*3462 1. Petitioner filed its income and profits-tax return for 1919 on or before March 15, 1920; thereafter on or about January 26, 1924, it entered into a consent in writing extending the time within which assessment of the tax for that year might be made until December 31, 1925; a deficiency notice was mailed to the petitioner on August 24, 1925, and on October 22, 1925, it filed an appeal with this Board. Held, the collection of the deficiency for 1919 is not barred by the statute of limitations. Following Sunshine Cloak & Suit Co.,10 B.T.A. 971">10 B.T.A. 971.
2. Commissioner Williams held that the petitioner and parent company herein were affiliated for 1917 and 1918; Commissioner Blair, who took office on May 27, 1921, advised the parent company on August 19, 1921, that it was affiliated with the petitioner for the year 1919, which ruling the later reversed. Held, the respondent committed no error in reversing a former ruling made by him with respect to the same taxable period.
3. The petitioner and the parent company were not affiliated in 1919 within the meaning of the statute.
*783 This is a proceeding for the redetermination of a deficiency of $6,641.64 in income and profits taxes for the year 1919.
The errors alleged in the original petition and by amendment thereto are:
(1) That the return of the petitioner for the year 1919 was filed on March 15, 1920, and that although it consented in writing prior to August 24, 1925, to extend the period of limitation within which an assessment of income and profits taxes might be made for 1919 until December 31, 1925, it did not consent to extend the period of limitation within which the collection of the deficiency might be made, and, therefore, the collection of said deficiency is now barred by the statute of limitation, and
(2) That the respondent erred in reversing a Department ruling dated August 19, 1921, holding the petitioner, the Durham Coal & Iron Co., and the Durham Coal & Coke Co., affiliated for the year 1919 and, therefore, entitled to file a consolidated return for that year.
FINDINGS OF FACT.
The Durham Coal & Iron Co. (hereafter referred to as the parent company) was organized and incorporated January 3, 1911, to engage*3464 in the mining of coal at mines located in the States of Georgia and Tennessee, near the City of Chattanooga, with an authorized capitalization of $5,000,000, par value of common, and $1,000 par value of preferred stocks. It was also authorized to issue bonds to the extent of $5,000,000, of which $3,000,000 were sold through New York bankers, Hallgarten & Co., W. R. Brady, and Imbrie & Co. (hereafter referred to as the bankers), throughout the United States, and to some foreign investors, in consideration of which services said bankers received the entire issue of the capital stock.
During the period 1911 to 1914, due to competitive conditions and freight differentials, the earnings of the parent company were insufficient to pay all of the interest on its bonded indebtedness. The bankers, realizing conditions, decided to organize a by-products coke plant, to be located in Chattanooga, in order to afford a ready market for approximately 80 per cent of that company's entire output. The screened coal mined by the parent company that went over a 2-inch screen could be marketed by it as domestic and steam coal, which constituted about 15 to 20 per cent of the entire production.
*3465 Therefore, in order to place the parent company on a profitable basis and in order to afford a ready market for its output, the Chattanooga Gas & Coal Products Co. was organized and incorporated in 1914 with a capitalization of $520,000 divided into 3,000 shares of common, $100 par value, and 2,200 shares of preferred, $100 par *784 value. That company also issued bonds to the extent of $450,000. At the inception, 2,995 shares of the total authorized issue of 3,000 shares of common stock were issued to the parent company, and five shares to Lewis T. Wolle, who was at that time president of the parent company and also the Chattanooga Gas & Coal Products Co. and its successor, the petitioner, in which capacity he served down to and through the taxable year here under consideration. Wolle subsequently transferred the five shares issued to him to the parent company, thereby increasing its holdings to 3,000 shares. Each of the three bankers advanced $150,000 and took the entire issue of first-mortgage bonds of $450,000 together with all of the authorized preferred stock. The parent company guaranteed the $450,000 of bonds as to principal and interest in consideration of the*3466 issuance to it of the entire issue of common stock. The common stock of that company had voting rights but the preferred did not.
