Summary
holding that substantially all, in the context of when two corporations are affiliated for tax purposes, means all except “a negligible minority” or when a “practically negligible” amount remains
Summary of this case from Fagg v. Bartells Asbestos Settlement TrustOpinion
No. 98.
January 7, 1929.
Appeal from the United States Board of Tax Appeals.
Petition by the Ice Service Company, Incorporated, and another, to review an order of the Board of Tax Appeals, confirming a determination of a deficiency in income and profits taxes for the year 1921 by the Commissioner of Internal Revenue. Affirmed.
The Commissioner of Internal Revenue having determined a deficiency in income and profits taxes, as shown by the tax return of the petitioners for the calendar year 1921, and such deficiency having been confirmed by a decision of the Board of Tax Appeals, a review of their decision is sought in this court, pursuant to section 1001 of the Revenue Act of 1926 (44 Stat. 109 [26 US CA § 1224]).
The two corporations filed a consolidated tax return on the theory that they were "affiliated" corporations, within the meaning of section 240 of the Revenue Act of 1921 (42 Stat. 260). The refusal of the Commissioner of Internal Revenue to accept such consolidated return, resulting in a deficiency tax of $9,699.47 against Ice Service Company and a deficiency tax of $8,012.47 against National Ice Coal Company, was the error asserted before the Board of Tax Appeals, and constitutes the sole question presented to us upon this appeal.
The facts were stipulated. Ice Service Company, Incorporated, is a Delaware corporation, with its principal office at 152 West Forty-Second street, New York City, and National Ice Coal Company is a New York corporation, having its principal office at the same address. On January 10, 1921, Ice Service Company acquired 25,500 shares of the common stock of the National Ice Coal Company, being 68 per cent. of the 37,500 common shares then outstanding. Subsequently, during 1921, but at dates not shown, Ice Service acquired additional shares of the National's stock, so that by the end of said year it owned approximately 75 per cent., or all but 9,236 shares. These minority shares were held by about 200 different shareholders. Upon the date on which Ice Service acquired 68 per cent. of the National's common stock, all of the latter's officers and a majority of its board of directors resigned, and were replaced by nominees of Ice Service. The new president and vice president were vice presidents of Ice Service, and the general counsel of both corporations was the same. By resolution of the directors of Ice Service its purchasing agent was directed to make all purchases for the National, as in the case of all subsidiary companies of Ice Service. Also certain outstanding notes and contract obligations of the National were purchased by Ice Service from two of the National's creditors, and other notes of the National were endorsed by Ice Service.
The opinion below is reported in 9 B.T.A. 386.
Greenbaum, Wolff Ernst, of New York City (Morris L. Ernst and Samuel J. Schur, both of New York City, of counsel), for petitioners.
Mabel Walker Willebrandt, Asst. Atty. Gen., Sewall Key and Edwin G. Davis, Sp. Asst. Attys. Gen. (C.M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Thos. P. Dudley, Jr., Sp. Atty., Bureau of Internal Revenue, both of Washington, D.C., of counsel), for respondent.
Before MANTON, L. HAND, and SWAN, Circuit Judges.
The Revenue Act of 1921, subdivision (a) of section 240 (42 Stat. 260), makes consolidated returns of affiliated corporations optional with the taxpayer after January 1, 1922. Subdivision (e) of the section provides that, for any taxable year beginning prior to January 1, 1922, affiliated corporations are required to make a consolidated return in the manner prescribed by the Revenue Act of 1918 (40 Stat. 1081). The definition of what is meant by affiliation is identical in both acts and reads as follows:
"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 moninee 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."
Under the Stock Corporation Law of New York (Consol. Laws, c. 59, § 20) two-thirds of the shareholders of a domestic corporation completely control the corporate enterprise and may even cause the termination of the business and the voluntary dissolution of the corporation. Hence, it is argued by the appellants, ownership of two-thirds of the voting stock of National Ice Coal Company is ownership or control of "substantially all the stock."
Ignoring the fact that the National Company's stock was acquired by Ice Service Company after January 1, 1921, we hold that the construction contended for by appellants is not permissible. To say that 68 per cent. of the stock is substantially all the stock would not only pervert the statutory language, but would defeat the purpose of the enactment. Congress has declared that two corporations shall be treated as one for tax purposes, when one corporation owns or controls substantially all the stock of the other, or when substantially all the stock is owned or controlled by the same interests. Judicial interpretation may perhaps limit the statutory language to voting stock, as was held in Re Temtor Corn, etc., Products Co. (D.C.) 299 F. 326, affirmed sub. nom. Schlafly v. United States, 4 F.2d 195 (C.C.A. 8); but we are not to confuse control of the corporation with control of the stock. The test is not declared to be control of the business or the policies of the subsidiary corporation, but substantial identity of interest in the enterprise. The theory of affiliation, resulting in a consolidated return for taxes, is that the income and invested capital are really the income and capital of a single enterprise, though carried on through the instrumentality of several corporations. See article 631, Treasury Regulations (1920 Ed.); Holmes, Fed. Taxes (6th Ed.) 281; Alameda Inv. Co. v. McLaughlin, 28 F.2d 81 (D.C.N.D. Cal.). Only when the outside interest — that is, the interest of the minority — is so small as to be practically negligible, are the two corporations to be treated as in receipt of a single income, requiring a consolidated return.
What constitutes a negligible minority we need not now attempt to state in terms of percentage. By article 633 of Regulations 45, 1920 Edition, it was provided that ownership or control of 95 per cent. of the outstanding voting capital stock of the subsidiary corporation should constitute an affiliation within the statute, although a consolidated return might be required when the ownership was less than 95 per cent. The Revenue Act of 1924, by section 240, prescribed ownership of 95 per cent. of the voting stock as essential for affiliation (43 Stat. 288 [26 USCA § 993]), and this same percentage of ownership is required by the Revenue Act of 1926 (44 Stat. 46 [26 USCA § 993]) and the Revenue Act of 1928 (45 Stat. 831 [26 USCA § 2141]). Whether so great a percentage was necessary under the 1918 and 1921 acts to constitute ownership or control of "substantially all the stock" we find it unnecessary to determine. In any event, we think it clear that a minority of 32 per cent., comprising some 200 owners of National stock, who had no interest in the Ice Service Company, precludes that substantial identity of interest which the statute requires before the income of both corporations shall be treated as a single income for taxation.
This view accords with numerous rulings of the Board of Tax Appeals, which are cited in the opinion below, and with the only court decisions which have been brought to our attention. Alameda Inv. Co. v. McLaughlin, supra; Montana Mercantile Co. v. Rasmusson, 28 F.2d 916 (D.C. Mont.).
The judgment is affirmed.