*223 Decisions will be entered under Rule 50.
Petitioner is a manufacturing company which manufactures fans and blowers and for several years sold its products through its own officers and "manufacturers' agents." In 1944, three sales companies were organized to sell petitioner's products and were assigned separate territories. The stockholders of these sales companies were essentially the same as the stockholders of petitioner. Thereafter these sales companies acted as sales agents for petitioner and their income was derived from sales of petitioner's products. Each of these sales companies filed its own income and declared value excess-profits tax returns and excess profits tax returns. For the taxable years the Commissioner has added to the net income reported on petitioner's return the net income of each of these sales companies. Held, the sales companies were organized and operated for business purposes and must be recognized as separate corporate entities, and their income is not that of petitioner. National Carbide Corp. v. Commissioner, 336 U.S. 422">336 U.S. 422. Held, further, section 45, I. R. C., as the Commissioner seeks to apply it is*224 not applicable. Held, further, section 129, I. R. C., is not applicable because the sales companies were organized and operated for business purposes and not primarily for tax avoidance or evasion.
*841 Docket No. 19849 involves deficiencies*225 determined by the Commissioner for the year 1944 of $ 110.58 in income tax and $ 37,091.85 in excess profits tax. These deficiencies are due to the following adjustments:
| (a) Chelsea Fan & Blower Co., Inc | $ 13,936.08 |
| (b) Chelsea Fan & Blower Co. of Georgia | 13,531.80 |
| (c) Chelsea Fan and Blower Company of Missouri | 14,221.80 |
| (d) Factory expenses | 3,500.00 |
| Nontaxable income and additional deductions: | |
| (e) Depreciation | 864.25 |
Explanations in the deficiency notice which are pertinent here are as follows:
(a), (b) and (c) It has been determined that the amounts of $ 13,936.08, $ 13,531.80 and $ 14,221.80, alleged to represent net income of Chelsea Fan & Blower Co., Inc., Chelsea Fan and Blower Company of Georgia and Chelsea Fan and Blower Company of Missouri, respectively, represent net income taxable to you for the taxable year 1944.
The petitioner assigns errors as to adjustments (a), (b), and (c) but does not assign error as to adjustments (d) and (e). Therefore, adjustments (d) and (e) are not in issue.
Docket No. 22920 involves deficiencies determined by the Commissioner for the year 1945 of $ 165.62 in income tax and $ 25,519.13 in excess profits tax. These deficiencies*226 are due to the following adjustments made by the Commissioner:
| (a) Capital expenditures | $ 424.00 |
| (b) Capital stock tax | 1,250.00 |
| (c) Travel and Entertainment expense | 2,500.00 |
| (d) Chelsea Fan and Blower Co., Inc | 12,587.34 |
| (e) Chelsea Fan and Blower Company of Georgia | 6,776.97 |
| (f) Chelsea Fan and Blower Company of Missouri | 6,900.97 |
| Nontaxable income and additional deductions: | |
| (g) Depreciation | 21.20 |
*842 Each of the above adjustments is explained in the deficiency notice. Adjustments (d), (e), and (f) are explained in the same manner as in the deficiency notice for 1944. The petitioner assigns error as to adjustments (d), (e), and (f) in the same manner as error was assigned as to similar adjustments for 1944. Error is also assigned as to respondent's disallowance of $ 2,500 traveling and business entertainment expenses for the year 1945, adjustment (c). Petitioner in its brief abandons any contest as to adjustment (c). Therefore, that adjustment is no longer in issue. The petitioner did not assign error as to adjustments (a), (b), and (g).
Many of the facts have been stipulated.
FINDINGS OF FACT.
The stipulated facts are hereby found.
Petitioner filed its income*227 and excess profits tax returns for 1944 and 1945 with the collector of internal revenue for the fifth district of New Jersey. The returns were prepared on an accrual basis.
Petitioner was incorporated in New Jersey as Chelsea Fan & Blower Co., Inc., on January 3, 1941, as successor to a New York corporation of the same name in existence since 1935. The sole stockholders, officers, and directors of the New York company and of petitioner during the years in question were William J. Lohman, Sr., who owned 50 of the 100 shares of common stock outstanding, and his two sons, William J. Lohman, Jr., and Eugene W. Lohman, each of whom owned 25 shares. Petitioner's officers during the years in question were: William J. Lohman, Sr., president; Eugene W. Lohman, vice-president; and William J. Lohman, Jr., secretary and treasurer.
