Court Opinion

ID: 4496369
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:49.48903+00
Date Added: 2024-06-11T14:54:14.005091
License: Public Domain

Hill,
concurring in the result: To constitute affiliation of two or more corporations, the Revenue Acts of 1926 and 1928, in sections 240 (d) and 142 (c), respectively, require the ownership by one corporation of at least 95 per centum of the “stock” of the other or others, or the ownership by the same interests of the same per centum of the “stock” of all the corporations; and it is further provided that the term “stock” as used in the statutes “does not include nonvoting stock which is limited and preferred as to dividends.”
The majority opinion holds that the “preference stock” involved in this proceeding was not “nonvoting” but voting stock, which was preferred, but not limited, as to dividends. I agree that this stock was preferred, but not limited, as to dividends, but in my opinion the conclusion reached that it was not “nonvoting” but voting stock, within the purview of the statutes, is erroneous.
The certificates of preference stock provided that the holders should have no power to vote the same at any election for directors, unless the dividends on such shares for two quarterly periods remained unpaid; and that otherwise the holders of preference shares should be entitled at all times to full voting power. During the taxable periods here involved, the dividends payable on the preference shares were not in default, and hence the provision conferring power to vote at an election for directors in event of default is béside the point. It is the situation actually existing which is determinative. Vermont Hydro-Electric Corporation, 29 B. T. A. 1006, 1011.
Under the terms of issuance, it appears that the holders of preference stock, while they had no part in the management of the corporation and its affairs through the selection of directors, could vote to increase or decrease the capital stock, the number of directors, time of election, place of principal office, time of stockholders’ meeting, approval of investment of surplus, and other like things. Because of these matters the majority concludes that the preference stock was “voting stock” within the meaning of the revenue acts.
Solution of the question presented requires interpretation of the statutory provisions. Obviously, the same stock could not be both voting stock and nonvoting stock at the same time. The one is the opposite of the other. Yet, the stock in controversy was in some *913respects voting stock and in others nonvoting stock. How then is it to be classified? Because it could be voted in the determination of such minor matters as above referred to, is it to. be treated as “voting stock” and placed in the same category as the common stock, which, because of its unrestricted voting power, was undeniably in control of the corporation? Where might such a construction of the statutes lead us ? .
Let us suppose that this preference stock carried only the right to vote on the question of changing the place of the corporation’s-principal office, in the event such a proposal should ever be made. Having such voting power, could it be properly classified as “voting stock” for the purpose of determining affiliation ? If not, where is the line to be drawn? Such reasoning, it seems to me, would inevitably lead to incongruous and absurd results, never contemplated by the revenue acts.
The Revenue Acts of 1918 and 1921 provided for the affiliation of corporations upon the basis of the ownership or control of substantially all the stock of one or more corporations by another, or the ownership or control of substantially all the stock of two or more corporations by the same interests. The Commissioner interpreted these provisions as referring to “voting stock.” See article 638 of Regulations 45 and 62. In the Revenue Act of 1924, section 240 (c), the term “voting stock” was substituted for the word “stock” used in the previous acts, thus embodying in the later act the Commissioner’s prior interpretation. The Revenue Acts of 1926 and 1928, in providing the requirements for affiliation, used the term “stock”, and then defined that term as not including “nonvoting stock which is limited and preferred as to dividends.” It seems clear that the requirement, running through all the revenue acts from 1918 to 1928, respecting the ownership of corporate “stock”, refers to “voting stock,”
It seems equally *clear to me, from a consideration of the legislative history of the various enactments and the evident purpose of the affiliation provisions, that “voting stock” means only that stock which, by virtue of the right to vote at the election of directors, exercises control oyer the management of the corporation and its business affairs.
The purposes to be served by the filing of consolidated returns of affiliated corporations are aptly stated in article 631 of respondent’s Regulations 45 and 62, and may be summarized as based upon the principle of levying the tax according to the true net income of a single business enterprise, even though the business is operated through more than one corporation. In some cases the filing of separate returns by affiliated corporations might result in tax eva-. sion, through an arbitrary shifting of income; and, in other cases, *914without a consolidated return excessive taxation might be imposed as a result of purely artificial conditions existing between corporations within a controlled group.
