Reports of the U.S. Board of Tax Appeals

beau Paper Company for the year 1923 is entitled to deduct from its taxable income for the year 1923 an item not heretofore allowed by the Commissioner, amounting to $16,509.80, the same representing the excess of the net loss sustained by such company in the year 1921 over the amount of such net loss applied to the taxable year 1922.

FINDINGS OF FACT.

The Flambeau Paper Company (hereinafter referred to as the Paper Company) was incorporated under the laws of Wisconsin in 1898. Its principal place of business is in Park Falls, Wisconsin. It is engaged in the business of making print paper and so-called specialties which were sold mostly to jobbers.

The Wisconsin Realty Company (hereinafter referred to as the Realty Company) was incorporated in 1899 under the laws of Wisconsin and is engaged in buying and selling real estate and in making investments. Its principal office is at Milwaukee, Wisconsin. It holds a considerable amount of unproductive assets. It acquired and owned various water power sites on the Flambeau River. It owned timber lands in Iron and Pike Counties. It bought and sold and owns some farms and also owns some lots and about 18 houses in the City of Park Falls, most of which houses are rented to employees of the Paper Company. It built and owned a private railroad from Park Falls to Pixley Water Power, which railroad was originally built by it to construct "Pixley Power" and was later leased to the Paper Company to transport wood for grinding to the pulp mill at Pixley Rapids and to transport the ground wood product back to Park Falls. Upon formation of the Power Company, the Pixley Power Plant was electrified and the railroad was of no further use and was abandoned. In July, 1922, the Realty Company conveyed to the Power Company the Pixley dam and power plant, for which it received 1,322 shares of the preferred stock of the Power Company of the par value of $100 per share. It also conveyed to the same company at that time certain power or dam sites and rights for which it received 5,197 shares of the common stock of the Power Company of no par value.

The Flambeau Public Service Company, previously known as the Park Falls Water, Light & Power Company (hereinafter referred to as the Public Service Company), was incorporated under the laws of the State of Wisconsin in 1902. Its principal office is at Park Falls, Wisconsin. It is engaged in the business of distributing electric power for light, heat and other purposes.

The Flambeau Power Company (hereinafter referred to as the Power Company) is also a Wisconsin corporation and was organized May 8, 1922, to take title to and to develop water power theretofore

owned by the Realty Company and the Paper Company. It has its principal office in Milwaukee, Wisconsin, and a branch office at the office of the Paper Company, at Park Falls. Its business activities consist of owning, developing and leasing water power.

The common stock of the four companies was held, during all of the calendar year 1923, as follows:

Certain directors' qualifying shares, which are held in trust, are included in the above table under the names of the owners of the beneficial interest. These consist of two shares of stock of the Realty Company and one share of stock of the Paper Company which are of record in the names of directors but are in fact held in trust for E. P. Sherry, who is president and director of each of the above corporations and resides in Milwaukee, Wisconsin.

Abbie Sherry was the widow of Henry Sherry and the mother of E. P. Sherry and died on April 19, 1925, and the stock held by her was distributed to E. P. Sherry on December 15, 1925. During the time that stock was owned by Abbie Sherry, and during all the history of the several corporations, the stock owned by Abbie Sherry was regarded by her as intended to pass to E. P. Sherry, who was her only child and heir, and for many years prior to her death, including the year 1923, she put such stock under his control and disposition and had the certificates for the same in his custody. It was understood between her and E. P. Sherry that he should have the voting power of her stock. In fulfillment of this understanding she gave him proxies to vote her stock at every meeting of the Paper Company for which he requested them, and did not, at any time, for at least fifteen years, personally attend any meeting of such corporation, or give or attempt to give any proxy to any person other than E. P. Sherry.

Guy Waldo, who owned 10 per cent of the common stock of the Paper Company, is, and was in 1923, the general manager of such corporation and has been in its employ since 1903. As general manager of the corporation, he was not in chief direction of its affairs, because they were all under the direction and control of E. P. Sherry, the president. The stock held by Guy Waldo was

sold to him some years prior to 1923 by E. P. Sherry and his father, Henry Sherry, and was and is coupled with an agreement that, if the employment of Waldo by the corporation should be severed by it, the vendors, now represented by E. P. Sherry, are required, at the option of Waldo, to purchase his stock at a basis of value fixed in the contract and, likewise, that should Waldo's employment by the corporation be severed by him and he desire to sell his stock, the vendors have a 30-day option to buy it at a fixed valuation. The money used for the purchase of this stock was loaned to Waldo by the Realty Company and he is and was in 1923 still indebted to that company on a collateral note for about $12,700 of the purchase price.

Guy Waldo resides at Park Falls, Wisconsin. He is vice president and general manager of the Paper Company; vice president, treasurer and general manager of the Power Company; and vice president and manager of the Public Service Company. He has general supervision of the renting of the houses in Park Falls and also over other real estate interests of the Realty Company in and around Park Falls, for which he receives no compensation from the Realty Company. However, the Paper Company was paid the customary percentage by the Realty Company for collecting its rentals.

