*1142 1. Held, that the petitioners were not affiliated with J. A. Folger & Company, a California corporation, at any time in either of the taxable years.
2. The tax liability of each of the petitioners for the year 1921 was extinguished by the statute of limitations prior to the issue of the notices asserting deficiencies for that year.
3. In the determination of their true deficiencies for the several taxable years the petitioners are entitled to credit for each year in the several amounts which they paid to their parent corporation in discharge of their share of the taxes shown on the consolidated returns for each of such years.
4. Special assessment denied.
*1 The respondent asserted deficiencies against J. A. Folger & Company, a Nevada corporation, for the fiscal years ended November 30, 1921, 1922, and 1923, in the respective amounts of $106,474.09, $32,740.79, and $2,145.78, and against the Folger Estate Company for $1,481.10, $1,681.79, and $1,698.72. The several proceedings*1143 were consolidated for hearing. The issues pleaded, as summarized in petitioners' brief, are:
(1) Whether the respondent erred in ruling that the petitioners were not affiliated during the taxable years with J. A. Folger and Company, a California corporation which is not a party to this proceeding.
(2) In the alternative, and only in the event the Board should deny petitioners' claims for affiliation, the Board will have for decision the questions whether the respondent erred:
(a) In failing to hold that deficiencies for the fiscal year 1921 were barred by the statute of limitations;
*2 (b) In failing to give petitioners proper credit for taxes paid by them through their parent company, J. A. Folger and Company (California) with whom they filed a consolidated return for each of the years under review;
(c) In failing to grant special assessment to petitioner J. A. Folger (Nevada) for the fiscal year 1921 and for the month of December, 1921.
FINDINGS OF FACT.
The petitioner, J. A. Folger & Company, hereinafter sometimes called the Nevada Company, was organized in 1908 to act as a distributing agent for J. A. Folger & Company of San Francisco, California, hereinafter*1144 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 corporations was held as shown in the following table:
| Shares of common stock held | |||
| Stockholders | J. A. Folger & Co. (California) | J. A. Folger & Co. (Nevada) | Folger Estate Co. |
| C. E. L. Folger | 500 | 788 | 2,004 1/3 |
| Elizabeth M. Folger | 390 | 788 | 2,004 1/3 |
| E. R. Folger | 9 | 1 | |
| E. B. F. Tibbitts | 710 | 2,004 1/3 | |
| Folger Estate Co | 1,340 | ||
| J. A. Folger & Co. (California) | 3,080 | ||
| Others | 1 | 3 | 2 |
| Total | 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 |
In the same periods the parent corporation had outstanding preferred stock, held as follows:
| Shares of preferred stock held | |||
| Stockholders | Nov. 30, 1921 | Nov. 30, 1922 | Nov. 30, 1923 |
| 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 |
*1145 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. *3 Folger; Emma F. Platt, widow of a former pensioned employee of the Folger interests; A. K. Munson, employee of the Folger interests from 1880 until death in 1924; R. R. Vail, employee of the 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 the Folger interests since 1899; John M. Cunningham, son of Mrs. C. E. L. Folger, under a prior marriage and employed by the California Company.
This preferred stock, 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 30 days notice; and after the date*1146 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:
| 1921 | 1922 | 1923 | |
| J. A. Folger & Company | $280,414.98 | $232,528.03 | $220,377.14 |
| Folger Estate Company | 16,810.97 | 15,682.29 | 15,589.79 |
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 1921 and extended it to December 31, 1926. On March 4, 1926, these petitioners, separately, *1147 executed waivers to the Commissioner of Internal Revenue extending the time for making tax assessments against each of them in respect to 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 *4 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.
The consolidated return for 1921 disclosed a tax liability of $82,537.67, payable on consolidated net income of $386,328.73 made up as follows:
| J. A. Folger & Company (California) | $89,102.77 |
| J. A. Folger & Company (Nevada) | 280,414.99 |
| Folger Estate Company | 16,810.97 |
The entire amount of tax shown on such return was paid in the year 1922 by the parent corporation and in the same year the petitioner, J. A. Folger & Company (Nevada) paid to such parent corporation the amount of $73,637.67 on account of its proportion of the tax shown on the return.
