*3871 Petitioners are not affiliated within the meaning of the law and, therefore, are not entitled to file consolidated income and profits-tax returns for the years 1920 and 1921.
*75 These proceedings are for the redetermination of deficiencies in income and profits taxes of $5,400.22 and $3,343.75 asserted against the Pelican Ice Co., Ltd., for the years 1920 and 1921, respectively, and a deficiency of $182.05 asserted against the Pelican Cold-Storage & Warehousing Co., Ltd., for the year 1921.
Since the sole question presented for the consideration of the Board is whether the two companies herein are affiliated within the meaning of the Act, these two proceedings were, upon motion of the parties, duly consolidated for joint hearing and consideration.
Pelican Ice Co., Ltd. (hereafter referred to as the parent company), was organized and incorporated under the laws of the State of Louisiana, in 1902, with authorized capital stock of $200,000 *76 (2,000 shares, par value $100 each) to engage in the manufacture and sale of ice, with power to operate*3872 one or more cold-storage warehouses.
The Pelican Cold-Storage & Warehousing Co., Ltd. (hereafter referred to as the subsidiary), was organized and incorporated under the laws of the State of Louisiana, in 1904, with authorized capital stock of $100,000 (1,000 shares, par value $100 each) to engage in the cold-storage and general warehousing business.
The charters of both companies contained a provision that all the stock be transferred on the books of the company by the stockholder in person, or by his duly authorized agent, and that no sale of stock shall be valid and no transfer of a certificate shall be made on the books of the company, unless the stockholder shall first offer in writing to sell the same to those companies at book value.
Charles H. Behre organized both the parent and subsidiary companies and he has served as their president since that time.
By means of a bridge built between the plants of the two companies all of the refrigeration used by the subsidiary company was furnished by the parent company at a cost determinable by Behre.
The books of account of both companies were kept jointly by one bookkeeper, and up to May, 1921, only one set of books (with*3873 separate accounts for each company), one bank account, and only one cash account were kept for the two companies. The cost of maintaining joint accounts was allocated to the two companies in amounts determinable by Behre.
Behre exercised control over the affairs of both companies from their inception. He managed the finances of the subsidiary and when funds were needed by it he either advanced them personally or procured them through the bank on his personal endorsement or through the parent company. Such financing he did of his own volition without the necessity for calling a special meeting of the board of directors.
Outstanding capital stock of the parent company was owned by the following stockholders during the years 1920 and 1921:
| Shares outstanding | ||
| 1920 | 1921 | |
| Charles H. Behre | 184 | 202 |
| E. S. Behre (wife of Charles H. Behre) | 147 | 147 |
| Theodore S. Behre (son of Charles H. Behre) | 30 | 30 |
| Edwinie Behre (daughter of Charles H. Behre) | 30 | 30 |
| Ellinor Behre (daughter of Charles H. Behre) | 30 | 30 |
| Edna Behre Macgowan (daughter of Charles H. Behre) | 30 | 30 |
| C. H. Behre, jr. (son of Charles H. Behre) | 30 | 30 |
| M. Hirzel (aunt of Charles H. Behre) | 1 | 1 |
| L. C. Quintero (attorney for companies) | 18 | |
| Total outstanding | 500 | 500 |
*3874 *77 The outstanding capital stock of the subsidiary company was owned by the following stockholders during the years 1920 and 1921:
| Shares outstanding | ||
| 1920 | 1921 | |
| Pelican Ice Co | 430 | 541 |
| C. S. Behre | 150 | 150 |
| Theo. S. Behre | 1 | 1 |
| Mrs. Emma M. Quintero | 20 | |
| J. G. Dietze | 1 | |
| Jno. Bonura & Co | 10 | 10 |
| V. Tumminello | 5 | 5 |
| V. J. Allenbach | 3 | 3 |
| Miss Carrie T. Henchert | 1 | 1 |
| Miss Helen J. Henchert | 1 | 1 |
| La Nasa Brothers | 2 | 2 |
| Jno. H. Meyer | 20 | 23 |
| Miss M. Meyer | 4 | 4 |
| Mrs. Anna Meyer | 5 | |
| Jos. F. Meyer | 1 | 3 |
| S. Olinstein | 3 | 3 |
| Penick & Ford | 10 | 10 |
| Dunbar Molasses Co | 10 | 10 |
| Sivewright & Schlegel | 12 | 12 |
| Everett Lawrence & Co | 1 | 1 |
| Wm. Edenborn | 200 | 200 |
| Total | 870 | 1,000 |
The above stock ownership may be summarized as follows:
| Shares outstanding | ||
| 1920 | 1921 | |
| Stock held by parent company and its employees and stock- | ||
| holders | 582 | 712 |
| Stock held by customers | 88 | 88 |
| Stock held by outsider other than customers | 200 | 200 |
| Total | 870 | 1,000 |
It was the policy of the subsidiary company to allot a certain amount of capital stock to its customers, in small quantities, in order to maintain trade relations, which*3875 accounts for the 88 shares appearing in the tabulation above.
