deposit business so acquired was operated*2249 by the Trust Co. as a separate department until the petitioner's *1138 organization in 1914. The petitioner then purchased the Trust Co.'s vaults and safe-deposit boxes, which it operated thereafter as a separate business.
Prior to the year 1921 the Trust Co. and the petitioner moved their principal offices to the Equitable Building, 120 Broadway, which building was owned by the Equitable Office Building Corporation, hereinafter referred to as the Building Corporation. The petitioner leased certain vaults and space in the sub-basement of the Equitable Building, with an option to purchase, and the Trust Co. leased space on the floors above for its offices and banking business. The Trust Co. also occuped space in the sub-basement, some of which it leased from the Building Corporation and some of which it subleased from the petitioner.
The Trust Co. and the petitioner both had branch offices at 580 Fifth Avenue in a building owned by the Trust Co. The petitioner rented from the Trust Co. certain vaults and office space in the basement of that building.
On November 18, 1920, the petitioner exercised its option to purchase the vaults of the Building Corporation located*2250 in the Equitable Building. As a means of carrying out this plan its authorized capital stock was increased on January 1, 1921, from $100,000 to $500,000, represented by 5,000 shares of a par value of $100 each. One thousand of the additional 4,000 shares of stock were issued to the Building Corporation in part payment for the vaults, the balance being paid in cash, and the remaining 3,000 shares being purchased by the Trust Co. Thereafter and during the taxable years 1921 and 1923 the petitioner's stock was held as follows:
| Owner | Shares | Per cent |
| owned | ||
| Empire Trust Co | 3,985 | 79.7 |
| Equitable Office Building Corporation | 1,000 | 20.0 |
| Directors' qualifying shares | 15 | .3 |
The Trust Co. owned no stock in the Building Corporation. The principal stockholder of the Building Corporation was T. Coleman du Pont, who, during the year 1921, owned approximately 71 per cent of its stock and who also owned approximately 11 per cent of the stock of the Trust Co. He was chairman of the board of directors of both these compaines and was also a director of the petitioner company, owning one qualifying share of its stock. During the year 1923 du Pont's stockholdings*2251 in the Building Corporation varied, due to the fact that in October, 1922, he transferred to a trustee a large part of his stock in that company, which stock was *1139 retransferred to him on June 29, 1923. Other shares of his stock in that company were transferred to a trustee on July 9, 1923. The Building Corporation was a large company owning assets of a value of approximately $40,000,000.
The Trust Co. had 22 directors in 1921, and 26 in 1923. The petitioner had 13 directors in both these years, 8 of whom were also directors of the Trust Co. In each of the years 1921 and 1923 the petitioner had eight officers, five of whom were also officers of the Trust Co. LeRoy W. Baldwin, the largest stockholder in the Trust Co., was president, W. Barton Baldwin was treasurer, and William H. English was vice president of both the petitioner and the Trust Co. They were also directors of both companies. The Trust Co. had many officers who were not officers of the petitioner company. Many of the employees of the Trust Co. were also employees of the petitioner and received salaries from both companies. Some of the small salaries were paid by the petitioner to officers and employees*2252 of the Trust Co. so that they might have access to its vaults, a privilege that was extended only to petitioner's employees. Much of the petitioner's business was secured through officers of the Trust Co., who received only nominal salaries from the petitioner.
There were no formal leases executed by the petitioner and the Trust Co. in respect of the vaults and office space which they leased or subleased from one another at the Fifth Avenue building. The amount of the rent paid by the petitioner to the Trust Co. and by the Trust Co. to the petitioner was fixed by W. Barton Baldwin, treasurer of both companies. Leases were executed by the companies for the rental by the petitioner of office space from the Trust Co. and the rental by the Trust Co. of vaults from the petitioner at the Equitable Building, but the terms of the latter lease were varied by the Trust Co. at will. This lease was executed December 1, 1920, for a period of one year at $3,000 per year, to continue thereafter from year to year unless revoked on notice. On April 1, 1922, the Trust Co. reduced the rental to $1,000 per year; on December 1, 1922, increased it to $1,400 per year, and on May 1, 1923, increased*2253 it to $1,900 per year. These changes in the lease were made informally by the officials of the Trust Co. without revocation of the old lease.
Annual stockholders' meetings of the petitioner company for the years involved were held on January 11, 1921, and January 9, 1923. Notice of these meetings, with proxy forms prepared by Paul H. Hudson, secretary of the petitioner and assistant secretary of the Trust Co., were sent out to all of the petitioner's stockholders. At the meeting held on January 11, 1921, no stockholder was present, but all of petitioner's 5,000 shares of stock were represented and voted by Glentworth B. Whiting and S. U. Grant, employees of the Trust *1140 Co., as proxies. At the meeting on January 9, 1923, no stockholder was present and all of the stock but two shares was represented and voted by Charles A. Dean, chief clerk of the Trust Co., as proxy. These individuals were named and designated to vote the stock in the proxy forms sent out by Hudson. The proxies were merely voting proxies effective for these meetings only or for any adjournment thereof. The proxy forms sent to the Building Corporation were signed and returned by an officer of the*2254 company without any formal corporate action. Just prior to each of the meetings Hudson consulted with LeRoy W. Baldwin, president of the petitioner and the Trust Co., who gave instructions concerning the election of directors and all other matters of importance to be considered at the meetings. These instructions were given to the proxies by Hudson and were always carried out. The meetings were both conducted by Hudson and minutes of the meetings were prepared and filed by him. No other meetings of the petitioner's stockholders were held during either of the years 1921 or 1923 than those of January 11, 1921, and January 9, 1923.
