*2340 Petitioner held to be affiliated with the Equitable Powder Manufacturing Co.
*174 Petitioner, claiming that during the years 1920 and 1921 it was affiliated with the Equitable Powder Manufacturing Co., asks a redetermination of deficiencies in income and profits taxes determined by the respondent for those years in the respective amounts of $24,335.84 and $34,603.95. At the hearing all issues raised by the pleadings save that of affiliation were withdrawn.
FINDINGS OF FACT.
Petitioner and the Equitable Powder Manufacturing Co., hereinafter called the Equitable Co., are domestic corporations, engaged in the business of manufacturing mining powder. Petitioner has one manufacturing plant located at Marion, Ill., and the Equitable *175 Co. has two, one at East Alton, Ill., and one at Ft. Smith, Ark. The general offices of both companies are at East Alton.
Petitioner was organized in 1903 by a group of coal operators who had mines located in a comparatively small area and who had previously secured mining*2341 powder from the Equitable Co. The organizers of petitioner operated it for three or four years, during which time the Equitable Co. lost considerable business in that territory, and this situation led the Equitable to seek control of petitioner.
Negotiations were opened by F. W. Olin, who since 1892 has been president of the Equitable Co. He encountered little difficulty as the petitioner had been losing money and the principal stockholders were glad to be relieved of the burden of operating the business, but the Equitable Co. desired to retain as stockholders of petitioners those who were operators of mines and consumers of explosives. Olin dictated which of the stockholders should retain stock. The negotiations resulted in Olin's purchasing a majority of petitioner's stock in his own name, for which he in turn was paid by the Equitable Co. for whom he held the stock as trustee.
The stockholders of petitioner and their stockholdings in the taxable years were as follows:
| Jan. 1, 1920, to Apr. 1, 1921 | ||
| Stockholders | Shares | Per cent |
| F. W. Olin, trustee | 1 1,472 | 73.60 |
| F. W. Olin, Jr | 2 2 | .10 |
| J. M. Olin | 3 1 | .05 |
| J. L. Donnelly | ||
| 1,475 | 73.75 | |
| F. W. Olin | 10 | .50 |
| J. M. Olin | ||
| Richard Stout | 10 | .50 |
| W. H. Joesting | 10 | .50 |
| James Duncan | 20 | 1.00 |
| James Duncan, trustee | 60 | 3.00 |
| C. E. W. Duncan | 23 | 1.15 |
| C. A. Caldwell | 10 | .50 |
| Austin Powder Co | 132 1/3 | 6.62 |
| Louise Terbush | 4 10 | .50 |
| Mary S. Cavanaugh | 55 | 2.75 |
| Mary Geraghty | 28 | 1.40 |
| O. L. Garrison | 36 2/3 | 1.83 |
| T. J. Armstrong | 20 | 1.00 |
| C. H. Vehmeyer | 100 | 5.00 |
| 2,000 | 100.00 |
| Apr. 1, 1921, to Dec. 31, 1921 | ||
| Stockholders | Shares | Per cent |
| F. W. Olin, trustee | 1,482 | 74.10 |
| F. W. Olin, Jr | ||
| J. M. Olin | 3 1 | .05 |
| J. L. Donnelly | 3 2 | .10 |
| 1,485 | 74.25 | |
| F. W. Olin | 10 | .50 |
| J. M. Olin | 83 | 4.15 |
| Richard Stout | 10 | .50 |
| W. H. Joesting | 10 | .50 |
| James Duncan | 20 | 1.00 |
| James Duncan, trustee | 60 | 3.00 |
| C. E. W. Duncan | 23 | 1.15 |
| C. A. Caldwell | 10 | .50 |
| Austin Powder Co | 132 1/3 | 6.62 |
| Louise Terbush | ||
| Mary S. Cavanaugh | ||
| Mary Geraghty | ||
| O. L. Garrison | 36 2/3 | 1.83 |
| T. J. Armstrong | 20 | 1.00 |
| C. H. Vehmeyer | 100 | 5.00 |
| 2,000 | 100.00 |
F. W. Olin was president and active manager of both the petitioner and the Equitable. At meetings of the stockholders of petitioner he voted the stock owned by the Equitable and held by him as trustee. *176 He was the active and controlling factor in all meetings of stockholders, directors, and executive*2343 committees; all business and financial policies of both companies were formulated by him and his recommendations were always put into effect; he directed the expansion and construction program of both companies. In all these matters, however, Olin consulted the other directors in order to have them share in the responsibility for corporate acts. No capital stock of the petitioner was ever transferred without his knowledge and consent. No stockholder ever opposed his policies.