Upon the organization of the Chattanooga Gas & Coal Products Co. a contract was entered into with a chemical engineer who had, as he thought, perfected a new type of by-products oven, whereby that company would install a certain type of oven, for which no fee or percentage of cost would be charged, for the reason that this was the first of the particular oven to be built. It was discovered later that those ovens were not as efficient as others, resulting in losses to that company of something over $100,000 for the first two years after the plant was installed, and consequently it was unable to pay the interest on its bonded indebtedness from earnings. In this situation the three bankers decided to replace those ovens with others and they (the bankers) entered into a contract with a company to build 24 new ovens at a cost of $700,000. The bankers made that contract, each guaranteeing to pay one-third of the cost plus 10 per cent. The Chattanooga Gas & Coal Products Co. was not a party to that contract. Those ovens were completed in the latter part*3467 of 1917, at which time it was decided to reorganize the Chattanooga Gas & Coal Products Co., change its capital structure, and also its name to Chattanooga Coke & Gas Co., which is the petitioner. All of the authorized preferred stock, 10,200 shares, $100 par value, of the new company was issued to the bankers in consideration of the surrender of the $450,000 of bonds of the old company, plus certain mortgage notes held by said bankers to the extent of $570,000, the amount advanced by them to build the new ovens. In other words, the entire issue of preferred stock was absorbed by the bankers in exchange for mortgage bonds and notes of an equal amount. The total common stock authorized was 15,000 shares of which 9,720 were issued to the bankers. Thereafter they sold certain of the new shares to various persons.
*785 On January 1, 1919, 7,888 1/2 shares, or 81.2 per cent of the total outstanding common stock of the petitioner, were held by the following stockholders:
| Stockholder: | Shares as of Jan. 1, 1919 |
| Durham Coal & Iron Co | 1,500 |
| M. F. Brady | 558 |
| E. W. McCarthy | 1,900 |
| R. Tikton | 325 1/2 |
| D. B. Wehrum | 900 |
| A. E. Sengstack | 700 |
| Imbrie & Co | 1,182 |
| Wm. Imbrie & Co | 25 |
| Wm. Morris Imbrie, jr | 50 |
| James Imbrie | 20 |
| E. M. Rabenold | 300 |
| Raymond Kuntz | 270 |
| E. A. Saunders | 158 |
| Total | 7,888 1/2 |
*3468 The remaining 1,831 1/2 shares of the total outstanding 9,720 shares of common stock, or 18.8 per cent, were owned by stockholders scattered throughout the United States and Canada. Of the above 7,888 1/2 shares held by the aforesaid stockholders on January 1, 1919, there were changes by way of increase or decrease during the year 1919, in certain individual holdings, to the extent of only 100 shares. The aforesaid common stockholders also held preferred stock of the petitioner as of January 1, 1919, in the following amounts:
| Shares | |
| E. W. McCarthy | 2,501 |
| D. B. Wehrum | 5 |
| Imbrie & Co | 4 |
| Wm. Morris Imbrie & Co | 8 |
| Wm. Morris Imbrie, jr | 100 |
| E. A. Saunders | 500 |
| Total | 3,118 |
The remaining 7,082 shares of preferred of the total of 10,200 outstanding, were owned by stockholders widely scattered throughout the United States.
M. F. Brady and Imbrie & Co. were the bankers, E. W. McCarthy was a clerk in the office of said Brady, R. Tikton was a member of the firm of Hallgarten & Co., one of the bankers aforesaid, D. B. Wehrum, and A. E. Sengstack were clerks of the said Hallgarten & Co., James Imbrie is a brother of Wm. Morris Imbrie, Jr., E. M. Rabenold was attorney*3469 for Imbrie & Co., Raymond Kuntz was a clerk in the office of Imbrie & Co., and A. E. Saunders was a client of Imbrie & Co., with office space in that company's office.
*786 Louis T. Wolle had been a consulting mining engineer for the firm of Imbrie & Co. and he represented that company's interests in taking over the affairs of the parent company in 1914.
The positions of president, general superintendent, assistant secretary and treasurer, and sales manager were occupied by the same individuals in both companies during the year 1919.
