1938 BTA LEXIS 828">*828 During the period August 1, 1927, to December 31, 1928, petitioner had outstanding 100,000 shares of class B voting common stock, which was unlimited and nonpreferred as to dividends. During the same period it also had outstanding 100,000 shares of class A common stock, more than 95 percent of which was owned by the Associated Gas & Electric Co. or one of its affiliates. On July 25, 1927, the latter company entered into a written agreement with a Massachusetts trust, with which it was not affiliated, wherein it was agreed that the trust would be permitted to subscribe for and purchase petitioner's class B stock at $1 per share, and that the Associated Gas & Electric Co. "shall have the option, at any time after the expiration of five years and prior to the expiration of ten years from the date of issuance" to the trust of petitioner's class B stock, to repurchase such stock at $1 per share, plus interest at 6 percent on the price paid by the trust, less cash dividends, if any. As security that the option agreement would be carried out, the trust agreed to deposit in escrow the class B shares and any distributions other than current net profits. It was further agreed that the option1938 BTA LEXIS 828">*829 would not be exercised under certain conditions, and that, "Until and unless said option shall be exercised" the trust "shall be and continue to remain the absolute owner of said shares of class B stock * * *." The agreement was substantially carried out. Held, during the period August 1, 1927, to December 31, 1928, petitioner's class B shares were owned by the trust and that, therefore, petitioner and the Associated Gas & Electric Co. were not affliated during that period under section 240(d), Revenue Act of 1926, and section 142(c), Revenue Act of 1928.
38 B.T.A. 778">*778 This proceeding was brought by the Eastern Utilities Investing Corporation to redetermine its income tax liability for the years 1927 and 1928, for which years the respondent determined deficiencies in 38 B.T.A. 778">*779 the amounts of $54,141.64 and $53,251.36, respectively. Thereafter, the Eastern Utilities Investing Corporation, as debtor, filed a petition for reorganization under section 77 B of the Bankruptcy1938 BTA LEXIS 828">*830 Act, as amended, in the United States District Court for the District of Delaware, and Thomas F. Bayard was appointed trustee. Upon motion duly made before this Board it was ordered that the instant proceeding "shall proceed henceforth under the title of Thomas F. Bayard, Trustee of the Eastern Utilities Investing Corporation, v. Commissioner of Internal Revenue." The deficiencies previously mentioned were assessed during December 1936. On December 15, 1937, the respondent duly filed a claim for an increased deficiency for the year 1928 in the amount of $23,092.86, making the total income tax liability claimed by the respondent against petitioner for the year 1928, $76,344.22. If we sustain his contention as to affiliation, the Commissioner concedes that there is an overassessment for the year 1927 of $20,711.95 in income tax and $2,707.08 in penalty.
The parties have agreed upon all the errors assigned in the petition except the one alleging that the respondent erred in refusing to determine under section 240(d), Revenue Act of 1926, and section 142(c), Revenue Act of 1928, that the Eastern Utilities Investing Corporation (hereinafter referred to as petitioner) was affiliated1938 BTA LEXIS 828">*831 with the Associated Gas & Electric Co. and its affiliated corporations (hereinafter sometimes collectively referred to as group II but generally as the Associated Co.) for the period August 1, 1927, to December 31, 1928. The parties have also agreed that, if it be held that petitioner is not so affiliated, its tax liabilities for the years in question are as set forth in exhibit A of the "Statement as to Facts" filed at the hearing on December 13, 1937; and that, if it be held that petitioner is so affiliated, then its income tax liabilities should be determined upon a consolidated basis with group II, the proceedings of which are now pending before this Board in Docket No. 59572, with the Associated Co. as the petitioner therein.
At the hearing the parties introduced an agreed statement of facts, together with exhibits attached thereto. Also several witnesses testified orally and certain documentary evidence was received, from all of which we make the following findings of fact.
FINDINGS OF FACT.
During the taxable years 1927 and 1928 petitioner was a corporation, duly organized and existing under the laws of the State of Delaware, and was engaged in the business of holding1938 BTA LEXIS 828">*832 securities for investment and as a corporate convenience. It was formerly known as the Pennsylvania Electric Corporation, then as the Eastern Utility Preferred Holding Corporation, and finally on and after July 26, 1927, as the Eastern Utilities Investing Corporation.
38 B.T.A. 778">*780 During September 1925 at least 95 percent of petitioner's common stock was acquired by the Associated Co., which on December 31, 1926, sold it to a nonaffiliated company. On or about August 1, 1927, at least 95 percent of this common stock was reacquired by a group II company.
During the period August 1, 1927, to December 31, 1928, petitioner had outstanding several classes of preferred stock, the classification of which was changed from time to time, but all of which were nonvoting stocks and limited and preferred as to dividends within the meaning of section 240(d) of the Revenue Act of 1926 and section 142(c) of the Revenue Act of 1928. In addition thereto, it had outstanding during all of this period 100,000 shares each of class A common stock and class B common stock. The class B common stock was voting stock and was unlimited and nonpreferred as to dividends. During this period more than 951938 BTA LEXIS 828">*833 percent of the 100,000 shares of class A common stock was owned by the Associated Co. or one of its wholly owned subsidiaries.
Petitioner was a holding company which controlled public utility and other companies operating in western Pennsylvania and Maryland. It desired to purchase a large number of securities of public utility companies in the Commonwealth of Massachusetts. The bankers, Harris-Forbes & Co., representing the Associated Co., had been advised that under the laws of Massachusetts, particularly chapter 181, section 10, General Laws of Massachusetts (1921), it would be advisable to have the record ownership of petitioner's class B voting common stock in a Massachusetts trust rather than in a corporation foreign to Massachusetts. The Associated Co. was incorporated under the laws of the State of New York.
