Valley Bank v. Commissioner

VALLEY BANK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Valley Bank v. Commissioner

Docket No. 17678.

United States Board of Tax Appeals

18 B.T.A. 48; 1929 BTA LEXIS 2123;

November 9, 1929, Promulgated

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Affiliation denied.

Theodore B. Benson, Esq., for the petitioner.

Harry LeRoy Jones, Esq., for the respondent.

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MURDOCK

The Commissioner made a determination as follows in regard to the petitioner's income and profits-tax liability for the years 1917 to 1920 inclusive:

Year	Deficiency	Overassessment
1917		$547.20
1918	$2,942.73
1919	289.36
1920	1,001.15

The petitioner's allegation of error is as follows: That the Commissioner failed to affiliate taxpayer with the Gila Valley Bank & Trust Co. of Globe, Ariz., for the years 1917 to 1920, notwithstanding the fact that substantially all of the stock of both banks is owned and controlled by the same interests.

In accordance with the stipulation of the parties we make the following findings of fact.

FINDINGS OF FACT.

1. The petitioner is a corporation organized and existing under the laws of the State of Arizona, with its principal office at Phoenix, Arizona.

2. The Gila Valley Bank & Trust Company is a corporation organized and existing under the laws of the State of Arizona, with its principal office at Globe, and with branches at Miami, Safford, Clifton, Morenci, Ray, Hayden, and Winkelman, Arizona. The above mentioned towns are located in the Gila Valley, in the mining district of Globe and Miami.

3. On November 9, 1914, the Valley Bank of Phoenix, suspended operations due to financial difficulties. Certain officers, directors, and stockholders of the Gila Valley Bank & Trust Company, organized the Valley Bank, the petitioner, to succeed the Valley Bank of Phoenix, which had suspended operations. The petitioner assumed the liabilities and took over the good assets of the old bank.

4. The petitioner commenced business December 31, 1914, with a capitalization in the amount of $500,000.00.

5. The stockholdings on January 1, 1918, in both companies were as follows;

	January 1, 1918
Stockholders common to	Valley Bank	Gila Valley
both corporations	Number of shares	Percent	Number of shares	Per cent
1. C. E. Mills	2,011	40.22	230	23.00
2. L. D. Ricketts	1,002	20.04	103	10.30
3. R. E. Moore	50	1.00	10	1.00
4. George E. Olney	100	2.00	100	10.00
5. T. A. & J. H. Pascoe	40	.80	89	8.90
6. B. M. Goldwater	215	4.30	10	1.00
7. H. S. Van Gorder	100	2.00	53	5.30
8. J. R. Todd	10	.20	10	1.00
9. J. D. Parks	10	.20	10	1.00
10. M. H. McLean	20	.40	10	1.00
11. George and Maud Kingdon	20	.40	20	2.00
12. George W. P. Hunt	10	.20	5	.50
Total	3,588	71.76	650	65.00
Other stockholders	1,412	28.24	350	35.00
Total capital stock issued	5,000	100.00	1,000	100.00

The stockholdings as of January 1, 1919, and January 1, 1920, in both companies were as follows:

	Jan. 1, 1919
Majority stockholders	Valley Bank	Gila Valley
	Shares	Per cent	Shares	Per cent
1. C. E. Mills	2,011	40.22	230	23.00
2. L. D. Ricketts	1,340	26.80	103	10.30
3. R. E. Moore	100	2.00	10	1.00
4. George E. Olney	100	2.00	100	10.00
5. T. A. & J. K. Pascoe	40	.80	89	8.90
6. B. M. Goldwater	475	9.50	10	1.00
7. H. S. Van Gorder	150	3.00	53	5.30
8. J. R. Todd	10	.20	10	1.00
9. J. D. Parks	10	.20	10	1.00
10. M. H. McLean	20	.40	10	1.00
11. George and Maud Kingdon	220	4.40	20	2.00
12. George W. P. Hunt	10	.20	5	.50
Total	4,486	89.72	650	65.00
Minority stockholders	514	10.28	350	35.00
	5,000	100.00	1,000	100.00

