Onondaga Co. v. Commissioner

ONONDAGA CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. TEN EYCK CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Onondaga Co. v. Commissioner Docket Nos. 23978, 23979. United States Board of Tax Appeals 18 B.T.A. 944; 1930 BTA LEXIS 2564; January 29, 1930, Promulgated *2564 1. Assessment and collection of taxes held not barred by statute of limitations. 2. The petitioners held not to be affiliated with the United Hotels Co. during 1919. J. C. Murphy, Esq., and Alfred W. Gray, Esq., for the petitioners. W. F. Gibbs, Esq., for the respondent. VAN FOSSAN *944 These proceedings are brought to redetermine deficiencies in the income and profits taxes of the Onondaga Co., a corporation, and the Ten Eyck Co., a corporation, for the calendar year 1919 in the amounts of $45,627.44 and $43,429.53, respectively. The same issues are involved in both cases and consequently they were consolidated for hearing and decision. By their amended pleadings the petitioners assert the following errors: (1) The assessment and collection of the tax are barred by the statutory period of limitations properly applicable thereto. (2) The determination of the Commissioner that the petitioners were not affiliated with the United Hotels Co. of America, a corporation (hereinafter called United Hotels Co.), within the meaning of section 240(b)(1) of the Revenue Act of 1918. FINDINGS OF FACT. The United Hotels Co.*2565 is a corporation organized in March, 1914, under the laws of the State of New York. It is a holding corporation and also is engaged in the business of operating hotels. Under date of March 19, 1920, the United Hotels Co. filed a consolidated income-tax return for the year 1919 and set up therein the income of nine corporations, including itself and the two petitioners. The respondent thereupon ruled that the two petitioners were not affiliated with the United Hotels Co. and required them to file separate returns for the year 1919. Pursuant to the respondent's demand, the Onondaga Co. filed its individual return on January 27, 1923, and the Ten Eyck Co. filed its individual return on August 9, 1923. Thereafter waivers were filed in each case, one, on January 21, 1925, extending the time for making assessment to December 31, 1925; one, filed December 4, 1925, extending time to December 31, 1926; and one, filed December 23, 1926, extending time to December 31, 1927. *945 Under date of December 15, 1926, the respondent mailed a 60-day deficiency letter to the Onondaga Co. and on December 14, 1926, he mailed a similar letter to the Ten Eyck Co. Each of the above waivers*2566 was executed on behalf of the corporations by its proper officer and bears the name of D. H. Blair, Commissioner. During the year 1919 the United Hotels Co. was operating a chain of 10 hotels, subsequently increased to 24, in various cities in the United States and Canada. Each of these hotels was doing business as a corporation, the stock of which in almost every instance was controlled by the United Hotels Co., whose directors were also directors of the subordinate corporations. The United Hotels Co. entrusted to its executive committee the active conduct of its business. That committee analyzed all reports relating to the operation of the various hotels and issued instructions to the hotel managers concerning the methods and details of conducting the business. The financial operations of the hotels were also controlled and directed by the executive committee. The various managers and subordinate officials of the hotels were appointed by the chairman of the executive committee, Frederick W. Rockwell. Monthly operation reports were submitted to the United Hotels Co., analyzed by its expert accountants and presented to the executive committee for consideration and action. *2567 All orders issued by the executive committee were executed with strict precision. Prior to 1919 the United Hotels Co. did not own a majority of the common stock of the two petitioners. A Canadian corporation, the American Purchasing Corporation, Limited, was organized to assist in the development of the United Hotels Co., to acquire control of those hotels, a majority of whose stock was then not owned by the United Hotels Co., and to evolve a system of volume purchasing for the benefit of all hotels in the chain in order better to unify the various corporate elements into a harmoniously working organization. The American Purchasing Corporation presented a plan whereby its stock was exchanged for that of the United Hotels Co. on a basis of two to three. Pursuant to that plan, during 1919 the American Purchasing Corporation acquired over 25,000 shares of the total stock issue of 30,000 shares of the United Hotels Co. Frank A. Dudley was vice president of the Onondaga Co. and president of the United Hotels Co. Frederick W. Rockwell was president of the Onondaga Co. and vice president of the United Hotels Co. Between them they held 21,976 shares of the 30,000 issued shares of*2568 common stock of the American Purchasing Corporation. The following table sets forth the shareholding and relationship of the American Purchasing Corporation, the United Hotels Co., the *946 Onondaga Co., the Ten Eyck Co., and their officers and employees in the taxable year 1919. Welch, Grogan, Rennie, and Dunning were appointed by Rockwell. Hines was appointed by the general auditor of the United Hotels Co., who in turn was appointed by Rockwell. The stock of the petitioners was offered to and purchased by their junior officers and employees at considerably less than its value but with the understanding that they could not sell it without consent of the officers of the United Hotels Co. or unless they first offered it to them for purchase. Dudley and Rockwell voted the proxies of the minority stockholders of the two petitioners. The action of the stockholders and the directors of the petitioners was merely perfunctory, the executive committee controlling all their affairs. The directors of the two petitioners were practically the same. In 1919 the question of affiliation of the various hotel corporations being operated by the United Hotels Co. and its officers*2569 was discussed by those officers and it was deemed expedient to show that the United Hotels Co. had actual stock control of the subsidiary corporations. Consequently, a voting-trust agreement was authorized during that year by which the United Hotels Co. exercised actual voting control of the two petitioners. The agreement, however, bears date of January 1, 1920. During 1920 Rockwell turned over sufficient stock of the Ten Eyck Co. to the United Hotels