F. W. Olin, Jr., and J. M. Olin were sons of F. W. Olin. Neither of them paid for the stock standing in their names. F. W. Olin, Jr., took some part in the management of both companies. J. M. Olin was vice president of both companies in 1921 and in charge of them in the elder Olin's absence.
J. L. Donnelly, a lawyer, was secretary of another corporation controlled by F. W. Olin and was made a director of the petitioner company because of his ability to handle some of petitioner's legal work.
Richard Stout had been associated with F. W. Olin in the explosive manufacturing business since 1897 and on Olin's recommendation purchased the 10 shares of stock in the petitioner company which he owned in*2344 the years 1920 and 1921.
W. H. Joesting was vice president of both companies in both 1920 and 1921 and was sales manager of petitioner. He acquired his stock from his predecessor on Olin's recommendation.
James Duncan acquired his stock at Olin's suggestion. He was a manufacturer of mining machinery and he and Olin worked together in that they exchanged information as to prospective purchases of mining machinery and powder. Duncan transferred to his sisters a part of the stock originally purchased and thereafter represented them as trustee. C. E. W. Duncan was a sister with whom James Duncan lived.
C. A. Caldwell was president of the bank with which petitioner did its banking and of which F. W. Olin was a director. He purchased his stock in the petitioner upon Olin's recommendation.At the time Austin Powder Co. acquired its stock in the petitioner its then president, Lent, had been intimately associated with Olin in other enterprises and at Olin's request he purchased the stock for the Austin Co. For business reasons Olin felt that a connection between the petitioner and the Austin Co. was desirable. The succeeding president of the Austin Co., who was in office*2345 in 1920 and 1921 and who controlled the purchase and sale of stock of other corporations, has always felt that in the event his company desired *177 to sell its stock in the petitioner company it should first be offered to Olin.
Louise Terbush, whose 10 shares of stock were transferred on January 31, 1920, to Olin as trustee for the Equitable Co., was never active in the affairs of the petitioner.
Mary S. Cavanaugh was the widow of J. B. Cavanaugh, one of the original stockholders of petitioner. Mary Geraghty was his daughter. The 83 shares of stock which these two acquired upon the death of J. B. Cavanaugh were purchased by J. M. Olin and transferred to him on April 1, 1921.
T. J. Armstrong was superintendent of the Peabody Coal Co. and in charge of all its mines. Olin desired to have him connected with petitioner in order to have his services in handling disputes between miners and operators over powder questions. Petitioner often availed itself of Armstrong's services in such matters.
C. H. Vehmeyer was formerly in the powder business in Chicago. His understanding of the business made him a very desirable stockholder.With the exception of Vehmeyer, all*2346 of the stockholders of petitioner were under oral obligation to first offer their stock to F. W. Olin when they wished to dispose of it. The stock was not listed on any exchange.
