The opinion
BLUE LIMESTONE COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Blue Limestone Co. v. Commissioner
Docket Nos. 19639, 22249.
United States Board of Tax Appeals
22 B.T.A. 206 ; 1931 BTA LEXIS 2151 ;
February 18, 1931 , Promulgated
*2151 1. AFFILIATED CORPORATIONS. - During the years 1920 and 1921 the petitioner, the John Wunder Company, and the Trap Rock Company were operated under one management, all carrying on similar and related businesses, the stockholders of the petitioner and the John Wunder Company owning $151,000 par of the stock of the Trap Rock Company. Other and outside interests owned $98,700 par of the stock of the Trap Rock Company. Held, that the $151,000 par of the Trap Rock Company stock was not substantially all of that Company's stock and that the Trap Rock Company may not be consolidated with the other two companies under sections 240 of the Revenue Acts of 1918 and 1921.
2. ASSESSMENT OF TAXES COMPUTED ON THE BASIS OF A CONSOLIDATED RETURN. - During the year 1921, petitioner, although continuing its corporate existence, was in possession of no assets and did no business whatever. It had not entered into any agreement authorizing the assessment against it of any part of a tax computed against the consolidated group. Held, that no part of a deficiency computed on a consolidated return of the petitioner and the John Wunder Company filed for the year 1921 may be assessed against *2152 the petitioner.
John T. Kennedy, Esq., for the petitioner.
B. M. Coon, Esq., for the respondent.
TRUSSELL
*207 These are proceedings for the redetermination of deficiencies in income taxes determined by the respondent in the following amounts: for 1920, $32,949.62; for 1921, $7,972.48.
Upon motion duly made and granted, the petitioner was permitted to file amended petitions. The petitions were consolidated for purposes of hearing and decision. At the hearing the petitioner abandoned all of the issues raised in the petitions with the exception of the following: the petitioner claims (1) that the net income for 1920 has been overstated in an amount of $2,639.25, due to a mathematical error; (2) another corporation, known as the Trap Rock Company, is affiliated and should be included in the consolidated group with the petitioner and the John Wunder Company; (3) no part of the tax liability of the affiliated group for 1921 should be apportioned to the petitioner.
FINDINGS OF FACT.
The petitioner is a Minnesota corporation with principal office at Minneapolis, and it has been consolidated for purposes of computing the tax liabilities with *2153 an affiliated corporation, the John Wunder Company.
Throughout 1920 and 1921 the outstanding capital stock of the petitioner, the John Wunder Company, and the Trap Rock Company was held as follows: Stockholders John Wunder Co. Blue Limestone Co. Trap Rock Co. Total
John Wunder $29,700 $22,300 $108,350 $160,350
Harvey J. Wunder 100 2,600 35,650 38,350
H. E. Wunder 100 50 7,000 7,150
G. R. Hitchcock 100 50 150
Sundry individuals 98,700 98,700
30,000 25,000 249,700 304,700
Harvey J. Wunder is the son of John Wunder; H. E. Wunder is the brother of John Wunder; G. R. Hitchcock is the son-in-law of John Wunder. None of the stock included above in the group "sundry individuals" is held directly or indirectly by any of the three said corporations.
The Trap Rock Company produces and sells crushed rock. The petitioner during 1920 produced and sold limestone, sand, and gravel. In 1921 the John Wunder Company sold sand and gravel. The three corporations, during the taxable years, were under the sole management of John Wunder. He was president and general manager of the petitioner and of the John Wunder Company, and was *2154 treasurer and general manager of the Trap Rock Company. *208 The other officers of the Trap Rock Company were inactive in the direction and business management. The operation of the three corporations in unison under the management of Wunder was advantageous in stabilizing the market, as it enabled the combination of sales of rock or limestone and of sand and gravel.
