*2570 Under the facts held that substantially all the stock in the three corporations was not owned or controlled by the same interests and the corporations are, therefore, not affiliated.
*501 These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income and profits taxes for *502 the period January 1, 1921, to November 29, 1921, inclusive, as follows:
| Petitioner | Docket No. | Amount |
| S. N. & C. Russell Manufacturing Co | 18,825 | $34,188.27 |
| Kinney Worsted Yarn Co | 18,826 | 439.98 |
The matter in controversy is the correctness of the respondent's action in determining that the petitioners and another corporation, Nemasket Worsted Mills, were not affiliated during the period from January 1, 1921, to November 29, 1921, inclusive.
FINDINGS OF FACT.
The petitioners are Massachusetts corporations, with their principal offices at Pittsfield.
About January 1, 1915, George B. Sanford and Henry H. Russell became associated in partnership under the*2571 name of Sanford & Russell. As partners or as individuals they were closely identified through stock ownership and business relations with the corporations S. N. & C. Russell Manufacturing Co. (hereafter referred to as Russell Company), Nemasket Worsted Mills (hereinafter referred to as Nemasket Mills), and Kinney Worsted Yarn Co. (hereafter referred to as Kinney Company). The partnership of Sanford & Russell was organized primarily for the purpose of giving to the Nemasket Mills & Russell Co. a cheap distribution cost. The entire production of the Russell Company was sold by the partnership. The Kinney Company was a spinning plant and its finished product was yarn. The Nemasket Mills was a weaving plant and bought yarn. Practically all of the product of the Kinney Company was sold to Nemasket Mills.
In addition to the general business depression existing in 1920 and declining raw material markets the partnership of Sanford & Russell was involved in heavy indebtedness. Nemasket Mills owed the partnership $504,000. The Russell Company owed it about $900,000 and the Kinney Company owed it in excess of $70,000. The partnership was borrowing money to carry these corporations. *2572 Toward the end of 1920 it was felt that the situation was getting beyond control. The owners of the majority of the stock in the three corporations sought advice as to what should be done and called the creditor banks into consultation. At that time, and during the taxable period here involved, the stock of the three corporations was held as follows:
| No. | Stockholder | Relation to other | Official connection |
| stockholders | with company | ||
| 1 | Henry R. Russell | Brother of No. 3, cousin | President, companies A |
| of No. 2 | and B. | ||
| 2 | Carey R. Kinney | Cousin of Nos. 1 and 3. | Treasurer, companies A |
| and B. | |||
| 3 | Jane A. Russell | Sister of No. 1, cousin | Director, companies A |
| of No. 2. | and B. | ||
| 4 | Guy W. Kinney | Father of No. 2 | |
| 5 | George B. Sanford. | Treasurer, company C. | |
| 6 | Rufus L. Mackie | Director and | |
| superintendent, Co. B. | |||
| 7 | Crawford W. Barnes. | Son of No. 8 | President, company C. |
| 8 | Susan A. Barnes | Mother of No. 7 | |
| 9 | Frank W. Reed | Secretary, company C. | |
| 10 | Frank S. Jordan | ||
| Total |
| No. | Company A, S.N. & C. | Company B, Kinney | Company C, Nemasket | |||
| Russell Mfg. Co. | Worsted Yarn Co. | Worsted Mills | ||||
| Shares held | Percent of | Shares held | Percent of | Shares held | Percent of | |
| holdings | holdings | holdings | ||||
| 1 | 811 | 81.1 | 763 | 33.9 | 158 | 21 |
| 2 | 57 | 5.7 | 650 1/2 | 28.9 | ||
| 3 | 132 | 13.2 | 150 | 6.7 | ||
| 4 | 112 1/2 | 5 | ||||
| 5 | 312 | 13.9 | 250 | 33.3 | ||
| 6 | 162 | 7.2 | ||||
| 7 | 100 | 4.4 | 158 | 21 | ||
| 8 | 5 | 1 | ||||
| 9 | 6 | 1 | ||||
| 10 | 173 | 22.7 | ||||
| 1,000 | 100.0 | 2,250 | 100.0 | 750 | 100.0 |
*2573 *503 As a result of the consultation with the banks a creditors' committee was formed. On December 15, 1920, an agreement was entered into between the partnership of Sanford & Russell, the three corporations in their corporate capacity, Russell, Sanford, and Carey R. Kinney, individually, and all of the creditors of the partnership and the corporations, except some to whom small amounts were owing. The agreement provided in part as follows:
