*1913 Held that the petitioner and J. A. Folger & Company, a California corporation, were affiliated corporations within section 240 of the Acts of 1918 and 1921, during the periods involved.
*211 These consolidated appeals challenge the acts of the respondent in asserting income-tax deficiencies against the petitioners for the three taxable periods ended November 30, 1921, 1922, and 1923. The deficiencies asserted against J. A. Folger & Company are $106,474.09, $32,740.79, and $2,145.78; and against the Folger Estate Company, $1,481.10, $1,681.79, and $1,698.73. As grounds for relief the petitioners allege that the respondent committed error in (1) holding that they were not, in the taxable years, affiliated with J. A. Folger & Company, a California corporation which, in and for these periods, included their income in a consolidated return and paid the taxes due, and (2) in proposing to make the assessments in question after the running of the statute of limitations appertaining thereto. As*1914 alternate grounds for relief, in event affiliations are denied, petitioner J. A. Folger & Company contends that on account of liberal purchasing contracts it had with the parent corporation, which enabled it to purchase and resell that company's products, with nominal outlay of capital, abnormalities in income were created which entitles it to special assessment under section 327(d) of the Act of 1921; and both petitioners contend that, in any event, they are entitled to credits against the alleged tax on account of payment made thereon through the parent company. The several dockets have been consolidated for hearing.
FINDINGS OF FACT.
The petitioner, J. A. Folger & Company, hereinafter sometimes called the Nevada corporation, was organized in 1908 to act as a distributing agent for J. A. Folger & Company of San Francisco, Calif., hereinafter sometimes called the parent corporation. The petitioner, Folger Estate Company, a California corporation, was organized in 1904 by interests closely affiliated with the parent corporation. In the taxable periods, the outstanding common stock of these three corporations was held as shown in the following table:
| Stockholders | J. A. Fogler & | J. A. Folger & | Folger Estate |
| Co. (Calif.) | Co. (Nev.) | Company common | |
| common stock | common stock | stock | |
| Shares | Shares | Shares | |
| C. E. L. Folger | 500 | 788 | 2,004 1/3 |
| Elizabeth M. Folger | 390 | 788 | 2,004 1/3 |
| E. F. Folger | 9 | 1 | |
| E. B. F. Tibbitts | 710 | 2,004 1/3 | |
| Folger Estate Co | 1,340 | ||
| J. A. Folger & Co. (Calif.) | 3,080 | ||
| Others | 1 | 3 | 2 |
| 2,950 | 4,660 | 6,015 | |
| Emma F. Platt | 100 | 265 | |
| A. K. Munson | 250 | ||
| R. R. Vail | 175 | ||
| F. P. Atha | 900 | ||
| Total | 3,300 | 6,000 | 6,015 |
*1915 *212 In the same periods the parent corporation had outstanding preferred stock, held as follows:
| Stockholders | Nov. 30, 1921 | Nov. 30, 1922 | Nov. 30, 1923 |
| Shares | Shares | Shares | |
| Folger Estate Co | 300 | 300 | 300 |
| John M. Cunningham | 200 | 200 | 200 |
| E. B. F. Tibbitts | 200 | 200 | 200 |
| C. E. L. Folger | 150 | 150 | 150 |
| Elizabeth M. Folger | 150 | 150 | 150 |
| In hands of public | 1,854 | 644 | None. |
| Total | 2,854 | 1,644 | 1,000 |
The relationship of these parties is as follows:
C. E. L. Folger - sister-in-law of president, E. R. Folger.Elizabeth M. Folger - Wife of president, E. R. Folger.
E. B. Tibbitts - sister of president, E. R. Folger.Emma F. Platt - Widow of a former pensioned employee of the Folger interests.
A. K. Munson - employee of Folger interests from 1880 until death in 1924.
R. R. Vail - employee of Folger interests from 1880 until retired on pension December 31, 1921.
E. P. Atha - vice president and general manager of the Nevada Company and employee of Folger interests since 1899.
John M. Cunningham - son of Mrs. E. L. Folger, under a prior marriage and employed by the California Company.
This preferred stock, *1916 under the California laws, had voting powers equal to common stock, but carried no rights of participation in the profits of the corporation in excess of 7 per cent, except in case of liquidation of the corporation, in which event, the holders were preferred to the extent of the par value, plus 2 1/2 per cent. It was all callable by the corporation at 102 1/2 per cent, plus accrued dividends, on any quarterly dividend date upon thirty days notice; and after the date fixed in such notice for such redemption, all rights of the holders, other than to receive the amounts then due, ceased, except in case the corporation defaulted in providing money for redemption. At all times material here the parent corporation was financially able to redeem all of its outstanding preferred stock and to liquidate in cash all of its obligations incident thereto.
