Great Lakes Hotel Co. v. Commissioner

GREAT LAKES HOTEL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Great Lakes Hotel Co. v. Commissioner

Docket No. 1952.

United States Board of Tax Appeals

10 B.T.A. 120; 1928 BTA LEXIS 4174;

January 24, 1928, Promulgated

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Petitioner was not affiliated with other corporations in 1920.

Edwin H. Cassels, Esq., and Benjamin B. Pettus, Esq., for the petitioner.

J. Harry Byrne, Esq., for the respondent.

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LITTLETON

The Commissioner determined a deficiency in income and profits tax for 1920, in the amount of $28,707.31. The petitioner claims that the Commissioner erroneously held, (1) that it was not affiliated with any other corporation during the taxable year, and (2) that it was not, in such year, affiliated with H. L. Stevens & Co. It is asserted in its petition that in 1920 the petitioner was affiliated with H. L. Stevens & Co., and that such company was, in turn, affiliated with the Metropolitan Mortgage Co., Olmsted Hotel Co., the Lake Erie Hotel Co., and Valley Farm Co., and that thereby all such corporations, together with itself, were affiliated and entitled to make a consolidated income and profits-tax return for the taxable year. No evidence was introduced, however, as to the ownership or control of the stock of the Valley Farm Co. and at the hearing the petitioner apparently abandoned that phase of the case. At the hearing, the respondent moved that all alleged affiliated companies involved be made joint appellants in this proceeding, which motion was taken under advisement to be considered in connection with the issues and the evidence. Subsequent to the hearing the petitioner filed a consent in writing stating that the various companies all agree and are willing to stipulate as follows:

(1) That the Olmsted Hotel Company, the Lake Erie Hotel Company and Valley Farm be made parties petitioner in this proceeding, and all agree to be bound by the decision herein.

(2) That H. L. Stevens and Company be made a party to this proceeding, and it agrees to be bound by the decision herein on the question of affiliation; and that the decision in this case shall stand as the decision of the Appeal of H. L. Stevens and Company, Docket No. 22,067, as far as the question of affiliation is concerned.

(3) That the decision in this case with respect to affiliation shall apply to the Appeal of the Metropolitan Mortgage Company for 1920, Docket No. 18357, and,

(4) That in the event it is held that the corporations in this group are affiliated, the Appeal of H. L. Stevens and Company, Docket No. 22,067, will be dismissed.

Practically all of the facts were stipulated.

FINDINGS OF FACT.

The petitioner is an Ohio corporation, organized by H. L. Stevens & Co. for the purpose of operating the Olmsted Hotel at Cleveland, Ohio. The Olmsted Hotel building was designed, construed, and equipped by and under the supervision of H. L. Stevens & Co. In connection with the designing, constructing, and equipping contract for the erection of the hotel building, H. L. Stevens & Co. (hereinafter referred to as the Stevens Company) made an arrangement with one David Olmsted, a practical hotel operator of many years' experience, to take a 30-year lease on the hotel building when it should be completed. This lease later was to be assigned by him to a corporation to be formed by the Stevens Company to operate the hotel, and pursuant thereto, the Great Lakes Hotel Co., the petitioner, was formed. The Stevens Company advanced Olmsted's salary during the period of construction, and Olmsted began the operation of the hotel and became president of the petitioner. The money for the purchase of all the stock originally issued was furnished by the Stevens Company; such stock was issued in the name of Olmsted, and the certificates were indorsed in blank by him and turned over to the Stevens Company. The minority interest shares outstanding during the taxable year were purchased largely by persons known to Olmsted and the Stevens Company. There was no written agreement between the minority stockholders and the Stevens Company in relation to the stock.

The Lake Erie Hotel Co. was an Ohio corporation, organized by the Stevens Company, to operate the Hotel Ashtabula at Ashtabula, Ohio. This hotel building was designed and its construction and equipment were supervised by the Stevens Company in the same way as was the building of the Great Lakes Hotel Co.

