Kennington Realty Co. v. Commissioner

OPINION.

Lansdon :

The petitioners herein claim the right to file consolidated income and profits-tax returns for the fiscal years and period here involved and rely for authority so to do on section 240 (b) of the Revenue Act of 1918 which provides: “ For the purpose of this section two or more domestic corporations shall be deemed to be affiliated * * * (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.” The evidence discloses that R. E. Kennington was owner of record and in fact of 77% per cent, 77% per cent and 100 per cent respectively, of the three petitioners. In addition to his actual ownership of these percentages of the stock he exercised control of the remainder by virtue of the contract under which the so-called gratuity stock was issued to various employees of the three petitioners. We are of the opinion that the petitioners were entitled to affiliation for income and profits-tax purposes during the taxable years and taxable period involved. Appeal of Midland, Refining Co., 2 B. T. A. 292; Appeal of Wright Cake Co., 2 B. T. A., 58; Paris Cloak, Suit & Millinery House v. Commissioner, 5 B. T. A. 189.

The second contention of the petitioners is that the amounts paid to the owners of the so-called gratuity stock were not dividends resulting from distribution of corporate earnings but in fact were bonuses or additional compensation for services rendered and therefore were deductible as ordinary and necessary expenses from gross income of the several petitioners in the respective years in which such payments were made. To sustain this issue the petitioners rely on the fact that as the holders of the gratuity stock paid nothing therefor and had no investment therein, the payments received can not be regarded as dividends and on the further fact that such stock was held under the terms of a contract that authorized R. E. Kennington to recall and cancel it at any time on payment of its book value. The record discloses that except for the limitations of the contract the gratuity stock was the absolute property of the employees to whom it was issued. They could vote it and they could and did receive distributions of corporate earnings ratably as to their holdings. That no dividends were paid on the common stock held by R. E. Kennington is not material since by unanimous agreement of all stockholders, corporations may distribute earnings to stockholders other than ratably on the basis of stock holdings. Joseph Goodnow & Co., v. Commissioner, 5 B. T. A. 1154; 6 Fletcher on Corporations p. 6114, sec. 3674; C. J. 815; Breslin v. Fries-Breslin Co., 70 N. J. L. 274; 58 Atl. 313, 318. The petitioners also argue that the distributions or payments in question were not made as a result of corporate action declaring dividends. Inasmuch as each of the petitioners was a close corporation controlled by one man and that the distributions in question were computed and paid by an officer of the R. E. Kennington Co., it may be presumed that such action, though informal, was authorized by the corporation. We are of the opinion that the payments in question were distributions and that the amount thereof should be added to the gross income of the respective petitioners for each of the years and period here involved. Cf. Appeal of Hamilton Manufacturing Co., 3 B. T. A. 1045.

The evidence adduced in support of the petitioners’ allegation that the Commissioner erred in the computation of the prewar invested capital of the individual concern afterwards incorporated as the three petitioners is insufficient to serve as a basis for any findings of fact.

Judgment will be entered on 10 days' notice, under Rule 50.

Considered by Sternhagen and Arundell.