Adaskin-Tilley Furniture Co. v. Commissioner , 6 B.T.A. 316 ( 1927 )

OPINION.

MoRRis:

Section 240 (b) of the Revenue Act of 1918 provides in part that two or more corporations shall be deemed to be affiliated if substantially all of the stock is owned or controlled by the same interests. In the present case, Adaskin and Tilley owned 90.4 per cent in the petitioner and 53.1 per cent in the Providence company during 1920. These percentages standing alone would not be sufficient to meet the requirement of “ substantially all ” laid down by the statute. Appeals of United Metal Spinning Co., 2 B. T. A. 520; Rishell Phonograph Co., 2 B. T. A. 229. The petitioner, however, contends that, in addition to the stock owned outright by Adaskin and Tilley, the former controlled all of the minority stock of both companies. If, as a matter of fact, he controlled such additional stock, there would be no question that substantially- all of the stock was owned or controlled by the same interests.

There is no doubt but that Adaskin had absolute control of the business methods, policies and relations of the two corporations. He dominated and managed the business of each. He settled questions of policy, expediency and methods of operation. He organized both corporations with the understanding that he should have control of the business. We have heretofore held, however, in the Appeal of Canyon Lumber Co., 1 B. T. A. 473, that the control “referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.” We further held in the Appeal of Watsontown Brick Co., 3 B. T. A. 85, that “ control of the business is not control of the stock of a corporation conducting a business, nor, where a minority of stockholders are present, even though quiescent, representing 27.04 per cent of the stock, can we hold that the stock owned or controlled by the parent company constitutes substantially all of such stock.” In the Appeal of Rishell Phonograph Co., supra, we used the following language:

It is obvious that the two corporations constituted a single economic unit with an arbitrary assignment of profits to the phonograph company, which in fact employed no capital and was practically nothing but an order-soliciting department of the furniture company. But this alone is not necessarily sufficient to bring the corporations within the provisions of section 240 (b) of the Revenue Act of 1918.

The petitioner attempts to show control of the voting stock by the facts that Smith and Barstow, the owners of approximately 22 and 14 per cent, respectively, of the stock of the Flint-Adaskin Co., were subject to discharge without notice by Adaskin, that Smith and Barstow had worked harmoniously and had never interfered or objected to the business policies or methods of Adaskin, and that the minority stockholders, other than Smith or Barstow, never attended stockholders’ meetings or attempted to exercise their right to vote other than by certain proxies made out in favor of Adaskin and Smith. The fact that the stockholders worked harmoniously does not establish control of the stock of one by the other. Appeal of Sutherland Manufacturing Co., 3 B. T. A. 1224.

Barstow and Smith, who together owned approximately 36 per cent of the stock of the Flint-Adaskin Furniture Co., owned no stock in the petitioner and there is no showing that the other minority stockholders, owning 10 per cent additional, had any interest therein. To hold upon such facts that Adaskin controlled that stock by reason of his control of the business through a majority stockholding would, in our opinion, lead to the inevitable conclusion that a bare majority stock holding, or even less than a majority, where the ownership is widely scattered, brings about an affiliation, a result which is inconsistent with the express wording of the statute that there must be ownership or control of substantially all the stock. Appeal of Tunnel Railroad of St. Louis, 4 B. T. A. 596.

The petitioner relies chiefly upon three decisions of the Board, namely, Appeals of Monroe Furniture Co., 2 B. T. A. 743; Midland Refining Co., 2 B. T. A. 292, and Mahoning Coal Railroad Co., 4 B. T. A. 923. These cases are. clearly distinguishable. In the first-named case, the same stockholders owned in excess of 90 per cent of the stock of two of the corporations involved and approximately 80 per cent of the other two. In the Midland case, fifteen stockholders owned stock in both companies, their holdings amounting to approximately 80 per cent of both. In addition to the ownership of stock by the parent company in the Mahoning Coal Railroad Co. case in excess of 58 per cent and by the parent company and its officers and stockholders of 74 to 80 per cent, there were additional factors which influenced the decision in that case which are not present in the instant case.

Judgment will be entered for the respondent.