Dubois Lumber Co. v. Commissioner

DUBOIS LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Dubois Lumber Co. v. Commissioner Docket No. 27233. United States Board of Tax Appeals 21 B.T.A. 114; 1930 BTA LEXIS 1921; October 28, 1930, Promulgated *1921 AFFILIATED CORPORATIONS. - The capital stock of the petitioner was held as follows: 2,100 shares by DuBois, 500 shares by Nettleton, and 400 shares by Welch. For his holdings Welch paid in assets of an undisputed value in excess of $32,000 and gave his note for the balance of $6,788.05 due on the stock, payable out of the dividends if and when declared by the petitioner. Neither Welch nor Nettleton held any interest whatever in the consolidated group of corporations with which affiliation is claimed. Held, petitioner is not affiliated with said group of corporations within the purview of section 240(e)(2) of the Revenue Act of 1921, Continental Products Co.,20 B.T.A. 818, followed. Raymond G. Cranch, C.P.A., for the petitioner. Eugene Meacham, Esq., and C. E. Lowery, Esq., for the respondent. TRUSSELL *114 This is a proceeding for the redetermination of a deficiency in income tax for 1922 determined by the respondent in the amount of $932.79. The petitioner alleged that it is affiliated wih three corporations: DuBois Lumber Co. of Oregon, Wheeler Lumber Co., and DuBois Iron Works, and, therefore, its tax liability*1922 should be determined upon the basis of a consolidated return including said affiliated corporations. *115 FINDINGS OF FACT. The petitioner is a Mississippi corporation with its principal place of business at Lake, and it was incorporated in 1920 for the purpose of taking over and continuing the sawmill and wholesale lumber business which had been previously owned and conducted for a number of years in Mississippi by John E. DuBois, hereinafter referred to as DuBois. At the time of the incorporation of the petitioner, two valued employees of the business, E. B. Nettleton, hereinafter referred to as Nettleton, and J. E. Welch, hereinafter referred to as Welch, were highly appreciated by DuBois, and he desired to show his appreciation for their past services and, also, to arrange matters so that they would have a personal interest in the future profits of the business. Welch, therefore, was permitted to subscribe for 400 shares of the capital stock of the petitioner, and he paid in for the stock the assets of a store which he owned and conducted in his individual capacity. These store assets were valued by the parties in excess of $32,000, and were accepted at that value*1923 on account of the subscription of Welch. For the balance of his stock Welch gave a promissory note in the amount of $6,788.05 and attached to the note a certificate for 129 shares out of his holdings of the stock of the petitioner, and these shares were thereafter held as security for the payment of the note. It was understood, however, that the note would be paid out of the proceeds of dividends to Welch when and if declared. At the direction of DuBois 500 shares of the capital stock of jthe petitioner were issued to Nettleton as a bonus for personal services on the understanding that DuBois would later determine whether Nettleton's previous services should be recognized as paying for all or for part of this stock. There was no agreement that Nettleton would be expected to pay any amount of cash for the stock he received. The amount of the stock actually owned by Nettleton was not determined prior to the close of 1922, the taxable year. Nettleton had no personal means with which to buy the stock. There were 2,097 shares issued to DuBois and 3 shares were issued, respectively, to three individuals as qualifying shares; these 3 shares were actually the property of DuBois. There*1924 were no changes in the outstanding capital stock during 1920, 1921, and 1922. During 1922, therefore, DuBois owned 70 per cent of the outstanding capital stock, Nettleton held 16 2/3 per cent, and Welch held 13 1/3 per cent. During 1920, and also in 1922, Nettleton held a power of attorney from DuBois, and he was the personal representative of DuBois with right to vote the stock owned by DuBois in the petitioner. *116 DuBois was the president of the petitioner, and he alone determined the business policies and dictated how the managment should be conducted. At the beginning of 1920 stockholders' and directors' meetings were held, but no further formal stockholders' or directors' meetings were held subsequently. Nettleton was the manager of the petitioner's business, and Welch was the secretary-treasurer of the petitioner. Considerable amounts of additional cash capital were required by the petitioner in 1921 for the purpose of purchasing a large volume of additional standing timber, and this capital was supplied out of the personal means of DuBois in the form of a loan. In addition to the loan, DuBois, acting in his individual capacity, endorsed certain notes payable*1925 of the petitioner given for loans to the petitioner from the bank. No dividends have ever been declared or paid by the petitioner. DuBois held stock during 1922 in the other corporations with which affiliation is claimed, as follows: DuBois Lumber Co. of Oregon, all of the outstanding stock, par value $500,000, except two shares; Wheeler Lumber Co., all of the outstanding capital stock, par value $1,000,000, except about 5 per cent thereof which was owned by two estates, and a small quantity held by the wife of DuBois; DuBois Iron Works, all of the outstanding stock. Neither Nettleton nor Welch owned stock in any corporation other than the petitioner in which DuBois was interested. OPINION. TRUSSELL: The single issue in this case is a question of corporate affiliation. The respondent has consolidated for tax purposes a group of three corporations which were owned or controlled by one individual, DuBois, but he has excepted the petitioner from the consolidated group. The petitioner claims that although all of its capital stock was not owned by DuBois, its president, nevertheless, he dominated the business, dictated the management, and he controlled the stock which he*1926 did not own, thus bringing into force that part of section 240(e)(2) of the Revenue Act of 1921, which provides for affiliation if substantially all of the stock of two or more corporations is controlled by the same interests. The capital stock of the petitioner was held by three individuals; DuBois, president, holding 70 per cent; Nettleton, general manager, holding 16 2/3 per cent; and Welch, secretary-treasurer, holding 13 1/3 per cent. Whether Nettleton was the equitable owner of any of the shares standing in his name does not definitely appear. The *117 claims of DuBois and Nettleton to the stock are contradictory. Welch was still indebted to the petitioner for a minor portion of his stockholdings, but the evidence shows that he paid in, for the stock he owned outright, assets accepted without dispute by the parties at a valuation in excess of $32,000. At the very lowest consideration, he owned outright in excess of 10 per cent of the outstanding stock. Neither Nettleton nor Welch held any interest whatever in either of the three corporations with which consolidation is sought. We think that the substantial investment of Welch must be regarded as an interest separate*1927 and distinct from that of DuBois. Our conclusion in this respect is unaltered by the amply evidenced domination by DuBois in the management of the business. Even though Nettleton and Welch acquiesced in the management of DuBois, that does not mean that DuBois controlled the stock of either of them, but especially that of Welch. In , we had for consideration a claim for the consolidation of five corporations. The business management of all five was under the absolute control of one individual, but he did not own all of the stock. One Joyce held stock in two of the corporations, but had no interest in the other three. We held that the stockholding interests in the five corporations were not substantially the same, and we authorized the consolidation dation in one group of the three corporations in which Joyce was not interested, and the consolidation in another group of the two corporations in which Joyce was interested. This was affirmed in , wherein the court, citing with approval *1928 ; and , was of opinion that control of the stock through beneficial interest was the control intended by the statute. The instant appeal presents a question which we recently considered at length in , deciding that the control by the same interests necessary under the statutes for affiliation means not the control of the business or policies of the subsidiaries, but rather a substantial identity of beneficial interest, thus extending the benefit of consolidated returns to those subject to the hazard of a single enterprise. Our prior decision is controlling in the instant case, where the minority interest or interests in the petitioner have no interest whatever in the group of corporations with which consolidation is sought. We conclude, therefore, that the petitioner's claim for affiliation must be denied. Judgment will be entered pursuant to Rule 50.