Richfield Oil Co. v. Commissioner

RICHFIELD OIL CO. AND OLINDA GASOLINE CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Richfield Oil Co. v. Commissioner Docket Nos. 15799, 19077. United States Board of Tax Appeals 13 B.T.A. 1050; 1928 BTA LEXIS 3116; October 16, 1928, Promulgated *3116 Affiliation. - Where five persons owned all of the stock in one corporation, and 80.20 per cent in another, and controlled 18.80 per cent in the other, the corporations were affiliated and a consolidated return for each taxable year is proper. Claude I. Parker, Esq., and Ralph W. Smith, Esq., for the petitioners. Shelby S. Faulkner, Esq., for the respondent. MILLIKEN *1050 Deficiencies were determined in these two proceedings against the Richfield Oil Co. in the amount of $18,782.18 for the year 1918, Docket No. 19077, and in the amount of $1,095.17 for the year 1919, Docket No. 15799. The only error complained of is that the respondent erred in ruling that the Richfield Oil Co. was not affiliated *1051 with the Olinda Gasoline Co. during the taxable years in question and in refusing to allow it to file consolidated returns with the latter company. The Olinda Gasoline Co. joined in both proceedings by amended petition. FINDINGS OF FACT. The petitioners, Richfield Oil Co. and the Olinda Gasoline Co., are California corporations with their principal offices at Los Angeles. The Olinda Gasoline Co. was a producing company*3117 and was organized in 1913. The Richfield Oil Co. was a distributing company and was organized shortly before the Olinda Gasoline Co. Stockholdings in the two companies during 1918 and 1919 were as follows: Richfield Oil Co. Olinda Gasoline Co. Name of stockholder Shares held Per cent Shares held Majority holdings Per cent of total Per cent Per cent F. R. Kellogg 35,000 23.33 93.63 23.349 18.726 Mrs. T. A. Winter 35,000 23.33 93.63 23.349 18.726 G. J. Syminton 35,000 23.33 93.63 23.349 18.726 C. M. Fuller 10,000 6.67 26.48 6.604 5.296 J. R. Jacobs 35,000 23.34 93.63 23.349 18.726 Majority interest 150,000 100.00 401.00 100.00 80.20 J. F. Vordermark 1.00 .2 R. E. Vordermark 93.00 18.6 E. A. Sawyer 5.00 1.0 Minority interest 99.00 19.8 Total 150,000 100.00 500.00 100.00 100.00 The Olinda Gasoline Co. was organized and promoted by J. F. Vordermark, who was a practical gasoline man of experience. The stock was issued to him and others for leases and cash. On account of business reasons the 94 shares to which he was entitled were issued 1 share to*3118 him and 93 shares to Miss R. E. Harper, who subsequently became his wife. Of the remaining 406 shares, 401 became the property of the stockholders of the Richfield Oil Co., as indicated in the above table. The Richfield Oil Co. furnished four of the directors of the Olinda Gasoline Co. and Vordermark was the fifth and became president and general manager of it from its organization to 1925. By contract between the two companies, the entire output of the Olinda Gasoline Co. was sold to the Richfield Oil Co. at from 2 to 7 cents per gallon below the market price, averaging about 4 cents below during the entire period. The Richfield Company fixed the prices and terms of the contracts. During most of the time from 1913 to 1925, Vordermark received a salary of $200 per month as president-manager of the Olinda Company *1052 and for part of the time it was fixed at $150 per month. The business policy of the Olinda, its expenditures, and management were at all times under the complete domination and control of the majority interest represented by stockholders in the Richfield Oil Co., who owned 80.20 of the Olinda Company's stock and furnished four of its five directors. The*3119 93 shares of Olinda standing in the name of Mrs. Vordermark were never voted, nor were the 5 shares of E. A. Sawyer. Vordermark voted his 1 share in accordance with the wishes and plans of the majority, as he considered that his position and salary depended upon the will of the majority. There was no outstanding adverse interest and every stockholder actively aided in the unanimous control of the business and capital stock of the Olinda Company or was agreeable thereto. Substantially all of the stock of the Richfield Oil Co. and the Olinda Gasoline Co. was owned or controlled by the same interests during the years 1918 and 1919; they were affiliated during those years and were entitled to file consolidated returns. OPINION. MILLIKEN: We have stated in a number of these cases that a mere percentage of stock ownership does not control the decision of