Opinion · United States Court of Claims
Eby Shoe Co. v. United States
44 F.2d 273
- Type
- Opinion
- Court
- United States Court of Claims
- Jurisdiction
- Federal
- Date
- 1930-10-20
- Topic
- bankruptcy
WILLIAMS, Judge. The issue presented on the foregoing findings of fact is whether or not the plaintiff's predecessor, the Harry Eby Shoe Company, and the Kiddy Shoe Service, Inc., were affiliated corporations for the years 1920 and 1921 within the meaning of the Revenue Acts of 1918 and 1921. If they were affiliated corporations for the years in question, the total tax liability of the two companies, determined on the basis of section 240 of the Revenue Acts of 1918 and 1921, amounts to $175.41 for the year 1920 and to $6,586.53 for the year 1921, and the plaintiff has made an overpayment of its taxes for the two years in the sum of $9,-500.66. The applicable provisions of the Revenue Act of 1918 (the provisions of the 1921 act being substantially the same) are as follows: “See. 240. (a) That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return. * * * “(b) 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 the stock of two or more cor…
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EBY SHOE CO. v. UNITED STATES,44 F.2d 273(Ct.Cl. 1930)
EBY SHOE CO., Inc., v. UNITED STATES.
No. K-91.
Court of Claims.
October 20, 1930.
Judgment for plaintiff.
The plaintiff sues to recover the sum of $12,233.86, income and profits taxes paid for the years 1920 and 1921.
The issue involved is whether the plaintiff's predecessor, the Harry Eby Shoe Company, and the Kiddy Shoe Service, were affiliated corporations for the years 1920 and 1921 within the meaning of the revenue acts of 1918 and 1921.
The case having been heard by the Court of Claims, the court, upon the report of a commissioner and the evidence, makes the following special findings of fact:
1. The Harry Eby Shoe Company, Incorporated, was a domestic corporation organized under the laws of the state of Pennsylvania July 9, 1914, and was at all times from such date until the date of merger and consolidation hereinafter referred to engaged in the business of manufacturing shoes and had its principal office and place of business at Ephrata, Pa. By letters patent issued by the commonwealth of Pennsylvania, April 28, 1926, the Harry Eby Shoe Company, Incorporated, and other certain corporations were merged and consolidated into a body corporated by the name, style, and title of Eby Shoe Company, Incorporated, which said latter corporation succeeded to all the privileges, immunities, franchises, and powers of the Harry Eby Shoe Company, Incorporated.
2. The Kiddy Shoe Service, Incorporated, at all times mentioned was and is a domestic corporation organized and existing under the laws of the state of Pennsylvania, engaged in the business of jobbing and selling shoes, and having an office and principal place of business at Lititz, Pa.
3. Harry Eby Shoe Company, Incorporated, filed a return and reported no corporation income and profits taxes for the year 1920, and filed a return and reported income and profits taxes in the amount of $9,027.59 for the year 1921, which said sum was paid to the collector of internal revenue for the First district of Pennsylvania, Philadelphia, Pennsylvania, as follows:
September 18, 1922, $2,256.90. September 22, 1922, $767.13. September 25, 1922, $1,878.51. October 17, 1922, $1,878.51. December 16, 1922, $2,246.54.
4. The Kiddy Shoe Service, Incorporated, filed returns and reported no income and profits taxes for the years 1920 and 1921.
5. The Commissioner of Internal Revenue audited and revised the returns filed by the Harry Eby Shoe Company, Incorporated, and after the review thereof demanded additional taxes in the amounts of $3,356.17 and $5,881.44 for the years 1920 and 1921, respectively, the full amounts of which said sums so demanded were paid to the said collector of internal revenue on January 5, 1927. On January 21, 1927, interest on these two additional assessments in the total amount of $438.46 was paid.
6. The total of all the sums so paid to the said collector was thereafter turned over by him and deposited in the Treasury of the United States in the usual course of the collector's official business.
7. During the years 1920 and 1921 Harry Eby Shoe Company, Incorporated, was engaged in manufacturing children's shoes, and the Kiddy Shoe Service, Incorporated, was engaged in the distribution of shoes. Approximately 50 per cent. of the output of Harry Eby Shoe Company, Incorporated, was sold to the Kiddy Shoe Service, Incorporated. The sales were on the basis of credit at the market price at the time orders were placed.
