*1309 The petitioner and F. W. & M. L. Bell, Inc., held not affiliated under the Revenue Acts of 1926 and 1928, where less than 95 per cent of the voting stock of both corporations was owned by the same interests.
*424 These proceedings which were consolidated for hearing and decision are for the redetermination of deficiencies in income tax of $13,969.18 and $1,579.53 for 1926 and 1928, respectively. The only matter in controversy is the correctness of the respondent's action in determining that the petitioner and F. W. & M. L. Bell, Inc., were not affiliated during 1926, 1927 and 1928. The proceedings were submitted upon a stipulation of facts, oral testimony and documentary evidence, from which we make our findings of fact.
FINDINGS OF FACT.
The petitioner is a Florida corporation, having its principal office at Miami, Florida. It was organized prior to December 21, 1925, with an authorized capital stock of $100,000, represented by 1,000 shares of common stock of a par value of $100 per share.
On December 21, 1925, the outstanding capital*1310 stock of the petitioner, consisting of 750 shares, was owned as follows: F. W. Bell, 374 shares; A. B. Bell, one share; and M. L. Bell, 375 shares. F. W. Bell was the father of M. L. Bell and A. B. Bell was the wife of F. W. Bell. Vera E. Bell, hereinafter mentioned, was the wife of M. L. Bell.
Pursuant to resolution of the stockholders adopted December 21, 1925, and to the by-laws as amended on that date, the petitioner from time to time thereafter issued shares of its capital stock to certain of its employees as a bonus for services. In issuing stock to the employees it was thought that they would be more loyal to the petitioner and would have more interest in its business. It was also thought that this method would help the employees to save money. The by-laws of the petitioner as amended provided as follows with respect to the issuance of stock as a bonus:
ARTICLE IX. - Delivery of Bonus Stock.
Section 1.The Board of Directors may from time to time upon vote of the majority of the Board of Directors authorize the issue of stock of the corporation *425 as bonus to the employees of the corporation, as they may deem necessary.
Section 2. No holder*1311 of stock issued for bonus by reason of service to the corporation shall be elected as a member of the Board of Directors of the corporation except upon the unanimous vote of all of the stockholders of the corporation other than the stockholders by reason of the issue of bonus stock.
Section 3. No stock issued to employees of the corporation as bonus stock by reason of service to the corporation shall be transferred or assigned on the books of the corporation until after the corporation shall have been offered the purchase of all such stock at the par value of $100.00 per share, such offer to be made in writing, addressed to the corporation and delivered at its present place of business and the corporation shall have not less than ten days in which to elect to purchase such stock.
All stock issued by the corporation to the employees of the corporation as bonus stock must be repurchased by the corporation at any and all times at the election of the Board of Directors for the par value of $100.00 per share, and all bonus stock shall be restricted as to dividend rights to 8% nonaccumulative.
The certificates for stock issued by the petitioner to persons other than F. W. Bell, *1312 A. B. Bell, M. L. Bell and Vera E. Bell, with the exception of the certificate for two shares issued to Fay E. Collins, bore the following endorsement:
The within certificate of stock is issued as a bonus for service rendered to the corporation and is issued subject to the By-Laws of the corporation providing that the same may be re-purchased by the corporation at par value at any time; cannot be sold or transferred without offering the same to the corporation at par value; and that the holder shall not be entitled to election as a Director of the corporation.
F. W. & M. L. Bell, Inc., is a Florida corporation with an authorized capital stock of $100,000 represented by 1,000 shares of common stock of a par value of $100 per share. It was organized December 9, 1925, and began business on February 8, 1926.