On July 14, 1927, Harding U. Greene, S. H. Cheney, and P. M. Hopson (a sister of H. C. Hopson, who at that time was financial vice president, treasurer, and director of the Associated Co. and was also an officer of petitioner and one of the trustees of the Associated Gas & Electric Properties, hereinafter mentioned), as original trustees, made at Boston a declaration1938 BTA LEXIS 828">*834 of trust 37 pages in length. The name of this trust was Eastern Utilities Investing Trust (hereinafter generally referred to as the trust). It was a Massachusetts form of common law trust. Among other things, the declaration of trust provided that the trust property was to be held for the benefit of the shareholders (sec. 3); that the trustees were to have full power and discretion to purchase, hold, and sell stocks and other securities of any firm, association, trust, joint stock company, or corporation of any state, territory, or country, to conduct and manage plants, to borrow and lend money, to exercise any and all powers and rights belonging to the holder of any stocks, securities, etc., to invest and reinvest the 38 B.T.A. 778">*781 capital or other funds of the trust, to declare dividends out of the net earnings of the trust property, to use a common seal, and generally in all matters to deal with the trust property and to manage and conduct the business of the trust as fully as if the trustees were the absolute owners of the trust property (sec. 5); that the original trustees thereunder were to be the three persons executing the declaration of trust (sec. 6); that the trustees might1938 BTA LEXIS 828">*835 from time to time appoint depositaries (sec. 14); that until appointment was terminated, the State Street Trust Co. of Boston was to be the principal depositary (sec. 14); that the beneficial interest of the trust was to be and during the continuance of the trust was to remain in the owners of transferable shares of beneficial interest consisting of 1,000 shares of no par value common stock (sec. 21); that the shares were to be personal property entitling the holders only to the rights and interest in the trust property (sec. 29); that, unless sooner terminated as provided in section 38, the trust was to continue until the expiration of 75 years from the date thereof or the expiration of 20 years from the death of the last survivor of the persons signing the declaration and 18 other named persons, whichever of such periods shall first expire (sec. 36); that the trustees could terminate the trust at any time upon authorization of a majority of the outstanding shares thereof (sec. 38); and that upon termination of the trust the trustees were to make proper distribution of the trust property to the shareholders (sec. 39).
On July 14, 1927, the trustees of the trust adopted certain1938 BTA LEXIS 828">*836 "Votes of Trustees" two of which concern the trust's 1,000 shares of no par value common stock and two of which concern the 100,000 shares of petitioner's class B voting common stock. The first two votes are as follows:
VOTED that this Trust issue 1,000 of its shares for the consideration of $100 per share and that said shares, when issued for such consideration, shall be fully paid and nonassesable.
VOTED that the officers of this Trust be, and they hereby are, authorized to prepare suitable certificates for the shares of this Trust and to issue and deliver the same upon receipt of the consideration therefor.
Journal entry No. 1 of the trust, made on or about August 1, 1927, was as follows:
| Debit | Credit | |
| ACCOUNTS RECEIVABLE | $100,000.00 | |
| COMMON STOCK (1,000 shares) | $100,000.00 | |
| To record the sale of the latter stock to Associated Gas and Electric Properties for $100,000 cash. |
On August 1, 1927, the books of the Associated Gas & Electric Properties recorded the purchase of the 1,000 shares of no par value common stock of the trust on open account for a consideration 38 B.T.A. 778">*782 of $100,000. It carried the said 1,000 shares of stock in its1938 BTA LEXIS 828">*837 investment account until after December 31, 1928.
The Associated Gas & Electric Properties was also a Massachusetts trust. It had outstanding two beneficial certificates, one of which was owned by J. I. Mange and the other by H. C. Hopson. The Associated Gas & Electric Properties and its affiliates are sometimes referred to as group I. For the purposes of this proceeding the parties agree that group I was not affiliated with group II.
One of the wholly owned subsidiaries of the Associated Gas & Electric Properties was the Associated Securities Corporation. It owned all the class B voting stock of the Associated Co. The latter company also had outstanding some preferred stock, debentures and class A stock, the ownership of which is not shown by the record except for 242,700 shares of $7 dividend series preferred stock, the rights to which were acquired by petitioner during July 1926.
The 1,000 shares of no par value common stock of the trust were actually issued July 14, 1927, to Daly & Co. as nominees of an undisclosed principal. On January 28, 1932, they were transferred to Day & Co. as nominees of an undisclosed principal. The certificate itself was deposited from1938 BTA LEXIS 828">*838 August 10 to December 31, 1928, in vault No. 434 of the Columbia Safe Deposit Co. (now known as the Irving Safe Deposit Co.), which vault was leased to the Associated Co. from December 18, 1925, to December 17, 1929. Daly & Co. was a nominee partnership or street name, which was used to record stocks and securities for any company in the Associated Gas & Electric System, but principally for the Associated Co. and its subsidiaries. The term "Associated Gas & Electric System" was understood to include all organizations under the management of J. I. Mange and H. C. Hopson and their associates. Daly was an associate vice president with H. C. Hopson. Daly later became ill, and the system selected one Day to take his place.