Since its incorporation petitioner has engaged in the manufacture of fans and blowers. Prior to June 21, 1944, the products were sold by petitioner through its officers and "manufacturers' agents" situated throughout the country, and the profits were entered on petitioner's books of account. The "manufacturers' agents" were paid commissions of about 10 per cent. *228 Petitioner's gross sales through its manufacturers' agents and officers for 1943 and the period from January 1 to June 30, 1944, were as follows:
| Manufacturers' | Petitioner's | Total gross | |
| Period | agents | officers | sales |
| 1943 | $ 224,635.74 | $ 324,484.54 | $ 549,120.28 |
| Jan. 1 to June 30, 1944 | 156,082.98 | 181,848.82 | 337,931.80 |
In the Spring of 1944, the three Lohmans consulted their attorney about the advisability of making a change in petitioner's manufacturing and selling activities. One reason given for desiring a change *843 was to reduce petitioner's liability to persons injured by its fans. The Lohmans had in mind two recent accidents involving fans, one resulting in a man's electrocution by a fan sold by petitioner. Other reasons given were that sales could be increased, especially in the southern states, if promoted by a firm operating locally, and the further advantages of saving freight charges by establishing assembly plants in the states of ultimate sale. The attorney advised the Lohmans that the problems of petitioner would be simplified if, instead of qualifying petitioner to do business in several states, separate and distinct corporations would*229 be organized to sell petitioner's products. He also advised the Lohmans that petitioner should be a manufacturing company and that if these steps were taken, liability arising from personal injuries due to defective fans would be minimized inasmuch as the sales company's assets would be small as compared with the assets of petitioner and that state social security tax liability would be reduced. The attorney also recommended that the name of petitioner should be changed from Chelsea Fan & Blower Co., Inc., to Chelsea Products, Incorporated.
Pursuant to the attorney's advice petitioner's name was changed on June 12, 1944, to Chelsea Products, Incorporated; and on June 21, June 26, and July 3, 1944, three new corporations were organized under the laws of Missouri, New Jersey, and Georgia, respectively. They were named Chelsea Fan & Blower Company of Missouri, Chelsea Fan & Blower Co., Inc., and Chelsea Fan & Blower Company of Georgia, and are hereinafter called the sales companies.
Each of the sales companies issued 1,200 shares of capital stock at $ 1 per share. The three Lohmans each purchased 400 shares in the New Jersey and Georgia sales companies, and were the sole stockholders. *230 The stock in the Missouri sales company was held as follows:
| Stockholder | Shares |
| William J. Lohman, Sr | 400 |
| William J. Lohman, Jr | 400 |
| Eugene W. Lohman | 399 |
| David T. Zucker | 1 |
The three Lohmans constituted the board of directors of each sales company during the period in question.
By three separate written agreements dated July 11, 1944, petitioner appointed the sales companies as its exclusive agents to sell its merchandise. The agreements were signed by William J. Lohman as president of petitioner, and Eugene W. Lohman as vice-president of the sales companies. Each sales company was assigned a territory consisting of several states, the three combined territories including substantially all of continental United States. Each agreement, *844 referring to the sales company as "Agent" and to petitioner as "Company," contained the following provisions:
2. The Agent covenants and agrees:
(a) To devote all of its efforts and attention to the business of the Company and to conduct such business to the satisfaction of the Company;
(b) To keep accurate books of account, records, etc., and to make same available to the Company or its representatives at all reasonable times;
*231 (c) To adhere strictly to the sales prices and all terms and conditions that may from time to time be fixed by the Company;
(d) To forward immediately to the Company each original order received from each purchaser with all conditions of the agreement, if any, proposed to be made with such purchaser;
(e) To notify the Company in writing of all sales effected by it;
(f) To employ a sufficient number of salesmen to properly canvass its territory, which salesmen shall be employees of the Agent and not of the Company;
(g) To enter into a written contract with each salesman so employed in a form to be approved by the Company, which said contracts of employment shall contain restrictive covenants prohibiting each salesman from engaging in any competing business for a reasonable period after the termination of his employment;
(h) To obtain proper Workmens Compensation Insurance to cover all of its employees and if the said employees or salesmen shall, in the course of their duties, be required to obtain any motor vehicle, to obtain proper public liability insurance against personal injury and property damage;
(i) To assume, pay and discharge, at its own cost and expense, all taxes and contributions*232 required from an employer under any and all employment insurance, old age insurance and other social security acts applicable to the salesmen and other employees of the Agent;
(j) To indemnify and save harmless the Company from any and all loss, costs or damage which the Company may sustain or become liable for by reason of any claims against it because of the acts of any such salesmen, employees or other persons acting for or on behalf of the Agent.
