The vice president connected with the sales department of the companies went with the Hagerstown Company in 1913. He bought stock under the arrangement above described with a full realization of the restrictions in the by-laws and the contract quoted above, and completed the payments on the notes in 1917. He was not a stockholder of the Byron Company but was a director representing the Hagerstown Company, which owned 10 per cent of the Byron Company stock in 1919 and 20 per cent in 1920. After the death of Lewis T. Byron in 1922 he acquired some stock in the Byron Company. The employee stockholders voted their stock as the Byrons voted. They regarded their interests as identical with the Byron interests, and that the best interest of the corporations was their own best interest. There was never any difference of opinion in the stockholders' and directors' meetings as to the best interests of the companies. All the stockholders were in entire accord with the handling and management of the company at all times. The employee stockholders did not feel strictly compelled to vote in accord with the Byrons, but they recognized that the Byrons were in control of the business through stockholdings and elections to the directorate. We find the following, as testified by an employee stockholder without contradiction: "The junior members of this corporation have mostly worked with their sleeves rolled up. The senior members of the corporation, as represented by the Byron brothers, have furnished the capital and done a great deal as to the general policies of the business. My position as a junior called for my putting my best efforts for the good of the business. I have never had any occasion to feel other than in accord with the business policy." Another employee stockholder finished paying for his Hagerstown Company stock in 1919 and is still paying for his Byron Company stock. Some of the employees did not finish paying until 1921 and 1922. The stock ownership during the years in question is as follows: The Commissioner determined a deficiency for the calendar years 1919 and 1920 of $52,388.26, of which he duly notified the taxpayer on August 29, 1924. DECISION. The Hagerstown Shoe & Legging Co. and the Byron Shoe Manufacturing Co., Inc., were affiliated in the calendar years 1919 and 1920, and their lability should be determined on the basis of a consolidated return. The tax should be recomputed and final decision will be made on stipulation or on seven days' notice, in accordance with Rule 50. OPINION. STERNHAGEN: We are to consider whether the foregoing facts combine into a situation where two corporations are affiliated so as to make the determination of their tax liability a single rather than a multiple problem. Clearly there is a commercial and economic unity in the enterprise. Probably for no other practical purpose would one consider the production of income by these two factories as a double function. Their owners and employees consider them a business unit, and the interest of each is the interest of all. The Byron Company was conceived in the necessities and inadequacy of the older company, and was deliberately created as a branch and supplement to supply its pent need. If personnel and legal structure be disregarded the evidence leads unswervingly to the conclusion of a single united enterprise. Why the Byron Company was separately created does not appear, and we shall not speculate on its reason. For aught the evidence discloses its whole function could as well have been performed as an arm of the Hagerstown Company. The Byron brothers are the dominating and guiding spirit of the business. They originated it and formed the Hagerstown Company, which they alone financed. They operated the business and so completely controlled it that no one else questioned their management. They determined the extent of outside stack ownership and its tenure, and by unequivocal written agreements they forestalled any opposition through discontentment. At no time had they less than a voting majority in absolute ownership or, we are satisfied, less than an irresistible influence over the whole. The president expressed the situation by calling the employees' stock ownership a plan of profit sharing. One needs only to read the written terms of the note, the by-laws, and the agreement, carefully drawn and fully comprehended by the stockholders, to see that the tiller is always in the firm grasp of the Byron family. Theirs is the last and controlling word, however freely they may invite suggestion. The oarsman who at any moment may be cast overboard is no more free because he pulls an ardent stroke. Does it matter that most of the employees' stock was paid for so that title was freed from the pledge for the note? This was not ownership, for the power of free disposition, that sine qua non of ownership, was wholly wanting. The stockholder could only vote and share the profit. Indeed, his vote was futile unless in accord with the Byrons. And his ownership carried no responsibility, for in case of loss he had only to quit by selling his stock to the Byrons under his contract. Are we, in applying this statute, to look at the tabulated statement of stock ownership and, because it there appears that several persons are stockholders of one or the other legal entity and not of both, say that this alone is determinative? We have had occasion in other appeals on other questions to say, and we can not too often repeat, that all facts must be considered. These problems are not flat mathematical or legalistic puzzles; they are vital, and must be examined in three dimensions with the light of reality. No solution otherwise arrived at could long survive. Here the table of percentages changes its color entirely in the light of the circumstances under which the percentage distribution exists, and, instead of indicating a substantial independent minority, indicates that "substantially all the stock of two corporations is owned or controlled by the same interests." Appeal of YORK