Weber-King Lumber Co. v. Commissioner

WEBER-KING LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Weber-King Lumber Co. v. Commissioner Docket No. 22574. United States Board of Tax Appeals 20 B.T.A. 1011; 1930 BTA LEXIS 1981; September 26, 1930, Promulgated *1981 The petitioner and the Farmers Rice Milling Co. were owned or controlled by the same interests during the period February 6 to October 31, 1920, and they are entitled to file a consolidated return for that period. A. O. King, Esq., and George Bailleo, C.P.A., for the petitioner. J. Arthur Adams, Esq., for the respondent. LOVE *1011 This proceeding results from the respondent's determination of a deficiency in income and profits tax for the period January 1 to October 31, 1920, inclusive, in the amount of $27,824.80. The calendar years 1919 and 1921, referred to in the deficiency letter, are not covered by this appeal. The respondent found no deficiency for the period November 1 to December 31, 1920. In substance, it is alleged that the respondent erred in determining that the petitioner and the Farmers Rice Milling Co. were affiliated during the year 1920 only for the period November 1 to December 31, whereas the two companies were in fact affiliated for the entire year 1920. It is further alleged that the respondent erred in requiring the petitioner and the Rice Co. to file separate returns for the period January 1 to October 31, 1920, and*1982 a consolidated return for the remainder of that year. FINDINGS OF FACT. The petitioner is a Louisiana corporation, with its principal place of business at Lake Charles, Calcasieu Parish. It was organized in 1918. *1012 During 1920 the petitioner was engaged in the operation of a circular sawmill located at Barhan, La., about 90 miles from Lake Charles. In connection with the sawmill the petitioner operated a very large commissary and general merchandise store which served not only employees of the sawmill, but the community and the country for many miles around. During 1920 a Louisiana corporation known as the Farmers Rice Milling Co., hereafter termed the Rice Co., was engaged in the operation of a rice mill, and in dealing in rice, at a point about 7 miles southeast of Lake Charles on the Iron Mountain Railroad. As indicated by their books, the following is a statement of the names of the stockholders of the petitioner and the Rice Co., showing in each instance (1) the percentage of the total outstanding stock held by each for the periods (a) January 15 to February 4, 1920, and (b) February 4 to October 31, 1920; and (2) dividends paid by the petitioner during*1983 1920. Petitioner Rice Co. - Percentage of shares Percentage of shares Stockholder Jan. 15, 1920, to Feb. 4, 1920 Feb. 4, 1920, to Oct. 31, 1920 Dividends paid, 1920 Jan. 15, 1920, to Feb. 4, 1920 Feb. 4, 1920, to Oct. 31, 1920 Per cent Per cent Per cent Per cent W. P. Weber 11.25 11.25 $12,600 26.00 26.00 Geo. M. King 12.59 12.59 14.800 19.50 19.50 A. L. Gayle 3.35 3.35 3,750 6.80 4.80 B. M. Talbot 13.40 13.40 15,000 13.50 13.50 D. A. Kelly 3.35 3.35 3,750 4.00 4.00 C. L. Giovanni .67 .67 [750] .50 .50 W. E. Lee 2.01 2.01 2,250 2.00 2.00 Fred Weber 1.34 1.34 1,500 1.00 1.00 Mrs. F. Breucher 1.34 1.34 1,500 1.00 1.00 W. D. Hoover 2.01 2.01 2,250 1.00 1.00 A. O. King .27 .27 [300] .50 .50 C. A. King .27 .27 [200] .50 .50 G. M. King, jr .13 .13 [50] .50 .50 S. A. Carroll 1.34 1.34 1,500 2.70 2.70 A. Gisch .54 .54 [600] .50 .50 Edna L. King .13 .13 .50 .50 Jean M. King .13 .13 [50] .50 .50 Mrs. F. Chitwood .13 .13 .50 .50 Powell Lumber Co 39.74 39.74 44,475 W. J. Bilbo 1.34 1.34 1,500 Jno. M. Sherrill 1.34 1.34 1,500 Miss B. Canton .13 .13 [150] 1.00 Mrs. W. F. Kelly .40 .40 [450] C. O. Deabler .40 .40 [450] W. B. Gabbert .27 .27 [300] Mrs. T. Gabbert .27 .27 [300] N. S. North .13 .13 [150] M. D. Chitwood .13 .13 [150] Miss P. Brown .13 .13 [150] T. B. Hutchins .67 .67 [750] .50 King Lucas .67 .67 [750] .50 A. S. King .13 .13 [50] H. W. Lanz 17.50 17.50 W. J. Uncle 1.00 1.00 H. W. Miller Not shown. Not shown. [600] Not shown. Not shown. Total 100.00 100.00 112,575 100.00 100.00 *1984 The total number of outstanding shares of the companies for each of the periods mentioned was, the petitioner, 7,465; the Rice Co., 1,000. *1013 Although, as indicated by its books, H. W. Lanz owned 175 shares of the stock of the Rice Co. on October 31, 1920, he had in fact sold 