*1765 Held that the petitioner and the Wales Adding Machine Co. were not affiliated in 1923.
*951 This proceeding is for the redetermination of a deficiency in income tax of $23,986.60 for 1923. The only matter in controversy is whether the petitioner and the Wales Adding Machine Co. were affilated from February 28, 1923, to December 31, 1923.
*952 FINDINGS OF FACT.
The petitioner is and was throughout 1923 a Delaware corporation with its principal office at New York, N.Y. During 1923 it was the owner of certain foreign patents. Its business consisted of purchasing from its wholly owned subsidiary, the Powers Accounting Machine Corporation, tabulating and punching machines and cards to be used therein, manufactured by that corporation, and reselling them to certain agents throughout the world.
Throughout 1923 the Wales Adding Machine Co. was a Pennsylvania corporation with its principal office at Kingston, Pa.
Out of a desire to save the investment of the stockholders of the Wales Adding Machine Co. by associating that company*1766 with a stronger and more successful enterprise, Abram G. Nesbitt and Fred M. Kirby of Wilkes-Barre, Pa., who owned 58.93 per cent of the voting stock of the Wales Adding Machine Co., in December, 1922, entered into negotiations for the purchase of all of the issued and outstanding stock of the petitioner.
As a part of the negotiations and pursuant to the request of Kirby, Hugh J. Pritchard, president of the petitioner then and throughout 1923, examined an accountant's report on the Wales Adding Machine Co. and made a study of the operating conditions and general business affairs of that company. Pritchard was assisted in the study by the treasurer of the petitioner and of the Powers Accounting Machine Corporation and by the factory manager of that corporation.
Shortly after Pritchard made his report Kirby and Nesbitt on February 5, 1923, purchased all of the issued and outstanding stock of the petitioner, each acquiring one-half of it. They continued to own the stock from that date throughout the remainder of the year.
In February, 1923, Nesbitt and Kirby, together with certain other holders of the common stock of the Wales Adding Machine Co., amounting in the aggregate*1767 to 80 per cent of that class of stock, formulated a plan and agreement to organize a new corporation, to be known as The Wales-Powers Corporation, the stock of which would be accepted by the individuals subscribing to the plan in exchange for their stock of the petitioner and of the Wales Adding Machine Co.
Shortly after Kirby and Nesbitt acquired the stock of the petitioner and in the month of February, 1923, the executives of the petitioner were unofficially given control of the operations of Wales Adding Machine Co. and operated that company without consulting anyone or reporting to the board of directors of that company. On March 6, 1923, in furtherance of such control Pritchard, president of the petitioner, was elected a director of Wales Adding Machine *953 Co. at the annual meeting of the stockholders of that corporation held on that date. On June 8, 1923, at the request of Nesbitt and Kirby, Pritchard was elected chairman of the executive committee of the board of directors of the Wales Adding Machine Co. and from that date officially took charge of all of the business operations of that company, continuing in that office and exercising such charge throughout the*1768 remainder of 1923. After Pritchard took charge of the Wales Adding Machine Co.'s plant at Kingston, Pa., some Powers adding machines were manufactured there in addition to the Wales adding machines.
The common stock of the Wales Adding Machine Co. had full voting power. Its preferred stock had no voting power. Throughout 1923 there were issued and outstanding 39.906 shares of the common stock of the Wales Adding Machine Co., which were held as follows:
| Class | Number of shares | Percentage |
| 1. Fred M. Kirby and Abram G. Nesbitt | 23,517 | 58.93 |
| 2. Directors of petitioner and Wales | ||
| Adding Machine Co | 2,386 | 5.98 |
| 3. Business or personal associates or | ||
| relatives of classes 1 or 2 | 12,122 | 30.38 |
| 4. Employees of Wales Adding Machine Co. | ||
| or of classes 1, 2, or 3 | 1,222 | 3.06 |
| 5. Relationship unknown | 659 | 1.65 |
| Total | 39,906 | 100.00 |
Under date of June 30, 1923, and as party of the first part, C. F. Huber, chairman of the board of directors of the Wales Adding Machine Co. and a director of the petitioner, J. C. Wiegand, a director of the petitioner and of the Wales Adding Machine Co., and H. B. Schooley, a director of the petitioner and a director and*1769 secretary-treasurer of the Wales Adding Machine Co., entered into the following agreement with the Miners Bank of Wilkes-Barre, as party of the second part:
WHEREAS, there is about to be organized a new Company which Company will acquire from Abram G. Nesbitt and F. M. Kirby, the entire Capital Stock of the Accounting & Tabulating Machine Company which they now own, and to issue certain securities in payment therefor. The new Company, in addition to the above acquisition, is desirous of acquiring the Preferred and Common Stocks of the WALES ADDING MACHINE COMPANY on the following basis:
One share Preferred Stock of the new Company for four shares of twenty-five (25) dollar par value Preferred Stock of the Wales Adding Machine Company, and one share Common Stock of the new Company for four shares of twenty-five (25) dollars par value Common Stock of the Wales Adding Machine Company, and
WHEREAS, certain individuals representing the ownership of over three-fourths (3/4) of each class of said stock of the Wales Adding Machine Company have determined to accept stock of the new Company in exchange for their present holdings, and
*954 WHEREAS, it is desired by these holders*1770 to deposit their stock with the MINERS BANK OF WILKES-BARRE for the purpose of effecting the exchange and
WHEREAS, by circular letter to all stockholders of the Wales Adding Machine Company signed by the stockholders representing the above ownership of more than three-fourths of each class of the Wales Stock, recommend to the minority holders of the Wales Stock to make the exchange above mentioned and likewise to deposit their stock with the Miners Bank aforesaid.
