*3988 Affiliation denied.
*1013 This proceeding comes before the Board as the result of a determination by the Commissioner of a deficiency in income tax for the fiscal year ended June 30, 1920, in the amount of $5,393.53. The determination is set forth in a deficiency notice from the Commissioner to the petitioner dated September 2, 1925, a copy of which, together with its accompanying statement, was attached to the petition and admitted by the respondent's answer. It is alleged that the Commissioner erred in refusing the petitioner the right to file a consolidated return as an affiliated corporation with Chatterton & Son.
FINDINGS OF FACT.
The petitioner is a Michigan corporation organized in the year 1907, having its principal office at McBain, Mich., and Chatterton & Son is a corporation with its principal office at Lansing, Mich. The former was engaged in the wholesale buying and selling of farm produce, and retail handling of feed, coal and other merchandise. The farm produce was purchased from farmers in the vicinity of McBain and was sold to*3989 jobbers in the State, and the retail merchandise *1014 was sold for the most part to farmers. Chatterton & Son was a jobber of farm products.
From the time of its organization up to and including the taxable year the petitioner purchased some commodities from Chatterton & Son, and sold to the latter corporation certain of its products under an arrangement whereby Chatterton & Son would have the preference upon the petitioner's products if the bid of Chatterton & Son was the same or lower than that of other jobbers. All sales between the two corporations were made at market.
H. E. Chatterton, the president of Chatterton & Son, was president of the petitioner during part of the taxable year until August 8, 1919, and A. E. Schepers, a director of Chatterton & Son, was secretary of the petitioner until the same date. On August 8, 1919, at a meeting of the directors of the petitioner, A. E. Schepers was elected president for the ensuing year and A. H. Madsen, secretary of Chatterton & Son, was elected secretary of the petitioner for the same term. There were 3,500 shares of common stock of the petitioner outstanding during the taxable year and no other stock was issued*3990 during this period. The common stock certificate books of the petitioner showed the following stockholders as of June 30, 1919, and June 30, 1920, together with the dates upon which their stock was issued:
| MCBAIN GRAIN COMPANY | ||
| STOCK OUTSTANDING | ||
| Certificate No. | Shares. | |
| June 30, 1919. | ||
| (All issued Sept. 1, 1916.) | ||
| H. E. Chatterton | 1-4 | 1,711 |
| A. E. Schepers | 5-8 | 1,711 |
| Sam Harris | 9 | 39 |
| Johannah Schepers | 10 | 39 |
| 3,500 | ||
| June 30, 1920. | ||
| (All issued Aug. 9, 1919, except as otherwise indicated.) | ||
| Peter Vandepol | 11 | 10 |
| Geo. W. Taylor | 12 | 10 |
| A. H. Vandepol | 13 | 20 |
| Wm. Bazuin | 14 | 10 |
| John H Schepers | 15 | 20 |
| Wm Van De Pol | 17 | 10 |
| Henry Hamming | 19 | 50 |
| Jno. Westdorp | 20 | 10 |
| Walter Scholten | 21 | 20 |
| Sietse Ellens | 23 | 20 |
| Frank Hoekwater | 24 | 10 |
| H. Benthem | 25 | 20 |
| G. H. Benthem | 26 | 20 |
| Jno. Arthur Hoekwater | 27 | 10 |
| Bert De Bree | 28 | 10 |
| H. H. Vandepol | 29 | 50 |
| A. A. Vande Pol | 30 | 10 |
| Charles Quist | 31 | 10 |
| (All issued Aug. 9, 1919, except as otherwise indicated.) | ||
| A. J. Schepers | 32 | 10 |
| H. J. Vander Woude | 33 | 20 |
| Jake G. Herweyer | 34 | 10 |
| Jake G. Herweyer | 34 | 10 |
| Andrew Vander Woude | 35 | 10 |
| Jacob Quist | 36 | 20 |
| John A. Hoekwater | 37 | 10 |
| Herman Geers | 38 | 20 |
| Ben Gernast | 40 | 10 |
| James English | 42 | 100 |
| Gerrit Herweyer | 44 | 10 |
| H. H. Koster | 46 | 10 |
| J. W. Kieldsen | 48 | 50 |
| Harry Schepers (issued Aug. 23, 1919) | 49 | 10 |
| John Laarman (issued Sept. 8, 1919) | 50 | 20 |
| Auke Bouma (issued Sept. 8, 1919) | 51 | 10 |
| Ray Kent (issued Feb. 2, 1920) | 52 | 10 |
| A. E. Schepers, Trustee (issued Aug. 9, 1919) | 53 | 1,000 |
| A. H. Madsen, Trustee (issued Aug. 9, 1919) | 54 | 750 |
| H. E. Chatterton, Trustee (issued Aug. 9, 1919) | 55 | 750 |
| Robert Ryon, Trustee (issued June 30, 1920) | 56 | 350 |
| Total | 3,500 |
*3991 *1015 Johannah Schepers the holder of 39 shares as of June 30, 1919, is the wife of A. E. Schepers. The shares held by the persons designated as trustees were held by them in trust for Chatterton & Son according to an arrangement carried out in pursuance of the following resolution of the board of directors of Chatterton & Son:
MEETING OF THE BOARD OF DIRECTORS OF CHATTERTON & SON JUNE 30 - 1919
Moved by B. A. Stickle and supported by Minor Walton that Chatterton & Son take over the McBain Grain Company at book value as of June 30th, 1919; in payment thereof present stockholders of McBain Grain Company be given equivalent amount of stock in Chatterton & Son; further that plants at McBain and at Lake City be separate corporations.
