Heller Bros. Co. v. Commissioner

*1328 Heller Brothers Co. and the Heller Tool Co. file their petitions for the redetermination of deficiencies in taxes for the fiscal year ended July 31, 1920, determined by the Commissioner to be $4,510.77 and $1,368.37, respectively. Upon agreement of counsel the two cases were ordered consolidated and heard at the same time.

FINDINGS OF FACT.

Heller Brothers Co. is a corporation organized under the laws of the State of New Jersey, with its principal office and place of business at 865 Mount Prospect Avenue, Newark, N.J.

The Heller Tool Co. is a corporation organized under the laws of the State of New Jersey, with its principal office and place of business at 245 Verona Avenue, Newark, N.J.

During the taxable year involved in this proceeding the voting stock in Heller Brothers Co. and*4250 the Heller Tool Co. was held as shown in the following schedule:

*1329 All of the stockholders set forth above, with the exception of W. W. Lyons, were members of the same family. Paul Heller was president of both companies; A. G. Heller was vice president of both companies; E. A. Geoffroy was treasurer of both companies, and W. W. Lyons was secretary of the Heller Tool Co.

The accounting for the Heller Tool Co. was handled by Heller Brothers Co. and in the office of Heller Brothers Co., the Heller Tool Co. having no accounting department and keeping no books in its office, with the exception of factory accounts and records of small purchases. Heller Brothers Co. was engaged in the manufacture and sale of files, rasps, tools and steel, and sold its own products on the market. W. W. Lyons was the manager of its tool department. In addition to its own products, it sold*4251 on commission the products of the Heller Tool Co., which was engaged in manufacturing farriers' tools and automobile tools. All of the products of the Heller Tool Co. were sold by Heller Brothers Co. as the product of Heller Brothers Co. Heller Brothers Co. did the financing for the Heller Tool Co. The only trade-marks which appeared upon the products of the Heller Tool Co. were the trade-marks of Heller Brothers Co.

During the taxable year and for more than 20 years before that time, the Heller Tool Co. had conducted its business in the buildings and upon the lands owned by Heller Brothers Co. The plant of the Tool Company adjoined the steel plant of Heller Brothers Company and the Tool Company purchased from Heller Brothers Co. the power necessary to operate its plant. The annual payment for the use of the plant and for power was $5,000. This amount had been the same for over 20 years, being fixed by lease. In 1920 the plant was worth about $70,000.

W. W. Lyons was one of the founders of the Heller Tool Co. Lyons, in 1881, was engaged in business with one Dodge, manufacturing machinery, some of which they sold to Heller Brothers Co. On or about that date, at the invitation*4252 of A. G. Heller, then active in the business of Heller Brothers Co., they occupied a part of the shop of Heller Brothers Co. and built many machines for that company. They also started a steel works which they soon sold to Heller. *1330 Then, at the suggestion of A. G. Heller, they commenced the manufacture of farriers' tools. Dodge, desiring to retire from the business, in 1890, Heller proposed to take an interest in the business, he to have two-thirds and Lyons to have one-third, and in 1890 the business was incorporated as the Heller Tool Co. and Lyons received his 40 shares of stock. From then on Lyons continued to own and vote his own stock and to operate the Tool Company. There were five directors of the Heller Tool Co. during the taxable year 1920, of whom Lyons was one. Each director had one vote.

In 1920 about 65 per cent of the output of the Heller Tool Co. was of farriers' tools and the remainder automobile tools. The price at which farriers' tools were sold was fixed by Lyons. The price at which automobile tools were sold was fixed by competition, Heller Brothers Co. informing the Tool Company of the condition of the competitive market. Heller Brothers*4253 Co. did not own or control the stock owned by W. W. Lyons.

On August 15, 1919, Heller Brothers Co. entered into a written contract, whereby it agreed to sell to one Weinhouse certain buildings, consisting of three stores and apartments, and to move them at its expense from the north side of Verona Avenue, Newark, to vacant land owned by Weinhouse on the south side of Verona Avenue. It agreed also to convey to Weinhouse a strip of land 30 feet wide, adjoining Weinhouse's property on the west. On April 30, 1920, Heller Brothers Co. acquired a plot of land having a frontage of 102 feet on the south side of Verona Avenue, for which it paid $15,000. This tract included the 30 feet which was to be conveyed to Weinhouse. A building upon the land had a value of $600. In June, 1920, the buildings were moved and a strip of land 30 feet wide was deeded to Weinhouse. The Commissioner, in determining profit or loss on the sale of the Verona Avenue property, did not include the cost of this 30-foot strip in the cost of the property sold. This 30-foot strip cost Heller Brothers Co. $4,235.

The Verona Avenue stores cost $21,443.32. The Commissioner determined depreciation and invested*4254 capital of Heller Brothers Co. on the basis of the value of the assets on the books at July 31, 1916, in computing the Heller Brothers Co.'s taxes for the fiscal year ended July 31, 1920. In computing depreciation on the Verona Avenue stores, for purposes of determining profit or loss on the sale of these stores in 1920, the Commissioner used as a basis the cost of the assets at the date of acquisition.

In computing the income of the Heller Tool Co. the Commissioner overstated such income by $8,340.84, due to a mathematical error in misplacing a decimal point.

*1331 OPINION.

PHILLIPS: It is contended that the petitioners are affiliated corporations within section 240 of the Revenue Act of 1918 and entitled to file a consolidated return. That section provides that "corporations shall be deemed 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." Here one-third of the stock of the Heller Tool Co. was owned by Lyons, who owned none of*4255 the common stock of the Heller Brothers Co. The principal contention is that Heller Brothers Co. controlled the output and sales of the Tool Company to the extent that its stock was also under the control of the former company.

The record shows some intercompany transactions. It also shows that the entire output of the Tool Company was sold on commission by the Heller Brothers Co. Apparently the arrangement was satisfactory to the stockholders of both companies, for the testimony discloses that Lyons had no disagreement with the majority stockholders or they with him. It does not appear that either controlled the other nor does it appear that the sales arrangement with Heller Brothers Co. was more important to the Tool Company than the supply of tools was to the selling company. By eliminating the name on their dies, the Tool Company was equipped to manufacture their product for any purchaser. The record does show that Heller Brothers Co. controlled the board of directors and consequently they were in a position to control the activities of the Tool Company, so long as there was no interference with the rights of the minority stockholder. But this is far from a control of*4256 his stock and stock control is the test laid down by the statute. We conclude that the two companies are not affiliated.

In determining profit or loss from the sale of the Verona Avenue property, the cost of the 30-foot strip conveyed to Heller Brothers Co. should be added to the cost determined by the Commissioner.

The Commissioner determined depreciation and invested capital of Heller Brothers Co. upon the basis of the values of the assets on its books on July 31, 1916. In computing depreciation on the Verona Avenue stores, for purposes of determining gain or loss on the sale of those stores, he departed from that basis and used as a basis the cost of the property at the date when Heller Brothers Co. acquired it. We must approve the action of the Commissioner since there is no evidence of the March 1, 1913, value of the stores.

*1332 It is conceded that the Commissioner made a clerical error, overstating the net income of the Heller Tool Company by $8,340.84.

Decision will be entered accordingly upon 20 days' notice, under Rule 50.