WITNESSETH, that the said party of the first part acting in behalf of the majority stockholders of the Wales Company have requested the said party of the second part to act in the capacity of depositary to effect the above exchange, and wherefor the said party of the second part does hereby accept the within trust and does hereby agree that it will accept for deposit all stock, Preferred and Common, of the Wales Adding Machine Company delivered to it, and issue its receipt therefor, and upon delivery of the proposed new stock, will notify all depositors to present their receipts and will deliver in exchange for such receipts such stock as each depositor may be entitled thereto.
On or about July 5, 1923, a circular*1771 letter bearing date of July 5, 1923, signed by Nesbitt, Kirby, Wiegand, Huber, Schooley and others, all of whom owned a total of about 68 per cent of the common stock of the Wales Adding Machine Co., was sent to the stockholders of that company. This letter recited, among other things, that a new company was being organized which would acquire from Nesbitt and Kirby the entire capital stock of the petitioner and that the holders of more than three-fourths of each class of stock of the Wales Adding Machine Co. had decided to deposit their stock with the Miners Bank of Wilkes-Barre for the purpose of having it exchanged for the stock of the new company when issued. The letter also recommended that the remaining stockholders deposit their stock with the Miners Bank of Wilkes-Barre to be exchanged for the stock of the new company in accordance with the terms of exchange as set forth in the letter.
Pursuant to the plan of exchange set forth in the letter, the common stock of the Wales Adding Machine Co. was deposited with the Miners Bank of Wilkes-Barre as follows:
| To date of - | Total number of | Percentage |
| shares of | of total | |
| common stock | number of | |
| deposited | shares of | |
| common stock | ||
| outstanding | ||
| July 31, 1923 | 15,065 | 37.75 |
| Aug. 28, 1923 | 31,856 | 79.81 |
| Sept. 29, 1923 | 37,841 | 94.83 |
| Oct. 31, 1923 | 38,948 | 97.59 |
| Nov. 26, 1923 | 39,447 | 98.85 |
| Dec. 29, 1923 | 39,551 | 99.11 |
| Apr. 11, 1924 | 39,793 | 99.72 |
*1772 Receipts were issued by the Miners Bank of Wilkes-Barre for the stock deposited with it for exchange for stock in the new corporation *955 in accordance with the plan outlined in the letter of July 5, 1923, to the stockholders of the Wales Adding Machine Co. Due to the delay of counsel in completing the organization of the new corporation, the Wales-Power Corporation, it was not chartered until January, 1924.
The stockholders of the Wales Adding Machine Co. and those of the petitioner met on March 6, 1923, and on August 6, 1923, respectively, and elected directors as follows:
| Wales Adding Machine Co. | Petitioner |
| A. G. Nesbitt. | A. G. Nesbitt. |
| J. C. Wiegand. | J. C. Wiegand. |
| C. F. Huber. | C. F. Huber. |
| F. M. Kirby. | F. M. Kirby. |
| Hugh J. Pritchard. | Hugh J. Pritchard. |
| H. B. Schooley. | H. B. Schooley. |
| E. M. Rosser. | S. R. Bertron. |
| W. J. Richards. | Sidney W. Caulfield. |
| C. F. Forves. | Wm. B. Clarkson. |
At meetings of the directors of the Wales Adding Machine Co. and of the petitioner held on March 15, 1923, and August 14, 1923, respectively, officers were elected as follows:
| Office | Wales Adding Machine Co. | Petitioner |
| President | A. G. Nesbitt | Hugh J. Pritchard. |
| Vice president | F. M. Kirby | Wm. G. James. |
| Secretary | H. B. Schooley | Wm. B. Clarkson. |
| Treasurer | H. B. Schooley | Sidney W. Caulfield. |
| Chairman of board | C. F. Huber |
*1773 The Wales Adding Machine Co. was insolvent in 1923. It had outstanding approximately $300,000 first mortgage bonds and approximately $500,000 of bank loans, all of which were either owned by Kirby and Nesbitt or guaranteed by them with one exception which was a joint guarantee by the Stegmaiers.