	Jan. 1, 1920	Jan. 1, 1920
Majority stockholders	Valley Bank	Valley Bank	Gila Valley
	Shares	Per cent	Shares	Per cent
1. C. E. Mills	2,011	40.22	230	23.00
2. L. D. Ricketts	1,233	24.70	103	10.30
3. R. E. Moore	100	2.00	10	1.00
4. George E. Olney	100	2.00	100	10.00
5. T. A. & J. K. Pascoe	40	.80	89	8.90
6. B. M. Goldwater	475	9.50	10	1.00
7. H. S. Van Gorder	150	3.00	53	5.30
8. J. R. Todd	10	.20	10	1.00
9. J. D. Parks	10	.20	10	1.00
10. M. H. McLean	20	.40	10	1.00
11. George and Maud Kingdon	220	4.40	81	8.10
12. George W. P. Hunt	10	.20	5	.50
Total	4,381	87.62	711	71.10
Minority stockholders	619	12.38	289	28.90
	5,000	100.00	1,000	100.00

The stock ownership as at January 1, 1921, was identical with that as at January 1, 1920, except that H. S. Van Gorder increased his holdings in the Gila Valley Bank & Trust Company from 53 shares to 103 shares.

6. The officers and directors of both corporations during the years in question were as follows:

	Years 1918-1920, inclusive
	Valley Bank	Gila Valley Bank
1. C. E. Mills	President and director	President and director.
2. L. D. Ricketts	Vice president and director	Vice president and director
3. R. E. Moore	do	General manager & director.
4. George E. Olney	Director and stockholder	Director and stockholder.
5. T. A. Pascoe	Stockholder	Vice president and director
6. B. M. Goldwater	Director and stockholder	Stockholder.
7. H. S. Van Gorder	Stockholder	Cashier and director.
8. J. R. Todd	do	Asst. gen. mgr. & director.
9. M. H. McLean	do	Director and stockholder.
10. George Kingdon	do	Do.
11. George W. P. Hunt	do	Do.

7. The stock of the petitioner at annual meetings was voted at follows:

Annual stockholders' meeting, January 15, 1918
	Shares
C. E. Mills, present in person	2,004
L. D. Ricketts, present in person	1,002
B. M. Goldwater, present in person	215
George A. Olney, present in person	200
J. H. Kibbey, present in person	10
R. E. Moore, present in person	50
H. S. Van Gorder, proxy to C. E. Mills	10
M. H. McLean, proxy to C. E. Mills	20
Norman Carmichael, proxy to C. E. Mills	20
C. E. Hull, proxy to R. E. Moore	5
B. A. Packard, proxy to R. E. Moore	100
T. A. Pascoe, proxy to R. E. Moore	40
George Kingdon, proxy to R. E. Moore	20
E. W. Graves, proxy to R. E. Moore	20
P. T. Hurley, proxy to R. E. Moore	10
E. F. Whittlesey, proxy to R. E. Moore	20
J. R. Todd, proxy to R. E. Moore	10
George W. P. Hunt, proxy to R. E. Moore	10
T. F. Cole, proxy to C. E. Mills	1,002
W. R. Battin, proxy to R. E. Moore	5
E. M. Blake, proxy to R. E. Moore	10
J. D. Wick, jr., proxy to R. E. Moore	10
Total shares voting and present	4,883
Total outstanding shares	5,000

Business consisted of election of directors for ensuing year.

