Court Opinion

ID: 4601092
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:26:53.755574+00
Date Added: 2024-06-11T07:52:25.435635
License: Public Domain

GREAT AMERICAN STORES CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Great American Stores Co. v. CommissionerDocket No. 14494.United States Board of Tax Appeals14 B.T.A. 320; 1928 BTA LEXIS 2993; November 16, 1928, Promulgated 1928 BTA LEXIS 2993">*2993  Control of shares of one corporation which were held by a third person is not established by another corporation by a showing of economic unity, an option to purchase such outstanding shares, dictation of business policies, and the fact that such third person, through his bank, held a mortgage on the property of the subsidiary corporation.  J. C. Halls, Esq., for the petitioner.  Harry Leroy Jones, Esq., for the respondent.  SIEFKIN14 B.T.A. 320">*320  This is a proceeding resulting from respondent's determination of deficiencies in petitioner's income and profits taxes for the calendar years 1920 and 1921 in the amounts of $1,800 and $800, respectively.  The sole error alleged is the respondent's refusal to treat petitioner and the Sterling Baking Co. as affiliated until October 27, 1921.  The facts are stipulated.  FINDINGS OF FACT.  The petitioner, the Great American Stores Co., is a corporation organized under the laws of Illinois on April 21, 1917.  The corporation owned and operated a chain of retail grocery, tea, and coffee stores.  Its capital stock during the years 1920 and 1921 was owned by J. M. Sarther and Frederick Cowin, Sarther owning 3941928 BTA LEXIS 2993">*2994  shares and Cowin owning 570 shares throughout those two years.  The Sterling Baking Co. is a corporation organized under the laws of Illinois on July 3, 1928.  At January 1, 1920, it had outstanding 300 shares of capital stock, of which 150 stood of record in the name of Frederick Cowin (the actual owner was the Great American Stores Co., petitioner herein) and 150 shares were owned by A. A. Wolfersberger, a lawyer engaged in active practice at Sterling, Ill.  Under an oral agreement between Cowin and Wolfersberger, entered into in 1918, Wolfersberger was obligated to deliver his stock to Cowin for the Great American Stores Co., on demand for $750,000.  The Great American Stores Co. was the purchaser of about 70 per cent of the output of the Sterling Baking Co. and by an agreement between Wolfersberger and Cowin was entrusted with full authority for managing the affairs of the Sterling Baking Co.  Pursuant to this authority it had fixed for itself preferential prices, paying from 1 to 1 1/2 cents per loaf less for bread than the Sterling Baking Co. was securing from other customers.  During the year 1920 the Sterling Baking Co. sold 120 shares of additional capital stock for cash1928 BTA LEXIS 2993">*2995  at $100 per share, 50 being purchased by Wolfersberger and 14 B.T.A. 320">*321  50 by Cowin for the Great American Stores Co.  Two employees of the company, Long and Smith by name, each purchased 10 shares and each received as a gift from Cowin and Wolfersberger a total of 10 shares so that at the end of 1920 Cowin and Wolfersberger were each holding 190 shares and Long and Smith were each holding 20 shares.  This same condition obtained during the year 1921 until the date in October when Cowin and Sarther acquired 100 per cent ownership of the Sterling Baking Co.'s stock.  The Sterling Baking Co. plant was located at Sterling, Ill., a city with a population of about 8,000, and had a capacity for producing more bread than could possibly be absorbed in its own community, and, therefore, was dependent on the Great American Stores Co. to take the greater part of its output.  When Wolfersberger took the additional stock in 1920 he supplemented his earlier agreement with Cowin and agreed to deliver to the Great American Stores Co., on demand, his entire holdings for a total of $5,750.  In October, 1921, this option was exercised and the stock of Wolfersberger and Smith was acquired by the payment1928 BTA LEXIS 2993">*2996  of $1,000 to each of them.  Throughout the years 1920 and 1921 the said Wolfersberger was the principal stockholder and a director of the First National Bank of Sterling, which held a mortgage of $12,500 on the property of the Sterling Baking Co.  If at any time during those two years the patronage of the Great American Stores Co. had been withdrawn from the Sterling Baking Co., it would probably have been unable to find a market for its product, and hence would have been unable to meet its liability under this mortgage.  Throughout the years 1920 and 1921, the president and manager of the Sterling Baking Co. were named by the officers of the Great American Stores Co. and received their instructions from those officers for the management of the business of the Sterling Baking Co.  