*1039 The taxes in controversy are income and profits taxes for the calendar year 1921, for which year the respondent has asserted a deficiency in the amount of $8,013.73. In this proceeding, the petitioner seeks a redetermination of such taxes, and in its petition alleges the following error:
The Commissioner held that the petitioner was not affiliated with any other corporation for the taxable year 1921, whereas the petitioner claims that it was in fact that year affiliated with the Avenue State Bank.
*1040 At the inception of the hearing on the merits, on petitioner's motion the petition was amended to allege an additional error as follows:
Respondent erred in failing to credit petitioner's proposed tax liability for 1921 in the sum of $5,969.11, heretofore paid by the petitioner as income and profits taxes for said year.
FINDINGS OF FACT.
The Avenue Agency & Loan Corporation, the petitioner herein, was incorporated under the laws of the State of Illinois, in the latter part of the year 1920, for*2197 the purpose of making and selling mortgage loans on real estate. It commenced active operations at Oak Park, Ill., on or about the first day of January, 1921, and has been continuously engaged in business since that date.
The Avenue State Bank of Oak Park, Ill., hereinafter called the bank, was organized in 1899, to conduct a general banking business under the laws of Illinois. For many years the real estate loan business of the bank was comparatively unimportant. The business of the bank grew to such an extent that larger quarters were necessary, and in 1920 a new banking house was constructed and at that time, adequate housing facilities being available, it was determined that the real estate loan business of the bank should be enlarged. The board of directors of the bank, at a meeting held September 20, 1920, appointed a committee to consider "all questions and problems affecting the growth and development" of the bank, and to report their conclusions to the board.
The committee thus appointed made two separate reports on October 8, 1920, and October 11, 1920, to the directors, recommending an increase in the capital stock of the bank, the formation, as a separate corporation, *2198 of a trust company, and the acquisition of a going real estate loan business, known as Dunlop & Co., for the sum of $35,000. The committee report of October 11, 1920, to the directors made these suggestions with respect to the purchase of the business of Dunlop & Co.:
With respect to acquiring the real estate loaning and insurance business of Dunlop and Co., for the consideration of which proposition further time was asked, your committee are advised that said business can be acquired for the sum of $35,000, payable not less than $10,000 in cash and the balance in three equal yearly installments bearing six per cent interest. Your committee is of the opinion that said business should be acquired on these terms, and recommends that the same be done by means of an Agency & Loan Corporation to be incorporated under the general corporation law, which provides for such a corporation, the same to be known as "Avenue Agency and Loan Corporation," and to have a capital stock of $35,000 which shall be subscribed for by directors or stockholders of the bank, with one-half of their subscription paid in. This corporation will give an option to the bank, or if preferred to *1041 the*2199 trust company when it shall be organized, to purchase the business of the Agency & Loan Corporation at any time within five years at a price of $35,000, it being contemplated that all earnings of the corporation (exclusive of seven per cent dividends to be allowed its stockholders), shall be left to accumulate until the purchase price of the Dunlop and Co. business shall have been fully paid for, both principal and interest, and written off its books. The corporation will further agree that it will not during such five year period declare dividends to its stockholders in excess of seven per cent per annum.
The board of directors of the bank spread this report upon the minutes of their meeting of October 11, 1920, and also appointed a committee of three to proceed with the organization of an agency and loan corporation. Shortly thereafter and prior to January 1, 1921, the petitioner was incorporated under the laws of Illinois.
The authorized capital stock of petitioner was $35,000, divided into 350 shares of the par value of $100 each, which were subscribed for in writing by nine men, who comprised the board of directors of the bank. One-half of the stock (175 shares) was issued*2200 at the time of organization and $17,500 was paid in by the stockholders, who were the directors of the bank. The remaining 175 shares were never issued, although the subscriptions of the stockholders remained an obligation on their part until the capital stock was reduced in 1924. One of the directors, prior to January 1, 1921, sold 12 1/2 shares of petitioner's stock to John J. Rutherford, who was a stockholder in the bank but who did not become a director of the bank until 1922, although in 1920 it was contemplated that he would be elected as soon as a vacancy should occur. Throughout the year 1921 the stock of the Loan Corporation was held by the nine directors of the bank and John J. Rutherford. These ten men owned between them a total of 940 shares of the capital stock of the bank at the beginning of the year 1921, and 946 shares at the end of the year, out of a total of 2,500 shares outstanding. There were in all 43 stockholders of the bank at the beginning of 1921, and 47 at the end of that year.
