*1915 Petitioner corporation and two other corporations are held to have been affiliated in 1924 and 1925, at least 95 per cent of the stock of each being held to have been owned by the same interests during the taxable year.
*125 In this proceeding the petitioner seeks a redetermination of its income-tax liability for the calendar years 1924 and 1925, for which years the respondent has determined deficiencies in the amounts of $3,217.47 and $3,021.60, respectively.
The question at issue is whether the tax should be computed on the basis of a separate return of the Baker Lumber Co. or on a consolidated return, including the Baker Lumber Co., Baker Box Co., and Leominster Novelty Corporation.
FINDINGS OF FACT.
The Baker Lumber Co. conducts a retail lumber business in Worcester, Mass. The Baker Box Co. manufactures and sells box shooks, and also deals in sawdust and shavings. The Leominster Novelty Corporation manufactures and sells advertising novelties. These companies occupied*1916 the same offices at 84 Foster Street, Worcester, Mass., and all were under the direct management of Charles Baker, who was the dominating and guiding spirit of each enterprise. The companies made advances from one to the other at various times during the taxable years and Charles Baker loaned the companies considerable amounts, without interest, in addition to endorsing the companies' notes when loans were obtained from banks.
During the years under consideration the voting stock of the Baker Lumber Co., Baker Box Co., and the Leominster Novelty Corporation were held as follows:
| Baker | Baker Box | Leominster | |
| Lumber | Co. | Novelty | |
| Corporation | |||
| Jan. 1, 1924, to June 24, 1924: | Per cent | Per cent | Per cent |
| Charles Baker | 93.06 | 86.98 | 100 |
| Chas. A. Swenson | 6.94 | ||
| Leon M. Ludden | 13.02 | ||
| June 24, 1924, to Jan. 20, 1925: | |||
| Charles Baker | 93.06 | 100 | 100 |
| Chas. A. Swenson | 6.94 | ||
| Jan. 20, 1925, to Feb. 12, 1925: | |||
| Charles Baker | 92.51 | 100 | 100 |
| Chas. A. Swenson | 6.94 | ||
| Philip N. Curtis | .55 | ||
| Feb. 12, 1925, to Dec. 31, 1925: | |||
| Charles Baker | 92.51 | 76 | 100 |
| Chas. A. Swenson | 6.94 | ||
| Philip N. Curtis | .55 | 24 |
Swenson and Ludden, prior to their*1917 acquisition of stock, had both for a long period of years been employees of the corporations controlled by Baker and their stock was purchased under an agreement whereby no sale or transfer could be made until Baker had been given an option to purchase it. Curtis is the brother-in-law of Baker. His stock was sold to him by Baker at about 50 per cent of *126 its book value in order that he could be induced to continue to reside in Worcester, and become a director and treasurer of the Baker Box Co. The interests of Swenson, Ludden, and Curtis in no way conflicted with Baker in the conduct of the business and at no time was their stock voted in opposition to Baker. There were no restrictions on their right to vote said stock.
Consolidated returns were filed for the years 1924 and 1925, in which the incomes of these companies were reported as follows:
| 1924 | 1925 | |
| Baker Lumber Co. | $25,782.78 | $25,027.96 |
| Baker Box Co | 1 23,951.15 | 1 31,297.08 |
| Leominster Novelty Corporation | 211.43 | 1 2,394.25 |
| Total | 2,043.06 | 1 8,663.37 |
The respondent disallowed the affiliation of the three companies and computed the petitioner's tax on the basis*1918 of its separate income, resulting in deficiencies of $3,217.47 for the year 1924 and $3,021.60 for the year 1925.
OPINION.
BLACK: In the , the same petitioner as in the instant case was held entitled to file consolidated returns for the calendar year 1919. The material facts in the two cases are identical except that in June, 1924, Ludden's stock was transferred to Baker and in January and February of 1925 Curtis acquired stock from his brother-in-law, Baker.