142 1/2 of such shares to W. P. Weber on February 6, 1920. Weber bought 100 of these shares for himself and 42 1/2 shares for the Powell Lumber Co., hereafter termed the Powell Co., which was the principal stockholder of petitioner. When the sale was made, Lanz endorsed the stock certificates for 175 shares in blank and delivered them to Weber, in whose possession they remained until November 1, 1920, when they were transferred on the books of the Rice Co. to Weber, and a certificate for 142 1/2 shares was issued to him. On the same day Weber transferred 142 1/2 shares of the stock to the Powell Co. and a certificate for 142 1/2 shares was then issued to that company. The following are statements relating to each of the above-mentioned stockholders of the petitioner and/or the Rice Co. In each instance the business relationship mentioned prevailed during the entire year 1920, unless otherwise*1985 indicated. W. P. Weber was president, a director, and manager of the petitioner, the Rice Co., the Powell Co., Kelly, Weber & Co., Farmers Land & Canal Co., Louisiana Grain & Milling Co., and Lake Charles Railway & Navigation Co.; vice president and director of the Prairie Farm Lands Co. (now the Prairie Land & Canal Co.); director, chairman of the board, and member of the executive committee of the Calcasieu National Bank; director of the Calcasieu Agricultural Credit Corporation; vice president, director, and member of the board of the Calcasieu Investment Co.; director of the Missouri Pacific Railroad Co.; vice president and director of the Placke-Lake Investment Co.; vice president and director of the American Mutual Life Insurance Co. (now the American Southern Life Insurance Co.); vice president and director of the First National Bank; vice president and director of the Lake Charles Trust & Savings Bank; and director of the Lake Charles Feed Co. His salary from the Weber-King Lumber Co. during 1920 was $12,000. Geo. M. King was secretary and treasurer of the petitioner; treasurer of the Rice Co.; treasurer of the Farmers Land & Canal Co.; secretary and treasurer of the*1986 Powell Co.; treasurer of Kelly, Weber & Co.; director of the Prairie Farm Lands Co.; director of the Calcasieu National Bank; treasurer of the Lake Charles Railway & Navigation Co.; and vice president of the Lake Charles Grain & Milling Co. He received a salary from the Powell Co. during 1920. A. L. Gayle was Lake Charles manager of Kelly, Weber & Co. and director of the Rice Co. His salary during 1920 was $6,000, in addition to which he received a bonus of about $15,000. B. M. Talbot was Lake Charles manager and a director of the petitioner. His *1014 salary during 1920 was $6,000. D. A. Kelly was a brother-in-law of Geo. M. King and general manager of Kelly, Weber & Co. C. L. Giovanni had been bookkeeper of the Powell Co. since 1906. During 1920 his salary was $2,160, and he was paid a bonus of $1,000. W. C. Lee was traffic manager for the petitioner and the Powell Co., and assistant secretary of the Rice Co. His salary from both during 1920 totaled $4,780. He also received a bonus. Fred Weber was a brother of W. P. Weber. Mrs. F. Breucher was a sister of W. P. Weber and bookkeeper for the petitioner. During 1920 she received a salary of $1,980 and a bonus. *1987 W. D. Hoover was sales manager of petitioner and the Powell Co. His salary during 1920, paid by the Powell Co., was $4,620 and a bonus of $3,000. A. O., C. A., and G. M. King, Jr., were sons of Geo. M. King. C. A. King was manager of the Powell Co. sawmill at Reeves. S. A. Carroll was traveling salesman for the petitioner at an annual salary of $3,200. A. Gisch was manufacturing superintendent of petitioner. His salary during 1920 was $3,600 and a bonus of $1,000. Edna L. King was a daughter of Geo. M. King. Jean M. King was a son of Geo. M. King, and an employee of the petitioner. Mrs. F. Chitwood was a daughter of Geo. M. King. The Powell Lumber Co. was engaged in the operation of sawmills at Lake Charles, Reeves, and Edan, La. The following is a statement of the names of the stockholders of the company for the period from January 1 to October 31, 1920, showing the number of shares and the percentage of total outstanding stock held by each, as indicated by the books of the company. Name Shares Per cent W. P. Weber 493.5 39.4 Geo. M. King 529.5 42.3 W. R. Hoover 10.0 .8 A. O. King 10.0 .8 