The Olmsted Hotel Co. is an Ohio corporation, organized by the Stevens Company, to operate the Winton Hotel at Cleveland, Ohio. This building was not designed and constructed by the Stevens Company, but was located in close proximity to the Olmsted Hotel, operated by the Great Lakes Hotel Co. The lease of the Winton Hotel Co. was offered to the Stevens Company and it being considered that the hotel could be successfully operated in connection with the Olmsted Hotel, by the same local management and substantially the same organization, the Olmsted Hotel Co. was therefore organized, and took over said lease and operated the Winton Hotel. The money for the purchase of all the stock originally issued was, at the direction of the Stevens Company, furnished by the Great Lakes Hotel Co. The minority interest in the Olmsted Hotel Co. was purchased largely by friends of Olmsted and the Stevens Company. The Winton Hotel, operated by the Olmsted Hotel Co., was in 1920 and other years under the same management as the Olmsted Hotel, operated by the Great Lakes Hotel Co.

The Metropolitan Mortgage Co. (hereinafter referred to as the Mortgage Company) was a Delaware corporation, with its principal office in Chicago. It was originally chartered under the name of the Lincoln Land & Investment Co. The original organizers of this company, which was a family affair, liquidated the company but retained its charter. The Stevens Company with its own funds purchased the charter and changed the name of the company to Metropolitan Mortgage Co. The functions of the Mortgage Company were to cooperate in the financing of hotels designed and constructed by the Stevens Company. It purchased second-mortgage bonds at a discount, all of which had been taken by the Stevens Company as part or all of its compensation for the design and construction of hotels. All of its assets in the way of investments consisted of securities so purchased from the Stevens Company, except the capital stock, amounting to $5,000, of a small subsidiary called the Metropolitan Company. The Metropolitan Company attempted, but without any great measure of success, to buy and sell other securities on commission. It did some business in the year 1920 and afterwards its operations were entirely discontinued.

The Valley Farm Co. was a Wisconsin corporation organized by the Stevens Company for the purpose of taking over and operating a large fruit and stock farm located in Monroe County, Wisconsin. It was planned that this farm should furnish dairy products, fruits, and possibly some other produce to the hotel-operating organizations.

H. L. Stevens & Co. was a Maine corporation, which succeeded to business and acquired all the properties of two predecessor companies of the same name theretofore organized under the laws of Illinois and Texas, respectively. Its chief executive officer is, and has always been since its organization, H. L. Stevens, who was also president and chief executive officer of each of said two predecessor companies. The Stevens Company made a specialty of hotel designing, construction and equipment, operating on a cost-plus basis. It has designed and supervised the construction of many of the fire-proof hotels in the United States and Canada. It carried a complete staff of experienced architects, engineers, construction and equipment men, hotel operators and experts in hotel organization and financing. In its organization also are men experienced in selecting sites, choosing the type of hotel for a particular site, arranging leases for subtenants and concessioners, and in hotel publicity and advertising. It has men in contact with available operators and lessees. It has collected and arranged for use a considerable volume of data on the location, design, plans, specifications, equipment, operation, and financing of American and foreign hotels. It is equipped to underwrite securities of hotels which it constructs, and to furnish part of the money for the construction of hotels. It has underwritten more than 51 per cent of the capital stock of the petitioner and of the Lake Erie Hotel Co. The petitioner, in turn, underwrote the majority of the stock of the Olmsted Hotel Co. The Stevens Company has underwritten both stocks and bonds in many other cases. Through subsidiary companies, organized by it, the Stevens Company has undertaken the operation of several hotels, among which are the Olmsted and Winton Hotels in Cleveland and the Ashtabula Hotel in Ashtabula.

All the officers and principal employees of the Stevens Company and the other companies claimed to be affiliated constitute what is referred to by the parties as the "Stevens organization." H. L. Stevens is the executive head of this organization. Each corporation, through its managing executive, reports daily to him on a blank form furnished and sent out from the Chicago office of the Stevens Company. Likewise every other executive officer, superintendent, and all of the hotel managers, report daily to H. L. Stevens. Each of the hotel companies sends him a monthly financial statement showing the total operations for the month by departments. The following activities of the "Stevens organization" are carried out under the direction of H. L. Stevens, and from the office of the Stevens Company at Chicago:

