J. P. Burton Coal Co. v. Commissioner

J. P. BURTON COAL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. J. P. Burton Coal Co. v. Commissioner Docket No. 44014. United States Board of Tax Appeals 24 B.T.A. 1052; 1931 BTA LEXIS 1559; November 30, 1931, Promulgated *1559 Where two corporations were operated as an economic unit under the management of an individual owning all of the stock of one and 75 per cent of the stock of another, the remaining 25 per cent being held by an employee, held, the corporations were not affiliated under the 1926 Act, where the evidence fails to show that the minority stockholder constituted the same interest as the majority. L. F. Loux, Esq., and Henry Ravenel, Esq., for the petitioner. J. M. Leinenkugel, Esq., for the respondent. MATTHEWS *1053 This is a proceeding for the redetermination of a deficiency in income tax for the fiscal year ended March 31, 1925, in the amount of $5,752.10. The assignments of error are (1) that the respondent erred in determining that the By-Products Coal Company was not affiliated with the petitioner, and (2) that the respondent erred in disallowing a loss of $99,712.79 sustained by the By-Products Coal Company as a deduction from the income of the affiliated group. FINDINGS OF FACT. The petitioner is a corporation organized and existing under the laws of Ohio, with its principal place of business in Cleveland. The petitioner*1560 is engaged in the business of selling coal. In 1922 Jonathan P. Burton, president of the petitioner and owner of approximately all of its stock, decided to acquire certain maining properties in Kentucky. After consulting with Cadwalader Jones, a salesman for the petitioner, a lease on mining property was acquired from the Elkhorn Coal Company. Burton agreed to pay Jones one-fourth of the profits from the operation of the mine upon such property. After the acquisition of the lease a corporation was formed - the By-Products Coal Company, 75 per cent of the stock being issued to Burton and 25 per cent to Jones. During the year ended March 31, 1925, Burton was the president of the By-Products Coal Company, which was managed by Jones under his direction. The main office of the business was in Cleveland and the general business of both the companies was handled there. The bookkeeping was handled to a large extent in that office. Burton, although he consulted frequently with the stockholders and employees, determined to a large extent the business policies of these corporations, determined the amount of salaries, and handled all the financing. Most of the banking was done through*1561 the petitioner, and if the other company needed money the petitioner advanced it. The business was run as one business with several departments. The petitioner sold the entire output of this mining company at prices fixed by Burton. *1054 Jones never attended stockholders' meetings, which were very informal, or voted his stock, except once when he happened to be in the office at the time action was being taken on a bond issue. His home and office were in Kentucky and he came to Cleveland occasionally on business. In the latter part of January, 1925, Burton discharged him as the result of a disagreement between them. From April 1, 1924, to March 31, 1925, J. P. Burton owned 1,083 shares of the common stock of the petitioner, the remaining 22 shares being held as qualifying shares. From April 1, 1924, to February 2, 1925, Burton owned 2,246 shares of the common stock of the By-Products Coal Company and Jones 750 shares, the remaining 4 shares being held as qualifying shares. From February 3 to March 31, 1925, Burton owned 2,246 of the shares of the By-Products Coal Company, the J. P. Burton Coal Company 750, and the remaining 4 shares were owned by the same individuals*1562 as owned them in the preceding period. The preferred stock of the By-Products Coal Company had no voting rights during the period April 1, 1924, to February 2, 1925. When the By-Products Coal Company was organized the petitioner bought part of its preferred stock. It later advanced money to the By-Products Coal Company totaling several hundred thousand dollars. The By-Products Coal Company never made any profits and sustained a loss of $99,712.79 for the period April 1, 1924, to February 2, 1925. Claims having priority over the common stock of the By-products Coal Company include preferred stock, a bond issue, and an open book account of several hundred thousand dollars, representing moneys advanced to the By-Products Coal Company by the Burton Coal Company. OPINION. MATTHEWS: The petitioner in the instant proceeding is claiming that it was affiliated with the By-Products Coal Company for the entire fiscal year ended March 31, 1925, and that it is entitled to file a consolidated return for that period. Section 240(c) of the Revenue Act of 1926 provides: * * * (c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated*1563 (1) if one corporation owns at least 95 per centum of the voting stock of the other or others, or (2) if at least 95 per centum of the voting stock of two or more corporations is owned by the same interests. This subdivision shall be applicable to the determination of affiliation for the taxable year 1925. We are concerned in this case only with the second subdivision of the above section. The petitioner contends that since the two corporations *1055 were operated as an economic unit, with Burton controlling both businesses, and that since Jones did not actually vote his stock or take any active interest in the business, the two corporations are affiliated, regardless of the fact that Burton, who owned all of the stock of the petitioner, did not own but 75 per cent of the stock of the By-Products Coal Company. The evidence in this proceeding does not show that Burton and Jones constituted the "same interests." Jones did not own any stock in the petitioner and his interest in the By-Products Coal Company was not the same as that of Burton. The mere fact that Jones acquiesced in the management and did not vote his stock and that Burton determined the policies of the business*1564 does not entitle the corporations to file consolidated returns. See , and . We must, therefore, sustain the action of the respondent in refusing to allow the petitioner and the By-Products Coal Company to file consolidated returns and in refusing to allow the petitioner to deduct the loss sustained by the By-Products Coal Company from its net income. We do not believe that the cases of , and , relied upon by the petitioner are controlling in this proceeding. In the Kile case two individuals, Kile and Alling, owned 99 per cent of the stock of one corporation and 1,656 shares out of 1,810 of another (91 1/2 per cent). Of the remaining, 17 were owned by Kile's sister, Mrs. Boston, and 137 by her husband, an employee who was heavily indebted to the corporation and under an agreement not to sell his stock without first offering it to the trustees. In the Baker case, Baker owned all of*1565 the stock of one corporation, from 76 to 86 per cent of another and 92 per cent of another, the remaining stock being owned by Swenson, Ludden and Curtis. Curtis was Banker's brother-in-law and had purchased the stock at 50 per cent of its face value, in order to act as director. Swenson and Ludden were employees and purchased their stock under an agreement whereby no sale or transfer could be made without Baker's consent. It was shown that the interests of these three in no way conflicted with that of Baker. It is clear from a study of the above cases that affiliation was granted upon the theory that the minority stockholders constituted the "same interests" as the majority, and as we have pointed out above such is not the situation here. Judgment will be entered for the respondent.