It seems too obvious for argument that the term “controlled group”, when referring to corporations, implies an ownership of that stock of each member which carries the right to vote in the selection of directors, who, together with the officers elected by the directors, control the operation and management of the corporations and their respective businesses.
The ownership of the preference stock involved in this proceeding had nothing whatever to do with constituting the corporations “a controlled group.” Control, as that term is ordinarily understood, during the taxable years vested exclusively in the holder of the common stock. The fact that the preference stock carried the right to vote on’ minor matters in no material respect affecting the control and management of the corporation, does not characterize it as “voting stock” within the meaning of the taxing acts.
“Voting stock” may very properly be termed “management stock.” Thompson on Corporations, 3d ed., vol. 5, sec. 3449.
“* * * Congress had in mind voting stock only, or such stock as carried control by one corporation over its affiliated corporation. Unless this was the purpose and meaning of Congress, the statute is .* * * wholly incapable of enforcement.” In re Temtor Corn & Fruit Produce Co., 299 Fed. 326.
Preferred stock, which normally carried voting power coequally with the common stock but which under agreement on its issuance was so circumscribed and hedged in by restrictions and limitations as to nullify that power as a practical matter, is not to be treated as “voting stock.” Detour Dock Co., 22 B. T. A. 925.
The term “stock” as used in the affiliation provisions of the statute embraces preferred stock with voting rights which enable the holders to participate in the direction of the undertaking. Atlantic City Electric Co. v. Commissioner, 288 U. S. 152.
“We think the term ‘stock’, as used in the statute, is clearly intended to mean stock with a potential voting power which, if asserted, will be effective in the management or control of the corporation.” Commissioner v. Shillito Realty Co., 39 Fed. (2d) 830.
Preferred stock having no voting power can not be a means of controlling the corporation, and is not to be considered in determining affiliation, Commissioner v. City Button Works, 49 Fed. (2d) 705, but preferred stock which carries the legal right to vote for the election of directors is not “nonvoting” but voting stock, and is not to be-excluded in determining affiliation, Wurlitzer Co. v. Commissioner, 81 Fed. (2d) 971.
*915In Pantlind Hotel Co., 23 B. T. A. 1201, the Board held that preferred stock was voting stock and not to be excluded in determining affiliation, where the holders of the preferred stock acquired the right to vote during the taxable year equally with the holders of the common stock, share and share alike, in the election of the directors and control of the corporation, because of the fact that dividends due on the preferred stock remained unpaid. The case of Vermont Hydro-Electric Corporation, supra, is not in point on this question, since the holders of the preferred stock there involved were not entitled to vote on any matter during the taxable year.
For the reasons above indicated, I can reach no other conclusion than that the term “stock” or “voting stock” as used in the taxing statutes, including the Revenue Acts of 1926 and 1928, means stock which, by reason of its voting power, is effective in the management of the corporation and controls the conduct of its business affairs. Under this interpretation of the statutes, the preference stock involved in the instant case is “nonvoting” stock.
It does not necessarily follow, however, that because the preference stock in question was “nonvoting” that it is to be excluded in determining affiliation. The statute requires exclusion only of nonvoting stock which is (1) limited as to dividends, and (2) preferred as to dividends. The conditions are expressed conjunctively and not disjunctively. All the elements prescribed, therefore, must be present in order to exclude. United States v. Field, 255 U. S. 257.
That the stock in controversy was “preferred” as to dividends is conceded by all parties, but I think it is clear that it was not “limiter!” as to dividends, as concluded in the majority opinion. The holders of the preference shares were entitled to receive out of the surplus or net profits of the corporation quarterly cumulative dividends at the rate of $2 per share per annum before any dividends could be declared on any other stock; when the preferred dividends had been paid, the holders of common shares were then entitled to receive dividends of $2 per share per annum out of any remaining surplus or net profits, and all additional surplus or net profits became distributable as dividends at the same' rate per share to the holders of the stock of both classes. Thus, the holders of the preference stock might have received a greater return by way of dividends than the holders of the common stock, but conceivably could not have received less.
The preference stock, therefore, was not limited as to dividends, and, although nonvoting, must be included with the voting common stock in determining the ownership of 95 per centum of the “stock” required for purposes of affiliation.
Black, Leech, and IIaeiíon concur in the above.