(1) A monthly magazine called the "Stevens Monthly" sent to all members of the organization and used as an advertising medium. (2) Weekly and monthly bulletins prepared in the office of the Stevens Company in Chicago, and sent out to all members of the "Stevens organization," containing articles contributed by officers and employees of all the companies hereinabove mentioned. (3) A customary annual dinner for the "Stevens organization," such a dinner being held in 1920, and to which were invited the officers and principal employees of the companies hereinabove mentioned. (4) The annual reports of all the companies were during the year 1920, and before and since, kept in a single record book. (5) All of the companies have the same fiscal year. (6) The system of accounting of all the hotel companies, the Mortgage Company and Valley Farm, was devised and put into operation and continuously supervised by the Stevens Company. (7) All subleases, important contracts, contracts for concessions, etc., of all the hotel companies were forwarded to the office of the Stevens Company in Chicago for the approval of Stevens, and the general counsel of the organization, or were prepared in Chicago by the general counsel. (8) All the companies have the same general counsel, whose office is in Chicago. (9) The Stevens Company has provided a fund for loaning money to employees who desire to build homes, the advantages of which are open to employees of all companies, without discrimination. (10) The Stevens Company provides a bonus on savings deposited with it, adding a certain percentage to the amount any employee will so save from salary during the year, which advantage is and has been available to the employees of all the companies without discrimination. (11) There is maintained by the "Stevens organization" a technical library on hotel organization, financing, design, construction, equipment, and operation and a general library for use, without discrimination, among the employees of all the companies. (12) The length of service with the Stevens Company and the other companies is recognized by giving service pins, and a ten-year service watch. These are and have always been given by the Stevens Company to all executives and important employees of all the companies without discrimination.

The entire capital stock of the Stevens Company stands in the name of the so-called "Stevens Associates," pursuant to a certain trust agreement in full as follows:

DECLARATION OF TRUST.

We, H. L. STEVENS, J. C. STEVENSON, C. A. MOORE, W. S. AAGAARD, Jr., and DAVID OLMSTED, associate ourselves together as Trustees for the purposes of acquiring managing and administering trust property under the terms and conditions hereinafter in this declaration stated:

I. For the purpose of convenience we adopt the name, "STEVENS ASSOCIATES," and the business of the Trustees shall be carried on as far as practicable under that name and in accordance with the Rules and Regulations which may be from time to time adopted by the Trustees for the purpose of governing their action.

II. The object of the trust hereby created shall be in all lawful ways to promote the welfare and to assist in the success of the general organization, and of the individual officers and employees of H. L. STEVENS & COMPANY, its subsidiary and affiliated companies, partnerships and associations; to provide financial and other assistance for such officers and employees and for their families widows and orphan children; to provide and maintain a technical and professional library and technical instruction; to provide and maintain facilities for recreation and, without limitation, in all lawful and proper ways to promote and encourage efficiency, cooperation and good-feeling among the officers and employees, and to promote and encourage the general efficiency of the organization as a whole including its subsidiary and affiliated organizations.

III. The Trustees may acquire property in any lawful manner - by gift, purchase, exchange or barter; and (subject only to conditions which may be attached to any gift) dispose of the same in any lawful manner. IV. The Trustees may adopt Rules and Regulations for the conduct of the business of the trust not inconsistent with this declaration of trust and not inconsistent with the terms and conditions of any gift. V. The Trustees reserve to themselves (subject only to the terms and conditions of any gift) the following rights, powers and authority.

(a) The power after the death of H. L. Stevens to fill vacancies as they may occur and from whatsoever cause arising, and to choose a successor to any Trustee or Trustees. During his lifetime such power shall be exercised by H. L. Stevens.

(b) The right by a vote of three or more Trustees to remove any Trustee and to fill the vacancy caused thereby (subject to the provisions of paragraph a).

(c) The right subject to the terms of paragraph a) to incorporate under the laws of any State or of the United States, and to make such corporation in all respects the successor of the Trustees and to vest in such corporation full and complete title to the property of the trust.

(d) The power to amend this declaration of trust and any rules and regulations which may be made hereunder, but no amendment to this declaration shall change the object of the trust without the consent of the donors of any gifts which may now or hereafter be made to it, and without the consent of the Directors of H. L. Stevens & Company; it being the intent of this instrument that an amendment as to the objects of the trust may be made only with the consent of such donors, and with the consent of the Directors of H. L. Stevens & Company. With such consent an amendment may amend or change the terms or conditions of any gift.

VI. The Trustees shall not personally or individually (jointly or severally) be liable to the beneficiaries of the Trust, or to third parties except for claims or demand growing out of acts done in bad faith or for wanton breaches of trust; nor shall they jointly or severally be liable on contracts or other undertakings individually or personally; or as Trustees beyond the amount of the corpus of the trust.