WHEREAS, the parties of the first part (the partnership, the three corporations and the three individuals) represent that together they carry on a profitable manufacturing business that is amply solvent, and that taken as a whole their assets exceed their liabilities, but that industrial conditions at the present time make it advisable for them to secure an extension of the time of payment of their respective debts; and
WHEREAS, the Partnership and the Companies have requested and do hereby request their respective undersigned creditors to extend the time of payment of the indebtedness and claims owing them respectively, a sufficient length of time ot enable the Partnership and the Companies to meet, pay and discharge all of their*2574 respective debts and liabilities in full with interest, and conserve and preserve their businesses as going concerns, and their surplus equity above their debts, for the benefit of their partners and stockholders, which equity may be seriously impaired if not lost without such extension by the undersigned creditors;
NOW, THEREFORE, the Partnership, the Companies and the individuals above named as parties of the first part and the undersigned Creditors hereby agree among themselves and with each other as follows:
First: The undersigned Creditors hereby create an Advisory Committee with the rights and powers hereinafter set forth, and agree that ALBERT M. PATTERSON, President of the Waterloo Woolen Manufacturing Company of Waterloo, *504 New York, as Chairman, and EDWIN S. SCHENCK, 1st Vice-President of the Chemical National Bank of New York City, and HENRY A. FRANCIS, President of the Pontoosuc Woolen Manufacturing Company of Pittsfield, Massachusetts, shall constitute such Advisory Committee.
Second: The Partnership and the Companies respectively undertake and agree to forthwith by due partnership and corporate action, appoint and retain a comptroller to be nominated*2575 by the Committee whose countersignature and approval shall be required on all checks and notes made or issued by the Partnership or the Companies, as well as upon such other documents as may be specified or named by the Committee. The Partnership and Companies further agree that the Advisory Committee and each member thereof, and each employee and representative of the Committee shall have access to their respective books, documents, premises, factories and plants, and shall have the right from time to time as the Committee in their discretion shall deem proper and necessary to examine said books, documents, premises, factories and plants, and to have from the Partnership and from the Companies and from their respective said books, documents, premises, factories and plants, full and complete information as to the businesses of the Partnership and the Companies and their respective financial condition.
* * *
Sixth: It is further agreed that immediately upon the execution of this Agreement GEORGE B. SANFORD, HENRY R. RUSSELL and CAREY R. KINNEY will execute and deliver to the Committee or to such individual as the Committee may designate irrevocable powers of attorney empowering*2576 the said Committee to carry on the business of the Partnership of SANFORD & RUSSELL, and to vote upon all shares of stock in the Companies heretofore enumerated, which shall be owned by the said SANFORD, RUSSELL and KINNEY individually and as copartners, and to do each and every act and thing in connection with the affairs of the Partnership of SANFORD & RUSSELL, and in connection with the voting of the said shares of stock as any or all of the said individuals might or could do.
Seventh: The Advisory Committee may act by a majority thereof, and any action by a majority of the Committee shall be as binding as if by the entire Committee. The Committee may fill any and all vacancies which may occur in their membership by resignation, death or otherwise; and they may enlarge the membership of the Committee by the addition of other members and the Committee so enlarged shall have the same rights and powers as if the Committee so enlarged had been created and constituted by this agreement.
Eighth: The Advisory Committee may employ such agents and representatives, including counsel, as the Committee in their discretion may from time to time deem necessary or proper, and may*2577 fix and determine the compensation of each and all such agents and representatives. And the Partnership and the Companies shall pay such compensation and all of the expenses and obligations of the Committee in such proportions as the Committee shall determine and in priority over the claims and demands of the undersigned Creditors.
