*2611 The petitioner and the Rishel Phonograph Co. were not affiliated during the year 1921.
*287 The Commissioner determined a deficiency in income and profits tax for 1921 in the amount of $813.46. The error assigned is the failure of the Commissioner to allow an affiliation of the petitioner with the Rishel Phonograph Co.
*288 FINDINGS OF FACT.
The petitioner, hereinafter referred to as the Furniture Company, and the Rishel Phonograph Co., hereinafter referred to as the Phonograph Company, are both Pennsylvania corporations with their principal offices at Williamsport.
The petitioner was organized by J. K. Rishel and Ralph T. Smith in 1896. Its factory was located at Hughesville, Pa. Later, about 1900, certain citizens of Williamsport, who were interested in the development of that city, induced the petitioner to move its factory to that place. These citizens subscribed and paid for $50,000 of the stock of the petitioner and the remaining $65,000 stock of the petitioner was held by*2612 Rishel and Ralph T. Smith. From this time until the end of 1921 stockholders, other than Rishel, Ralph T. Smith, and B. H. Hamner, an employee of the petitioner, held at all times from 35 to 40 per cent of the stock of the petitioner.
Rishel and Ralph T. Smith directed the policies and management of the petitioner with little or no interference or objection on the part of the other stockholders. For the most part, the other stockholders did not attend the stockholders' meetings, nor were they represented by proxies. The relationship between Rishel, Ralph T. Smith, and the minority stockholders was at all times pleasant. The minority stockholders in the Furniture Company had confidence in the management of the business by the two majority stockholders and, so far as known, none of the minority stockholders were ever dissatisfied with the management of the business. The minority stockholders had no business interests which conflicted with the success of the petitioner or the Phonograph Company, but rather business interests owned by the minority stockholders were benefited by the success of these companies.
In only one instance did the minority stockholders ever sell their*2613 stock without first giving Rishel or Smith the opportunity of purchasing it. In this case the stock was sold to David Fulmer, an employee of the company.
Prior to 1916 the Furniture Company was engaged in manufacturing dining room and bedroom furniture and phonograph cabinets. It received large orders for phonograph cabinets from the leading manufacturers of phonographs, and installed a large amount of special machinery for the making of such cabinets. Thereafter, it failed to receive further orders from the same customers and in order to have use for such machinery, decided to produce phonographs itself. It caused the Phonograph Company to be organized in 1916 for the purpose of selling the phonograph which it should manufacture. The reason for organizing a separate corporation was to limit *289 liability in case of litigation for the infringement of phonograph patents.
The Phonograph Company had no separate place of business, no equipment, no stock in trade. It solicited orders from retail stores for phonographs and these orders were filled by deliveries from the phonographs in the inventory of the Furniture Company. The Furniture Company billed the Phonograph*2614 Company monthly for phonographs delivered on its account and credited it with phonographs returned. The price at which the Furniture Company billed the Phonograph Company was arrived at by adding 15 per cent to an amount denominated "cost," though this amount did not include any apportionment of the charge for depreciation of fixed assets of the Furniture Company; it amounted to some $20,000 per annum. The Furniture Company's regular practice in dealing with others than the Phonograph Company was to fix a price by adding from 25 per cent to 35 per cent to cost.
The Furniture Company charged the Phonograph Company that proportion of its office salaries which the sales of the Phonograph Company bore to the sales of the two companies, but no charge was made against the Phonograph Company for any other item of overhead.
The effect of these practices was to throw an undue proportion of the combined earnings of the two companies into the profits of the Phonograph Company. The corporations kept separate books and separate bank accounts.
The Furniture Company and the Phonograph Company had the same officers in 1921. J. K. Rishel was president and director of both companies. Ralph*2615 T. Smith was secretary, treasurer, and director of both companies. B. H. Hamner was superintendent of both companies and a director of the Phonograph Company.
