*1812 1. As of July 15, 1920, the petitioner acquired the assets of E. W. Burt & Co. under an agreement by which all of petitioner's shares of stock, consisting of 10,000 no-par-value common shares and 5,000 shares of 6 per cent cumulative preferred stock, would, in the first instance, be issued to the stockholders of E. W. Burt & Co., who in turn within 30 days should transfer to one Julian all of the shares of common stock, Julian agreeing to loan to E. W. Burt, the principal stockholder, $350,000 secured by 3,500 shares of the preferred stock of the petitioner. The petitioner was incorporated under the laws of the State of New York, and the terms of the agreement were strictly complied with. The assets of E. W. Burt & Co. had a fair market value in excess of their cost to that company. Held that section 331 of the Revenue Act of 1921 does not operate to deprive the petitioner from including in invested capital the appreciation in value of the assets of E. W. Burt & Co.
2. The petitioner owned less than 60 per cent of the stock of the Ground Gripper Stores, Inc. Held that the two companies were not affiliated for the fiscal period ended April 30, 1921, or for the fiscal*1813 year ended April 30, 1922.
*646 These proceedings, consolidated for hearing and opinion, involve deficiencies in income and profits tax of petitioner for the fiscal period July 1, 1920, to April 30, 1921, of $20,832.84, and for the fiscal year ended April 30, 1922, of $53,664.49. The questions in issue are:
(1) Whether good will and appreciation of fixed assets set up on the books of the predecessor corporation, E. W. Burt & Co., should be excluded from the invested capital of the petitioner under the provisions of section 331 of the Revenue Act of 1921; and
*647 (2) Whether the petitioner and the Ground Gripper Stores, Inc., were affiliated during the fiscal period ended April 30, 1921, and the fiscal year ended April 30, 1922.
In the determination of the deficiency in income and profits tax for the period July 1, 1920, to April 30, 1921, the Commissioner allowed the inclusion in invested capital of intangible assets, to wit, good will*1814 to the extent of 25 per cent of $500,000 preferred stock outstanding of the petitioner for the taxable period involved. By an amended answer filed in Docket No. 17940, the Commissioner moved to increase the deficiency for this period by the application of section 331 of the Revenue Acts of 1918 and 1921, and to disallow the inclusion in invested capital of any amount for good will.
At the hearing it was stipulated that if section 331 of the Revenue Act of 1921 does not operate to prevent the inclusion in invested capital of any amount representing the value of good will and the appreciation of the assets of E. W. Burt & Co., prior to the date of the transfer of such assets to the petitioner, the invested capital determined by the Commissioner should be increased by the sum of $199,954.48; or, in other words, the invested capital of the Ground Gripper Shoe Co. for the fiscal year ended April 30, 1921, should be in the amount of $714,970.91.
FINDINGS OF FACT.
E. W. Burt & Co., Inc., was organized on September 5, 1903, under the laws of the Commonwealth of Massachusetts, with a capital stock of $50,000, which was increased to $500,000 on April 29, 1920, by the issuance of a*1815 stock dividend of $450,000. E. W. Burt was practically the sole stockholder.
On January 8, 1920, W. A. Julian, acting on behalf of himself and associates, obtained an option from E. W. Burt to purchase all the property and assets of E. W. Burt & Co., a going business engaged in the manufacture of shoes, with its principal office at Lynn, Mass. Under this option Julian was to cause a corporation to be organized under the laws of the State of New York, with a capital stock of not less than $500,000 of 6 per cent preferred stock and to cause the New York corporation to issue all of its stock, both common and preferred, to E. W. Burt & Co. in exchange for all of the assets of that company.
Burt, on his part, agreed within 30 days after said distribution of the stock of the new corporation to the stockholders of E. W. Burt & Co., -
* * * to sell and deliver or cause to be sold and delivered to Julian and his associates, the entire issue of common stock of the New York corporation in consideration for and upon receipt of the sum of One thousand dollars ($1,000.).
*648 Julian agreed that he would make to or procure for Burt a loan of $348,000 upon the deposit by Burt, *1816 as collateral, of 3,500 shares par value of the preferred stock of the New York corporation -
* * * to be evidenced by an evidence of indebtedness which shall recite that the loan is to be repaid only out of and to the extent of the moneys received from the corporation in the redemption of said stock, the evidence of indebtedness, however, to be for the full $350,000.00, the extra $2,000.00 being a premium for procuring the said loan.
