Dome Co. v. Commissioner , 26 B.T.A. 967 ( 1932 )

THE DOME COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dome Co. v. Commissioner

Docket No. 41887.

United States Board of Tax Appeals

26 B.T.A. 967; 1932 BTA LEXIS 1212;

September 12, 1932, Promulgated

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Godfrey, N. Nelson, Esq., for the petitioner.

Eugene Meacham, Esq., for the respondent.

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GOODRICH

This proceeding involves the redetermination of a deficiency in income tax for the fiscal year ending March 31, 1926, in the amount of $8,738.91. An issue raised as an alternative by amendment to the pleadings upon motion at trial having been abandoned, the sole issue remaining is whether petitioner was affiliated during the year 1926 with Warner Brothers Pictures, Inc., within the meaning of section 240, Revenue Act of 1926, which requires that, in order to constitute affiliation, at least 95 per centum of the voting stock of a corporation be owned by the corporation with which it claims affiliation, or that 95 per centum of such stock of the corporations claiming to be affiliated be owned by the same interests.

FINDINGS OF FACT.

In 1926, and for some years prior thereto, the Dome Company existed as a corporation under the laws of Ohio and was engaged in the business of operating a motion picture theatre in Youngstown, Ohio; and Warner Brothers Pictures, Inc. (hereinafter called Warner Brothers), existed as a corporation under the laws of Delaware and was engaged in the business of producing motion pictures. Of the outstanding voting stock of the latter company, the several Warners, individually, owned 85.7 per centum. For the fiscal year ended March 31, 1926, these corporations filed a consolidated income-tax return.

Prior to 1924 the pictures produced by Warner Brothers were not shown at any of the theatres in Youngstown. Wishing to have their pictures shown there, the Warners instructed David M. Robbins, who is a resident of Youngstown and their brother-in-law, to ascertain whether a theatre in Youngstown could be purchased. Robbins opened negotiations with the stockholders of the Dome Company and, having advised the Warners that the outstanding stock, which was then 1,115 shares, might be purchased, they personally entered into the transaction and secured an option for the purchase of all the stock at an agreed price. Authorization for the purchase of the stock by Warner Brothers was given by an appropriate corporate action, as reflected by the records of the corporation. Upon instructions from the Warners, Robbins arranged for a loan to their corporation with the First National Bank of Youngstown, as security for which all the stock of the Dome Company to be purchased by Warner Brothers was to be hypothecated. A few days before the option expired, the Warners requested Robbins to arrange for an additional loan in the amount of $15,000. He informed them that he could borrow no more for the corporation, but he obtained from the same bank a loan on his personal account of $15,000, representing that he desired the money to purchase some of the stock of the Dome Company and agreeing to deposit the same as collateral for the loan made to him. In November, 1924, the option for purchase of the Dome Company stock was exercised and shortly thereafter the stock was reissued, 1,017 shares, or 90.4 per cent to Warner Brothers Pictures, Inc., and 108 shares, or 9.6 per cent, to Robbins. The loans were made by the bank and the stock was hypothecated as arranged. The $15,000 borrowed by Robbins personally was turned over to and used by Warner Brothers.

Robbins was made manager of the Dome Theatre, at an agreed salary and bonus, the basis of the latter not being here disclosed, and was made also an officer and director of the company. He attended no meetings however, except one of the stockholders held in Youngstown at the time the stock was purchased, and took no part in the management of the company beyond his duties as local manager of its theatre. The affairs of the company were thereafter conducted from the offices of Warner Brothers in New York City, where all meetings were held and the accounts kept.

From time to time Robbins executed renewals of his personal note evidencing the indebtedness incurred as aforesaid, but he paid no part of the principal of or the interest thereon. Both principal and interest were paid by the Dome Company and, upon payment, the note, together with the certificate for 108 shares held as collateral therefor, was delivered by the bank to that company following instructions given by Robbins. The books of the Dome Company reflected the transaction in an account called "First Nat'l Bank. D. M. Robbins-Loan Account." Dividends declared by the company and payable on the stock standing in Robbins' name were credited to this account, but no part of such dividends was paid to Robbins. About July 15, 1928, the outstanding stock of the Dome Company was reduced to 250 shares, so that thereafter 24 shares were issued in Robbins' name instead of the 108 shares originally outstanding. Upon the surrender of the stock to effect this reduction, $79,100 was credited by the Dome Company to Warner Brothers and $8,400 was credited to the Robbins loan account above mentioned.

In October, 1929, Robbins borrowed $10,000 from the Warners and, at about the same time, requested that this indebtedness be credited with any bonus which might be due him as manager of the Dome Theatre. He was advised that his bonus amounted to $8,000. A check payable to him was issued in this amount on October 30, 1929, and was endorsed by an employee of the Warners and applied in accordance with Robbins' request. This payment of bonus was entered as a debit in the Robbins loan account.

The Dome Company paid no salaries to any of its officers as such, all of whom, except Robbins, were likewise officers of Warner Brothers. Its legal matters were handled by counsel for Warner Brothers, which bore this expense as well as that incident to the keeping of its books and the preparation of its tax returns. In March, 1930, Warner Brothers proposed to transfer the stock of the Dome Company to the Empire Anusement Company, an Ohio corporation. In response to a request by Robbins that he be protected in his agreement with respect to a bonus on the earnings of the Dome Theatre, a contract was effected under date of March 14, 1929, between Robbins, Warner Brothers, and the Empire Amusement Company, granting to Robbins an annual bonus of one-tenth of the net profits of the theatre for the remaining term of its lease. The contract recited that Robbins was the owner of 24 shares of stock of the Dome Company and required that he deliver the same to Warner Brothers. The Dome Company was dissolved on October 1, 1930.

Respondent has held that the Dome Company and Warner Brothers Pictures, Inc., were not affiliated during the period here involved and has denied their right to file a consolidated return.

OPINION.

GOODRICH: Petitioner contends that Warner Brothers was the purchaser and owner of all of the outstanding stock of the Dome Company and that Robbins, with respect to the stock standing in his name was but a nominee, having no interest in the stock and no right to possession or control of it. We are convinced that such was the fact. True, so far as the corporate record is concerned, Robbins appeared as owner of 9.6 per centum of the stock, both before and after the reduction of the company's capital. The certificates were issued in his name; he was listed as a stockholder upon the certificates filed with the authorities of the state; the contract recited that he was a stockholder, and he was made an officer and director of the company. But, in the absence of estoppel, the corporate record will not serve to bind petitioner if it is contrary to facts, as we believe it was.

The evidence before us is convincing that Warner Brothers intended to, and did, acquire the entire outstanding stock of the Dome Company and that stock was issued in Robbins' name only because it was necessary so to do to secure the loan of additional funds. Robbins emphatically denies any expectation of interest in or claim to the stock and he paid for none of it. He exercised none of the rights of a stockholder, he took no part in the management of the company's business beyond the duties of his employment as theatre manager, he received none of the substantial dividends paid by the company, he received nothing in payment for the stock in his name upon its surrender, either at the time its capital was reduced or when he formally relinquished his rights by the contract of March 14, 1930. Long before that contract was drawn the stock standing in his name, which since its issuance had been in the possession of the bank, had been delivered not to Robbins, but to Warner Brothers. We conclude that Warner Brothers Pictures, Inc., was the real owner of all of the stock of the Dome Company and Robbins was its nominee. Therefore those corporations, during the period before us, were affiliated under section 240 of the Revenue Act of 1926.

Judgment will be entered for the petitioner.