San Francisco Lumber Co. v. Commissioner

*1242 This proceeding results from the determination by respondent of deficiencies in profits and income taxes amounting as follows: For 1917, $3,853.29 (overassessment $1,284.05); for the period January 1, 1918, to March 14, 1918, $147.05.

Petitioner alleges error in the*3927 exclusion of petitioner for tax purposes from an affiliated status with The Charles Nelson Co. prior to March 5, 1918.

FINDINGS OF FACT.

Petitioner is a California corporation with its principal place of business at San Francisco.

Petitioner was incorporated in January, 1912, with authorized capital stock of 250 shares, which were originally issued to The Charles Nelson Co., a corporation, excepting that a few qualifying shares were issued to individual directors. In April, 1912, 83 shares of petitioner's stock were transferred from The Charles Nelson Co. to J. H. Masterson, the manager of petitioner. Masterson immediately assigned the same 83 shares to The Charles Nelson Co. and he delivered to the Charles Nelson Co. the stock certificates together with his promissory note for $8,300 bearing interest. The oral understanding between the parties was that Masterson would be entitled to any dividends payable on the 83 shares of stock and he would pay the interest on his note. Either party could terminate the arrangement at any time, whereupon the transfer of the 83 shares of stock would be recorded. The certificates of stock and note were *1243 retained in the possession*3928 of the Nelson Co. until July 18, 1918, when the note was canceled and the transfer of the stock to The Charles Nelson Co. was completed of record. In December, 1919, the arrangement was again effected through similar transactions and was later again terminated. The remainder of a dividend in 1918, after deducting therefrom the accrued interest on his note, was paid to Masterson in 1918. Masterson was an experienced retail lumber dealer, the possessor of personal good will in that business. He functioned as the figurehead of petitioner and the fact that The Charles Nelson Co. was the real owner of petitioner was kept secret for business reasons. Petitioner paid Masterson a salary of $300 per month. Two of the three directors of petitioner were officers and employees of The Charles Nelson Co. The officers of The Charles Nelson Co. rendered services to petitioner without charge. During the period from 1911 to 1918, inclusive, The Charles Nelson Co. owned and operated at least 15 other corporations engaged in the retail lumber business at various places in California. All of these companies and also petitioner were financed by The Charles Nelson Co.The Charles Nelson Co. owned*3929 and operated as a manufacturer and wholesaler a number of lumber mills. The president of The Charles Nelson Co. determined the selling prices of petitioner. Petitioner purchased all of its lumber from The Charles Nelson Co. with the exception of rush orders of minor importance. These practices were also followed in the relations between The Charles Nelson Co. and the other retail companies it owned.

James Tyson, the president of The Charles Nelson Co., was the general manager of all of the companies. He was in frequent consultation with the local presidents or managers and none of them were authorized to take any action without the authorization of Tyson.

Petitioner filed a return for 1917, in March, 1918, signed by James Tyson, president, and reported a tax amounting to $1,039.43, which did not include a profits tax.

OPINION.

TRUSSELL: The sole issue before us is the period during which petitioner and another corporation should be consolidated for tax purposes under the statutory provisions following:

Revenue Act of 1921:

SEC. 1331. (a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated*3930 returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917.

*1244 (b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all the stock of the other or others. * * *

Revenue Act of 1918:

SEC. 240. (a) That corporations which are affiliated within the meaning of this section shall * * * make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return: * * *

* * *

(b) For the purpose of this section two or more domestic corporation shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests * * * substantially all the stock of the other or others. * * *

Reduced to its simpliest terms the question is whether the 83 shares of the capital stock of petitioner which*3931 stood of record in the name of J. H. Masterson during 1917, and the early months of 1918, but which were indorsed over to and held by a parent corporation the owner of the remainder of the outstanding capital stock of petitioner constituted a separate minority interest free of control, so that respondent was right in failing to consolidate the returns of petitioner and the parent corporation for income-tax purposes for the calendar year 1917, and for the early months of 1918. The facts are detailed in the findings; we will not extend this opinion by a repetition of them. Such a question as this must be "examined in three dimensions with the light of reality," , and affiliation is not defeated by a separate ownership of part of the stock provided there is a community of interest. . We think there was a community of interest between the record owner of the 83 shares and the parent corporation, and, furthermore, the parent corporation was in control of all of the stock sufficiently to warrant consolidation. In addition there was a complete unity of enterprise; petitioner*3932 was nothing more than a separately incorporated branch of the parent corporation and we entertain no doubt but that consolidation will effect a clearer reflection of the income of the affiliated group. We are of opinion that petitioner should be consolidated with The Charles Nelson Co. for the entire years 1917 and 1918. Compare ; ; ; .

Judgment will be rendered upon 15 days' notice, under Rule 50.