C. A. King 10.0 .8 H. W. Miller 10.0 .8 G. M. King, jr 10.0 0.8 M. D. Chitwood 25.0 2.0 D. A. Kelly 2.0 .3 Fred Weber 75.0 6.0 Mrs. F. Breucher 75.0 6.0 1,250.0 100.0 *1988 W. J. Bilbo was woods superintendent of petitioner, and John M. Sherrill was a traveling salesman for Kelly, Weber & Co. Kelly, Weber & Co. was a large wholesale and retail grocery concern. Miss B. Canton was bookkeeper for Kelly, Weber & Co., for whom she has worked about 27 years. Her salary during 1920 was $2,680. Mrs. W. F. Kelly was the wife of a grocery salesman and with her husband, a close personal friend of W. P. Weber. C. O. Deabler was secretary and manager of the Missouri Timber & Tie Co., in which, directly or through W. P. Weber, the petitioner owned a one-third interest. W. B. Gabbert was field manager of the Farmers*1015 Land & Canal Co. Mrs. T. Gabbert was the wife of W. B. Gabbert. W. S. North was cashier of the First National Bank, of which W. P. Weber was vice president. M. D. Chitwood was a son-in-law of Geo. M. King and former employee of the Powell Co. Miss P. Brown was a stenographer with the Powell Co. Her salary during 1920, paid by the Powell Co., was $1,595 and a bonus of $1,000. T. B. Hutchins was secretary of Kelly, Weber & Co., by which he has been employed for more than 20 years. His salary during 1920 was $3,530. King Lucas was*1989 a traveling salesman for Kelly, Weber & Co. His salary during 1920 was $3,450. A. S. King was a son of Geo. M. King. H. W. Lanz was secretary, treasurer, manager, and a director of the Prairie Farm Lands Co., hereafter referred to as the Prairie Co. Lanz devoted all his time to the Prairie Co., which was engaged in the irrigation and leasing of farm lands. His salary during 1920 was $5,000. W. J. Uncle was manager of the Prairie Co. and the Lake Charles Canal Co. On June 27, 1917, W. P. Weber personally bought from Jabez B. Watkins a certain tract of land containing approximately 158 acres and improved by a rice mill and power plant. He paid $7,264.50 for this purchase. Thereafter he suggested that certain friends join him in the organization of a rice-milling company, which eventually became the Rice Co. mentioned herein. The persons invited to participate in the enterprise were H. W. Lanz, Geo. M. King, D. A. Kelly and A. L. Gayle. Weber sold each of these men a one-fifth interest in the land above mentioned at the price it had cost him, retaining the other one-fifth interest for himself. Thereafter the Rice Co. was organized and Lanz, King, Kelly, Gayle, and Weber*1990 sold the above described property to it for $50,000 in stock. Lanz received $10,000 in stock of the Rice Co. at that time. At the beginning of the year 1920, Lanz owned 175 shares of stock of the Rice Co. As above detailed, on February 6, 1920, he sold 142 1/2 shares of such stock to Weber, who purchased for the Powell Co. Weber paid Lanz $100 per share for such stock, giving his unendorsed note for the purchase price. Lanz, W. P. Weber, and Geo. M. King had been friends for approximately 30 years. In 1917 Lanz was employed as trust officer of the Calcasieu National Bank, of which both Weber and himself were directors. At that time Weber organized the Prairie Co. and through his interest in Lanz the latter was made secretary and manager of that company. Lanz, Weber, Geo. M. King, and B. M. Talbot, S. T. Wooding and B. M. Musser became directors of the Prairie Co. Talbot and Wooding were personal friends of W. P. Weber and were associated in business with him at that time. *1016 Petitioner, the Rice Co., the Powell Co., the Prairie Co., and the Farmers Milling Co. had offices together in Lake Charles. Employees worked interchangeably for them and practically*1991 all were paid by the Powell Co. At the end of each year W. P. Weber and Geo. M. King would apportion the office expenses and salaries among the various companies. As between the lumber companies, the expenses were apportioned on what was known as "the shipping basis." Stock of other corporations held by the Powell Co. was always voted by W. P. Weber or Geo. M. King, as they might agree. Weber and King have been engaged together in various business enterprises since 1886. No minority stockholder of any of the business enterprises in which they have been the dominating personalities has ever objected to their conduct of the business. They were the only persons who could hire