*3105 Affiliation. - Where three persons owned all the stock of a refining corporation, and owned or controlled substantially all of the stock of an oil-producing corporation and both corporations were managed and controlled by said three persons as a business and economic unit, the corporations were affiliated and should file a consolidated return.
*1150 The respondent determined a deficiency of $7,623.41 against the petitioner for the year 1920. In asking a redetermination, petitioner alleges that during the taxable year it was affiliated with the Bandini Petroleum Co. and was entitled to file a consolidated return with that company. Respondent denies affiliation and right to file consolidated return.
FINDINGS OF FACT.
The petitioner is a California corporation with its principal place of business at 2455 Twenty-seventh Street, Los Angeles, Calif. It is engaged in the oil-refining business and its entire capital stock during the taxable year was owned*3106 by three brothers, viz., George L. Machris, Alfred P. Machris, and Victor A. Machris, each of whom owned 33 1/3 per cent thereof. In order to secure a supply of crude oil for petitioner and which would be under their control, the three brothers decided to develop two oil and gas leases, which they owned or controlled, situated near Bandini and Santa Fe Springs, Calif. To accomplish this purpose, they organized the Bandini Petroleum Co., a corporation, under the laws of California, with a capital stock of $1,000,000 divided into shares of $1 each. This was a producing company. In promoting the organization of the Bandini Company *1151 the Machris brothers prepared a preorganization subscription agreement, which a number of their friends and business associates signed. It provided in substance that a corporation was to be organized under the laws of California with a capital stock of $1,000,000, divided into shares of $1 each, for the purposes of acquiring and developing oil and gas leases on certain described property. It provided for the issuance of 300,000 shares of stock in payment for the leases and obligated the signers to purchase and pay for the number of shares*3107 placed opposite their signatures. This was signed by the three Machris brothers and twenty-five others, for a total of 65,000 shares, but of which the Machris brothers subscribed 7,500 shares, leaving 57,500 subscribed by others.
In obtaining these subscriptions, the Machris brothers represented that the petitioner, Wilshire Oil Co., needed crude oil for its refinery and that it would take all the oil produced and that they would take care of the operations, run the company and produce the oil. The subscribers were told the Machris brothers would take care of the financing and see it through and that its operations would be under the supervision and control of the Wilshire Oil Co. and the Machris brothers. The subscribers to this agreement relied upon these representations and agreements in subscribing for their stock, which amounted to 57,500 shares or 13.5 plus per cent of the outstanding stock of the Bandini Petroleum Co. during 1920.
During the year 1920, the total issued and outstanding capital stock of the Bandini Co. consisted of 424,270 shares and was owned as follows:
| Name | Number of shares | Per cent |
| George L. Machris | 102,670 | 24 1/6 |
| Alfred P. Machris | 102,670 | 24 1/6 72.5 plus |
| Victor A. Machris | 102,670 | 24 1/6 |
| Certain employees | 2,900 | .6 plus. |
| Close friends and business associates (signers of subscription contract) | 57,500 | 13.5 plus. |
| Public | 55,860 | 13.1 plus. |
| Total | 100 |
*3108 Immediately after the incorporation of the Bandini Company the leases on the two properties were assigned to it and an agreement was entered into with petitioner by which it was given the preferential right to purchase all of the oil and gas produced by the Bandini Company. Officers of petitioner were George L. Machris, president; Victor A. Machris, secretary; and Alfred P. Machris, vice president and treasurer. Officers of the Bandini Company were George L. Machris, president; Jack J. Doyle, vice president; Victor A. Machris, secretary; and H. S. Botsford and John B. Lewis, directors.
The Bandini Petroleum Co. during 1920 did not maintain an office but used the office of petitioner free of rent, no officer of the Bandini*1152 Company received any salary from it, its accounts were kept by the employees of the petitioner and for some time in petitioner's books, and from June, 1920, to the end of the year, petitioner advanced or paid out for Bandini approximately $20,000, for which it received no interest. Bandini had no office or selling force and its office work was performed by petitioner's employees. The names of the two companies were on petitioner's office door, *3109 but Bandini was in smaller letters and beneath petitioner's.