Ninth: Subject to the terms of this agreement, the Advisory Committee are authorized and empowered to do any and all things which in their discretion they may deem to be for the best interests of the undersigned Creditors; to the same extent as the undersigned Creditors or any or either of them might or could do.
Tenth: No member of the Advisory Committee shall incur any obligation or liability in connection with or arising out of anything done by the Advisory Committee, or any member thereof, except for or on account of his own actual bad faith.
*505 Eleventh: The Partnership and the Companies agree to take, or cause to be taken, such partnership or corporate action by their partners, stockholders, directors and officers, as the Advisory Committee may from time to time deem necessary or proper in order to carry out and perform*2578 this agreement.
Twelfth: The Advisory Committee are authorized to determine and declare when, in their discretion, this agreement shall become effective and operative, and upon their making such determination and declaration, and not before, this agreement shall become binding upon each and all the parties hereto; and shall thereupon remain in full force and effect until all the debts and claims owing to the undersigned Creditors and all claims, demands and liabilities of the Partnership and Companies having priority thereto under this agreement, have been paid and discharged in full, or provision shall have been made for the payment of the debts and claims owing to the undersigned Creditors in a manner satisfactory to the Advisory Committee; provided, however, that this agreement shall not become operative unless the Committee shall determine from a valuation of the inventory and an audit of the books of the Partnership and Companies now being prepared under the direction of the Committee, that in the opinion of the Committee, the value of the combined current assets of the Partnership and Companies is substantially equal to the amount of the combined current liabilities of*2579 the Partnership and Companies at the date of this agreement.
The agreement also provided for the extension of the time of payment of all debts and claims.
On the same day a supplemental agreement was entered into by the partnership, the three corporations, the three individuals previously mentioned, and the creditors, by which, among other things, the committee was authorized in its absolute discretion at any time thereafter to declare all or any part of the indebtedness of the partnership or of the corporations due and payable and, upon nonpayment and after notice, to sell the business and property of the debtor whose indebtedness remained unpaid. The supplemental agreement also provided:
FOURTH: The Advisory Committee may, with the consent of the Partnership and/or the Company or Companies to be affected, at any time during the life of the original agreement and this supplementary agreement take the necessary steps to merge, consolidate or amalgamate the partnership with all or any one or more of the companies or to merge, consolidate or amalgamate any one of the companies with all or any one or more of the other companies, provided that the new entity resulting from such*2580 merger, consolidation or amalgamation shall assume all the debts, duties and liabilities of the partnership or of the company or companies so merged with it and shall be subject to all of the terms and provisions of the original agreement and of this supplementary agreement with the same force and effect as if originally a party thereto.
* * *
EIGHTH: George B. Sanford, Henry R. Russell and Carey R. Kinney further agree that immediately upon the execution of this instrument they will procure and lodge with the Advisory Committee the resignations of all of the directors of each of the companies, such resignations to become effective whenever the Advisory Committee may in its discretion determine.
*506 The foregoing instruments were executed on behalf of the partnership by George B. Sanford, on behalf of the Russell Company and Kinney Company by Henry R. Russell as president of the respective companies, on behalf of the Nemasket Mills by C. W. Barnes as president, and by Sanford, Russell, and Carey R. Kinney as individuals.
Barnes' salary as president of the Nemasket Mills as voted by the directors, of whom Russell and Sanford represented the majority stockholders, *2581 was $4,500 and 10 per cent of the net earnings of the mills. Frank S. Jordan was a retired partner of Sanford and relied upon him absolutely in all matters pertaining to his stock in the Nemasket Mills. He was familiar with the transactions leading up to the execution of the above mentioned agreements and fully acquiesced in what was done. He considered that the action taken was for the best interest of all the parties concerned. Jane A. Russell, sister of Henry R. Russell and cousin of Carey R. Kinney, was informed by them of the plan to place the corporations in which she held stock under the control of a creditors' committee and she expressed to them her approval and acquiescence in the plan. Guy W. Kinney was also advised by Carey R. Kinney of the plan, and he offered to join in the execution of the agreements. Rufus L. Mackie was superintendent and a director in the Kinney Company. In accordance with the supplemental agreement of December 15, 1920, he, as well as the directors of the three corporations, placed his resignation in the hands of the creditors' committee.