Annual stockholders' meeting, January 21, 1919
	Shares
B. M. Goldwater, present in person	475
J. H. Kibbey, present in person	5
A. T. Esgate, present in person	30
A. T. Esgate, proxies from others	2,169
Total shares voting and present	2,679
Total outstanding shares	5,000
Annual stockholders' meeting, January 20, 1920
R. E. Moore, present in person	100
R. E. Moore, proxies from others	3,857
H. S. Van Gorder, present in person	150
A. T. Esgate, present in person	30
A. T. Esgate, proxies from others	134
J. R. Todd, present in person	10
T. C. McReynolds, present in person	50
J. H. Kibbey, present in person	5
Total shares voted and present	4,336
Total outstanding shares	5,000
Annual stockholders' meeting, January 26, 1921
C. E. Mills, present in person	2,011
L. D. Ricketts, present in person	1,235
B. M. Goldwater, present in person	475
A. T. Esgate, present in person	30
A. T. Esgate, proxies from others	94
R. E. Moore, present in person	100
R. E. Moore, proxies from others	775
C. E. Mills, proxies from others	20
L. D. Ricketts, proxies from others	5
Total shares voted and present	4,745
Total outstanding shares	5,000

8. The stock of the Gila Valley Bank & Trust Co. at annual meetings was voted as follows:

Annual stockholders' meeting, January 18, 1918
	Shares
C. E. Mills, present in person	230
T. A. Pascoe, present in person	69
M. H. McLean, present in person	10
George Kingdon, present in person	10
George Olney, present in person	100
J. R. Todd, present in person	10
R. E. Moore, present in person	10
H. S. Van Gorder, present in person	53
Elizabeth Douglas, proxy to C. E. Mills	6
Marjorie Efromson, proxy to C. E. Mills	10
Mrs. H. Jacoby, proxy to C. E. Mills	1
R. D. Kennedy, proxy to C. E. Mills	4
John Langton, proxy to C. E. Mills	25
Mrs. E. C. Little, proxy to C. E. Mills	7
T. O'Brien, proxy to C. E. Mills	1
J. D. Parks, proxy to C. E. Mills	10
Mrs. E. V. Pickett, proxy to C. E. Mills	50
L. D. Ricketts, proxy to C. E. Mills	103
H. V. Snell, proxy to C. E. Mills	18
N. Solomon, proxy to C. E. Mills	8
Bernice Thorpe, proxy to C. E. Mills	2
Lena Thorpe, proxy to C. E. Mills	2
A. Trojanovich, proxy to C. E. Mills	61
D. W. Wickersham, proxy to C. E. Mills	69
B. M. Goldwater, proxy to T. A. Pascoe	10
G. W. P. Hunt, proxy to T. A. Pascoe	5
C. A. Little, proxy to T. A. Pascoe	3
J. H. Pascoe, proxy to T. A. Pascoe	20
Gin Ah Quong, proxy to T. A. Pascoe	7
C. L. Rawlins, proxy to T. A. Pascoe	7
Total shares voting and present	921
Total shares outstanding	1,000
Annual stockholders' meeting, January 14, 1919
J. R. Todd, present in person	10
T. A. Pascoe, present in person	69
John Langton, proxy to T. A. Pascoe	25
E. V. Pickett, proxy to T. A. Pascoe	50
H. S. Van Gorder, proxy to T. A. Pascoe	53
E. C. Little, proxy to T. A. Pascoe	7
R. E. Moore, proxy to T. A. Pascoe	10
George Kingdon, proxy to T. A. Pascoe	10
J. H. Pascoe, proxy to T. A. Pascoe	20
B. M. Goldwater, proxy to T. A. Pascoe	10
G. L. Rawlins, proxy to T. A. Pascoe	7
H. V. Snell, proxy to T. A. Pascoe	18
C. A. Little, proxy to T. A. Pascoe	3
A. Trojanovich, proxy to T. A. Pascoe	61
George W. P. Hunt, proxy to T. A. Pascoe	5
Charles S. Smith, proxy to T. A. Pascoe	10
Elizabeth Douglas, proxy to T. A. Pascoe	6
M. H. McLean, proxy to T. A. Pascoe	10
George A. Olney, proxy to T. A. Pascoe	100
L. K. Ricketts, proxy to T. A. Pascoe	103
Gin Ah Quong, proxy to T. A. Pascoe	7
J. D. Parks, proxy to J. R. Todd	10
R. D. Kennedy, proxy to J. R. Todd	4
Total shares voting and present	608
Total shares outstanding	1,000
Annual stockholders' meeting, January 13, 1920
T. A. Pascoe, present in person	69
J. R. Todd, present in person	10
Elizabeth Douglas, proxy to T. A. Pascoe	6
T. O'Brien, proxy to T. A. Pascoe	1
H. S. Van Gorder, proxy to T. A. Pascoe	53
C. E. Mills, proxy to T. A. Pascoe	230
L. D. Ricketts, proxy to T. A. Pascoe	103
George Kingdon, proxy to T. A. Pascoe	71
R. D. Kennedy, proxy to T. A. Pascoe	4
John Langton, proxy to T. A. Pascoe	25
Mrs. H. Jacoby, proxy to T. A. Pascoe	1
J. H. Pascoe, proxy to T. A. Pascoe	20
C. A. Little, proxy to T. A. Pascoe	3
George Olney, proxy to J. R. Todd	100
D. W. Wickersham, proxy to J. R. Todd	69
R. E. Moore, proxy to J. R. Todd	10
Total shares voting and present	775
Total shares outstanding	1,000
Annual stockholders' meeting, January 25, 1921
L. D. Ricketts, present in person	103
T. A. Pascoe, present in person	69
George Kingdon, present in person	71
R. E. Moore, present in person	10
J. R. Todd, present in person	10
L. E. Thorpe, proxy to R. E. Moore	2
Bernice Thorpe, proxy to R. E. Moore	2
M. H. McLean, proxy to R. E. Moore	10
E. V. Pickett, proxy to R. E. Moore	50
H. S. Van Gorder, proxy to R. E. Moore	53
H. Jacoby, proxy to R. E. Moore	1
J. H. Pascoe, proxy to R. E. Moore	20
M. Kohn, proxy to R. E. Moore	7
J. D. Parks, proxy to R. E. Moore	10
D. W. Wickersham, proxy to R. E. Moore	69
N. Solomon, proxy to R. E. Moore	8
C. S. Smith, proxy to R. E. Moore	10
B. M. Goldwater, proxy to R. E. Moore	10
C. L. Rawlins, proxy to J. R. Todd	7
E. Douglas, proxy to J. R. Todd	6
H. V. Snell, proxy to J. R. Todd	25
R. D. Kennedy, proxy to T. A. Pascoe	4
Total shares voting and present	557
Total shares outstanding	1,000

