1929 BTA LEXIS 2725">*2725 The petitioner owned 81.466 per cent of the capital stock of the Merchants Ice Co. of Lebanon Valley, Pa., from January 1, 1922, to the date of sale of its holdings in the last named company. It sold its holdings in the Merchants Ice Co. of Lebanon Valley in 1922 at a profit of $65,677.37. Held, that the petitioner was not affiliated with the Merchants Ice Co. of Lebanon Valley for the year 1922 and that it is liable to income tax upon the profit received by it in 1922 from the sale of the stock.
15 B.T.A. 1076">*1077 This is a proceeding for the redetermination of a deficiency in income tax for 1922 in the amount of $5,346.13. The question in issue is whether the petitioner is liable to income tax in respect of a profit realized by it from the sale of stock in 1922 of a subsidiary company.
FINDINGS OF FACT.
1. The petitioner is a Delaware corporation engaged in the manufacture and sale of ice and since incorporation has had its office and principal place of business at Harrisburg, Pa.
2. Prior1929 BTA LEXIS 2725">*2726 to 1916 the petitioner operated branches of its business at Lebanon, Pa., and other places, and on or about January 4, 1916, the value of its investment in its Lebanon branch was approximately $32,000.
3. On January 4, 1916, the petitioner caused to be incorporated the Lebanon branch under the laws of the Commonwealth of Pennsylvania, under the name of Merchants Ice Co. of Lebanon Valley, hereinafter referred to as the Merchants Ice Co., for the purpose of manufacturing and selling ice.
4. The authorized capital stock of the Merchants Ice Co. was $60,000, consisting of 2,400 shares of common stock of the par value of $25 each. Of this capital stock there were issued and outstanding, during the years 1918 and 1919, 1,431 shares of an aggregate par value of $35,775; during the years 1920 and 1921, 1,477 shares of an aggregate par value of $36,925; and during the year 1922, up to about March 13, 1922, 1,473 shares of an aggregate par value of $36,825.
5. The petitioner, on the incorporation of the Merchants Ice Co., transferred the assets of the Lebanon branch to that company and received therefor 1,200 shares, or $30,000 par value, of its capital stock. The balance of the1929 BTA LEXIS 2725">*2727 capital stock of the Merchants Ice Co. issued and outstanding was sold to parties in and about Lebanon, Pa., for the purpose of gaining local support and patronage.
6. The petitioner continuously held and owned the 1,200 shares of capital stock of the Merchants Ice Co. until on or about March 13, 1922, when it sold the said 1,200 shares to one Caleb H. Westenberger for $123,800, the petitioner to assume and pay all the debts and obligations of the Merchants Ice Co. up to and including March 13, 1922.
7. The net amount received by the petitioner for said 1,200 shares of stock over and above the cost thereof to the petitioner was $65,677.39.
15 B.T.A. 1076">*1078 8. From the time of the incorporation of the Merchants Ice Co. to the date of the sale of said 1,200 shares of stock the business of the Merchants Ice Co. was entirely managed and controlled by the petitioner from its Harrisburg office, the only difference in the mode of operating being that a separate set of books was kept by the petitioner for the Merchants Ice Co.
9. For the years 1919, 1920, and 1921 the petitioner and the Merchants Ice Co. filed consolidated tax returns which were accepted by the Commissioner as1929 BTA LEXIS 2725">*2728 a basis for the computation of income and profits taxes due from the affiliated group.
10. The petitioner for the calendar year 1922 filed its income-tax return on a consolidated basis, including therein the operation of the Merchants Ice Co. for the year 1922 up to the date of the sale.
11. In the consolidated return filed for 1922 the petitioner returned, as taxable gain resulting from the sale of the 1,200 shares of stock, $23,818.12 made up as follows:
| Excess of sale price over cost | $65,677.39 | |
| Accrued surplus of Merchants Ice Co | $42,205.52 | |
| Less dividend due on stock of Merchants Ice Co. | ||
| not held by the taxpayer but to be paid to it | 346.25 | |
| 41,859.27 | ||
| Amount returned in the 1922 consolidated report | ||
| as taxable gain | 23,818.12 |
12. The respondent has held the petitioner liable to income tax for 1922 upon the entire amount of profit realized from the sale of its 1,200 shares of capital stock of the Merchants Ice Co. of Lebanon Valley.
OPINION.
SMITH: In 1922 the petitioner realized a profit of $65,677.39 upon the sale of 1,200 shares of the capital stock of Merchants Ice Co. In its income-tax return for 1922, filed upon the basis1929 BTA LEXIS 2725">*2729 that it was affiliated with the Merchants Ice Co. until it disposed of its stock in that company, it returned a profit of $23,818.12 on the sale. It now contends that under the decisions of the Board of Tax Appeals in ; ; ; ; and in , it is not liable to income tax in respect of any portion of the profit of $65,677.39.
The first question presented by this proceeding is whether the petitioner and the Merchants Ice Co. were affiliated for the portion of 1922 during which the petitioner owned 1,200 shares of stock of the Merchants Ice Co. The evidence indicates that the petitioner 15 B.T.A. 1076">*1079 owned substantially the same percentage of the stock of the Merchants Ice Co. during the years 1919, 1920, and 1921 as it owned from January 1, 1922, to the date of the sale of that stock in 1922, and that the respondent permitted the two corporations to file consolidated returns for the calendar years 1919, 1920, and 1921. The1929 BTA LEXIS 2725">*2730 instant proceeding involves a deficiency for only the year 1922, and the fact that the respondent permitted or required the petitioner and the Merchants Ice Co. to file consolidated returns for prior years is not determinative of the question of the affiliation of the corporation for 1922. Section 240(c) of the Revenue Act of 1921 provides:
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) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
During the period of 1922 in which the petitioner was the owner of shares of stock of the Merchants Ice Co. it owned 81.466 per cent of the stock of that company. There is no evidence that it controlled "through closely affiliated interests" any of the stock of the Merchants Ice Co. which it did not own outright. The question presented is therefore whether 81.466 per cent of the total shares of stock is substantially all of the stock within the meaning of the statute.
1929 BTA LEXIS 2725">*2731 The question of what constitutes substantially all of the stock of a corporation was before the Circuit Court of Appeals for the Second Circuit in , and . The purpose of Congress in permitting corporations to file consolidated returns was that corporations which were so closely connected that they constituted a single business unit, should be taxed as a business unit. The record in the instant proceeding does not show any shifting of profits from one corporation to the other. So far as the year 1922 is concerned it is shown that there were no dealings between the two corporations. We think in the circumstances that the ownership by the petitioner of 81.466 per cent of the stock of the Merchants Ice Co. was not an ownership of substantially all of the stock of that company and that within the decisions of the Circuit Court of Appeals above cited the corporations were not affiliated for the year 1922. The petitioner realized a profit upon the sale of its stock in the subsidiary corporation of $65,677.39. No portion of this profit1929 BTA LEXIS 2725">*2732 accrued to the Merchants Ice Co. and we see no reason why petitioner should not be held liable for the tax due upon the profit.
Judgment will be entered for the respondent.