On December 13, 1920, the board of directors of the newly organized Loan Corporation, at their first meeting, authorized the officers of petitioner to accept an offer made by*2201 Dunlop & Co., to sell the good will of that company's real estate loaning and insurance business for the sum of $35,000, to be paid $15,000 in cash and $20,000 in three equal installments, payable on or before January 1, 1922, January 1, 1923, and January 1, 1924, respectively. Upon these terms, the purchase of the good will of Dunlop & Co. was concluded on the same day. Nothing was purchased from Dunlop & Co. except its good will.
*1042 The following resolution was adopted by the board of directors of petitioner at their meeting on December 14, 1920:
Resolved, that in furtherance of the purpose for which this corporation was organized, the officers be and they are hereby authorized to execute in the name of the corporation and deliver to Avenue State Bank an agreement in words and figures as follows:
Whereas the undersigned, Avenue Agency and Loan Corporation, has been organized with a view to purchasing the good will of the real estate loaning and insurance business of Dunlop and Co., for the ultimate benefit of the stockholders of Avenue State Bank (the stockholders and directors of the undersigned corporation being the same persons who are the directors of Avenue*2202 State Bank), and it having been contemplated that the undersigned shall conduct a real estate loaning and insurance business until such time as its earnings (less seven per cent annual dividends to be allowed and paid to its stockholders) shall provide the undersigned net assets (exclusive of good will) of not less than Thirty-five Thousand Dollars ($35,000) (being the price to be paid Dunlop and Co., for its said loaning and insurance business):
Now, therefore, in furtherance of said contemplated plan and in consideration of the sum of One Dollar ($1.00) to the undersigned corporation in hand paid, the receipt of which is hereby acknowledged, the undersigned agreed with Avenue State Bank as follows:
1. That said Avenue State Bank shall have the option and is hereby given the option to purchase, at any time within five years from January 1, 1921, for the sum of Thirty-five Thousand Dollars ($35,000), the assets and the business of the undersigned.
2. That during said five year period the undersigned will not declare dividends to its stockholders which shall exceed in the aggregate seven per cent per annum upon the capital stock from the date that it was paid in.
An option*2203 in these exact words was given by petitioner to the bank and was in force throughout the year 1921. Prior to the expiration of this option and on November 10, 1924, said option was surrendered by the bank to petitioner in exchange for a new option providing that the bank might at any time within ten years purchase the net assets, business and good will of petitioner for the sum of $9,000, and further providing that, while this new option was in force, petitioner would not declare dividends to its stockholders in excess of 7 per cent per annum. At the same time, the capital stock of petitioner was reduced from $35,000 to $9,000. Thereafter, each director of the bank held one-ninth of the stock of petitioner. The option of November 10, 1924, has been in full force and effect from that date until the present time.
The ownership of stock in the petitioner and the bank, on January 1, 1921, and, as far as ownership expressed in percentages is concerned, for the entire year 1921, was as follows:
| Owner | Bank shares | Per cent | Petitioner shares | Per cent |
| 1. Willis S. Herrick (director) | 40 | 2.0 | 40 | 22.85 |
| 2. Lydia J. Herrick (wife of No. 1) | 80 | 4.0 | ||
| 3. J. B. Herrick (brother of No. 1) | 46 | 2.3 | ||
| 4. Dora E. Herrick (mother of No. 1) | 40 | 2.0 | ||
| 5. Jewell H. Tomlinson (daughter of No. 1) | 20 | 1.0 | ||
| 6. C. B. Scoville (cousin of No. 1) | 220 | 11.0 | ||
| 7. William Einfeldt (director) | 52 | 2.6 | 12 1/2 | 7.14 |
| 8. E. A. Cummings (director) | 350 | 17.5 | 40 | 22.85 |
| 9. George Wallser (director) | 20 | 1.0 | 10 | 5.72 |
| 10. C. W. Stiger (director) | 40 | 2.0 | 20 | 11.43 |
| 11. Frank E. Hoover (director) | 40 | 2.0 | 10 | 5.72 |
| 12. Mrs. Frank E. Hoover (wife of No. 11) | 20 | 1.0 | ||
| 13. G. W. Hales (director) | 20 | 1.0 | 5 | 2.86 |
| 14. Jacob Mortenson (director) | 100 | 5.0 | 20 | 11.43 |
| 15. Sampson Rogers (director) | 40 | 2.0 | 5 | 2.86 |
| 16. Mrs. Sampson Rogers (wife of No. 15) | 20 | 1.0 | ||
| 17. J. J. Rutherford | 50 | 2.5 | 12 1/2 | 7.14 |
| 18. T. A. Rutherford (uncle of No. 17) | 72 | 3.6 | ||
| Subtotal | 1,270 | 63.5 | 175 | 100 |
| 19. Others | 730 | 36.5 | ||
| Total | 2,000 | 100 | 175 | 100 |
| Summary of stock ownership during 1921 | ||
| Owner | Bank | Petitioner |
| Per cent | Per cent | |
| 1. Stockholders in each corporation | 37.6 | 100 |
| 2. Family relations of above stockholders | 25.9 | |
| 3. Others | 36.5 | |
| Total | 100 | 100 |
*1043 The stock owned by others, as shown above, was owned by approximately twenty-five individuals, subject to no conditions or agreements as to vote or resale.