VII. No vested right to any pecuniary or other benefit shall be acquired by or inure to any beneficiary, nor shall the Trustees have the power or authority to create any such right. VIII. This agreement may be terminated, the trust property disposed of and the trust wound up at any time by agreement of the Trustees and the Directors of H. L. Stevens & Company, and with the consent during his lifetime of H. L. Stevens; and in any event the agreement shall be terminated, the trust property disposed of and the trust wound up twenty (20) years after the death of the survivor of Mary Jane Stevenson and Catherine Helton Stevenson, daughters of J. C. Stevenson, Richard Moore, son of C. A. Moore, Shirley Virginia Olmsted, daughter of David Olmsted and Ruth Frances Stevens, daughter of L. J. Stevens.

IX. In winding up this trust and terminating the same, nothing in this instrument shall be construed to prevent any transfer (otherwise lawful) of the property of the trust to other Trustees or a Trustee (individual or corporate) administering a trust with the same or substantially the same objects. * * *

Notwithstanding the provisions of paragraph VII of the trust agreement above quoted, counsel for both the petitioner and the respondent have apparently regarded legal title to this stock as being in the "Stevens Associates" and the equitable title thereto as resting in the individuals of the "Stevens organization" indiscriminately. The trust agreement is silent and no evidence was adduced at the hearing as to the precise interest, if any, which a member of the so-called "Stevens organization" owned in the stock of the Stevens Company. It was testified by H. L. Stevens, president of the Stevens Company for the past eighteen years, that "there has never been any dividend declared from H. L. Stevens and Company."

The trust agreement above quoted succeeded an older agreement which, although somewhat different in terms, was administered in precisely the same way as the present agreement. In administering the above quoted trust agreement, it has been at all times the aim and purpose of the trustees to deal precisely in the same way with every member of the organization, whether he be an officer or employee of the Mortgage Company, any of the hotel companies, or the Stevens Company.

The stockholders' meeting of H. L. Stevens & Co. is held at Portland, Me., at the office of the Corporation Trust Co., and all the stockholders in the year 1920 voted by proxies. The stock stands in the name of the Stevens Associates and in the individual directors. the latter having simply qualifying shares, the equitable title to which is in the Stevens Associates. The proxies are obtained by the Chicago office of H. L. Stevens & Co. and a list of the proposed directors is also prepared and forwarded to Portland. During 1620 there were on the directorate of H. L. Stevens & Co. the vice president of the Valley Farm, the president of the Metropolitan Mortgage Co., the president of the two Cleveland hotel companies, and the general counsel of H. L. Stevens & Co., Metropolitan Mortgage Co., Valley Farm, and an officer of all the hotel companies. The connection of all the directors of H. L. Stevens & Co. with the other companies is hereinafter shown. The stockholders' meetings of the Metropolitan Mortgage Co. for the year 1920 were held in Chicago. Proxies were sent out to all stockholders. In 1920, 55 were returned, representing 1,355 shares out of 2,000, each of which ran to H. L. Stevens. In the case of the annual meeting of the stockholders of the Olmstead Hotel Co. for the year 1920, there were present in person six stockholders, including David Olmsted and W. H. Byron, officers of H. L. Stevens & Co. The other stockholders represented were present by proxy, and all proxies ran to David Olmsted. The same general situation obtained with reference to the annual meeting of the Lake Erie Hotel Co. and of the Great Lakes Hotel Co. At the annual meeting of all hotel companies and of the Metropolitan Mortgage Co. a list or slate of directors was made out by H. L. Stevens in consultation with his principal executive assistants and presented to each meeting, and in every case the board so nominated was unanimously elected.

The directors of H. L. Stevens & Co. for the year 1920 were as follows:

DIRECTORS

H. L. Stevens J. C. Stevenson C. A. Moore L. J. Stevens O. C. Gross E. H. Cassels

David Olmsted

Walter S. Aagaard, Jr.

Robert L. Acker

Rube S. Frodin

Ruth Crawford

David Olmsted was president and director of the Great Lakes Hotel Co. and the Olmsted Hotel Co. W. S. Aagaard, Jr., was president and director of the Metropolitan Mortgage Co. L. J. Stevens was director and manager of Valley Farm.

