*2914 Two corporations held to be affiliated by reason of the actual control of substantially all the stock by the same interests.
*152 The Commissioner determined a deficiency of $22,658.96, income and profits tax for 1921. The petitioner contests this and claims the right to affiliation with other corporations named in the findings.
FINDINGS OF FACT.
The Gong Bell Manufacturing Co., the petitioner, is a corporation whose business was established in 1866 and incorporated in 1899, and it has been at all times engaged in the manufacture of toys and bells, with its principal place of business at East Hampton, Conn.
*153 Bevin Bros. Manufacturing Co. is a corporation, incorporated in 1868, and has been at all times engaged in the manufacture of bells, with its principal place of business at East Hampton, Conn.
East Hampton Bell Co. is a corporation, incorporated in 1895, and has been at all times engaged in the manufacture of bells and trolley wheels, with its principal place of business at East Hampton, Conn.
Bevin, Wilcox Line*2915 Co. is a corporation incorporated in 1920, and has been at all times engaged in the manufacture of fish line, with its principal place of business at East Hampton, Conn.
The respondent has determined the income and profits-tax liability for the year 1921 of Bevin Bros. Manufacturing Co., East Hampton Bell Company, and Bevin, Wilcox Line Co. upon the basis of a consolidated return, but did not include the petitioner with the affiliated group.
The following constitutes the percentage of stock ownership in the various companies:
| Owner | Gong Bell | Bevin Bros. | East Hampton | Bevin, Wilcox |
| Mfg. Co. | Mfg. Co. | Bell Co. | Line Co. | |
| Per cent | Per cent | Per cent | Per cent | |
| Bevin Bros. Mfg. Co | 100 | 100 | ||
| Chauncey G. Bevin | 17.5 | 54.86 | ||
| Mayo S. Purple | 25.0 | 7.70 | ||
| A. Avery Bevin | 33.78 | |||
| Stanley Bevin | 1.83 | |||
| Marshall Bevin | 1.83 | |||
| Alice C. Bevin | 7.5 | |||
| Grace C. Bevin | 10.0 | |||
| J. H. Conklin | 28.0 | |||
| C. M. Watrous | 12.0 |
The business of the petitioner, prior to the date of incorporation, was conducted as a partnership by the father of J. H. Conklin and the father of Chauncey G. and A. Avery Bevin. After 1903 and Gong Bell Manufacturing Co. *2916 was acquired by the National Novelty Corporation, later known as Hardware & Woodenware Corporation. The Hardware & Woodenware Corporation went into the hands of a receiver in 1908.
The father of J. H. Conklin was the manager of the business of Gong Bell Manufacturing Co. until the Hardware & Woodenware Corporation went into the hands of a receiver, and was purchased by the Asset Realization Co. and Gamble & Carndon in 1912.
C. G. Bevin had always lived as the next-door neighbor to J. H. Conklin and his father. The Bevins and the Conklins had been lifelong friends as well as neighbors. C. G. Bevin, at the time of the purchase of the holdings of Hardware & Woodenware Corporation in 1912, determined to secure the assets and stock of the Gong *154 Bell Manufacturing Co. in order to permit the father of J. H. Conklin to manage the same.
At the time of the determination to purchase the assets of the Conklin was 74 years old. Realizing that he would not live long, to told his son to follow out whatever C. G. Bevin said and do as C. G. Bevin thought best because of the ability of C. G. Bevin to acquire the business and loan it money.
C. G. Bevin bought the stock and*2917 assets of the petitioner in August, 1912, and, immediately after the death of the father of J. H. Conklin, transferred 14 shares of the stock to J. H. Conklin.
The stock of the petitioner, which was transferred by C. G. Bevin g that if J. H. Conklin was ever in a position to pay for the stock he sould do so. At a later date the stock was paid for by J. H. Conklin.
From the year 1919 J. H. Conklin has resided with his sister, who married Frank Bevin, a cousin of C. G. Bevin. C. G. Bevin advanced money to J. H. Conklin in 1921.
J. H. Conklin felt morally obligated in every respect to C. G. Bevin because the latter had helped his father out, had comforted him at the time of his death, had advanced the moneys to purchase the business of the petitioner, had given stock in the petitioner to J. H. Conklin and had loaned money to him. Furthermore, C. G. Bevin had built up the business of the petitioner. J. H. Conklin thought he had a duty to be loyal to C. G. Bevin.