HOTEL CORPORATION. * Docket No. 925. The evidence does not show that the good will paid into the corporation in exchange for shares of stock had an actual cash value. Submitted February 16, 1925; decided February 28, 1925. M. H. Rothman, C. P. A., for the taxpayer. Robert A. Littleton, Esq. (Nelson T. Hartson, Solicitor of Internal Revenue) for the Commissioner. Before GRAUPNER, LANSDON, LITTLETON, and SMITH. This appeal is from a deficiency in income and profits taxes for the year 1921. From the oral and documentary evidence the Board makes the following FINDINGS OF FACT. 1. The taxpayer is a New York corporation with its principal office at Seventh Avenue and Thirty-sixth Street, New York, N. Y. 2. It was incorporated May 7, 1912, and issued $250,000 capital stock, consisting of $125,000 preferred stock and $125,000 common stock, for the assets of the York Company and the Hotel York, a corporation. The preferred stock was issued for the assumed value of the tangibles, $125,000, and the common stock was issued, $70,000 for the appraised value of a lease and $55,000 for the appraised value of good will. 3. In its return for 1921 the taxpayer claimed that the assets paid in to the corporation in 1912 in exchange for $250,000 capital stock had a cash value of $250,000 at that date. Upon the audit of the return the Commissioner excluded from claimed invested capital $55,000, the alleged value of the good will paid in for an equivalent amount of the common stock of the corporation. 4. In 1903 Henry G. Williams and Sylvanus Stokes leased the hotel building at the northwest corner of Thirty-sixth Street and Seventh Avenue, New York, N. Y. The term of the lease was 21 years, with a privilege of renewal. Williams and Stokes operated the hotel as partners from 1903 to 1906. In the latter year the partners, who had invested $135,000 in the partnership, organized a corporation known as the York Company, and turned the assets of the partnership, including the lease, into the corporation for its capital stock of $135,000. Of the stock $88,500 was issued to Williams and $46,500 to Stokes. At the same time another corporation was organized known as "Hotel York, a corporation," which operated the hotel under the lease held by the York Company. Its capital stock of $50,000 was issued to Williams for $50,000 cash. From 1906 to 1911 the hotel was operated at a loss. Neither the partnership nor the Hotel York, a corporation, had any net earnings, and no dividends were ever paid by either of the corporations. On December 21, 1911, receivers were appointed for the York Company and for the Hotel York, a corporation, and they operated the York Hotel from December 21, 1911, to May 7, 1912, the date of the incorporation of the taxpayer. In 1912, Hotel York, a corporation, was indebted to Williams for personal loans to the extent of $24,174.37. Williams was never repaid any portion of the moneys thus advanced by him. In 1912 he paid an additional $57,054.20 to creditors of the corporation, including $10,000 to Sylvanus Stokes for his interest in the York Company, in order to wind up the receivership and get the properties in his own hands. Williams' total investment to May 7, 1912, was as follows: York Corporation__ Hotel York, a corporation_. Paid to creditors__ Total. $88,500.00 57, 054. 24 219, 728. 61 Upon the organization of the taxpayer on May 7, 1912, the incorporators valued the tangible assets at $125,000, the lease at $70,000, and the good will at $55,000. 61359-26- 43 The owners of the fee of the property voluntarily reduced the rental of the hotel $10,000 per annum from May 1, 1912, to May 1, 1917. DECISION. The determination of the Commissioner is approved. OPINION. SMITH: Under the Revenue Act of 1921, a corporate taxpayer is entitled to include in invested capital Intangible property bona fide paid in for stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporation outstanding on March 3, 1917, whichever is lowest. (Section 326 (a) (4).) The only question for determination here is whether the good will of the predecessor corporations, the York Company and the Hotel York, a corporation, had an actual cash value of $55,000, or any less amount at the time paid in for shares of stock in 1912. The facts with respect to the value of the good will are stated in the findings of fact. The predecessor corporations had not been able to operate at a profit. A considerable portion of the money invested by Sylvanus Stokes and H. G. Williams had gone to wipe out operating deficits. Stokes withdrew from the enterprise in 1912 and realized only $10,000 upon his investment of $46,500. The York Company and the Hotel York, a corporation, were insolvent. The lessor agreed to reduce the rental $10,000 per year for the term of five years from May 1, 1912, and then Williams invested in excess of $57,000 (including $10,000 for Stokes' interest) to liquidate the liabilities of the companies and continued to carry on the business. We are not satisfied from the evidence before us that the good will of the York Company and of the Hotel York, a corporation, had an actual cash value in 1912. Those corporations had not been able to operate at a profit from the date of organization. The fact that the lessor voluntarily reduced the rental to the extent of $10,000 per annum for a period of five years from May 1, 1912, argues strongly that the good will had no cash value in the year in which the reduction was made. Upon the evidence before us it must be held that the claimed cash value of the good will in 1912 has not been proven. In its petition the taxpayer asks assessment under section 328 of the Revenue Act of 1921. No evidence has, however, been presented which would prove such an abnormality in invested capital or income for the year 1921 as would warrant such assessment. Appeal of HARRY GOTTLIEB. Docket No. 890. Held: That the taxpayer failed to prove that certain debts were ascertained to be worthless during the year 1920. Submitted January 28, 1925; decided February 28, 1925. |