*1316 Petitioner held not affiliated during the taxable years. Handy & Harmon v. Burnet,284 U.S. 136">284 U.S. 136.
*404 This proceeding was brought to redetermine the deficiency in income tax of the petitioner for the year 1925 in the sum of $23,145.30.
The sole issue is whether or not the petitioner was affiliated with A. Klipstein & Company during the calendar year 1925.
The facts were stipulated, and we adopt the stipulation as our findings of fact.
FINDINGS OF FACT.
1. A. Klipstein & Company, Palgrove Company, Bulls Ferry Chemical Company and Manetto Company were incorporated under the laws of the State of New Jersey on the following dates: A. Klipstein & Company, January, 1894; Palgrove Company, May, 1906; Bulls Ferry Chemical Company, February, 1891; Manetto Company, May, 1904.
2. A. Klipstein & Company is a dealer in chemicals and chemical products, among which are certain tanning extracts; Palgrove Company, the petitioner herein, merely owns and holds title to land in Florida; Bulls Ferry Chemical Company is a manufacturer*1317 of chemical products, selling exclusively to A. Klipstein & Company; and Manetto Company was organized to gather tanbark on the lands of the Palgrove Company for purposes of manufacturing into tanning compounds to be sold by A. Klipstein & Company.
3. These four corporations, during all the years mentioned herein and during the year 1925, the year in question, had joint offices at 644 Greenwich Street, New York, New York, and the books, records and accounts of each of these corporations were kept by the same employees.
4. Advances for the exploitation of the property of the Palgrove Company by the Manetto Company were made solely by A. Klipstein & Company.
*405 5. As of January 1, 1922, the Manetto Company was indebted to A. Klipstein & Company for such advances in the amount of $112,150.23. As of January 1, 1925, the amount was $125,077.77. This latter debt was assumed by Palgrove Company in accordance with the terms of a contract hereinafter set out and the indebtedness was paid to A. Klipstein & Company in 1925 after the sale by the Palgrove Company of its land.
6. For the year 1921, these four corporations filed, and the Commissioner of Internal Revenue*1318 Accepted, consolidated returns.
7. The capital stock outstanding, all voting, and all of the par value of $100 per share, and percentages of stockholdings of the four corporations on January 1, 1922, were as follows:
| A. Klipstein & Company | Palgrove Company | ||
| Name of stockholder | Number of shares | Percentage | Number of shares |
| August Klipstein | 510 | 10.2 | 49 |
| Hedwig Klipstein | 510 | 10.2 | |
| Louise A. Klipstein | 510 | 10.2 | |
| Herbert C. Klipstein | 510 | 10.2 | |
| August Klipstein, jr | 510 | 10.2 | |
| Ernest C. Klipstein | 500 | 10 | 49 |
| Grace L. Klipstein | 440 | 8.98 | |
| Ernest H. Klipstein | 500 | 10 | |
| Kenneth H. Klipstein | 500 | 10 | |
| Gerald P. Klipstein | 500 | 10 | |
| William A. Klipstein | 9 | .02 | |
| Nominees 1 | 1 | 2 | |
| 5,000 | 100 | 100 |
| Palgrove Company | Bulls Ferry Chemical Company | Manetto Company | ||
| Percentage | Number of shares | Percentage | Number of shares | Percentage |
| 49 | 146 | 10 | 250 | 48 |
| 146 | 10 | |||
| 146 | 10 | |||
| 146 | 10 | |||
| 146 | 10 | |||
| 49 | 150 | 10.3 | 250 | 48 |
| 140 | 9.5 | |||
| 140 | 9.6 | |||
| 140 | 9.6 | |||
| 140 | 9.6 | |||
| 20 | 1.4 | |||
| 2 | 20 | 4 | ||
| 100 | 1,460 | 100 | 520 | 100 |
*1319 8. Two distinct families are represented in the above table. One family, hereafter referred to as the August Klipstein family, consisted of August Klipstein and Hedwig Klipstein, his wife, and Louise A. Klipstein, Herbert C. Klipstein and August Klipstein, Jr., their children. The other family, hereafter referred to as the Ernest C. Klipstein family, consisted of Ernest C. Klipstein and Grace L. Klipstein, his wife, and Ernest H. Klipstein, Kenneth H. Klipstein, Gerald P. Klipstein and William A. Klipstein, their children. The two families are not related.
