Court Opinion

ID: 4612135
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:50:28.573553+00
Date Added: 2024-06-11T07:54:22.777066
License: Public Domain

HAMILTON CARHARTT COTTON MILLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Hamilton Carhartt Cotton Mills v. CommissionerDocket No. 31472.United States Board of Tax Appeals18 B.T.A. 1167; 1930 BTA LEXIS 2513; February 14, 1930, Promulgated *2513  AFFILIATION - FAILURE OF PROOF. - It is alleged in the petition that a corporation owned 80 per cent of the stock in the petitioner, and controlled the remaining 20 per cent, but the evidence shows that during the taxable year the 80 per cent stood in the name of an individual who voted it as his own, pledged it as collateral security to his debts, and collected or directed the disbursements of dividends.  Affiliation is denied.  H. A. Mihills, C.P.A., for the petitioner.  Harry Le Roy Jones, Esq., for the respondent.  BLACK *1168  Respondent determined a deficiency in income tax against the petitioner in the sum of $10,330.89 for the year 1923.  Petitioner alleges that in making said determination the respondent erred in denying affiliation of the petitioner with the Hamilton Carhartt Cotton Mills Co., of Detroit, Mich., for the taxable year, which it is alleged owned 80 per cent of its voting stock, the remaining 20 per cent of its stock being owned by E. R. Partridge, local manager of petitioner, and controlled by the parent Detroit company.  FINDINGS OF FACT.  The petitioner is a South Carolina corporation engaged in the manufacture of*2514  overalls with its factory located in Atlanta, Ga.  Prior to the organization of the petitioner, the Hamilton Carhartt Cotton Mills Co., of Detroit, Mich., was a corporation engaged in the manufacture of overalls from cotton denim.  To obtain the supply of necessary material it became the owner of several cotton mills in the South where the material was manufactured.  The material was then sent to Detroit, made into overalls by the Detroit company, and a large part thereof sold and reshipped to the South.  One of these cotton mills was located at Rock Hill, S.C.  E. R. Partridge was the bookkeeper at the Rock Hill mill, and he conceived the idea of manufacturing the overalls at the Rock Hill mill and thus saving freight charges and other expense in shipping material to Detroit and returning the finished overalls to the southern markets.  A number of overall machines were furnished by the Detroit company to the Rock Hill mill and the experiment developed into a success.  This manufacturing business was then incorporated in 1913 under the name of Hamilton Carhartt Cotton Mills Co., with an authorized capital stock of $60,000 common and $40,000 preferred, and the business was moved to*2515 Atlanta, Ga., and a factory established there with E. R. Partridge as manager.  In the development of the business the Detroit company had expended or advanced $30,000 and in payment thereof there was issued to it $30,000 of the common stock, and subsequently $4,700 of preferred stock was issued to a number of persons in small lots.  No additional stock was issued.  Partridge was employed as manager on a salary, and after the business was removed to Atlanta it prospered under his management.  He requested an interest in the business, and it was finally arranged that he should have 20 per cent of the stock held by the Hamilton Carhartt Cotton Mills Co., of Detroit, upon the terms shown in the following correspondence: *1169  NEW YORK CITY, December, 1918.MY DEAR MR. PARTRIDGE: I am arranging to act upon your suggestion to sell you say 20% of the Common Stock of your concern, to be paid for out of the earnings of the business, you to pay 6% interest on unpaid balances.  This to be in lieu of salary, though a drawing account would be guaranteed to you.  Yours truly, (Signed) HAMILTON CARHARTT.  NEW YORK CITY, January, 1919.MY DEAR MR. PARTRIDGE: I am*2516  returning minutes and stock certificate signed.  The value of your stock, Mr. Ivey dopes out as about $9,600.00.  But after all is gone over we can get it exact.  You can attach a note to the certificate for the amount, and hand it to your Bank for their help and if they want me to indorse them, I will do so willingly.  You can have other minutes drawn up making Hamilton Carhartt, Junior, President, Wylie Welling Carhartt, Vice President and Treasurer and Ivey, Secretary, or any way you see fit.  Also send me resignation to sign as President, but I will remain a Director as I hold one share of preferred stock.  I feel while this is a wonderful thing, but you have fully earned it, and I wish you all the luck in the world.  If there is anything you want done differently than outlined, kindly let me know.  Yours truly, (Signed) HAMILTON CARHARTT.  NEW YORK CITY, January, 1919.MY DEAR MR. PARTRIDGE: Your stock will be paid for out of the earnings of your business, and you can arrange it any way you see fit, by attaching your note for $9,600.00 to your stock certificate and discounting it at the Bank.  Sending the funds to the mill would help out immensely just now. *2517  You can promise to redeem it $500.00 per quarter any way, more if possible, which can be done by declaring dividends from time to time.  I will have the Mill ship you the next lot of No. 5 at 25?? which will make the average price 27 1/2?? for February shipment, and I want you to accept every yard you possibly can finance, as these are very rough times for cotton mills.  Yours truly, (Signed) HAMILTON CARHARTT.  The price was later fixed at $12,000 and was paid for out of dividends and salary.  There was no other agreement of any kind relative to Partridge's ownership of his 60 shares of stock, or limiting his rights to vote or dispose of it as he saw proper.  