While the facts in the two cases are identical with the exceptions above noted, the law governing the two cases is not the same. The taxable year involved in , was 1919 and was governed by the Revenue Act of 1918, whereas the taxable years involved in this proceeding are 1924 and 1925 and are governed by the 1924 and 1926 Acts, respectively. The 1926 Act is applicable to the taxable year 1925 involved in this proceeding because Congress made the 1926 Act applicable to the taxable year 1925 for income-tax purposes. Section 240(b)(2) of the 1918 Act, which governed our decision in *1919 , provides that two or more domestic corporations will be deemed to be affiliated "if substantially all the stock of two or more corporations is owned or controlled by the same interests." The substance of our decision in , was that what stock Charles Baker did not own in the Baker Lumber Co., Baker Box Co., and Leominster Novelty Corporation, he controlled within the meaning of the statute and therefore there was affiliation. If the law had remained the same, we *127 would have no difficulty in deciding the instant case the same as we decided in , because the facts are substantially the same in both proceedings. But, as we have already pointed out, the law has not remained the same. The Revenue Acts of 1924 and 1926 dropped the word "control" and also dropped the phrase "substantially all," so that section 240(c)(2) of the Revenue Acts of 1924 and 1926 reads: "For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the*1920 same interests."
Under the language of the above quoted statute the criterion for determining affiliation is ownership of stock, and not a combination of ownership and control. The "same interests" must actually own at least 95 per cent of the stock of two or more corporations before there can be affiliation. The question of control does not enter into it. We are still faced, however, with the necessity of determining what Congress meant when it used the expression, "the same interests." The respondent contends that the expression, "the same interests," means "the same individual, partnership, or corporation, or the same individuals, partnerships, or corporations." The Circuit Court of Appeals for the First Circuit in the case of , held otherwise and reversed this Board. The taxable years involved in that proceeding were the same as here - 1924 and 1925. In that case the court, after quoting the regulation of the Commissioner of Internal Revenue defining the expression "same interests" to mean the same individual, partnership, or corporation, says: "But the Board in numerous decisions held to the contrary*1921 and we think rightly." The court then proceeded to hold that there was affiliation between a corporation and an association taxable as a corporation under circumstances existing as follows:
The Kile & Morgan Company has been engaged in the lumber business since 1903. Its president is Berton E. Kile, its secretary and treasurer Mortimer H. Alling. Kile and Alling, owning 99 per cent of the capital stock of the corporation, and M. G. Atkin, their bookkeeper, owning the other one-half of 1 per cent, constitute the board of directors.
* * *
The voting shares of the Kiboling Company for the period in question were 1810, of which Kile owned 1483 shares and Alling 173 shares, a total of 1656, 91 1/2 per cent of the entire issue. Of the balance, 17 shares had been given by Kile as a Christmas present to his sister, Mrs. Thomas J. Boston, whose husband, Thomas J. Boston, owned 137 shares, and was employed as local manager in charge of the Kiboling property. * * *
The effect of the decision in , is to hold that Congress meant to give a somewhat broader *128 meaning to the expression, "the same interests," than would*1922 be the case if it should be held to mean the same individual, partnership, or corporation. Such has been the ruling of this Board in ; , and other cases decided by the Board.
In other words, if Congress had wanted to restrict the ownership of 95 per cent of the stock before there could be affiliation, to the extent contended for by the respondent, it would have said in the second clause of section 240(c), "(2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same individual, or partnership or corporation or by the same individuals, partnerships or corporations." It did not say that, however, but, on the contrary, continued to use the same expression, "the same interests," as had been used in former statutes.
Under authority of , and the cases of the Board of Tax Appeals cited, we hold that the petitioner was affiliated during each of the taxable years with the Baker Box Co. and Leominster Novelty Corporation, and had a right to file a consolidated return with said corporations*1923 for each of the taxable years.
Reviewed by the Board.
Judgment will be entered under Rule 50.
MORRIS, MARQUETTE, SMITH, STERNHAGEN, and MURDOCK dissent.
Footnotes
1. Loss. ↩