*224 The petitioner's president and general manager, who had renegotiable sales during his and the petitioner's concurrent fiscal year in excess of $ 1,800,000, controlled the meetings of the petitioner's stockholders, controlled its board of directors, caused its war contracts to be transferred to him without payment therefor, and at will used its liquid assets for his personal advantage. Held, that the petitioner was under the control of its president and general manager within the meaning of section 403 (c) (6) of the Renegotiation Act and that it was subject to renegotiation under the provisions of that act.
*621 The respondent determined that the petitioner realized*225 excessive profits in the amount of $ 200,000 for the fiscal year ended December 31, 1945, within the meaning of the Renegotiation Act of 1943. The issue presented for determination is whether the petitioner was under the control of or under common control with C. J. Hug, the petitioner's president and general manager, during the fiscal year in controversy within the meaning of the Renegotiation Act.
*622 FINDINGS OF FACT.
Part of the facts were stipulated and are found accordingly.
The petitioner is a Delaware corporation, with its principal place of business in Highland, Illinois. It was organized in 1922 and engaged in the manufacture of motor trucks and road-building equipment. C. J. Hug, who had been in the contracting business since the 1890's, became connected with the petitioner at the time of its organization and from its inception through 1945 was a director and president. He was also president of Hug Acceptance Corporation from 1932 through 1945.
In 1930 the petitioner was reorganized, with three classes of stock, namely, preferred, class A common, and class B common. On November 29, 1937, the petitioner filed a petition in the District Court of the United States*226 for the Southern District of Illinois for reorganization under section 77-B of the Bankruptcy Act. In that proceeding a plan of reorganization, designated new plan, was confirmed. The petitioner was discharged by the court on May 13, 1942.
The new plan provided for the continuance by the petitioner of the three classes of stock outstanding on November 29, 1937, sometimes herein referred to as the old stock, and for the issuance of two new classes of stock, namely, new preferred class A and new preferred class B, sometimes herein referred to as the new stock. The new stock and notes of the petitioner, sometimes referred to as reorganization notes, were issued by the petitioner to its creditors in settlement of their claims. All of the old stock was subordinated to the notes and new stock. The shares of new stock had a par value of $ 10 each, and were entitled to annual dividends of 4 per cent, based on par value. Dividends were cumulative after December 31, 1941. After the notes had been paid the petitioner might retire the new stock at any time at its par value plus accumulated dividends. None of the old stock could be retired, nor could any dividends be paid thereon until*227 all the notes had been paid and all the new stock had been retired. The holders of the petitioner's stock, both old and new, and the holders of its reorganization notes were entitled to one vote for each share of stock held or each $ 10 of notes held. However, under the new plan, if the petitioner failed to make certain specified payments when due, or to make certain stated annual profits or failed to perform any obligation imposed on it under the plan, the holders of the reorganization notes and of the new stock (excepting new stock issued to Hug) were to be entitled, in annual or special meetings of the stockholders, to elect four of the seven members of the board of directors of the petitioner. The plan further provided that the new stock issued to Hug Acceptance Corporation should be represented and voted by a proxy or proxies of that corporation designated and elected by the stockholders of that corporation in annual or special *623 meeting thereof. The plan also provided that the petitioner should not increase the number of members of its board of directors beyond the number of seven or amend its articles of incorporation, except in certain stated instances, without*228 the consent of the holders of three-fourths in principal amount of the reorganization notes and in par value of new stock, exclusive of new stock issued to Hug.
In November or December, 1941, the petitioner defaulted in its compliance with the terms of the new plan and the holders of the reorganization notes and the new stock (excepting Hug) became entitled to elect four directors of the petitioner. The default continued with respect to the notes until their payment in full with interest on August 14, 1944, and with respect to the stock until the present time. Although entitled to elect four directors of the petitioner, the holders of the notes and the new stock did not exercise their right and the board of directors continued with the same members after the default as before. Thereafter and until May 17, 1945, changes in the personnel of the board occurred only by reason of death of the members or their removal from the vicinity of Highland.