3. It is mutually understood and agreed:
(a) That the Agent shall pay the list price as shall from time to time be established by the Company for its equipment less 50% and 25% excepting only on Octopus blowers on which the Agent shall pay the list price as established less 30%.
(b) On special equipment which is not normally manufactured by the Company, terms and conditions shall be determined prior to the Agent making any such sale or entering into any agreement for any such sale.
The 50 per cent discount was the standard discount given by petitioner and its competitor manufacturers to wholesale jobbers and was passed on to the wholesale jobbers who bought the products. The 25 per cent referred to in the contract with the sales companies*233 comprises 10 per cent commission to the agent, which is the normal commission paid to sales agents by competitors of the sales companies, leaving 15 per cent for the operation of the business of each sales company. In determining the 15 per cent, consideration was given to the volume of business which the sales companies could do and the 15 per cent rate was based on such estimated volume.
*845 During the years 1941 to 1943, inclusive, petitioner employed three manufacturers' agents to solicit orders. From January 1 to July 1, 1944, it employed seven manufacturers' agents who obtained orders from 91 accounts. After July 1, 1944, petitioner did not employ any agents to solicit sales. The sales companies entered into written agreements with 10 sales agents in 1944 who obtained orders from 128 accounts, and with 19 sales agents in 1945 who obtained orders from 359 accounts. Except for the Lohmans, the sales agents, and an accounting firm which audited their books, the sales companies had no employees during the years in question.
During the period from 1941 through 1945, all sales of blades manufactured by petitioner were made by its officers. Petitioner's total sales as compared*234 with its sales of blades for the same period were as follows:
| Year | Total sales | Sales of blades |
| 1941 | $ 158,455 | $ 8,700 |
| 1942 | 337,726 | 10,700 |
| 1943 | 549,120 | 12,700 |
| 1944 | 579,191 | 14,000 |
| 1945 | 548,847 | 35,000 |
Purchases made by the sales companies from petitioner in 1944 and 1945 were as follows:
| Year | New Jersey | Georgia | Missouri | Total |
| sales co. | sales co. | sales co. | ||
| 1944 | $ 68,417.38 | $ 94,872.27 | $ 66,701.98 | $ 229,991.63 |
| 1945 | 121,085.20 | 196,988.12 | 192,002.39 | 510,075.71 |
The sales of the sales companies in 1944 and 1945 were as follows:
| Year | New Jersey | Georgia | Missouri | Total |
| sales co. | sales co. | sales co. | ||
| 1944 | $ 94,820.46 | $ 125,802.52 | $ 87,327.59 | $ 307,950.57 |
| 1945 | 170,535.04 | 240,132.45 | 228,132.11 | 638,799.60 |
Orders from customers of the sales companies were received by their sales agents who sent the orders to the respective sales company which in turn forwarded them to petitioner. Petitioner shipped the merchandise direct to customers and invoiced each sales company for each item of merchandise purchased. Each sales company invoiced the customers and received payments directly from the customers.
All complaints concerning*235 defective merchandise were received by the sales company which had made the sale. The sales companies replaced defective merchandise, charging the cost to petitioner in the case of major adjustments and absorbing the cost of minor adjustments.
*846 During 1944 and 1945, the three sales companies used letterheads and order forms showing their addresses to be the same as that of petitioner: 1206 South Grove Street, Irvington, New Jersey. The agreements between the sales companies and sales agents were drafted upon stationery containing these letterheads. The premises occupied by petitioner at the above address were rented from the owner, a corporation in which all the stock is held by petitioner.