One of the wholly owned subsidiaries of the Associated Co. was the Associated Gas & Electric Securities Co. On or about July 31, 1927, it purchased from petitioner the 100,000 shares of petitioner's class A common stock and the 100,000 shares of petitioner's class B voting common stock for a total consideration of $100,000 for the 200,000 shares. The acquisition by the Associated Gas & Electric Securities Co. of the 100,000 shares of petitioner's class B voting1938 BTA LEXIS 828">*839 common stock was a part of the plan then being worked out by the representatives of the Associated Co. and the representatives of the Associated Gas & Electric Properties of placing the record ownership of such 100,000 shares of petitioner's class B voting common stock in a Massachusetts trust. H. C. Hopson was the principal representative of both the Associated Co. and the Associated Gas & Electric Properties. Although the record ownership of petitioner's 38 B.T.A. 778">*783 100,000 shares of class B voting common stock was to be in a Massachusetts trust, it was also a part of the plan, as more fully described below, that the Associated Co. was to have an option whereby it could, under certain circumstances and after the lapse of a certain number of years, reacquire the record ownership of these shares and thereby assure for itself all the benefits of ownership therein.
The second two "votes of Trustees" of the trust referred to above which were adopted on July 14, 1927, are as follows:
VOTED that this Trust subscribe for, purchase or acquire at the price of One Dollar ($1.00) per share 100,000 shares of the proposed Class B stock of Eastern Utility Preferred Holding Corporation (whose1938 BTA LEXIS 828">*840 name is about to be changed to "Eastern Utilities Investing Corporation"), a corporation of the State of Delaware.
VOTED that the President or any Vice-President and the Secretary or any Assistant Secretary of this Trust be, and they hereby are, authorized to execute and deliver on behalf of this Trust an option or contract for the sale of said 100,000 shares of the proposed Class B stock of Eastern Utilities Investing Corporation, upon such terms and for such period as shall be approved by the officers executing the same.
On July 25, 1927, a written agreement was entered into between the trust as first party and the Associated Co. as second party. In this agreement the trust is called the "Association"; the Associated Co. is called the "Company"; and petitioner is called the "Investing Company." The material provisions thereof are as follows:
WHEREAS the Investing Company proposes to enlarge the scope of its business and, in order to permit the Investing Company the fullest opportunity for the investment of its funds, it is deemed inadvisable that the Company or any of its subsidiary corporations at the present time acquire the Class B Stock of the Investing Company, and1938 BTA LEXIS 828">*841 the Association is willing and desires to acquire the same upon the terms hereinafter mentioned;
Now, THEREFORE, * * * the parties hereto do hereby agree as follows:
1. The Company agrees that, upon the amendment of the certificate of incorporation of the Investing Company so as to effect said reclassification of existing classes of stock and authorization of new classes of stock, the Association or its nominee will be permitted to subscribe for and purchase said 100,000 shares of Class B Stock of the Investing Company at the price of One Dollar per share.
2. The Association agrees that the Company, its successors and assigns, shall have the option, at any time after the expiration of five years and prior to the expiration of ten years from the date of issuance to the Association or its nominee of said shares of Class B Stock of the Investing Company, to purchase said 100,000 shares of Class B Stock of the Investing Company, upon and subject to the following terms and conditions:
(a) The purchase price shall be One Dollar per share plus an amount equal to interest thereon at the rate of six per cent. (6%) per annum from the date of payment of the subscription of the Association1938 BTA LEXIS 828">*842 therefor, less the amount of cash dividends, if any, paid by the Investing Company on said shares of its Class B Stock from the date of issue thereof to the date of the exercise of said option and not deposited in escrow as hereinafter provided.
(b) As security for the delivery of said shares of Class B Stock of the Investing Company if and when such option shall be exercised, the Association will, upon the issue thereof, deposit in escrow the certificates therefor, duly endorsed 38 B.T.A. 778">*784 in blank or accompanied by proper instruments of assignment duly exercised in blank, with a depositary satisfactory to the Company, with instructions to deliver the same upon the exercise, within the period hereby permitted, of said option and upon receipt for account of the Association of the purchase price specified in subdivision (a) hereof in accordance with the provisions of this agreement.
(c) The Association agrees that if, pending the exercise or expiration of said option, the Investing Company shall pay any dividend on said shares of its Class B Stock in stock, securities or property, other than cash, or shall pay any dividends upon, or make any distribution of assets to the holders1938 BTA LEXIS 828">*843 of, said shares of its Class B Stock except out of current net profits accruing after the date of issue thereof, exclusive of profits derived from the sale of assets or resulting from a reappraisal or revaluation of assets, the stock, securities, property or funds paid upon such dividend or so distributed will likewise be deposited in escrow, with all necessary instruments of transfer, with a depositary satisfactory to the Company, with instructions to deliver the same upon the exercise, within the period hereby permitted, of said option, and upon receipt for account of the Association of the purchase price specified in subdivision (a) hereof in accordance with the provisions of this agreement.
(d) Said option shall not be exercised by the Company or by any corporate successor or assignee of the Company if at the time of the acquisition of said shares of Class B Stock of the Investing Company, such acquisition, or the issuance of securities of the purchaser thereafter, shall be contrary to the provisions of any statute or shall subject the Investing Company, or any corporation or association whose stock is directly or indirectly held by the Investing Company or from which any part1938 BTA LEXIS 828">*844 of the income upon any shares or securities held by the Investing Company is directly or indirectly derived, to any penalty, fine, forfeiture, dissolution or other action prejudicial to any such corporation or association.
3. Until and unless said option shall be exercised, the Association shall be and continue to remain the absolute owner of said shares of Class B Stock of the Investing Company and of all dividends declared and paid thereon and of all voting rights appertaining thereto, and in voting said shares of stock the Association shall be under no obligation or duty whatsoever to consult or advise with the Company, its successors or assigns, respecting the same.