The officers of H. L. Stevens & Co. for 1920 were as follows:

President - H. L. Stevens

Vice president - Eastern District - C. A. Moore

Vice president - Central District - L. J. Stevens

Vice president - Western District - J. C. Stevenson

Executive in charge - New York office - C. A. Moore

Executive in charge - Chicago office - J. C. Stevenson

Executive in charge - Valley Farm - L. J. Stevens

Executive in charge - Investment Companies - Walter S. Aagaard, Jr.

Executive in charge Hotel Operations - David Olmsted

Supervising architect - O. C. Gross

Chief engineer - J. C. Stevenson

Treasurer - H. L. Stevens

Secretary - Ruth Crawford

General counsel - E. H. Cassels

Office architect - Chicago office - Rube S. Frodin

Office engineer - Chicago office - Rube S. Frodin

Office secretary - Chicago office - Lillian Bauman

Office architect - New York office - W. M. Bachman

Assistant treasurer - Ruth Herman

Assistant secretary - Lillian Bauman

All of the stock of H. L. Stevens & Co. was during the taxable year owned by H. L. Stevens, J. C. Stevenson, C. A. Moore, W. S. Aagaard, Jr., and David Olmsted, designated in the trust instrument as "Stevens Associates."

The stockholders of the Great Lakes Hotel Co., the Olmsted Hotel Co., the Lake Erie Hotel Co., and the Metropolitan Mortgage Co., during the year 1920, were as follows:

GREAT LAKES HOTEL CO.
Stockholders belonging to organization of H. L. Stevens & Co. and
beneficial holders of stock of H. L. Stevens & Co.
Name	Position		Number of
			shares
W. H. Byron	Manager, Hotel Olmsted		161
R. B. Bunstine	Room clerk, Hotel Olmsted		33
F. W. Blackburn	Room clerk, Hotel Olmsted		3
Elizabeth Brett	Housekeeper, Hotel Olmsted		2
Edna Fischer	Cashier, Hotel Olmsted		2
J. P. Forestall	House officer, Hotel Olmsted		1
M. W. Hawkins	Steward, Hotel Olmsted		5
Francis Hawkins	Steward's assistant, Hotel Olmsted		1
M. I. Jewett	Auditor, Hotel Olmsted		1
L. W. Kellogg	Engineer, Hotel Olmsted		1
Anna Koeck	Cashier, Hotel Olmsted		17
C. A. Moore	Vice president, H. L. Stevens & Co		10
David Olmsted	Director and president,		603
	Great Lakes Hotel Co
J. C. Stevenson	Vice president, H. L. Stevens & Co		3
J. C. Stevenson
(Mary M. Stevenson)	Vice president, H. L. Stevens & Co		10
Total			853
Outsiders		Shares
W. S. Bayer		6
Carl W. Brand		10
Mrs. H. W. Brandt		95
B. B. Goodman		20
David Lane		85
L. L. McConnell		1
Albert Pochelon		12
Wm. Henry Palmer		35
Emily Miller Poole		2
W. J. Schneidewind		10
C. J. Seabrook		70
L. L. Shoemaker		1
Total			347
Grand total			1,200
Owned by H. L. Stevens
& Co. and its stockholders	71%
Owned by outsiders			29%

 

OLMSTED HOTEL CO.
Stockholders belonging to organization of H. L. Stevens & Co. and
beneficial holders of stock of H. L. Stevens & Co.
Name	Position		Number of
			shares
W. H. Byron	Manager, Hotel Olmsted		10
David Olmsted	Director and president, Great Lakes Hotel Co
	Manager, Hotel Winton		500
C. A. Moore	Vice president, H. L. Stevens & Co		10
J. C. Stevenson	Vice president, H. L. Stevens & Co		3
Total			523
Outsiders		Shares
W. S. Bayer		5
H. W. Brandt		24
C. W. Brand		3
B. B. Goodman		1
David Lane		22
George H. Oomsted		10
Howard Olmsted		2
Albert Pochelon		10
George Robertson		40
John J. Stanley		10
Charles J. Seabrook		6
Fanny Seabrook		14
Total			147
Grand total			670
Owned by H. L. Stevens
& Co. and its stockholders		78%
Owned by outsiders			22%