9. The Gila Valley Bank & Trust Company kept all deposits with the Valley Bank in Phoenix, cash funds, upon which the Valley Bank allowed interest at the rate of 3%. The cash balance as carried by the Gila Valley Bank & Trust Company with the Valley Bank and the total deposits in all banks, including the Valley Bank are as follows:

	Cash balance	Total balance	Per cent of
	carried by Gila	carried with all	balance carried
	Valley with Valley	banks by Gila Valley	with Valley Bank to
	Bank	Bank	total balances
At Dec. 31, 1918	$285,788.12	$621,967.96	46
At Dec. 31, 1919	388,547.16	1,430,771.98	27
At Dec. 31, 1920	236,293.62	735,635.00	30

10. There is submitted below a schedule disclosing the amount of notes transferred by the Valley Bank to Gila Valley Bank & Trust Company and also the total notes carried by the Gila Valley Bank & Trust Company.

	June 30, 1918	Dec. 31, 1918	Dec. 31, 1919	Dec. 31, 1920
Total loans and
discount carried	$2,486,991.74	$2,501,744.36	$2,587,980.02	$2,765,648.05
Loans and discounts
assigned by Valley
Bank for which no
discount or handling
charge was made	707,318.91	1,038,767.00	858,088.00	633,838.00

DISTRIBUTION OF EXPENSES

11. Supplies and stationery were purchased by the Valley Bank for both the Valley and Gila Valley Banks and the cost of same was allotted between the two institutions. The executive salaries of those officers who were serving in both banks simultaneously were also apportioned. The auditor of the Valley Bank was also the auditor of the Gila Valley Bank and his salary and expenses were apportioned. Certain overhead expenses applying to both banks and paid by the Valley or Gila Valley Bank, as the case might be, was likewise apportioned between the two banks.

