
    MADERA YOSEMITE BIG TREE AUTO CO. AND YOSEMITE STAGE & TURNPIKE CO. v. THE UNITED STATES
    [No. J-62.
    Decided May 4, 1931]
    
      Mr. Virgil 7. Moore for the plaintiff. Smith da Moore were on the briefs.
    
      Mr. John A. Rees, with whom was Mr. Assistant Attorney General Charles B. Rugg, for the defendant.
   Williams, Judge,

delivered the opinion:

The sole issue presented in this case is whether the Ma-dera Yosemite Big Tree Auto Company (hereinafter referred to as the Auto Company) and the Yosemite Stage and Turnpike Company (hereinafter designated the Turnpike Company) were affiliated corporations for the years 1919 and 1920.

It is mutually agreed that if the plaintiffs are held to be affiliated corporations for the years in question, the Auto Company is entitled to recover the sum of $1,932.72 for the year 1919, and $6,063.56 for the year 1920, with interest as provided by law.

Section 240 (a) of the revenue act of 1918, subparagraph (b), 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 of the stock of two or more corporations is owned or controlled by the same interests.”

The Turnpike Company owned directly 65 per cent of the outstanding stock of the Auto Company during the years 1919 and 1920. The remaining 35 per cent of the stock of the Auto Company was owned by one Huffman, president and general manager of the company. Huffman owned no stock in the Turnpike Company.

The percentage of stock necessary to constitute “ substantially all of the stock” is not definitely fixed in the statute of 1918, nor in the applicable regulations, but under the uniform holdings of the Board of Tax Appeals and the courts the ownership of 65 per cent of the stock of the Auto Company by the Turnpike Company is not sufficient to constitute ownership of substantially all of the stock of such corporation. Wadhams & Company v. United States, 67 C. Cls. 235; Continental Products Co. v. United States, 70 C. Cls. 556; United States v. Cleveland, Painesville & Eastern R. R. Co., Inc., 42 Fed. (2d) 413.

The plaintiffs contend that they are entitled to affiliation for the years involved, because the Turnpike Company, in addition to its direct ownership of 65 per cent of the stock of the Auto Company, exercised control within the meaning of the statute of the 35 per cent of stock in the said company owned by Huffman. It is argued, the arrangement whereby Huffman became the owner of 35 per cent of the stock of the Auto Company was merely a profit-sharing agreement and that by reason of the outstanding option held by the Turnpike Company of Huffman’s stock, the control of such stock was at all times vested in the Turnpike Company and was never exercised by Huffman.

It is further argued that the two companies constituted one business unit, carrying on the single business of transporting passengers through the park for hire; that the only business or income either company had during the years in question resulted from tbeir contract with each other; that three out of the five directors of each company were identical persons, and that there was ample opportunity for the shifting of profits from one company to the other without regard for the corporate relationship.

The taxes sought to be recovered were paid by the Auto Company as deficiency assessments for the years 1919 and 1920. For the year 1919, the Auto Company, when notified by the commissioner of the asserted deficiency, filed its appeal with the Board of Tax Appeals. The Board of Tax Appeals (2 B. T. A. 346) rendered judgment against the plaintiff denying it affiliation with the Turnpike Company for the said year. The board said:

“ The mere agreement by a single minority interest to sell its stock to the single majority interest on request at a price to be determined upon the exercise of the option, unsupported by any evidence that control was in fact exercised by the majority as to the voting of the minority stock or as to how any of the stock was voted, does not constitute sufficient proof of the affiliation of two corporations within the meaning of section 240 of the revenue act of 1918.
“ As stated by us in Appeal of Isse Koch & Co., 1 B. T. A., 624, 627:
“ ' The control, however, must be shown to be a genuine and real control actually exercised, and it can not be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation.’
“ The direct ownership by the Yosemite Stage & Turnpike Co. of 65 per cent of the taxpayer’s stock was not, to our minds, an ownership or control of substantially all of such stock.”

Because of the adverse decision of the board as to the year 1919, the Auto Company dismissed its appeal for the year 1920.

We think the decision of the Board of Tax Appeals is correct. It is not shown that the Turnpike Company exercised any real or actual control over the stock owned by Huffman in the Auto Company during the years involved. The plaintiffs cite Ullman Manufacturing Co. v. United States, 67 C. Cls. 104; Koch & Company, Inc., 1 B. T. A. 624, and Hagerstown Shoe & Legging Co., 1 B. T. A. 666, as applicable to the instant case. In these cases it was held that where an employee holds stock in a company and his position is such that the company which employs him virtually controls his action with reference to the stock, that this is such control as is referred to in the statute.

Huffman, the employee in this case, occupied an entirely different position in his relations to the Auto Company than that occupied by the employees in the cases cited in relation to the companies employing them. Huffman’s employment was not of a character where the employee works under the direction of his employer. He was the owner of more than one-third of the stock of the Auto Company, and as its president and general manager had the direction and control of everything relating to the business of the company. While it is true he had given an option to the Turnpike Company to purchase his stock on demand, the arrangement also included an agreement that in case the option was exercised by the Turnpike Company it would give him a satisfactory contract of employment. Under these circumstances, and in the absence of a showing to the contrary, it must be held Huffman retained complete control of his stock in the Auto Company until it was taken over by the Turnpike Company in 1928.

The fact that the two companies constituted a single business unit is not alone determinative of their right to affiliation. The test is whether the ownership or control of the stock meets the requirements of the statute.

In United States v. Cleveland, Painesville & Eastern Railroad Company, Inc., supra, the court said:

" We find that two corporations, alleged to have been affiliated §- a nd so found by the Board of Tax Appeals and the District Court, were concededly operated as a single interurban road, that there was a complete identity of control of the businesses, and that the joint operating expenses were arbitrarily apportioned. Defendant actually owned 70.9 per cent of the stock of the Ashtabula Company, and voted, by means of solicited proxies, over 99 per cent of the stock that was voted at the annual meetings. This stock, however, constituted only 77 per cent to 84 per cent of the total issue, which can not be deemed ‘ substantially all ’ of the sole class of stock issued by the subsidiary corporation within the fair meaning of the act.”

The plaintiffs are not entitled to affiliation for the years 1919 and 1920. The petition is dismissed. It is so ordered.

Whaley, Judge; LittletoN, Judge; GkeeN, Judge; and Booth, Chief Justice, concur.  