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APPEAL OF MATHER PAPER CO. Docket No. 1378. Submitted April 30, 1925. Dezided November 12, 1925.

The taxpayer was one of a group of corporationis. which filed
a consolidated return for the year 1920. Theretofore, Commis-
sioner Williams had held the taxpayer to be affiliated with other:
corporations for the year 1919, and the conditions respecting affili: .
ation were identical as to the year 1920. The taxpayer advanced
the funds with which to pay its share of the tax, which amount
was more than its pro rata share of the consolidated tax. The
parent corporation thereafter became insolvent. Commissioner
Blair, thereafter, determined correctly that the taxpayer was not
affiliated with the parent corporation in the year 1920. Held, that
the determination by Commissioner Blair was not an overruling of
Commissioner Williams with respect to the year 1920. Held, fur-
ther, that in the computation of the deficiency against the tax-
payer, credit should be given for the pro rata portion of the tax
paid by the parent corporation theretofore advanced by the tax-

Joseph M. Dohan, Esq., for the taxpayer.
Percy S. Crewe, Esq., for the Commissioner.

Before JAMES, LITTLETON, Smith, and TRUSSELL. This is an appeal from the determination of a deficiency in income and profits taxes for the calendar year 1920 in the amount of $20,231.05.

FINDINGS OF FACT. The taxpayer is a Pennsylvania corporation organized in 1917 under the name of Shuttleworth, Hogg & Mather, Inc., and, after its incorporation, including the year in question, was engaged in business in Philadelphia as a wholesale and retail dealer in paper and paper bags.

Shuttleworth, Keiller & Co., hereinafter referred to as the Shuttleworth Co., was, during the taxable year in question, a New York corporation engaged in business in New York City as a wholesale and retail dealer in paper and paper bags and as a jobber distributing paper products to other dealers in the same business. That company, through its stockholders, controlled a 'majority of the stock of a number of other corporations, including the taxpayer, engaged in the same line of business in various cities, operated the group of corporations substantially as one unit and, through the medium of said corporations, effected a large sale or distribution of its merchandise.

On the organization of the taxpayer, its stock, consisting of 1,400 shares, was subscribed to in the amount of 50.14 per cent by the Shuttleworth Co., and distributed among its stockholders. The remaining 49.86 per cent was acquired by H. J. Hogg, Charles W. Mather, James J. Gallen, and William S. Graham, in the amounts, respectively, of 279 shåres each by Hogg and Mather, 100 shares by Gallen, and 10 shares by Graham. During the year 1920, Hogg sold 128 shåres of his stock to the stockholders of the Shuttleworth Co., increasing its percentage of control, some time during that year, to:59.28 per cent.

· Under an agreement dated January 17, 1919, in order to assure uniformity of control by the Shuttleworth Co. and to prevent thesale of the stock of the associated companies, except with the knowledge and consent of the Shuttleworth Co., the stockholders of that company transferred to it, as trustee for the respective depositors, all of the shares in the associated companies, including Shuttleworth, Hogg & Mather, Inc., except 28 shares in the last-named com-pany. This agreement, after reciting that, by virtue of the stock: controlled by the Shuttleworth Co., all of the associated companies were managed and directed as to their policies and methodsof operation to the advantage of the depositing stockholders and that the depositors desired to prevent division of their holdingsand to assure a permanent policy in the management, provided that the Shuttleworth Co. should have the exclusive right to vote all the deposited shares and to control, in so far as that was possible through the control of the majority of the stock, all of the business activities of the said associated companies. This agreement remained in effect throughout the taxable year here in question. Tothe 674 shares of the taxpayer originally deposited under this agreement were added 80 shares of the 128 shares disposed of by Hogg in that year. The remaining 48 shares were held by stockholders. of the Shuttleworth Co. without deposit. The 28 shares not originally deposited were owned and held by one Tompkins at the timeof the execution of the agreement and, upon his death, were acquired by other stockholders, who deposited them under the termsof the agreement.

During the year 1920, four of the seven directors of the taxpayer were selected by the Shuttleworth Co., Mather, Hogg, and Gallencomprising the other three directors. During that year Shuttleworth was president, Mather vice president, and Gallen and Graham secretary and treasurer, respectively.