*1148 The consolidated return for 1922 disclosed a tax liability of $31,482.26, payable on a net income of $248,142.80 made up as follows:
| J. A. Folger & Company (California) (loss) | $67.52 |
| J. A. Folger & Company (Nevada) | 232,528.03 |
| Folger Estate Company | 15,682.29 |
The entire amount of tax shown on such return was paid by the parent corporation in 1923. In the same year the petitioner, J. A. Folger & Company (Nevada) and the Folger Estate Company paid to such parent corporation the respective amounts of $30,000 and $1,482.86 on account of their tax liabilities for the fiscal year 1922.
The consolidated return for 1923 disclosed a tax liability of $27,100.08 on a consolidated net income of $216,800.66, made up as follows:
| J. A. Folger & Company (California) (loss) | $19,166.27 |
| J. A. Folger & Company (Nevada) | 220,377.14 |
| Folger Estate Company | 15,589.79 |
The entire amount of tax shown on such return was paid by the parent corporation in 1924, except that portion which was satisfied by credit of an overassessment of $3,863.65 which was paid May 21, 1926. In the same year J. A. Folger & Company (Nevada) and the Folger Estate Company paid the parent*1149 company the amounts of $27,547.14 and $1,948.72 on account of tax liability for 1923.
Each of the petitioners filed Form 1122 for each of the taxable periods here involved, and gave the name and address of the parent company as J. A. Folger and Company, 101 Howard Street, San Francisco, California. In the space provided for question (7) for the statement of, "The amount of income and profits taxes for the taxable period to be assessed against the subsidiary or affiliated corporation *5 making this return," the petitioners in each instance inserted the word "none" after the dollar sign.
The deficiency notices at Docket Nos. 22212, 30721 and 35147 do not indicate that the respondent, in computing the deficiencies, gave the petitioners credit for any portion of the consolidated tax which they paid as above set forth. The deficiency notice at Docket 35147, Folger Estate Company, shows that in computing the deficiency of $1,698.72 for 1923 the respondent gave no credit for the amount paid by this company to the parent corporation in 1924 on account of its tax liability for 1923 or any other year.
During the periods involved, E. R. Folger was president of these petitioners, *1150 as well as of the parent corporation. In their intercompany dealings, the parent company invoiced its products to the petitioner, J. A. 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*1151 as to authorize the issuance of 4,000 shares 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 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.
*6 OPINION.
LANSDON: Each of the petitioners here claims that it was affiliated with the parent corporation for Federal income tax purposes in each of the taxable years. The parent corporation and the Nevada Company had common stock outstanding in the several taxable years in the respective amounts*1152 of 3,300 and 6,000 shares. Five persons and corporations which may be regarded as the Folger family interests owned stock in the two corporations in the respective amounts of 2,950 and 4,660 shares or 89 2/3 and 77 2/3 per cent of the entire issues. Four persons not members of the Folger family owned respectively 350 and 1,340 shares of such corporations. Emma F. Platt owned 100 and 265 shares, respectively; A. K. Munson owned 250 shares of the parent corporation and none of the Nevada company; R. R. Vail, and F. P. Atha owned respectively 175 and 900 shares of the Nevada company and none of the parent corporation. The record contains no evidence of any effective legal control of the minority stock by the Folger family interests. Since such interests, even if they were the same within the meaning of the law owned only approximately 90 per cent and 78 per cent, respectively, of the stock of the parent corporation and the Nevada company, they fall short, as now determined by the courts, of ownership of substantially all the stock of those corporations. As they had no legal control over the minority stock holdings, we think it follows that the parent corporation and the Nevada company*1153 were not affiliated in any of the taxable years. .
The Folger family interests owned all but two of the shares of the Folger Estate Company and all but 351 shares, or slightly under 90 per cent, of the stock of the parent corporation. There is no evidence that the minority holdings in the parent corporation were subject to any effective legal control by the majority, and, as the stock of the parent corporation falls short of substantially all of the ownership, we think it follows, on the authority above cited, that the parent corporation and the Folger Estate Company were not affiliated in the taxable years.
Inasmuch as the common stock situation in the taxable years deprived the petitioners of the right to file consolidated returns as subsidiary corporations of the parent corporation it is not necessary to discuss the effect, if any, of the diverse holdings of the preferred stock of that concern.
The petitioners also contend that the statute of limitations had run against their deficiencies for 1921, if any, prior to the date of the respective deficiency notices. The consolidated return for the fiscal *7 *1154 years ended November 30, 1921, was filed on February 16, 1922. It was a completed return and stated separately the income and invested capital of each corporation. Since the record discloses that consolidated returns filed by the parent corporation had been accepted and tax liability thereunder settled in prior years, it can not be said that such return was unauthorized at the date of its filing. In our opinion it was sufficient to start the statute of limitations running against the tax liability, if any, for each of the petitioners. ; ; ; ; ; ; affd., .