By a subsequent agreement, dated April 16, 1920, it was agreed that the New York corporation to be formed under the name of "Ground Gripper Shoe Co., Inc.," should -
* * * have $500,000 preferred stock and 10,000 shares of nonpar value common stock. The preferred stock shall be a six per cent (6%) cumulative dividend stock, but shall not be entitled to receive more than six per cent (6%). The franchise of the corporation shall be amended so that the preferred stock shall have no vote except upon the passing of a dividend, and in the event of a dividend being passed the preferred stock shall vote so long as accrued dividends remain unpaid, and during the same period of time the common stock shall not be entitled to vote.
It was further agreed:
*1817 In further respects the option now held by Julian, dated the day of January, 1920, shall be carried out, except that in the event the $1,000. Paid for the option is used to pay for the common stock in the New York corporation, the loan provided to be made by the terms of the option, Paragraph Eight, subparagraph (b), shall be in the sum of $350,000.00 instead of $348,000.00 as recited in the original option.
The option was exercised in due course by Julian on July 15, 1920. Immediately thereafter, to wit, on July 17, 1920, E. W. Burt & Co. declared a liquidating dividend, distributing among its stockholders the common and preferred shares of the Ground Gripper Shoe Co. received in the sale of its assets, such distribution liquidating the said shares of stock to the said individuals, to wit:
| Shares of common stock | Shares of preferred stock | |
| E. W. Burt | 9,980 | 4,990 |
| Marvin E. Tucker | 20 | 10 |
| Total | 10,000 | 5,000 |
On the same day Burt and Tucker directed that the liquidating dividend comprising 10,000 shares of common stock of the Ground Gripper Shoe Co. be paid over unto the said Julian under the agreement and option between Burt and Julian.
Certificates*1818 for the 10,000 shares of common stock, duly executed and endorsed, were delivered to Julian on or about July 17, 1920, *649 pursuant to the directions of Burt and Tucker, as above recited, and certificates for 3,500 shares of preferred stock were delivered in pledge and as collateral for the aforesaid loan.
Burt had no part in the organization of the Ground Gripper Shoe Co., he did not at any time thereafter become a director or employee of that corporation, and, contemporaneously with the sale of the business to that company, he executed an agreement not to enter into any business, or consent to the use of his name in connection with any business which "if it had been established during the past six months * * * would have competed * * * with the business of the said E. W. Burt & Co., Inc." from which he was then retiring.
From the inception of the Ground Gripper Shoe Co., Julian was its dominating and controlling stockholder, owning practically 80 per cent of its entire common stock.
Prior to June 30, 1920, E. W. Burt & Co. not only manufactured Ground Gripper shoes, but retailed them through a chain of stores which were included in the sale to the petitioner. The*1819 shoes were also retailed through a chain of stores owned and controlled by the O. K. Dorn Shoe Co., of wich one O. K. Dorn was the principal and controlling stockholder.
Julian and his associates in the petitioner, soon after acquisition of the E. W. Burt & Co. business, organized the Ground Gripper Stores, Inc., and transferred or caused to be transferred to that company the retail stores of the Ground Gripper Shoe Co., as well as those thereafter owned and operated by the O. K. Dorn Shoe Co.
The O. K. Dorn Shoe Co. stores were acquired pursuant to agreement negotiated by Julian with Dorn August 13, 1920, which agreement had stipulated that preferred stock of the new company should be issued in payment for the tangible assets (inventories, supplies, and fixtures) of the stores, and that common stock of the new company should be issued and apportioned between the parties in such manner as would vest in Julian absolute and complete control by ownership of majority of voting stock (preferred stock having no voting rights). These respective issues being made, the stockholdings of the parties became as follows:
| Shares held | ||
| Stockholder | Common stock | Preferred stock |
| Ground Gripper Shoe Co | 3,605 | 1,663 |
| Dorn Co | 3,395 | 1,147 |
| Total | 7,000 | 2,810 |
*1820 *650 The stock issued to O. K. Dorn & Co. was subsequently distributed among the stockholders of that company, placing in the hands or at the disposition of O. K. Dorn 2,703 shares of common stock and 933 shares of preferred stock of the Ground Gripper Stores, Inc., which he subsequently transferred to the petitioner in 1927.