F. W. Olin controlled the business policies of the Equitable Co. to the same extent as those of the petitioner. The stockholders of the Equitable Co. were as follows:
| Jan. 1, 1920, to Apr. 20, 1921 | ||
| Stockholders | Shares | Per cent |
| F. W. Olin | 2,465 | 49.30 |
| C. F. McMurray | 1 50 | 1.00 |
| F. Seymour | 1 9 | .18 |
| F. W. Olin, Jr | 10 | .20 |
| J. M. Olin | 10 | .20 |
| W. H. Joesting | 1 | .02 |
| E. I. Du Pont de Nemours & Co | 2,450 | 49.00 |
| W. H. Taylor | 5 | .10 |
| Total | 5,000 | 100.00 |
| Apr. 20, 1921, to Dec. 31, 1921 | ||
| Stockholders | Shares | Per cent |
| F. W. Olin | 2,475 | 49.50 |
| C. F. McMurray | 1 50 | 1.00 |
| F. Seymour | 1 9 | .18 |
| F. W. Olin, Jr | ||
| J. M. Olin | 10 | .20 |
| W. H. Joesting | 1 | .02 |
| E. I. Du Pont de Nemours & Co | 2,450 | 49.00 |
| W. H. Taylor | 5 | .10 |
| Total | 5,000 | 100.00 |
The Du Pont Co., owning 2,450 shares, has at times been represented on the Equitable's board of directors but was not so represented in the taxable*2347 years, and its stock was usually voted by F. W. Olin.
The directors, members of the executive committee, and officers of the petitioner and the Equitable Co. were:
| DIRECTORS | |
| Petitioner | Equitable Co. |
| F. W. Olin | F. W. Olin. |
| F. W. Olin, jr. (deceased Mar. 16, 1921) | F. W. Olin, jr. |
| J. M. Olin | J. M. Olin. |
| James Duncan | |
| C. A. Caldwell | |
| W. H. Joesting | W. H. Joesting. |
| Richard Stout | |
| J. L. Donnelly (after Mar. 16, 1921) | |
| C. F. McMurray. | |
| F. Seymour. | |
| EXECUTIVE COMMITTEE | |
| F. W. Olin | F. W. Olin. |
| F. W. Olin, jr. | F. W. Olin, jr. |
| W. H. Joesting | W. H. Joesting. |
| J. M. Olin (after Mar. 16, 1921) | J. M. Olin. |
| OFFICERS | |
| President, F. W. Olin | F. W. Olin. |
| Vice president, W. H. Joesting | W. H. Joesting (until May 27, 1921). |
| Vice president, J. M. Olin | J. M. Olin (after May 27, 1921). |
| Sec.-treasurer, Richard Stout | Richard Stout. |
| Asst. treasurer, R. E. Marshall | R. E. Marshall. |
*178 The attendance record and record of petitioner's stock voted at stockholders' meetings in the taxable years is as follows:
| Shares voted Mar. 2, 1920 | Shares voted Mar. 16, 1921 | |
| F. W. Olin, trustee | 1 1,482 | 1 1,482 |
| J. M. Olin | 1 | 1 |
| F. W. Olin | 1 10 | 1 10 |
| Richard Stout | 10 | 10 |
| W. H. Joesting | 10 | |
| James Duncan | 20 | |
| C. A. Caldwell | 10 | 10 |
| Total | 1,523 | 1,533 |
The offices of both the petitioner and the Equitable Co. were in the same rooms in a building owned by the latter. A nominal charge of $20 per month was made by the Equitable Co. against petitioner for the use of the offices including the use of furniture and light and heat. The two companies kept separate books and had separate bank accounts, but all employees and all the officers located at the general offices worked indiscriminately for both companies. No record was kept of the time spent by employees and officers for each company. All of the joint employees were carried on the Equitable pay roll and *179 paid by checks drawn by that company. The same sales manager and some of the salesmen served both companies, and the other salesmen were subject to call for use by either company. However, in making a particular sale the expenses and salary of the salesmen in connection therewith were charged to the company for which the sale was made. Because of the fact that the Equitable Co. had two powder plants and the petitioner had but one, general expenses were divided, as a matter of convenience, on the basis of two-thirds to the Equitable*2349 and one-third to petitioner. For the year 1921 officers' salaries of $22,066.65 were charged to the Equitable and one-half of that amount, $11,033.33, to petitioner. These amounts represented, on the basis of the number of kegs of powder produced, 7.75 cents per keg charged to the Equitable and 4.01 cents per keg to petitioner. Selling expenses of the Equitable amounted to $29,558.94, or 3.22 per cent of sales, and those of petitioner were 18,117.17, which was 2.41 per cent of sales.