LAKE ERIE HOTEL CO.
Stockholders belonging to organization of H. L. Stevens & Co. and
beneficial holders of stock of H. L. Stevens & Co.
Name	Position		Number of
			shares
R. B. Bunstine	Room clerk, Hotel Olmsted		10
W. H. Byron	Manager, Hotel Olmsted		1
George L. Crocker	Manager, Hotel Ashtabula		1
M. W. Hawkins	Steward, Hotel Olmsted		1
David Olmsted	Director and president,		500
	Great Lakes Hotel Co
Total			513
Outsiders		Shares
C. W. Brand		20
H. S. Bowdler		4
H. M. Burroughs		1
The Carlisle Company		10
C. E. Ducro		5
Ruth Dickinson		1
D. L. Davis Company		5
C. P. Goddard		10
A. L. Gregory		10
George E. Haas		10
W. F. Hewins		2
E. J. Inman		5
Mrs. Fannie E. Jacque		10
Anna Koeck		2
G. J. Mitchell		10
D. W. Mitchell		10
James W. McMorris		10
Howard Olmsted		10
R. H. Pfaff		10
P. C. Rennick		10
M. C. Robinson		5
T. J. Rennick		10
George B. Scrambling Company	25
G. W. Sandborn		5
R. J. Sweet		1
Ray Schenkelberger		2
W. H. Young		5
Total			208
Grand total			721
Owned by H. L. Stevens
& Co. and its stockholders		71%
Owned by outsiders			29%

METROPOLITAN MORTGAGE CO.
Stockholders belonging to organization of H. L. Stevens & Co. and beneficial holders of stock of H. L. Stevens & Co.
Name	Position		Number of shares
H. L. Stevens & Co			285
J. C. Stevenson	Vice president, H. L. Stevens & Co		168
C. A. Moore	Vice president, H. L. Stevens & Co		144
L. J. Stevens	Vice president, H. L. Stevens & Co		142
David Olmsted (Augusta Ellen Olmsted).	President and director, Great Lakes Hotel Co., Manager, Hotel Winton.		90
Edwin H. Cassels	Director: H. L. Stevens & Co., Metropolitan Mortgage Co		88
	Counsel: H. L. Stevens & Company, Metropolitan Mortgage Co., Great Lakes Hotel Co., Lake Erie Hotel Co., Olmsted Hotel Co., Valley Farm.
H. L. Stevens (Ruth S. Kent)	President, H. L. Stevens & Co		65
James H. Wilkerson	Counsel, H. L. Stevens & Co		53
H. L. Stevens (Caroline D. Stevens).	President, H. L. Stevens & Co		50
W. S. Aagaard, Jr	President, Metropolitan Mortgage Co		50
Rube S. Frodin	Chief architect, H. L. Stevens & Co		42
O. C. Gross (Wilhelmina Gross).	Supervising architect, H. L. Stevens & Co		30
O. C. Gross (Myrtle Gross Calvin).	Supervising architect, H. L. Stevens & Co		30
Robert L. Acker	Chief engineer, H. L. Stevens & Co		29
Ruth Crawford	Secretary, H. L. Stevens & Co		24
H. W. Kahle	Foreman, H. L. Stevens & Co		21
Clarice D. Stevens	Aunt of president, H. L. Stevens & Co		20
L. J. Stevens (Rose Lee Stevens).	Vice president, H. L. Stevens & Co		20
Ralph F. Potter	Counsel, H. L. Stevens & Co		18
A. D. Huff (Electa Huff)	Foreman, H. L. Stevens & Co		16
M. D. Kistler	Foreman, H. L. Stevens & Co		15
Rube S. Frodin (Fran A. Frodin).	Chief architect, H. L. Stevens & Co		12
L. O. Hagerup	Architectural draftsman, H. L. Stevens & Co		10
Ruth Herman (Eva Herman)	Cashier, H. L. Stevens & Co		10
J. G. Day	Office architect, H. L. Stevens & Co		10
E. D. Waldron	Superintendent, H. L. Stevens & Co		9
Ruth Hill	Stenographer, H. L. Stevens & Co		9
Ruth Herman	Cashier, H. L. Stevens & Co		8
K. B. Hawkins	Counsel, H. L. Stevens & Co		7
George L. Crocker	Manager, Hotel Ashtabula		6
A. J. Erbach	Architectural draftsman, H. L. Stevens & Co		6
Earl D. Hostetter	Counsel, H. L. Stevens & Co		5
Barry P. Gilbert (Mary P. Gilbert).	Counsel, H. L. Stevens & Co		5
Will Simmons	Foreman, H. L. Stevens & Co		5
George H. Weichlein	Foreman, H. L. Stevens & Co		5
Barry Gilbert	Counsel, H. L. Stevens & Co		4
H. L. Stevens		President, H. L. Stevens & Co
3
O. R. Brouillet	Foreman, H. L. Stevens & Co		3
F. G. Rutan	Superintendent, H. L. Stevens & Co		3
Robert Roberts	Foreman, H. L. Stevens & Co		3
Ray Schraedel	Architectural draftsman, H. L. Stevens & Co		3
Paul Uahgen	Foreman, H. L. Stevens & Co		3
W. T. Buck	Manager, Valley Farm		4
Total			1,533
Outsiders.		Shares.
J. A. Swanson		70
Helen B. Haldeman		60
T. P. Moorehead		40
Harriet MacBoyle		35
Mrs. Mary Blaul		21
Mrs. C. A. Clark		20
J. H. Wallovick		15
E. G. Watrous		15
Dr. Robert MacBoyle		15
J. K. Grannis		12
Ben P. Branham		10
C. B. Campbell		12
Charles L. Hecox		10
Dr. George C. Wallace		10
Julia Walsh		10
Kenneth W. Nosker		7
James C. Matchett		6
Dr. W. E. Fribley		6
Delia Drew King		6
H. L. Ofenloch		6
Ethel V. Heaford		5