9. Each family owned approximately 50 per cent of each of the four corporations during 1922.
10. Under date of December 2, 1922, a contract was entered into by the Ernest C. Klipstein family to sell all its holdings in A. Klipstein & Company to the August Klipstein family. Also, Ernest C. Klipstein agreed to transfer one share of the Bulls Ferry Chemical Company to August Klipstein, Jr. In addition, Ernest C. Klipstein, *406 holder of 50 per cent of the outstanding stock of the palgrove Company, undertook to dispose of his shares to A. Klipstein & Company and nominated August Klipstein, Jr., the absolute holder*1320 thereof. The pertinent provisions of the contract are here set out:
1. * * * In addition, Ernest C. Klipstein, one of the parties of the first part, agrees to transfer and deliver to A. Klipstein & Company, 50 shares of the capital stock of Palgrove Company, subject to the conditions hereinafter stated in paragraph 5 hereof.
5. Ernest C. Klipstein, one of the parties of the first part agrees to duly transfer and deliver to said August Klipstein, Jr., 50 shares of the capital stock of Palgrove Company upon the following conditions: (a) Said August Klipstein, Jr., will procure the dur transfer and delivery to him from August Klipstein of 50 shares of said Palgrove Company stock; (b) said August Klipstein Jr., shall have the full voting rights of said 100 shares of said stock for any and all corporate purposes, with the right to take any and all action and any and all steps necessary to procure the assumption by the Palgrove Company of the certain indebtedness of the Manetto Company to A. Klipstein & Company; (c) if and in the event that the land owned by the Palgrove Company is sold, the proceeds thereof shall be applied, first, to the expenses of such sale and the payment of*1321 all taxes due by said company, both state and federal, then to the payment of said Manetto Company indebtedness so assumed, and the balance then remaining shall be equally divided and paid by the Palgrove Company to Ernest C. Klipstein and August Klipstein, their heirs, executors, administrators and assigns.
There was no change in the stockholdings of the Manetto Company during 1922. The deficit on that company's balance sheet per the returns filed as at December 31, 1921, was $120,397.23 and its capitalization $52,000.
11. The terms of the contract were duly carried out. The stockholdings prevailing on January 1, 1923, and during each of the calendar years 1924 and 1925, the latter the year in question, were as follows:
| A. Klipstein & Company | Palgrove Company | |||
| Name of stockholder | Number of shares | Percentage | Number of share | Percentage |
| August Klipstein | 10 | 0.2 | ||
| Hedwig Klipstein | 1,248 | 25 | ||
| Louise A. Klipstein | 1,247 | 24.9 | ||
| Herbert C. Klipstein | 1,247 | 24.9 | ||
| August Klipstein, Jr | 1,248 | 25 | 98 | 98 |
| Ernest C. Klipstein | ||||
| Grace L. Klipstein | ||||
| Ernest H. Klipstein | ||||
| Kenneth H. Klipstein | ||||
| Gerald P. Klipstein | ||||
| William A. Klipstein | ||||
| Nominal holders 1 | 2 | 2 | ||
| Total | 5,000 | 100 | 100 | 100 |
| Bulls Ferry Chemical Company | Manetto Company | ||
| Number of shares | Percentage | Number of shares | Percentage |
| 146 | 10 | 250 | 48 |
| 146 | 10 | ||
| 146 | 10 | ||
| 146 | 10 | ||
| 147 | 10 | ||
| 149 | 10.3 | 250 | 48 |
| 140 | 9.5 | ||
| 140 | 9.6 | ||
| 140 | 9.6 | ||
| 140 | 9.6 | ||
| 20 | 1.4 | ||
| 20 | 4 | ||
| 1,460 | 100 | 520 | 100 |
*407 12. The four corporations continued to file a consolidated return for each of the years 1923, 1924 and 1925. For 1925, the Commissioner of Internal Revenue ordered the affiliation of the Palgrove Company with the Bulls Ferry Chemical Company and the Manetto Company, but disapproved of its affiliation with A. Klipstein & Company.
13. During the entire year of 1925, the August Klipstein family, taken as a unit, owned 100 per cent of the capital stock of A. Klipstein & Company and of the Palgrove Company. The later company owed the former company $125,077.77 by the assumption*1323 of the Manetto Company's indebtedness. August Klipstein, Jr., came into possession of the Palgrove Company shares and held the same pursuant to the terms of the contract hereinbefore set out. He was, during the year 1925, treasurer of A. Klipstein & Company and president of the Palgrove Company. His father, August Klipstein, 77 years old and of failing health (he died on January 8, 1926), was during 1925 president of A. Klipstein & Company. After his father's death, August Klipstein, Jr., became president of A. Klipstein & Company. His mother and sister took no part at all in business affairs. He was the elder son and was most actively engaged in the affairs of the business group. His brother, Herbert D. Klipstein, was employed by Bulls Ferry Chemical Company. The family always voted as a unit, August Klipstein, Jr., usually holding the proxies of his mother and sister.