He did offer to surrender his stock at any time that the Carhartt interests might require it, but there was no agreement to that effect and it was not done.  The stockholders of the Detroit company were Hamilton Carhartt and his two sons, Hamilton Carhartt, Jr., and Wylie W. Carhartt.  On February 19, 1919, when Partridge issued 60 shares in *1170  petitioner to himself, acting under instructions from Hamilton Carhartt, president of the Detroit company, the remaining 240 shares were transferred from the Detroit*2518  company to Hamilton Carhartt, Jr., and remained in his name until July, 1919, when it was retransferred to the Detroit company and remained in its name until December, 1920, when it was again transferred to the name of Hamilton Carhartt, Jr., on the petitioner's records and so remained until June 10, 1927.  From some time prior to December 20, 1921, until on or about July 9, 1923, the 240 shares of stock standing in the name of Hamilton Carhartt, Jr., were pledged as collateral security to his personal note held by the Citizens & Southern Bank, Atlanta, Ga.  The note was originally for $24,000 and was paid by dividends from the stock.  Dividends subsequent to July 9, 1923, were used to pay Carhartt's account on petitioner's books and $30,000 thereof was transferred to and credited to his account on the books of the Michigan Corporation, Rock Hill, South Carolina Unit.  During the entire period from February, 1919, to the end of the taxable year 1923, Hamilton Carhartt, Jr., was a director and president of the petitioner.  The stock standing in his name was voted in his name as his stock at all stockholders' meetings, without any qualification or limitation indicating that he was*2519  merely acting as nominee or representative of the Detroit company.  The Detroit company was a close family corporation, as were all of the subsidiary mills, and no person outside of the family was a stockholder with voting power in any of them, except in the petitioner.  The petitioner was operated as a business and economic unit with the Detroit company under the direction of Hamilton Carhartt, Sr.  Patterns, designs and patents belonging to the Detroit company were used by petitioner without charge, prices were fixed from Detroit, material was bought from other subsidiary plants, and funds were shifted from petitioner to other plants controlled by the Detroit company.  During the period under discussion the Detroit company and all subsidiaries except petitioner were in financial difficulties and were in the hands of and operated by a creditors' committee until May, 1929, when there was a reorganization which included petitioner.  Partridge's stock was always voted in conformity with the Carhartt stock.  Stockholders' and directors' meetings were not held formally.  Usually the minutes were written up by Hamilton Carhartt, Jr., or under his direction, and forwarded to Partridge*2520  who inserted them in the minute book.  Hamilton Carharrt, Jr., was the record holder and owner of 240 shares of the common stock in petitioner during 1923, Partridge owned 60 shares of common, and 47 shares of preferred were owned by a number of persons in small lots.  *1171  OPINION.  BLACK: Petitioner alleges in its petition that it is entitled to affiliation with the Hamilton Carharrt Cotton Mills Co., of Detroit, Mich., because said company owned 240 shares of its common stock, being 80 per cent of its stock, and controlled the remaining 60 shares being 20 per cent, which constituted all of the stock in petitioner.  Section 240(c) Revenue Act of 1921 provides: For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.  Petitioner is proceeding under class (1), viz., that another corporation owned or controlled substantially all of its stock, and the*2521  Hamilton Carhartt Cotton Mills Co., of Detroit, Mich., is named as the parent corporation.  In order to sustain its claim it is incumbent upon petitioner to prove that during the taxable year the Detroit company was the owner of 80 per cent of petitioner's stock and that it controlled enough in addition, either through closely affiliated interests or by a nominee or nominees, to constitute substantially all of petitioner's stock.  In our opinion petitioner has failed to prove that the Detroit company owned any stock in petitioner during the taxable year.  It is true that in the organization of the petitioner, the Detroit company became the owner of 300 shares of stock, but it disposed of its entire holdings in 1919 by transferring 240 shares to Hamilton Carhartt, Jr., and 60 shares to Partridge, and, with the exception of a short period of time, said 240 shares stood in the name of Carhartt, Jr., until 1927.  He exercised unquestioned rights of ownership over it by pledging it as collateral security in bank to secure his personal note of $24,000.  The dividends on the stock were used to pay the note, to extinguish his charge account with petitioner, and to loan or advance in his*2522  name $30,000 to the mill located at Rock Hill, S.C.  And when such $30,000 was received by the Rock Hill plant, it was credited on the books of the company, not to Hamilton Carhartt Cotton Mills Co., of Detroit, Mich., but to Hamilton Carhartt, Jr.  No evidence has been introduced to show the reason or terms of the transfer of the stock from the Detroit company to Hamilton Carhartt, Jr.  He was not even introduced as a witness.  It may be significant that at this time all the Carhartt interests were in financial difficulties except the petitioner.  Under these circumstances we can not hold that the Detroit company owned 80 per cent of petitioner's *1172  stock during 1923, either directly or by a nominee or nominees.  Therefore, the two corporations were not affiliated within the meaning of section 240(c), Revenue Act of 1921.  Judgment will be entered for the respondent.