or discharge or fix the salaries or other compensation of employees of the petitioner, the Rice Co., Kelly, Weber & Co., the Prairie Co., and the Powell Co., except that foremen or superintendents had such control over the common labor. Each of the five companies above named was a large business enterprise. The banking credit of the Rice Co. was dependent upon the personal credit of W. P. Weber and Geo. M. King and was secured from various Lake Charles banks as a result of continuing blanket guarantees*1992 given by Weber and King. When notes of this company fell due they were sometimes taken up by the Powell Co., transferred to the petitioner, and finally paid by the maker. The petitioner and the Rice Co. were affiliated through ownership of all or substantially all of the stock of the two companies by the same interests, from February 6, 1920, to October 31, 1920. OPINION. LOVE: The petitioner in this proceeding complains of the respondent's determination that it was not affiliated with the Farmers rice Milling Co. for the entire year 1920. The respondent has found that the two companies were affiliated for the period November 1 to December 31, 1920. In denying the claimed affiliation for the period January 1 to October 31, 1920, the deficiency letter states: As no control of "voting rights of stock" has been shown over the 175 shares 17.5% of the stock of the Farmers Rice Milling Company owned by H. W. Lanz, your contention that the Weber-King Lumber Company and the Farmers Rice Milling Company were affiliated during the entire year 1920 has been denied. Neither Lanz, nor W. J. Uncle, who owned 10 shares (1 per cent) of the stock of the Rice Co., was a stockholder*1993 of the petitioner. *1017 Petitioner further complains of the respondent's requirement that the alleged affiliates file separate returns for the period January 1 to October 31, 1920, and a consolidated return for the remainder of that calendar year. Adjudication of this complaint is, of course, dependent upon our determination of the first issue. Petitioner contends, first, that it was affiliated with the Rice Co. for the entire year 1920, because the stock of the two companies was owned or controlled by the same interests. Petitioner also contends that if the two companies were not affiliated for the entire year, they were affiliated for the period February 6 to December 31, 1920, rather than the period November 1 to December 31, 1920, as determined by the respondent. This contention is founded upon Weber's purchase of 142 1/2 shares of the stock of the Rice Co. held by Lanz, the evidence being that such stock was purchased by Weber for the Powell Co. on February 6, 1920. We shall first consider the question of affiliation for the entire year 1920, discussing it without regard to the change in ownership of a portion of the stock owned by Lanz in the Rice Co. on February 6, 1920. *1994 The applicable statute, section 240(b) of the Revenue Act of 1918, provides: (b) 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. It appears that from January 15 until October 31, 1920, there were 31 stockholders of petitioner and that their respective interests in petitioner remained unchanged during the period. Eighteen of these stockholders, owning 54.25 per cent of petitioner's stock, owned during the period January 15 to February 4, 1920, 81.50 per cent of the stock of the Rice Co., and during the period February 4, to October 31, 1920, 21 of petitioner's stockholders owned 81.50 per cent of the stock of the Rice Co. During the periods mentioned, the Powell Lumber Co., owning 39.74 per cent of petitioner's stock, was not a stockholder of the Rice Co. But during the entire period January 15 to October 31, 1920, 9 of the 18 persons first above mentioned*1995 as stockholders of petitioner owned 96.40 per cent of the stock of the Powell Co. Summarized, therefore, from 18 to 21 persons owned 54.25 per cent of the stock of petitioner, and 9 of these persons owned 96.40 per cent of the stock of the Powell Co., which in turn owned 39.54 per cent of the stock of petitioner. Regarding the above mentioned owners of 54.25 per cent of the stock, and the Powell Co. owning 39.54 per cent, as "the same interests," then 93.99 per cent of *1018 petitioner's stock and 81.50 per cent of the Rice Co.'s stock was owned by these "interests." The question now presented is whether or not