The stock of the petitioner and F. W. & M. L. Bell, Inc., was held as follows during the periods indicated:
| Columbia Tire Co. | F. W. & M. L. Bell, Inc. | |||
| Shares | Per cent | Shares | Per cent | |
| January 1, 1926, to July 7, 1926 | ||||
| F. W. Bell | 374 | 47.28 | 250 | 25 |
| A. B. Bell | 1 | .13 | 250 | 25 |
| M. L. Bell | 375 | 47.41 | 250 | 25 |
| Vera E. Bell | 250 | 25 | ||
| L. A. Clark | 15 | |||
| W. P. Brown | 11 | |||
| Charles Harris | 5 | 5.18 | ||
| J. S. Talley | 5 | |||
| Theodore Robinson | 5 | |||
| Total | 791 | 100 | 1,000 | 100 |
| July 8, 1926, to December 23, 1926 | ||||
| F. W. Bell | 0 | 250 | 25 | |
| A. B. Bell | 375 | 47.41 | 250 | 25 |
| M. L. Bell | 375 | 47.41 | 250 | 25 |
| Vera E. Bell | 250 | 25 | ||
| L. A. Clark | 15 | |||
| W. P. Brown | 11 | |||
| Chas. Harris | 5 | 5.18 | ||
| J. S. Talley | 5 | |||
| Theo. Robinson | 5 | |||
| Total | 791 | 100 | 1,000 | 100 |
| December 24, 1926, to February 25, 1927 | ||||
| F. W. Bell | 250 | 25 | ||
| A. B. Bell | 375 | 44.70 | 250 | 25 |
| M. L. Bell | 375 | 44.70 | 250 | 25 |
| Vera E. Bell | 250 | 25 | ||
| L. A. Clark | 20 | |||
| W. P. Brown | 16 | |||
| Chas. Harris | 10 | |||
| J. S. Talley | 10 | |||
| Theodore Robinson | 10 | |||
| Fay E. Collins | 7 | 10.60 | ||
| A. L. High | 5 | |||
| Chas. E. Rogerson | 2 | |||
| G. W. Sconyers | 2 | |||
| G. W. Thomas | 2 | |||
| W. B. Watson | 5 | |||
| Total | 839 | 100 | 1,000 | 100 |
*1313 *426 The following changes in the outstanding capital stock of the Columbia Tire Company occurred during the period February 26, 1927, to July 31, 1927:
2-26-27 - Chas. E. Rogerson sold two shares of stock owned by him. One share was sold to the Columbia Tire Company and 1 share was sold to A. B. Bell.
4-15-27 - G. W. Sconyers sold two shares of stock owned by him to the Columbia Tire Company.
5-18-27 - G. W. Thomas sold two shares of stock owned by him to the Columbia Tire Company.
| Columbia Tire Co. | F. W. & M. L. Bell, Inc. | |||
| Shares | Per cent | Shares | Per cent | |
| August 1, 1927, to December 23, 1927 | ||||
| Columbia Tire Co | 501 | 51 | ||
| F. W. Bell | 249 1/2 | 24.5 | ||
| A. B. Bell | 376 | 45.13 | ||
| M. L. Bell | 249 1/2 | 24.5 | ||
| Vera E. Bell | 374 | 44.90 | ||
| L. A. Clark | 20 | |||
| W. P. Brown | 16 | |||
| Chas. Harris | 10 | |||
| J. S. Talley | 10 | |||
| Theodore Robinson | 10 | 9.97 | ||
| Fay E. Collins | 7 | |||
| A. L. High | 5 | |||
| W. B. Watson | 5 | |||
| Total | 833 | 100 | 1,000 | 100 |
| December 24, 1927, to December 31, 1928 | ||||
| Columbia Tire Co | 501 | 51 | ||
| F. W. Bell | 249 1/2 | 24.5 | ||
| A. B. Bell | 376 | 43.72 | ||
| M. L. Bell | 249 1/2 | 24.5 | ||
| Vera E. Bell | 374 | 43.49 | ||
| L. A. Clark | 22 | |||
| W. P. Brown | 18 | |||
| Chas. Harris | 10 | |||
| J. S. Talley | 12 | |||
| Theodore Robinson | 12 | |||
| Fay E. Collins | 9 | |||
| A. L. High | 7 | |||
| W. B. Watson | 5 | |||
| H. W. Moore | 2 | |||
| Asa Brown | 1 | 12.79 | ||
| C. W. Hightower | 1 | |||
| I. C. Huckaby | 1 | |||
| H. H. Hoffman | 1 | |||
| Claude Jernigan | 1 | |||
| J. H. Matchett | 2 | |||
| O. R. Powell | 2 | |||
| G. H. Smith | 2 | |||
| F. W. Hackett | 2 | |||
| Total | 860 | 100 | 1,000 | 100 |
*1314 *427 Other than members of the Bell family, the persons shown above as stockholders of the petitioner were its employees at the time indicated. It has been the policy of the petitioner to purchase the stock from its employees when they left the petitioners' service. L. A. Clark, W. P. Brown and Charles Harris were employed by the petitioner as salesmen. J. S. Talley was the bookkeeper, Fay E. Collins was stenographer and clerk, and Theodore Robinson was a service-man.