On November 19, 1942, the petitioner's board of directors appointed Hug as general manager of the petitioner. It gave him full power and authority to hire, discharge, and fix salaries and wages of all employees of the petitioner and, in behalf*229 of the petitioner, to enter into negotiations and contracts dealing with or connected with the operation of the petitioner's business. In general, he was given all powers and authority usually vested in the general manager of a corporation. Thereafter he acted as general manager of the petitioner, with all the powers and authority thus given him, and during the year ended December 31, 1945, continued to act in that capacity with such powers and authority.
The annual meetings of the petitioner's stockholders were held on February 18, 1943, February 17, 1944, and February 22, 1945. The following is a statement of the number of voting units (shares and reorganization notes) of the petitioner outstanding on the foregoing dates, the number of voting units represented at such meetings, the number of voting units owned by Hug, the number of voting units for which he held proxies, and the total voting units owned by him and for which he held proxies:
| 2/18/4 3 | 2/17/44 | 2/22/45 | |
| Voting units outstanding | 76,274 | 76,144 | 67,083 |
| Voting units represented | 61,604 | 57,559 | 61,825 |
| Voting units owned by C. J. Hug | 24,776 | 24,766 | 24,766 |
| Voting units proxies held by C. J. Hug | 6,949 | 6,796 | 6,749 |
| Total voting units owned and proxies held by | |||
| C. J. Hug | 31,725 | 31,562 | 31,515 |
*230 Included in the above number of voting units represented at each of the meetings, but not included in the number of voting unit proxies *624 held by Hug, were 13,403 shares of the petitioner's new stock which was owned by Hug Acceptance Corporation. While the new plan heretofore described provided that this stock should be voted in the meetings of the petitioner's stockholders by a proxy or proxies of Hug Acceptance Corporation designated and elected by the stockholders of Hug Acceptance Corporation in annual or special meeting thereof, the stockholders of Hug Acceptance Corporation never at any time made any such designation. However, on February 17, 1943, Hug Acceptance Corporation, by its secretary, executed a proxy in blank for the voting of the stock for the election of directors and upon all matters to be considered at the February 18, 1943, meeting of the petitioner's stockholders. It never executed any other proxy for the voting of its stock at any other meeting of the stockholders of the petitioner. Hug did not consider that a proxy for this stock was necessary, because whenever he was present he, as president of Hug Acceptance Corporation, voted the stock. He *231 was present at each of the aforementioned annual meetings of the petitioner's stockholders in 1943, 1944, and 1945. At said annual meetings the directors were elected by unanimous vote.
As heretofore indicated, the reorganization notes of the petitioner, with interest, were paid in full on August 14, 1944. In March, 1945, Hug began buying stock owned by others in the petitioner and in Hug Acceptance Corporation. By the end of May, 1945, he had acquired a majority of the total of all shares of stock in the petitioner, but it was not until July 13, 1945, that he acquired a majority of the shares of stock in Hug Acceptance Corporation, which owned more than 50 per cent of the new stock in the petitioner.
On December 31, 1944 and 1945, the shares of stock in the petitioner and in Hug Acceptance Corporation were owned as follows:
| December 31, 1944. | ||||
| Petitioner | Hug Acceptance | |||
| Corporation | ||||
| Old stock | New stock | Total | ||
| C. J. Hug | 24,014 | 752 | 24,766 | 10 |
| R. J. Tibbetts | 3,860 | 3,860 | 10 | |
| Hug Acceptance Corporation | 13,403 | 13,403 | ||
| Petitioner | 1,611 | |||
| Others | 20,482 | 4,572 | 25,054 | 5,065 |
| Total | 48,356 | 18,727 | 67,083 | 6,696 |
| December 31, 1945. | ||||
| C. J. Hug | 48,314 | 3,808 | 52,122 | 5,060 |
| Hug Acceptance Corporation | 13,403 | 13,403 | ||
| Petitioner | 1,611 | |||
| Others | 42 | 1,516 | 1,558 | 25 |
| Total | 48,356 | 18,727 | 67,083 | 6,696 |
*232 *625 At the meeting of the board of directors of the petitioner on April 17, 1945, the bylaws of the petitioner were amended to provide for a reduction of the number of directors from 7 to 3. Two of the directors present at the meeting resigned. Thereafter 2 others resigned, leaving Hug, S. A. Bleisch, and C. A. Riggs as the 3 directors for the remainder of 1945. Bleisch was attorney for the petitioner, the personal attorney of C. J. Hug, and the owner of 32 shares of stock in the petitioner. Riggs, during 1944 and 1945, was employed part time as office manager of the petitioner and employed part time by C. J. Hug Co. He owned 10 shares of stock in the petitioner and was its secretary and treasurer.