 

Olive H. Smith		5
R. T. Huggard		5
Mary B. Eldredge		5
Frank O. King		5
W. W. Drew		5
N. H. Leipzig		5
Mrs. Otto Dullin		5
Mrs. Jerry Welch		5
Jennie A. Mellin		5
O. P. Alford		5
Ethel B. Means		5
Harold P. Hall		4
Earnst Kauffman		4
E. D. Blair		3
Laurette Darroch		3
G. W. Mattox		3
H. M. Hansen		2
George P. Stevens		2
Total			467
Grand total			2,000
Owned by H. L. Stevens & Co.
and its stockholders			71%
Owned by outsiders			29%

The individuals comprising certain outside stockholders who at one time, as shown below, held stock in the Great Lakes Hotel Co., the Olmsted Hotel Co., and the Metropolitan Mortgage Co., have made sworn statements that at the time they purchased the stock shown below they had full confidence in the rectitude and business ability of H. L. Stevens and that they anticipated that this individual would continue as president of the Stevens Co. and that if they desired to sell the stock it was their understanding they should first offer it for sale to H. L. Stevens & Co.

Name	Company	Number of
		shares
H. W. Brandt	Olmsted Hotel Co	24
H. W. Brandt	Great Lakes HotelCo	95
Charles Seabrook	Olmsted Hotel Co	20
Charles Seabrook	Great Lakes Hotel Co	70
George Robertson	Great Lakes Hotel Co	145
George Robertson	Olmsted Hotel Co	40
David Lane	Olmsted Hotel Co	22
David Lane	Great Lakes Hotel Co	85
Olive H. Smith	Metropolitan Mortgage Co	5
Helen M. Swanson	Metropolitan Mortgage Co	70
Ethel V. Heaford	Metropolitan Mortgage Co	6
Marion Simonson	Metropolitan Mortgage Co	48
E. D. Blair	Metropolitan Mortgage Co	3
Mrs. Robert MacBoyle	Metropolitan Mortgage Co	20

Pursuant to the above understanding, the Stevens Company has purchased from the minority stockholders a number of shares of stock of both the Mortgage Company and the petitioner.

There was complete harmony between the stockholders and the officers of all the companies herein involved. The Stevens Company advanced money to organize the various corporations and the three hotel companies have frequently loaned money to the Stevens Company, 6 per cent interest being charged for the loans running for any length of time and no interest being charged on short-time loans. There was a continuous interchange of personnel between the companies involved, which transfers were directed by Stevens. The hotel companies transferred furniture from one to the other at cost. The petitioner does not claim, however, that the companies took money from one corporation and put it into another without consideration.

H. L. Stevens & Co. did not own directly, or control through closely affiliated interests, substantially all the stock of any of the other corporations, nor was substantially all the stock of the Great Lakes Hotel Co., or any one of the before-mentioned corporations owned or controlled by the same interests.

OPINION.