Co. to give the latter company voting control and in the year 1924 took similar action with *947 relation to the Onondaga Co. From 1919 to 1924, inclusive, and thereafter, there was no difference whatever in the operating control of the petitioner corporations by the United Hotels Co. and its executive officers. OPINION. VAN FOSSAN: In his brief the attorney for the petitioners attacks on various grounds the validity of assessment and collection of the tax under the conditions set forth in the findings of fact, the basic contention being that the waivers were not signed by the Commissioner personally. That brief contains the following statement. The evidence in this case shows that the petitioner signed the waivers*2570 in good faith and filed them with the Commissioner of Internal Revenue. Had the Commissioner exercised his discretion and signed the writings, it would undoubtedly have created an exception which would have permitted the assessment of the tax after the expiration of the limitation period. * * * The right to collect the tax was lost, not by any word or act of the petitioners, but by operation of law, and by reason of the failure of the Commissioner to exercise his discretion and sign the writing agreeing to assessment after the limitation. On examination the waivers are found to bear the name of the then Commissioner accompanied by certain initials, reasonably indicating that they were signed on behalf of the Commissioner by another. Signature by the Commissioner personally is not necessary to make the waivers valid. Perkins Land & Lumber Co.,9 B.T.A. 528; Trustees for Ohio & Big Sandy Coal Co.,9 B.T.A. 617; Greylock Mills,9 B.T.A. 1281; National Piano Mfg. Co.,11 B.T.A. 46; *2571 Pantages Theater Co.,17 B.T.A. 82. The assessment and collection of the tax are not barred by the statutory period of limitation. As the second error the petitioners allege that the respondent determined that they were not affiliated with the United Hotels Co. during the year 1919 under 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 (1) if one corporation owns directly or controls through closely affiliated interests 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. The petitioners originally filed their consolidated return as subsidiaries of the parent corporation, United Hotels Co. The respondent required them to file individual returns. Under the facts set forth above we are unable to find the petitioners were affiliated with United Hotels Co. during the taxable year. The case comes squarely within the reasoning of the court in *2572 Commissioner of Internal Revenue v. Adolph Hirsch & Co.*948 (C.C.A., 2d Cir.), 30 Fed.(2d) 645. In that case the Hirsch brothers owned 94.85 per cent of the stock of Adolph Hirsch & Co. and 55.63 per cent of the Brazilian Co. The Bloomberg family owned the remaining 44.37 per cent of the second company. Bloomberg was the personal attorney for the Hirsch brothers, had been intimately associated with them for years, and was the attorney who organized the second company. The affairs of the Brazilian Co. were handled by the Hirsch brothers, first through a partnership and later through the corporation, Adolph Hirsch & Co. No regular set of books was kept regarding the affairs of the Brazilian Co.; that is, there was no ledger, cash book, or sales book, and since 1913 it had no separate bank account. All activities were commenced and managed entirely by the Hirsch Co.; funds necessary for the conduct of the affairs of the Brazilian Co. were advanced by the Hirsch Co. by cable, by transferring or opening a bank credit against which a draft would be made by people in Brazil. Sales were made through and in the name of the Hirsch Co., and the proceeds were*2573 credited on the books of the Hirsch Co. In a word, the Brazilian Co. was conducted as a department of the Hirsch co.'s business. No stock of either company was sold to the general public. Commenting on these facts, the court said: * * * We may regard the Hirsch brothers as of the same "interest." "Substantially all" was not intended to be interpreted as being any particular percentage, but must be applied to the particular facts of each case. We held in Ice Service Corp. v. Commissioner of Internal Revenue, 30 Fed.(2d) 230, decided January 7, 1929, that 75 per cent. was not a control of "substantially all" of the stock. In the Revenue Acts of 1924, 1926 (section 240(c), 43 Stat. 253, 44 Stat. 9; 26 USCA sec. 993(c), and 1928 (sections 141(d), 142(c), Pub. No. 562, 70th Congress; 26 USCA secs. 2141(d), 2142(c), Congress has substituted for "substantially all" of the stock the words "at least 95 per cent of the stock." The court said further: * * * The management of the business of the corporation is not the control required by the statute. It refers to stock control. The fact that the minority is acquiescent, *2574 and permits the majority to manage the business, does not prove actual control over the minority interests. Nor does a control based upon friendship or professional relations satisfy the statute. The control of the stock owned by the same interest refers to beneficial interest. This meaning is consistent with the purpose of the statute to extend to those subject to the hazard of the enterprise, when they are substantially one and the same, the benefit of the consolidated reports. Applying the principles announced by the court, the fact that there was a close personal or professional relationship among the various stockholders or that certain of them were appointees or employees of Rockwell is not controlling. Nor is the fact that the operations *949 were entirely dominated by the executive committee sufficient. The acquiescence of minority stockholders and the covenant of certain stockholders to offer their stock to the majority before sale elsewhere are to be similarly viewed. The stock control requisite to achieve affiliation must be more tangible and real. The aggregate of a number of inadequate conditions does not constitute the control required by the statute. *2575 A study of the tabular statement included in the findings of fact showing the distribution of stock holdings and other proven facts fails to disclose that one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially stantially all of the stock of the petitioning companies. We are confronted with the same result when the facts are studied in an attempt to find the existence of ownership or control of substantially all of the stock of the several corporations by the same interests. Reviewed by the Board. Judgment will be entered for the respondent. TRAMMELL concurs in the result only.