On August 20, 1943, the petitioner entered into a contract with the War Department for the boxing of heavy items such as tractors, graders, and bulldozers at the Engineer Depot, Granite City, Illinois, for shipment overseas. Under the contract the Government furnished the required materials and equipment and the petitioner furnished the labor and executed the work. The contract was let through competitive bidding and was for one year. Hug, as president and general manager *233 of the petitioner, carried on such negotiations as were necessary in obtaining the contract and after the award of the contract made plans for the assembly of the work, laid out the production line, etc., and directed the performance of the work. At one time the petitioner employed as many as 1,000 men on the contract.
On November 11, 1943, the petitioner entered into a contract with the War Department for processing and reclaiming spare parts for machinery at the petitioner's plant at Highland, Illinois. Spare parts were brought into the plant, and the petitioner worked on an experience basis for a week or two, after which unit prices were set. This contract was not subject to bidding and expired about August 1, 1944.
On August 1, 1944, the petitioner entered into a second Highland contract for the continuance, on the unit price basis, of the work theretofore performed under its first Highland contract. The second contract was let through competitive bidding and expired on June 30, 1945.
In May or June, 1944, John A. Latzer, a director of the petitioner and a holder of a substantial amount of its stock, inquired of Hug as to the petitioner's progress with the Granite City contract. *234 Upon being informed that progress was satisfactory except for the difficulty being experienced in getting the Government to pay for work done, and that the petitioner could get a further contract when the then current contract expired, he inquired of Hug as to the advisability of bidding for another contract, on which the petitioner might lose. Hug advised him that he was going to take the next contract "on his own" account. Hug thereupon on the same day approached the procurement *626 officer about getting a new contract for himself personally upon the expiration of the petitioner's contract and was advised that it was immaterial with that officer whether the petitioner or Hug, personally, took the contract, so long as the work, which was being done satisfactorily, was continued. Certain disgruntled stockholders of the petitioner, including some who had received new stock in settlement of their claims, felt that the petitioner should not renew the Granite City contract and run the risk of losing what it had made, but should quit the work at the end of its current contract and distribute what it had made. Some were pressing Hug to take action toward that end. Hug was desirous*235 of paying off such stockholders and getting rid of them as soon as it could be done.
On August 17, 1944, three days before the expiration of the petitioner's Granite City contract, a regular meeting of the petitioner's board of directors was held, with six, including Hug, of the seven directors present. At that meeting there was a general discussion of the petitioner's operations at Granite City and Highland and the directors were informed that Hug was going to bid on a renewal of the Granite City contract for himself. After disclosing that a resolution was adopted authorizing the petitioner to enter into a contract under which it would lease certain machinery and equipment from the Small War Plants Corporation, the minutes of the meeting show the following with respect to what then occurred:
The matter of the company taking on further work and contracts other than that above mentioned with Small War Plant Corporations was discussed and all present were of the opinion that the company should hold the money it had made on its Government contract and not take on new work and contracts with possibility of losing what it had and in line therewith it should dispose of its present contracts, *236 claims, and accounts, the buyer or assignee to assume all obligations and Bleisch offered the following resolution and moved its adoption.
Resolved, That the company take on no new work or contracts other than the above mentioned with the Small War Plant Corporation except such contracts as may be necessary because of present lease arrangements and that not later than December 31, 1944, if at all possible, it sell and assign all present outstanding contracts, claims, and accounts -- not including real and personal property -- And,
Resolved, That a proposition made by C. J. Hug where he would assume and agree to finish the Granite City Engineer Depot Contract being Contract No. 11-052-ENG-5 and take care of odds and ends thereof in consideration of the assignment to him of all claims of the company against the Government arising out of said contract be accepted, And,
Resolved, That the president and secretary of the company be and they are hereby authorized on behalf of the company to sign and deliver all papers necessary to carry the above into effect.
Motion seconded by Riggs and carried.