Pursuant to the terms of the agreement of December 15, 1920, Sanford, Russell, and Carey R. Kinney in*2582 January, 1921, executed irrevocable powers of attorney to the persons named as the committee in the original agreement of December 15, 1920. The powers of attorney executed by Sanford and by Russell provided in part as follows:
* * * My true and lawful attorneys in fact for me, in my name and to my use during the time that the said agreement remains in full force and effect and until all the terms and provisions thereof have been carried out, to ask, demand, sue for, recover and receive all manner of goods, chattels, debts, rents, interest, sums of money and demands whatsoever due or hereafter to become due and owing or belonging to me on account of the business now carried on by me under the firm name of SANFORD & RUSSELL, at No. 45 East 17th Street, Borough of Manhattan, City of New York, and to make, give and execute acquittances, receipts, releases or other discharges for the same, whether under seal or otherwise, and to make, execute, endorse, accept and deliver in my name or in the name of my attorneys, all checks, notes, drafts, warrants, acknowledgments, agreements and all other agreements in writing of whatsoever nature as to my said attorneys may seem needful for the carrying*2583 on of the said business; and also for me and in my name and stead to employ all workmen, clerks, assistants and servants necessary and proper to enable my said attorneys more effectively to conduct *507 and carry on my said business and to discharge any and all such workmen, clerks, assistants or servants and to do, execute and perform and finish for me in my name and stead all and singular those things which shall be necessary and expedient or which my said attorneys shall judge necessary and expedient in and about or concerning my said business, and for me and in my name to commence and prosecute any suits or actions or other legal proceedings for the recovery of any goods, chattels, debts, dues, demands, cause or thing whatsoever due or to become due or belonging to me and to prosecute, follow and discontinue the same if they shall deem proper and for me and in my name to take all steps and remedies necessary and proper for the conduct and management of my said business, and for the recovery, receiving and retaining and holding possession of any goods, chattels, debts, interest, demands, dues, sums of money, or any other thing whatsoever that is, are or shall be by my said*2584 attorneys thought to be due, owing, belonging to, or payable to me in my own right or otherwise; and also for me and in my name and stead to appear, answer and defend any and all actions or suits whatsoever which shall be commenced against me; and also for me and in my name to compromise, settle and adjust with each and every person or persons, all actions, accounts, dues and demands, subsisting or to subsist, between them or any of them, and in such manner as my said attorneys shall deem proper; * * *
The power of attorney executed by Russell also authorized the committee to vote all shares of the stock then owned or thereafter acquired by him in the Russell Company, Kinney Company and Nemasket Mills. The power of attorney executed by Sanford authorized the voting of the shares of stock then owned or thereafter acquired by him in the Kinney Company and Nemasket Mills, and that executed by Carey R. Kinney authorized the voting of the shares of stock then owned or thereafter acquired by him in the Russell Company and the Kinney Company.
As soon as the committee took charge of the properties of the partnership and the three corporations under the agreements of December 15, 1920, it*2585 immediately shut down the mills, engaged its own auditors, appointed a comptroller to take charge of the funds of the companies on hand, and made arrangements to receive those funds which were about to come in. It opened four bank accounts and made arrangements for paying out all sums, other than small amounts from petty cash, under the signature of its comptroller and under its own direction. It also caused the assets to be valued and made arrangements to conduct in a general way, under its direction, the business as it had been conducted by the officers of the corporations and the members of the partnership.
The committee functioned without regard to the wishes of any stockholder unless such stockholder had been retained in an official capacity by it and was working under its direction. The committee, however, was not unduly influenced by expressions of opinion of any such stockholders.
