Court Opinion

ID: 4608492
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:42:50.711222+00
Date Added: 2024-06-11T07:53:43.132150
License: Public Domain

CENTURY MUSIC PUBLISHING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Century Music Publishing Co. v. CommissionerDocket No. 12840.United States Board of Tax Appeals12 B.T.A. 647; 1928 BTA LEXIS 3488; June 15, 1928, Promulgated *3488  AFFILIATED CORPORATIONS. - Three corporations involved herein were affiliated within the meaning of section 240(b)(2) of the Revenue Act of 1918, and should file consolidated returns for the periods under consideration.  Jerome E. Malino, Esq., and A. S. Gilbert, esq., for the petitioner.  Harry LeRoy Jones, Esq., and John D. Kiley, Esq., for the respondent.  MILLIKEN *647  This proceeding is for the redetermination of a deficiency in income and profits taxes in the amount of $7,369.75 for the calendar years 1920 and 1921.  It is alleged that respondent erred in not permitting *648  petitioner to file a consolidated return with Leo Feist, Inc., and the De Luxe Music Co., two affiliated corporations.  The petition originally included another corporation, viz, the Myrex Company as being affiliated with those above-mentioned, but same was waived at the hearing.  Respondent, at the hearing, conceded that petitioner and the De Luxe Music Co. were affiliated for the year 1920.  FINDINGS OF FACT.  During the year 1920 the stock ownership of respective companies was as follows: In Century Music Publishing Co., Leo Feist owned 90 shares; *3489  Sol Feist owned 5 shares, and Felix F. Feist owned 5 shares, out of a total issue of 100 shares.  In Leo Feist, Inc., Leo Feist owned 80 shares; Edgar F. Bitner owned 20 shares, out of a total issue of 100 shares.  In De Luxe Music Co., Leo Feist owned 48 shares; Edgar F. Bitner owned 1 share, and Luther G. Batten 1 share, out of a total issue of 50 shares.  There was no change in the situation during the year 1921, except that Luther G. Batten became a stockholder to the extent of 10 shares in the Century Music Publishing Co., and the stock held by Leo Feist was reduced by 10 shares, so that in 1921 Leo Feist owned only 80 shares of the petitioner, instead of 90 shares.  The 20 shares of stock held by Edgar F. Bitner in Leo Feist, Inc., were donated to him by way of gift by Leo Feist.  The 10 shares of stock held by Batten in the petitioner in 1921 were donated to him by way of gift by Leo Feist.  Neither Bitner nor Batten paid anything for said shares but received the same wholly as an incentive to greater effort as employees of the respective corporations with which they were connected.  Sol Feist and Felix F. Feist were brothers of Leo Feist and closely and intimately*3490  associated with him.  Bitner and Batten were employees of Leo Feist for many years and closely and intimately related with him and with each other socially as well as in business.  Leo Feist originally engaged in the music-publishing business as a side line in 1897 with a partner and soon thereafter devoted his entire time and attention to the music-publishing business, organizing the corporation known as Leo Feist, Inc.  Edgar F. Bitner became associated with Leo Feist in this music-publishing business from its inception in 1897.  Leo Feist's interests at first, and continuing with the corporation Leo Feist, Inc., were in the publication of so-called popular music.  In 1902 Leo Feist took over the petitioner Century Music Publishing Co., which was then and continued thereafter to be engaged in the publication and sale not of so-called *649  popular music but of standard or classical numbers such as the "Flower Song", "Il Trovatore" and "Humoresque," particularly noncopyrighted numbers.  Luther G. Batten became associated with Leo Feist in connection with this standard or classical number business in 1902, when Feist took over the Century Music Publishing Co., first as office*3491  manager and a few months later as general manager, in which position Batten has continued to and through the taxable years in question.  Leo Feist took over the De Luxe Music Co. in 1905.  The business of De Luxe Music Co. was also the publication of standard or classical numbers identical with the publications of the petitioner, but to a very limited extent, confining itself only to the biggest sellers and publishing a pictorial edition in colors, whereas Century Edition was plain white paper with a plain white title page, the different compositions published by Century thus being not easily distinguishable from their covers, but being dealt in by catalog, whereas the De Luxe number was easily distinguishable by reason of the pictorial cover.  The De Luxe Music Co. was taken over and fostered and continued by Leo Feist as an aid to the business of Century Music Publishing Co.  All of the companies accordingly Were in the music publishing business.  All of the companies occupied space in a building owned by Leo Feist at 235 West 40th Street, Manhattan, New York City, paying rent therefor to Feist, who fixed the amount that each company should pay him on the pro rata space occupied*3492  by each company.  The companies had no lease from Feist, written or oral, and the rent was raised as he deemed expedient.  Leo Feist's private office was on the same floor as the general offices of the petitioner and De Luxe Music Co.  The fourth floor was occupied by petitioner and De Luxe Music Co. for their surplus stock, but Leo Feist, Inc., had its art department on that floor, employees of the different companies having access to all floors.  The various companies exchanged employees with each other as the need required without extra compensation except in the case of overtime, when the corporation which used the employee for overtime would pay such overtime.  The De Luxe Music Co. had no separate employees, but employees of the petitioner did all the work for De Luxe Music Co. and an arbitrary apportionment of the expenditures was made by the office manager of the petitioner charging a share of all expenditures incurred by the petitioner against De Luxe Music Co.  There was no separate bookkeeper for the petitioner and De Luxe Music Co., but there were separate books, and all of the corporate books, such as minute books, stock books and stock ledgers of the three corporations*3493  were kept in the private office and private safe of Leo Feist.  