City Button Works v. Commissioner ( 1929 )

CITY BUTTON WORKS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

City Button Works v. Commissioner

Docket No. 15826.

United States Board of Tax Appeals

16 B.T.A. 839; 1929 BTA LEXIS 2508;

May 31, 1929, Promulgated

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On the evidence, held that the two corporations involved were affiliated in 1921.

Donald Horne, Esq., for the petitioner.

C. H. Curl, Esq., and I. W. Carpenter, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of a deficiency in income and profits tax for the year 1921, in the amount of $2,599.52.

There is only one assignment of error, that the Commissioner erred in denying affiliation of petitioner with Rothschild Brothers & Co. for the year 1921.

FINDINGS OF FACT.

The petitioner is a New York corporation, with its principal office in New York City. Ludwig Rothschild organized the corporation, City Button Works, in 1895, and owned practically all its stock. He operated another business known as Rothschild Brothers & Co., of which he was sole proprietor.

He died, testate, in 1910, and bequeathed his estate, one-third in trust, to his wife, and the other two-thirds share and share alike to his two sons and three daughters.

In 1911 the executors of the Ludwig Rothschild estate concluded it advisable to incorporate the Rothschild Brothers & Co. business and did so in that year. Prior to 1921 the two corporations were deemed affiliated and made consolidated returns which were accepted by the Commissioner. Early in 1921, by reason of the fact that the two sons, Leo and Walter L., managed the operations of both corporations, and, further, because all parties wanted to render more certain the income of the mother and sisters, it was decided that preferred stock in the Rothschild Brothers & Co. corporation should be issued, and that the mother and sisters should be given preferred stock in lieu of the common stock theretofore held by them. This was done and accomplished prior to May 6, 1921. After such readjustment of stock, the stocks of the two companies were held as follows:

		Rothschild Bros.
	City Button	& Co. shares
	Works shares	Common	Preferred
Julius Heiden	1	100	50
Leo Rothschild	141	450
Estate of L. Rothschild	330		1,125
Elsa R. Heymann	132		450
Anna Rothschild	132		450
W. L. Rothschild	132	450
Estate of Helen R. Heymann	132		450
Louis Hirsh		30	45
C. T. Carpenter			25
I. H. Cohen		20	40
Edward W. Osmers		12	25
John J. Koch		3	4
M. Weisburger		25	20
Edward Van Riper		15

The City Button Works is a manufacturing plant, and Rothschild Brothers & Co. is a wholesale mercantile institution. The mercantile company was the principal customer of the manufacturing company and purchased most, though not all, of its output. The mercantile company dealt in lines of merchandise which the manufacturing company did not produce, hence purchased the same elsewhere.

Leo Rothschild was president of both companies and if he desired to do so, he could, and sometimes did, fix arbitrary prices which the mercantile company paid to the manufacturing company for the products purchased from it. Thus he was able to shift profits, though there is no evidence that such was done in 1921. The stock held by the "Estate of L. Rothschild" was the mother's stock. Helen R. Heymann, Elsa R. Heymann, and Anna J. Rothschild were sisters of the two brothers, Leo and Walter L. Rothschild. Julius Heiden is the brother of Mrs. Ludwig Rothschild. The other stockholders named in the foregoing list were employees. The employees held their stock under an agreement that in the event they desired to sell, or left the employ of the company, they should first offer to sell such stock to the company.

There was no preferred stock in the City Button Works. The preferred stock in Rothschild Brothers & Co. had no voting rights. It was orally agreed by and between Leo Rothschild and his mother and sisters that if present at stockholders' meetings they would vote their stock as he directed, and if not present, he was authorized to vote such stock, and he did so vote it.

OPINION.

LOVE: The sole question involved in this proceeding is whether or not, under the facts as disclosed by the record, the City Button Works and Rothschild Brothers & Co. in 1921, were affiliated corporations and entitled to make a consolidated return.

Section 240(c) prescribes that:

For the purposes 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.

Under a fair and reasonable interpretation of the stock ownership and control situation of the common stock, as disclosed by the record in this case, we believe it should be held, and we do so hold, that the petitioner and the Rothschild Brothers & Co. were affiliated and entitled to make consolidated return in 1921.

Reviewed by the Board.

Judgment will be entered under Rule 50.

PHILLIPS, MURDOCK, and SIEFKIN dissent.