Morrisdale Coal Co. v. Commissioner of Internal Rev.

• Decision Date: 06 May 1938
• Docket Number: No. 5991-5993.,5991-5993.
• Citation: 97 F.2d 272
• Parties: MORRISDALE COAL CO. v. COMMISSIONER OF INTERNAL REVENUE. MORRISDALE LAND CO. v. SAME. MORRISDALE SUPPLY CO. v. SAME.
• Court: U.S. Court of Appeals — Third Circuit

97 F.2d 272 (1938)

MORRISDALE COAL CO. v. COMMISSIONER OF INTERNAL REVENUE.

MORRISDALE LAND CO. v. SAME.

MORRISDALE SUPPLY CO. v. SAME.

Nos. 5991-5993.

Circuit Court of Appeals, Third Circuit.

May 6, 1938.

COPYRIGHT MATERIAL OMITTED

George E. H. Goodner, of Washington, D. C., for petitioners.

James W. Morris, Asst. Atty. Gen., and Sewall Key and Ellis N. Slack, Sp. Assts. to Atty. Gen., for respondent.

Before BUFFINGTON, DAVIS, and BIGGS, Circuit Judges.

BIGGS, Circuit Judge.

It is agreed by the parties that the issues involved in cases No. 5992 and No. 5993 are precisely those raised by the assignments of error in case No. 5991. We therefore will deal with the facts and the law relating to case No. 5991, since our rulings in this case, being equally applicable to the first two cases referred to, will dispose fully of the issues there presented.

In case No. 5991 the issues involved are set out clearly in the assignments of error.¹ We think that the questions of law raised can be disposed of best by dealing with the assignments of error seriatim. A preliminary statement of facts is essential, however, in order that the circumstances of the case may be understood.

The Board of Tax Appeals determined that deficiencies were due from the petitioner by reason of income and excess profits tax liability for the years ending June 30, 1917 to 1923, inclusive, and for the year ending June 30, 1927.

The petitioner is a corporation of the State of Pennsylvania and at the times with which we are concerned was engaged in the mining of coal in Clearfield county, Pennsylvania. When it was organized in 1894 its stock was owned by two brothers, B. Frank Clyde and William P. Clyde, and Frank H. Wigton was employed as the executive head of the company entitled to receive compensation by way of the stock of the corporation. B. Frank Clyde died in 1906. William P. Clyde, desiring to dispose of all of his business interests so that he might retire, upon August 3, 1906, acting with the executors of his brother's estate, made an agreement with Wigton whereby it was agreed that all of the real estate, mining plants and railroad cars belonging to the petitioner should be transferred to a trustee for the purpose of effecting the terms of a contemplated sale from Clyde and Clyde's executors to Wigton for the sum of $125,000. It was agreed by the parties that until Wigton should carry out the terms of the agreement and pay the stipulated sum, the trustee should lease to him the real estate, mining plants and railroad cars referred to at a stipulated rental which should serve in lieu of interest upon the sum of the purchase price. The agreement also provided that Wigton should purchase from Clyde and Clyde's executors, who must sell, at the price of $46.50 per share, all of the stock of Morrisdale Supply Company, a New Jersey company, which had been incorporated in order to serve as a commissary company for the sale of merchandise and supplies to the employees of the Coal Company. The agreement also provided that upon its execution, all of the stock of the Coal Company owned by the Clyde brothers should be transferred to Wigton for the consideration of a dollar.

The terms of this agreement were extended to August 1, 1914, by supplemental contracts entered into by the parties.

In accordance with the provisions of the agreement of August 3, 1906, the petitioner, the Coal Company, transferred to the trustee the property heretofore referred to and the lands of the Coal Company. Upon August 13, 1906, the Coal Company and Wigton entered into an agreement whereby Wigton agreed to sell and the Coal Company agreed to purchase the real estate and personal property referred to in the agreement of August 3, 1906, for the sum of $165,000. This agreement also provided that the stipulated purchase price of $165,000 should be paid in notes, having a face value of $40,000, bearing 6 per cent. interest, payable monthly, and that the balance of the purchase price be paid within a year. The contract also provided that the trusteed property should be leased to the Coal Company at a rental of $625 per month, which was the sum of the rental required for it from Wigton by the Clyde brothers under the agreement of August 3, 1906.