The regular term of credit extended to all of the parent company's customers, other than the petitioner, was for payment on the fifteenth of the month following the date of shipment, but the petitioner was not required to pay until it had sufficient funds with which to do so. As a result of the liberal extension of credit to the petitioner a considerable balance had accrued against it in favor of the parent company, which was paid in course of time.
While there was no formal contract fixing the prices at which coal would be sold to the petitioner, the prices were such that the petitioner was able to save approximately $42,000 under*3470 the prevailing market prices by purchasing from the parent company.
The parent company received a letter from the Commissioner of Internal Revenue dated February 17, 1921, advising it that during the years 1917 and 1918 its company and the petitioner were affiliated within the purview of the law and the regulations and that consolidated returns should be filed for those years. The common stock holdings in the petitioner in 1918 were identical with those on January 1, 1919.
Commissioner David H. Blair, who took office on May 27, 1921, advised the parent company by a communication dated August 19, 1921, that it was affiliated with the petitioner within the meaning of the law and that it should file a consolidated income and profits-tax return for the years 1919 and 1920. Commissioner Blair in his deficiency notice to the petitioner, out of which this proceeding arose, held that the petitioner was not affiliated with the parent company for 1919 within the purview of the law and, therefore, it was not entitled to file a consolidated income and profits-tax return for that year.
The petitioner filed its income and profits-tax return for the year 1919 on or before March 15, 1920, and*3471 thereafter under date of January 26, 1924, it entered into the following consent in writing with the respondent:
In pursuance of the provisions of existing internal revenue laws, the Chattanooga Coke & Gas Company, a taxpayer of Chattanooga, Tenn., and the Commissioner of Internal Revenue, hereby waive the time prescribed by law for making any assessment of the amount of income, excess profits or war profits taxes due under any return made by or on behalf of the said taxpayer for the year 1919 under existing revenue acts or under prior revenue acts.
This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire, except that if a notice of *787 a deficiency in tax be sent to said taxpayer by registered mail before said date, and (1) no appeal is filed therefrom with the United States Board of Tax Appeals, then said date shall be extended sixty days, or (2) if an appeal is filed with said Board, then said date shall be extended by the number of days between the date of mailing of said notice and the date of final decision by said Board.
The deficiency notice herein was mailed to the petitioner on August 24, 1925, and*3472 this proceeding was begun by the filing of a petition with this Board on October 22, 1925.
OPINION.
MORRIES: The first issue urged by the petitioner for consideration is whether the collection of the proposed deficiency is barred by operation of the statute of limitations.
The various provisions of the Revenue Acts of 1921, 1924, and 1926, which are pertinent to the issue raised, are as follows:
Section 250 (d) of the Revenue Act of 1921:
The amount of income, excess-profits, or war-profits taxes * * * due under any return made under this Act for prior taxable years or under prior income, excess-profits, or war-profits tax Acts, * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes due under this Act or under prior income, excess-profits, or war-profits tax Acts, * * * shall be begun, after the expiration of five years after the date when such return was filed, but this shall not affect suits or proceedings begun at the time of the passage of this*3473 Act: * * *
Section 277(a)(2) of the Revenue Act of 1924:
The amount of income, excess-profits, and war-profits taxes imposed by the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes," approved August 5, 1909, the Act entitled "An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes," approved October 3, 1913, the Revenue Act of 1916, the Revenue Act of 1917, the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.
Section 278 (c) of the Revenue Act of 1924:
Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
Section 278 (d) of the Revenue Act of 1924:
Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint*3474 or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without *788 assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.
Section 278 (d) of the Revenue Act of 1926:
Where the assessment of any income, excess-profits, or war-profits tax imposed by this title or by prior Act of Congress has been made (whether before or after the enactment of this act) within the statutory period of limitation properly applicable thereto, such tax may be collected by distraint or by a proceeding in court (begun before or after the enactment of this Act), but only if begun (1) within six years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxpayer.