When the Ground Gripper Stores, Inc., was organized by Julian, its primary purpose was that of separating the retail business from the manufacturing operations so that one Farwell, who had been placed in charge of manufacturing and wholesale distribution, should not be burdened with the operation of retail stores, and Dorn had been engaged by Julian to manage and operate the retail stores even prior to the agreement of August 13, 1920, for the sale and transfer of the O. K. Dorn & Co. stores. Upon the organization of Ground Gripper Stores, Inc., Dorn was made its president.
The policies of the Ground Gripper Stores, Inc., have continuously been framed and practically dictated by Julian, and at all times Dorn has voted his stock to carry out and give effect to these policies. At no time has Dorn or any other stockholders ever cast a dissenting*1821 vote against the votes cast by the Ground Gripper Shoe Co., or against the wishes and directions of Julian.
Julian, exercising the control vested in him by the aforesaid agreement and by virtue of his majority stock holdings, has at all times controlled the election of the board of directors of both corporations.
There has existed at all times an oral understanding between Julian and Dorn that upon the termination of the latter's employment, by whatever reason or cause, he would offer his stock to Julian and his associates, or to the corporation at the book vlue thereof without any allowance for good will. In 1927 Julian saw fit to terminate Dorn's employment and to call for Dorn's stock, resulting in the acquisition by petitioner of 2,703 shares of common and 933 shares of prefered stock (out of 3,395 and 1,147 shares, respectively, of the original issue to the O. K. Dorn Shoe Co.). The cost to the petitioner of acquiring the preferred stock was $87,000 (against a par value of $93,300), the common stock being surrendered without any additional payment.
The fiscal year of both corporations was fixed at a period to end on April 30 of each year. A consolidated return was*1822 filed for the two companies for the 10-month period ended April 30, 1920, and a similar consolidated return was also filed for the fiscal year ended April 30, 1922.
*651 The report so filed disclosed net income of the corporations as follows:
| To April 30, 1921 | To April 30, 1922 | |
| Ground Gripper Shoe Co | $112,860.95 | $336,133.48 |
| Ground Gripper Stores (Inc.) | 1,709.67 | 11,417.85 |
The balance sheets of the petitioner as at April 30, 1921, and April 30, 1922, disclose preferred stock outstanding of $460,000 and $430,000, respectively. The amount of dividends actually paid in cash on the preferred stock for the fiscal period ended April 30, 1921, was $15,000, and for the fiscal year ended April 30, 1922, was $18,041.67.
OPINION.
SMITH: The first question presented by these proceedings is the application of section 331 of the Revenue Acts of 1918 and 1921 to the facts presented by the record. This section provides, so far as material, as follows:
In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business*1823 or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received: * * *
It is the contention of the respondent that E. W. Burt was practically the sole stockholder of E. W. Burt & Co., and that upon the organization of the petitioner he received all of the capital stock of the petitioner or, in any event, retained more than a 50 per cent ownership in the value of the assets transferred to the petitioner on July 15, 1920. The respondent contends that under the agreement entered into between Burt and Julian, Burt had the right to retain the common stock for a period of 30 days after incorporation of the petitioner and that during such period he was both legal and beneficial owner of all of the stock of the petitioner; that it is immaterial under the agreement that Burt was required eventually to turn over the common stock to Julian; that this ownership of the common stock*1824 for an appreciable interval of time was sufficient to make section 331 applicable in the proceedings at bar. In support of this contention *652 the respondent cites , in which the Board stated:
* * * it is not a change of interest or control which is the first consideration, but a change of ownership, and this occurs at a time and not vaguely over a period.
* * *
* * * But the statute is in our opinion clearly applicable and leaves no room for construction.
The respondent further cites , in which we said:
* * * Section 331 has reference to the interest or control which exists at the time the stock is issued for property; not to the situation which may exist at some future time if the new company is successful in selling more of its stock. We must look to the situation on May 22, 1919; not to that which existed on December 3, 1919. At that time we find tht entire ownership and control in Keen and Woolf.
