Boker Cutlery & Hardware Co. v. Commissioner

*1405 Petitioner asks a redetermination of a deficiency in income tax for the year 1920 in the amount of $5,743.41, on a claim of affiliation with H. Boker & Co., Inc.

FINDINGS OF FACT.

In 1914, Carl H. Boker, who was engaged in the cutlery and hardware business went into bankruptcy. A reorganization was effected and there was created the corporation of H. Boker & Co., Inc., which took over the individual business of Boker, and also the capital stock *1406 of the Valley Forge Cutlery Co., which was owned by Boker. The business consisted of two departments, one of which was the sale of cutlery and hardware. Edward Grafmueller had been in charge of the cutlery and hardware department for some time, and when the reorganization was effected it was felt that he should be given some interest in that branch of the business. Accordingly the petitioner corporation was created with an authorized capitalization of $200,000. Stock of the par value of $40,000 was issued to Grafmueller, $122,000 par value was issued*3342 to H. Boker & Co., Inc., and the balance of $38,000 was unissued.

During 1920 Grafmueller was president and director of the petitioner, vice president and director of H. Boker & Co., Inc., and president and director of the Valley Forge Cutlery Co. J. R. Boker and Grafmueller were the active heads of these three companies.

Prior to 1920, H. Boker & Co., Inc., acquired an interest in the C. H. Redman Co., a corporation, and in 1920 owned stock of the par value of $125,000 out of a total capitalization of $150,000. The Redman Company manufactured hair clippers and pruning shears which were sold by the petitioner.

Petitioner's sales of the cutlery manufactured by the Valley Forge Cutlery Co., which were made on a commission basis, amounted to $946,183.95 in 1920. Its sales of Redman Company products were approximately $348,000. Total sales of petitioner in that year amounted to $2,149,000. The sales of the products of these two companies were vital to the business of the petitioner. The rates of commissions on sales were fixed by J. R. Boker and Grafmueller.

Grafmueller owned outright his $40,000 stock in the petitioner.

OPINION.

ARUNDELL: The petitioner seeks affiliation*3343 only with H. Boker & Co., Inc. Evidence as to the other two companies was introduced to show the unity of management and close business relationship existing between all four.

As to the ownership of petitioner's stock, H. Boker & Co., Inc., owned 122 shares of a total of 162 shares outstanding, or 75.3 per cent. The remaining 24.7 per cent of the stock was owned by Grafmueller, who was vice president and a director of the parent company. Prior to the creation of the petitioner Grafmueller had been in charge of the cutlery department of the parent company and its predecessor and the petitioner company was created largely for the purpose of giving him an interest in the business. Grafmueller was in reality an employee, and the petitioner a department of the parent; the profitable existence of the petitioner, and hence the value of Grafmueller's stock, depended upon sales of products made by two concerns, in one *1407 of which the parent company owned all the stock and in the other it owned 83 1/3 per cent. From all the facts and circumstances we are satisfied that the parent company controlled all of the stock of the petitioner that it did not directly own. *3344 ; .

Judgment will be entered under Rule 50.