Court Opinion

ID: 4616551
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:34:43.143713+00
Date Added: 2024-06-11T07:55:08.884303
License: Public Domain

D. J. & T. SULLIVAN, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.D. J. & T. Sullivan, Inc. v. CommissionerDocket No. 15547.United States Board of Tax Appeals17 B.T.A. 1258; 1929 BTA LEXIS 2157; November 6, 1929, Promulgated 1929 BTA LEXIS 2157">*2157  1.  Two brothers were the owners of all the stock in one corporation, and the owners of 75 per cent of the stock of another corporation, but had no control over the remaining 25 per cent of the stock of the latter corporation.  Held, that the corporations were not affiliated.  2.  A ruling by the Commissioner for one or more years that corporations are affiliated and should file a consolidated return does not of itself warrant the same ruling for a succeeding year.  Leon Samuels, Esq., for the petitioner.  Eugene Meacham, Esq., for the respondent.  LITTLETON17 B.T.A. 1258">*1258  The Commissioner determined a deficiency of $3,088.37 in income and profits tax for 1920.  Petitioner claims that it was affiliated during the taxable year with another corporation, the Sullivan Investment & Realty Co., and that it was entitled to file a consolidated return with said corporation.  FINDINGS OF FACT.  Petitioner is a California corporation with its principal office at San Francisco.  About 1902 or 1903 two brothers, Dennie J. and Timothy F. Sullivan, became engaged in San Francisco in the business of shoring and moving buildings, and razing buildings, and foundations. 1929 BTA LEXIS 2157">*2158  In 1909 the business was incorporated with a capital stock of 1,000 shares, but the amount thereof and the par value of the shares is not stated.  The capital stock was equally divided between the two brothers, viz, 500 shares to each.  This corporation was the petitioner, and D. J. Sullivan became president and continued as such through the taxable year.  At the same time another corporation was organized under the name of the Sullivan Investment & Realty Co., with a capital stock of 2,500 shares, but the amount thereof and the par value of the shares is not stated.  The two brothers, D. J. and Timothy F. Sullivan, subscribed for and became the owners of the entire capital 17 B.T.A. 1258">*1259  stock in the amount of 1,250 shares each.  Timothy F. Sullivan became the president of this corporation.  Its business was the purchase and sale of real estate.  Both of the above named brothers continued in the management and operation of both corporations, with the stock ownership remaining the same until about 1918, when Timothy F. Sullivan's health and sight began to fail and he moved away from San Francisco.  At about the same time he made a gift of 250 shares of the capital stock in the petitioner1929 BTA LEXIS 2157">*2159  corporation to a younger brother, Thomas W. Sullivan.  This made the stock ownership in petitioner: D. J. Sullivan, 500 shares; Timothy F. Sullivan, 250 shares; and Thomas W. Sullivan, 250 shares, and it so remained through the taxable year.  There was no change in the ownership of the capital stock of the Sullivan Investment & Realty Co.  The result was that during the taxable year D. J. and Timothy F. Sullivan owned 75 per cent of the capital stock of petitioner and 100 per cent of the capital stock of the Sullivan Investment & Realty Co.  The gift of 250 shares of stock in petitioner from Timothy F. Sullivan to his brother, Thomas W. Sullivan, was an absolute gift, with no restrictions or conditions attached thereto.  There was no agreement of any kind that restricted his right to vote or dispose of his stock as he saw fit, or that gave any person or corporation any control over it whatever.  After 1918 D. J. Sullivan was the dominating power in both corporations.  The younger brother, Thomas W. Sullivan, assisted, but he and Timothy F. Sullivan were quiescent and raised no objections to the management as conducted by D. J. Sullivan.  There appears to have been no intercorporate1929 BTA LEXIS 2157">*2160  relations between the two companies in the conduct of the business other than that D. J. Sullivan was the managing head of both and the same person acted as secretary for both.  There were no formal meetings of stockholders or directors after 1918.  When necessary, casual consultations were held.  The Commissioner ruled that the two corporations were affiliated for the years 1917, 1918, and 1919, and required a consolidated return for each year.  For 1920 he ruled that they were not affiliated and required separate returns.  The petitioner was not affiliated with the Sullivan Investment & Realty Co. for the year 1920.  OPINION.  LITTLETON: Petitioner contends that inasmuch as the Commissioner ruled that the two corporations were affiliated for 1917, 1918, and 1919, they were entitled to be affiliated for 1920 and to file a consolidated return.  Such is not the law.  Affiliation is a statutory 17 B.T.A. 1258">*1260  status which is determined separately for each year.  ; ; 1929 BTA LEXIS 2157">*2161 ; . The control required by the statute, section 240, Revenue Act of 1918, is control of the stock and not mere control of the business, though the latter may be considered as one of the elements in determining whether there is control of the stock.  In this proceeding there is no pretense of control of any kind over the 25 per cent stockholdings of Thomas W. Sullivan by his two brothers or either of the corporations.  Under such circumstances the ownership of 75 per cent of the capital stock in petitioner by D. J. and Timothy F. Sullivan is not ownership or control of substantially all of the stock by the same interests, and the corporations were not affiliated.  . In , the court stated: The management of the business of the corporation is not the control required by the statute.  It refers to stock control.  The fact that the minority is acquiescent and permits the majority to manage the business does not prove actual control over the minority1929 BTA LEXIS 2157">*2162  interest.  Nor does a control based upon friendship or professional relations satisfy the statute.  The control of the stock owned by the same interest refers to beneficial interest.  This meaning is consistent with the purpose of the statute to extend to those subject to the hazard of the enterprise, when they are substantially one and the same, the benefit of the consolidated reports.  In , the Board stated: These excerpts set forth what we conceive to be the theory of affiliation, and in the instant case the ownership of 75 per cent of the capital stock of the Aluminum Rolling Mills, Inc., by the petitioner with no control over the minority stock does not constitute the ownership or control of substantially all of the stock of the two corporations, as required by the statute, and we must therefore confirm the action of the respondent in denying the right to file consolidated returns.  See, also, , where the percentage was 83 1/3 per cent; 1929 BTA LEXIS 2157">*2163 , where it was 70 per cent; and , where it was 81.4 per cent.  Judgment will be entered for the respondent.