YEAS
All present
NAYS
None
In accordance with this resolution, for each share of stock transferred to Chatterton & Son, and held in trust for that corporation, the transferor received a share of Chatterton & Son stock.
During the fall of 1918 there was organized among the farmers of the district a cooperative association, the activities of which cut into the petitioner's business to some extent. It was then thought advisable to*3992 sell a portion of the petitioner's stock to some of the substantial farmers of the vicinity in order to hold their business. Accordingly, during 1919, A. E. Schepers sold certain shares to them and, with the exception of those stockholders designated as trustees, all the stockholders whose names appear on the petitioner's stock certificate books as of June 30, 1920, were farmers who had bought their stock from A. E. Schepers. John H. Schepers and Harry Schepers are nephews of A. E. Schepers, and Bert De Bree and H. H. Vandepol are his brothers-in-law. The remaining stockholders were farmers with whom A. E. Schepers had become acquainted in a business way.
At a stockholders' meeting of the petitioner held August 8, 1919, there were present 29 of the 30 farmers who appeared as stockholders on the petitioner's books as of August 9, 1919. The directors of the petitioner from August 8, 1919, to the end of the fiscal year were six in number, of whom three were stockholding farmers and a fourth was the treasurer and manager of the company. The remaining two were A. H. Madsen and A. E. Schepers. There was perfect harmony at all times at the meetings of the stockholders during the*3993 year.
The two corporations were operated separately, had separate offices, property, and equipment, and there were no intercompany loans.
*1016 OPINION.
MURDOCK: The petitioner alleges that during the taxable year it was affiliated with Chatterton & Son within the meaning of section 240(b) of the Revenue Act of 1918, which reads as follows:
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.
The fiscal year before us extended from June 30, 1919, to June 30, 1920. It is seen from the petitioner's stock certificate books that for part of this year, until August 9, 1919, the total outstanding stock was held by four stockholders, two of whom, holding 97.7 per cent, were stockholders and directors of Chatterton & Son. However, we have before us no evidence to show what proportion of the latter's stock was owned by these two stockholders and the*3994 absence of such evidence is a fatal defect in the proof necessary to show affiliation for this period.
After August 9, until the close of the fiscal year, Chatterton & Son were the beneficial owners of 2,500 shares or 71.4 per cent of the total shares outstanding. In addition, at least 361 shares were still owned by Chatterton and Schepers, stockholders of Chatterton & Son, and Schepers' wife, which it might be said Chatterton & Son controlled through closely affiliated interests. ; ; . But it also appears that during this whole period outsiders, consisting of farmers in the vicinity, held no less than 17.1 per cent of the outstanding stock and this holding was increased during the year until by February 2, 1920, it amounted to 650 shares or 18.5 per cent. These stockholders had no connection with Chatterton & Son and their stock was not controlled by Chatterton & Son through closely affiliated interests within the meaning of the Act. The fact that several of the farmer stockholders*3995 were related by blood or marriage to A. E. Schepers, a stockholder of Chatterton & Son, does not constitute them a closely affiliated interest in the absence of evidence to show that they had a common interest in some manner with the corporation which owned or controlled the majority of the petitioner's stock. ; .
The corporations were operated separately with separate offices and equipment and there were no intercompany loans. Although Chatterton & Son was allowed a preference upon sales of the petitioner, it was forced to buy at market upon the same terms as any *1017 other jobber dealing with the petitioner. The meeting of the stockholders and directors was harmonious but practically all of the stockholders who had no connection with Chatterton & Son attended the only stockholders' meeting during the year, while four of the six directors of the petitioner had no connection with Chatterton & Son.
No rule can be laid down as to the exact percentage of stock ownership or control which would constitute affiliated corporations within the*3996 meaning of the Act, but each case is to be decided in the light of its peculiar facts and circumstances, and where, as in this case, there are no intercompany transactions except the one kind mentioned above and where there is no economic unity, the ownership by the one corporation of 71.4 per cent of the stock of the other and the possible control by closely affiliated interests of 10 to 11 per cent does not constitute ownership or control of substantially all of the stock of the petitioner and is no sufficient to entitle it to the affiliation disallowed by the respondent. ; ;.
Judgment will be entered for the respondent.