*1477 Affiliation denied upon the evidence.
*666 These are proceedings, duly consolidated for hearing, for redetermination of deficiencies in income taxes in Docket No. 16430 for the fiscal year ending March 31, 1918, in the amount of $5,734.55; in Docket No. 26171, for the fiscal years ending March 31, 1919, 1920 and 1921, in the amount of $32,400.83; and in Docket No. 27084 for the fiscal years ending March 31, 1922 and 1923, in the amount of $4,137.30.
Each of the petitions in the above dockets was filed in the name of the Hotel Dempsey Company and the Midland City Hotel Company. At the hearing the proceedings, in so far as the Midland City Hotel Company is concerned, were dismissed for lack of jurisdiction, it appearing that no deficiency had been asserted against that company.
A number of assignments of error were set forth in the petitioners, but the petitioner has either waived or settled by stipulation all except one which is common to all the dockets, that is, whether the petitioner and the Midland*1478 City Hotel Company were affiliated for the taxable years involved.
FINDINGS OF FACT.
The petitioner and the Midland City Hotel Company are corporations, organized and existing under the laws of the State of Georgia.
The Midland City Hotel Company, hereinafter referred to as the Midland City, was organized in 1911 by a group of citizens of Macon, Georgia, to provide that city with adequate hotel facilities. Under a plan outlined by N. M. Block, one of the citizens subscriptions were secured amounting to about $200,000, and, upon the organization of *667 the corporation, the subscribers received stock therein for their subscriptions. Block was made chairman of the building committee and selected the architect.
A lease was entered into between the Midland City and Mrs. Lillian Dempsey, under the terms of which the company leased property from Mrs. Dempsey for a term of 50 years, at a yearly rental of $10,000, the company agreeing to erect a hotel building thereon to cost not less than $300,000 and to be called the Hotel Dempsey.
After the building was started it was found difficult to collect on the subscriptions and Block lent the corporation $150,000. He later*1479 advanced an additional $125,000, receiving, as security for the $150,000, first mortgage 6 per cent bonds, and for the $125,000, second mortgage 8 per cent bonds secured by deeds of trust on the hotel property. The deeds of trust carried a provision to the effect that in case of default in the interest payments the trustees, upon request of the bondholders, could enter and foreclose. No interest was ever paid on these bonds.
Before the company could secure possession of the building it was necessary to pay off contractors' liens amounting to approximately $35,000. These were paid by Block.
After the hotel was completed it was found impossible to secure a lessee for the building. Block then proposed that the stockholders of the Midland City form a corporation to operate the hotel. Some of the stockholders who owned only one or two shares were not interested, but others did form a corporation, the petitioner herein. The stockholders of Midland City were allowed to subscribe for stock in the petitioner pro rata. Not all of them did this, but all of the stockholders of the petitioner were stockholders in the Midland City.
The petitioner was incorporated with a capital stock*1480 of $50,000, 500 shares of a par value of $100 each, all of which was voting stock.
After its incorporation the petitioner entered into a contract with the Midland City whereby the Midland City leased the hotel building to the petitioner for a period of five years, with an extension privilege, at a rental of $35,000 per year for the first year, $40,000 per year for the succeeding four years, and stated amounts per year for additional periods of five years. In addition the petitioner was to pay, after the first year of operation of the hotel, 10 per cent of the net profits derived from its operation. On December 12, 1917, another lease was entered into between the parties, the provisions of which were similar to the first lease, except that there was a slight change in the rental to be paid.
The operation of the hotel was not profitable for the first few years and in order to get credit Block agreed to be personally liable for its debts. He also paid taxes and insurance.
*668 Block was president of the petitioner and a director in the Midland City. Burden, a friend of Block's, was president of Midland City.
For the fiscal year ending March 31, 1917, Block, his*1481 relatives, and a number of friends and business associates, constituting the same interests, owned 99.57 per cent of the stock of the petitioner and 59.43 per cent of the stock of Midland City, the remainder of which, approximately 42 per cent, was owned by 215 stockholders; on March 31, 1918, they owned 99.57 per cent of the stock of the petitioner and 58.45 per cent of the stock of Midland City. On March 31, 1919, these same interests owned 100 per cent of the stock of the petitioner and 56.98 per cent of the stock of Midland City; on March 31, 1920, they owned 100 per cent of the stock of the petitioner and 56.79 per cent of the stock of Midland City; on March 31, 1921, they owned 100 per cent of the stock of the petitioner and 56.65 per cent of the stock of Midland City. For these three years, 1919, 1920 and 1921, the minority stock of Midland City was held by approximately 215 stockholders. On March 31, 1922, and March 31, 1923, these same interests owned 100 per cent of the stock of the petitioner and 80.17 per cent of the stock of Midland City, the remainder being held by approximately 150 stockholders.