Journal voucher No. 232 of the Associated Gas & Electric Securities Co., under date of "Month of August, 1927", debits accounts receivable with $100,000 and credits investments with $99,999 and capital surplus with $1, "To record sale as at July 31, 1927, of 100,000 shares Eastern Utilities Investing Corp. Class 'B' Stock."
Journal entries Nos. 2 and 3 of the trust, made on or about August 1, 1927, were as follows (see also Journal entry No. 1, supra ):
| -2- | ||
| INVESTMENTS (100,000 shares Class "B" stock of E.U.I. Corp.) | $100,000.00 | |
| ACCOUNTS PAYABLE | $100,000.00 | |
| To record the purchase of the former securities for $100,000 cash. | ||
| Note: The accounts receivable and accounts payable above were liquidated by checks passed on August 9th. | ||
| -3- | ||
| ACCOUNTS PAYABLE | $100,000.00 | |
| ACCOUNTS RECEIVABLE | $100,000.00 | |
| For liquidation of accounts payable and accounts receivable by checks passed on August 9th. |
1938 BTA LEXIS 828">*845 38 B.T.A. 778">*785 Although the books of the trust show that its account receivable due from the Associated Gas & Electric Properties and its account payable due to either the petitioner or the Associated Gas & Electric Securities Co. were offset against each other by checks passed on August 9, the check offsetting and liquidating these two accounts, through an oversight of the accountant for the Associated Gas & Electric System, was not actually issued until April 5, 1928, on which date the Associated Securities Corporation drew a check on the First National Bank of New York City for $100,000 payable to the order of its sole stockholder, the Associated Gas & Electric Properties. This was regarded solely as a loan to the latter by its wholly owned subsidiary. The Associated Gas & Electric Properties endorsed the check, payable to the order of petitioner. This direct endorsement to petitioner was done with the intention of liquidating the $100,000 which the Associated Gas & Electric Properties owed the trust on open account for the 1,000 shares of no par value common stock of the trust purchased by the Associated Gas & Electric Properties on or about August 1, 1927, and with the intention1938 BTA LEXIS 828">*846 of also liquidating the $100,000 which the trust owed either the petitioner or Associated Gas & Electric Securities Co. on open account for the 100,000 shares of class B voting common stock of petitioner purchased by the trust on or about August 1, 1927. Petitioner endorsed the check, payable to the order of the Associated Gas & Electric Securities Co., which in turn deposited it in the Chase National Bank of New York City. The latter received payment through the New York Clearing House on April 10, 1928.
The certificate representing the 100,000 shares of class B voting common stock of petitioner was, during the period involved in this proceeding, in the name of Daly & Co., as nominees of an undisclosed principal, deposited in vault No. 434 of the Columbia Safe Deposit Co. No dividends were declared or paid upon the class B stock of the petitioner during the years 1927 and 1928.
On November 19, 1928, the trust extended the option contained in the July 25, 1927, contract, referred to above, to cover any additional shares of the class B stock of the petitioner which the trust might purchase at $5 per share. This extension was approved by votes of the trustees of the trust adopted1938 BTA LEXIS 828">*847 on November 20, 1928. No shares of class B stock of petitioner, in addition to the 100,000 shares hereinbefore referred to, were issued until after December 31, 1928.
38 B.T.A. 778">*786 The Associated Utilities Investing Corporation, the name of which was changed some time between March 1929 and March 1932, to Associated Gas & Electric Corporation, was a Delaware corporation and, except for some debentures owned by the public, was a wholly owned subsidiary of the Associated Co.
During March 1929 the books of the trust record a purchase from petitioner on open account of 400,000 additional shares of class B voting common stock at $5 per share. As a result of this purchase the trust's investment account was debited with the 400,000 shares at $2,000,000, and petitioner was given a credit of a like amount. At or about the same time the Associated Co., for the account of the trust, made payment to petitioner through open account for the 400,000 shares purchased by the trust from petitioner at $5 per share. As a result of this payment the trust on its books charged or debited petitioner's account with $2,000,000 and credited the Associated Co. with a like amount. During June 1929 this1938 BTA LEXIS 828">*848 credit of $2,000,000 on the books of the trust to the Associated Co. was transferred to the Associated Utilities Investing Corporation, the name of which, as above stated, was later changed to Associated Gas & Electric Corporation.
In March 1932 the following journal entry was made on the books of the trust:
| Debit | Credit | |
| ASSOCIATED GAS AND ELECTRIC CORP. DEL. INVESTMENTS | $2,100,000.00 | |
| X Eastern Utilities Investing Corp. Common Class "B" (500,000 Shares) | $2,100,000.00 | |
| To charge Associated Gas and Electric Corp.Del. for the above securities transferred to them as of March 31, 1932. | ||
| X Ctfs. #1/2 | ||
| As per resolution adopted at a meeting of the Trustees held on May 3, 1932. |
The resolution referred to in the above entry, which was adopted at a meeting of a majority of the trustees of the trust held on May 3, 1932, is as follows:
VOTED that the acition of the officers in arranging for the sale as of March 31, 1932 to Associated Gas and Electric Corporation of 500,000 shares of Class B Common Stock of Eastern Utilities Investing Corporation for the consideration of $2,100,000.00, be and the same is hereby ratified, approved and confirmed.
As1938 BTA LEXIS 828">*849 a result of the above sale the Associated Gas & Electric Corporation owed the trust $100,000 instead of the trust owing the Associated Gas & Electric Corporation $2,000,000.
On June 13, 1932, the Associated Gas & Electric Corporation drew a cashier's draft for $100,000 on the Guaranty Trust Co. of New 38 B.T.A. 778">*787 York in favor of the trust. On the same day the $100,000 in cash was received by the trust, and was distributed by the trust in liquidation to its sole stockholder, the Associated Gas & Electric Properties, which in turn transferred the $100,000 in cash to its wholly owned subsidiary, the Associated Securities Corporation, in liquidation of the advance of $100,000 made by that subsidiary to it on April 5, 1928.