Early in 1920 Charles H. Behre entered into negotiations with the American Sugar Refining Co. for the purchase of a tract of land. The terms under which the said property was to be purchased were $25,000 cash and the balance in ten installments of $22,500, evidenced by 10 promissory notes maturing one each year thereafter, making the total purchase price $250,000. Behre did not have the necessary $25,000 in cash himself so he discussed the matter with his friend, William Edenborn, with a view to raising sufficient capital to carry out this transaction. Rather than make a loan between himself and Edenborn it was suggested that Behre take $20,000 in cash and issue capital stock of the subsidiary company to Edenborn therefor. The purchase was finally consummated for and in the name of the subsidiary company by the payment of $25,000 cash, $20,000 of which was paid by Edenborn and $5,000 was advanced by Behre. The two hundred shares of stock of the subsidiary company, appearing in the tabulation hereinabove as "stock held by outsider," were issued *78 to Edenborn in accordance with this plan. The following journal*3876 entries were made on the books of the subsidiary company to record this transaction:
| Charge real estate | $250,000 |
| Credit Leo Feldman | $250,000 |
To purchase one plot of ground, American Sugar Refining Company * * *. Terms $25,000 cash, balance $22,500 a year for ten years at 5 per cent interest * * *.
| Charge Leo Feldman | $25,000 |
| Credit Charles Behre | $25,000 |
Cash payment made to Leo Feldman and charge to Charles Behre's personal account $20,000 February 25, 1920 and $5,000 paid by Charles Behre personally.
The purchase of this land could have as well been made in the name of the parent company instead of the subsidiary, in which event fewer shares of stock would have been issued to Edenborn than were, because the stock of the parent company had a greater book value than that of the subsidiary. The purchase was made in the name of the subsidiary, however, because it was then occupying leased premises and it was contemplated to put a storage warehouse on this new property.
Edenborn, although the record holder of 200 shares of capital stock of the subsidiary company, took no active part in the conduct of its affairs, nor did he ever attend*3877 any of the stockholders' meetings, except one that was held in July of 1922. At that meeting, the capital stock of the subsidiary company having been increased by amendment to its charter, a 400 per cent stock dividend was declared, which increased Edenborn's holdings in the subsidiary company to 1,000 shares. Thereafter, Behre purchased the entire 1,000 shares owned by Edenborn for $20,000 plus 6 per cent interest from the time he purchased the original two hundred shares. A dividend was also declared in 1920 or 1921 in which Edenborn participated.
When Edenborn purchased the stock of the subsidiary, hereinbefore referred to, he did so, not because of the profits which he expected to derive from the business of the subsidiary, but because he expected to make a handsome profit upon the purchase and sale of said real estate.