The facts with respect to this issue are that the petitioner filed its income and profits-tax return for the year 1919 on or before March 15, 1920; that thereafter, to wit, on or about January 26, 1924, it entered into a consent in writing extending*3475 the time prescribed by law within which the assessment for the year 1919 might be made until December 31, 1925, at which time the period for the assessment of such taxes should expire "except that if a notice of a deficiency in tax be sent to said taxpayer by registered mail before said date, and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board, then said date shall be extended by the number of days between the date of mailing of said notice and the date of final decision by said Board." The deficiency notice was mailed to the petitioner on August 24, 1925. Thereafter, on October 22, 1925, the petitioner filed its appeal with this Board from the findings set forth in the respondent's deficiency notice, which extended the period for making assessment by the number of days between the date of mailing the deficiency notice and the date of our final decision.
The facts and circumstances in the instant case are practically identical with those considered and disposed of in *3476 . In that case the fiscal year ended November 30, 1918, was under consideration. It appears from the record there that the taxpayer filed its return on June 15, 1919; that on or about February 12, 1924, it filed a consent in writing to extend the period within which the "determination, assessment and collection" of those taxes might be made for one year; that on January 19, 1925, it filed another consent in writing postponing "assessment" of those taxes until December 31, 1925; that a further consent was entered into on March 3, 1926, providing for a further postponement of "assessment" of its taxes until six months after final decision of this Board. The respondent in that case mailed a deficiency notice to the petitioner on December 12, 1925, and on February 9, 1926, said petitioner filed its appeal from that deficiency notice with this Board.
*789 The Board in that case, after finding that the period within which the assessment could legally be made had not expired and further that the statute expressly extended the time for collection after the assessment has been made, held that the statute of limitations*3477 had not barred the collection of the tax, notwithstanding the consents in writing there, as here, extended the period within which the assessment and not the collection should be made.
Under the authority of , we are of the opinion that the collection of the deficiency herein is not barred by operation of the statute of limitations.
Before proceeding with the major question set forth in the second allegation of error herein, we must first dispose of a preliminary issue that has been raised by the pleadings. Since the petitioner's statement of the error committed by the respondent, when considered in the light of the proposition of law laid down in its petitioner as controlling this issue, seems to confuse and confound the issue attempted to be raised, we deem it advisable to reconcile the pleadings and thus determine the true issue to be considered.
The petitioner's statement of the allegation of error reads:
(a) The reversal by the Income Tax Unit of a Departmental ruling dated August 19, 1921, requiring consolidated returns to be filed * * *.
The proposition of law stated by the petitioner as supporting this*3478 issue is:
(a) As a matter of law the present Commissioner is without authority to reverse the action of his predecessor in ordering the consolidation herein referred to.
If the above allegation of error correctly states the issue, then the question presented for consideration is whether Commissioner Blair was justified, under the law, in reversing a prior ruling made by him concerning the same taxable year, if, on the other hand, the proposition of law above stated is to be considered as properly defining the issue intended to be raised by the petitioner, then the question is whether Commissioner Blair was empowered under the law to reverse the previous action of his predecessor, Commissioner Williams.
The facts are that Commissioner Williams found from the evidence presented to him with respect to the years 1917 and 1918, that the petitioner and the parent company were affiliated within the purview of the law and the regulations for those years. Commissioner Blair, who took office on May 27, 1921, communicated a ruling of his office to the parent company under date of August 19, 1921, that the parent company and the petitioner herein were affiliated within the meaning*3479 of the law and the regulations for the years 1919 and 1920, which ruling he later reversed as to 1919 and found that the parent company and the petitioner were not so affiliated for that year, and he so informed the petitioner.
*790 Therefore, since it appears that Commissioner Williams made no ruling with respect to the year 1919, which is the one here in controversy, it will not be necessary for us to determine whether Commissioner Blair would have been justified in reversing such a ruling, had one been made. See, however, ; also see .
The question of whether the respondent was empowered under the law to reverse a prior ruling made by him concerning the same taxable year, has been heretofore considered and disposed of by the Board in . We find, therefore, nothing to prohibit the respondent from reversing a prior ruling made by him. Counsel for the petitioner relies strongly on section 1107 of the Revenue Act of 1926, but in our opinion that section has no bearing on the question herein.