None of the stockholder employees were ever elected as a director of the petitioner, were ever present at or voted stock at a meeting of the stockholders, or ever sold their stock to anyone other than the petitioner or to members of the Bell family. The fact that the employees, who were employed on a monthly basis, were stockholders did not change their responsibility to F. W. Bell, president of the petitioner. His authority during the taxable years to change their salary after they became stockholders was not changed by reason of their stock ownership. Stockholder employees were discharged and their salaries were changed in the same manner as before such employees became stockholders. The president*1315 of the petitioner did not, during the taxable years, consider that the interests of the employee-stockholders were antagonistic to those of himself, his son and their respective wives.
While dividends on all stock issued by the petitioner to its employees as bonus stock were restricted to an amount not in excess of *428 8 per cent nonaccumulative, there was no restriction on the shares of petitioner's stock held by members of the Bell family.
During 1925 F. W. Bell and M. L. Bell engaged extensively in the real estate business and by the end of that year had acquired real estate of a value of approximately $100,000. Funds for conducting their real estate business and for purchasing the real estate acquired by them were obtained primarily from the petitioner, and at the end of 1925 they were indebted to it. Upon organization of F. W. & M. L. Bell, Inc., the real estate owned by F. W. Bell and M. L. Bell was transferred to that corporation and in payment therefor it issued in equal amounts to the members of the Bell family its total capital stock of 1,000 shares.
On August 1, 1927, members of the Bell family transferred 501 shares of the capital stock of F. W. & M. *1316 L. Bell, Inc., owned by them to the petitioner to apply as a credit at par on the indebtedness of M. L. Bell and F. W. Bell who at that time were indebted to the petitioner in the amounts of $54,841.51 and $33,679.27, respectively. The remainder of the stock held by the Bell family in the corporation was pledged as collateral to the petitioner for the balance of the indebtedness of M. L. Bell and F. W. Bell.
F. W. & M. L. Bell, Inc., constructed the building used by the petitioner with funds obtained from petitioner. The building was transferred to the petitioner on August 1, 1927, for a credit of $100,000 on the indebtedness owing to petitioner by F. W. & M. L. Bell, Inc.
During the taxable years the principal offices and place of business of the petitioner and F. W. & M. L. Bell, Inc., were the same. They used the same employees in the conduct of their business, occupied the same office and used the same telephone. F. W. & M. L. Bell, Inc., obtained funds from the petitioner to meet its obligations and expenses. While there was an apportionment or segregation of expenses by the two corporations, the funds of the petitioner were used when in the opinion of F. W. Bell and*1317 M. L. Bell it was advisable for either corporation, and no distinction was made other than bookkeeping records.
On January 2, 1926, F. W. Bell was elected president and director of the petitioner, A. B. Bell was elected vice president and director, and M. L. Bell was elected secretary and treasurer and director. From the date of their election to the present time these parties have served continuously in the capacities indicated. During the taxable years F. W. Bell and M. L. Bell were each paid a salary of $5,000 a year, but no salary was paid to A. B. Bell.
On January 2, 1926, F. W. Bell was elected president and director of F. W. & M. L. Bell, Inc., A. B. Bell was elected secretary and *429 director, M. L. Bell was elected vice president and director, and Vera E. Bell was elected treasurer and director. From the date of their election until the present time they have served continuously in the capacities indicated. No salaries were ever paid by F. W. & M. L. Bell, Inc., to its officers and directors.
The net income of the petitioner for the calendar year 1926 was $119,387.04. This amount does not include deductions for any net loss sustained by F. W. & M. L. *1318 Bell, Inc., during the year 1926.
The net loss of the petitioner for the calendar year 1927 was $7,333.60. The net loss sustained does not reflect the net income and/or net loss of F. W. & B. L. Bell, Inc., for either 1926 or 1927.
The net income of the petitioner for the calendar year 1928 was $23,496.36 before deduction of its statutory net loss for the calendar year 1927 of $7,333.60, thus leaving a net income of $16,162.76. This amount does not reflect income and/or losses of F. W. & M. L. Bell, Inc., for any years.
A net loss was sustained by F. W. & M. L. Bell, Inc., for the calendar year 1926 in the amount of $28,329.41.
A net loss was sustained by F. W. & M. L. Bell, Inc., for the calendar year 1927 in the amount of $3,472.65. In determining the net loss of $3,472.65 for the calendar year 1927 no portion of the net loss for the year 1926 was considered.
A net loss was sustained by F. W. & M. L. Bell, Inc., for the calendar year 1928 in the amount of $4,198.47. In determining the net loss of $4.198.47, no portion of the net losses for previous years was considered.
The petitioner and F. W. & M. L. Bell, Inc., filed a consolidated income-tax return for the*1319 calendar years 1926, 1927 and 1928.
