*2489 Corporations held not to be affiliated within section 240 of the Revenue Act of 1918.
*909 The Commissioner determined deficiencies in income and profits taxes of Avonmore Coal & Coke Co. for the periods from January 1, to December 17, 1918, and from December 18, 1918, to December 31, 1918, in the amounts of $2,725.39 and $328.19, respectively. The Commissioner rejected in full the claim of Pine Run Coal & Coke Co. for abatement of an additional assessment of income and profits tax for the period from January 1 to December 17, 1918. The Avonmore Coal & Coke Co. and the Pine Run Coal & Coke Co. having merged and consolidated with another corporation under the name of Avonmore Coal & Coke Co., these proceedings were instituted by it to secure a redetermination of the deficiency.
In several assignments of error the petition sets out that the Commissioner erred in failing to permit the filing of a consolidated return for the period in 1918 prior to the merger and in failing to permit proper use to be made of a loss sustained by one of the merging*2490 companies.
A substantial part of the findings is based upon the stipulation of the parties.
FINDINGS OF FACT.
The Avonmore Coal & Coke Co. was incorporated under the laws of Pennsylvania in August, 1888. The Pine Run Coal & Coke Co. was incorporated under the laws of Pennsylvania in April, 1890. *910 The Gilpin Coal Co. was incorporated under the laws of Pennsylvania in August, 1890. On December 17, 1918, said corporations were merged and consolidated under the laws of Pennsylvania with the name Avonmore Coal & Coke Co.
The Commissioner ruled that prior to December 18, 1918, said corporations were not affiliated and refused to compute their income and profits tax for 1918 on the basis of a consolidated return. The deficiencies here in question result from such ruling.
The Gilpin Coal Co. sustained a net loss for the period from January 1 to December 17, 1918, in the amount of $15,652.80.
The officers and directors of the Avonmore Coal & Coke Co., Pine Run Coal & Coke Co. and Gilpin Coal Company for the period January 1 to December 17, 1918, were as follows:
| Avonmore | Pine Run | Gilpin | |
| President | Frank T. Patterson | L. W. Hicks | L. W. Hicks. |
| Vice president | L. W. Hicks | R. C. Hill | R. C. Hill. |
| Secretary | Winthrop Sargent | Winthrop Sargent | Winthrop Sargent. |
| Treasurer | Winthrop Sargent | Frank T. Patterson | Frank T. Patterson. |
| BOARD OF DIRECTORS | ||
| Avonmore | Pine Run | Gilpin |
| Frank T. Patterson. | Frank T. Patterson. | Frank T. Patterson. |
| L. W. Hicks. | L. W. Hicks. | L. W. Hicks. |
| Winthrop Sargent. | Winthrop Sargent. | Winthrop Sargent. |
| R. C. Hill. | R. C. Hill. | R. C. Hill. |
| Chas. S. Farnum. |
On December 17, 1918, the Avonmore Coal & Coke Co. was a creditor of the Gilpin Coal Co. and the Pine Run Coal & Coke Co. in the following amounts:
| Gilpin | Pine Run | |
| May 10, 1918 | $4,000.00 | $4,000.00 |
| June 12, 1918 | 4,500.00 | 4,000.00 |
| Aug. 9, 1918 | 11,000.00 | 6,000.00 |
| Aug. 22, 1918 | 5,000.00 | 5,000.00 |
| Sept. 25, 1918 | 3,500.00 | |
| Nov. 6, 1918 | $4,000.00 | |
| Dec. 6, 1918 | 7,500.00 | |
| Dec. 17, 1918 | 3,991.99 | |
| 43,491.99 | $19,000.00 |
These were loans originally. No interest was charged or paid. Upon the merger these loans were not repaid.
The meetings of the board of directors and the meetings of the stockholders of the respective corporations for the purpose of voting upon an agreement to merge and consolidate were all held on the morning of December 17, 1918. There were present at each meeting Patterson, Hicks, Sargent, and Hill. The number of shares *911 voted at the*2492 stockholders' meetings for the adoption of the agreement were:
| Avonmore Coal & Coke Co | 2,000 |
| Pine Run Coal & Coke Co | 240 |
| Gilpin Coal Co | 920 |
No shares were voted against such agreement.
By the agreement to merge and consolidate the stock of the consolidated corporation was fixed at 3,460 shares of the par value of $50 each. Stock was to be issued to the stockholders of the merging corporation as follows: The Avonmore Coal & Coke Co., share for share; the Pine Run Coal & Coke Co., four shares of new stock for each share held in the merging corporation; Gilpin Coal Co., one share of new stock for each two shares held in the merging corporation.
