Brandon v. Commissioner

D. S. BRANDON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Brandon v. Commissioner Docket No. 20124. United States Board of Tax Appeals 10 B.T.A. 1118; 1928 BTA LEXIS 3953; March 1, 1928, Promulgated *3953 The two corporations herein were affiliated within the meaning of section 240(b) of the Revenue Act of 1918, and, therefore, entitled to file a consolidated return for the period under consideration. H. H. Hunt, Esq., for the petitioner. William H. Lawder, Esq., and A. H. Fast, Esq., for the respondent. MORRIS *1119 This is a proceeding for the redetermination of a deficiency in income and profits taxes of $1,557.19 for the fiscal year ended June 30, 1920. The sole question presented for consideration is whether the respondent incorrectly held that D. S. Brandon & Co., Dublin, Ga., and the Oconee Milling & Grain Co., of the same place, were not affiliated and, therefore, not entitled to file a consolidated return for the period in controversy. This proceeding is brought by the petitioner as transferee of the assets of D. S. Brandon & Co., Inc., of which he was a stockholder. FINDINGS OF FACT. The petitioner is an individual residing and engaged in business in Dublin, Ga. D. S. Brandon & Co. (hereinafter referred to as the parent company), was incorporated on or about June 25, 1918. The Oconee Milling & Grain Co. (hereinafter*3954 referred to as Oconee), which had prior to its incorporation operated as a copartnership, was incorporated on June 25, 1918. The business of both the parent company and Oconee was that of buying and selling corn products, grits, bran and other similar products. Upon the incorporation of the parent company, 205 shares of stock were issued to D. S. Brandon, president and general manager of that company, 30 shares of which, in 5-share lots, he gave to his wife, daughter, son, R. W. Brandon, H. H. Brandon and D. S. Brandon, Jr. He also sold 90 shares to J. P. Smith, vice president of the parent company, and 15 shares to A. T. Duncan, secretary and treasurer, taking the notes of these two individuals in payment therefor and holding the shares of stock as security for the payment of those notes, it being understood at the time that if the business prospered they were to participate in the profits in proportion to the amount of stock owned by them, and if no profits were realized they were to pay D. S. Brandon 80 per cent of the amounts of the notes. It was further agreed and understood between Brandon, Smith and Duncan at the time of the sale of that stock that, if they ever wanted*3955 to sell their shares, Brandon would have the first option to purchase. Prior to the incorporation of Oconee, A. D. Blackshear was a member of the partnership conducting that business. He enlisted in the United States Army on or about October 1, 1917, and embarked for France about two months later. Blackshear left no power of attorney for the conduct of his interest in the business, but he did say to Brandon upon leaving, "If you make any money out of the mill, all right; if you lose, you will never hear from me; go to it." Brandon and his fellow officers of the parent company, feeling somewhat apprehensive *1120 about the condition of the affairs in the event of the death of Blackshear, who had invested $4,000 in Oconee prior to his departure for France, sought the advice of an attorney, who advised them that both the parent company (which had also existed as a copartnership prior to incorporation) and Oconee should be incorporated, whereupon the two businesses were separately incorporated. The parent company having advanced moneys from time to time to Oconee to the extent of $20,500, that company's capital investment in Oconee, at the time of incorporation, was entered*3956 upon its books as $16,000, and the capital investment of Blackshear, who was then in France, was entered as $4,000, making a total of $20,000. No stock certificates were ever issued by Oconee, nor were any stockholders' meetings held for the purpose of drawing up by-laws or for any other purpose. The business of Oconee was adjacent to that of the parent company and the same clerical staff kept the books of both businesses. D. S. Brandon handled the finances of Oconee, borrowing money frequently for the operation of that company, and conducted its affairs generally in addition to his duties as president of the parent company. Blackshear was discharged from the United States Army May 31, 1919, and he immediately went to Douglas, about 100 miles distance from Dublin, where he engaged in business, but he exercised no control over nor had anything to do with Oconee from May, 1919, to January, 1920, the date when that business was destroyed by fire. He visited the company only once during that time. A consolidated income and profits-tax return was prepared and filed for the fiscal year ended June 30, 1920, showing the combined net income of the parent company and that of Oconee, *3957 and a tax of $377.50 was paid thereon. That return was rejected by the respondent on the ground that those two