American Refrigerator Transit Co. v. Commissioner , 14 B.T.A. 616 ( 1928 )

AMERICAN REFRIGERATOR TRANSIT CO., PETITIONER, MISSOURI PACIFIC RAILROAD CO., INTERVENER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

American Refrigerator Transit Co. v. Commissioner

Docket No. 19019.

United States Board of Tax Appeals

14 B.T.A. 616; 1928 BTA LEXIS 2948;

December 7, 1928, Promulgated

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">*2948 The American Refrigerator Transit Co. and the Missouri Pacific Railroad Co.held to have been affiliated for the years 1920 and 1921.

Thomas T. Railey, Esq., and Edward J. White, Esq., for the petitioners.

M. N. Fisher, Esq., for the respondent.

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SMITH

">*616 This is a proceeding filed by the American Refrigerator Transit Co. for the redetermination of deficiencies in income and profits tax for the years 1920 and 1921 in the respective amounts of $17,666.38 and $66,593.03. The Missouri Pacific Railroad Co. joins in the petition as intervener, and asks that it be held to be affiliated with the American Refrigerator Transit Co. for the tax years in question and that any taxes found to be due from the American Refrigerator Transit Co. be assessed and collected from it.

">*617 Many of the points in issue between the petitioners and the respondent have been settled by a stipulation filed with the Board. The only question not settled by such stipulation is whether the two petitioners were affiliated for the calendar years 1920 and 1921 and as such entitled and required by the taxing statute to file consolidated returns for those years.

">*2949 FINDINGS OF FACT.

The American Refrigerator Transit Co. is a New Jersey corporation with its principal office in St. Louis, Mo. It is engaged in the business of furnishing and handling private refrigerator cars, and furnishing certain icing facilities for the Missouri Pacific Railroad Co. and the Wabash Railway Co. It was originally organized as an Illinois corporation, but prior to 1920 was reincorporated under the laws of the State of New Jersey.

During the years 1920 and 1921, the capital stock of the American Refrigerator Transit Co. was divided into 5,000 shares of stock, 3,783 shares or 75.657 per cent of which were owned by the Missouri Pacific Railroad Co., and 1,217 shares or 24.343 per cent by the Wabash Railway Co. The certificate of incorporation provides in part as follows:

The board of directors shall have power without the assent or a vote of the stockholders to make, alter, amend and rescind the by-laws of this corporation, to fix the amount to be reserved as working capital, to authorize and cause to be executed mortgages and liens upon real and personal property of this corporation. With the consent in writing and pursuant to the vote of the holders">*2950 of a majority of the stock issued and outstanding, the stockholders having been formally convened in a meeting, the directors shall have power and authority to sell, assign, transfer, mortgage or otherwise dispose of the whole property of this corporation.

The American Refrigerator Transit Co. (hereinafter referred to as the Transit Co.), owned approximately 11,000 refrigerator cars. The Missouri Pacific Railroad Co. obtained freight for these cars throughout its territory and from connecting lines and those cars were routed, whenever convenient, over the Wabash Railway Co.'s lines from St. Louis eastward. At the time of the original organization of the company, the Missouri Pacific Co. and the Wabash Co. were so-called Gould Lines and there was an intimate community of interest between them.

One stockholders' meeting a year was held at East Orange, N.J. From 1913 to 1923, C. C. Huitt voted by proxy all of the stock at such stockholders' meetings, save qualifying shares issued to his stenographer and to his brother. Huitt was the nominee of the Missouri Pacific Railroad Co. He was also a director and an officer of the Missouri Pacific. He had no connection with the Wabash">*2951 ">*618 Railway Co. During the tax years involved and for a long time prior thereto Huitt voted the stock owned by the Wabash pursuant to proxies in substantially the following form:

Know All Men by These Presents: That the Wabash Railway Co., the undersigned stockholder in American Refrigerator Transit Co., does hereby constitute and appoint C. C. Huitt its true and lawful attorney with power of substitution for it and in his name to vote at the annual meeting of the stockholders in said company to be held at East Orange, New Jersey, on the day of April, , or at any adjournment thereof, on all matters which may properly come before it, with all the powers it shall possess if personally present.

Prior to March, 1920, the president of the Transit Co. was invariably a Missouri Pacific officer and it was he who instructed Huitt as to the names of the directors to be elected at the meetings of the Transit Co. In April, 1920, H. B. Kooser was elected president of the Transit Co. and thereafter he, with the advice and consent of the Missouri Pacific officers, submitted the names of the directors to Huitt, which parties so named were invariably elected. The officers of the Wabash">*2952 Railway Co. were at no time consulted in the choice of any of these directors. During 1920 and 1921 the directors so elected by Huitt were B. F. Bush, president of the Missouri Pacific; A. Robertson, vice president of the Missouri Pacific; J. G. Drew, vice president of the Missouri Pacific; E. J. White, vice president of the Missouri Pacific; J. E. Taussig, president of the Wabash; Wm. H. Williams, chairman of the boards of directors of both the Missouri Pacific and the Wabash, and H. B. Kooser, president of the Transit Co., subsequent to April, 1920.