All purchases, except small items which were purchased locally by each plant, were made through the general offices of the two companies. All raw material contracts for the benefit of both companies were made by the Equitable, which by reason of its larger volume of business, had greater purchasing power and could make more advantageous contracts than could the petitioner. Vendors' invoices were rendered against the Equitable, which in turn billed petitioner at cost for the goods received by it. Payment for raw materials was made by the Equitable and when it was not convenient for the petitioner to meet its bills promptly the Equitable carried its account without interest. Petitioner's total*2350 purchases for 1920, including raw materials, investment securities, and practically all charges except salary and expenses, amounted to $643,540.31, of which $260,665.88, or 41.08 per cent, represented purchases made from the Equitable Co. In 1921 petitioner's total purchases were $621,262.88, of which $271,418.65, or 43.69 per cent, were made from the Equitable Co.
The business of petitioner at the time the Equitable acquired a majority of the stock in 1907 was all within a radius of 40 miles of its plant. Petitioner retained that business, but did not compete with the Equitable in territory where the Equitable was established which included the State of Kentucky. However, it was the custom of the Equitable to make many shipments to its Kentucky customers from petitioner's plant because petitioner had a lower freight rate into that territory. To some extent the two companies distributed powder in the same territory.
In 1920 the Equitable Co. shipped 9,000 kegs of powder from its plant at East Alton direct to petitioner's customers and billed the petitioner therefor in the amount of $14,748.28. Petitioner billed its *180 customers for these shipments in the gross*2351 amount of $16,400, which, after freight allowances of $1,536.13, left a net sales price of $14,863.87. Similar shipments in 1921, covering 5,240 kegs, were billed to petitioner at $8,091.30, and in turn billed by it to its customers at $7,488, which, after freight allowance of $242.48, made a net sales price of $7,245.52.
In 1920 petitioner shipped in carload lots 20,220 kegs of powder, for the account of the Equitable Co., for the total price of $34,732.50, and in 1921 it made similar shipments of 23,000 kegs, for the total price of $38,710.
All experimental work for the two companies was conducted by the Equitable Co. and the expenses in connection therewith were paid by it.
For each of the years 1920 and 1921, petitioner, the Equitable Co., and the Texas Powder Co. filed a consolidated return.
OPINION.
ARUNDELL: Petitioner claims that in 1920 and 1921 it was affiliated with the Equitable Powder Manufacturing Co. within the meaning of section 240 of the Revenue Acts of 1918 and 1921, because substantially all of its stock was owned by the Equitable Co. or controlled through closely affiliated interests.
The Equitable Co. owned directly 1,472 to 1,482 shares, representing*2352 percentages of from 73.6 to 74.1, which were controlled by F. W. Olin through his holding it as trustee and through his control of the Equitable Co. There can be no doubt that Olin, his sons, and other officers and directors of the two companies constituted "closely affiliated interests." Olin, Senior, owned 10 shares of the Egyptian Co.'s stock which stood in his own name and 3 shares standing in the names of his sons and another director, which gave Olin direct ownership or control of from 74.25 to 74.75 per cent of the stock of the petitioner. In addition to the stock thus directly controlled, W. H. Joesting and J. M. Olin, each of whom owned 10 shares of stock in petitioner and who were directors of petitioner and members of the executive committee and officers of petitioner, were also stockholders, directors, members of the executive committee and officers of the Equitable Co. Richard Stout, who was secretary-treasurer of both companies, was a 10-share stockholder in petitioner. Adding these stockholdings, we have percentages of from 75.75 to 76.25 of petitioner's stock which without any doubt were owned or controlled by "closely affiliated interests."