8. The inventories of the two corporations were during the years 1920 and 1921 takenPage 274on the basis of cost or market whichever was lower.
9. The voting stock in the two corporations at all times during the years 1920 and 1921 was held as follows:
------------------------------------------------------ | Kiddy Shoe | Harry Eby | Service | Co. |-----------------|-------------- | 1920 | 1921 | 1920 | 1921 ---------------------|--------|--------|-------|------ Harry E. Eby ....... | 170 | 255 | 252 | 507 M.S. Eby ........... | 170 | 255 | 41 | 82 Frank E. Eby ....... | 20 | 30 | 16 | 32 Elias Eby .......... | 20 | 30 | ..... | ..... E.N. Eby ........... | 40 | 60 | ..... | ..... Elizabeth Miller Eby | ...... | ...... | 2 | 6 John N. Miller ..... | 50 | 50 | 16 | 32 Elam H. Risser ..... | 100 | 100 | 16 | 32 A.N. Wolf .......... | ...... | ...... | 8 | 8 Norman Badorf ...... | 170 | 225 | 13 | 29 John S. Badorf ..... | 60 | 80 | ..... | ..... Paul M. Badorf ..... | 100 | 110 | ..... | ..... S. Milo Herr ....... | 40 | 120 | 108 | 216 Elmer M. Badorf .... | 50 | 105 | 12 | 24 Elizabeth Holtzhouse | 5 | 10 | ..... | ..... H.E. Holtzhouse .... | 5 | 5 | ..... | ..... |--------|--------|-------|------ | 1,000 | 1,435 | 484 | 968 ------------------------------------------------------
10. The officers of the Harry Eby Shoe Company, Incorporated, were: Harry E. Eby, president; Elam H. Risser, vice president; S. Milo Herr, treasurer; and Norman Badorf, secretary; and in addition to the officers mentioned, the following were directors: M.S. Eby, Frank Eby, and John M. Miller.
11. The officers of the Kiddy Shoe Service, Incorporated, were: Harry E. Eby, president; M.S. Eby, vice president; Norman Badorf, treasurer; and Paul M. Badorf, secretary; and in addition to the officers mentioned, Elmer M. Badorf was a director.
M.S. Eby was first cousin to Harry E. Eby, and was employed by Harry Eby Company, Incorporated.
Frank E. Eby is a brother of Harry E. Eby.
Elias Eby is a brother of Harry E. Eby.
E.N. Eby is the father of Harry E., Frank E., and Elias Eby, and was during the years in question not employed or actively engaged in business.
Elizabeth Miller Eby is the wife of Harry E. Eby and the sister of John M. Miller.
John M. Miller's wife is a sister of the Eby brothers, and Norman, Paul M., and Elmer M. Badorf are his first cousins.
Elam H. Risser is a brother-in-law to Harry E., Frank E., and Elias Eby, having married their sister.
A.N. Wolf was engaged in an independent business in his own name and was a stockholder in the said Eby Shoe Company.
Norman Badorf was treasurer and manager of Kiddy Shoe Service, Incorporated.
John S. Badorf was the father of Norman, Paul M., and Elmer Badorf and was not actively engaged in business nor employed during the years in question.
Paul M. Badorf was employed as salesman by Harry Eby Company, Incorporated, and Kiddy Shoe Service, Incorporated. His duties required him to travel as salesman for the two corporations.
S. Milo Herr was employed by Harry Eby Company as manager.
Elmer M. Badorf was employed by Harry Eby Company as factory superintendent.
Elizabeth Holtzhouse was personal secretary to Harry E. Eby, and H.E. Holtzhouse is her father.
There has never been a minority stockholder who did not acquiesce in the management of the companies. At times stockholders have given proxies to the secretaries of the respective companies to vote their stock.
12. During the years 1920 and 1921 Harry Eby Company sold shoes to Kiddy Shoe Service on orders placed by the latter at the market price at the time placed.
13. It was the practice of the two companies that whenever the Harry Eby Company needed orders to keep its output on an even keel it asked the Kiddy Shoe Service to place orders. It customarily took the Harry Eby Company from four to eight weeks to fill orders placed by Kiddy Shoe Service.
14. During the years 1920 and 1921 the trend of the market was downward. This began in the latter part of 1919 and continued three or four years.