As President and general manager, Hug was in entire control of the production end of the petitioner's*237 operations. In adopting the foregoing *627 resolutions the directors were aware of that fact and also realized that without his services the petitioner's business would not succeed, since they had no one to put in his place. Since Hug was going ahead on his own account, and they were in no position to proceed without him, they considered it advisable to go along with the proposals submitted and recover what they could from their investment in the petitioner. During the years 1943 and 1944 and into May, 1945, Hug was looked to for leadership and it was not felt that it was possible for any group of the directors advocating policies opposed to those of Hug to assume control of the petitioner.
On September 3, 1944, Hug, as an individual, entered into a contract for one year to do the work previously done by the petitioner at Granite City under its contract of August 20, 1943. When Hug took over the work as an individual there was practically no change in the personnel and administration or the duties of the employees at Granite City from that previously existing under the petitioner. Hug's profit on the Granite City contract from September 3 through December 31, 1944, was approximately*238 $ 106,000.
On October 6, 1944, C. J. Hug borrowed from the petitioner approximately $ 130,600, which was repaid three days later, and on October 20, 1944, he borrowed approximately $ 117,765, which was repaid the following day. These borrowings were on open account. On September 21, 1944, he borrowed $ 150,000 from the petitioner, which was not repaid until December 16, 1944. This borrowing was on a note or notes. All of the foregoing borrowings were for pay roll purposes of Hug and were made by Hug without taking up the matter with either the petitioner's board of directors or its stockholders. The record is silent as to whether interest was paid on any of these loans.
The minutes of a meeting of the petitioner's board of directors held on November 24, 1944, at which six of the seven directors were present, contain the following:
It was moved by Bleisch seconded by Spencer that if the net earnings of the company for the years 1943 and 1944 were sufficient in amount, such determination to be made by the auditor of the company, all accrued and now unpaid dividends on all new preferred stock both Class "A" and Class "B" to be paid in full, this to include dividends for 1944 and*239 such dividends to be at the rate provided for at the plan of reorganization adopted during the company's reorganization proceedings and that such dividends, if any, be payable as of January 1, 1945. Motion carried.
After some discussion, it was moved by S. A. Bleisch seconded by Robert L. Latzer that as soon as all reorganization obligations were liquidated in full and the company's financial position justified it, such determination to be made by the president of the company, all preferred stock, being the preferred stock issued pursuant to the reorganization proceedings, be paid in full both principal and accrued unpaid dividend. Motion carried.
*628 So far as disclosed, no dividends were ever paid pursuant to the first of the foregoing resolutions. No stock was ever purchased, retired, or redeemed by petitioner pursuant to the second of the resolutions, but C. J. Hug, personally, began to purchase the stock approximately four months afterwards.
At the close of December 31, 1944, the petitioner had cash in bank of $ 520,000, receivables of $ 60,000, of which approximately $ 54,000 was due from the Government on the petitioner's second Highland contract, and Treasury bonds*240 of $ 15,000, or total current assets of approximately $ 595,000. It had fixed assets of a net book value of approximately $ 98,000, or total assets of approximately $ 693,000. It had current liabilities of $ 296,000, of which $ 274,000 was Federal taxes. It also had a reserve of approximately $ 100,000 to provide for a possible back Federal income tax liability and also for renegotiation for 1944. At the close of December 31, 1944, Hug had cash of approximately $ 300,000, accounts receivable from the Government of $ 274,000, accounts receivable from C. J. Hug Co. of $ 2,000, and an inventory of $ 15,000, or total current assets of $ 591,000. He had current liabilities of $ 183,000.
On January 1, 1945, the petitioner and C. J. Hug executed a "Sub-Contract Order" whereby the petitioner, without the payment of anything to it by Hug, "sublet" its second Highland contract to Hug. Under the terms of the instrument Hug was to carry out all the terms and conditions of the contract as set forth therein and to relieve the petitioner of all responsibility for the full execution of the contract. No written notice was ever given to the Government of the foregoing action of the petitioner*241 and Hug, but oral notice was given to the officer in charge of the contract for the Government. He stated that so long as the work was done he had no objection. After Hug took over the performance of the contract, the personnel and management remained substantially the same as prior thereto. Although Hug executed the contract from January 1 to its expiration on June 30, 1945, all invoices for the work were made out on the billhead of the petitioner and all checks in payment thereof were made payable to the petitioner, which endorsed them to Hug. The petitioner made no record of the receipt of these payments. For renegotiation and income tax purposes, they have been treated as Hug's receipts.