The respondent has held that the petitioners are not affiliated within the meaning of the law and, therefore, not entitled to file consolidated income and profits-tax returns for the years 1920 and 1921.
OPINION.
MORRIS: The sole question presented for consideration is whether the two petitioners herein are affiliated within the meaning of the *79 *3878 law and, therefore, entitled to file consolidated income and profits-tax returns for the years 1920 and 1921.
Section 240(b) of the Revenue Act of 1918 and the corresponding provisions of the Revenue Act of 1921 provide:
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 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.
If the parent company here can be said to "own directly or control through closely affiliated interests * * * substantially all the stock of the" subsidiary within the meaning of the Act, as previously defined, it is entitled to file consolidated returns, if not, then the converse is true.
What combination of facts or circumstances must be found to constitute an affiliation within the meaning of the law depends upon the facts of each individual case. Appeal of Old Colony Railroad Co., 1 % b.t.a./ 1067; *3879 ; ; ; .
The words "controls" and "controlled" as used in section 240, supra have been defined in the , to mean "full and complete control," and in the , it is said the word control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock."
Let us examine briefly the salient facts found from the record of these proceedings. Charles H. Behre organized these two corporations, and insofar as the conduct of their respective businesses is concerned, it may be said that he was in absolute control. It is well, however, that we point out at this juncture that control of the business methods without more is not decisive. The test of the statute is ownership or control of substantially all the stock of the corporation. *3880 . We are satisfied that Behre and his immediate family owned substantially all the stock of the parent company in 1920, and all in 1921, but the situation with respect to the subsidiary is wholly different.
The amounts of capital stock of the subsidiary outstanding during the years 1920 and 1921 were 870 and 1,000 respectively, of which the parent company actually owned 430 shares, or 49.4 per cent in 1920, and 541 shares, or 54.1 per cent in 1921. Charles S. Behre and his son Theo. owned 151 shares of stock of the subsidiary during each *80 of the two years in question, which amounted to 17.3 per cent in 1920 and 15.1 per cent in 1921. The number of shares of the subsidiary actually owned by the parent company, its stockholders and a few employees thereof in 1920 and 1921 were 582 and 712, or 66.9 per cent and 71.2 per cent, respectively.
Therefore, we may safely conclude that the parent company itself and through closely affiliated interests owned or controlled 66.9 per cent of the stock of the subsidiary for 1920 and 71.2 per cent for 1921 which can not be said to be "substantially all the stock" within*3881 the meaning of the Act.
The 88 shares of stock of the subsidiary held by customers may be eliminated from further discussion as they can by no stretch of imagination be considered in determining the control exercised by the parent company over the subsidiary through its capital stock.
It remains to be seen, therefore, whether the 200 shares of stock held by Edenborn during these two years can be considered as bringing the parent company's control within the purview of the statute. It is true that Edenborn became a stockholder of the subsidiary under rather peculiar circumstances, and that his principal interest in becoming a stockholder was to share in the ultimate profits to be derived from the purchase and sale of a piece of real estate, and that he, some years later, resold his 200 shares, plus an additional number of shares acquired through his stock dividend, to Behre, at the original cost, plus six per cent interest from the date of his investment, but these factors do not alter the fact that Edenborn, during the years 1920 and 1921, was a stockholder with all the rights and privileges appertaining thereto. It is also true that Edenborn was a friend of Behre, however, *3882 there is no showing in the record that this friendship was of such a nature as to create a community of interest between them by which Behre or the parent company was in control of Edenborn's stock.
Therefore, finding, as we must, that the control of the parent company over the subsidiary company's stock, directly or through closely affiliated interest, is limited to 66.9 per cent in 1920 and 71.2 per cent in 1921, we are constrained to hold that the petitioners were not affiliated within the meaning of the law and are, therefore, not entitled to file consolidated returns for the years 1920 and 1921.
Reviewed by the Board.
Judgment will be entered for the respondent.
GREEN and MILLIKEN dissent.