On May 18, 1932, Day & Co. delivered to the trustees of the trust an instrument reading as follows:
The undersigned, holder of all the outstanding shares of Eastern Utilities Investing Trust, constituted under Declaration of Trust, dated July 14, 1927, hereby consents to the termination of said Eastern Utilities Investing Trust and for that purpose delivers herewith for cancellation certificate No. C2 for 1,000 common shares, being all the outstanding shares1938 BTA LEXIS 828">*850 of said Eastern Utilities Investing Trust, registered in the name of and bearing the endorsement of the undersigned.
On May 19, 1932, the three trustees, Greene, cheney, and Hopson, terminated the trust by means of a signed instrument reading as follows:
The undersigned, Trustees of Eastern Utilities Investing Trust, constituted under a Declaration of Trust dated July 14, 1927, having received the consent of the holders of all of the outstanding shares of said Eastern Utilities Investing Trust as required under section 38 of said Declaration of Trust and having received for cancellation the certificate representing all of said issued and outstanding shares, hereby terminate said Trust this 19th day of May, 1932.
The proceedings for reorganization of petitioner under section 77 B of the Bankruptcy Act, as amended, referred to in our preliminary statement, are still pending. On January 10, 1938, the United States Attorney for the District of Delaware filed as a part of such proceedings for reorganization a "Petition for examination of designated persons under Section 21(a) of the Bankruptcy Act." In this petition for examination of designated persons, which was sworn to before1938 BTA LEXIS 828">*851 a notary public, the United States Attorney alleged on information and belief in part as follows:
6. That under an Indenture dated March 15, 1929, the Debtor (Eastern UtilitiesInvestigating Corporation) issued $35,000,000.00 5% debentures due in 1954 * * *; that the prospectus upon which the debentures were advertised and sold contained statements * * *.
7. That said prospectus, although indicating wide diversification of investments, failed to state that * * *;
That said prospectus further failed to state that the Debtor's substantial investment in the Class A common stock of its parent company, Associated Gas and Electric Company, represented stock * * *. [Italics supplied.]
During the period August 1, 1927, to December 31, 1928, the 100,000 shares of petitioner's class B voting common stock were owned by a separate and distinct legal entity, the Eastern Utilities Investing 38 B.T.A. 778">*788 Trust. During the same period the 1,000 shares of no par value common stock of the trust were owned by the Associated Gas & Electric Properties.
During the years 1927 and 1928, petitioner was included as an affiliate of the Associated Gas & Electric Properties in a consolidated1938 BTA LEXIS 828">*852 corporation income tax return filed by the Associated Gas & Electric Properties, as parent, which return also included group II companies as affiliates. The respondent determined that petitioner was neither affiliated with group I nor group II.
OPINION.
BLACK: The sole issue in this proceeding is whether petitioner was affiliated with the Associated Gas & Electric Co. (generally referred to in this report as the Associated Co.) for the period August 1, 1927, to December 31, 1928. The applicable statutes are section 240(d) of the Revenue Act of 1926 and section 142(c) of the Revenue Act of 1928. The pertinent provisions of these sections are substantially identical. Those of the 1928 Act provide:
(c) Definition of affiliation. - For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subsection the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.
1938 BTA LEXIS 828">*853 The ownership referred to in the applicable statutes pertaining to affiliation means beneficial ownership. Handy & Harman v. Burnet,284 U.S. 136">284 U.S. 136.
The parties are in agreement that the question of affiliation in this proceeding is narrowed to a determination of the beneficial ownership of the 100,000 shares of petitioner's class B voting common stock during the period August 1, 1927, to December 31, 1928. If this beneficial ownership was in the Associated Co. or its wholly owned subsidiary, the Associated Gas & Electric Securities Co., respondent concedes our decision must be for the petitioner; otherwise, petitioner concedes it must be for the respondent.
Petitioner, in support of its contention that its class B stock was during the period in question beneficially owned by the Associated Co. or one of its affiliates, relies upon six points, namely, (1) that the issue before us has in effect been admitted by the respondent by reason of the fact that in the proceedings for reorganization of petitioner under section 77 B of the Bankruptcy Act, now pending in the United States District Court for the District of Delaware, the United States Attorney in a petition1938 BTA LEXIS 828">*854 for examination of designated persons, referred to the Associated Co. as petitioner's "parent company" 38 B.T.A. 778">*789 during the year 1929; (2) that during the period involved the Associated Co. or one of its determined affiliates had legal title to petitioner's class B stock; (3) that if the trust had any title to petitioner's class B stock, it held such title only as an agent or nominee of the Associated Co.; (4) that, by virtue of the option contract of July 25, 1927, as construed by the contracting parties, the record transfer to the trust of petitioner's class B stock was not a sale, but at most a transfer in trust; (5) that by virtue of oral agreements and understandings between the parties involved, the Associated Co. was the beneficial owner of petitioner's class B stock; and (6) that the purpose of the revenue acts, and particularly the provisions thereof relating to consolidated returns, can be carried out only by permitting the consolidation of petitioner with the Associated Co. We shall consider these points in their regular order.