15. Prices of materials taken from the files of the Harry Eby Company disclosed that at December 22, 1919, the cost of special mahogany sides was 54 cents a foot, at June 4, 1920, it was 50 cents a foot, and during June of 1921 it was 19½ cents a foot; the price of patent leather at December 5, 1919, was 71 cents a foot, at December 9, 1920, it was 40 cents a foot, and at January 28, 1921, it was 34 cents a foot; in May, 1920, the price of misses' soles was 42 cents a pair, and the same grade was purchased in 1921 for 25 cents a pair; in 1919 sole leather, No. 1 grade, was purchased for 75 cents a foot, and in April, 1920, for 58 cents a foot; black kidPage 275was purchased in April, 1920, at 70 cents a foot, and in November, 1921, at 30 cents a foot; mat kid, used for topping, was purchased in June, 1920, at 48 cents a foot, in November, 1920, at 30 cents a foot, and in September, 1921, at 18 cents a foot; the invoices from which the above prices were quoted were taken at random of the files of Harry Eby Shoe Company.
16. The leathers mentioned in the above finding represent about 90 per cent. of the materials in shoes that were made by the Harry Eby Company and sold to the Kiddy Shoe Service during the years in question and they consist of sole leather, patent leather, side leather, and mat topping.
17. On November 23, 1921, the Harry Eby Company allowed the Kiddy Shoe Service a special discount in the amount of $7,500. This was in addition to the regular discount. With reference to this the witness made the following explanation:
"We made a special discount of an item of $7,500.00 to help them out on shoes which they purchased, the market having fallen before they received them; before we even had the shoes made they were worth considerably less than they paid for them, so we made them an allowance to help them merchandise them without taking too great a loss. There were several other allowances made them, amounting to, I think, $6,000.00, which was made for the same purpose. I knew that they would have to take less for their shoes than they paid for them when they were delivered."
18. On the $7,500 item the Kiddy Shoe Service was allowed the regular discount. On the day that the special discount was allowed the Kiddy Shoe Service paid Harry Eby Company the sum of $6,236.50 and, by the allowance of the special discount and the regular discount, reduced accounts receivable by about $15,251.38.
19. On July 1, 1921, and again on December 29, 1921, Kiddy Shoe Service was given credit by Harry Eby Company for $3,000, making a total of $6,000 credited during the year. With reference to this transaction the witness gave the following explanation:
"This was done in order to help them out further on account of their paying more than the market price for their shoes at that time due to the fact that the leather market broke so fast. * * * I knew that they would have to take a loss on the shoes when they were shipped because I remember one lot of leather I looked at one week at 60 cents and the following week it was 40 cents."
20. The Harry Eby Shoe Company received no consideration for the adjustments in the amounts of $7,500 and $6,000. During the month of January, 1922, Harry Eby Shoe Company accepted in payment of invoices of goods shipped to Kiddy Shoe Service from November 3, 1921, to January 7, 1922, 435 shares of the capital stock of the Kiddy Shoe Service of the par value of $43,500, and in addition thereto allowed Kiddy Shoe Service discounts in the amount of $5,106.98.
21. During the years 1920 and 1921 goods were sold by Harry Eby Company to Kiddy Shoe Service and trade acceptances were taken in payment. At December 31, 1920, these trade acceptances amounted to $56,666.08, and at December 31, 1921, to $46,962.97.
22. The accounts payable of the Kiddy Shoe Service at December 31, 1920, amounted to $39,598.97, and at December 31, 1921, $61,071.24. The accounts payable were separate and distinct from the trade acceptances.
23. On March 1, 1921, 100 shares of the stock of the Kiddy Shoe Service were issued to A.W. McNaughton and remained in his name until 1923. McNaughton paid $5,000 cash on the date that the stock was issued to him and later was credited with $166.65. The balance of the subscription was never paid by McNaughton, and during the year 1923 the stock was transferred to Harry E. Eby, who paid the corporation the balance of the unpaid subscription.
24. During the year 1920 Paul M. Badorf was the holder of 100 shares of the stock of the Kiddy Shoe Service. At January 1, 1920, the unpaid balance was $5,847.50, and at January 1, 1921, was $1,279.58, and at January 1, 1922, was $2,430.61.
