The opinion
JOHN LEE SHOE CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John Lee Shoe Co. v. Commissioner
Docket No. 10061.
United States Board of Tax Appeals
11 B.T.A. 187 ; 1928 BTA LEXIS 3856 ;
March 23, 1928 , Promulgated
*3856 AFFILIATED CORPORATIONS. - The two corporations involved herein were affiliated within the meaning of section 240(b) of the Revenue Act of 1918, and should file a consolidated return for the period under consideration.
Edgar G. Goodrich, Esq., for the petitioner.
P. M. Clark, Esq., and C. C. Holmes, Esq., for the respondent.
MILLIKEN
*187 This proceeding is for the redetermination of a deficiency in income and profits taxes in the sum of $1,845.91 for the period of eleven *188 months from February 1, 1921, to December 31, 1921. The petitioner alleges that the respondent erred (a) in holding that the petitioner was not affiliated, within the purview of section 240(b) of the Revenue Act of 1918, with the John Lee Shoe Co. of Ashland, Ky., (b) in failing to deduct from petitioner's income for the period above mentioned, a loss of $5,327.93 resulting from a sale of part of its assets to the John Lee Shoe Co. of Ashland, Ky.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of West Virginia, with its principal office and place of business at Charleston. It is engaged in the retail shoe business and was *3857 so engaged during 1920. Desiring to extend and enlarge its business into the neighboring City of Ashland, Ky., on May 10, 1920, it purchased the retail shoe business of H. W. Hatcher Shoe Co. of Ashland, Ky., for the approximate sum of $25,327.93.
Petitioner took charge of the Ashland store at once, put a man in charge as manager, changed the sign over the door to that of the petitioner, and went ahead conducting a retail shoe business as a branch of the Charleston, W. Va., corporation.
The first manager placed in charge of the Ashland store proved unsatisfactory and he was replaced by H. L. Johnson as manager. Johnson was in the employ of the petitioner and the Ashland store continued as a branch of the Charleston store. After this arrangement had been in operation several months Johnson desired to become a stockholder in the petitioner, but those controlling the business were not willing for him to become a stockholder in, or share in the profits of, the business of petitioner located at Charleston, W. Va. They were willing, however, for him to have an interest in the business and profits of the branch store at Ashland, Ky., of which he was manager. To accomplish this *3858 purpose, a subsidiary corporation was organized under the laws of Kentucky to take over the store and business at Ashland.
The Kentucky corporation was organized under the name of the John Lee Shoe Co. of Ashland, with a capital stock of $20,000; $5,000 was subscribed for by the local manager, Johnson, which he paid for in cash or its equivalent, and the remaining $15,000 was subscribed for by the petitioner. The entire assets of the Ashland branch store were turned over to the Kentucky corporation in payment for its subscription of $15,000 and $5,000 cash or its equivalent; The Ashland store was operated under the Kentucky articles of incorporation from April 1, 1921, until the dissolution of the Kentucky corporation in the early part of 1922.
*189 At the time Johnson purchased his stock it was agreed between him and officers of the petitioner that, should he leave the service of the company or desire to dispose of his stock, he should first offer his stock to petitioner and they agreed to pay him par therefor.
John W. Lee was president of both corporations, and Fred Faulkner was secretary and treasurer of both. The directors of the petitioner were John W. Lee, Fred *3859 Faulkner and C. S. Tutt, and those of the Kentucky corporation were the same except that the local manager, Johnson, made the third member instead of C. S. Tutt.
The business policies and general management of the Kentucky corporation were at all times subject to the orders of John W. Lee, president of both concerns, the books of the Kentucky corporation were kept in petitioner's office at Charleston, and all orders for goods made by the Kentucky manager had to be confirmed by the president. In some instances purchases were made for both stores in one order, and afterwards divided according to their needs; at other times separate orders were given, but in all cases the orders were either given by the president or confirmed by him.
The Kentucky manager had no right to sign checks, and submitted a weekly report to the petitioner's office in Charleston, from which the accounts were made up and the needs of the business were passed on. His principal duties were to see to the proper operation of the Ashland store, to see that employees performed their duties properly, to pass on checks offered in trade and to give information as to stock needs, viz, mainly, that of a head salesman *3860 and credit man, with only authority as related to minor details.
OPINION.
MILLIKEN: The relief asked by the petitioner is alternative, viz, it first claims the right to file a consolidated return with the John Lee Shoe Co. of Ashland, Ky., or, if that be denied, then the second assignment of error is urged.
The Board has repeatedly stated that affiliation must depend on the facts in each particular case, that no hard and fast rule can be laid down for guidance, and percentages of stock ownership may not be the sole criterion for a determination of the question.
In the case at bar, the Kentucky corporation was organized merely for convenience and in order to give the local manager, as an incentive to greater effort, an interest in that branch of the business of petitioner. The stock which Johnson was allowed, was issued to him with the distinct understanding that, should be leave the employ of the Kentucky corporation or otherwise wished to dispose of his stock, the same should first be offered to petitioner at par and that par *190 would be paid for it. The two corporations were also operated as a business and economic unit. Based upon all the facts of record, *3861 we are of the opinion that the two corporations should be permitted to file a consolidated return for the period in question. Compare ; ; , and . Such a decision renders unnecessary a decision on the second assignment of error.
Judgment will be entered on 15 days' notice, under Rule 50.