The opinion
MENOMINEE BAY SHORE LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Menominee Bay Shore Lumber Co. v. Commissioner
Docket No. 24400.
United States Board of Tax Appeals
18 B.T.A. 499 ; 1929 BTA LEXIS 2032 ;
December 12, 1929 , Promulgated
*2032 Petitioner held not affiliated with the Soper Lumber Co. in 1920.
E. F. Colladay, Esq., M. D. Hanley, Esq., and Wilton H. Wallace, Esq., for the petitioner.
E. C. Lake, Esq., for the respondent.
ARUNDELL
*499 Petitioner claims that it was affiliated with the Soper Lumber Co. in 1920 and on that ground asks a redetermination of the respondent's *500 determination of a deficiency in income and profits taxes in the amount of $18,669.40 for that year.
FINDINGS OF FACT.
Petitioner is a Michigan corporation, organized in 1881, and is engaged in the manufacture and sale of lumber and lumber products. In 1920 its plant and office were located in Soperton, Wis. The Soper Lumber Co. is an Illinois corporation with offices in Chicago, and is engaged in the wholesale lumber business.
In 1887 the Soper Lumber Co., A. C. Soper, James P. Soper, and James Soper acquired a majority of petitioner's capital stock, all of which was common stock, and shortly thereafter they purchased the remaining outstanding stock. After thus acquiring all of petitioner's stock, the Soper interests enacted certain by-laws for the petitioner, among which *2033 was one dealing with the duties of the secretary and which reads in part as follows:
It shall also be his duty to countersign all certificates of stock and such other papers as the board of directors may require, but it is also provided that no stock shall be transferred or sold unless first offered to the original stockholders.
This by-law remained in effect throughout the succeeding years, including the year 1920, and its terms were known by all stockholders.
The Sopers adopted the policy of allowing a few of petitioners' employees to share in profits through the purchase of stock under a plan whereby the employee paid some cash for the stock allotted to him, and gave his note for the balance, the note being paid off out of dividends. In such cases the stock issued to the employee was indorsed in blank and held by the Soper Lumber Co. until paid up. In one instance where an officer had subscribed for stock in the amount of $500 the Sopers gave him back his note and canceled his indebtedness when it had been reduced to some $180 or $190.
In 1920 the stock of petitioner was held as follows: Stockholder Shares Per cent
James P. Soper, as trustee for Soper Lumber Co 1,004
James P. Soper, jr., trustee for Soper Lumber Co 1 66.8
Alex. C. Soper, trustee for Soper Lumber Co 1,000
H. E. McGraw, secretary of petitioner 140
John Rogers, logging superintendent of petitioner 70 7.8+
T. H. Lovell, formerly mill foreman of petitioner 25
M. J. Quinlan, vice president and general manager of petitioner 345
J. V. Quinlan, son of M. J. Quinlan and superintendent of petitioner 115
Edmire E. Quinlan, daughter of M. J. Quinlan 105 25.3+
Mary B. Quinlan, daughter of M. J. Quinlan 105
Mrs. S. T. Murray, daughter of M. J. Quinlan 90
3,000 99.9+
*2034 H. E. McGraw entered the employ of petitioner in 1887. In 1890 he became treasurer and in 1907 secretary of petitioner. In 1920 *501 T. H. Lovell was no longer in the employ of petitioner but was and still is a stockholder. The daughters of M. J. Quinlan acquired all their stock from him, and the son, J. V. Quinlan, acquired all but 10 shares from him.
Only one stockholders' meeting was held in 1920 and at that meeting in January, the following stockholders were represented: Stockholders How represented Shares
James P. Soper, trustee In person 1,004
M. J. Quinlan do 345
J. V. Quinlan do 115
H. E. McGraw do 140
Alex C. Soper, trustee Proxy to J. P. Soper 1,000
Edmire E. Quinlan
Mary B. Quinlan Proxy to M. J. Quinlan 300
Stella T. Murray
Total shares represented 2,904
Two directors' meetings were held in 1920, at Soperton, Wis., on the following dates and were attended by the persons as follows:
January 20, 1920:
James P. Soper.
M. J. Quinlan. J. V. Quinlan. H. E. McGraw. August 16, 1920:
James P. Soper.
M. J. Quinlan. H. E. McGraw. The directors of the two companies were as follows: PETITIONER SOPER LUMBER CO.
Alex. C. Soper. Alex. C. Soper.
James P. Soper. James P. Soper.
James P. Soper, jr. James P. Soper, jr.
H. E. McGraw. James S. Merrill.
M. J. Quinlan. Fred H. Rudderham.
Wm. A. Gaw.