The purchasing agent of the Missouri Pacific acted without compensation as a purchasing agent of the Transit Co. in purchasing equipment and supplies. The traffic department of the Missouri Pacific furnished the Transit Co. tariffs and traffic advice without compensation. The legal facilities of the Missouri Pacific were at the command of the Transit Co. for the nominal sum of $100 per month, which services were necessary in the defense of numerous personal-injury suits and extended tax litigation. The Wabash furnished no legal advice or assistance to the appellant. One Hickman, local treasurer of the Missouri Pacific, served">*2953 without compensation as treasurer of the Transit Co., and the treasurer of the Missouri Pacific in New York served as eastern fiscal agent of the Transit Co. The officers of the Transit Co., in the conduct of its business, consulted and relied upon advice given by the executive officers of the Missouri Pacific. They never went to the officers of the Wabash for advice, except with respect to operating matters peculiar to that line under the operating contract. The employees of the Transit Co. were members of the Missouri Pacific Hospital Association. The shops of the Transit Co. located at Kansas City, St. ">*619 Louis, and Omaha, were on Missouri Pacific property, and the general offices at St. Louis occupied space subleased from the Missouri Pacific, located on the same floor with the president of the Missouri Pacific. The Transit Co.'s soliciting agents at cities served jointly by the Missouri Pacific and Wabash, such as Kansas City and Omaha, were invariably officed with the Missouri Pacific agents. A Missouri Pacific business car was at the disposal of the president of the Transit Co. Directors' meetings were frequently held in the office of the president of the Missouri">*2954 Pacific, and the Missouri Pacific and the Transit Co. used the same telephone exchange.

The Missouri Pacific controlled the revenues of the Transit Co. by reason of the fact that a very considerable portion of the latter's revenue was derived from services performed for the Missouri Pacific, and the latter was in position to dictate the amount to be paid for such services. At the termination of Federal control the Transit Co. was turned back to its owners without cash in its treasury and with inadequate revenue. The Missouri Pacific Co. decided that the Transit Co. should have some additional revenue and changed the contract with the company for payment for use of its cars from 1 cent per mile to $1.80 per diem, which was the equivalent of about four times the 1 cent per mile rate. These heavy payments in 1920 of $1.80 per diem made an enormous net income for the company. When this came to the attention of the officers of the Missouri Pacific in 1921, they were about to change the operative contract to reduce the payments or eliminate them entirely, but at that time they were advised by counsel that the companies would be held to be affiliated and that it was not necessary to">*2955 make any change in the operating agreement.

The Wabash Railway Co. never attempted to interfere with the management of the Transit Co. by the Missouri Pacific. It always gave proxies for the voting of its stock at the request of the latter company.

OPINION.

SMITH: The petitioners claim to be affiliated for the calendar years 1920 and 1921 and claim the right to file consolidated returns for those years in accordance with the provisions of section 240 of the Revenue Acts of 1918 and 1921. Affiliation is denied by the respondent upon the ground that the Missouri Pacific Railroad Co. owned only 75.657 per cent of the Transit Co. and that it had no control over the stock of that company owned by the Wabash Railway Co. In support of this proposition the respondent relies upon , wherein we held that authorization to vote stock by proxy does not effect a separation ">*620 of the voting power from the ownership of the stock or neither does it constitute a relinquishment by the stockholder of any right of ownership or control of the stock.

The facts in this case are materially different from those which obtained">*2956 in the case of In numerous cases we have held that each case must be considered and decided on its own facts and surrounding circumstances. ; ; ; . In the instant case the evidence clearly shows that the Transit Co. was an adjunct or an arm of the Missouri Pacific Railroad Co. It owned the cars that were used by the Missouri Pacific in the transportation of perishable freight. The Wabash Railway Co. was closely connected with the Missouri Pacific. The refrigerator cars of the Transit Co., which obtained their freights in Missouri Pacific Co. territory, were generally routed from St. Louis to Chicago and points east over the Wabash. It was for the interest of the Wabash to work harmoniously with the Missouri Pacific. The Missouri Pacific bore a very large part of the overhead expense of the Transit Co. It was to the interest of the Wabash to allow such an arrangement to continue. It never interposed any objection">*2957 to the arrangement. The control exercised by the Missouri Pacific over the voting rights of the shares of stock of the Transit Co. owned by the Wabash was actual control. The control referred to in the statute, whether it be legal or otherwise, means control of the voting rights of the stock. ;The contention of the petitioners that they were affiliated for the calendar years 1920 and 1921, and entitled to file consolidated returns for those years, is sustained.

Judgment will be entered under Rule 50.