25. On January 19, 1927, Harry Eby Shoe Company, Incorporated, duly filed with the said collector a claim for refund in the amount of $11,696.97, the basis of which said claim is that Harry Eby Shoe Company, Incorporated, was during the years 1919, 1920, and 1921 affiliated with Kiddy Shoe Service, Incorporated, and with the Eby Shoe Company, Incorporated, within the meaning of the said section 240 of the said Revenue Acts of 1918 and 1921.
26. The said Harry Eby Shoe Company, Incorporated, was notified by bureau letter dated March 17, 1927, that its claim for refund of $11,696.97 would be rejected.Page 276
27. On October 26, 1928, the plaintiff on behalf of Harry Eby Shoe Company, Incorporated, filed with the said collector a claim for refund for the year 1920 in the amount of $3,507.19 and for the year 1921 in the amount of $8,877.69, the basis of which said claims is that Harry Eby Shoe Company, Incorporated, was during the said years affiliated with the Kiddy Shoe Service, Incorporated, within the meaning of section 240 of the revenue acts of 1918 and 1921.
28. The said claims for refund in the amounts of $3,507.19 and $8,877.69 were rejected in full by the Commissioner of Internal Revenue on March 22, 1929.
29. The total tax liability of Harry Eby Shoe Company, Incorporated, and Kiddy Shoe Service, Incorporated, determined on the basis of section 240 of the Revenue Acts of 1918 and 1921, amounts to $175.41 for the year 1920 and to $6,586.53 for the year 1921.
30. No other action than as aforesaid has been had on this claim by Congress or by any of the departments of the government. The plaintiff, Harry Eby Shoe Company, Incorporated, and Kiddy Shoe Service, Incorporated, have at all times borne true allegiance to the United States and have not in any way voluntarily aided, abetted, or given encouragement to rebellion against the United States. The plaintiff is the sole and absolute owner of the claim herein sued upon and has made no transfer or assignment of the said claim or any part thereof or any interest therein.
R.C. Williamson, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
If they were affiliated corporations for the years in question, the total tax liability of the two companies, determined on the basis of section 240 of the Revenue Acts of 1918 and 1921, amounts to $175.41 for the year 1920 and to $6,586.53 for the year 1921, and the plaintiff has made an overpayment of its taxes for the two years in the sum of $9,500.66.
The applicable provisions of the Revenue Act of 1918 (the provisions of the 1921 act being substantially the same) are as follows:
"Sec. 240. (a) That corporations which are affiliated within the meaning of this section shall, under regulations to be prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income and invested capital for the purposes of this title and Title III, and the taxes thereunder shall be computed and determined upon the basis of such return. * * *
"(b) 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 the stock of two or more corporations is owned or controlled by the same interests." (40 Stat. 1081and42 Stat. 260, § 240 (a, c).
Neither the plaintiff's predecessor, the Harry Eby Shoe Company, nor the Kiddy Shoe Service Company, owned or controlled any part of the stock of the other during the years in question, and if the two corporations are deemed to be affiliated, it must be because "substantially all their stock is owned or controlled by the same interests."
An examination of the list of stock owners of these corporations discloses that a group of shareholders, who owned stock in both companies during the year 1920, owned 474 out of 484 shares, or 98 per cent. plus, of the stock of the Harry Eby Shoe Company for that year, and owned 770 out of the 1,000 shares of the Kiddy Shoe Service Company, or 77 per cent. of the stock of that company. The same stockholders owned, during the year 1921, 954 shares out of 968 shares of stock, or 98 per cent. plus, of the Harry Eby Shoe Company, and 1,140 shares out of 1,435 shares, or 78 per cent. plus, of the stock of the Kiddy Shoe Service Company.
The 230 shares of stock held by minority stockholders of the Kiddy Shoe Service Company for the year 1920 were owned as follows:
E.N. Eby; father of Harry Eby, the president of both companies, 40 shares.
Elias Eby, brother, 20 shares. John S. Badorf, uncle, 60 shares. Paul M. Badorf, cousin, 100 shares.Page 277
Elizabeth Holtzhouse and H.E. Holtzhouse, 5 shares each.
The minority stockholders of the Kiddy Shoe Service Company for the year 1921 were:
E.N. Eby, 60 shares. Elias Eby, 30 shares. John S. Badorf, 80 shares. Paul M. Badorf, 110 shares. Elizabeth Holtzhouse, 10 shares. E.H. Holtzhouse, 5 shares.