Having concluded that the respondent*3480 acted within his authority in reversing a former ruling made by him with respect to 1919 we will consider now whether the conclusion so reached, insofar as it affected the petitioner's affiliation with the parent company, is supported by the evidence as found in the record.
Section 240(b) of the Revenue Act of 1918 provides:
For the purpose of this section two or more domestic corporation 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.
The petitioner's counsel cites , and he says that case "in principle is on all fours with the instant appeal." While it is true that the principles laid down by the Board in the earlier affiliation cases are controlling, it is equally true, and well established, that affiliations must be determined and decided in the light of the facts found to exist in each individual case. *3481 ; ; ; ; ; .
Although mere mathematical calculations are not the controlling factors in determining whether two or more corporations are affiliated within the meaning of the law, , the test of the statute is ownership or control of substantially all the stock of the corporations in question, , consequently that requirement must be found to have been complied with and all facts evidencing such ownership or control considered.
*791 The testimony reveals that the entire capital stock of the parent company was issued to the bankers at or about the time of its organization, but the record is practically silent as to how the stock of that company was held during the year 1919. Therefore, it must be apparent that whatever ownership or control*3482 of capital stock existed must be found in the evidence relating to the outstanding stock of the petitioner for 1919.
The bankers received 10,200 shares of preferred and 9,720 shares of common stocks of the petitioner in 1917 when the reorganization and change in capital structure took place. On January 1, 1919, there were 9,720 shares of common stock of the petitioner issued and outstanding (with only insignificant changes during the year 1919) of which 1,500 shares or approximately 15 1/2 per cent were recorded in the name of the parent company, 6,388 1/2 shares or approximately 65 3/4 per cent in the names of the bankers, their employees and attorney and client of one of said bankers. The remaining 1,831 1/2 shares of common stock of the petitioner, or approximately 18 3/4 per cent, were owned by stockholders scattered throughout the various cities of the United States and Canada.
It appears that 7,082 shares of the 10,200 shares of preferred stock of the petitioner issued and outstanding on January 1, 1919, were owned by scattered interests as in the case of a portion of the common stock, and that only 3,118 shares were owned by the bankers group. The evidence does not*3483 disclose whether the preferred stock had voting rights or not. However, since it appears from the record that the same conclusion is inevitable in any event, we shall proceed with our consideration of the case on the theory that it was nonvoting.
Adopting the most favorable attitude, and even assuming for the sake of argument that the bankers did control the stock of their employees and associates, we are still unable to see wherein the requirements of the statute have been complied with. The statute permits an affiliation "if one corporation owns directly or controls * * * substantially all of the stock" of another corporation. Therefore, it will be seen that in order to meet this test of the statute the parent company here, and not the bankers, must be shown to own or control substantially all of the stock of the petitioner. The evidence shows that the parent company owned approximately 15 1/2 per cent. Petitioner's counsel has gone to great length in proving that the common stock of the petitioner was owned or controlled by the bankers, not by the parent company. Such proof does not comply with the first requirement of the statute. The statute also lays down a second test*3484 where substantially all of the stock of two or more corporations is owned or controlled by the same interests. As we have already *792 said, none of the stock of the parent company is shown to have been owned or controlled during the taxable year by the bankers or their alleged nominees, consequently, the instant case can not be said to fall within that test.
It is true that these corporations enjoy many benefits because of their close relationship, and that there are many intercompany transactions which are no doubt highly advantageous to both, but as we have said in , "The fact of intercompany relations, or the absence of them, without the necessary stock ownership or control as provided in the statute, is not sufficient to permit or require affiliation."
From what we have already said the distinction between the instant case and , must be too apparent to warrant further discussion.
We are, therefore, of the opinion that the provisions of section 240(b) of the Revenue Act of 1918 have not been satisfied and that the respondent was correct in holding*3485 that the petitioner and the parent company were not affiliated for the year 1919.
Judgment will be entered for the respondent.