On January 2, 1945, Hug borrowed $ 150,000 from the petitioner. On January 12 and January 20, 1945, he made further borrowings of $ 50,000 and $ 100,000, respectively. These borrowings, which were represented by unsecured notes bearing interest at the rate of 2 per cent per annum, were used by Hug to pay his individual income tax and to finance his Granite City contract, on which he was engaged at that time. The foregoing amounts, totaling $ 300,000, were repaid on *629 December 28, *242 1945, but at the time of the hearing in this proceeding Hug had never paid any interest thereon. During the first half of 1945 Hug did not borrow any money except from the petitioner. Hug never notified petitioner's board of directors when he borrowed money from the petitioner. His borrowings in 1945, like those in 1944, were made by him without the matter having been considered by either the petitioner's board of directors or its stockholders. Some of the petitioner's directors who regularly attended the directors' meetings had never heard of Hug's borrowings until during the hearing in this proceeding.
The minutes of the annual meeting of the petitioner's stockholders on February 22, 1945, contain the following:
Finances, after the war possibilities and other matters were discussed at length.
Bleisch then moved that the following resolution be adopted:
Whereas, The Hug Company, of necessity, has discontinued its truck business and by reason of said discontinuation there is no future for the Company after its war orders are completed, and;
Whereas, It is the desire and wish of C. J. Hug, President and General Manager of the Company, that all of the companies with which he is *243 connected be dissolved as soon as possible after all of their obligations are paid; and
Whereas, It is believed that it will be for the best interest of stockholders and all concerned that this Company be dissolved as soon as all of its obligations are paid and income tax and renegotiation matters are adjusted; and
Whereas, It will be a matter of a year or more after the Company has ceased all business before said tax and renegotiation matters can be adjusted;
Now, Therefore, be it resolved that this Company take the necessary steps toward a dissolution as soon as such can be done after payment of all obligations of the Company, and after its income tax and renegotiation matters have been adjusted; and, as a step in that direction that the Company take on no more orders or contracts, and that the transfer and assignment of all of its contracts to C. J. Hug, Not Inc., as of December 31, 1944, be and the same is hereby approved. Motion seconded by Spencer and carried, all stockholders present both in person and by proxy, with the exception of Robert L. Latzer, voting aye.
Robert L. Latzer, who was a director of and the owner of a substantial amount of stock in the petitioner, voted *244 against the resolution because he did not consider that it was for the best interest of the stockholders to transfer the second Highland contract from the petitioner to Hug.
On June 22, 1945, Hug entered into a third Highland contract, which was to be effective July 1, 1945, and to continue for one year. So far as disclosed, Hug performed the work under this contract.
Shortly after the petitioner began work under its Granite City contract, which was entered into on August 20, 1943, and was for one year, it was called upon to go outside of its area and do certain repair work which was not involved in its contract. The performance *630 of this work required the services of the most skilled employees the petitioner had. In the invoices submitted by the petitioner for this work a charge of $ 2.50 an hour was made for the services of these employees. That amount was the same rate paid for their services in the performance of the Granite City contract. Payments of the invoices based on the foregoing hourly charge were made for about three months, when a new procurement officer stopped all payments for the work on the ground that the charge was too high. At the time of the termination*245 of the Granite City contract in August, 1944, unpaid charges for the extra work done in 1943 and 1944 amounted to $ 475,457.84. The petitioner held various conferences in an attempt to obtain a settlement of its claim, but was unsuccessful. A new commanding officer was assigned to the Engineers Depot in Granite City in February, 1945. The matter was taken up with him and about March 1, 1945, a compromise agreement was reached for the payment of $ 266,916.65 in settlement of the claim. Payment of that amount was made to the petitioner over the period beginning March 8, 1945, and ending on July 9, 1945, when a final payment of $ 100,000 was made.