J. H. Conklin conferred with Mr. Bevin with respect to the voting of the stock standing in J. H. Conklin's name and always voted in the manner C. G. Bevin thought best. J. H. Conklin voted his stock as directed*2918 by C. G. Bevin and managed the business in the manner directed by C. G. Bevin.
Mayo S. Purple in the year 1921 was secretary of Bevin Bros. Manufacturing Co. and owned 7.70 per cent of the stock of that company. His stock in the petitioner was originally given him at the time of the purchase of Gong Bell Manufacturing Co. by C. G. Bevin. He is a cousin of C. G. Bevin and has never paid for the stock.
C. M. Watrous is the brogher-in-law of J. H. Conklin and in 1921 was the general manager of the petitioner. He was originally superintendent of the tool room of Bevin Bros. Manufacturing Co. and was placed in the business of the petitioner to make a success of the business. C. G. Bevin caused him to be transferred from Bevin Bros. Manufacturing Co. to the petitioner at the time of the organization of the petitioner and allowed him to subscribe for some of the stock of the petitioner.*155 Alice C. Bevin received her interest in the stock of the petitioner as a gift from C. G. Bevin, her uncle. Grace C. Bevin, who lived at the home of J. H. Conklin, was the cousin of C. G. Bevin and received her stock in the petitioner as a gift from C. G. Bevin. Neither Alice C. Bevin*2919 nor Grace C. Bevin ever attended any stockholders' meeting of the petitioner, nor did they ever take any interest in its affairs. Alice C. Bevin lived in Paris in 1921.
C. G. Bevin caused Bevin Bros. Manufacturing Co. and East Hampton Bell Co. to furnish to petitioner some of its materials, supplies, work and labor without cost, or at a nominal cost.J. H. Conklin, Mayo S. Purple, and C. M. Watrous all voted their stock under the direction of C. G. Bevin, and in every respect carried out his direction in the management of the business.
C. G. Bevin, in the year 1921, was vice president of the petitioner, treasurer of Bevin Bros. Manufacturing Co., and president of East Hampton Bell Co. and the Bevin, Wilcox Line Co. In such year he was the financial director of all of the companies and controlled all of their finances.A. Avery Bevin was the brother of C. G. Bevin, and in 1921 had been sick for two years with cancer. He died in 1922. During the period of his illness C. G. Bevin had A. Avery Bevin's stock in the safe in his office. C. F. Bevin voted this stock. C. G. Bevin managed Bevin Bros. Manufacturing Co. and A. Avery Bevin had nothing whatever to do with the company*2920 in the year 1921.
The plant of the petitioner is and always has been one unit in the buildings originally acquired and operated by Bevin Bros. Manufacturing Co. All of these buildings are on the same stream, one below the other, and connected by one water supply, which supply is owned by Bevin Bros. Manufacturing Co. These buildings were supplied to the different units by Bevin Bros. Manufacturing Co. All of the buildings were run as one unit and one complete plant.
The petitioner received a portion of its toy business from Bevin Bros. Manufacturing Co. at the direction of C. G. Bevin, without cost. This business consisted of manufacturing baby rattles and children's driving reins.
The petitioner received its water supply from the reservoir of Bevin Bros. Manufacturing Co. and its water power from the well of the East Hampton Bell Co. The only water available for the petitioner was from the reservoir of Bevin Bros. Manufacturing Co.
The petitioner paid to Bevin Bros. Manufacturing Co. in the year 1921, for a building 30 ft. wide by 70 ft. long, and 3 stories in height, and for all the water and water power received, a rental of $12.50 per month.
The total purchase*2921 of materials by the petitioner in the year 1921 was $152,374.54. Of this amount, the purchases from Bevin Bros.*156 Manufacturing Co. totaled between $45,000 and $45,000, and the materials were supplied practically at cost of manufacture.
All of the fuel used by the petitioner was purchased from Bevin Bros. Manufacturing Co. The total cost in the year 1921 was $1,398.73.
The open account with Bevin Bros. Manufacturing Co. averaged during the year 1921 between $3,000 and $4,000 per month. In this year the petitioner borrowed from Bevin Bros. Manufacturing Co. between $7,000 and $8,000.