During 1920 and 1921 Wolfersberger did not take any active part in the conduct of the business affairs of the Sterling Baking Co., but was a director.  During 1920 and 1921 the Sterling Baking Co. sold to the Great American Stores Co. approximately 850,000 and 575,000 loaves of bread, respectively.  OPINION.  SIEFKIN: It is not contended that the stock of the Sterling Baking Co. held by or on behalf1928 BTA LEXIS 2993">*2997  of petitioner constituted the two corporations affiliated during the year in question.  It, therefore, becomes necessary to examine the additional facts urged by petitioner in support of its contention.  We have repeatedly held the existence of an option to purchase stock held by others does not give to the holder of the option such control of the stock involved as is contemplated by the statute; 14 B.T.A. 320">*322 ; . . In , which is cited by petitioner, there was not only an option to purchase but a deposit of stock in escrow and an agreement not to vote such stock. Another fact relied upon in part by the petitioner is the fact of economic dependency of the one corporation on the other.  This, of course, is but another way of saying the two corporations were an economic unit.  Economic unity has been urged, and, standing alone, denied by this Board as a ground for affiliation.  1928 BTA LEXIS 2993">*2998 ; . It is stipulated that by agreement between Wolfersberger and Cowin petitioner was entrusted with full authority for managing the affairs of the bakery company.  The nature of this agreement is not shown and we can not assume that it was such as to prevent Wolfersberger from interfering with petitioner's policies if he saw fit by exercising his presumptive right to vote the stock held by him.  While it may be inferred from the prevailing harmony that Wolfersberger did not exercise his right to vote for a different policy, we have no evidence that he did not in fact vote his stock.  The agreement in , does not present a parallel case, as it provided the minority stockholders were not to vote their stock.  In the instant case, so far as we are informed, the control of management agreement did not exceed the scope of the understanding in , concerning which we said: There is no doubt but that Adaskin had absolute control of the business methods, policies and relations of the1928 BTA LEXIS 2993">*2999  two corporations.  He dominated and managed the business of each.  He settled questions of policy, expediency and methods of operation.  He organized both corporations with the understanding that he should have control of the business.  We have heretofore held, however, in the , that the control "referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock." We further held in the , that "control of the business is not control of the stock of a corporation conducting a business, nor, where a minority of stockholders are present, even though quiescent, representing 27.04 per cent of the stock, can we hold that the stock owned or controlled by the parent company constitutes substantially all of such stock." Upon the authority of such quotation we must reject the claim of affiliation by reason of control of the business.  Petitioner, apparently, thinks it had control of the stock held by Wolfersberger due to the mortgage on the bakery company being held by a bank in which he was the principal stockholder.  The proposition1928 BTA LEXIS 2993">*3000  is at least novel.  It may be true that such mortgage might have a restraining influence upon him to prevent a break with petitioner over management and policies of the bakery company so long 14 B.T.A. 320">*323  as the latter company was successful.  On the other hand such mortgage gave Wolfersberger an interest in the success of that company in addition to that of a stockholder, and the option price indicates the mortgage investment was larger than his stock investment.  Wolfersberger had not only the presumptive right to vote his stock if he saw fit to disagree with petitioner's policies, but he could also bring pressure to bear through his bank by reason of the mortgage.  Thus it would seem the actual control, if any, arising from the loan made to the bakery company by his bank placed Wolfersberger in a position to force the petitioner's hand in the case of a show down between them.  In any event the fact that the custom of the petitioner was probably essential to the bakery company's ability to make the mortgage payment had a double edge capable of cutting both ways.  Certainly we have no assurance that any such round-about pressure as petitioner suggests would result as happily as it1928 BTA LEXIS 2993">*3001  anticipates.  Judgment will be entered for the respondent.