OPINION.
VAN FOSSAN: The petitioner asserts that it and A. Klipstein & Company were affiliated during 1925, pursuant to the provisions of section 240(c) of the Revenue Act of 1926, which is as follows:
For the purpose of this section two or more domestic corporations shall be deemed to be affiliated*1324 (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925.
During 1925 August Klipstein, Hedwig Klipstein, Louise A. Klipstein and Herbert C. Klipstein owned two-tenths per cent, 25 per cent, 24.9 per cent and 24.9 per cent, respectively, of the stock of A. Klipstein & Company, but held no stock in the petitioner. During the same year August Klipstein, Jr., owned 25 per cent of the stock of the A. Klipstein Company and 98 per cent of the stock of the petitioner. August Klipstein, Jr., had acquired his stock in the petitioner from Ernest C. Klipstein under the contract of December 2, 1922, which provided that Ernest C. Klipstein agreed *408 to transfer and deliver to A. Klipstein & Company 50 shares of the capital of the petitioner, subject to the conditions stated in paragraph 5 thereof. That paragraph is as follows:
Ernest C. Klipstein, one of the parties of the first part agrees to duly transfer and deliver to said August*1325 Klipstein, Jr., 50 shares of the capital stock of Palgrove Company upon the following conditions: (a) Said August Klipstein, Jr., will procure the due transfer and delivery to him from August Klipstein of 50 shares of said Palgrove Company stock; (b) said August Klipstein, Jr., shall have the full voting rights of said 100 shares of said stock for any and all corporate purposes, with the right to take any and all action and any and all steps necessary to procure the assumption by the Palgrove Company of the certain indebtedness of the Manetto Company to A. Klipstein & Company; * * *
The petitioner contends that August Klipstein, Jr., was merely the nominal holder of 98 shares of its stock and that such stock was in reality the property of individual members of the August Klipstein family, who were the stockholders of A. Klipstein & Company. There is nothing in the stipulation to support this theory. At the most August Klipstein, Jr., may have received the 50 per cent of the petitioner's stock from Ernest C. Klipstein for the benefit of the corporation, A. Klipstein & Company, thus contributivg to a the corporation, A. Klipstein & Company, thus contributing to a the petitioner does*1326 not claim. However, there is an express stipulation in the contract of December 2, 1922, that August Klipstein, Jr., should "have the full voting rights of said 100 shares of said stock for any and all corporate purposes." Nor does it appear how, for whose benefit, or for what consideration August Klipstein, Jr., acquired the 50 shares of the petitioner's stock from his father. In the absence of explanatory evidence, we must look to the schedule of stockholdings as it appears from the record.
The petitioner quotes from the stipulation as follows: "During the entire year of 1925 the August Klipstein family, taken as a unit, owned 100 per cent of the capital stock of A. Klipstein & Company and of the Palgrove Company," and asserts that the test of the statute has been met thereby. Whatever the phrase "taken as a unit" may mean, we understand that it imports no more than that the entire stock of A. Klipstein & Company and the petitioner was held within the August Klipstein family. Such a situation alone does not justify affiliation. In *1327 , the Supreme Court said:
It requires no discussion to show that such returns will not make against inequality or evasion unless the same interests are the beneficial owners in like proportions of substantially all of the stock of each of such corporations. * * * Affiliation on any other basis would not make against inequality or evasion. * * *
*409 The phrase "the same interests" is common to section 240(c) of the Revenue Act of 1926 and section 240(b) of the Revenue Act of 1918, under which the Handy & Harmon case arose. The court does not suggest that "family corporations" are exempt from the application of the above construction of the law. The purpose of section 240 was "to secure substantial equality as between stockholders who ultimately bear the burden." The situation surrounding the ownership of the capital stock of the petitioner and A. Klipstein & Company does not bring it within the rule as above set forth and, therefore, under the authority of *1328 , we must deny affiliation.
Decision will be entered for the respondent.
Footnotes
1. Share in A. Klipstein & Company owned by August Klipstein. One share each in Palgrove Company owned by August Klipstein and Ernest C. Klipstein. Ten shares each in Manetto Company owned by August Klipstein and Ernest C. Klipstein, shown on the books of the corporation under the names of B. H. Haley, as to ten shares, and E. J. Haley, as to ten shares. ↩
1. Two nominal holders in Manetto Company held ten shares each, but these were owned by August Klipstein and Ernest C. Klipstein, respectively. Two nominal holders in Palgrove Company held one share each for qualifying purposes, but these were owned by August Klipstein, Jr. ↩