The capital stock of the Avonmore Coal & Coke Co., Pine Run Coal & Coke Co. and Gilpin Coal Co. was held during the period from January 1 to December 17, 1918, as set out in the tabulation below. Proxies for the annual meetings of stockholders in the years 1913 to 1917, inclusive, were given by stockholders as shown by such tabulation. In such tabulation the symbol "X" indicates proxy given, and the letters A, P and G indicate respectively the Avonmore Coal & Coke Co., the Pine Run Coal & Coke Co. and the Gilpin*2493 Coal Co.
| Shares held | 1913 | 1974 | 1915 | |||||||||
| A | P | G | A | P | G | A | P | G | A | P | G | |
| Alfred Hicks Estate | 206 | 24 | 120 | X | X | X | ||||||
| L. W. Hicks | 5 | 3 | 6 | X | X | X | ||||||
| W. A. Lewis | 220 | 17 | 84 | X | X | X | X | X | X | |||
| Frank T. Patterson | 350 | 67 | 164 | X | X | X | ||||||
| R. C. Hill | 170 | 34 | 50 | X | X | X | X | X | X | X | X | X |
| Winthrop Sargent | 178 | 8 | 20 | X | X | X | ||||||
| W. H. Rohrer estate | 178 | 10 | 46 | X | X | X | ||||||
| Cooper Wood | 100 | 15 | 50 | X | X | X | X | X | X | |||
| James M. Niblo 1 | 100 | 100 | ||||||||||
| Charles S. Farnum | 198 | 17 | X | X | X | X | X | X | ||||
| John A. Richmond 2 | 25 | 20 | ||||||||||
| A. P. Kirkland | 25 | 20 | X | X | X | X | X | X | ||||
| Charles P. Hine | 20 | 20 | X | X | X | X | X | X | ||||
| H. S. Hayward, Jr | 25 | 60 | X | X | X | X | ||||||
| F. D. Casanave estate | 100 | X | X | |||||||||
| W. D. Windsor estate | 25 | X | X | X | ||||||||
| P. C. Madeira, Jr | 25 | X | X | X | ||||||||
| L. C. Madeira, 3rd | 25 | |||||||||||
| Elsie D. Madeira | 25 | |||||||||||
| Marie V. M. Butler | 25 | |||||||||||
| E. J. Berwind | 20 | |||||||||||
| G. L. Potter | 80 | X | X | |||||||||
| E. B. Taylor | 50 | X | X | X | ||||||||
| Mrs. W. D. Graff | ||||||||||||
| Miller | 60 | X | ||||||||||
| Girard Trust Co | 50 | X | ||||||||||
| 220 | 240 | 1,000 |
| 1916 | 1917 | |||||
| A | P | G | A | P | G | |
| Alfred Hicks Estate | X | X | X | |||
| L. W. Hicks | X | X | X | |||
| W. A. Lewis | X | X | X | |||
| Frank T. Patterson | X | X | X | X | X | X |
| R. C. Hill | X | X | X | X | X | X |
| Winthrop Sargent | X | X | X | |||
| W. H. Rohrer estate | ||||||
| Cooper Wood | X | X | X | |||
| James M. Niblo 1 | ||||||
| Charles S. Farnum | X | X | ||||
| John A. Richmond 2 | X | X | ||||
| A. P. Kirkland | X | X | ||||
| Charles P. Hine | X | X | ||||
| H. S. Hayward, Jr | X | X | X | X | ||
| F. D. Casanave estate | X | |||||
| W. D. Windsor estate | X | |||||
| P. C. Madeira, Jr | X | X | ||||
| L. C. Madeira, 3rd | X | |||||
| Elsie D. Madeira | ||||||
| Marie V. M. Butler | X | |||||
| E. J. Berwind | ||||||
| G. L. Potter | ||||||
| E. B. Taylor | X | X | ||||
| Mrs. W. D. Graff | ||||||
| Miller | ||||||
| Girard Trust Co | ||||||
*912 All of such proxies were general and named either Patterson or Sargent as voting agent. At none of such*2495 meetings was there any dissenting vote. Hicks, Patterson, Hill, and Sargent were the only persons who appeared in person at any of such meetings.
The mines of these companies were within 20 miles of each other. All of these companies were organized at the instance of Alfred Hicks and Patterson. Until his death Alfred Hicks managed all of the mines, and after his death they were managed by his son, L. W. Hicks. Each mine had its own foreman. Patterson and Hill were in charge of the financial matters of the companies. The companies sold all of their coal to the Pennsylvania Railroad and had no sales organization. One man acted as bookkeeper for all. The affairs of all of the companies had been carried on from organization to the date of consolidation by Alfred Hicks, L. W. Hicks, Patterson, Hill, and Sargent. During this period they were the only officials and directors except that Farnum was elected a director in 1918. He never attended stockholders' or directors' meetings. Notes for loans were endorsed by some or all of the officers but never by any other stockholder.