*508 The committee was constituted such at a creditors' meeting. It was put in charge at the instance of the creditors and conducted the business in their interest. The agreements, which were passed upon by the creditors themselves and in practically all cases by the creditors' counsel, *2586 were considered sufficient to give the committee the necessary control over the assets of the partnership and the corporations under any circumstances that might possibly arise. The members of the committee exercised the same control in the management of the partnership and the three corporations that they exercised over their own private business, except in so far as limited by the agreements.
Pursuant to the agreements of December 15, 1920, the committee, under date of November 10, 1921, proposed a plan of reorganization, which was subsequently modified and adopted. By this plan a corporation was formed and took over the assets and liabilities of the partnership of Sanford & Russell. Such corporation, the Russell Company, the Kinney Company, and Nemasket Mills were all consolidated by exchange of stock, effective November 30, 1921. The consolidation having been completed, the committee was discharged.
For the year 1921 a consolidated return was filed for Sanford & Russell Co., Sanford & Russell, Inc., S.N. & C. Russell Manufacturing Co., Kinney Worsted Yarn Co., and Nemasket Worsted Mills.
OPINION.
TRAMMELL: The question is whether the three corporations involved*2587 were affiliated from January 1, 1921, to November 29, 1921. If they are to be held to be affiliated it must be by reason of the fact that substantially all of the stock of the three corporations is owned or controlled by the same interests. The creditors' committee, which was authorized by agreement of the stockholders representing 86.8 per cent of the Russell Company, 81.1 per cent of the Kinney Company and 75.3 per cent of the Nemasket Mills, was given entire charge of the operation and control of the various corporations, and stockholders owning 86.8 per cent of the Russell Company, 76.7 per cent in the Kinney Company and 54.3 per cent of the Nemasket Mills executed irrevocable powers of attorney to the creditors' committee to vote their stock. The question then to be decided is whether the creditors' committee, which stepped into the shoes of Russell, Kinney and Sanford with respect to the voting of their stock, controlled sufficient amount of stock to amount to substantially all within the meaning of the statute.
The fact that the creditors' committee operated and controlled the corporations is not important if it did not control the voting rights of the stock. It is the*2588 control of the stock and not the control *509 of the business which is the control referred to in the statute. See , in which the court affirmed the decision of the Board in .
There is testimony in the record as to the acquiescence of the balance of the stockholders and testimony relating to the relationships between the stockholders, but the fact that stockholders acquiesced in the management of the business by the committee does not indicate that their stock was controlled within the meaning of the statute. See News Publishing Co. v. Commissioner, decided by the Court of Appeals for the District of Columbia December 3, 1928, , wherein the court stated:
The statute contemplates something more than control by mere sufferance. The control must have a tangible and substantial basis.
The Court of Appeals affirmed the decision of the Board in .
The evidence relating to the relationship of the parties, in so far as it might indicate either that the stockholders of the different corporations were the same interests*2589 or that the stock was controlled by the same interests in so far as the stockholders were concerned, does not indicate or tend to show that the creditors' committee, which took the place of the majority stockholders, were the same interests as the minority stockholders or that they controlled the stock of minority stockholders. As we see it, the case presents the question as to whether the creditors' committee controlled substantially all of the stock in the various corporations. From the evidence we can not find that this committee controlled the stock to the excess of 86.8 per cent in the Russell Company, 76.7 per cent in the Kinney Company, and 54.3 per cent in the Nemasket Mills. These percentages clearly do not represent substantially all of the stock. See ; ; . See also the case of , in which it was held that 80 per cent of the stock did not constitute substantially all. See also *2590 , wherein the court stated that only when the outside interests, that is, the interest of the minority, is so small as to be practically negligible are corporations to be treated as in receipt of a single income requiring a consolidated return.
In view of the foregoing, it is our opinion that the corporations were not affiliated during the period involved.
Judgment will be entered under Rule 50.