ownership or control by the "same interests" of 93.99 per cent of the stock of petitioner, and 81.50 per cent of the stock of the Rice Co. is sufficient, under the circumstances of this case, to constitute petitioner and the Rice Co. affiliated corporations within the intendment of section 240 of the Revenue Act of 1918. Petitioner is a lumber company engaged in the operation of sawmills; the Rice Co. is engaged in milling and dealing in rice. There has been no contention that the two companies form an economic business unit. While it does appear that W. P. *1996 Weber and Geo. M. King were the dominating figures in the affairs of each company; that they pledged their personal credit for the Rice Co.; that the two companies, and several others, had offices together in Lake Charles, and that obligations of the Rice Co. were sometimes taken up by petitioner and/or the Powell Co., we do not believe that any or all of these factors appear in this case to a degree warranting the assignment to them of any influence in our determination of the issue. We think our determination must rest upon the control of the 175 shares of stock of the Rice Co. held by Lanz. The respondent's action was predicated upon that factor and the petitioner's evidence has been principally directed to it. As stated in its brief, petitioner "relies upon the fact that W. P. Weber and George M. King controlled the stock of H. W. Lanz by reason of the fact that he acquired said stock at their pleasure and invitation, and that the said H. W. Lanz during that time was employed by the Prairie Farm Lands Company, from which he gained his livelihood, of which company George M. King and W. P. Weber and B. M. Talbot were directors and officers"; or, in other words, "petitioner claims*1997 that the principal stockholders of the two companies, namely, W. P. Weber and George M. King, controlled the said stock of H. W. Lanz." This alleged "control" it appears is founded principally upon the fact that Weber, King, and Talbot, as directors of the Prairie Co., controlled the job of Lanz, who was secretary-treasurer, manager, and a director of that company, at a salary of $5,000 per year. Petitioner argues that Lanz's "job meant more to him than his investment in the Rice Milling Co." The extensive business interests of Weber and King in the vicinity of Lake Charles are amply demonstrated by the record. They were, no doubt, dominating personalities in the industrial activities of the community. It may be true that they could have autocratically persuaded minor characters in those industrial activities to cooperate in one enterprise under penalty of losing their means of livelihood *1019 in another. It is even reasonable to assume that such minor characters, aware of their positions, would ordinarily cooperate readily and so merit the beneficience of those in whose hands their material destiny lay. But the cooperation secured by such considerations can scarcely*1998 be considered a matter of "right" by those who obtain it, nor in our opinion, is it necessarily an assured thing. Lanz, it seems true, never opposed King and Weber, but whether this was due to his acknowledgment of their control of his actions or to a belief that it was to his interest as a stockholder to let successful men guide and guard his financial interest in the Rice Co., we do not know. There is nothing to indicate that Lanz did not, or could not, vote his stock in the Rice Co. as he saw fit, and if he concurred in the policies of Weber and King, it may well have been because he personally approved proved those policies and not merely because they were the policies of Weber and King. Considering all the circumstances, we are of opinion that while Lanz owned 175 shares (17.50 per cent) of the stock of the Rice Co. and none of the petitioner's stock, the two companies were not controlled by the "same interests" within the intendment of statute, and, therefore, were not entitled to file affiliated returns. Petitioner, as another and further means of establishing its right to affiliation with the Rice Co., has cited various provisions of Act 267 of the Acts of the Legislature*1999 of Louisiana for the year 1914. (1 Wolff's Compiled Statutes of Louisiana, p. 305.) Petitioner and the Rice Co. were organized under this act. The act contains various provisions relative to the control which stockholders exercise