Upon July 7, 1914, Clyde and Clyde's executors with Wigton sent a written communication to the trustee, to the effect that the lands and premises known as the "Morrisdale Mines property," with certain exceptions, and not including the grant of any personal property, should be transferred by the trustee for the sum of $200,000 to a company about to be created, to be known as the "Morrisdale Land Company." The sum of the consideration, viz., $200,000, was to be secured by a mortgage on the real property and bonds to the extent of $200,000 were then to be issued. Of these bonds, $115,000 face value were to be delivered immediately to Wigton and the remaining bonds were to be sent to the Philadelphia Trust Safe Deposit and Insurance Company to be held by it for the purposes of the trust, set forth in the agreement of August 3, 1906.

Two days later, as contemplated, Wigton organized the Morrisdale Land Company. All of the capital stock of this company, viz., $5,000 par value, was issued to him. The trustee thereupon conveyed all of the real property, which he held under the agreement of August 3, 1906, to the Land Company. The property thus conveyed included interests in coal lands and the fee-simple title to two hundred forty two acres of surface land. Upon July 9, 1914, there were buildings and coke ovens standing upon this surface land. The mortgage was given as contemplated and the bonds secured thereby were issued according to plan.

(1) As to the Question of Affiliation of the Coal Company with the Land Company and the Supply Company during the Calendar Year, 1917.

The Board held that the Coal Company was not affiliated with the Land Company and the Supply Company for tax purposes during the calendar year 1917, though the Land Company and the Supply Company were so affiliated. The petitioner contends that all three companies were affiliated throughout the year 1917.

The applicable statute is the Revenue Act of 1921, c. 136, 42 Stat. 227,² which provides for the consolidation of corporations for excess profits tax purposes in 1917. The pertinent parts of the statute are as follows:

"Sec. 1331. (a) That Title II of the Revenue Act of 1917 shall be construed to impose the taxes therein mentioned upon the basis of consolidated returns of net income and invested capital in the case of domestic corporations and domestic partnerships that were affiliated during the calendar year 1917.

"(b) For the purpose of this section a corporation or partnership was affiliated with one or more corporations or partnerships (1) when such corporation or partnership owned directly or controlled through closely affiliated interests or by a nominee or nominees all or substantially all the stock of the other or others, or (2) when substantially all the stock of two or more corporations or the business of two or more partnerships was owned by the same interests: Provided, That such corporations or partnerships were engaged in the same or a closely related business, or one corporation or partnership bought from or sold to another corporation or partnership products or services at prices above or below the current market, thus effecting an artificial distribution of profits, or one corporation or partnership in any way so arranged its financial relationships with another corporation or partnership as to assign to it a disproportionate share of net income or invested capital. * * *

"(c) The provisions of this section are declaratory of the provisions of Title II of the Revenue Act of 1917." 42 Stat. 319.

The parties agree, and the Board found, that throughout 1916 and 1917 Wigton owned all of the stock of the three companies involved, other than directors' qualifying shares, and that therefore the first condition of affiliation clearly was fulfilled. The Board also found that the Coal Company, as the lessee of the Land Company, was mining coal at a royalty rate of 8 cents per ton and that the Supply Company sold merchandise to the employees of the Coal Company in return for token money issued by the Coal Company.

The petitioner lays emphasis upon its contention that the royalty rate of 8 cents per ton charged by the Land Company to the Coal Company, as operating lessee, was substantially lower than the ordinary royalty rate for similar mining operations in the Clearfield district at that time and that therefore the Coal Company bought from the Land Company products at prices "below the current market, thus effecting an artificial distribution of profits" within the terms of the statute. The petitioner contends that the prevailing royalty rate was 10 cents per ton in the Clearfield district.

In respect to this contention the Board stated as follows:

"What were the circumstances and conditions, the terms of the uniform lease agreements under which it might be said that there was a `prevailing royalty rate' at 10¢ per ton in the Clearfield District of Pennsylvania at March 1, 1913? There is no answer to be found in the record. Are the Coal Company's leases which it owned at March 1, 1913, comparable in the rights they confer and the obligations they impose upon the lessee with the uniform lease agreements which, it might be said, establish a `prevailing royalty rate'? That question is unanswered in the record. The leases are not in evidence, and all that we have been told about them is they run to exhaustion of the coal and provide for royalty payments of 8¢ per ton of coal mined. Not knowing what the provisions of the Coal Company's leases are, or the provisions of the uniform agreements which establish a `prevailing royalty rate', we are certainly in no position to make a comparison of the former with the latter for the purpose of determining...