The Trap Rock Company was in bad financial condition during the taxable years and it was indebted to the petitioner in an amount, according to the books, averaging slightly in excess of $13,000. It was also indebted to John Wunder individually, mainly for loans. The Trap Rock Company was under obligation to pay off each year a certain amount of its outstanding bonds, and this it was unable to do, so that Wunder found it necessary to advance the necessary cash for this purpose, and in addition he loaned cash capital for use as working capital in the current operations. The balance due to John Wunder, according to the books, amounted at the beginning of 1920, to $22,200; at the end of 1920, to $56,126.72; at the end of 1921, to $66,110. The balance steadily increased, going over $100,000 in 1924, and was *2155 closed in 1924 by a charge attributed to bonds issued to Wunder in evidence of the indebtedness.
On or about January 1, 1921, the John Wunder Company took over all of the assets of the petitioner. The petitioner continued in existence during 1921, but did not engage in business, and it had no income whatever. The petitioner has never entered into an agreement providing for the manner in which the income-tax liabilities for 1921 computed upon the consolidated basis shall be apportioned and assessed to the individual companies.
Consolidated returns were filed for 1920 and 1921, reporting on behalf of the petitioner, the John Wunder Company, and the Trap Rock Company. The consolidated net income for 1920 and 1921 was reported as follows: 1920
Petitioner John Wunder Co. Trap Rock Co. (loss) Consolidated net income
Gross income $127,959.01 $11,356.34
Deductions 50,421.66 $2,639.25 50,177.29
Net income 77,537.35 $13,363.87
Excess of deductions 2,639.25 61,534.23
1921
Petitioner John Wunder Co. Trap Rock Co. Consolidated net income
Gross income Nil. $116,389.56 $44,691.70
Deductions Nil. 59,239.61 48,383.61
Net income Nil. 57,149.95 $53,458.04
Excess of deductions 3,691.91
*2156 *209 The tax liability of $9,153.29, shown on the return for 1921 was paid in 1922 by the John Wunder Company.
By agreements with the Commissioner in writing the parties extended the time within which to make assessment, as follows: Blue Limestone Company, for 1920 until December 31, 1927; for 1921 until December 31, 1926; John Wunder Company for 1920 until December 31, 1926; for 1921 until December 31, 1926. The deficiency letters were mailed to the petitioner as follows: for 1921, on June 30, 1926; for 1920, on November 4, 1926.
OPINION.
TRUSSELL: The petitioner, admitting inability to substantiate the allegations, has abandoned all of the issues raised in the petitions save three.
The first issue is disposed of by the admission of the respondent at the hearing that the mathematical error in the amount of $2,639.25 has resulted as claimed in an overstatement of the income for 1920. Accordingly, the income should be recomputed.
With respect to the second issue the petitioner argues that the control exercised by Wunder through his dominance in the business management of the three corporations is the control within the intendment of section 240(b) of the Revenue *2157 Act of 1918 and section 240(c) of the Revenue Act of 1921, providing for consolidation of affiliated corporations. The petitioner contends that the reason for the acquiescence of the minority interest in the sole management of Wunder was the financial condition of the Trap Rock Company, and especially the fact that it was heavily indebted to the petitioner and to Wunder personally. While these are good reasons for the acquiescence of the minority, and the advantage derived is obvious, we think there is no satisfactory evidence that the income of the corporations was arbitrarily shifted or that the minority interest was suffered to be arbitrarily damaged in any way. The relatively large minority interest in the Trap Rock Company has no interest whatever in the other two corporations, and there is, therefore, a diversity of beneficial interest.
The control required by the statutes is that of the beneficial interest. There must be a substantial identity of interest to effect consolidation. ; *2158 ; ; . See our extended discussion in .
We therefore conclude that the Trap Rock Company may not be included in the consolidated group of the petitioner and the John Wunder Company.
*210 With respect to the third issue it appears that the petitioner has never entered into an agreement with respect to the apportioning of the tax liability determined upon the consolidated basis for 1921, and that it did not operate in that year, and it had no income in that year. These facts bring this case squarely within the provisions of section 240(b) of the Revenue Act of 1921, reading as follows:
In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis *2159 of the net income properly assignable to each.
There is no authority for the proposed apportionment of the tax liability for 1921 to the petitioner. ; ; .
Reviewed by the Board.
Decision will be entered pursuant to Rule 50.