*2035 The officers were: Petitioner Soper Lumber Co.
Chairman of board Alex. C. Soper Alex. C. Soper.
President James P. Soper James P. Soper.
Vice president M. J. Quinlan James S. Merrill.
Treasurer H. E. McGraw James P. Soper, jr.
Secretary H. E. McGraw Wm. A. Gaw.
Petitioner employed no salesmen. The Soper Lumber Co. had two salesmen, who, together with James P. Soper, solicited lumber orders. Some of the orders obtained by the Soper Co. were filled by shipments from petitioner's plant and some with lumber purchased from other concerns. On such orders as were to be filled with the petitioner's lumber the Soper Co. fixed the price. In some cases the orders obtained by the Soper Co. were transmitted to petitioner *502 through the Soper Co.'s office and at other times the purchasers sent their orders direct to the petitioner. Where orders came through the Soper Lumber Co. the petitioner billed that company for the sales price of the shipments. Lumber sold directly to the Soper Lumber Co. was sold at practically the same price as lumber sold to others.
About 62 per cent of petitioner's output in 1920 was sold to others than the Soper *2036 Lumber Co. A part of this was sold by M. J. Quinlan and part by James P. Soper.
James P. Soper was the active director of both companies. He formulated the policies of both and he and Alexander C. Soper directed in a general way the operations of petitioner. M. J. Quinlan was directly in charge of petitioner's operations and the Sopers conferred with him on matters affecting the petitioner. The Soper policies were never opposed by any of petitioner's stockholders, directors or officers. James P. Soper had authority to and did sign checks against petitioner's bank account. Both companies kept their accounts at the same bank. When the petitioner had surplus funds it notified James P. Soper, who withdrew them and purchased securities which he held for the petitioner until such time as the petitioner needed cash to pay dividends, when they were sold and the proceeds credited to petitioner's account. When the petitioner was in need of additional funds the amount needed was advanced by the Soper Lumber Co. and interest was charged to the petitioner at the current bank rate. Petitioner furnished to the Soper Lumber Co. weekly reports of shipments and monthly trial balances and *2037 cash book transcripts.
James P. Soper was paid a salary by the petitioner of $5,000 in 1920. No other amount was paid by the petitioner for the space in the Soper Co.'s office or the time of employees of the latter devoted to making sales for the petitioner.
Other than the Sopers, no stockholders of petitioner owned any stock of the Soper Lumber Co.
The petitioner and the Soper Lumber Co. were not affiliated in 1920 within the meaning of section 240 of the Revenue Act of 1918.
OPINION.
ARUNDELL: It is plain at the outset that affiliation does not exist in this case through direct ownership of petitioner's stock by the Soper interests, owning as they did but 66.8 per cent. ; ; .
*503 The question then is whether the remaining 33.2 per cent, owned by others than the Sopers, was controlled through closely affiliated interests. The fact that the stock held by the minority interests was to be first offered to the Sopers before being transferred to others does not give the sopers the control contemplated by the taxing statute. *2038 ; . We fail to see wherein it can be said that the eight owners of the 33.2 per cent minority constitute interests closely affiliated with the Soper Lumber Co. None of these eight owned any stock in the Soper Co. Four of them, namely, Rogers, McGraw, M. J. Quinlan, and John V. Quinlan, were employees of petitioner, and although the petitioner and the Soper Co. were very closely associated in a business way, and though the Sopers had a hand in determining petitioner's policies and to some extent supervised its operations, still these men were primarily employees of the petitioner. The other four stockholders, one a former employee of petitioner, and the others daughters of M. J. Quinlan, are still a further step removed from being closely affiliated with the petitioner. The statute, section 240 of the Revenue Act of 1918, provides that affiliation exists where one corporation "owns directly or controls through closely affiliated interests * * * substantially all the stock of the other * * *." While the evidence is clear that the minority never opposed or voted against the Soper *2039 proposals, there is lacking any evidence that the Soper Co. controlled through the minority the stockholdings of the latter. And so, even though it could be said that the minority holders were closely affiliated interests, the requirement of the statute has not been met. See ; ;
We do not have in this proceeding the economic unity that in some instances has been an aid in determining corporations to be affiliated. ; . The petitioner was free to sell its product to others than the Soper Lumber Co. and in the taxable year it did sell more than half its output to outsiders. The Soper Lumber Co. did not confine its purchases to the petitioner, but dealt with whom it saw fit. When the Soper Lumber Co. advanced money to the petitioner the latter received no preferred treatment, but was charged with interest at bank rates. In our opinion the two companies were not affiliated in 1920.
*2040 Reviewed by the Board.
Judgment will be entered for the respondent.