The record further discloses that a group of stockholders closely related by blood or marriage owned a very large per cent. of the stock of both companies. For the year 1920 this family group owned 95 per cent. of the stock of the Kiddy Shoe Service, and 79 per cent. plus of the stock of the Harry Eby Shoe Company. For the year 1921 they owned 97 per cent. plus of the Kiddy Service stock and 79 per cent. plus of the stock of the Harry Eby Shoe Company.
Out of the 16 persons owning stock in the two corporations, 12 are members of this closely related family group. Harry Eby was president of both corporations, and with a single exception all the officers and directors of both corporations were members of the family group.
Under these facts, was substantially all the stock of these two corporations owned or controlled by the same interests within the meaning of the revenue acts of 1918 and 1921? We are of the opinion that such was the case and that the two corporations were affiliated during the years 1920 and 1921.
In Hagerstown Shoe Legging Co.,1 B.T.A. 666,672, the board said:
"Are we, in applying this statute, to look at the tabulated statement of stock ownership and, because it there appears that several persons are stockholders of one or the other legal entity and not of both, say that this alone is determinative? We have had occasion in other appeals on other questions to say, and we cannot too often repeat, that all facts must be considered. These problems are not flat mathematical or legalistic puzzles; they are vital, and must be examined in three dimensions with the light of reality. No solution otherwise arrived at could long survive. Here the table of percentages changes its color entirely in the light of the circumstances under which the percentage distribution exists, and, instead of indicating a substantial independent minority, indicates that `substantially all the stock of two * * * corporations is owned or controlled by the same interests.'"
In Germantown Braid Company,3 B.T.A. 1336,1339, the meaning of "the same interests" is further discussed and defined:
"The `same interests' does not necessarily mean the same individuals. The relationship between the individuals and the facts and circumstances of the case should be considered in determining whether different individuals are in fact the `same interests.' Family groups owning stock in different corporations, under the circumstances of this case, may fairly be said to be the same interests."
The Board of Tax Appeals has frequently and consistently held that blood relationship is a factor to be taken into consideration in determining whether the shares of stock in different corporations are owned or controlled by the same interests. Wright Cake Co.,2 B.T.A. 58; Gage Hat Works,7 B.T.A. 1219; Jordan Marsh Co. and Avon Street Trust,3 B.T.A. 553.
In Highland Land Company, Ltd.,2 B.T.A. 100, it was held that a limited partnership and a corporation were affiliated where two brothers owned 79 per cent. of the stock of one and 98 2/3 per cent. of the stock of the other, the remaining 21 per cent. of the former being owned by two sisters and a brother of the majority stockholders.
In Wright Cake Company, supra, two corporations were held to be affiliated where the same person owned 97.06 per cent. in one, 62.5 per cent. in the other, the remaining stock being owned by his wife and son in different proportions.
We believe these decisions of the Board of Tax Appeals correctly interpret the meaning of subsection (b) of section 240 of the revenue act of 1918 and § 240(c) of 1921 as to what constitutes "substantially all the stock of two or more corporations" and what comprises "the same interests." As before stated, identical stockholders during the year 1920 owned 98 per cent. plus of the stock of the Harry Eby Shoe Company, and 77 per cent. of the stock of the Kiddy Shoe Service Company, and for the year 1921 they owned 98 per cent. of the stock in the Harry Eby Shoe Company and 78 per cent. plus of the stock of the Kiddy Shoe Service Company, and during the same years the closely related family group owned 95 per cent. and 91 per cent. of the stock of the Kiddy Shoe Service Company and 79 per cent. of the stock of the Harry Eby Shoe Company.Page 278
These facts, taken into consideration with the further fact, fully disclosed by the findings, that the two companies during the years in question were practically operated as one business unit with the apparent consent of the stockholders of both companies, unquestionably show that substantially all the stock of both corporations was owned and controlled by the same interests.
The plaintiff, having within the time provided by law filed its claim for a refund of the additional taxes paid on January 5, 1927, and the interest thereon paid on January 21, 1927, is entitled to a judgment for the amounts so paid with interest as provided by the statute.
Judgment for $9,500.66 is hereby awarded. It is so ordered.