With the exception*2353 of Vehmeyer, who owned 5 per cent of petitioner's stock, and possibly Garrison, who is not described in the record and who owned 1.83 per cent, the remaining stockholders, owning *181 in the aggregate less than 25 per cent, were hand picked by F. W. Olin and were under obligation to offer their stock to him should they desire to dispose of it. The reality of Olin's control in this respect is amply demonstrated by the fact that he actually controlled the transfer of the four small blocks that changed hands in the taxable years. The 10-share lot of Louise Terbush was acquired by Olin as trustee for the Equitable; the 10 shares standing in the name of Olin's son were transferred to an officer of a company controlled by Olin in order to make him a director of petitioner; the other two blocks of stock, aggregating 83 shares, were transferred to one of Olin's sons.
When we add the stock thus controlled by Olin to that above described as owned or controlled by him, we find that over 90 per cent of petitioner's stock was owned or controlled by the small and closely affiliated group consisting of the Equitable Co., Olin and his sons, and other officers and directors of the two companies.
*2354 In addition to the stock held by the closely affiliated interests as above discussed, the business relations of the two companies are worthy of consideration. We have here, as disclosed by the evidence, what in substance is a single business enterprise, operated in the name and form of two corporations, both being dominated and controlled by one man, F. W. Olin. He defined the business and financial policies of the two corporations and directed their activities. The policies he advocated were never opposed. The two companies were not competitors but cooperators. Each one shipped powder to the other's customers. Their purchases were made jointly, the bills being paid by the Equitable which carried petitioner's share without interest when it was inconvenient for the latter to pay promptly. Their officers were in the same rooms and their office work was done by the same employees without discrimination in favor of either company. It was impossible to accurately allocate expenses. Salesmen and officers likewise worked for both companies. Experiments for both companies were made by the Equitable, which absorbed the cost of such work. The facts in this case are quite similar*2355 to those in .
The latest pronouncement on the question of affiliation by the Circuit Court of Appeals for the Seventh Circuit, in which circuit petitioner's principal office and place of business are located, is in the case of . We have here a much larger percentage of stock owned or controlled by closely affiliated interests than was present in the Great Lakes case and to that extent we have a clearer case of affiliation. In that case the court, after stating its conclusions as to the scope of certain of the terms used in the statute, said:
Applying these conclusions to the facts in the case before us, we have no hesitancy in holding that the majority stockholders in each of the six corporations *182 comprise a group which comes within the statutory designation of "closely affiliated interests." They were guided in their action by a common interest and their common object was attained by all corporations pursuing the same methods through the same agencies. In addition to owning more than one-half of the stock, these "closely affiliated*2356 interests" controlled other stock. For example, there was an understanding that if any minority stockholder wished to sell his stock, it should first be offered for sale to H. L. Stevens & Co., and as a matter of practice such minority stockholders offered their stock to H. L. Stevens & Co., and this company actually purchased the stock thus offered.
When we consider all the factors that have been presented, the large amount of stock owned and controlled by the closely affiliated interests, the extent of Olin's control of the two corporations, the business and financial relations of the two, it is our opinion that they must be considered affiliated within the meaning of the revenue acts and entitled to file consolidated returns. Cf. ; .
Judgment will be entered under Rule 50.
Footnotes
1. Owned by the Equitable Co. ↩
2. Director's qualifying shares, owned by F. W. Olin or the Equitable Co. Transferred to J. L. Donnelly on Feb. 4, 1921. ↩
3. Director's qualifying shares, owned by F. W. Olin. ↩
4. Transferred to F. W. Olin, Trustee on Jan. 31, 1920. ↩
1. Director's qualifying shares owned by F. W. Olin. ↩
1. By proxy to J. M. Olin. ↩