All of the stock in both companies was acquired for value paid in, was held subject to no conditions or agreements as to resale, and the holders of record were the equitable owners of the stock in their names.
The petitioner was established because the bank felt the need of a real estate loan department. When the opportunity to purchase the good will of Dunlop & Co. - a going concern and an old established business, was presented, a separate corporation was organized to handle this branch of the banking business because it did not seem wise at the time to take the purchase money from the funds of the bank and because the bank examiners would regard as objectionable any attempt to carry the good will of Dunlop & Co., as an asset on the books of the bank. For*2205 these reasons it was deemed preferable to have the bank directors subscribe individually for the stock of petitioner. The bank, under the terms of the options given, could acquire, at any time deemed expedient, the assets and business of petitioner by paying to its stockholders the amounts of their stock subscriptions.
*1044 The business of petitioner was a success from the beginning. In 1921, with a working capital of $2,500 ($17,500 paid in by the stockholders, less $15,000 paid on account to Dunlop & Co.), approximately $1,000,000 of real estate loans were made. The petitioner operated at a profit in 1921 and in each succeeding year. Out of the profits in 1921, there was paid to Dunlop & Co. the sum of $20,000, the remainder of the purchase price of the good will of that organization. Dividends of 7 per cent per annum, as allowed by the terms of the options, were paid each year to the stockholders. In each year, after the payment of dividends, and in 1921, after the payment of the balance of the purchase price, all profits, except a small amount retained for working capital, were turned over to the bank.
The office of the petitioner was located in the banking*2206 house of the bank. There was no written lease between the parties, but a working agreement, whereby the bank furnished space, furniture, telephone and janitor service and the petitioner paid a portion of the rent and a portion of the expense of a joint clerical force. The president and vice president of the bank held the same positions with petitioner and the president devoted the largest part of his time to petitioner's affairs. His salary for 1921 was paid partly by one corporation and partly by the other. All applications for real estate loans made to the bank were turned over by it to petitioner. In 1921 the bank purchased approximately one-half of these loans at par and accrued interest. No direct profit on these purchases was made by the bank, but, since the yearly profits of petitioner were turned over to the bank, this was considered the easiest method of handling these transactions.
The public and the stockholders of both companies considered that petitioner was a department of the bank and that the two were one in substance. They were so reported to the clearing house and the state banking department, both of which examined the two companies simultaneously, as one*2207 concern. The stockholders of petitioner, who were the directors of the bank, at all times believed that they were acting for the bank. They would not have invested their money in the stock of petitioner if they had not known that it was formed in the interests of the bank and that any profits earned would go to the bank. Except for the separate incorporation, petitioner was in all respects the real estate loaning department of the bank. The stockholders of petitioner were selected by the directors of the bank.
The Avenue State Bank and the petitioner, Avenue Agency & Loan Corporation, filed a consolidated income and profits-tax return for 1921 on Form 1120 (together with Avenue Bank Building Corporation and Avenue Trust Co., whose status is not material here), under *1045 the name of "Avenue State Bank and Affiliated Corporations," and showed thereon a consolidated tax of $8,082.73. Petitioner also filed a return for 1921 on Form 1122, entitled "Information Return of Subsidiary or Affiliated Corporation," stating that its parent corporation was Avenue State Bank. Paragraph 7 of Form 1122, as filed by petitioner, reads as follows:
7. The department prefers that the*2208 entire tax shown on a consolidated return be paid by the parent or principal reporting corporation, instead of being apportioned among the corporations composing the affiliated group.
If apportionment is made, state the amount of income and profit taxes for the taxable period to be assessed against the subsidiary or affiliated corporation making this return - $5,969.10.