From the time these two companies were organized Block was the active, *1482 dominating head of both of them. He submitted names of directors and officers to the stockholders and directors and his nominees were always unanimously elected. No opposition was ever made to his policies by any of the stockholders or directors. With the exception of the secretary-treasurer, who was an employee of the petitioner and received a nominal salary from Midland City, none of the officers of Midland City took any active part in its affairs or received any salary from it. The actual management of the company was in the hands of Block, who also never received any salary from it.
Block knew personally a number of the minority stockholders. When he requested it proxies were filled out either to him or to his clerks or assistants. Very few of the minority stockholders ever appeared at stockholders' meetings. A great many letters addressed to the stockholders were returned by the post office. A number of the stockholders died or moved away or became bankrupt but the stock remained in their names on the books of the corporation.
Midland City used the office of petitioner as its office and paid no rent. It used the telephone exchange of petitioner and was not charged*1483 for telephone service. Its books and records were kept in the same office as those of petitioner by the bookkeeper of petitioner and no charge was made to Midland City for his services. Both *669 companies had the same general counsel. The books of both companies were audited by the same auditors, who were selected by Block. Block selected the bank depositories for both companies, the same banks being used.
No dividends were ever paid on the stock of the Midland City.
The petitioner filed separate returns for the fiscal years ending March 31, 1919, 1920, 1921, and 1922. For the year 1923 the Midland City filed a consolidated return which included the income and deductions of the petitioner. On the return it stated that it was not consolidated for prior years.
The parties have stipulated as follows:
That the net taxable income of the Hotel Dempsey Company as rede termined is as follows:
| Fiscal year ended March 31, 1918 | $38,097.37 |
| Fiscal year ended March 31, 1919 | 40,426.44 |
| Fiscal year ended March 31, 1920 | 41,963.57 |
| Fiscal year ended March 31, 1921 | 45,218.67 |
| Fiscal year ended March 31, 1922 | 19,185.34 |
| Fiscal year ended March 31, 1923 | 38,552.10 |
*1484 That the surplus of Hotel Dempsey Company for computing invested capital is as follows, subject to the adjustment of Federal Income, War and Excess Profits Taxes:
| As at March 31, 1917 Operating Deficit | $40,481.16 |
| As at March 31, 1918 Operating Deficit | 3,812.67 |
| As at March 31, 1919 Surplus | 18,561.94 |
| As at March 31, 1920 Surplus | 45,518.64 |
| As at March 31, 1921 Surplus | 68,063.35 |
That the capital stock for invested capital purposes is as follows:
| For the fiscal year closed March 31, 1918 | $50,000.00 |
| For the fiscal year closed March 31, 1919 | 91,666.70 |
| For the fiscal year closed March 31, 1920 | 100,000.00 |
| For the fiscal year closed March 31, 1921 | 100,000.00 |
| For the fiscal year closed March 31, 1922 | 100,000.00 |
OPINION.
MATTHEWS: The petitioner in the instant proceeding is claiming that it was affiliated with the Midland City for the tax years in controversy. Section 240(b) of the Revenue Act of 1918 provides:
(b) 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*1485 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.
Section 240(c) of the Revenue Act of 1921 is similar to this provision and section 1331(a)(b) of that same act provides:
(a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income *670 and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917.
(b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all the stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more partnerships was owned by the same interests * * *.
Counsel for the petitioner contends that an affiliation existed because the business of the petitioner and the Midland City constituted an economic*1486 unit and the same interests who owned over 99 per cent of the stock of the petitioner and owned approximately 54 to 80 per cent of the stock of Midland City controlled the balance of the stock of the latter corporation.
As far as the Act of 1918 is concerned, since it is clear that these interests did not own the minority stock, affiliation for so much of the fiscal year ending March 31, 1918, as falls within the calendar year 1917 must be denied.
As to the remaining years, there is no doubt that the corporations were operated as an economic unit and that Block and the other stockholders of the petitioner constituted the same interests. We must, therefore, determine whether these interests "controlled" the minority stock of the Midland City. Counsel for petitioner does not contend that Block and his associates had any legal control over the stock of the minority stockholders, but that Block had actual and practical control and sets forth in his brief a number of factors to establish that control. It is true that a number of the Circuit Courts have held that actual or practical control is sufficient to entitle the corporations to affiliation under the 1918 Revenue Act. *1487 However, since the hearing of this proceeding the Supreme Court of the United States, in the case of has held that the word "control" as used in section 240 of the Revenue Act of 1918 means legally enforceable control of the stock, saying:
The purpose of § 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, by 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. *1488 ; . . . Affiliation on any other basis would not make against inequality or evasion. It would require very plain language to show that Congress intended to permit consolidated returns to depend on a basis so indefinite and uncertain as control of stock without title, beneficial ownership or legal means to enforce it. Control resting solely on acquiescence, the exigencies of business or other considerations having no binding force is not sufficient to satisfy the statute.
Since it is clear that Block and the other stockholders of the petitioner did not have any legal control over the stock of the minority stockholders in Midland City, and that the same interests were not the beneficial owners in like proportions of substantially all of the stock of both corporations, the petitioner and the Midland City are not entitled to file affiliated returns.
Judgment will*1489 be entered under Rule 50.