All of the plating, enameling and casting for the petitioner was done at the plants of East Hampton Bell Co. and Bevin Bros. Manufacturing Co. at a rate of 20 per cent or more below market or actual cost if it had been done anywhere else.
In the year 1921 the most successful product produced and sold by the petitioner was a miniature telephone, in the manufacture of which it was aided by East Hampton Bell Co. because of the inability of the petitioner to manufacture it completely. All of the profits from this were included in the income of the petitioner.
In 1921 and prior*2922 years, the laborers of the petitioner were used at any time by Bevin Bros. Manufacturing Co., and the petitioner would likewise use the laborers of these companies. The trucking for the petitioner was done by Bevin Bros. Manufacturing Co. without charge.
The petitioner, Bevin Bros. Manufacturing Co., and East Hampton Bell Co. were all managed by C. G. Bevin and there was no competition between them with respect to similar products. The catalogues of the petitioner, in the year 1921, carried products manufactured by Bevin Bros. Manufacturing Co. and East Hampton Bell Co.
In the year 1921 the petitioner borrowed $12,000 or $15,000 from banks on the endorsement of C. G. Bevin, and from C. G. Bevin himself.
C. G. Bevin controlled all of the stock of both the petitioner and Bevin Bros. Manufacturing Co.The petitioner, Bevin Bros. Manufacturing Co., East Hampton Bell Co., and Bevin, Wilcox Line Co. were operated as a business unit under the direction of C. G. Bevin.
OPINION.
STERNHAGEN: The foregoing findings of fact are substantially as requested by petitioner, and are in our opinion fully supported by the evidence. From them the petitioner urges the conclusion that, *2923 as prescribed by section 240, Revenue Act of 1921, "substantially all the stock of two or more corporations [i.e., Gong Bell Manufacturing *157 Co. and Bevin Bros. Manufacturing Co.] is owned or controlled by the same interests" and hence that such corporations are affiliated and their income taxed upon a consolidated return. The Commissioner has recognized the statutory affiliation of Bevin Bros. Manufacturing Co., East Hampton Bell Co., and Bevin, Wilcox Line Co., and has refused to permit the inclusion of the Gong Bell Manufacturing Co.
The petitioner, relying on earlier decisions, argues that C. G. Bevin controlled all the stock of petitioner and Bevin Bros. Manufacturing Co., and that the business of the four corporations was unified so as to permit a shifting of profits and thus to enable tax evasion, and hence that they are within the statutory purpose of affiliation. The Board has consistently, since , and , interpreted the statute to mean, where affiliation is predicated upon control of stock, that control is a matter of fact to be determined in the light*2924 of the evidence and not a matter of legally enforeceable right. The extent to which the Board has gone in recognizing factual control is shown by the decisions cited by petitioner, ; (now on review); ; ; ; and .
Looking at the evidence, we have no doubt that C. G. Bevin in owned the stock of the Gong Bell Manufacturing Co. and Bevin owned the stock of the Gong Bell Manufacturing Co,. and Bevin Bros. Manufacturing Co. He had given them their stock and Conklin and Watrous later paid for theirs when they were able to do so. The profits were measured by the extent to which Bevin shifted costs of labor and material. They voted their stock as he directed, and no one had the temerity or the inclination to assert an adverse or different right or interest from his. To speculate upon the result of an independent exercise by them of the rights of ownership would take us beyond the*2925 facts. Conklin, the largest stockholder, seemed on the witness stand to regard such a situation as beyond contemplation. He regarded himself entirely as an employee of Bevin and beholden to him for his livelihood. Bevin stood apparently as a feudal lord over these individuals and their affairs.
The evidence as to the freedom with which Bevin devoted the facilities of one corporation to the use of the other and allocated costs arbitrarily be charging one with the expense of services and facilities used by another shows that the power existed to make income appear as tax interests required. There is no evidence to indicate that this was in mind, but it is shown that earnings of the several *158 companies were not charged with their normal share of costs. Hence income was fictitious.
In our opinion the doctrine of actual control is properly applicable here and under it the evidence indicates that substantially all the stock of Gong Bell Manufacturing Co. and Bevin Bros. Manufacturing Co. was in 1921 controlled by C. G. Bevin, and that they are affiliated under the statute.
Judgment will be entered under Rule 50.