Jos. Denunzio Fruit Co. v. Commissioner

JOS. DENUNZIO FRUIT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Jos. Denunzio Fruit Co. v. Commissioner Docket No. 14753. United States Board of Tax Appeals 16 B.T.A. 1326; 1929 BTA LEXIS 2400; July 16, 1929, Promulgated *2400 The evidence does not establish that petitioner owned and controlled substantially all of the stock of the Spivey Packing Co. during 1921. Theodore B. Benson, Esq., for the petitioner. Harry LeRoy Jones, Esq., for the respondent. LITTLETON *1326 The Commissioner determined a deficiency of $49.43 for 1921. The issue is whether petitioner and the Spivey Packing Co. were affiliated for the taxable year. The Commissioner held that they were not affiliated because 50 shares, or 16 2/3 per cent, of the stock *1327 of Spivey Packing Co. was owned by persons who were not stockholders of petitioner and because the voting rights of such stock was not controlled by petitioner. FINDINGS OF FACT. Petitioner and the Spivey Packing Co. are Kentucky corporations, the principal office and place of business of the petitioner being at Louisville and the principal place of business of the Spivey Packing Co. being at Clearwater, Fla. The Spivey Packing Co. was organized by petitioner in 1920 with a capitalization of $30,000, represented by 300 shares of stock, all of which had voting rights. Upon organization the stock of the Spivey Packing Co.*2401 was issued as follows: Stockholders Shares Per cent Jos. Denunzio Fruit Co [241] 80 1/3 Mark Denunzio - vice president and director of petitioner and the Spivey Packing Co [1] Charles Scholtz - president and a director of petitioner and the Spivey Packing Co [1] Fred Scholtz - secretary and treasurer and a director of petitioner and the Spivey Packing Co. [1] S. J. Meares, manager of Spivey Packing Co [50] 16 2/3 Meares was unable to pay for his stock in full and in 1921 he sold and transferred 25 shares to his brother, E. T. Meares. There were no other changes in stock ownership. The stock of petitioner was all owned by Mark Denunzio, and Charles and Fred Scholtz. For a number of years prior to 1920 the petitioner had been engaged in the business of buying and selling citrus fruits in Louisville, Ky., and during the same years had an arrangement with one Spivey of Clearwater, Fla., to purchase and pack for it the citrus fruits required to supply its trade. Spivey died in 1920, and the Spivey Packing Co., a corporation, was organized to continue the business previously carried on by Spivey. S. J. Meares had previously been in the employ of*2402 Spivey. The Spivey Packing Co. paid no salaries to its officers. Neither S. J. Meares nor his brother, E. T. Meares, was an officer or director. As general manager of the Spivey Packing Co., S. J. Meares received a salary of $1,500 a year. He always attended meetings of the stockholders in Louisville, Ky., the expense of such attendance being ultimately borne by the petitioner. The stockholders' meetings were informal. During 1921 there arose no necessity for a formal vote of the stockholders. The petitioner advanced money to the Spivey Packing Co. to enable it to carry on its business, such advances from July 31, 1920, to June 30, 1921, inclusive, amounting to $67,052.68. For the year 1921 the total sales of the Spivey Packing Co. amounted to $238,632.81, of which amount $108,192.35 was purchased *1328 by the Jos. Denunzio Fruit Co. The petitioner permitted the Spivey Packing Co. to use trade brands and trade-marks which it had advertised and built up in previous years, for which it made no charge to the Spivey Packing Co. The Spivey Packing Co. was a financial failure, never paid any dividends, and was finally liquidated at a loss. The petitioner assumed full*2403 responsibility for the finances of the Spivey Packing Co. and discharged all of its indebtedness and made no demand on either S. J. Meares of E. T. Meares. Petitioner did not control the stock owned by S. J. and E. T. Meares. OPINION. LITTLETON: The petitioner's evidence sustains the Commissioner's determination that the petitioner did not control the 50 shares of stock of the Spivey Packing Co. which it did not own. The direct examination of petitioner's witnesses, Mark Denunzio, Fred Scholtz, and Charles Scholtz, appears to indicate a sort of vague verbal agreement among the incorporators of the Spivey Packing Co. to keep the stock closely held - not to be sold to the public, but such an "understanding" falls short of constituting control of the voting rights of the stock. It does not appear that E. T. Meares was a party to such an understanding or had any knowledge of its existence. The following testimony of petitioner's witnesses shows the total absence of control of the stock of the Meares brothers: Cross-examination of Mark Denunzio: Q. Did the stock certificates have any provision as to an agreement, or was there any agreement, express or implied, as to how*2404 the stock could be voted? A. No, sir. Q. Was there any provision that it should be purchased by the corporation or by the other stockholders in case Mr. Meares or his brother should want to get out of the corporation? A. I don't think so. Cross-examination of Fred Scholtz: Q. The Joseph Denunzio Fruit Company did not have any control of the 50 shares of stock owned by Mr. Meares or his brother, did it? A. As directors, we had control of all of it. Q. You mean the business? A. Yes, sir. Q. But not of Mr. Meares' individual stock? A. Nor of his individual stock. Q. You didn't have any control whatever of that 50 shares of stock? A. No, sir. Cross-examination of Charles Scholtz: Q. There was nothing ever said about his voting rights? A. There was nothing come to a vote. *1329 Q. And he had as perfect a right to vote his 50 shares as you had to vote your nine shares? A. If it came to a vote, more than likely he would. Q. Was there any other agreement, other than this verbal agreement not to sell stock on the outside, concerning the stock of Mr. Meares? A. No; no other that I recall. Q. Was or was not the Joseph*2405 Denunzio Fruit Co. obligated to buy the stock of Mr. Meares if Mr. Meares wanted them to take it? A. Nothing said about that. Q. There was no agreement regarding stock or voting rights other than this verbal agreement not to sell stock on the outside? A. I don't recall anything. A. Is it not a fact that there wasn't any other agreement? A. None that I recall. There were intercompany transactions between petitioner and the Spivey Packing Co. and the latter, as above indicated, appears to have been organized for the purpose largely of selling or supplying the former with citrus fruits. The evidence, however, shows that the petitioner's purchases from the Spivey Packing Co. amounted to less than one-half of the latter's sales, and the answer of petitioner in the affiliation questionnaire filed by petitioner with the Commissioner shows its transactions with the Spivey Packing Co. were on a market basis and that Manager Meares of the Spivey Packing Company "had full authority to buy, sell and make prices." In *2406 , we stated: There is no doubt but that Adaskin had absolute control of the business methods, policies and relation of the two corporations. He dominated and managed the business of each. He settled questions of policy, expediency and methods of operation. He organized both corporations with the understanding that he should have control of the business. We have heretofore held, however, in the , that the control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock." In , we stated: * * * The mere fact of family and business relationship standing alone is insufficient to constitute control or warrant persons standing in such relationship constituting the same interests. ; and intercompany transactions or the absence of them, without the necessary stock ownership or control as provided in the statute, is not sufficient to permit or require affiliation. *2407 . In , the Board stated: Although mere mathematical calculations are not the controlling factors in determining whether two or more corporations are affiliated within the meaning of the law, , the test of the statute is ownership or control of substantially all the stock of the corporations in question, , consequently that requirement must be found to have been complied with and all facts evidencing such ownership or control considered. *1330 Ownership of 83 1/3 per cent of the stock of the Spivey Packing Co. can not be regarded as ownership of substantially all, and, since the evidence does not convince us that petitioner controlled any portion of the stock of the Spivey Packing Co. owned by others, the corporations were not affiliated within the meaning of section 240 of the Revenue Act of 1921. Judgment will be entered for the respondent.