The stockholders and directors of the Furniture Company on December 1, 1921, and December 31, 1921, were as follows:
| January 1, 1921 | December 31, 1921 | |
| Shares | Shares | |
| J. K. Rishel (Director) | 4,208 | 4,208 |
| Ralph T. Smith (Director) | 1,642 | 1,669 |
| B. H. Hamner | 220 | 220 |
| J. Roman Way (Director) | 170 | 170 |
| H. C. Bubb (Director) | 85 | 85 |
| N. B. Bubb | 85 | 85 |
| John L. Hall | 170 | 170 |
| D. A. Howe | 85 | 85 |
| J. Walton Bowman | 213 | 213 |
| Sarah L. Stearns | 26 | 26 |
| George L. Stearns | 119 | 148 |
| Charles H. Stearns (Director) | 111 | 141 |
| David Fulmer | 51 | 51 |
| Godfrey W. Howard | 136 | 136 |
| Edgar B. Linck | 145 | 145 |
| Mrs. M. N. Clark | 170 | 170 |
| Mrs. Marcia H. Rothfuss | 213 | 213 |
| Mrs. Martha M. Brown | 145 | 145 |
| Douglas M. Smith | 68 | 68 |
| 329 | 329 | |
| Susquehanna T. & S. Dep. Co., Trustee | 34 | 34 |
| Mrs. Jennie B. Haupt | 26 | 26 |
| Agnes W. Bennett | 25 | 25 |
| W. R. Deemer, Trustee | 119 | 60 |
| Mrs. Sallie E. Foresman | 85 | 85 |
| Mrs. Laura F. Robb | 43 | 43 |
| Mrs. Ruth F. MacMullen | 43 | 43 |
| John H. Foresman | 43 | 43 |
| George P. Foresman | 42 | 15 |
| H. M. Foresman Estate | 128 | 128 |
| Mary L. Deemer | 213 | 213 |
| Wm. R. Deemer (Director) | 213 | 213 |
| Lulu D. Keefer | 213 | 213 |
| Laura D. Becht | 213 | 213 |
| Walter E. Clark | 50 | 50 |
| L. L. Stearns | 119 | |
| Helen E. Hunt | 59 | |
| Emily L. Lyon | 30 | |
| H. W. Chamberlain, Trustee | 15 | |
| Katharyn L. Beeber | 25 | |
| 10,000 | 10,000 |
*2616 *290 The stockholders of the Phonograph Company on January 1, 1921, and December 31, 1921, were as follows:
| Shares | |
| J. K. Rishel | 470 |
| Ralph T. Smith | 230 |
| B. H. Hamner | 50 |
| J. K. Rishel Furniture Co | 250 |
| Total | 1,000 |
Exclusive of the holdings of Rishel, Ralph T. Smith and B. H. Hamner, who were the only stockholders of the Phonograph Company who held stock in the petitioner, the stockholders of the petitioner at January 1, 1921, represented 39.30 per cent of the total stock and at December 31, 1921, 39.03 per cent.
Of the minority stock of the Furniture Company during the year 1921, 27.77 per cent was owned by family and business groups, among which were the Way-Bowman-Foresman Lumber Co. group, the Stearns family group, the Howard-Rothfuss family group, the Deemer family group, and the Bubb family group. Douglas M. Smith, the son of Frank T. Smith, owned 329 shares of stock in the Furniture Company in 1921, which was always voted by Frank T. Smith. Employees of the Furniture Company and the Phonograph Company holding stock in the Furniture Company during 1921 were David Fulmer, 136 shares, B. H. Hamner, 220 shares, and Walter E. Clark, 50 shares.
*2617 The Phonograph Company paid the Furniture Company for phonographs by way of trade acceptances. The Furniture Company drew the acceptances and the Phonograph Company accepted them. The bank then agreed to and did take and carry the trade acceptances *291 until they were paid, thus extending credit to the Phonograph Company on these acceptances.
OPINION.
LITTLETON: The question whether the petitioner and the Rishell Phonograph Co. were affiliated for the years 1919 and 1920 was before the Board and the action of the Commissioner in denying an affiliated status was sustained. . It does not necessarily follow however that an affiliated status fixed for one or more years will continue for the succeeding year or years for the reason that "affiliation is a statutory status, which is determinable separately for each year, and the failure of a taxpayer to establish for one year the facts prescribed by the statute can not operate to prevent a full presentation of the facts for a subsequent year." *2618 .