On June 14, 1945, the petitioner had a conference with the renegotiators respecting its profits for 1944. It was decided at the conference that, since the claim had not been determined at the end of 1944 and the amount received in payment was to be rated for income tax purposes as 1945 income, the amount would not be considered in renegotiation for 1944.
The foregoing amount of $ 266,916.65 constituted the only renegotiable sales of the petitioner for the fiscal year ended December 31, 1945. The total renegotiable sales of Hug for the*246 same fiscal year were in excess of $ 1,800,000.
The respondent determined that of the petitioner's profits derived from contracts subject to renegotiation for the fiscal year ended December 31, 1945, $ 200,000 represented excessive profits which should be eliminated.
During the entire fiscal year ended December 31, 1945, the petitioner was under the control of C. J. Hug, within the meaning of section 403 (c) (6) of the Renegotiation Act, and was subject to renegotiation under the provisions of that act. For that fiscal year the petitioner had excessive profits within the meaning of the Renegotiation Act of not less than $ 200,000.
OPINION.
The respondent contends that the petitioner was in common control with C. J. Hug during 1945 within the meaning *631 of section 403 (c) (6) of the Renegotiation Act 1*248 and paragraphs 348.2 and 348.4 of the Renegotiation Regulations 2 issued pursuant thereto and that therefore the petitioner is subject to renegotiation under the act for the fiscal year ended December 31, 1945, since the total amount of its and C. J. Hug's renegotiable sales for 1945 was in excess of $ 2,000,000. The petitioner contends that it was not under common control*247 with Hug and that, since its renegotiable sales were less than $ 500,000, it is not subject to renegotiation for its fiscal year 1945.
*249 The respondent's position is that the control shown to have been exercised by C. J. Hug in all phases of the petitioner's operations establishes that he was in actual control of the petitioner during 1945 *632 for the purposes of the above quoted provisions of the Renegotiation Act and the regulations. The petitioner denies that Hug had actual control of the petitioner prior to July 14, 1945, which was subsequent to the receipt of the renegotiable receipts involved herein.
The petitioner takes the position that the question of control in the instant case is to be determined on the basis of Hug's stock ownership in the petitioner rather than on other grounds. The act contains no definition of, nor any limitations or restrictions as to the basis of, the "control" referred to in the provisions of section 403 (c) (6). In view of that, a determination made on the limited basis suggested by the petitioner would write into the section an unwarranted limitation.
Hug, who had had long experience as a contractor, became president and director of the petitioner at the time of its organization in 1922 and continued as such through 1945. While it is not disclosed whether he was also its*250 general manager prior to November 19, 1942, he was its general manager from that date through 1945. In addition, he is shown to have been the owner of the largest amount of the petitioner's stock at various times after November, 1942, down to May, 1945, when he acquired ownership of more than one-half of the petitioner's total outstanding shares, and to July 14, 1945, when he acquired ownership of more than one-half of the stock in Hug Acceptance Corporation, which in turn owned more than one-half of the petitioner's new stock.
At the stockholders' meetings held on February 18, 1943, February 17, 1944, and February 22, 1945, Hug, through his ownership of voting units in the petitioner and the proxies held by him for other voting units, had control of more than one-half of the voting units represented at such meetings. Such control was aside from and independent of the 13,403 shares of the petitioner's new stock which were owned by Hug Acceptance Corporation and represented at such meetings, and which we have found were voted by Hug, as president of that corporation.
Some argument is made by the petitioner that, since it continued in default from late in 1941 through 1945, the holders*251 of the new stock and the note holders, until the notes were paid in August, 1944, had the right to elect four of the petitioner's seven directors and that, since Hug did not own a majority of such stock and notes and did not, until July 14, 1945, acquire a majority of the stock in Hug Acceptance Corporation, which owned a majority of such stock, he could not be said to have been in stock control of the petitioner prior to July 14, 1945. While the holders of the new stock and the notes had the right to elect four directors in the case of the petitioner's default in certain respects the evidence clearly establishes that no action was taken by them toward *633 that end. Apparently they did not consider that their right was worth exercising, or, if exercised, would result in any greater benefit to them than if not exercised. Directors of the petitioner continued to be elected in the same manner as if no default had occurred and as if the holders of new stock and notes had no greater right in the election of directors than the holders of the old stock. The former directors of the petitioner continued to be reelected as before. Since the holders of the right to elect four directors*252 apparently attached no importance to the right when they could have exercised it, we are unable to see why any importance should be attached to it here. In this connection it is observed that the plan pursuant to which the new stock was issued provided that the new stock in the petitioner issued to Hug Acceptance Corporation should be represented and voted by a proxy or proxies of that corporation designated and elected by the stockholders of that corporation. Despite the fact that no such designation of proxy or proxies was ever made, Hug, as president of that corporation and without a proxy, voted its new stock in the petitioner, which was a majority of such stock. So far as is shown, his action in so doing was never called in question by any one.