The records of the sales companies were kept at the New Jersey address by the same bookkeeper who keeps petitioner's books, and were audited regularly by an accounting firm. The records included for each sales company a general ledger, general journal, purchase book, sales record, cash receipts book, cash disbursements book, accounts receivable ledger, and accounts payable ledger. A separate corporate minute book was kept for each sales company. The sales companies did not occupy*236 any space separate from petitioner at their New Jersey address.
As disclosed by the minutes, the officers of each sales company during the years in question were: William J. Lohman, Sr., president; Eugene W. Lohman, vice-president; and William J. Lohman, Jr., secretary and treasurer.
On July 14, 1944, each sales company opened a separate account in a New Jersey bank with a deposit of the $ 1,200 received for its stock. On or about March 26, 1945, the Missouri sales company opened an account in a St. Louis, Missouri, bank. On or about May 1, 1945, the Georgia sales company opened an account in an Atlanta, Georgia, bank. The New Jersey address of the sales companies was printed on all checks drawn by them upon the New Jersey, Missouri, and Georgia accounts. All bank statements were mailed to the sales companies at their New Jersey address.
Each sales company had numerous bank transactions which are reflected in bank statements, checks, and checkbooks of said companies. The New Jersey sales company made 21 bank deposits totaling $ 41,853.69 during the months of July, August, October, and November 1944, and 60 bank deposits totaling $ 166,757.53 during the months of February, March, *237 April, June, July, August, September, October, November, and December 1945. The Georgia sales company made 20 bank deposits totaling $ 73,076.19 during the months of July, August, October, and November 1944, and 60 bank deposits totaling $ 218,200.01 during the months of February, March, April, May, June, July, August, September, October, November, and December 1945. The Missouri sales company made 22 bank deposits during the months of July, August, October, and November 1944, totaling $ 53,094.39 and 48 bank deposits during the months of February, March, April, June, July, August, September, and October 1945, totaling $ 189,369.09. The *847 number of checks and the dollar amount of checks drawn by the respective sales companies in 1944 and 1945 were:
| 1944 | 1945 | |||
| Number | Dollar | Number | Dollar | |
| of checks | amount | of checks | amount | |
| New Jersey sales company | 54 | $ 69,766.08 | 186 | $ 182,802.10 |
| Georgia sales company | 25 | 107,206.13 | 78 | 246,021.55 |
| Missouri sales company | 43 | 72,758.78 | 145 | 238,043.69 |
The sales companies paid all commissions to sales agents and made all payments to petitioner by the respective sales company's checks.
None of the sales companies*238 had a telephone listed in its own name.
None of the three Lohmans lived in either Missouri or Georgia during the period in question. On an "Information and Anti-Trust Affidavit," dated June 26, 1945, filed with the Secretary of State of Missouri, the Missouri sales company listed its "registered office in Missouri" as 622 Chestnut Street, St. Louis. That is the address at which David I. Zucker, son-in-law of William J. Lohman, Sr., operates a printing business. The document was executed in New Jersey and gives the New Jersey address for the sales company's officers. The Missouri sales company filed a 1945 Missouri corporation franchise tax report in which each of its officers was given either the New Jersey or a Connecticut address. In a "personal property affidavit" for Los Angeles, California, filed in 1945, the same company listed the New Jersey address. According to the affidavit, the company had fans and blowers costing $ 2,591.24 stored in a Los Angeles warehouse.
The Georgia sales company filed Georgia State income tax returns for 1944 and 1945, and an information return for 1945, listing the company's business address as 375 Whitehall Street, S. W., Atlanta, Georgia. *239 The same address was given in a statement attached to the information return for Henry W. Clower, a manufacturer's agent who solicited orders for petitioner's products, both before and after creation of the sales companies. In Georgia State personal property tax returns for 1944 and 1945, the Georgia sales company reported that each of its officers had either the New Jersey or a Connecticut address.
The New Jersey sales company filed a New Jersey State domestic corporation franchise tax return for 1945.
Each sales company filed United States corporation income and declared value excess-profits tax returns and United States corporation excess profits tax returns for the taxable years 1944 and 1945.
*848 Petitioner was the sole source of fans and blowers for each of the sales companies during the period in question. The electric motors attached to the fans and blowers were manufactured by various other manufacturers, and not by petitioner.