The Trust Co. filed a consolidated return for each of the years 1921 and 1923 in which the income of the petitioner and other companies which the respondent has found to be affiliated was reported. The respondent has ruled that the petitioner was not affiliated with the Trust Co. and was not authorized to file a consolidated return with the Trust Co. for either of the years in question.
OPINION.
SMITH: The petitioner contends that it was affiliated with and is entitled to file consolidated returns with the Empire Trust Co. for each of the taxable*2255 years 1921 and 1923. Section 240(c) of the Revenue Act of 1921 provides that:
(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
It is undisputed that the Trust Co. owned outright approximately 80 per cent of petitioner's outstnading stock during each of the taxable years and that practically all of the minority stock was represented at the stockholders' meetings by proxies who voted it in accordance with the Trust Co.'s wishes. The evidence also discloses that the Trust Co. directed, to a large extent, the business affairs of the petitioner; that a majority of the petitioner's directors, offiers, and employees were common to both companies, and that the companies maintained a close business relationship. We have often said, *1141 however, that "the test of the statute is ownership or control of substantially all of the stock of all the corporations*2256 of the affiliated group by the same 'interests'." . "The test laid down by the statute for affiliation, however, is control of the stock by the same or closely affiliated interests." . See also ; .
It must be admitted that the 79 7/10 per cent of petitioner's stock which the Trust Co. owned directly is not substantially all of petitioner's stock. . Did the Trust Co. "control through closely affiliated interests or by a nominee or nominees" the minority stock owned by the Equitable Office Building Corporation? Such control, if it existed, was not based upon any right of ownership, since the Trust Co. owned no stock in the Building Corporation. There was no mutuality of ownership between the companies except through du Pont, who, in 1921, owned approximately 11 per cent of the Trust Co.'s stock and 71 per cent of the Building Corporation's stock. *2257 The Trust Co. had no right of control over du Pont or over his stock in the Building Corporation. At the annual stockholders' meetings of the petitioner company substantially all of petitioner's minority stock was represented by proxies who were employees of the Trust Co. and who voted the stock strictly in accordance with the Trust Co.'s wishes. In , which involved facts similar to these, we said:
Authorization to vote stock by proxy does not effect a separation of the voting power from the ownership of the stock; neither does it constitute a relinquishment by the stockholder of any right of ownership or control of his stock.
In , we said:
* * * The fact that the minority stockholders gave proxies for the voting of their stock is immaterial. As was stated in :
"The giving of proxy is not a relinquishment by the donor of any of the rights of ownership or control."
This rule we believe is sound and governs in the instant case. It is immaterial that the proxies representing the minority*2258 stockholders always voted their stock according to the wishes and instructions of the officers of the Trust Co. This merely indicates a willingness on the part of the minority stockholders to entrust the management of the business affairs of the petitioner to the Trust Co. So far as has been shown the Trust Co. was in no position to demand the right to vote the Building Corporation's stock or to deny the Building Corporation a voice in the management of the petitioner's business *1142 affairs. The control of a business, however acquired or however complete, is not the control required by the statute for affiliation. ; ; ; ; ;; affirming ; , affirming *2259 ; ; . In the last named case we said:
* * * The management of the business of the corporation is not the control required by the statute. It refers to stock control. The fact that the minority is acquiescent, and permits the majority to manage the business, does not prove actual control over the minority interest. Nor does a control based upon friendship or professional relations satisfy the statute. The control of the stock owned by the same interest refers to beneficial interest. This meaning is consistent with the purpose of the statute to extend to those subject to the hazard of the enterprise, when they are substantially one and the same, the benefit of the consolidated reports.
In , the court said:
* * * Congress has declared that two corporations shall be treated as one for tax purposes, when one corporation owns or controls substantially all the stock of*2260 the other, or when substantially all the stock is owned or controlled by the same interests. Judicial interpretation may perhaps limit the statutory language to voting stock, as was held in , affirmed sub. nom. (C.C.A. 8); but we are not to confuse control of the corporation with control of the stock. The test is not declared to be control of the business or the policies of the subsidiary corporation, but substantial identity of interest in the enterprise. The theory of affiliation, resulting in a consolidated return for taxes, is that the income and invested capital are really the income and capital of a single enterprise, though carried on through the instrumentality of several corporations. See article 631, Treasury Regulations (1920 Ed.); Holmes, Fed. Taxes (6th Ed.) 281; (D.C.N.D. Cal.). Only when the outside interest - that is, the interest of the minority - is so small as to be practically negligible, are the two corporations to be treated as in receipt of a single income, requiring*2261 a consolidated return.
The views of the court above expressed, as we have declared in , express what we conceive to be the theory of affiliation upon which the statute permits the filing of a consolidated return.
While there is evidence here of considerable informality in the business dealings carried on between the petitioner and the Trust Co., such as the arbitrary changing of rental agreements and allocation *1143 of employees' compensation, it is by no means sufficient to constitute the companies "a single enterprise" or "substantially one and the same." Upon authority of the decisions in the above named cases we hold that the petitioner was not affiliated with the Empire Trust Co. during either of the years 1921 or 1923.
Judgment will be entered for the respondent.