(594)

NATIONAL CARBIDE CORPORATION.

61

by Airco and, with one exception, they are all senior executive officer
of Airco. The chairman of the board of directors of Airco was al

chairman of the board of directors of each petitioner. The president 1
Airco was also a director of Airco and of each petitioner. The Airc

board held regular meetings and exercised complete domination an
control over the business of Airco and each of the petitioners. T
board of directors of the petitioners held an organization meeting each
year and thereafter only met when called upon by Airco to formaliz
action taken by the Airco board. The chairman, vice chairman, arı
president of Airco were in charge of the administration and manage
ment of the activities of each petitioner and carried out the policies anci
directives with respect to each petitioner as promulgated by the Airco
board. One main office was maintained for Airco and the petitioners z
the Lincoln Building, New York City, and, with two minor exception=
the offices of all the executive officers of Airco and the petitioners were
located there. All assets held by each petitioner were furnished to it b
Airco, which paid for them with its own cash or stock. Airco supplier i
all the working capital of each petitioner. The business of the paren
and the petitioners was conducted as one business unit, divided into si
branches: corporate, operations, sales, financial, distribution, and re
search. Each of the six main branches was directed by a senior office
of Airco. The subdivisions of each of the six branches were als
directed and managed by officers of Airco. All employees in each of
the six branches performed their duties for Airco and each petitioner
whenever and wherever their services could be utilized in connection
with the operations of any of the petitioners. All expenditures fo
Airco and each petitioner of more than 8500 required specific approva
of the Airco board of directors and its chairman. Advertising
conducted under one advertising manager, and through the medals.
Airco represented to its stockholders and the general pole that te.
petitioners were divisions of the parent company. All purchase
each petitioner from persons oftebde the affiliated guns, except el

Pandaca prodiced of OF BAB,
gency purchases up to 850 were made of spon orders water by
general purchasing agent of Alya
rials purchased for one agency company were often transferrer
another agency company. Where this was done the transfer
reflected on the intercompany accounts at cret. without the pas
of any cash. There were no intercompany profits. AL TALK WIF
maintained in the name of each petitioner were treated by Altro a
own and were drawn upon indiscriminately by it wA KUAT
There was substantia. Det ny of ou
authorized to sign checks on the bank accounts Almer, and c
bank accounts of each petitioner. All credits and viertora v
charge of the Airco credit manager. Aires nata.net gensen se

needed by any company.

tems for all employees of all companies. Accounting was done for all companies by one general accounting office under the general auditor of Airco and accounting procedure was uniform. The proceeds realized from each petitioner's activities did not come to Airco as the result of any independent action by the agency company, such as declaration of dividends. A written operating agreement was entered into between Airco and each petitioner, under which the petitioner agreed to conduct a branch of the Airco business for a purely nominal fee. In each agreement the agency company agreed to credit, and did credit, monthly on its books to Airco all profits from its operations above the nominal amount of its compensation. The accounts between Airco and each petitioner were kept strictly in accordance with each operating agreement.

It is true, of course, that, taken separately, some of the foregoing facts would not be sufficient in themselves to make inoperative the general rule that corporations are separate juristic persons and are to be so treated for tax purposes. We think, however, that when all these facts are viewed together they bring petitioners within the rule announced by the Supreme Court in Southern Pacific Co. v. Lowe,

supra.

The Circuit Court of Appeals of the Second Circuit held, in Munson S. S. Line v. Commissioner, supra, that the taxpayer, Munson Line, should be deemed the owner of each vessel held by and documented in the name of its wholly owned subsidiaries. In thus holding, the court, among other things, said:

The situation is similar to that involved in Southern Pacific Co. v. Lowe, 247 U. S. 330, 38 S. Ct. 540, 62 L. Ed. 1142, where the court held that there was practical identity between the Central Pacific and the Southera Pacific because of the complete ownership and control which the latter corporation possessed over the former. Thus even in tax cases the separate identity of corporations may be disregarded in exceptional circumstances. See, also, Gulf Oil Corp. v. Lewellyn, 248 U. S. 71, 39 S. Ct. 35, 63 L. Ed. 133; New Colonial Ice Co. v. Helvering, 292 U. S. 435, 442, 54 S. Ct. 788, 78 L. Ed. 1348.

*

Respondent, in support of his determination, relies heavily upon Interstate Transit Lines v. Commissioner, supra, which affirmed 130 Fed. (2d) 136, which in turn affirmed our decision in 44 B. T. A. 957. We think that case is clearly distinguishable from the instant case on its facts. In the Interstate Transit Lines case the taxpayer (a Nebraska corporation) operated an interstate bus line between Illinois and California, and Missouri and Wyoming. Under California law as it existed prior to 1937, the petitioner, being a foreign corporation, was prohibited from doing an intrastate business in California. In order to handle such local business on its buses, the taxpayer organized a California bus corporation, named Union Pacific Stages of California, and made an agreement with that corporation under which the Cali

fornia corporation was to take over the operation of Interstate's buses at the state line and operate them in California for its benefit and under its direction, the profits to be paid to Interstate and any deficit to be borne by it. In the year 1936 the California corporation had an operating deficit of $28,100.66 and Interstate paid that amount to the California subsidiary and deducted it as a business expense in its own return. The Supreme Court, sustaining the decisions of the lower courts, held the deduction improper. The decision of the majority of the Court was placed squarely upon the ground that the subsidiary was engaged in a business which the parent corporation could not lawfully do; hence, that the parent corporation could not claim the deduction as an ordinary and necessary expense of its business. The majority opinion pointed out that "an income tax deduction is a matter of legislative grace and that the burden of clearly showing the right to the claimed deduction is on the taxpayer." The Court then said:

This is not the case of a mere branch or division of a business conducted solely for convenience's sake under a separate corporate form. Petitioner did an interstate bus business and was a corporation foreign to California. On the other hand the business of Stages in the tax year in question was both interstate and intrastate. For petitioner to engage in intrastate business in California was, on the findings, illegal.