None of the corporations in 1923 had any outstanding preferred stock which carried with it voting rights to the holder thereof. The preferred stock outstanding did carry certain voting rights after default by the corporation in payment of dividends, but no such defaults occurred at any time. The Realty Company owned preferred stock of the Paper Company in the amount of $135,500; which it received in exchange for money advanced to the Paper Company for use in its business. During 1923 the Realty Company owned $133,200 par value of the preferred stock of the Power Company. At the beginning of 1923 the Paper Company owned 427 shares of preferred stock of the Power Company, but sold the same on August 1, 1923, to the Winnebago Realty Company. These were all of the shares of preferred stock of the Power Company outstanding.

The Paper Company received a letter from the respondent dated November 19, 1921, advising it that it (Paper Company) and the Realty Company, Public Service Company and Winnebago Realty Company, during the taxable year 1917, were not affiliated, and that each company should file a separate excess profits tax return for that year, but that during the taxable years 1918, 1919 and 1920, the Paper Company and the Public Service Company were affiliated and should have filed consolidated income and profits tax returns for those years; and that the Realty Company and Winnebago Realty

Company were not affiliated with the other companies mentioned nor with each other during 1918, 1919 and 1920.

On February 20, 1923, E. P. Sherry, as president of the Paper Company, addressed a letter to the respondent requesting an early ruling "as to the necessity or possibility of filing a consolidated income return of our own company with the affiliated companies listed in table one of the questionnaire."

The Paper Company on March 8, 1923, received a reply to its inquiry of February 20, 1923, from the respondent, advising it that during the taxable year 1922 the Paper Company and the Public Service Company were affiliated and may elect to file a consolidated income and profits tax return for that year, and that during the taxable year 1922 the Realty Company and the Power Company were not affiliated with any of the companies named nor with each other, and each company should file a separate income and profits tax return for the year 1922.

E. P. Sherry received a copy of the above letter on March 9, 1923. The Paper Company filed a tentative income tax return for the year 1922, dated March 10, 1923, and later filed its complete income tax return for the year 1922 dated June 11, 1923. The Public Service Company filed its return for the year 1922 under date of March 10, 1923. The Realty Company filed its income tax return for the year 1922 under date of March 12, 1923. The Power Company filed its income tax return for the year 1922 under date of March 4, 1923. All these returns were signed in behalf of the respective companies by E. P. Sherry as president.

Under date of March 12, 1924, the Paper Company, the Realty Company and the Public Service Company, by E. P. Sherry, as president, sent two letters to the collector of internal revenue at Milwaukee, Wisconsin. One of these letters is in part as follows:

The Flambeau Public Service Company was formerly named Park Falls Water, Light & Power Company, and its right to file a consolidated return with the Flambeau Paper Company has not been questioned by the Internal Revenue Bureau.

For 1922 a separate return was filed by the Wisconsin Realty Company. This, however, was not because of the exercise of an option by either the Wisconsin Realty Company or the Flambeau Paper Company to file separate returns, but in deference to a tentative ruling by the Internal Revenue Department holding them not affiliated and not entitled to file a consolidated return. This ruling is now being reconsidered by the Department; a hearing has been had thereon and the matter is open and undetermined. Accordingly, the Flambeau Paper Company and Wisconsin Realty Company, and in connection with them also the Flambeau Public Service Company, do hereby exercise their option to file a consolidated return for the year 1922.

The other letter is in part as follows:

We hand you herewith consolidated income tax return for 1923 of the Flambeau Paper Company, Flambeau Public Service Company and Wisconsin Realty

Company, and also a return of 1922 income in consolidated form for these three companies.

The Paper Company, Public Service Company and Realty Company filed an amended consolidated income tax return for the year 1922 and a consolidated income tax return for the year 1923, both signed by E. P. Sherry, as president, and Guy Waldo, as secretary, as of March 11, 1924.

The Power Company filed its income tax return for the calendar year 1923 under date of March 11, 1924, signed by E. P. Sherry, as president, and M. A. Batchelor, as secretary.

In a letter dated July 7, 1925, the respondent advised the Paper Company that the affiliation issue had been conceded by the Bureau and that the Realty Company was affiliated with the Paper Company during the taxable years 1919, 1920, and 1921 within the purview of section 240 of the Revenue Acts of 1918 and 1921.

Each of the four companies during 1923 at its principal office kept its own separate books of account. The books of account of the Realty Company do not indicate or show that certain or any of its assets were held for the benefit of the Paper Company.

The income tax returns, heretofore referred to in these findings, respondent's Exhibits A, B, C, D, E, F and G, are hereby made a part of these findings by reference, as well as petitioners' Exhibits 7, 8 and 9. The latter are commented upon in the opinion.

OPINION.

MCMAHON: In both petitions herein it is alleged that substantially all of the common stock of the Paper Company, Realty Company and Power Company is now and was during all of 1923 owned or controlled by the same interests and that the Paper Company owns directly all of the stock of the Public Service Company. The respondent admitted such allegations in both answers.

« Previous Continue »

Books

Reports of the U.S. Board of Tax Appeals, Volume 27