The respondent further contends that since under the charter of the petitioner the right of the holders of the common stock to vote such stock*1825 should be suspended so long, but only so long, as dividends or any accrued dividends on the unpaid stock are unpaid, and since the returns filed by the petitioner show a cash dividend on the preferred stock on January 15, 1921, of $15,000, a further dividend on April 15, 1921, of $4,014.50, a reserve for dividends of $9,200, a cash dividend paid on July 15, 1921, of $4,600, another on January 15, 1922, of $13,441.67, and a reserve for dividends at April 30, 1922, of $8,600, it must be assumed that dividends were not paid regularly on the preferred stock; that the voting rights of the common stock were suspended; and that the only stock which could be voted was the preferred stock of which Burt was the owner.
We think there is no merit in the latter contention. The evidence adduced indicates that from July 15, 1921, Burt took no part in the management of the petitioner. The contract under which the loan of $350,000 was made by Julian to Burt provided that the rights of Julian should be as follows:
1. To hold the certificates for said stock, except upon payment by me or my legal representatives as hereinbefore provided, and except upon surrender thereof to the corporation, as*1826 hereinafter provided;
2. To receive from me semiannually to his own use interest at the rate of 6 per cent per annum on so much of the principal sum as remains unpaid; and I hereby authorize him to receive from said corporation, and the said corporation to pay to him all dividends that may be declared on such stock as is held by him in pledge as aforesaid, all such dividends to be applied pro tanto as payment of interest due from me under the provision hereof.
Therefore, even though the returns do not show that dividends were paid in cash on the regular dividend dates upon the entire amount of preferred stock outstanding, there is no implication that Burt thereby acquired any right to vote his preferred stock. But, *653 as above stated, the evidence all shows that the contracts entered into between Julian and Burt were fully complied with.
We can not grant the contention of the respondent that Burt, for any appreciable length of time, acquired the beneficial ownership of the common stock. Under the terms of the agreements which led up to the sale of the assets of E. W. Burt & Co. to petitioner on July 15, 1920, Julian agreed to organize a New York corporation*1827 with a capital stock of 5,000 shares of 6 per cent preferred stock of $100 par value per share, and 10,000 shares of no-par-value common stock. Julian also agreed to advance to Burt a loan of $350,000 upon the security of a like par value of preferred stock and to redeem the preferred stock at the rate of $50,000 per annum. Burt, on his part, agreed that if this were done and the loan made to him, he would assign to Julian his certificate for 10,000 shares of the common stock within 30 days from date of the organization of the corporation. Julian made the loan of $350,000 to Burt on July 15, 1920. On the same day, E. W. Burt & Co. transferred to the petitioner the assets of E. W. Burt & Co. Under this agreement, Burt was required to assign the common stock to Julian within the period of 30 days. He actually did assign it to him on July 17, 1920, only two days after the sale of the assets of E. W. Burt & Co. to the petitioner. It seems to us that the substance of the transaction is that Burt held the common stock for a period of two days only for the benefit of Julian. The substance of the transaction is not affected by the mechanics by which it was carried into effect.
*1828 The facts in the proceedings at bar are substantially the same as those which obtained in , wherein we held that section 331 of the Revenue Act of 1921 was not applicable where the owner of a business received practically all of the stock of a corporation but immediately transferred it in accordance with the preexisting agreement that he should sell it. We there said:
We do not believe the word "remains," as used by Congress is to be construed as applying to a state of facts in which the person who receives the stock has entered into a definite agreement to have such stock reissued to others and who carries out such agreement coincident with the issuance to him of the stock. In , relied on by the respondent, the interval between receipt of the stock by the former holders of the property and their disposition of such stock was nearly a year. We said:
"Here, the stockholders of the old company lawfully came into possession of all the issued stock of the new, with no obligation on their part unperformed. Their subsequent disposition of stock, both as to time and amount, *1829 was entirely discretionary."
So we held section 331 applicable. But in this proceeding there was a definite obligation unperformed, i.e., the immediate transfer of the stock to others. We consider that the interest or control did not "remain" in H. L. Neuman.
*654 Upon the authority of the Neuman case, the motion of the respondent to increase the deficiency for the fiscal period ended April 30, 1921, by the application of section 331 to the stated facts is denied and, pursuant to the stipulation, the invested capital of the petitioner should be increased for the fiscal year ended April 30, 1922, over the amount allowed by the respondent by the sum of $199,954.48, to stand at a total of $714,970.91.