For the calendar year 1923 the petitioner filed a consolidated return in which it reported its own income, that of its wholly owned subsidiary, Powers Accounting Machine Corporation, and the income of Wales Adding Machine Co. In determining the deficiency here involved the respondent determined that the petitioner and the Wales Adding Machine Co. were not affiliated during 1923.
OPINION.
TRAMMELL: The petitioner contends that it and the Wales Adding Machine Co. were affilated for the period February 28, 1923, to December 31, 1923. The respondent denies that the corporations were affilated in 1923.
*956 Section 240 of the Revenue Act of 1921 provides: "(c) 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*1774 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."
Kirby and Nesbitt, who owned 58.93 per cent of the common or voting stock of the Wales Adding Machine Co., purchased equally between them the entire capital stock of the petitioner on February 5, 1923. Sometime in February, 1923, the exact date not being disclosed by the evidence, but being conceded by the petitioner in its brief as February 28, Kirby and Nesbitt, together with certain other holders of the common stock of Wales Adding Machine Co., amounting in the aggregate to 80 per cent of that stock, formulated a plan and agreement to organize a new corporation, to be known as The Wales-Powers Corporation, whose stock would be accepted by the individuals subscribing to the plan in exchange for the stock owned by them in the petitioner and in the Wales Adding Machine Co. The petitioner does not contend that it and the Wales Adding Machine Co. were affiliated from February 5, 1923, the date on which Kirby and Nesbitt acquired all of the petitioner's capital stock, but from February 28, 1923, the date on which the plan and agreement*1775 for the formation of a new corporation were formulated.
The petitioner urges that as the agreement imposed on the parties thereto (the owners of all of the stock of the petitioner and the owners of 80 per cent of the voting stock of the Wales Adding Machine Co.) an obligation to exchange their stock for the stock of the new corporation when organized, there resulted such a radical change in the stock ownership and control of the two corporations as to give ownership or control of substantially all of the stock of the two corporations to the same interests within the purview of the statute, thereby creating such an affiliation as would entitle the two corporations to file a consolidated return for the remainder of 1923. In support of its contention the petitioner relies primarily upon our decisions in All , and . The facts in those cases are readily distinguishable in a most important particular from the facts in the instant case. In each of those cases existing corporations offered to acquire from stockholders of other corporations their stock in such other corporations, giving*1776 therefor stock in themselves. The facts showing that the conditions contained in the offer had been complied with and the corporations having acquired either outright and or under contract very substantial amounts of stock in the other corporations, *957 we allowed affiliation. In the instant case the holders of all of the stock of the petitioner and the holders of 80 per cent of the common or voting stock of the Wales Adding Machine Co. agreed among themselves to accept in exchange for their stock in these corporations stock in a new corporation to be formed. Although the holders of 99.11 per cent of the common stock of the Wales Adding Machine Co. had at December 31, 1923, deposited their stock with the depository pursuant to the plan of exchange, the new corporation was not chartered until some time in January, 1924. Until the new company came into existence it is clear that neither the petitioner nor the Wales Adding Machine Co. could be affiliated with it. If the petitioner and the Wales Adding Machine Co. are to be held to have been affiliated in 1923, it must be upon some other basis than that they were eventually to be affiliated with a new corporation.
*1777 We find nothing in the record to indicate that the agreement by the stockholders of the two corporations to exchange their stock for stock in the new corporation when it was organized resulted in any change in the ownership of the stock of the two corporations during the year 1923. So far as the record shows, the holdings of the minority interest in the Wales Adding Machine Co. remained the same through 1923. Kirby and Nesbitt continued to own the stock of the petitioner from February 5, 1923, until the end of the year. Although the executives of the petitioner were put in control of the operations of the Wales Adding Machine Co. shortly after Kirby and Nesbitt acquired the stock of the petitioner, this did not give the petitioner the control of the stock of the minority interests as contemplated by the Act. ; ; . The petitioner owned no stock in the Wales Adding Machine Co. and its sole stockholders, Kirby and Nesbitt, owned only 58.93 per cent. That amount does not represent*1778 substantially all of the stock. ; ;. As there was a substantial minority interest which owned 41.07 per cent of the stock of the Wales Adding Machine Co. and which owned no stock in the petitioner, and therefore had no beneficial interest in the petitioner, we do not think this minority interest can be classified as constituting part of the same interests within the meaning of the statute. See , and .
*958 In view of the foregoing, we are of the opinion that the action of the respondent in determining that the petitioner and the Wales Adding Machine Co were not affiliated in 1923 is correct, and is therefore approved.
Reviewed by the Board.
Judgment will be entered under Rule 50.