The total tax of $8,082.73 shown on the consolidated return for 1921 was paid to the collector of internal revenue at Chicago, Ill., by checks of the bank, in four equal installments dated March 13, 1922, June 9, 1922, September 9, 1922, and December 8, 1922. No tax for 1921 has ever been assessed against petitioner. By its checks dated March 13, 1922, June 9, 1922, September 8, 1922, and December 7, 1922, petitioner paid to the bank in four equal installments, the sum of $5,969.11, being the share of petitioner, as reported on Form 1122, of the consolidated 1921 tax of $8,082.73. The figure of $5,969.11 was reached by computing the total tax of each of the affiliated corporations upon a separate basis, adding them together, and deriving the percentage of the total which each corporation would pay upon that*2209 basis. The percentages so derived were then applied to the total consolidated tax to determine how much of it each corporation should bear.
For the calendar year 1922, the bank and the petitioner filed a consolidated return under the name of "Avenue State Bank and Affiliated Corporations." Schedule L of that return, item 13, showed a statement of payments of income and profits taxes during 1922 (on account of 1921 taxes) by the petitioner in the sum of $5,969.11, and by the bank in the sum of $1,677.16.
On or about July 27, 1926, the respondent refunded to the Avenue State Bank the sum of $5,830.69. The notification of overassessment, which preceded the refund, indicates the refund was made to the bank because it was determined that the bank and the petitioner herein were not affiliated. The bank, the petitioner, the Avenue Trust Co., the Avenue Bank Building Corporation, and the Avenue Agency & Loan Corporation were related corporations and filed a consolidated return. This return was prepared by the same firm which subsequently represented each of the corporations just enumerated in the adjustment within the Bureau of the additional taxes which the respondent asserted and*2210 the refunds which he allowed. When these lawyers were advised that a refund had been allowed, *1046 they, on June 11, 1926, addressed a letter to the Commissioner of Internal Revenue, stating that they thought there must be some mistake, it being their impression that the Commissioner would hold that the Avenue State Bank, the Avenue Agency & Loan Corporation, and the Avenue Trust Co. were affiliated, and that there was undisposed of the protest of the Avenue Agency & Loan Corporation against the additional tax liability assessed against it. In an intradepartmental communication with reference to the letter of June 11, 1926, appears the following statement:
The taxpayer apparently has refused to accept the overassessment indicated as it results from an audit on a separate basis, whereas the company contends that it is affiliated with the Avenue Agency and Loan Corporation and the Avenue Trust Company. The Bureau holds that the companies are not affiliated and a sixty-day letter dated July 9, 1926, has been sent to the Avenue Agency and Loan Corporation. The Certificate of Overassessment of $5,830.69 should have been held up pending the assessment of the deficiency in tax*2211 of the Avenue Agency and Loan Corporation or the decision on its appeal, if an appeal is filed * * *.
The bank had previously filed a claim for refund and a claim for credit of 1921 taxes, but neither claim was based upon any question of affiliation. The respondent has not given the petitioner credit for the payment of any tax for the year 1921.
OPINION.
GREEN: The petitioner contends that it is affiliated with the Avenue State Bank. The requirements for affiliation are set forth in section 240(c) of the Revenue Act of 1921, which reads as follows:
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 nom nees, all of 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.
Only a very terse statement of the facts is necessary. The bank, being desirous of enlarging its real estate loan business, determined to acquire the good will of a then existing loan company. Fearing the criticism of the bank examiners if such a procedure were*2212 followed, the stockholders of the bank approved of the organization, for that purpose, of a separate corporation, stock of which was to be owned by the directors of the bank. The directors were to subscribe for all of the stock and actually purchase at par one-half thereof. The initial payment on the purchase price was to be made from the amounts thus paid in, and the balance of the payment was to be made from the profits of the operation of the loan business. The loan corporation was to give the bank an option to purchase its assets at an amount *1047 equivalent to the par value of the stock. The stockholders of the loan company were to receive 7 per cent interest on their investment and the balance, after the payment of the purchase price, was to be turned over to the bank. The arrangements were carried out and the loan company engaged in a very profitable business. All of the loan company's transactions with the bank were so handled that the profits therefrom came to the loan company. All profits, after the payment of the purchase price and the annual interest to the stockholders, were turned over to the bank. The officers of the bank continued to be the officers*2213 of the loan company.
The essential facts in this case closely parallel those of the , in which this Board affirmed the action of the Commissioner in holding two corporations affiliated. The rule there announced is controlling and we, accordingly, hold that the petitioner and the Avenue State Bank were affiliated during the year 1921. See, also, . Our conclusion as to affiliation makes it unnecessary for us to pass upon the second assignment of error.
Judgment will be entered under Rule 50.