For the periods involved the parent corporation filed consolidated income-tax returns for itself and these petitioners, which attributed income to the latter companies as follows:
| Company | 1921 | 1922 | 1923 |
| J. A. Folger & Co | $280,414.98 | $232,528.03 | $220,377.14 |
| Folger Estate Co | 16,810.97 | 15,682.29 | 15,589.79 |
*213 *1917 The consolidated return for the fiscal year ended November 30, 1921, was filed February 16, 1922. Thereafter, on October 19, 1925, the parent corporation and the Commissioner of Internal Revenue entered into an agreement in writing which waived the statutory time for making any assessment of income and war-profits tax due under any return made on behalf of that taxpayer for that period and extended it to December 31, 1926. On March 4, 1926, these petitioners, separately, executed waivers to the Commissioner of Internal Revenue extending the time for making any tax assessments against each of them in respect of the same period until December 31, 1926. On December 14, 1926, new waivers covering this period were executed by all three corporations and the Commissioner of Internal Revenue, which further extended the time for making tax assessments against each taxpayer to December 31, 1927. The deficiency notices for the fiscal year ended November 30, 1921, were mailed to the Folger Estate Company and J. A. Folger & Company on November 12, 1926, and July 20, 1927, respectively.
During the periods involved, E. R. Folger was president of these petitioners, as well as of the parent corporation. *1918 In their intercompany dealings, the parent company invoiced its products to the petitioner, E. R. Folger & Company, for sale and distribution in its territory at actual cost, plus 5 per cent, which price was from 7 per cent to 10 per cent below the open market price on like products. In addition to this preference in price which was worth not less than $20,000 per year to the agent on the goods distributed, the parent company extended to this petitioner an unlimited line of credit which enabled it to realize on its sales before paying for the goods.
For a number of years prior to 1919, the parent company had been a regular borrower of money from the Wells-Fargo Nevada National Bank of San Francisco, and in the latter part of that year was indebted to the bank in the sum of $600,000. This company was prosperous and in no way embarrassed by these loans, but its officers considered that it was not good business to have so large an indebtedness subject to call and, therefore, decided to liquidate the same by a preferred stock issue. Accordingly, on October 27 of that year, by proper corporate action, this corporation amended its charter so as to authorize the issuance of 4,000 shares*1919 of 7 per cent preferred stock having a par value of $100 each. This stock was issued on November 1 and November 3, following, and 1,000 shares were purchased by members of the Folger family. During the month of January, 1920, the corporation repurchased 50 of the shares of its preferred stock which had been sold to the public and, before the end of that fiscal period, additional lots, amounting to 406 shares in all. Further purchases and retirement of this stock were made by this *214 company, amounting in all to 2,594 shares before the end of the fiscal period of 1922. In 1923 none of this stock was in the hands of the public. During all of these periods, the entire issue of preferred stock was voted at all stockholders' meetings by E. R. Folger, president of the three companies, in virtue of proxies held by him from the owners.
OPINION.
LANSDON: First in importance of the issues presented is the petitioners' claim for affiliation with the parent company, which, if sustained, renders all other questions immaterial to this decision. We will, therefore, consider that issue first. The petitioners and the parent corporation are creatures of the Folger interests, which*1920 they were organized to serve and from which they derived their names. Except for two shares, all of the common stock of the Folger Estate Company was owned by C. E. L. Folger, Elizabeth M. Folger, and E. B. F. Tibbitts, who, among them, also owned more than 45 per cent (1,600 of the 3,300 outstanding shares) of the common stock of the parent company. These personal holdings, when added to 1,340 shares owned by their corporation (the Folger Estate Company), made these interests 90 per cent one and the same, in so far as the common stock was concerned. Two of these stockholders, between them, also owned 1,576 shares of the stock of the (petitioner) Nevada corporation, which, added to the 3,080 shares owned by the parent company, controlled as above shown, gave them 77.6 per cent control of that company. To these may be added the holdings of E. F. Folger of 9 shares in the parent corporation and one share in the Nevada corporation; also of Emma F. Platt, who owned 100 shares in the parent company and 265 shares in the Nevada corporation. The record shows but three stockholders in the entire group considered, who, during the period mentioned, held stock in less than two of these corporations*1921 at the same time; and even then the corporations were so linked together through cross holdings of each other's stock as to make them interdependent upon each other and their business success mutual. One of these stockholders