The field operations of the Bandini Company were conducted by or under the supervision of the officers and employees of the petitioner, and petitioner's entire organization was at all times at the service of the Bandini Company. Petitioner and the Machris brothers financed and obtained credit for the Bandini Company by purchasing and paying for goods and equipment, and guaranteeing its accounts, one account for $35,000 being guaranteed in writing. Material and appliances belonging to petitioner were freely used by the Bandini Company and its entire field and financial operations were conducted by petitioner and the Machris brothers. No stockholders' meetings of the Bandini Company were held during 1920. There was harmony between all classes of stockholders and both corporations and the program mapped out by the Machris brothers was carried out in accordance with their representations.
After the organization of the Bandini Company, it had its own books of account and bank account, but they were kept by petitioner without charge. Field men of petitioner were paid by the Bandini Company for services performed for*3110 it. One dry well was completed in 1920.
The Machris brothers were experienced and successful oil men, which was known to the signers of the preorganization agreement.
OPINION.
MILLIKEN: The facts in this case clearly show that the Bandini Petroleum Co. was organized by the Machris brothers for the purposes of insuring a supply of oil for the petitioner, and was operated as a department or branch of petitioner's business. For the purpose of raising funds necessary for the incorporation of the Bandini Company certain friends, business associates, and employees were sold stock amounting to 14.1 per cent of the whole, and 13.1 per cent was sold to the general public. The Machris brothers retained 72.5 per cent of the Bandini stock and owned all of the stock of petitioner.
Prior to the organization of the Bandini Company the three Machris brothers induced several of their friends and business associates to enter into a preorganization subscription agreement. There was a general understanding as to the necessity for the existence of the company from a business standpoint and the investors were *1153 informed of the control and dominion to be exercised over the company*3111 by the Machris Brothers. Several of the investors testified that such an understanding between all the parties was a prerequisite to their becoming stockholders in the newly formed corporation. Instead of the control by the Machris Brothers being opposed, it was welcomed and expected in accordance with prior understanding. The well defined and restricted scope of its activities and the manner in which it was operated made the Bandini Company simply a business adjunct of petitioner.
The three stockholders of petitioner carried out the letter and spirit of their preorganization agreement. When credit, material, supplies, services or any assistance was needed by Bandini Company, it was supplied by petitioner or its stockholders. The stock in the hands of the public as distinguished from that represented by the preorganization subscription agreement was at all times agreeable to the management and conduct of the business of Bandini Company by the Machris Brothers.
The case is strikingly like that of . There, as here, one company was an oil-refining company and the other was a producing or drilling company organized for*3112 the purpose of providing crude oil for the former. The refining company took all the crude oil produced by the drilling company and there were intercompany transactions similar to those in the instant case, such as loaning of money, facilities and equipment, interchange of officers and employees, occupation of the same offices, and absolute domination of the business of both companies by three persons, who endeavored to make both companies successful.
In that case, the dominant stockholders originally owned 90 per cent of the stock in the refining company and 78.26 per cent in the producing company, but part of their holdings was sold to friends, business associates and employees, so that their holdings were reduced to 62.71 per cent, and 51.07 per cent, respectively, yet on account of the close business relationship, we held that substantially all of the capital stock of both corporations was owned or controlled by the same interests. The Board there said:
The intercompany transactions show that there was the closest cooperation between the two organizations, and that no effort was made to allocate between the companies the cost of materials, services, or labor furnished by*3113 the one to the other. It is a clear case of commercial and economic unity.
Approximately 80 per cent of the stock of each company was held by persons owning stock in both companies. It is apparent that the two companies were, in fact, operated as one and each for the benefit of the other. Skelly, Osborne and Pielsticker dominated and controlled both of these corporations and their efforts were directed not to making a success of one company but to making a success of both companies, which effort was the result of a preconceived plan consistently carried out.
*1154 A careful examination of the stockholdings and the relationships existing between the various holders shows that substantially all of the stock is owned or controlled by the same individuals. It seems to follow, naturally, if a group of individuals owns or controls substantially all of the stock of both corporations, and if such ownership or control is by all exercised for one purpose, namely, the joint success of the corporations, that these individuals meet the requirements of the words "the same interests."
We believe that the two corporations were affiliated and that any other conclusion would be contrary*3114 to the meaning of the statute.
We think that case on principle is decisive of the case at bar and it results that petitioner and the Bandini Petroleum Co. were affiliated and are entitled to file a consolidated return for the year 1920.
Judgment will be entered under Rule 50.