these questions, but in connection with other facts it may indicate and establish a complete control of substantially all of the stock of two or more corporations. In these proceedings it appears that five persons owned all of the stock of the Richfield Oil Co. and that the same persons owned 80.20 per cent of the stock of*3120 the Olinda Gasoline Co. Of the remaining 19.80 of Olinda stock, 18.80 was owned by Vordermark and his wife, and 1 per cent was owned by E. A. Sawyer. From the organization of the Olinda, in 1913, to 1925 its affairs and stock have been under the practical control and domination of the Richfield stockholders. They dictated the officers of the Olinda, fixed the salaries, and disposed of its entire product on terms fixed by them to the Richfield Company at prices considerably below the market price. There was never any objection thereto by any stockholder, and J. F. Vordermark, the holder or representative of all the minority shares except five, actively participated therein as president-manager and voted his stock in accordance with the plans of the majority. He testified that it was to his interest to do so as he desired to retain his official position and salary. Vordermark, while a stockholder and president-manager of the Olinda Company, was in reality an employee, and his position and the value of his stock depended on the control of the majority interests represented by the Richfield stockholders. The Olinda Company was merely a department of the Richfield Company in which*3121 *1053 it owned 80.20 per cent of the stock and controlled 18.80 per cent standing in the name of Vordermark and wife. In , in defining the word "control," the Board said: The word "control" as defined in Funk & Wagnall's New Standard Dictionary, means "To exercise a direct, a restraining or governing influence." Webster defines it as "To exercise restraining or directing influence over; to dominate; hence to hold from action; to curb; subject; overpower." The object sought to be accomplished by Congress, in enacting section 240 of the Revenue Act of 1918, was to tax as a business unit what really was a business unit, and to prevent the component parts thereof from evading taxation by means of inter-company transactions. Since Congress intended to require two or more corporations, where substantially all their stock "is owned or controlled by the same interests," to file a consolidated return in order to prevent them from evading income tax, we can find no reason for holding that the "control" contemplated by the statute means only legal control; that is, control enforceable by legal means, for control not arising or flowing*3122 from means legally enforceable may be just as effective in evading taxation as if founded on the most formal and readily enforceable legal instrument. There is no authority in the section of law referred to or in its context, so far as we can see, for assuming that Congress intended to use the word "control" in other than its ordinary and accepted sense. On the other hand, we believe that a proper construction of the statute, if it is to serve the purpose for which it was intended, requires us to hold that the "control" mentioned therein means actual control, regardless of whether or not it is based upon legally enforceable means. The control, however, must be shown to be a genuine and real control actually exercised, and it can not be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation. No definite rule, applicable to all cases, can be laid down for recognizing control. Each case must, therefore, be considered and decided upon its own facts and surrounding circumstances. In the instant proceedings we think that a real control actually exercised*3123 has been shown over that part of the Olinda stock not actually owned by the Richfield stockholders. This has been manifested through a period of 12 years and during the taxable years in question. While not resting upon any legal instrument, or legally enforceable means, the influence over Vordermark and his position proved sufficiently potent for an exercise of this control for 12 years. We think that this case comes within the purview of section 240(b) of the Revenue Act of 1918, and that substantially all of the stock of the two corporatios was owned or controlled by the same interests. Cf. ; ; ; . The Richfield Oil Co. and the Olinda Gasoline Co. were affiliated during the taxable years 1918 and 1919 and are entitled to file consolidated returns. Judgment will be entered under Rule 50.