1929 BTA LEXIS 2167">*2167 AFFILIATION. - Upon the facts proven petitioner held to be affiliated with the Associated Simmons Hardware Companies during 1921 and 1922 and with the Winchester Repeating Arms Co. during 1923.
17 B.T.A. 1236">*1236 These proceedings, consolidated for hearing and decision, are in respect to deficiencies determined by respondent for calendar years and in amounts as follows:
| 1921 | $4,317.50 |
| 1922 | 5,363.15 |
| 1923 | 12,361.34 |
Only one issue is presented, this being whether petitioner was affiliated with the Associated Simmons Hardware Companies during the calendar years 1921 and 1922, and with the Winchester Repeating Arms Co. during the calendar year 1923, it having filed consolidated returns for such years and the several deficiencies to the extent questioned in these proceedings, having resulted from the denial of affiliation by respondent and the computation of its tax liability upon the basis of a separate return for each year.
17 B.T.A. 1236">*1237 FINDINGS OF FACT.
Petitioner is a New York corporation located at Walden and has for many years1929 BTA LEXIS 2167">*2168 manufactured cutlery. From a date prior to the year 1918 through the taxable years involved in this proceeding the capital stock of petitioner was 2,000 shares of a par value of $10 each.
The Associated Simmons Hardware Companies, hereafter referred to as Simmons, is a Massachusetts trust created by a declaration of trust dated April 26, 1920, and is the successor of a similar trust of the same name created by a declaration of trust dated October 2, 1911. It controls by stock ownership a number of corporations, some engaged in the manufacture and others in the sale and distribution of hardware. It is also the owner of certain brands, trade-marks, and trade-names, among which are Keen Kutter and Oak Leaf, under which the products of the controlled corporations are marketed. Title to the trust estate is held by three trustees, designated by the declaration of trust and who have charge and control of the estate with power to manage, operate, sell and convey its property, to manage and operate the corporations controlled by it, and to perpetuate its existence by electing new trustees to fill vacancies. The interests of its beneficaries were represented upon its creation by 51,0001929 BTA LEXIS 2167">*2169 shares preferred, negotiable in character, of a par value of $100, each, and 93,000 common negotiable shares of a par value of $10, each, with authority given the trustees to increase the issued preferred shares to 150,000 and the common to 1,000,000, such increase to be only for acquisition of additional property. The trustees declare and pay dividends upon the shares representing the interests of the beneficiaries from the income of the trust property accruing from their direction, management and operation of the various owned or controlled businesses.
Upon its creation Simmons acquired from the predecessor trust of the same name 1,400 of the 2,000 shares of stock of petitioner, 500 of the remaining 600 shares being owned by one E. Whitehead, and 100 shares by Samuel Andrews. It also acquired at the same time an opinion dated November 12, 1915, held by the predecessor trust upon the aforementioned 50 shares of stock belonging to Whitehead, and an option dated January 21, 1918, upon the 100 shares of stock belonging to Andrews. These option agreements were in effect and held by Simmons from the time acquired through the taxable years 1921 and 1922.
The purposes of the organization1929 BTA LEXIS 2167">*2170 of Simmons, which purposes were from that time and during the taxable years in question carried out were the active control and operation of the subsidiary corporations 17 B.T.A. 1236">*1238 which it dominated through stock ownership. From the time of its acquisition of the 1,400 shares of stock of petitioner, Simmons took entire charge of the business, all of petitioner's officers and directors from that time forward being officers and employees of Simmons, with the one exception of E. Whitehead, who served continuously as a director of petitioner during that period. During this time Simmons operated petitioner through its officers mentioned, purchased its supplies, fixed the prices at which petitioner sold its product, and took and marketed from 95 to 98 per cent of its entire yearly output, handled all of its finances, controlled and audited its financial statements, and determined its policy. Petitioner's sales organization had long since been abolished and its product had for some years been manufactured under the trade-marks and trade-names of Simmons. During the period in question an arrangement existed, agreed to by petitioner's minority stock interests, whereby Simmons guaranteed1929 BTA LEXIS 2167">*2171 to petitioner distributive earnings of $30,000 per year, or 150 per cent upon its total outstanding stock, any amount by which petitioner's earnings fell short of this sum to be made up by Simmons and any amount by which this sum was exceeded to be rebated to Simmons and not participated in by petitioner's stockholders as such.
