Herald News Co. v. Commissioner

HERALD NEWS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Herald News Co. v. Commissioner Docket No. 48530. United States Board of Tax Appeals 26 B.T.A. 688; 1932 BTA LEXIS 1269; July 22, 1932, Promulgated *1269 1. Affiliation denied for the period January 1 to May 24, 1926. where less than 95 per cent of the stock was owned by the same interests. 2. Upon the evidence the petitioner is not entitled to any redetermination of its tax liability under the provisions of section 240(f) of the Revenue Act of 1926. R. A. Bartlett, Esq., for the petitioner. C. A. Ray, Esq., for the respondent. SMITH *688 This proceeding involves a deficiency in income tax for the period January 1 to May 24, 1926, in the amount of $1,474.28. The petitioner alleges that the respondent erred in not affiliating it with the El Paso Times Company, or, in the alternative, in not consolidating its accounts with that company, for the period mentioned. FINDINGS OF FACT. During the year 1926 the petitioner, the Herald News Company, now dissolved, was a corporation organized and operating under the laws of the State of Texas. It was the publisher of the newspaper, the El Paso Herald. For the calendar year 1926, it filed a consolidated *689 income-tax return with the El Paso Times Company, publisher of the El Paso Times. On January 1, 1926, the petitioner had issued*1270 and outstanding 6,000 shares of stock of a par value of $25 each. This stock was held of record as follows: Shares H. D. Slater 5,041 Elsie McElroy Slater (wife of H. D. Slater) [400] Ora W. L. Slater (sister of H. D. Slater) [40] John P. Ramsey [400] Others [119] Total 6,000 On January 1, 1926, the El Paso Times Company had issued and outstanding 1,000 shares of stock of a par value of $100 each, all of which was owned by H. D. Slater, who had acquired it in 1925. The 400 shares of stock of the Herald News Company standing in the name of Ramsey were originally the property of H. D. Slater. These shares were turned over to Ramsey by Slater in 1909 as security for a personal loan of $10,000, for which Slater executed his promissory notes. In 1911 the notes in question were canceled and returned to Slater, and the 400 shares of stock then pledged as security thereon were transferred to Ramsey in the corporation's books. At that time Slater gave Ramsey his personal guarantee against any loss on the stock, and also he guaranteed not less than 8 per cent interest on the stock, and also he guaranteed not less than dividends on the shares of stock at the rate*1271 of 8 per cent, except for one year when the dividends were passed. For that year Slater paid Ramsey an equivalent amount out of his personal funds. At the time of the transfer of the shares of stock to Ramsey in 1911, it was agreed that Slater might reacquire all of it at any time upon payment of its then market value and that it would not otherwise be disposed of without first being offered to Slater. Also, at that time Ramsey executed a power of attorney to Slater to vote the stock as long as it remained in his, Ramsey's name. The stock of the El Paso Herald in 1911 was worth not less than par. During the period 1911 to 1925 the El Paso Herald was a financially successful publication. In May, 1926, Slater reacquired the 400 shares of the Herald News Company stock from Ramsey in exchange for 8 per cent bonds of the El Paso Times Company, which Slater personally guaranteed. Ramsey and Slater were close personal friends. The former was in no way connected with either of the companies mentioned. The loan which Ramsey made to Slater in 1909 was in the nature of an accommodation rather than a strictly business matter. *690 After the purchase by Slater of the capital*1272 stock of the El Paso Times Company in 1925, the El Paso Herald and the El Paso Times were published under the same general management. The El Paso Herald Company published and distributed the El Paso Times, but the accounts of the companies were kept separately. In March, 1926, a working agreement was entered into between the El Paso Herald Company and the El Paso Times Company, effective as of March, 1925, which provided, in so far as material here, that both papers should be published by the El Paso Herald Company at its plant and that the cost of production should be apportioned between the companies upon the basis of the number of pages published. The El Paso Herald Company was also to collect all revenues for both companies, but the revenue accounts were to be kept separately. The above agreement remained in force during the period January 1 to May 31, 1926, and the accounts of the companies were kept in accordance therewith. On the basis of such accounting the El Paso Times Company sustained an operating loss for that period while the El Paso Herald Company had a net gain. The consolidated return filed by the companies for the entire calendar year 1926 shows a net income*1273 for the El Paso Herald Company of $67,995.07 and a net loss for the El Paso Times Company of $25,085.15. The respondent has determined that the companies were not affiliated for the period January 1 to May 24, 