Elsie B. Madeira was the wife and P. C. Madeira, Jr., L. C. Madeira, and Mary V. M. Butler were the*2496 children of Percy C. Madeira, a partner of Hill. They had received their stock as a gift from Percy C. Madeira. They looked to Hill for advice with respect to their stockholdings. W. H. Rohrer had been a business associate of Sargent. His widow was executor and beneficiary of his estate and looked to Sargent for advice. The executor and beneficiary of the estate of Alfred Hicks was the widow of the decedent. She relied upon her son, L. W. Hicks, in matters relating to affairs of these corporations.
The stockholders relied upon the officers and directors to manage the affairs of these corporations. They relied upon their advice with respect to the agreement to merge. All of the stockholders were acquainted with one or more of the directors.
Substantially all of the stock of the three companies was not owned or controlled by the same interests from January 1, to December 17, 1918, nor was substantially all of the stock of any two of said companies owned or controlled by the same interests during said period.
OPINION.
PHILLIPS: The single question presented is whether the three companies which merged and consolidated on December 17, 1918, or any two of them, are affiliated*2497 within section 240 of the Revenue Act of 1918 which provides:
(b) 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 *913 through closely affiliated interests or by a nominee or nominees 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.
It is clear that these corporations are not within the clause numbered (1). The question then is whether substantially all of the stock was owned or controlled by the same interests. The claim made by petitioner is that the stock not owned by the group consisting of Hicks, Patterson, Hill, and Sargent was controlled by them.
The respondent urges that in determining what is "substantially all" of the stock, we are controlled by section 240(c) of the Revenue Act of 1924 where Congress provided:
(c) 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 voting stock of the other or others, or (2) if at least 95 per centum of the*2498 voting stock of two or more corporations is owned by the same interests. * * *
We believe such a contention to be without merit. . The membership of the Congress and of the committees responsible for drafting these two Acts was substantially different. The report of the Committee shows no thought that this provision was interpretative and by its express terms it is limited to "the purposes of this section." It leaves out of consideration any element of control, making identity of ownership the measure of affiliation. It is impossible to read into this section any thought that it controls or interprets the prior acts.
There is a further consideration which must be weighed which bears on the argument respecting Congressional intent as well as respondent's contention that, "the words 'substantially all' should be construed so as to minimize the number of stockholders who receive the benefits of losses of corporations of which they do not share the burdens." The Revenue Acts of 1918 and 1921 imposed heavy excess-profits taxes. The amount and rate of tax depended not only upon the amount of income, but also upon the amount*2499 of invested capital. Under those Acts the shifting of profits from one corporation to another might alter substantially the tax to be paid. Affiliation of corporations owned or controlled by the same interests was as necessary to protect the revenues, and perhaps more than it was to protect the corporations or their stockholders. See discussion of the purpose of the affiliation provision in Utica Knitting Co. v.United States, decided by Court of Claims, May 6, 1929. The Revenue Act of 1924 and subsequent acts have imposed only an income tax based upon a fixed percentage of all corporate income. There is no longer the same incentive to work a fictitious allocation of profits. Except in unusual circumstances, affiliation benefits the taxpayer without any corresponding benefit to the Government such as existed during the *914 period when excess-profit taxes were imposed. Congress had no such reason for restricting affiliations under the prior acts as it had under the Act of 1924 and subsequent acts. Any principle which is enunciated must work against the Government as well as in its favor. To restrict affiliation to those cases where 95 per cent of the stock is*2500 owned or controlled by the same interests would not only read into the Revenue Act of 1918 something which is not there, but might well defeat its purpose.
We have heretofore held that in determining whether corporations were affiliated under the Revenue Act of 1918 all of the facts must be taken into consideration. The statute uses three phrases, none of which are susceptible of precise measurement: "substantially," "controlled" and "same interests." The manner in which the corporations are operated or profits shifted may indicate an identity of interests which would not be disclosed by a mere tabulation of stockholdings. Stock may be controlled other than through ownership. If Congress had not recognized such to be the case the words "or controlled" might well have been omitted as they were in the 1924 Act. But control of the stock means more than control of the management of the corporation.
In the instant proceeding the evidence discloses only that the same persons controlled the operations of the three corporations, that the minority stockholders were quiescent and satisfied with the operation, that at times they executed proxies and at other times did not, and that*2501 in the matter of the merger of the three corporations they were content to follow the plan recommended by the majority and active stockholders who were also the directors. Except for a common management, the three corporations were operated as separate units. There are no such intercompany transactions or unity of operation as would indicate an identity of interests among all the stockholders, nor are there facts which indicate that the active stockholders had any control over the stock of the minority. ; ; ; affd. ; ; affd. . We are of the opinion that the Commissioner properly held that these corporations were not entitled to file a consolidated return.
Reviewed by the Board.
Decision will be entered for the respondent.