Prior to the acquisition of its stock by Simmons there had been the same character of control and operation of the business by the aforementioned predecessor trust, from which Simmons acquired petitioner's stock, and the same arrangement between petitioner and such trust as to a guaranteed dividend. Under this arrangement the following sums were rebated by petitioner to the predecessor trust and to Simmons:
| For 1919 | $65,902.08 |
| 1920 | 23,621.58 |
| 1921 | 8,898.83 |
| 1922 | 23,503.40 |
In each of the years mentioned directors' meetings were held by petitioner and the action determined for petitioner by Simmons was uniformly taken without dissenting vote.
Effective January 1, 1923, a reorganization was carried through by Simmons in conjunction with the Winchester Repeating Arms Co., a Connecticut corporation, whereby a new corporation was created, 1929 BTA LEXIS 2167">*2172 known as the Winchester-Simmons Co., which acquired 98 1/2 per cent of the outstanding shares of Simmons and practically all of the common stock of the Winchester Repeating Arms Co. Under this reorganization the Winchester Repeating Arms Co. acquired from Simmons all of its subsidiary manufacturing companies and the latter retained only its subsidiaries engaged in sale and distribution and became a distributor of all of the products of the Winchester Repeating Arms Co. except arms and ammunition. 17 B.T.A. 1236">*1239 Under this reorganization the Winchester Repeating Arms Co. acquired from Simmons the 1,400 shares of stock of petitioner theretofore owned by Simmons and the options of that company upon the Whitehead and the Andrews stock, these 1,400 shares of stock and these options being thereafter held by that corporation throughout the taxable year 1923. Shortly after the close of the taxable year 1923, a recapitalization of petitioner was effected, nonvoting preferred and voting common stock being issued in place of the former stock. In this reissue the Whitehead and the Andrews interests took, in place of their former stockholdings, preferred stock in an amount upon which the fixed1929 BTA LEXIS 2167">*2173 dividends would slightly exceed the sum of the 150 per cent dividend guaranteed on their former stockholdings under the arrangement in effect in prior years. In this recapitalization the Winchester Repeating Arms Co. took all of the issued common or voting stock of petitioner.
For the calendar year 1920 petitioner filed a consolidated return with Simmons and for the two prior years it filed consolidated returns with the predecessor trust and for such years such returns were accepted by respondent and its taxes determined upon the basis of affiliation.
During the years 1921 and 1922 substantially all of the petitioner's stock was owned or controlled by the Associated Simmons Hardware Companies, and for the year 1923 substantially all of such stock was owned or controlled by the Winchester Repeating Arms Co.
OPINION.
TRUSSELL: The only issue presented is whether petitioner was affiliated in 1921 and 1922 with the Associated Simmons Hardware Companies and in 1923 with the Winchester Repeating Arms Co. under section 240(c) of the Revenue Act of 1921. It filed consolidated returns with the two organizations mentioned in those years and the dificiencies to the extent here appealed1929 BTA LEXIS 2167">*2174 from arise from the disallowance by respondent of the claim of affiliation and the computation in consequence of petitioner's tax liability for each year on the basis of a separate return.