The resolution adopted at the annual meeting of the petitioner's stockholders held on February 22, 1945, to take steps toward a dissolution of the petitioner discloses that such action was taken in compliance with "the desire and wish of C. J. Hug, President and General Manager of the Company, that all of the companies with which he is connected be dissolved as soon as possible after all their obligations are paid." The resolution also*253 authorized the transfer and assignment of all of the petitioner's contracts to Hug as of December 31, 1944, and, so far as shown, without any consideration to be paid by him therefor. While the foregoing resolution to dissolve conforms in some respects to a resolution adopted by the petitioner's board of directors on August 17, 1944, the adoption of the latter resolution, hereinafter discussed, was a result of Hug's action.
From the situation presented, we think the conclusion that Hug controlled the annual meetings of the petitioner's stockholders is inescapable.
Hug's actual control of the petitioner's directors is well illustrated by the action taken by them at their meeting on August 17, 1944, after being informed that Hug was going to bid on a renewal of the Granite City contract for himself. Without the services of Hug and with no one to put in his place, it was apparent to the directors that the petitioner was in no position to attempt to bid against him for a renewal of the contract or, if successful in that respect, it was in no position to perform the contract. Hug had a strangle hold on the petitioner, and that he was planning to tighten it was apparent to the directors. *254 *634 Their action at that meeting in authorizing the assignment to Hug of the unexpired portion of the petitioner's Granite City contract, and in directing that the petitioner take on no new work or contracts except as necessary in connection with certain leases, and if at all possible the petitioner dispose of all its then outstanding contracts, claims, and accounts by December 31, 1944, was the beginning of the end of the petitioner's war contract work. The end came on January 1, 1945, when the petitioner subcontracted to Hug the unexpired portion of its second Highland contract.
At their meeting on November 24, 1944, the directors of the petitioner authorized the payment as of January 1, 1945, of all accrued and unpaid dividends on the petitioner's new stock, including dividends thereon for 1944, provided the petitioner's auditor determined that the 1943 and 1944 earnings were sufficient for such purpose. The directors also authorized the retirement of the petitioner's new stock as soon as all reorganization obligations were liquidated and the petitioner's financial condition, in the opinion of Hug, justified doing so. While the record is silent as to the amount of the*255 petitioner's earnings in 1943 and 1944, it does show that at the close of 1944 the petitioner had assets totaling approximately $ 693,000, of which $ 535,000 was cash and Treasury bonds. The only liabilities shown were current liabilities totaling $ 296,000. With net assets of approximately $ 400,000, of which approximately $ 225,000 represented cash, it would appear that, since the petitioner had disposed of its war contracts and was not taking on any new business, some steps would have been taken by the petitioner at least toward payment of dividends on the new stock, if not also toward its retirement. The annual dividend on the new stock was approximately $ 7,500. While it is not shown what amount had accumulated, it is shown that the dividends on that stock had been cumulative only since December 31, 1941. Instead of action being taken toward paying dividends and retiring the stock as the directors had directed, Hug, in January, 1945, without the authorization of the petitioner's stockholders or its board of directors, borrowed $ 300,000 from the petitioner, or approximately 43 per cent of its total assets, on his unsecured notes and used the money for paying his individual*256 income tax and financing his Granite City contract. Approximately two months later he began buying up, at $ 8 a share, the petitioner's new stock, which was retirable at par of $ 10 a share plus accumulated dividends. Without the repayment to the petitioner of his loan, Hug continued thereafter in 1945 to buy up stock in the petitioner, both old and new, and in Hug Finance Corporation until he became the owner of a large majority of the stock in each corporation.