The De Luxe Music Co. also used in the printing of its publications, the plates of petitioner without compensation.  *650  The De Luxe Music Co. was used only and purely as a department of petitioner.  Leo Feist, Inc., advanced funds without security and without interest to the petitioner from time to time.  The petitioner advanced funds without security and without interest to De Luxe Music Co. from time to time.  Leo Feist, Inc., issued its orchestration copies, containing on the back thereof numbers from the catalog of the petitioner, without compensation, from time to time, and the petitioner used the services of the editor of Leo Feist, Inc., with or without compensation from time to time in making arrangements.  Customers lists were made available as between Leo Feist, Inc., and the petitioner constantly, and salesmen of Leo Feist, Inc., sold without extra compensation the numbers published by the petitioner.  The three corporations had the same branch telephone exchange; Leo Feist, Inc., paid the telephone bills, electric bills, stationery and supplies, and charged a pro rata share to petitioner and petitioner*3494  in turn charged a pro rata share to De Luxe Music Co.  The same printer did all of the printing of the publications of the three corporations.  Petitioner ordered all the printing for De Luxe Music Co., and guaranteed its account and frequently paid its bills.  Credit information was subscribed for by Leo Feist, Inc., and made available to petitioner without compensation, and to De Luxe Music Co.Leo Feist conducted the business of the three corporations as his own business, and as a single enterprise with several departments, having Bitner as general manager of the popular music department and Batten as general manager of the standard or classical music department.  Leo Feist made all of the decisions for the companies; determined the number of employees, the number of catalogs to put out; declared upon all the policies of the business; decided how the business was to grow or progress or be contracted; decided when dividends were to be paid and how much was to be paid; what salaries and bonuses were to be paid.  He was active in conducting the business of the three corporations and knew everything that was going on.  No objection either before or during the taxable years was ever*3495  made to any decision of Feist by any of the minority stockholders.  None of the minority stockholders ever took any antagonistic or obstructive attitude or objecting view to anything Feist decided to do.  The stockholders' meetings were held in Feist's office or at his home.  The meetings of the petitioner were usually attended only by Leo Feist and Batten, because Sol Feist was located in Philadelphia and Felix Feist only occasionally was present.  No vote of stockholders was ever taken at any meeting of stockholders of petitioner.  Sol Feist and Felix Feist and Batten never questioned *651  any decisions made by Leo Feist.  Nothing was done without Leo Feist's approval and if any suggestion did not originate with him it was referred to him.  OPINION.  MILLIKEN: Section 240(a), Act of 1918, provides that affiliated corporations shall file a consolidated return and in subsection (b) it is provided that "For the purpose of this section two or more domestic corporations shall be deemed to be affiliated if substantially all the stock of two or more corporations is owned or controlled by the same interests." This section governs the right and duty to file a consolidated return*3496  in this case.  We have repeatedly held that mere percentages of stock ownership do not control these questions, but that it is one of the elements to establish control or ownership of substantially all of the stock by the same interests.  In the instant case, Leo Feist owned 80 per cent of the stock in two corporations and 96 per cent in the other; in one an employee was given 20 per cent, in another an employee was given 10 per cent, and Feist's two brothers 5 per cent each, and in the third, two employees were given 2 per cent each.  In all the 30 years of existence of these corporations, they have been completely dominated, managed, and financed by Leo Feist.  They were simply departments of the same business, viz, music publishing, which for certain trade reasons, were conducted as separate corporate entities.  The gifts of small amounts of stock to his brothers and employees were plainly for the purposes of corporate organization and as an inducement to greater interest on the part of the employees.  In all these years there has been no diverse or antagonistic interest.  The business was conducted as an economic and business unit, and the interests of all were exactly the same. *3497  Counsel for respondent insists that this case should be decided on an arithmetical basis and that 80 per cent ownership in Leo Feist is not sufficient, but the fallacy in this is that the statute does not require ownership or control in one individual.  Ownership or control of substantially all of the stock of two or more corporations may rest in one or more individuals, or in a group of individuals, the only requirement being that they represent the same interests.  In , it was stated: A careful examination of the stockholdings and the relationships existing between the various holders shows that substantially all of the stock is owned or controlled by the same individuals.  It seems to follow, naturally, if a group of individuals owns or controls substantially all of the stock of both corporations, and if such ownership or control is by all exercise for one purpose, namely, the joint success of the corporations, that these individuals meet the requirements of the words "the same interests." *652  Cf. *3498 ; ; , and . In the cases of , and , cited by respondent, no opinions were written, but it appeared there were substantial "outside" stockholdings, as was also the case in . While it was held in , that 80 per cent was not a sufficient sum to constitute direct ownership of substantially all the stock of a corporation, affiliation was ordered in that case because it appeared that the petitioner controlled the other 20 per cent.  The petitioner was affiliated during the years 1920 and 1921, with Leo Feist, Inc., and the De Luxe Music Co., and under the Act of 1918, it is mandatory that a consolidated return be filed.  Judgment will be entered under Rule 50.