DocketNumber： Docket Nos. 11236, 16219, 27876.
Citation Numbers： 22 B.T.A. 925, 1931 BTA LEXIS 2039
Judges： Fossan
Filed Date： 3/26/1931
Status： Precedential
Modified Date： 11/20/2020
1931 BTA LEXIS 2039">*2039
22 B.T.A. 925">*925 These proceedings were brought to redetermine deficiencies in the income and profits taxes of the petitioners for the years 1920 and 1921 and their income taxes for the year 1922. In Docket No. 11236 deficiencies were asserted against the Detour Dock Company for the calendar year 1920 and the Perry Iron Company of Pennsylvania for the six-month period ended June 30, 1920, and the Perry Iron Company of Delaware for the sixth-month period ended December 22 B.T.A. 925">*926 31, 1920, in the amounts of $35,719.18, $43,531.99, and $7,618, respectively. In Docket No. 16219 a deficiency for the year 1921 is asserted against the Detour Dock Company in the amount of $12,983.02. In Docket No. 27876 a deficiency for the year 1922 is asserted against the Detour Dock Company and the Perry Iron Company of Delaware in the amounts of $10,059.39 and $2,765, respectively. These proceedings1931 BTA LEXIS 2039">*2040 were consolidated for hearing and decision.
The sole issue in all three proceedings is whether or not during the years 1920, 1921, and 1922 the Detour Dock Company was affiliated with the Perry Iron Company within the meaning of section 240 of the Revenue Acts of 1918 and 1921.
FINDINGS OF FACT.
Pickands, Mather & Company of Cleveland, Ohio, was a partnership which for many years prior to 1918 had been engaged in various lines of business, including producing and dealing in coal and fueling vessels from docks along the Great Lakes. One of these docks, at Detour, Mich., had become inadequate for the needs of its business, and in 1908 Pickands, Mather & Company began the construction of a new, larger, and more modern dock near the location of the old one.
At that time the Pittsburgh Steamship Company (hereinafter called the Steamship Company), a subsidiary of the United States Steel Corporation, owned and was operating a fleet of freight vessels on the Great Lakes and needed fueling facilities in the vicinity of Detour. While the new dock at Detour was under construction Pickands, Mather & Company and the Steamship Company entered into a verbal agreement whereby the Steamship1931 BTA LEXIS 2039">*2041 Company was to use the dock for refueling its own vessels with its own coal at the actual cost per ton of the service of storing and loading. Pickands, Mather & Company was to have charge of the management and operation of the dock and to continue its business of dealing in coal and refueling vessels. In December, 1908, Pickands, Mather & Company organized the petitioner corporation, the Detour Dock Company (hereinafter called the Dock Company), with an authorized capital stock of $260,000, divided into 1,300 shares of common and 1,300 shares of preferred stock of the par value of $100 each. Each share of common and preferred stock had equal voting power. The preferred stock was to have no preference over the common stock except as to the payment of a 6 per cent dividend, payable annually on February 1. In the event of a dissolution of the corporation the holders of common and preferred stock were to share pro rata in the assets of the corporation.
22 B.T.A. 925">*927 Pickands, Mather & Company thereupon transferred the dock and equipment at Detour to the Dock Company and received therefor its entire capital stock. On February 23, 1909, the Steamship Company entered into a contract1931 BTA LEXIS 2039">*2042 with the Dock Company for a period of 21 years by which it agreed to fuel all its vessels in the Sault Ste. Marie River exclusively from the dock of the Dock Company; to furnish and deliver alongside the dock all coal necessary for such purpose; and to pay for loading, handling, storing, and fueling at the actual cost per ton of such charges. The Dock Company agreed to perform the services specified according to the terms set forth in the agreement. The Steamship Company agreed to pay an additional fixed charge of $7,800 per year on or before February 1, of each year, regardless of the amount of coal handled. That amount was termed a consideration for entering into the contract and agreeing to perform the services named.