*635 From the foregoing we think it is clear that Hug not only controlled the petitioner's board of directors, but that when they took action which he later desired to disregard he did so without referring the matter back to them.
Hug's large borrowings from the petitioner in 1944 and 1945 under the circumstances presented show the complete control he exercised over the petitioner's liquid assets and how, when he desired to do so, he devoted them to his personal use without compensation to the petitioner.
Since Hug controlled the meetings of the petitioner's stockholders, controlled petitioner's board of directors, and controlled petitioner's operations and assets to the extent here shown, we conclude that he was in*257 actual control of the petitioner at all times during 1945 prior to July 14, 1945, after which date he was concededly in control by reason of his stock ownership. Accordingly, we hold that during 1945 Hug controlled the petitioner within the meaning of section 403 (c) (6) of the Renegotiation Act and that, since the petitioner's and Hug's renegotiable sales were in excess of $ 2,000,000, the petitioner is subject to renegotiation under the provisions of the act.
The parties have stipulated that, if it be held that the petitioner was subject to renegotiation, it had excessive profits within the meaning of the act for its fiscal year 1945 of not less than $ 200,000. We have found as a fact accordingly.
An order will be entered in accordance herewith.
Footnotes
1. This subsection shall be applicable to all contracts and subcontracts, to the extent of amounts received or accrued thereunder in any fiscal year ending after June 30, 1943, whether such contracts or subcontracts were made on, prior to, or after the date of the enactment of the Revenue Act of 1943, and whether or not such contracts or subcontracts contain the provisions required under subsection (b), unless (A) the contract or subcontract provides otherwise pursuant to subsection (i), or is exempted under subsection (i), or (B) the aggregate of the amounts received or accrued in such fiscal year by the contractor or subcontractor and all persons under the control of or controlling or under common control with the contractor or subcontractor, under contracts with the Departments and subcontracts (including those described in clause (A), but excluding subcontracts described in subsection (a) (5) (B)) do not exceed $ 500,000 and under subcontracts described in subsection (a) (5) (B) do not exceed $ 25,000 for such fiscal year. If such fiscal year is a fractional part of twelve months, the $ 500,000 amount and the $ 25,000 amount shall be reduced to the same fractional part thereof for the purposes of this paragraph.↩
2. 348.2 Computation of Aggregate Receipts and Accruals.
(1) In order to qualify for this exemption a contractor must meet two conditions --
(a) The gross receipts or accruals of the contractor and his affiliates for his fiscal year from subcontracts within the scope of subsection (a) (5) (B) of the 1943 Act (that is, for services in procuring contracts or subcontracts) must not exceed $ 25,000; and
(b) The gross receipts or accruals of the contractor and his affiliates for his fiscal year from all contracts with the Departments and from all subcontracts within the scope of subsection (a) (5) (A) of the 1943 Act, including contracts and subcontracts exempt from renegotiation under subsection (i) of the 1943 Act but excluding subcontracts covered in (a) above, must not exceed $ 500,000.
(2) Affiliate is used in this paragraph 348 to refer to a person who controls or is controlled by or under common control with the contractor. Total receipts or total billings under cost-plus-fixed-fee contracts are included in gross receipts or accruals in computing the limits referred to in this paragraph 348. For the purpose of applying this provision of the Act gross receipts and accruals will be computed without the elimination of intercompany sales.
348.4 Tests of "Control". In determining whether the contractor controls or is controlled by or under common control with another person, the following principles should be followed:
(1) Corporate Control: A parent corporation which owns more than 50% of the voting stock of another corporation controls such other corporation and also controls all corporations controlled by such other corporation.
(2) Individual Control: An individual who owns more than 50% of the voting stock of a corporation controls the corporation and also controls all corporations controlled by the corporation.
(3) Partnership Control: A general partner who is entitled to more than 50% of the profits of a partnership controls the partnership.
(4) Joint Venture Control: A joint venturer who is entitled to more than 50% of the profits of a joint venture controls the joint venture.
(5) Other Cases↩: Actual control is a question of fact. Whenever it is believed that actual control exists even though the foregoing conditions are not fulfilled, the matter may be determined by the Department or Service conducting the renegotiation.