Practically all of petitioner's products were sold to the armed forces or to essential war industries in the tax years. Although it was operating to capacity, petitioner was unable to fill all its orders. Purchasers were required to have*240 priorities from the War Production Board, and a major problem of petitioner's was the securing of priorities for its raw materials. No assembly plants were established in 1944 or 1945. Certain of the uses for the sales companies were recognized by the Lohmans and their attorney to be future, postwar needs.
About 50 manufacturers of fans and blowers were in competition with petitioner during the period in question. Chief among these were: American Blower Company, Sturdivant, Buffalo Forge, Hunter Fan & Ventilating Company, General Electric, and Westinghouse Electric Supply.
In 1943, 1944, and 1945, petitioner published The Chelsea Breeze, a "bi-monthly publication devoted to dealer interests." Ten issues were published prior to 1946. The only reference to the sales companies was in the issues of November 1944, and February and April 1945, where the following appeared at the bottom of page 1: "DISTRIBUTED BY CHELSEA FAN & BLOWER CO. OF NEW JERSEY, MISSOURI AND GEORGIA." Each issue consisted of two printed pages devoted to pictures and details of fan and blower installations in particular buildings, announcements relating to the types of equipment available, the length of waiting*241 period, and the priorities required, and information, including office addresses and telephone numbers, concerning old and new "sales representatives" of "Chelsea" products.
New catalogs were issued each year under the name "Chelsea Fan and Blower Company, Incorporated." In order to save printing costs, the same catalog was used interchangeably by the three sales companies.
The expenses of operating the New Jersey office, including payments for rent of the premises, bookkeeping and accounting, telephone, stationery, printing, postage, travel, and entertainment, were prorated on the books by petitioner between itself and the three sales companies.
Each sales company filed an excess profits tax return for 1944 and 1945 in which it claimed a "specific exemption" of $ 10,000.
In their corporation income and excess profits tax returns prepared *849 on an accrual basis for 1944 and 1945, the sales companies reported gross profit, deductions, and net income as follows:
| 1944 | |||
| Company | Gross profit | Deductions | Net income |
| Missouri sales company | $ 20,625.61 | $ 6,403.81 | $ 14,221.80 |
| New Jersey sales company | 26,403.08 | 12,467.00 | 13,936.08 |
| Georgia sales company | 30,930.25 | 17,398.45 | 13,531.80 |
| 1945 | |||
| Company | Gross profit | Deductions | Net income |
| Missouri sales company | $ 32,131.72 | $ 25,543.25 | $ 6,588.47 |
| New Jersey sales company | 49,451.84 | 37,177.00 | 12,274.84 |
| Georgia sales company | 43,146.33 | 36,681.86 | 6,464.47 |
*242 The deductions were itemized in the same returns as follows:
| 1944 | |||
| Missouri | New Jersey | Georgia | |
| Item | sales co. | sales co. | sales co. |
| Commissions | $ 1,537.30 | $ 6,097.53 | $ 10,509.93 |
| Rent | 300.00 | 300.00 | 300.00 |
| Bad debts | 874.61 | 951.58 | 1,274.78 |
| Travel & entertainment | 600.00 | 2,400.00 | 2,400.00 |
| Office expense | 750.00 | 750.00 | 750.00 |
| Professional fees | 889.00 | 765.00 | 828.25 |
| General expense | 310.50 | 347.00 | 302.55 |
| Postage & stationery | 757.52 | 523.00 | 727.00 |
| Telephone | 300.00 | 300.00 | 300.00 |
| Sales discount | 44.38 | 32.89 | 5.94 |
| Advertising | 40.50 | ||
| Totals | $ 6,403.81 | $ 12,467.00 | $ 17,398.45 |
| 1945 | |||
| Missouri | New Jersey | Georgia | |
| Item | sales co. | sales co. | sales co. |
| Compensation of Officers | $ 5,000.00 | $ 5,000.00 | $ 5,000.00 |
| Salaries & Wages | 150.00 | ||
| Rent | 600.00 | 600.00 | 600.00 |
| Bad debts | 2,884.30 | ||
| Taxes | 578.15 | 347.50 | 1,157.04 |
| Advertising | 34.50 | ||
| Commissions | 9,470.49 | 20,995.38 | 19,848.28 |
| Travel & Entertainment | 1,000.00 | 5,100.00 | 4,800.00 |
| Office expense | 1,500.00 | 1,500.00 | 1,500.00 |
| Professional fees | 1,210.00 | 1,200.00 | 1,200.00 |
| Directors' fees | 75.00 | 75.00 | 75.00 |
| General expense | 601.06 | 599.00 | 619.29 |
| Telephone | 600.00 | 600.00 | 600.00 |
| Sales discount | 591.85 | 47.37 | 65.00 |
| Postage & stationery | 1,247.90 | 1,112.75 | 1,217.25 |
| Totals | $ 25,543.25 | $ 37,177.00 | $ 36,681.86 |
*243 Each sales company was a business enterprise in 1944 and 1945, separate and distinct from the business conducted by petitioner and no part of the income of the sales companies constituted income of petitioner.