Point (1). - Petitioner contends that the sworn statement made by the United States Attorney for the District of Delaware in the petition1938 BTA LEXIS 828">*855 for examination of designated persons filed in the proceedings for reorganization of petitioner, pursuant to section 77 B of the Bankruptcy Act, as amended, now pending in the United States District Court for the District of Delaware, that a certain prospectus issued by petitioner in 1929 failed to state that petitioner's substantial investment in the "stock of its parent company, Associated Gas and Electric Company * * *" has the effect of an admission on the part of the respondent in the instant proceeding that petitioner was affiliated with the Associated Co. as the term "affiliated" is used in the applicable statutes, sections 240(d) and 142(c), supra. The basis of this contention is that, where corporations are deemed affiliated within the applicable revenue statute, it is customary to refer to the corporation which owns the required percentage of the stock of another or others as the parent corporation. In fact, Congress, in providing for consolidated returns for 1929 and subsequent years, in section 141(d) of the Revenue Act of 1928, used the term "a common parent corporation * * *." Petitioner argues therefore that, when the United States Attorney for the District of Delaware1938 BTA LEXIS 828">*856 referred to the Associated Co. as petitioner's "parent company", such allegation under oath had the same effect as if counsel for the respondent in the instant proceeding had admitted that the two corporations were affiliated, since, as contended by petitioner, the United States Attorney and counsel for respondent are both in effect representatives of the United States of America. Assuming without deciding that the United States Attorney for the District of Delaware could, in another different proceeding and in the manner alleged by petitioner, bind the United States on some issue involved in an entirely separate proceeding such as we now have before us, we do not think he did so in the present instance.
38 B.T.A. 778">*790 Without discussing all the arguments made pro and con by the parties on this point, we deem it sufficient to say that the term "parent company" is by no means synonymous with the term "affiliated" as used in the applicable statutes. Frequently in cases involving the question of affiliation one of two corporations will for convenience be referred to as the "parent company" and yet the two corporations will be held not affiliated. In 1938 BTA LEXIS 828">*857 Commissioner v. Terre Haute Electric Co., 57 Fed.(2d) 697; certiorari denied, 292 U.S. 624">292 U.S. 624, the Circuit Court's opinion opened with the question: "Were the taxpayer, the Terre Haute Electric Company, and its parent company, the Terre Haute, Indianapolis and Eastern Traction Company, Affiliated within in the meaning of that word as used in the Revenue Act?" [Italics supplied.] The two companies in that case were held not affiliated, although the one company was the parent company of the other. Crowell's Dictionary of Business and Finance (Rev. Ed.), defines "parent company" as follows:
Parent Company. One of which other companies derive authority. A company owning a patent may grant to other companies the right to use the patent. The parent company generally owns a controlling interest in a company which operates under authority from it, but this is not necessarily the case. This term is sometimes used for Holding Company or Controlling Company. * * *
In the large field of corporation law the term "parent company" is often used in referring to a corporation owning a bare majority of the stock of another or others. See Fletcher1938 BTA LEXIS 828">*858 Cyclopedia Corporations (Permanent Ed.), vol. 6, secs. 2821 to 2844. But a bare majority is not sufficient to permit affiliation under the revenue acts. The term "parent company" is not defined in the applicable statutes now under consideration. As previously shown, it is a rather loose term, lacking in any precise definition. During the period in question petitioner had outstanding several classes of preferred stock, substantially all of which was owned by the Associated Co. We think this preferred stock could also be considered in determining whether in a broad sense the Associated Co. was petitioner's parent company. Since the Associated Co. or one of its wholly owned subsidiaries owned 100 perecent of petitioner's class A common stock and substantially all of its preferred stock, it is apparent that it owned more than a majority of all the outstanding stock. But without the ownership of the required amount of the class B stock the two corporations would not be affiliated, although one might be referred to as the parent of the other. Therefore, it is our opinion that the allegation made by the United States Attorney that the Associated Co. was petitioner's parent company1938 BTA LEXIS 828">*859 does not in any way prove that petitioner was affiliated with the Associated Co. during the period in controversy. The petitioner's contention on this point is denied.
38 B.T.A. 778">*791 Point (2). - Petitioner's second point is that, since it was stipulated that the certificate representing the 100,000 shares of its class B stock was during the period involved in the name of Daly & Co., as nominees of an undisclosed principal, deposited in a vault leased by the Associated Co., and also in view of Hopson's testimony that the undisclosed principal of Daly & Co. was the Associated Co., the legal title to the shares was never transferred to the trust, but remained in the Associated Gas & Electric Securities Co., a wholly owned subsidiary of the Associated Co. Petitioner cites Fletcher Cyclopedia Corporations (Permanent Ed.), vol. 12, sec. 5484; Bank of Atchison County v. Durfee,118 Mo. 431">118 Mo. 431; 24 S.W. 133">24 S.W. 133, and Re Broomhall, Killough & Co., 47 Fed.(2d) 948, in support of the general rule that, in the absence of an express agreement to the contrary, there must be a delivery of some document representing shares of stock in order to constitute1938 BTA LEXIS 828">*860 a valid transfer. This is undoubtedly the general rule, but section 5484, supra, also states:
There may be a constructive delivery and acceptance, unaccompanied by a manual delivery or actual change of custody resulting from acts and conduct from dealing with stock, when there has been a change in the relation of the parties to it.