On February 25, 1909, Pickands, Mather & Company entered into a written contract with the Steamship Company whereby the latter company agreed to purchase the entire issue of the preferred stock of the Dock Company for cash. The contract recited that since such sale was induced by the execution of the contract of February 23, 1909, the Steamship Company agreed that if it failed to carry out the terms of that contract it would tender the said preferred stock to1931 BTA LEXIS 2039">*2043 Pickands, Mather & Company to be repurchased by it, at its option, at book value. The Steamship Company also agreed not to sell or assign any of its preferred stock and Pickands, Mather & Company agreed not to dispose of any of its common stock during the life of the contract. The contract further provided that the board of directors should be composed of two persons nominated by the Steamship Company, two by Pickands, Mather & Company, and the fifth selected by the four directors so chosen.
All negotiations relating to the association of the Steamship Company and Pickands, Mather & Company interests in the Detour Dock enterprise were carried on through H. Coulby, a partner in Pickands, Mather & Company, and president of the Steamship Company.
On February 23, 1909, the board of directors of the Steamship Company appointed the firm of Pickands, Mather & Company its agent, without compensation, to manage and operate the dock and dock business of the company, subject to the approval of the board of directors, and also gave Pickands, Mather & Company the authority to sign all checks on the Steamship Company's funds.
Acting under the authority of the above agreements and powers, 1931 BTA LEXIS 2039">*2044 Pickands, Mather & Company continued to operate the new dock exactly as it had operated the old one. The Steamship Company purchased its own coal and Pickands, Mather & Company supplied all coal used in the commercial trade. The coal purchased by the 22 B.T.A. 925">*928 Steamship Company was delivered on the dock and transported to "pockets," or elevated bins, from which its own ships were fueled.
The payments of the dividends of $7,800 and the service charges of the same amount covered by the contract of February 23, 1909, were effected by an exchange of checks made simultaneously through the mails. Stockholders' meetings of the Dock Company were held once a year. The Steamship Company and Pickens, Mather & Company acted under a "gentleman's agreement" which provided that the proxies to vote the preferred stock were executed in favor of Pickands, Mather & Company or some member or representative of that firm and that such proxies should be voted as Pickands, Mather & Company desired and determined. During 1920, 1921, and 1922 Samuel E. Boole, a partner in Pickands, Mather & Company, voted the proxies. W. J. Filbert, comptroller of the United States Steel Corporation and connected1931 BTA LEXIS 2039">*2045 with the Steamship Company, was the only director elected to represent the latter company, and he never attended a directors' meeting. The Steamship Company did not participate in, assume any control whatever over, or inquire into the management of the dock operations.
In May, 1920, Pickands, Mather & Company organized a corporation, called the Perry Iron Company, under the laws of Pennsylvania and transferred to it many properties, including the 1,300 shares of common stock of the Dock Company. Pickands, Mather & Company was the owner of all of the capital stock of the Perry Iron Company and the latter corporation was the owner of all of the common stock of the Dock Company during 1920, 1921, and 1922, while the Steamship Company was the owner of all of the preferred stock of the Dock Company during those years. The Perry Iron Company was engaged in many phases of the coal industry. The business conducted by the Dock Company was a department or branch of the Perry Iron Company operations.
On March 15, 1919, the respondent authorized Pickands, Mather & Company to make a consolidated return for income, war-profits and excess profits tax purposes for the Perry Iron Company, 1931 BTA LEXIS 2039">*2046 the Dock Company, and five other corporations. In 1924 the respondent reconsidered this ruling and denied affiliation. The Perry Iron Company billed coal to the Dock Company at cost until it received notice of the respondent's change of ruling. Thereafter, the price of coal billed to the Dock Company was fixed so that the Dock Company would make merely a nominal profit. Pickands, Mather & Company also made a charge for its services which theretofore it had furnished free.
The deficiency letters of the respondent relating to the year 1920 do not give credit for the sum of $57,275.06 paid by Pickands, Mather & Company for the consolidated group.
