
    Appeal of CLEVELAND, PAINESVILLE & EASTERN R. R. CO. and CLEVELAND, PAINESVILLE & ASHTABULA R. R. CO.
    Docket No. 4927.
    Decided July 31, 1926.
    
      Arthur B. Foye, G. P. A., for the petitioners.
    
      M. N. Fisher, Esq., for the Commissioner.
    Before Graupner, Teammell and Phillips.
    
      
      This decision was prepared during Mr. Graupner’s term of office.
    
   Phillips:

This is an appeal from the determination of a deficiency in income and profits taxes of the Cleveland, Painesville & Eastern R. It. Co. for 1917, 1918, and 1919, in the amount of $11,351.37. The deficiency arises from the fact that the Commissioner refused to permit the petitioning corporations to file a consolidated return.

findings of fact.

The Cleveland, Painesville & Eastern ft. R. Co., hereinafter referred to as the Eastern Company, and the Cleveland, Painesville & Ashtabula R. R. Co., hereinafter referred to as the Ashtabula Company, are Ohio corporations, operating an electric interurban railway between Cleveland, Painesville and Ashtabula. The railroad of the Eastern Company extended from Cleveland to Paines-ville, a distance of SO miles, and the railroad of the Ashtabula Company extends from Painesville to Ashtabula, a distance of 26 miles, but trains are operated from Cleveland through to Ashtabula over the tracks of the two companies: The operation of the entire service is from the offices of the Eastern’Company at Willoughby, Ohio. The Eastern Company owned and 'operated repair shops at which repairs were made on the propertjr of both companies, furnished the power which operated the trains of the Ashtabula Company, purchased all supplies and materials for that company, did its bookkeeping, financing and banking, and superintended its operation. At the end of each month there was an adjustment made by billing direct to the Ashtabula Company for all services, material and supplies, office help, etc. The Ashtabula Company paid for nothing direct. Everything was done through the Eastern Company and adjustments made monthly. The Ashtabula Company had no offices, shops or power plant.

During the years involved, the Ashtabula Company was indebted to the Eastern Company in the amount of $240,309.02 on a demand note dated January 1, 1914. The Eastern Company also owned $150,000 of the bonds of the Ashtabula Company of a total issue of $1,000,000, on which interest was in default during 1917, 1918 and 1919. No dividends have been .paid by either company.

The balance sheets of the Ashtabula Company for December 31, 1916, and December of each of the taxable years involved, were as follows:

The Eastern Company owns Y,090 shares of 10,000 shares of stock issued and outstanding, or Y0.9 per cent of the capital stock of the Ashtabula Company.

W. H. Douglas was president and general manager of the-Eastern Company and vice president and general manager of the Ashtabula Company. The same persons are officers of both companies and the directors are the same, except that the Eastern Company has two more directors than the Ashtabula Company.

At the meetings of the stockholders of the Ashtabula Company in 191Y, 1918, and 1919, the following shares were voted:

‘ Shares

1917_7,591

1918_■__ 7, 688

1919____-8, 315

The Eastern Company, through its president and treasurer, in addition to the stock which it owned, voted, in 191Y, 441 shares, in ] 918, 541 shares, and in 1919, 1,187 shares, through proxies, so that, during 1917, 1918, and 1919, the Eastern Company actually voted more than 99 per cent of the stock which was voted at the stock-, holders’ meetings. The Ashtabula Company sent out proxies for the stockholders to sign before the meetings of the stockholders held in the years involved, and as a result the above numbers gave proxies to the president or treasurer of the Eastern Company. During 1917, 2,509 shares of stock were not voted at any stockholders’ meeting. During 1918, 2,412 shares were not voted, and during 1919, 1,785 shares were not voted.

The taxpayers were affiliated during the taxable years involved.

Judgment for the petitioners.

LittletoN dissents.  