The Commissioner of Internal Revenue has determined that the petitioner and F. W. & M. L. Bell, Inc., were not affiliated during the years 1926, 1927 and 1928 and the deficiencies in tax here involved were asserted on that basis.
OPINION.
TRAMMELL: The petitioner contends that the respondent erred in determining that it and F. W. & M. L. Bell, Inc., were not affiliated during 1926, 1927 and 1928. The respondent denies that he thus erred and contends that affiliation within the meaning of the revenue acts did not exist between the two corporations during those years.
Section 240(d) of the Revenue Act of 1926, which is applicable to the years 1926 and 1927, provides as follows:
For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the *430 stock of two or more corporations is owned by the same interests. As used in this subdivision the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.
Section 142(c) of the Revenue*1320 Act of 1928, which is applicable to the year 1928, is identical with the foregoing provisions of the Act of 1926 except for the immaterial change of "subsection" for "subdivision."
Since at no time during the years in controversy did either of the corporations own 95 per centum of the stock of the other, it is clear that provision (1) of the sections has no application. That leaves for consideration the question as to whether 95 per cent of the stock of the two corporations was owned by the same interests. The petitioner contends that it was and the respondent contends that it was not.
The stipulated facts are that during the three years here involved from 5.18 per cent to 12.79 per cent of the stock of the petitioner was owned by its employees who owned no stock in F. W. & M. L. Bell, Inc. All of this stock, with the exception of two shares which if eliminated would not reduce the percentage below 5.18, was issued to the petitioner's employees with the restrictions set out in our findings of fact. While these stockholding employees did not attend stockholders' meetings or vote their stock by proxy the restrictions under which such stock was issued to them in no wise contained*1321 any limitation on their right to do so. Although the restrictions applicable to the stock limited the maximum amount of dividends payable on it to 8 per cent, the stock had no preference over shares of stock held by others. In view of these facts, we do not think that the stock held by the petitioner's employees was nonvoting stock limited and preferred as to dividends and to be excluded in determining the amount on which the 95 per cent is to be computed. Since the stock of the petitioner's employees is to be considered in determining whether 95 per cent of the stock of the two corporations was owned by the same interests, we are confronted with the question as to whether the Bell family and the stockholding employees of the petitioner are to be considered as the same interests.
The petitioner insists that under the circumstances of this case its stockholder employees or minority stockholders comprised the same interests with the majority stockholders. In Modern Tailoring Co.,25 B.T.A. 489, we had before us substantially the same question as that presented here. In determining what is meant by the term "same interests" as used in the statute we said:
*1322 The courts have construed the words "same interests" as meaning the same "beneficial interests." Commissioner v. Hirsch & Co., 30 Fed.(2d) 645; Handy & Harmon v. Commissioner,284 U.S. 136. In the latter case the Supreme Court said:
*431 The purpose of Sec. 240 was, by means of consolidated returns, to require taxes to be levied according to the true net income and invested capital resulting from and employed in a single business enterprise even though it was conducted by means of more than one corporation. Subsection (b) clearly reflects the intention, the means of such returns. to secure substantial equality as between shareholders who ultimately bear the burden. That intention is shown by the legislative history and was given effect by the regulations contemporaneously promulgated. 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. *1323 Alameda Investment Co. v. McLaughlin,28 F.(2d) 81. Montana Mercantile Co. v. Rasmusson,28 F.(2d) 916. Commissioner v. Adolph Hirsch & Co.,30 F.(2d) 645, 646. Commissioner of Internal Revenue v. City Button Works,49 F.(2d) 705. * * *
Cf. also Commissioner v. Gong Bell Mfg. Co., 48 Fed.(2d) 205; certiorari denied, 52 Sup.Ct. 125.
Obviously the conditions existing with respect to the ownership of the voting stock of the petitioner and Farr's Clothes, Inc., in 1926 do not meet the test laid down by the Supreme Court for affiliation. Cerney, not being a stockholder in Farr's Clothes, Inc., would neither have benefited by a gain nor shared a loss of that company. See also East Jersey Lumber & Timber Co.,24 B.T.A. 1047; J. P. Burton Coal Co.,24 B.T.A. 1052.
What we said in that case applies with equal force here. The petitioner's employees, who owned from 5.18 per cent to 12.79 per cent of its stock during the years before us, did not own any stock in F. W. & M. L. Bell, Inc. It is clear, therefore, that they would not have*1324 been benefited by a profit nor have shared a loss of that company. The respondent's action, in determining that the petitioner and F. W. & M. L. Bell, Inc., were not affiliated during 1926, 1927 and 1928, is sustained.
Judgment will be entered for the respondent.