The principal purpose for the organization of each of the sales companies was to carry on business and not to aid petitioner or the *850 sales companies in the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which the respective corporations would not otherwise enjoy.
OPINION.
The sole issue which we have to decide in these proceedings is whether the net income of the sales companies for their taxable periods in 1944 and for the calendar year 1945 should be included in the net income of petitioner for the calendar years 1944 and 1945, respectively.
In support of his determination that the net income of the sales companies should be included in the income of petitioner, respondent relies upon three propositions which may be stated as follows:
1. The corporate entity of each sales company should be disregarded.
2. The net income of the sales companies should be combined with petitioner's net income*244 under section 45 of the Internal Revenue Code which authorizes respondent to allocate "gross" income, deductions, credits, or allowances between organizations if necessary to prevent tax evasion or clearly to reflect income.
3. Control of the sales companies was acquired for the "principal purpose" of evading or avoiding Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance under section 129 of the Internal Revenue Code.
We shall take up these propositions in their order.
1. The corporate entities of the sales companies should be disregarded. -- In discussing the foregoing proposition we shall not repeat the facts which have been embodied in our findings of fact. It is sufficient to say that we think these facts show the sales companies were organized for business purposes and that in the taxable years they each did in fact engage in business activities and, therefore, the corporate entity of each company should be recognized. National Carbide Corp. v. Commissioner, 336 U.S. 422">336 U.S. 422; Moline Properties, Inc. v. Commissioner, 319 U.S. 436">319 U.S. 436.
In the National Carbide*245 case, supra, the taxpayers were wholly-owned subsidiaries of a parent corporation which utilized them as operating companies in the manufacture and sale of products. They operated pursuant to contracts with the parent which provided that the subsidiaries were employed as agents of the parent, that the parent would furnish working capital and that all profits in excess of 6 per cent on their capitalization would be paid to the parent. The contracts also provided that the parent was to provide plants and machinery, executive management and office facilities, and that no interest was payable on loans from the parent. The head of each division *851 of the parent was in turn the head of the same division of the subsidiary. The leading officials of the parent held similar positions in the subsidiaries. The directors of the subsidiaries met only to ratify the actions of the directors and officers of the parent. The Supreme Court held that the subsidiaries were taxable on the income turned over to the parent, as well as the 6 per cent retained as a return on capital. The Supreme Court said that the Court of Appeals for the Second Circuit correctly held that:
* * * when a corporation*246 carries on business activity the fact that the owner retains direction of its affairs down to the minutest detail, provides all of its assets and takes all of its profits can make no difference tax-wise. * * *
In the Moline Properties case, supra, the Supreme Court said that whatever the purpose of organizing the corporation "so long as that purpose is the equivalent of business activity or is followed by the carrying on of business by the corporation, the corporation remains a 'separate taxable entity'."
Therefore, relying on the Supreme Court's decisions in the National Carbide Corp. case and the Moline Properties, Inc., case, we hold against respondent's contention that the corporate entities of the sales companies should not be recognized for tax purposes.
