Crunden-Martin Mfg. Co. v. Commissioner

*81 This is a proceeding for the redetermination of a deficiency in income and excess profits taxes for the calendar year 1921, in the amount of $6,418.97, being the amount assessed against the petitioner, Conzelman-Crunden Realty Co.

The only error alleged is that the respondent refused to allow the petitioners to file a consolidated return on the ground that they were not affiliated as provided by section 240 of the Revenue Act of 1921.

FINDINGS OF FACT.

The petitioners in this case are Missouri corporations with offices at Second and Gratiot Streets, St. Louis.

The Crunden-Martin Manufacturing Co. was organized in 1891 or 1892. Its business was that of manufacturing of and jobbing in woodenware and tinware. The majority of the stock has at all times been owned by Frank P. Crunden, Theophilus Conzelman, and Charles L. Martin, and their families.

*3873 Due to the increase in business of the company these men found that it would be necessary to provide greater space and, accordingly, decided to buy certain property and construct suitable buildings thereon. They decided that, in order not to unnecessarily encumber the financial statement of the company, a separate company should be formed to construct buildings and lease them to the Manufacturing Company. The land was purchased in the name of Theophilus Conzelman, but in 1903 the Conzelman-Crunden Realty Co. was organized which held and developed the property and rented it to the Manufacturing Company. The stock in the Realty Company was held as follows at organization:

*82 Emilie C. Riley is the sister of Thephilus Conzelman and he invested in the Realty Company for her under power of attorney. By this power of attorney he had the right to handle all of his sister's property as he saw fit in her absence. Mrs. Riley lived in Washington, D.C., and only Martin, Conzelman, and Crunden attended meetings of the Realty Company. Mrs. Riley's stock and that*3874 which her daughters owned was voted by these three men by proxies.

For nine or ten years after its organization the Realty Company declared no dividends. However, on April 19, 1910, the capital stock of the Realty Company was increased from $100,000 to $400,000, and the increase was issued pro rata among its stockholders as stock dividend.

Crunden, Martin and Conzelman gave a great deal of their stock in the Crunden-Martin Manufacturing Co. to their families for no consideration except love and affection. Title to this stock was transferred absolutely and the members of the families holding it could have voted it as they wished but at no time did they interfere in the management of the business by these three men.

Both the common and preferred stock of the Crunden-Martin Manufacturing Co. had voting rights. The stock holdings of both companies as of January 1, 1921, and December 31, 1921, are shown below:

*83 The stock of the Crunden-Martin Manufacturing Co. which was not held by these families was held by their friends, by employees and former employees of the company and by their families. This stock was purchased unconditionally.

Crunden, Martin and Conzelman were*3876 the directors and officers of both companies but never received compensation from the Realty Company.

OPINION.

SIEFKIN: The only question in the case is whether the Crunden-Martin Manufacturing Co., and the Conzelman-Crunden Realty Co., were affiliated during the calendar year 1921.

Section 240(c) Revenue Act of 1921 provides:

For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

In this proceeding it is shown that 86.9 per cent of the stock of the Crunden-Martin Manufacturing Co. at the beginning of the calendar year 1921, was owned by Crunden, Martin and Conzelman, their immediate families, and Emilie C. Riley, sister of Mr. Conzelman, and her family, and that at the end of the year the same families held 86.7 per cent of the stock. There was no control whatever over the remaining minority interest by these parties.

*84 Throughout the same*3877 period the entire stock of the Conzelman-Crunden Realty Co. was held by Martin, Crunden, Conzelman and Emilie C. Riley and her two daughters as follows:

It is contended that the Manufacturing Company controlled the Realty Company through its principal stockholders, officers, and directors, and furthermore, that the percentages of control through ownership by the three families and the circumstances of the ownership by those not of these families make a complete case of control of substantially all the stock of the two companies by the same interests.

The respondent contends that the various family groups do not constitute the "same interests" within the meaning of the law, and that even if they do the minority stock interest of 13.1 per cent in the Manufacturing Company which had no stock interest in the Realty Company would be sufficient to preclude the allowance of affiliation.

While it was testified that the Realty Company was organized to serve the Manufacturing Company, no evidence was introduced to show that*3878 the rental charged by the Realty Company to the Manufacturing Company for use of buildings was other than at market rates. The title to all of the stock in the Manufacturing Company which Conzelman, Crunden and Martin gave to their families was passed absolutely and no control over the voting of it was reserved.

We are of the opinion that these men did not control the stock of their families. In , we held that the mere fact of family and business relationship, standing alone, is insufficient to constitute control or to warrant a holding that persons standing in such relationship constitute the same interest with the majority; and evidence that the minority is quiescent and permits the majority to manage the business does not prove actual control over the minority interest.

When we exclude the stock owned by the families, we find that the interests which hold all of the stock of the Realty Company control only slightly over 50 per cent of the stock of the Manufacturing Company. The language used in *3879 , is applicable to this case. In that case we said:

If the three corporations had made earnings during the year in question so that a substantial tax resulted, petitioner could, with force, contend that substantially all the stock was not owned or controlled by the same interests and that each corporation should pay its own separate tax.

*85 We must hold that substantially all the stock of the Crunden-Martin Manufacturing Co., and the Conzelman-Crunden Realty Co., was not controlled as required by section 240(b) of the Revenue Act of 1921, and the two corporations are, therefore, held to be not affiliated.

Judgment will be entered for the respondent.