over corporations organized under it. It prescribes the control that a stockholder or stockholders of certain percentages of stock may exercise over such a corporation, the percentages of stock necessary to control different acts of the corporation differing with the nature of the act. Petitioner contends that under the provisions of the act mentioned, the control of 81.50 per cent of the stock of the Rice Co. by a group of persons gives them control of the company, and we agree that this appears to be so under the Louisiana law. In this proceeding, however, we are dealing with a Federal statute, and as we interpret its provisions, the ownership by stockholders of the petitioner of 81.50 per cent of the stock of the Rice Co., under the circumstances herein shown, does not satisfy the prerequisites for affiliation of the two companies. Provisions of State laws, such as are herein mentioned, are not competent to effect the "control" necessary for affiliation*2000 of corporations under the Federal taxing acts. We turn now to consideration of petitioner's contention that if ownership by the same interests of 93.99 per cent of its stock and *1020 81.50 per cent of the stock of the Rice Co. (plus the alleged control of the 17.50 per cent of stock held by Lanz) does not entitle the two companies to affiliation for the entire year 1920, then affiliation should be allowed from the date that Weber purchased 142 1/2 shares of Lanz's stock for the Powell Co., i.e., February 6, 1920, rather than from the date that the said 142 1/2 shares were recorded in the name of the Powell Co., i.e., October 31, 1920. We believe the petitioner is correct in this contention. Certificates of stock are mere evidences of ownership of the stock. ; ; . Where an actual sale has been made and title to the stock has passed, the purchaser is a stockholder although no certificate has been issued to him. *2001 ; ; secs. 4330, 4331, 4332, Thompson on Corporations; Uniform Stock Transfer Act, sec. 1. The undisputed evidence in this proceeding is that on February 6, 1920, Weber bought 142 1/2 of the 175 shares of the Rice Co. held by Lanz. It further appears that Weber bought 100 shares of this stock for himself and 42 1/2 shares for the Powell Co., and that on October 31, 1920, Weber had the entire 142 1/2 shares transferred on the books of the Rice Co., first to himself and then to the Powell Co. The 142 1/2 shares constituted 14.25 per cent of the stock of the Rice Co. With the elimination of Lanz in the manner described, the "same interests owned 93.99 per cent of the stock of petitioner and 95.75 per cent of the stock of the Rice Co. The minor stockholders of petitioner then consisted of 13 persons, no one of whom held more than 1.34 per cent of petitioner's stock. The minor stockholders of the Rice Co. were Lanz, holding 32 1/2 shares (3.25 per cent) and W. J. Uncle, holding 10 shares (1 per cent). Upon consideration of the whole record we are of opinion that the stock ownerships mentioned constituted*2002 ownership of substantially all of the stock of the two companies by the same interests, and, therefore, that the two companies were affiliated for the period February 7 to October 31, 1920. The respondent, upon exactly the same stockholdings, has determined that the affiliation existed for the remainder of that calendar year. Petitioner suggests that since February 6 is close to the beginning of the calendar year, the Board should find that affiliation existed for the entire calendar year. We do not believe that the Board could properly take such action. Clearly, events might have occurred priod to the effective date of the affiliation which would have a substantial effect upon the tax liability of the affiliated group. Furthermore, we have no evidence of stock interest prior to January 15, 1920. *1021 Petitioner further asks a determination of the number of returns to be filed by it and the Rice Co. for the year 1920. The Rice Co. is not a party to this proceeding and its individual tax liability is not before us for adjudication. In accordance with our decision in *2003 , we hold that petitioner should file a separate return for the period January 1 to February 6, 1920, and that a consolidated return of petitioner and the Rice Co. should be filed for the period February 7 to December 31, 1920. Reviewed by the Board. Judgment will be entered under Rule 50.