The Court also pointed out that, even if it could be claimed that the intrastate business done by the subsidiary was legitimate business of the parent corporation, the record failed to show what part of the deficit, if any, resulted from that business as distinguished from the local business, so that no part of the deduction could be allowed.

We have no such facts in the instant case as existed in Interstate Transit Lines, supra. The Commissioner makes no contention that Airco and its subsidiaries operated in the manner shown in our findings of fact because it was illegal for Airco to do such business on its own account. On the contrary, the evidence affirmatively shows that such was not the reason for the manner of operation by Airco and its subsidiaries. The reasons which did prompt such method of operation are fully set out in our findings of fact and need not be repeated here. Moreover, the issue in the instant case is altogether different from the issue in the Interstate case. In the Interstate case the issue was one of deduction for ordinary and necessary business expense. We have no such issue here. The issue is squarely whether the income of the subsidiaries is taxable to them because it was their income, or whether, because they were operated as branches or divisions of Airco and each under a contract which clearly disclosed the relationship, the net income of these subsidiaries was taxable to Airco. Petitioners make no contention that if they lose on this issue they are in the alternative entitled to deduct as business expenses the

amounts of income which they turned over to Airco. They concede this if the issue which is raised by the pleadings is decided against them, then the deficiencies are those which have been determined by respondent. On the other hand, respondent concedes that, if the issue raised by the pleadings is decided in favor of the petitioners, then there are no deficiencies.

As we have already stated, we think the law and the facts are on the side of petitioners, and, therefore, we decide in their favor.

Los Angeles & Salt Lake Railroad Co., 4 T. C. 634, was not cited or relied upon by the Commissioner in his brief. However, we think it is appropriate to point out that one of the issues in that case was similar to that involved in Interstate Transit Lines, supra, and we decided it in the same way as we had decided in the Interstate case. As one of the authorities for such decision, we cited the Interstate case. If the distinction which we have made above between the Interstate Transit Lines case and the instant case is sound, as we think it is, then undoubtedly the same distinction applies to Los Angeles & Salt Lake Railroad Co., supra.

It may be argued, although not stressed in respondent's brief, that consolidated returns by affiliated corporations were denied generally by the Revenue Act of 1934, and, therefore, on that account, if no other, petitioners should not prevail in this proceeding. We are not unmindful of this change in the law effected by the 1934 Act and we have no purpose to impinge upon it. However, we do not believe that this change in the law affected that narrow class of corporations which are conducting their operations in the manner such as described by the Supreme Court in Southern Pac. Co. v. Lowe, supra. The respondent himself evidently so construed the law so far as petitioners were concerned, because it was not until the taxable year 1938 that he refused to recognize Airco's right to return the income of petitioners as its own.

So far as the record shows, the income tax returns of Airco and petitioners for the years 1935, 1936, and 1937 were not disturbed, although they were filed on the same basis as in the taxable year and they were all years subsequent to 1934, when Congress amended the law so as to deny the privilege of filing consolidated returns to affiliated corporations generally. Of course, respondent is not in any way estopped to do what he has done in the instant case by any action of his in the years 1935, 1936, and 1937. Nevertheless, we think that his apparent interpretation of the law in 1935, 1936, and 1937 as it affected petitioners was correct and that the rule announced by the Supreme Court in Southern Pac. Co. v. Lowe, supra, still stands. Reviewed by the Court.

Decisions will be entered for the petitioners. VAN FOSSAN, ARNOLD, and OPPER, JJ., dissent.

HOME GUARANTY ABSTRACT COMPANY, PETITIONER, v. COMMISSIONER

OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9574. Promulgated March 26, 1947.

Petitioner, an abstract company, was incorporated in 1902, and $15,000 was paid in for stock. About $20,000 was expended, up to 1914, upon records. In 1920 an amendment to charter was filed, raising stock to $40,000, based upon a $25,000 increase in value of assets. Offer to sell for $25,000 cash and $25,000 stock in a new company to be formed, was made in 1921. In 1944 the stock was sold for $60,000. The corporation paid dues to clubs for its officers, and from one club definite business was acquired. The purpose of the officers in joining the clubs was not shown. The petitioner filed its excess profits tax return out of time, believing that it owed no such tax, and leaving the return to its auditor to file. Held, only $15,000, in addition to accumulated earnings and profits at the beginning of the respective years allowed by the deficiency notice, should be included in computing equity invested capital; held, further, club dues not allowed as deductions; held, further, no error in addition of penalty for failure to file timely return.

A. E. Brooks, Esq., and Thorp A. Andrews, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.

In this case there are involved deficiencies determined as follows:

The questions presented for our determination are: (1) Whether petitioner is entitled to include $40,000, as equity invested capital, in determining excess profits; (2) whether it is entitled to deduction of certain club dues as business expense; and (3) whether it is liable for a delinquency penalty for failure to file a timely excess profits tax return for 1942. From evidence adduced and a brief partial stipulation of facts, we make the following findings of fact.

FINDINGS OF FACT.

The petitioner was incorporated under the law of Texas in 1902, as "Guaranty Abstract & Title Company," its name being changed about 1940 to "Home Guaranty Abstract Company" by charter amendment. Its business is that of an abstract company, and its business address is Forth Worth, Texas. It filed the Federal tax returns here. in question with the collector for the second district of Texas, at Dallas,

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