2. Applicability of section 45, I. R. C. -- Respondent's next contention is that even though the separate entities of the sales companies are recognized that nevertheless their respective net incomes should be allocated to petitioner under the provisions of section 45, I. R. C.1
*247 It is true, of course, that the facts in the instant case show that petitioner and the sales companies were owned and controlled by the same interests and in that respect one of the conditions prescribed by section 45 is present here. But, while that is true, the Commissioner has not distributed, apportioned or allocated gross income, deductions, credits, or allowances between or among such trades or businesses as contemplated by the statute where section 45 is to be applied. On the contrary, respondent has "combined" the "net" income of the sales companies with the "net" income of petitioner. Section 45 does not grant such authority to respondent. In Seminole Flavor Co., 4 T.C. 1215">4 T. C. 1215, we said that section 45:
* * * does not specifically authorize him "to combine." Certainly, the Commissioner's own regulations, section 19.45-1, Regulations 103, negative the use of section 45 for the purpose of combining or consolidating the separate net income of two or more organizations, trades or businesses, * * *
*852 Section 29.45-1 of Regulations 111 governing the years here involved is substantially the same as the section in Regulations 103 referred *248 to by us in the Seminole Flavor Co. case, supra, which reads in part as follows:
* * * It is not intended (except in the case of the computation of consolidated net income under a consolidated return) to effect in any case such a distribution, apportionment, or allocation of gross income, deductions, or any item of either, as would produce a result equivalent to a computation of consolidated net income under section 141.
Respondent has not attempted to distribute, apportion, or allocate "deductions, credits, or allowances" between the sales companies and petitioner. On the contrary, we think he has recognized that the books of account accurately reflect the transactions of the companies by using the net income of each sales company, per its books and tax returns, as the exact amount of net income to be included in the net income of petitioner for each taxable year, with the minor exception that for 1945 he increased the net income of each sales company by $ 312.50 before adding it to the net income of petitioner. In Seminole Flavor Co., supra, we said:
* * * The accuracy of the books of account and record is emphasized by the Commissioner's *249 use of the partnership net profits, per its books, as the exact amount of gross income to be allocated for each taxable year to the petitioner * * *
The inapplicability of section 45 as the Commissioner contends it should be applied here appears not only on the face of the statute but also from its interpretation in Miles-Conley Co., 10 T. C. 754, affirmed on other grounds 173 F. 2d 958; Buffalo Meter Co., 10 T. C. 83; and Seminole Flavor Co., supra. As to the applicability of section 45, I. R. C., under the facts of this case we hold against respondent and sustain petitioner.
3. Applicability of section 129, I. R. C. -- Respondent contends in the last place that the net income of the sales companies should be taxed to petitioner under the provisions of section 129, I. R. C.2
*250 *853 There have been two recent cases promulgated by the Tax Court in which the Commissioner sought to apply section 129, I. R. C. In both of those cases we held that section 129 was not applicable because the taxpayer corporations there involved had been organized for business purposes. See Alcorn Wholesale Co., 16 T.C. 75">16 T. C. 75, and Berland's Inc. of South Bend, 16 T.C. 182">16 T. C. 182.
In our findings of fact in the instant case we have found that:
The principal purpose for the organization for each of the sales companies was to carry on business and not to aid petitioner or the sales companies in the evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which the respective corporations would not otherwise enjoy.
This finding, we think, disposes of respondent's contention that section 129 is applicable to the facts of this case. Alcorn Wholesale Co. and Berland's Inc. of South Bend, both supra.
Decisions will be entered under Rule 50.
Opper, J., dissenting: The core of the present question is whether a reallocation of income*251 is necessary under section 45, Internal Revenue Code, to prevent distortion of petitioner's income. See Hearst Corp., 14 T. C. 575. Since no arm's length bargaining occurred between these commonly controlled entities, see Helvering v. U. S. Industrial Alcohol Co. (W. Va.), (C. A. 2), 137 F. 2d 511; Eskimo Pie Corp., 4 T. C. 669 affd. (C. A. 3), 153 F. 2d 301, our concern must be whether petitioner received from the sales companies fair value for its products. If not, distortion of income resulted. G. U. R. Co., 41 B. T. A. 223, affd. (C. A. 7), 117 F.2d 187">117 F. 2d 187; National Securities Corp., 46 B. T. A. 562, affd. (C. A. 3), 137 F. 2d 600, certiorari denied, 320 U.S. 794">320 U.S. 794.