In De Nunzio v. De Nunzio,90 Conn. 342">90 Conn. 342; 97 A. 323, it was stated that "Both acceptance and receipt and therefore delivery may be inferred from the attendant circumstances." The attendant circumstances in the instant proceedings are set forth at length in our findings. We think they were of such a nature as to show a very decided intention on the part of the contracting parties to dispense with the manual delivery or actual change of custody of the certificate in question. The certificate during the entire period was in the "street" name of Daly & Co., a circumstance which was not at all uncommon in view of the option to repurchase contained in the contract of July 25, 1927, between the trust and the Associated Co. See Fletcher Cyclopedia Corporations (Permanent Ed.), vol. 19, sec. 8981, on stock in "street" 1938 BTA LEXIS 828">*861 names. Daly & Co. was the street name, or nominee partnership, for all the companies in the Associated Gas & Electric System, which included the trust and the Associated Co. and its wholly owned subsidiaries. Therefore, Daly & Co. was the trust's agent as well as the agent for the Associated Co., and, in view of the July 25, 1927, contract above referred to and the contemporaneous records made by the trust and the Associated Gas & Electric Securities Co., the conclusion, in our opinion, is inescapable that Daly & Co. held the certificate for the 100,000 shares of petitioner's class B voting common stock during the period August 1, 1927, to December 31, 1928, for the trust rather than the Associated Co. or its subsidiary, the Associated Gas & Electric Securities Co., as testified to by Hopson.
38 B.T.A. 778">*792 Petitioner also cites Stiver v. Commissioner, 90 Fed.(2d) 505, as being a case in which an alleged similar agreement was held to be an option rather than a sale. We do not, however, regard this case as being in point, as its facts are quite different from those here involved.
Points (3), (4), (5). - Under these points petitioner argues that if the1938 BTA LEXIS 828">*862 trust held any title to petitioner's class B stock, it held such title as an agent, nominee or trustee for the Associated Co., and that therefore the latter company was the beneficial owner of petitioner's class B stock. Petitioner cites eight court and Board decisions and also a Bureau ruling, to wit, G. C. M. 8982, C.B. X-1, p. 250, in support of the proposition that a corporation, as well as an individual, may hold technical title to property as a mere nominee, agent, or trustee. We do not question the soundness of such a view, but we fail to see wherein it is of any help to petitioner in the instant case. An examination of the 37-page declaration of trust shows that the trust was organized and had authority to engage in an unusually wide and diversified field of business activities. It issued to a party unaffiliated with the Associated Co. all of its stock for $100,000 in cash. It then entered into a written contract with the Associated Co. in which it agreed to purchase petitioner's 100,000 shares of class B voting common stock for a consideration of $100,000, and further agreed that the Associated Co. "shall have the option, at any time after the expiration1938 BTA LEXIS 828">*863 of five years and prior to the expiration of ten years" from the date of issuance to the trust "or its nominee" of petitioner's class B stock, to purchase such stock upon the terms set out in our findings. The Associated Gas & Electric Securities Co. then purchased from petitioner all of its class A and class B common stock for $100,000. The stock was issued in the name of Daly & Co. and placed in a vault leased by the Associated Co. On the books of Associated Gas & Electric Securities Co. the trust was charged with $100,000 "To record sale as at July 31, 1927, of 100,000 shares Eastern Utilities Investing Corp. Class 'B' Stock." On the books of the trust the investment account was charged with 100,000 shares of class B stock of the Eastern Utilities Investing Corporation, "To record the purchase of the former securities for $100,000 cash." The trust later used the $100,000 which it received for the issuance of its own stock to pay for the 100,000 shares of petitioner's class B stock, which $100,000 was received by the Associated Gas & Electric Securities Co. on or about April 10, 1928.
Notwithstanding all of the above recorded corporate and trust evidence of what the transactions1938 BTA LEXIS 828">*864 were, petitioner now offers the testimony of Hopson, who was the financial vice president of the Associated Co., an officer of petitioner, and one of the trustees of the Associated Gas & Electric Properties, to prove that the transactions 38 B.T.A. 778">*793 were something different from that which they purported to be. But we are not convinced by this testimony. The trust was more than a mere agency or conduit or nominee of the Associated Co. Its business transactions were real and not mere bookkeeping entries and must be given their usual legal effect. Cf. Consumers Construction Co. (Del.),35 B.T.A. 966">35 B.T.A. 966. In the latter case pretty much the same sort of a contention was made as is made in the instant case, but we denied it. The main difference in that case from the instant case is that in the Consumers Construction Co. case the issue was as to income, whereas here the issue is as to affiliation, but we do not think this difference serves to distinguish the two cases, as petitioner argues in its brief. Our decision was affirmed by the Second Circuit in 1938 BTA LEXIS 828">*865 Consumers Construction Co. v. Commissioner, 94 Fed.(2d) 731.
Income taxes are levied with respect to annual periods, and each annual period must necessarily stand by itself. Burnet v. Sanford & Brooks Co.,282 U.S. 359">282 U.S. 359; Burnet v. Thompson Oil & Gas Co.,283 U.S. 301">283 U.S. 301; Woolford Realty Co. v. Rose,286 U.S. 319">286 U.S. 319; Helvering v. Morgan's Inc.,293 U.S. 121">293 U.S. 121; MacMillan Co.,4 B.T.A. 251">4 B.T.A. 251. We are concerned here with the situation as it existed during the taxable years 1927 and 1928 and not as it existed in 1932. During the period from August 1, 1927, to December 31, 1928, it is our opinion, and we have so found as a fact, that the beneficial ownership of petitioner's 100,000 shares of class B voting common stock was in the trust and not in the Associated Co. or any of its subsidiaries. To otherwise hold would be to completely disregard corporate and trust records which were made contemporaneous with the transactions involved and to rely upon oral testimony which is not convincing. It follows therefore that the trust beneficially owned the title to the stock for itself1938 BTA LEXIS 828">*866 and not as nominee, agent or trustee for the Associated Co. or any of its subsidiaries. The cases of Dome Co.,26 B.T.A. 967">26 B.T.A. 967, and Mark A. Mayer,36 B.T.A. 117">36 B.T.A. 117, specifically relied upon by petitioner, are distinguishable upon their facts.