was A. K. Munson, who began work for the Folger organization in 1880 and continued with its successors until his death in 1924. He owned 250 shares of the parent company's stock. Inasmuch as that company owned more than 50 per cent (3,080 out of 6,000 shares) of the Nevada corporation's stock; and, was itself 89.9 per cent owned by the Folger Estate Company and its stockholders, Munson's interests can not be regarded otherwise than as closely affiliated with those companies. The same may be said of R. R. Vail, who began work for the Folger interests in 1880 and continued until his retirement *215 on pension from the parent company, December 31, 1921. He owned 175 shares of the Nevada corporation's stock. The other of this trio was F. P. Atha, who began with J. A. Folger in 1899, and, upon organization of the Nevada corporation in 1908, was allocated 900 shares of that company's stock and made its vice president and general manager. It seems clear, *1922 unless otherwise affected by the preferred stock of the parent company, as wel shall later discuss, that both ownership and control of substantially all of the stock of these three corporations were, during the periods involved, so interlocked and unified as to make them an affiliated group within the law, as heretofore construed by this Board and the courts. Midland Refining Co. (No. 1),2 B.T.A. 292">2 B.T.A. 292; Abattoir Realty Co.,3 B.T.A. 415">3 B.T.A. 415; Shillito Realty Co.,8 B.T.A. 665">8 B.T.A. 665; affd., 39 Fed.(2d) 830; D. S. Brandon,10 B.T.A. 1118">10 B.T.A. 1118; Boker Cutlery & Hardware Co.,12 B.T.A. 1405">12 B.T.A. 1405; Metasap Chemical Co.,12 B.T.A. 1402">12 B.T.A. 1402; Richfield Oil Co.,13 B.T.A. 1050">13 B.T.A. 1050; affd., 42 Fed.(2d) 360; Great Lakes Hotel Co. v. Commissioner of Internal Revenue, 30 Fed.(2d) 1; United States v. Cleveland, Painsville & Eastern Ry. Co., 42 Fed.(2d) 413.
The respondent further contends that during these periods a substantial portion of the parent company's preferred stock was owned by interests outside of the affiliated group and that inasmuch*1923 as such stock had equal voting rights with the common stock in the control of that company, such adverse holdings - as he terms them - changed the situation in reference to ownership and control otherwise established through the common stock alone. In reference to this contention, it is obvious that the respondent has overappraised the control that was or could be exercised over all of the stock of this corporation through the outstanding preferred stock. This entire issue was only 2,854 shares, which at no time was more than 1,854 owned by parties outside of the related group. This so-called adverse holding represented at most but 64.96 per cent of the preferred stock, and only 30 per cent of the total voting common plus preferred stock of the company in that year. In 1922 the preferred stock held by outside interests had been reduced through repurchase and retirement to 644 shares; this was 39.17 per cent of the then outstanding preferred stock and slightly less than 14 per cent of the whole voting stock. In 1923, the last of these taxable periods, no preferred stock was owned outside of the Folger interests. Aside from this lack of power in the preferred stock to interfere*1924 with the control of the common, the record here shows that the right to vote it was voluntarily delegated by its owners to the president of the parent corporation, who voted it at all stockholders' meetings. This control was further reinforced and made secure by the terms of the stock certificates, which made all preferred stock subject to *216 call at the pleasure of the corporation at any quarterly dividend period, upon thirty days notice. Such domination, we have held, constitutes control within the statute. Cf. Detour Dock Co.,22 B.T.A. 925">22 B.T.A. 925, and cases hereinabove cited. In Bank of Italy,13 B.T.A. 1226">13 B.T.A. 1226, this Board allowed affiliation in a case where the dominant corporation owned 85 per cent of all of the stock of another; but was without any control, contractural or otherwise, over the remaining 15 per cent. Our decision in that case was reversed by the United States Circuit Court of Appeals for the Ninth Circuit in a decision rendered on January 26, 1931, which pointed out such lack of control and distinguished it from the cases cited wherein either through options to purchase or proxies, or both, as in this case, the affiliated*1925 interests controlled the minority stock. The control lacking in the Bank of Italy case, supra, we think, is abundantly established here and it is obvious that the situation meets the requirements of the statute. Shillito Realty Co., supra;Great Lakes Hotel Co. v. Commissioner of Internal Revenue, supra;United States v. Cleveland, Painsville & Eastern Ry. Co., supra; and Commissioner of Internal Revenue v. Richfield Oil Co., supra.
We hold, therefore, that these petitioners and the J. A. Folger Company of California were affiliated corporations for Federal tax purposes in and during the taxable periods involved and that their contentions in such respect must be sustained.
In view of our findings on this first issue, the remaining assignments of error need not be considered.
Reviewed by the Board.
Decision will be entered under Rule 50.
MORRIS, SMITH, and MURDOCK dissent on the question of affiliation.