Petitioner has failed to prove that it received fair value, or that its subsidiaries performed any valuable function. 1 The evidence, in fact, indicates the contrary, and that petitioner granted to its subsidiaries excessive discounts. 2 By selling*252 below the standard fair *854 market price, petitioner "voluntarily released to another * * * a part of its earnings for no consideration whatever," R. O. H. Hill, Inc., 9 T. C. 153, 157, a typical occasion for the corrective provisions of section 45 to be brought into play. Welworth Realty Co., 40 B. T. A. 97.
*253 Section 45 clearly authorizes the Commissioner in such circumstances to allocate gross income and deductions which, in effect, is what he did. 3 That the amounts of gross income allocated to petitioner should correspond with the net income of the sales companies 4 is a reasonable corollary of the fact, which the record amply demonstrates, that the subsidiaries rendered no services of any value such as to entitle them to a portion of the business profit.
*254 Disposition in respondent's favor under section 45 would dispense with the necessity of considering both of his other contentions. But it is not as clear as seems to be assumed that the case is controlled by National Carbide and Moline Properties. Cf. Higgins v. Smith, 308 U.S. 473">308 U.S. 473. Nor does it seem to me possible to say so cavalierly that section 129 has no application when the alleged business purposes are as flimsy as they were here; when the question is concededly one of fact, Alcorn Wholesale Co., 16 T. C. 75; Berland's Inc. of South Bend, 16 T. C. 182; and when as the hearer of the evidence, I would have found that no substantial purpose was, nor could have been expected to have been, served by the sales companies, see MacPherson v. Buick Motor Co., 217 N. Y. 382, except the tax avoidance objective which has apparently been attained.
Footnotes
1. SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.↩
2. SEC. 129. ACQUISITIONS MADE TO EVADE OR AVOID INCOME OR EXCESS PROFITS TAX.
(a) Disallowance of Deduction, Credit, or Allowance. -- If (1) any person or persons acquire, on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, on or after October 8, 1940, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately prior to such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income or excess profits tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then such deduction, credit, or other allowance shall not be allowed. For the purposes of clauses (1) and (2), control means the ownership of stock possessing at least 50 per centum of the total combined voting power of all classes of stock entitled to vote or at least 50 per centum of the total value of shares of all classes of stock of the corporation.↩
1. An analysis of the findings shows that the only services purportedly rendered by the sales companies during each of the tax years were to bill customers. to receive payment from them, and to enter into sales agreements with sales agents. All of these functions had previously been performed by petitioner. When performed during the tax years nominally on behalf of the sales companies, they were actually rendered by officers and employees of petitioner for whose compensation full deduction has been allowed by respondent's determination. Hence, it appears that the sales companies rendered no service of any value to petitioner during the tax years in issue.↩
2. A special 15 per cent discount, purportedly to cover costs, actually gave a gratuitous profit to the subsidiaries. That is really the only amount in controversy. Petitioner's vice president testified with respect to the discounts:
"It took considerable study to arrive at that 25%. The 50% is very easy to explain because it is passed on to the wholesale jobber. * * * The 50% is the standard discount that is given by manufacturers to wholesale jobbers whether it be our company or any of our competitors. That is a normal, justifiable discount↩ for them [and was allowed by respondent]. The 25% [additional] comprises 10% commission to the agent [also allowed by respondent] and then we have 15% to run our business." [Emphasis added.]
3. Respondent's action is not the same as a consolidated return, if that should be material. Here items of gross income and deductions were left with the sales companies. Respondent's regulations, read as a whole, have as their apparent purpose to make it clear that the Commissioner may not be compelled to apply section 45 by taxpayers who, for example, might attempt to substitute it for consolidated returns. Cf. Remco Steamship Co., 30 B. T. A. 579, affd. (C. A. 9), 82 F. 2d 988, certiorari denied, 299 U.S. 555">299 U.S. 555↩.
4. Respondent's deficiency notice treated as petitioner's income "the amounts * * * alleged to represent net income as corrected of" the Sales Companies. This was no more than a practical shorthand expression in a field where practicality is assumed to be the touchstone. See Leedy-Glover Realty & Insurance Co., 13 T. C. 95, 107, affd. per curiam (C. A. 5), 184 F. 2d 833↩.