Sutherland Mfg. Co. v. Commissioner

*1226OPINION.

The Davidson Co. owned 55 per cent of the stock of petitioner and claims that it controlled the 45 per cent owned by Sutherland, thus giving it ownership and control of substantially *1227all of tlie stock. But the record fails to present more than indications of potential control of the stock owned by Sutherland. The Sutherland Manufacturing Co. was organized not alone because it was thought that a branch of the Davidson Co.’s business could thereby be run more efficiently, but also to insure the retention of Sutherland’s services. He was the manager and active head of the petitioner and, so far as the record discloses, was free to vote his stock as his judgment dictated. The fact that Sutherland and the other stockholders worked harmoniously does not establish control by either of the stock of the other.

In the Appeal of Isse Koch & Co., 1 B. T. A. 624, we held that the control required by the statute was an actual control as distinguished from strictly legal control, but that s'uch control must be actually exercised and mere potential control will not suffice. We find no evidence in the record of the exercise of control by the Davidson Co. of the stock owned by Sutherland and we can not assume that it in fact existed. There was, undoubtedly, a close working agreement between the companies and some transactions between them were on an artificial basis, particularly during the early life of petitioner, but mere economic unity does not meet the statutory test. Appeal of Rishell Phonograph Go., 2 B. T. A. 229. The provision in the by-laws that no stockholder shall transfer his stock without first offering it to the executive officers of the company can not serve to give the Davidson Co. control of Sutherland’s stock. He may never desire to sell the stock, but even if he did desire to do so, he was under no obligation to sell to them, though it may be assumed he would do so provided the price offered was equal to what he could secure elsewhere. The evidence of control is not convincing. Appeal of R. A. Tuttle Co., 1 B. T. A. 1218 ; Appeal of Block Street Wharf & Warehouse Co., 2 B. T. A. 183.

The deficiences are $3,05035 for 1919 and $11^,$11.66 for 19$0. Order will he entered accordingly.

dissenting: The evidence taken in its entirety indicates to my mind an affiliatiop. The Sutherland Co. while separately incorporated is still but an organized branch of the complete enterprise. Sutherland testified that he understood, as a layman would, that the Davidson Co. and its board of directors controlled both the business and the stock of the Sutherland Co.; that he had no control, no more power in dictating the company’s policies than if he had owned only 5 per cent of the stock, and that he was manager in the same sense and exercised the same authority over the incorporated branch as prior to its separate incorporation. It should be remembered that the 55 per cent of the stock which he did not own was *1228not scattered and ineffectual but was owned entirely by tire Davidson Co., so that as a stockholder he was powerless against it.

There was complete unity in the enterprise. The Davidson Co. was not merely the progenitor of the Sutherland Co. but it exercised a parental care and responsibility. As Sutherland expressed it, “ We were working for the mutual good of each other.” The practice of each bidding for the whole job in behalf of both worked for their mutual advantage. Sutherland alone drew salary. In addition to this, if Sutherland at any time was discharged he Avas required to offer his stock to the Davidson Co., and, as he said, he had every reason to believe that the old company would take it over. This seems to me to indicate a control by the Davidson Co. of the Sutherland stock either directly or through closely affiliated interests.

The statute seems to me to make it necessary, as I had understood this Board to hold, to examine the facts of each case with a view to a recognition of actual control of the stock during the particular year in question, and'I had not supposed that by control of the stock was meant only ownership or its approximation. Here it seems to me that the Davidson Co. had all the control of this stock an owner could have except title and the right to dividends. The other rights were so completely dominated by the Davidson Co. as to make Sutherland’s so-called ownership a mere form for increasing his salary. This was what Davidson testified was the purpose of the separate incorporation. While I agree that ownership of a majority of voting stock is not of itself equivalent to the statutory ownership or control of substantially all of the stock, I think that actual conditions may be such as to bring such a situation within the statute. This I think is such a case.