The second point in issue in these proceedings is the question of the affiliation of the petitioner with the Ground Gripper Stores, Inc. The Revenue Acts of 1918 and 1921 provide in section 240(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 all the stock of the other or others, or (2) *1830 if substantially all the stock of two or more corporations is owned or controlled by the same interests.
The petitioner bases its claim to affiliation on the grounds that the board of directors of the Ground Gripper Stores, Inc., was composed of directors of the Ground Gripper Shoe Co.; that it controlled the management of the Ground Gripper Stores, Inc.; and that it had an agreement with O. K. Dorn to the effect that in the event of his death or separation from the petitioner his stock would be purchased by the petitioner. The control contemplated by the statute is that which gives rise to beneficial interest and not that which arises from the exercise of authority, management of the business, or acquiescence by the minority interests. ; ; ; ; *1831 ; . Julian testified that he had an agreement with O. K. Dorn which provided that in the event of Dorn's separation from the company his stock would be sold to the corporation. Julian was not clear whether the agreement was in writing. He said: "My opinion was that it was in writing." There is no evidence as to when the agreement was entered into. It may have been entered into subsequent to the years here in issue or prior thereto. If entered into at the time of the organization of the Ground Gripper Stores, Inc., it apparently would have been made a part of the organization agreement between Dorn and Julian, as the agreement covered all the provisions relative to the stock issue. It can not be ascertained from the record how much stock O. K. Dorn originally owned which was subject to the agreement. Under the terms of the agreement as testified to there was nothing to prohibit Dorn from transferring his stock while connected with the Ground Gripper Stores, Inc., *655 and if he did the agreement would have had no application to the transfer of the*1832 stock. When this stock was sold to the corporation in 1921, Dorn owned but 2,572 shares of common stock of the original issue of 4,495 shares, and only 618 of the 1,147 shares of preferred stock.
An inspection of our findings shows that upon the organization of the Ground Gripper Stores, Inc., $114,700 of $281,000 par value of the preferred stock and 3,395 shares out of 7,000 shares of common stock were issued to the O. K. Dorn Shoe Co. There is no evidence that either the petitioner or Julian owned or controlled this stock. Further, there is no evidence that Dorn was the same interest as Julian. Undoubtedly, all of the stockholders of the Ground Gripper Stores, Inc., had the interest of profits and successful operation in common. But this did not constitute control of substantially all of the stock by the same interests within the meaning of the statute. In , in denying affiliation because of an outstanding 20 per cent of stock, the court said:
The plaintiff did not "own directly or control through closely affiliated interests" or otherwise "substantially all the stock" of the Perfection Company [the subsidiary]. *1833 * * * True, the plaintiff [the parent company] managed the business of the Perfection Company and controlled its operations, but in order to come within the provisions of the statute the control must be of substantially all the stock, * * *
In , the court stated:
* * * Moreover, the object of the statute is taxes proportionate to income and equiality between taxpayers, to accomplish which the actual or ultimate taxpayer is ascertained by looking quite through the corporate entities. And in the course thereof, if it be found that the gains and losses of several corporations accrue to or fall upon substantially the same shareholders, taxpayers, the accounts of the corporations are balanced between themselves, to ascertain the actual gains to the common owners and upon which they should pay taxes.
In brief, the benefits of the statutes extend to those subject to the hazards of the enterprise, and only when they are substantially one and the same.
On behalf of petitioner it is contended that there was economic unity between the petitioner and the Ground Gripper Stores, Inc. This is doubtful, however. The record*1834 shows that Dorn controlled the buying of merchandise from the petitioner to be sold by the Ground Gripper Stores, Inc., and that the petitioner sold the majority of its manufactured product to other companies at the same price charged the Stores company. This indicates clearly that the two corporations operated independently of each other.
As the record stands, Julian owned and controlled during the taxable periods involved 80 per cent or more of the outstanding capital stock of the petitioner which in turn owned less than 60 per cent *656 of both classes of stock of the Ground Gripper Stores, Inc. This clearly was not substantially all of the stock of the Ground Gripper Stores, Inc. The disallowance of the claim of affiliation by the respondent is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.
STERNHAGEN, TRAMMELL, and MURDOCK dissent.