LITTLETON: Petitioner contends that during 1920 it was affiliated directly with H. L. Stevens & Co. and also with the Olmsted Hotel Co.; that H. L. Stevens & Co. was then affiliated with the Metropolitan Mortgage Co., the Olmsted Hotel Co., and Lake Erie Hotel Co.; and that in consequence the petitioner, through its affiliation with H. L. Stevens & Co., was also thereby affiliated with such later-named companies.

The "control" referred to by section 240 of the statute is of "substantially all of the stock," not simply corporate control of the conduct of the business or policy pursued. Cooperation in or consent to corporate control or policy, by the giving of proxies or otherwise, does not necessarily mean control or ownership of substantially all of the stock. We may appropriately here repeat what was stated in our opinion in :

In interpreting the statute and its kindred provision of the Revenue Act of 1918, it has been held that there must be full and complete control of substantially all the stock and that this control must be a genuine one actually exercised. ; ; . Control of the business of a corporation is not control of its stock, within the meaning of the statute, and where there is control of a corporation's business, but there are quiescent stockholders present, representing a sizeable minority, such business control does not amount to the control of substantially all of the stock. .

* * *

* * * And even assuming that the position of a creditor permits one to press his claim and thus possibly to defeat the right of a stockholder to receive dividends, this does not constitute control of a minority stockholder's stock. He still has the right to vote his stock and thus oppose the wishes of the majority if he so desires. True, the votes of the minority will not determine the policies of the corporation when the majority of the voting shares is held by one individual or corporation, but such control of the policies and financial affairs of the corporation as an entity does not amount to control of the individual stockholder or his stock. There must be a control of the voting rights. ; .

In , we stated:

There is no doubt but that Adaskin had absolute control of the business methods, policies and relations of the two corporations. He dominated and managed the business of each. He settled questions of policy, expediency and methods of operation. He organized both corporations with the understanding that he should have control of the business. We have heretofore held, however, in the , that the control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock."

In , we stated:

The facts that stockholders would have given proxies to the majority to vote their stock, had such request been made; that the minority stockholders were friendly to the majority; that at the time the minority purchased their stock, there was some sort of oral understanding that the majority would be given an opportunity to buy stock which the minority might desire to sell, and other similar circumstances are not sufficient to convince us that the control of the voting rights of stock contemplated by the statute existed in this case.

There was harmony between the minority stockholders and the officers and heads of H. L. Stevens & Co. and all three of the hotel companies. The minority stockholders of petitioner and of the other named corporations did not oppose nor contest the management and operation of any of said companies, but acquiesced in the views and policy of Stevens and those associated with him, which views apparently accorded with their own opinion. The voting rights of the substantial outside minority have not been shown to have been controlled by the Stevens Company.

It is true that there were numerous intercorporate transactions between the corporations, and it does not appear that there was ever any friction existing between the companies. Minority stockholders at times gave proxies which were voted in accordance with the views of Stevens, but sufficient evidence is lacking to establish that the minority stockholders who owned substantial stock interest were controlled in the matter of giving their proxies, or in any other manner.

In , we held:

The Commissioner contended that the expression "controlled through closely affiliated interests" mentioned in the statute meant a control which was exercised through legally enforceable means or a legal control as distinguished from an actual control of stock. The control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock. (Italics supplied.)

In , we stated:

* * * We believe that a proper construction of the statute, if it is to serve the purpose for which it was intended, requires us to hold that the "control" mentioned therein means actual control, regardless of whether or not it is based upon legally enforceable means. The control, however, must be shown to be a genuine and real control actually exercised, and it can not be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation. No definite rule, applicable to all cases, can be laid down for recognizing control. Each case must, therefore, be considered and decided upon its own facts and surrounding circumstances. (Italics supplied.)

In the case of , this board held (syllabus):

Authorization to vote stock by proxy does not effect a separation of the voting power from the ownership of the stock; neither does it constitute a relinquishment by the stockholders of any right of ownership or control of his stock. (Italics supplied.)

There is insufficient evidence in this record to establish that the minority stockholders were in any wise controlled in the exercise of the voting rights of their stock.

On consideration of all the facts presented, we are of opinion that petitioner was not affiliated with H. L. Stevens & Co. or with any of its alleged affiliated corporations during 1920.

Reviewed by the Board.

Judgment will be entered for the respondent.

LANSDON, TRUSSELL, GREEN, PHILLIPS, ARUNDELL, and SIEFKIN dissent.