BOOKS AND AUDITING

12. The auditor of the Valley Bank was likewise the auditor of the Gila Valley Bank & Trust Company. The system and internal check of the Gila Valley Bank was under the direct supervision of the officers of the Valley Bank.

DIRECTORS' MEETINGS

13. The meetings of the Board of Directors of the Valley Bank and the Gila Valley Bank were held in the same city, at the same time, in the same room and immediately following the other. Upon the completion of the business of the meeting of the first bank, the same directors would thereupon call to order the business of the other institution. The business of both banks was discussed at each of the meetings.

OPINION.

MURDOCK: The Commissioner has not determined a deficiency for the year 1917, but on the contrary has determined an overassessment for that year. His determination is not the result of the denial of a claim in abatement. We have no jurisdiction to entertain the present proceeding so far as it relates to that year and the same is hereby dismissed.

As to the other years, the petitioner is claiming that it is affiliated with the Gila Valley Bank & Trust Co. within the meaning of subdivision (b) of section 240 of the Revenue Act of 1918, which provides that two or more 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 apparent from a consideration of the foregoing facts that the petitioner has not shown that it is to be deemed affiliated with the other institution under either one of the above provisions of the Act.

On January 1, 1918, a group of individuals owned 71.76 per cent of the stock of the petitioner and at the same time owned 65 per cent of the stock of the other bank. Without knowing more, it can not be said that the same interests owned substantially all of the stock of the two corporations, because under such circumstances we must assume that the stockholders owning the remaining 28.24 per cent of the stock of the petitioner are not the same persons who owned the remaining 35 per cent of the stock of the other bank. See ; ; affd., ; . We have this same difficulty for the other years here in question, and we can not say as to any of the years that substantially all of the stock of the two corporations was owned by the same interests. Furthermore, the evidence fails to disclose control of the minority stock by the interests owning the majority stock. ;, as to proxies; ; affd., ; ; .

There is no claim that one of the corporations owns directly substantially all the stock of the other, but it is claimed in the petitioner's brief, though not alleged, that one corporation controls through closely affiliated interests, substantially all the stock of the other. In this the petitioner must certainly fail so far as the year 1918 is concerned, for at the beginning of that year and extending to an unknown time in that year, we must assume that 28.24 per cent of the stock of the petitioner was owned by a number of individuals who owned no stock in the other bank, and 35 per cent of the stock of the other bank was owned by individuals who owned no stock in the petitioner. The evidence does not show that those owning the majority of the stock in either of these banks exercised control, through closely affiliated interests or otherwise, over the minority stock. On January 1, 1919, there had been no substantial change in the identity of the owners of the stock in the Gila Valley Bank & Trust Co., but at that date those owning 65 per cent of its stock owned 89.72 per cent of the stock of the petitioner. The petitioner contends that under these circumstances the Gila Valley Bank & Trust Co. controls, through closely affiliated interests, substantially all the stock of the petitioner. It is unnecessary to decide, and we do not decide, whether 89.72 per cent is substantially all the stock of the petitioner, because in any event it can not be said that the Gila Valley Bank & Trust Co. controls through closely affiliated interests this 89.72 per cent of the stock of the petitioner. It could of course be said that stockholders owning 65 per cent of the stock of the Gila Valley Bank & Trust Co. owned directly 89.72 per cent of the stock of the petitioner, but this fact is no reason to say that the Gila Valley Bank & Trust Co. as a corporation controls, through closely affiliated interests, substantially all the stock of the petitioner, or in fact to say that the Gila Valley Bank & Trust Co. controls any of the stock in the petitioner. Control must be proven and we can not assume that it exists, particularly where 35 per cent of the stock of the corporation claimed to exercise the control is held by persons who own no stock in the corporation claimed to be controlled. Such a situation indicates a lack of that unity of interest contemplated by the Act. Proof of control is lacking.

The situation as to the year 1920 is no different in principle from the situation in 1919.

Judgment will be entered for the respondent.