In deciding against an affiliated status for the prior years, the Board said:
In the case at bar three men holding directly 61.57 per cent of the stock of the furniture company held directly 75 per cent of the stock of the phonograph company. Indirectly through the holdings of the former company in the latter, they owned an additional 15.39 per cent of the stock of the phonograph company and through their majority control of the furniture company they were in a position to vote all of the stock of the phonograph company. Their respective proportionate holdings in the two companies varied somewhat. Whether or not this variation is sufficient to justify the conclusion that their stock in the two corporations was controlled by the same interests is a question into which it is not necessary for us to go, for the reason that we are not convinced that they can be said to control substantially all the stock of both companies. That they controlled substantially all the stock of the phonograph company may be conceded for the purpose of argument, but we are not satisfied that in controlling 61.57 per cent of the stock of the furniture*2619 company they controlled substantially all of such stock. Much was stated in argument to the effect that the minority stockholders of the furniture company were friends and relatives of the majority stockholders, and that their stock was therefore controlled by the majority stockholders. But there is no real evidence in the record demonstrating any such control. The mere fact of relationship by blood or affinity does not of itself constitute proof of control, and the same may be said of friendship. To our minds 61.57 per cent of the stock of the phonograph company can not, in the light of all the circumstances of this case, be held to constitute substantially all of the stock, whether or not such a percentage in other circumstances might be held to be substantially all. The claim of the taxpayer for affiliation with the J. K. Rishel Furniture Company must be rejected and the determination of the Commissioner approved. (Italics supplied.)
Substantially the same conditions as to stock ownership exist in this proceeding as existed in the proceeding for the prior years; in fact, minority stockholders are slightly greater for 1921 than they were for 1919 and 1920. Additional*2620 evidence, however, has been *292 presented in the instant proceeding with respect to the conditions surrounding the early history of the petitioner, and the general relationship existing between the majority and minority stockholders.
In the decision on the appeal for the prior year, reference was made to the argument advanced "that the minority stockholders of the furniture company were friends and relatives of the majority stockholders, and that their stock was, therefore, controlled by the majority stockholders." We said, however, that there was "no real evidence in the record demonstrating any such control." Much of the evidence in the instant proceeding was introduced for the purpose of demonstrating the control referred to in the prior proceeding. While this evidence shows lack of interference on the part of the minority in the management of the petitioner and full confidence and satisfaction on the part of the minority in the acts of the majority, there was nothing shown which demonstrated real control, whether legal or actual. The most that can be said is that there was a quiescent minority which was satisfied with, and did not interfere in, the management of the*2621 petitioner, but this is far from saying that there was actual control by the majority of the minority stockholders. See . In , the Board said that the control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock." We are not convinced that there was control in the foregoing sense in this instance. The facts that stockholders would have given proxies to the majority to vote their stock, had such request been made; that the minority stockholders were friendly to the majority; that at the time the minority purchased their stock, there was some sort of oral understanding that the majority would be given an opportunity to buy stock which the minority might desire to sell, and other similar circumstances are not sufficient to convince us that the control of the voting rights of stock contemplated by the statute existed in this case.
Petitioner argues that by virtue of its holdings of 25 per cent of the stock of the Phonograph Company, there was, therefore, ownership by all of its stockholders of stock in the Phonograph Company and that when*2622 this stock ownership is considered there will be found to exist a complete ownership of the stock of the two companies by the same individuals. The answer to this contention is that ownership by a corporation is not ownership by the stockholders of the corporation. The corporation exists separate and apart from the stockholders, the assets of the corporation, among which in this instance was certain stock of the Phonograph Company, being owned by the corporation and the stockholders merely possessing and exercising certain rights through the corporation.
*293 In view of the foregoing and from a consideration of the entire record the action of the Commissioner in declining to compute the income and invested capital of the petitioner and the Phonograph Company upon the basis of a consolidated return is sustained.
Reviewed by the Board.
Judgment will be entered for the respondent.