As we said in Savoy Oil Co.,1 B.T.A. 230">1 B.T.A. 230:
The taxpayer can not convert a sale into a conditional sale, a trust, a joint adventure, or an advance merely by its board of directors deciding that they did not consider it a sale. The taxpayer did not produce the minutes of any meeting of its stockholders of directors as evidence of its contentions, it did not produce any evidence of a collateral agreement between it and the Burke-Hoffield Oil Co., showing that the sale evidenced by the agreement of May 1, 1917, was not a sale but was something else; instead, it chose to rely on parol evidence of conclusions drawn, after the lapse of seven years, by officers of the corporation.
In the absence of convincing evidence that the transaction evidenced by the agreement of May 1, 1917, was not what it purports to be, viz., a sale, this 38 B.T.A. 778">*794 Board can not accept any of the contentions advanced by1938 BTA LEXIS 828">*867 the taxpayer purporting to show error on the part of the Commissioner in determining the tax.
Before passing these points we shall refer briefly to Lavenstein Corporation v. Commissioner, 25 Fed.(2d) 375, cited by petitioner as having a controlling effect on the instant proceeding. That case involved the question whether the petitioner there was affiliated with the Lavenstein Brothers Co. under section 240(b) of the Revenue Act of 1918, and the question turned on whether the three Lavenstein brothers, who owned all the stock of the petitioner in that case, also owned substantially all the stock of the other corporation. The facts showed that the brothers had transferred all the stock, except two shares, of the Lavenstein Brothers Co. to a creditors' committee "as security for the claims of creditors * * *." The Fourth Circuit, in allowing affiliation, held that the brothers, however, remained the owners of the stock so transferred because "the Lavensteins could have had the stock transferred to them at any time, by merely paying the claims of creditors * * *." In the instant proceeding the Associated Co. did not have the right to reacquire petitioner's class1938 BTA LEXIS 828">*868 B stock during the taxable years in question and not until after the expiration of five years from the date of issuance to the trust, nor was the class B stock up as security to secure the payment of any loan. Therefore the Lavenstein case, in our opinion, does not control the question here involved.
Point (6). - Under this point petitioner's main propositions are that facts rather than bookkeeping entries control; and that our decision in United National Corporation,33 B.T.A. 790">33 B.T.A. 790, is practically on all fours with petitioner's contentions in the instant proceeding and that therefore the Board should reach the same conclusion here as it did there.
"Bookkeeping entries, though in some circumstances of evidential value, are not determinative of tax liability." Helvering v. Midland Mutual Life Insurance Co.,300 U.S. 216">300 U.S. 216. But when the bookkeeping entries actually record the true facts, the rule thus emphasized by petitioner is not applicable. We think this is the situation in the instant proceeding. We have carefully considered all the evidence in the case and are unable to find that the intention of the parties interested in petitioner's1938 BTA LEXIS 828">*869 class B stock was other than that which was so clearly expressed in the written agreement between the Associated Co. and the trust on July 25, 1927. This agreement provided, among other things (see paragraph 3 of the agreement set out in our findings), that "until and unless said option shall be exercised," the trust "shall be and continue to remain the absolute owner" of the shares in question. There were urgent business reasons why this should be so.
38 B.T.A. 778">*795 Fred S. Burroughs testified as a witness for petitioner. He was a member of the board of directors of the Associated Co. and was the representative on the board of Harris, Forbes & Co., bankers for the Associated Co. He testified that in 1927, when Harris, Forbes & Co. agreed to float $35,000,000 debentures for petitioner, the bankers did not want the control of petitioner to appear in the Associated Co. This testimony and other testimony in the record shows to our satisfaction that it was the purpose of all the parties to the transaction to have the trust acquire actual ownership of petitioner's class B stock, with the option that the Associated Co. or one of its subsidiaries could, after five years, reacquire the1938 BTA LEXIS 828">*870 stock, and that what was done was to accomplish that purpose. Now, after the lapse of several years, petitioner asks us to find that what was done, as shown by the corporate and trust records, was a sham and subterfuge and that from the beginning it was the intention that the beneficial ownership of petitioner's class B stock should not be in the trust, but should be in the Associated Co. or one of its subsidiaries. We are asked to do this largely on the strength of the testimony of the witnesses Hopson and Burroughs. We think we may not treat trust and corporate records so lightly, especially when there is ample evidence in the record to corroborate the fact that these records were meant to record the transactions as they really were.
The United National Corporation case is easily distinguishable from the instant proceeding. There the alleged sale was made to a subsidiary of the alleged seller. Here the trust was not a subsidiary of the Associated Co. But of much more importance is the distinguishable fact that in the United National Corporation case the alleged seller had an option to repurchase at any time, whereas in the instant proceeding the Associated Co. had1938 BTA LEXIS 828">*871 no option to repurchase whatever during the taxable years in question. Furthermore, the evidence in the United National Corporation case was clear and convincing that the whole transaction was intended as a loan, with the stock merely being transferred as collateral security therefor. Here the convincing evidence is that of an outright sale to the trust of 100,000 shares class B stock of petitioner, with an option to repurchase after a period of five years.
It is our conclusion, and we have so found as a fact, that during the period August 1, 1927, to December 31, 1928, petitioner's 100,000 shares of class B voting common stock were owned by the Eastern Utilities Investing Trust. It follows, therefore, that during the taxable years 1927 and 1928, petitioner was not affiliated with the Associated Gas & Electric Co. and its affiliated corporations and associations.
Reviewed by the Board.
Decision will be entered under Rule 50.