The record herein shows that the Associated Simmons Hardware Companies is a Massachusetts trust, organized for the purpose of deriving a profit for its shareholders through the ownership, control and use of the trust estate, which consisted of stock in various companies and certain trade-marks and trade-names. In the case of certain of these companies all of their outstanding stock was owned by Simmons, and others it controlled by majority stock ownership. Some of these companies were engaged in manufacture and some in distribution and sale, and all were actively controlled, managed, 17 B.T.A. 1236">*1240 directed and operated by Simmons. The owned and controlled manufacturing companies made their products under the trade names owned by Simmons and the latter took those at prices which it fixed and marketed them to the trade through these subsidiary companies engaged in sale and distribution. Its income, which the trustees distributed to its shareholders, was not limited to the dividends received upon1929 BTA LEXIS 2167">*2175 the stock which it owned in these subsidiary corporations.
Section 2 of the Revenue Act of 1921 provides that when used in such Act:
The term "corporation" includes associations, joint-stock companies and insurance companies.
By section 240(c) of that Act it is provided:
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 nominess 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.
In , the court defined a "Massachusetts trust" as:
A form of business organization, common in that state consisting essentially of an arrangement whereby property is conveyed to trustees, in accordance with the terms of an instrument of trust, to be held and managed for the benefit of such persons as may from time to time be the holders of transferrable certificated issued by the trustees showing the shares into which the beneficial interest in the property is divided.
1929 BTA LEXIS 2167">*2176 It was held that such organizations, holding and managing the trust property in business operations were "associations" within the meaning of section 1 of the Revenue Act of 1918, which defines corporations in similar language to section 2 of the Revenue Act of 1921 above quoted. See also ; ; ; . The proof as to the organization, purposes and activities of Simmons during the taxable years before us shows, in our opinion, beyond question that it was engaged actively in carrying on business and was under the rule laid down in , and followed in the cited cases, an association within the meaning of section 2 of the Revenue Act of 1921, subject to classification as a corporation for purposes of that Act and consequently subject to affiliation under section 240(c) of such Act if all requisites of ownership or control of stock required thereby are met.
On this question the record shows that during the taxable years here1929 BTA LEXIS 2167">*2177 involved 70 per cent of petitioner's stock was owned by Simmons and that this organization also held an option on the 30 per 17 B.T.A. 1236">*1241 cent minority stock which it could exercise at any time. It is further shown that all of this minority stock with the exception of 100 shares was owned by an individual who for many years, including the taxable years before us, had served as a director of petitioner, occupying such position wholly at the sufference of such majority stockholder, his election being controlled and brought about by the majority stock. It is further shown that under an arrangement in effect for many years including the years in question, and agreed to without dissent by the two minority stockholders, petitioner's entire business was completely controlled and directed by Simmons, its product being all produced under and stamped with the trade-marks belonging to that organization and the latter fixing a price upon such product and taking itself practically all of it, petitioner's sales organization having been abolished long before, because of such condition, and that Simmons during this period guaranteed earnings to petitioner of 150 per cent upon its capital stock and1929 BTA LEXIS 2167">*2178 took for itself all earnings in excess of this amount.
The picture presented by these proven facts is one of absolute control of petitioner's business by the organization with which it claims affiliation, economic dependence by petitioner upon the continued existence of such control, and ownership of 70 per cent of its stock by such organization with the power existing to make, at any time, that ownership absolute and complete.
We have on several occasions approved and reannounced the rule, laid down by us in , that each case of affiliation must be determined upon the particular facts presented. In the case before us it may be that none of the several conditions proven, existing alone, would show control of the minority stock by the majority interests, but when all of these conditions exist it is thought idle to say that the minority stock was not controlled, when to vote it against the wishes of the majority would not only have no effect on the result, but could result, at the option of the majority, not only in the loss by Whitehead of his voice in the management of the company, nominal though it might be, but the surrender by1929 BTA LEXIS 2167">*2179 him and by Andrews of all connection with petitioner, even as stockholders. Cf. ;.
We hold that petitioner was affiliated with and entitled to file consolidated returns with the Associated Simmons Hardware Companies for the calendar years 1921 and 1922 and with the Winchester Repeating Arms Co. for the calendar year 1923.
Reviewed by the Board.
Judgment will be entered pursuant to Rule 50.