22 B.T.A. 925">*929 OPINION.
VAN FOSSAN: The only issue in these proceedings is whether or not the petitioner, the Detour Dock Company, was affiliated with the Perry Iron Company during the years 1920, 1921, and 1922 within the meaning of section 240 of the Revenue Acts of 1918 and 1921. Section 240(b) of the 1918 Act provides:
For the purpose 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 nominees1931 BTA LEXIS 2039">*2047 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.
Section 240(c) of the 1921 Act contains identical language.
Every case involving the question of affiliation is a problem of fact. The factors may vary but their composite picture must portrary clearly either the requisite stock ownership or a stock control by closely affiliated interests. The control required is not merely a control of the management and operation of the business, but it is a control of the stock, which, in turn, by the exercise of the voting power inherent therein, controls the management and determines its policies. Such a control is not a mere equivalent to ownership. It is a more comprehensive term than ownership. ; affirming ;
Pickands, Mather & Company owned all of the capital stock of the Perry Iron Company. The Perry Iron Company owned all of the common stock of the Detour Dock Company. There is no question as to the practical domination by Pickands, Mather & Company and the Perry Iron Company of the actual operations of the Dock Company. The only so-called "outside" interest that possibly might prevent affiliation was the ownership of all the preferred stock of the Dock Company by the Pittsburgh Steamship Company, it being borne in mind that the preferred stock carried voting power coequally with the common stock. We must, therefore, consider the part the Steamship Company played in the corporate structure of the Dock Company and the circumstances surrounding 22 B.T.A. 925">*930 1931 BTA LEXIS 2039">*2049 the issuance of that stock in order to determine whether or not it interfered with the control, otherwise exclusive, which Pickands, Mather & Company, and the Perry Iron Company exercised over the Dock Company.
The acquisition and ownership of the preferred stock by the Steamship Company were surrounded by peculiar circumstances Under the articles of incorporation of the Dock Company the preferred stock had equal voting power with the common stock. However, as appears in the findings of fact, the issuance of that stock to the Steamship Company was so circumscribed and hedged in by restrictions and limitations as to nullify that power as a practical matter. See
The preferred stock bore no burden of taxation. It was not affected by the regular and long-established business of the Dock Company and received no beneficial interest therefrom. Profits could have been, and were apportioned arbitrarily between the Perry Iron Company and the Dock Company. See 1931 BTA LEXIS 2039">*2050 .
The evidence discloses that the lack of participation in the real business of the Dock Company as contemplated in the initial agreements was strikingly shown by the subsequent conduct of the Steamship Company and the Dock Company and their respective officers. The Steamship Company had no share in nor responsibility for the management and operation of the entire docking and fueling business of the Dock Company, including the service which the Steamship Company itself received. It did not even inquire into the business of the Dock Company. Pursuant to a standing oral agreement, it executed proxies to Pickands, Mather & Company or their representatives to vote the preferred stock just as the latter desired and determined. The Dock Company had only one formal stockholders' meeting a year. The Steamship Company did not avail itself of its right to elect two directors but, on the contrary, chose only one, W. J. Filbert, who never attended a directors' meeting. By its affirmative action in agreeing that Pickands, Mather & Company and the Perry Iron Company should manage and operate the Dock Company as it desired1931 BTA LEXIS 2039">*2051 and should control its preferred stock, and by its confirmation of that agreement through proxies consistently and continously executed over a period of many years, the Steamship Company, in practical effect, disclaimed any share in the control of the Dock Company by reason of or through its ownership of preferred stock. Thus, the Steamship Company exhibited no interest adverse or hostile to that of the Perry Iron Company.
22 B.T.A. 925">*931 In tax problems we deal with facts as they are and not as they might be. Under the facts as they were, the actual control of the entire stock of the Dock Company, common and preferred alike, was in the Perry Iron Company functioning through Pickands, Mather & Company, which were "the same interests" as contemplated by section 240.
The Perry Iron Company and the Detour Dock Company had that community of business interest and unity of stock control which entitled them to be classed as affiliated corporations during the years 1920, 1921, and 1922.
Proper credit should be given for the amounts of taxes paid by Pickands, Mather & Company on behalf of any and all of the affiliated corporations.