The four-year limitation period applicable to the tax liability of the three corporations included in the consolidated return filed on February 16, 1922, expired on February 16, 1926. On March 4, 1926, the petitioners separately executed waivers extending the time for assessing and collecting their*1155 1921 taxes to December 31, 1926. On December 14, 1926, new waivers were executed by all three corporations extending the time for making assessments to December 31, 1927. The deficiency notices that are the bases of these proceedings were mailed to the Folger Estate Company and the Nevada Corporation on November 12, 1926, and July 20, 1927, respectively. Since the statute of limitations ran against the petitioners on February 16, 1926, and no waivers were filed prior to the enactment of the Revenue Act of that year on February 26, the agreements entered into on March 6, 1926, could not extend the time for assessment. Section 1106 of the Revenue Act of 1926 extinguished all tax liability against which the statute had run prior to its enactment unless waivers had been executed prior to that date. ; ; .
The record discloses that the parent corporation filed a waiver on October 25, 1925, which extended the time for making assessments of 1921 taxes to December 31, 1926, and that it filed similar waivers on April 19, 1926, and*1156 December 14, 1926, extending such time to December 31, 1927. In his brief counsel for respondent argues that such waivers were effective to extend the period of limitation as to the petitioners, since the parent corporation had acted as the agent for its subsidiaries in filing the consolidated return and so had authority as such agent to execute waivers binding on the petitioner. A sufficient answer to this argument is that, even if the parent corporation had authority to execute waivers as the agent of its subsidiaries, it never did so. The waivers filed by the parent corporation related only to its own tax liability. They include no mention *8 of the subsidiaries. They were not signed by any officer of either of the petitioner taxpayers here as such and therefore are lacking in all the statutory requirements of binding agreements effective to extend the period of limitations. Nor would this situation have been different had the respondent finally held in favor of the affiliation contended for here. In that event the parent corporation would have been liable for all the taxes due upon the income of its subsidiaries in conformity with the information returns filed and*1157 neither of these petitioners would have the standing of a taxpayer within the meaning of the law. In our opinion the respondent was without authority to assess or collect any 1921 taxes as to these petitioners when the notices of deficiencies were issued.
The parent corporation filed consolidated returns for itself and the petitioners in each of the years under review and paid all the taxes shown to be due thereon. The information return filed by the petitioners for each of such years stated that none of the tax was to be assessed against either subsidiary corporation. On or about the dates at which the parent corporation paid the several installments of taxes shown on the consolidated returns it was reimbursed by each of the subsidiaries, as set forth in our findings of fact. The petitioners contend that in the computation of the deficiencies here involved the respondent should have credited each of them in each of the taxable years with the amounts it paid in discharge of its liability shown on the consolidated return. This contention is in conformity with decisions of this Board in several proceedings involving similar questions. *1158 Affiliation having been denied, it follows that the true deficiency against each of the separate companies is the difference between its share of the tax shown on the consolidated return and the amount of its tax liability as a separate taxpayer. The deficiencies asserted against the several petitioners should be credited with the amounts which each of them paid to the parent corporation in discharge of its proportion of the tax shown on the respective consolidated returns. ; ; ; ; ; ; .
Petitioners also claim the right to have their taxes computed under the provisions of section 328 of the Revenue Act of 1921. The evidence of abnormalities in income and invested capital does not convince us that either petitioner will suffer any hardship, as compared with like corporations*1159 in a similar business, if its tax liability for each of the several years under review is determined under the *9 provisions of section 230 of the Revenue Act of 1921. The plea for special assessment is denied.
The findings of fact and opinion herein take the place of our findings of fact and opinion in these proceedings promulgated on May 13, 1931, which are hereby vacated.
Reviewed by the Board.
Decision will be entered under Rule 50.
SMITH, dissenting: I dissent from so much of the opinion of the Board as holds that the tax liability of each of the petitioners for the year ended November 30, 1921, was extinguished by the statute of limitations prior to the issuance of the deficiency notices for that year.
The consolidated and information returns filed for that year showed that the parent company was liable for the tax due on the consolidated return. All of the evidence goes to show that the parent company acted as the agent of the subsidiary corporations.
MARQUETTE, STERNHAGEN, and GOODRICH agree with this dissent.