1926. OPINION. SMITH: The petitioner contends that it is entitled to have its tax liability for the entire calendar year 1926 computed on the basis of the consolidated return filed by it and the El Paso Times Company, or, in the alternative, that it is entitled under the provisions of section 240(f) of the Revenue Act of 1926 to have its accounts consolidated with those of the El Paso Times Company for the period January 1 to May 24, 1926. As to the first question, the statutory requirements for affiliation under section 240(d) of the Revenue Act of 1926 are (1) the ownership by one corporation of at least 95 per cent of the stock of the other or others, or (2) the ownership by the same interests of at least 95 per cent of the stock of two or more corporations. The petitioner claims affiliation under the second provision. It contends that Ramsey, who held more than 5 per cent of the stock of the El Paso Herald Company during the period in question, constituted the*1274 same interests with Slater, who owned all of the stock of the El Paso Times Company. This contention must be denied. The term "same interests," as used in the statute, has been construed to mean the same economic interests. . *691 So far as the evidence shows, Ramsey and Slater had no common business interests. Ramsey merely lent Slater a sum of money and in settlement of the indebtedness acquired the 400 shares, amounting to more than 5 per cent, of stock of the El Paso Herald Company. These individuals were in no sense the same economic interests. There is no question but that Ramsey was the legal owner of the shares in question, notwithstanding the agreement that Slater might reacquire them at his will and that he held a power of attorney to vote them. The statute requires legal ownership of at least 95 per cent of the stock by the same interests. This requisite was lacking during the period January 1 to May 24, 1926. With respect to the second question, the statute provides, in section 240(f) of the 1926 Act, as follows: In any case of two or more related trades or businesses (whether unincorporated*1275 or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may and at the request of the taxpayer shall, if necessary in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses, consolidate the accounts of such related trades or businesses. It is undeniable that the businesses here were "related" and were controlled directly or indirectly by the same interests. Beyond this point, however, we are unable to proceed in applying the statute. All that this provision of the statute requires the Commissioner to do is to "consolidate the accounts" of the related business, if necessary, "in order to make an accurate distribution or apportionment of gains, profits, income, deductions, or capital." The record before us indicates that such a consolidation of the accounts as the statute contemplates may have been made upon the basis of the written agreement under which the companies operated. In substance this agreement calls for an apportionment between the companies of the cost of production of both*1276 papers on the basis of the amount of the relative percentage of total pages issued. The revenue or income accounts were kept separately. At proper accounting intervals the necessary charges were made as between the several accounts. Apparently this plan produced the results of which the petitioner now complains, that is, a taxable gain for the El Paso Herald Company and a loss for the El Paso Times Company. The petitioner argues that "the operating loss indicated by the accounting records of the Times Company was reflected in the income of the Herald Company by reason of arbitrary allocation of production costs which were made, regardless of the earnings of the Times Company;" that "the portion of such costs arbitrarily assigned to the Times Company was inaccurate and greatly in excess of the actual costs of producing the *692 Times and hence caused the company to show a loss for accounting purposes." The fact is, however, that the petitioner has offered no other or better plan for a consolidation of the expense accounts of the companies, nor is any plan suggested for a consolidation and apportionment of the income and other accounts. It merely protests that the method*1277 used was arbitrary. We held in , that, where any distribution or apportionment of deductions is proper, it is incumbent upon the petitioner to prove an apportionment which is reasonably accurate under the circumstances. As pointed out in , and , where the accounts are consolidated under this provision of the statute, it is then necessary to break up the accounts and segregate the items attributable to each in order to determine the correct tax liability . There is no evidence before us which would afford a basis for such a segregation of the items unless it be the above agreement under which the companies operated. Cf. also ; affd., . Certainly the statute does not purport to authorize the offsetting of a loss or gain of one business against a gain or loss of a related business by a consolidation of accounts. Judgment will be entered for the respondent.