companies were not affiliated within the meaning of the law. The respondent's deficiency notice proposing the assessment here in controversy says: As provided in section 280 of the Revenue Act of 1926, there is proposed for assessment against you the amount of $1,557.19, constituting your tax liability as a transferee of the assets of D. S. Brandon Company, Inc., Dublin, Georgia, for the outstanding portion of income and profits taxes in the amount of $1,962.39, assessed against D. S. Brandon Company, Inc., for the fiscal year ended June 30, 1920, as per attached statement. OPINION. MORRIS: The sole issue herein is whether D. S. Brandon & Co. and the Oconee Milling & Grain Co. were affiliated within the meaning of the Act and, therefore, entitled to file a consolidated return for the fiscal year ended June 30, 1920. *1121 Section 240(b) of the Revenue Act of 1918 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*3958 or by a nominee or nominees 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. While the corporate structure of Oconee was somewhat defective because of its failure to enact its by-laws, issue its stock, and hold stockholders' meetings, etc., no issue was raised as to whether it was a corporation within the meaning of the above provision. Let use see, therefore, if the parent company "owns directly or controls through closely affiliated interests * * * substantially all the stock" of Oconee. The parent company had an investment of $16,000 in Oconee, or 80 per cent of the total amount invested in that company, which is not a sufficient sum to say that it owns "directly * * * substantially all the stock" of Oconee. If it did not own "directly," did it have sufficient control over the stock of Blackshear to say that it controlled "through closely affiliated interests or by a nominee or nominees substantially all of the stock" of Oconee? What constitutes an affiliation within the meaning of the statute depends upon the facts of each individual case. *3959 ; ; ; ; . Oconee, prior to its incorporation on June 25, 1918, was a copartnership of which Blackshear was a member. In October, 1917, Blackshear enlisted in the United States Army and embarked for France shortly thereafter, leaving instructions with Brandon to operate the business, and, while he left no power of attorney, he did leave Brandon in complete and effective control, not only of the business, but of his (Blackshear's) interest therein. After Blackshear's departure, Brandon, for reasons hereinbefore stated, incorporated Oconee, and, Blackshear having a $4,000 interest in the business, that amount of stock was allotted to him and $16,000 to the parent company, which had advanced money to Oconee to the extent of $20,500, and these amounts were so recorded in the books of account of the corporation. When Blackshear returned from the Army in 1919 he*3960 made no attempt to exercise any control over Oconee. At the hearing of this proceeding Blackshear appeared as a witness, and when asked in whose hands he left control of his interest in Oconee, he said, "D. S. Brandon & Company." While we recognize that mere control of a business, in the sense that its affairs are conducted without interference from minority *1122 stockholders, is not sufficient in itself to being it within the meaning of the statute, the peculiar facts and circumstances of this case must be borne in mind in construing the extent of the parent company's control, through Brandon, over the affairs of Oconee. It must be remembered that when Blackshear departed for the Army the business was not then a corporation, and therefore the witness, not having in mind a corporation, could not have used language applicable to the assignment of control in a corporate enterprise. He gave complete control of the business, and his interest therein, to the Brandon Company when he departed for the Army, and while it is true Blackshear returned from the Army at the beginning of the fiscal period under consideration, it is clear that the control placed in the parent company*3961 was never in any manner repealed or interfered with. Blackshear can not be said to have parted with his legal control over his stock ownership, but legal control is not necessary where the control exercised through closely affiliated interests is just as effective. As an illustration of the utter lack of interest taken by Blackshear in the business or his control exercised over it, he was asked, "What knowledge did you have of the incorporation of Oconee Milling & Grain Company?" and he replied, "I had none, sir." Considering the facts and circumstances hereinbefore related, we are of the opinion that direct ownership of 80 per cent of the stock of Oconee by the parent company, together with the control here enjoyed over the remaining 20 per cent owned by Blackshear, affiliates these two corporations within the meaning of the Act and the decided cases supra. Reviewed by the Board. Judgment will be entered for the petitioner on 15 days' notice, under Rule 50. LITTLETON, MARQUETTE, TRAMMELL, and ARUNDELL dissent.