From and after its organization the taxpayer made total purchases on account of its business and purchases from the Shuttleworth Co. as set forth below:

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In general, the method of doing business between the taxpayer and the Shuttleworth Co. was as follows: The Shuttleworth Co. acted as agent of the Union Paper Bag Co., purchased from them and sold to the taxpayer. In so far as requirements could be supplied by the Shuttleworth Co., the taxpayer made all purchases from that source, and fully advised the Shuttleworth Co. of any purchases made elsewhere.

Prior to the taxable year in question the taxpayer made separate and independent income and profits-tax returns to the collector of internal revenue at Philadelphia. On November 1, 1920, and after the Shuttleworth Co. had furnished to the Commissioner certain information in respect of its activities, the Commissioner sent to the Shuttleworth Co. a communication reading in full as follows:



474 West Broadway, New York, N. Y. SIRS : Reference is made to the Affiliated Corporations Questionnaire filed by you for each of the taxable years 1917, 1918 and 1919.

From the facts presented, you are informed that, for the taxable years 1917 and 1918, the companies listed below were affiliated within the purview of Articles 77 and 78 of Regulations 41, Treasury Decision 2662, and Section 240 of the Revenue Act of 1918. For the purpose of consolidation the companies should be divided into two groups. A consolidated excess profits tax return for 1917 and a consolidated income and profits tax return for 1918 should be filed for each group:

Shuttleworth, Keiller and Co. (Parent.)
W. E. Shuttleworth and Co.
Congress Warehouse and Forwarding Co.

Gallen Paper Company.
Shuttleworth Hogg and Mather, Inc.

For the taxable year 1919 the companies listed below were affiliated within the provisions of Section 240 of the Revenue Act of 1918. Therefore, a consolidated income and profits tax return should be filed for these companies if such action has not been taken:

Shuttleworth, Keiller and Co. (Parent.)
W. E. Shuttleworth and Co.
Congress Warehouse and Forwarding Co.
Gallen Paper Co.
Shuttleworth Holly Co.
Shuttleworth, Hogg and Mather, Inc.
Shuttleworth Dumouchel Co.
Shuttleworth Wollny Co., Inc.
George A. Fink Co.

The companies listed below were not affiliated within the purview of the law and regulations hereinbefore referred to and each company should, therefore, file a separate return for each of the taxable years indicated, where such action has not already been taken, and provided they were not affiliated with any other companies not herein considered :

Doscher-Tetamore Co., Inc., 1917, 1918 and 1919.
Shuttleworth Holly Co., 1917 and 1918.
Shuttleworth Dumouchel Co., 1917 and 1918.
Shuttleworth Wollny Co., Inc., 1918.
Kolb Carton Co., 1919.
Berlin Veneer Works, Inc., 1917, 1918 and 1919.
Wm. Spreen and Co., Inc., 1917, 1918 and 1919.

The consolidated excess profits tax returns for the taxable year 1917 should be forwarded direct to this office within thirty days from the date of this letter.

A copy of this letter should be attached to each return when filed,
In your reply, refer to IT: SA:CR: Af-MLS.

(Signed) G. V. NEWTON,

Deputy Commissioner. During the year 1920 the stockholders and the respective percentages of stock held by them in the Shuttleworth Co. and the taxpayer were as follows:

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W. E. Shuttleworth...
E. G. Shuttleworth..
Frank Keiller.....
Margaret Keiller.
Russell Keiller....
Florence Lee.. .
C.H. Shuttleworth
C. H. Shuttleworth, In
J. L. Wolff.-
John Weidman...
C. V. Shuttleworth.
Clinton Cuttrell.
R. H. Jackson...
M. A. Paulsen.
J. D. Tompkins..
H. Beisler.
Shuttleworth Ke
H. J. Hogg..---
C. W. Mather..
J.J. Gallen.--.
W.8. Graham.

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For the taxable year 1920 the taxpayer filed a return on Form 1122, notifying the collector at Philadelphia of the filing of a consolidated return with the Shuttleworth Co. with the collector at New York, and the Shuttleworth Co. duly filed the consolidated return above mentioned. Form 1120, as issued by the Commissioner for the use of corporation taxpayers for the year 1920, instructed corporations required to file consolidated returns as follows:

That the parent company should file the consolidated return in the office of the collector at the place where its principal office was located and that the subsidiaries should file Form 1122 in the offices of the collectors of their respective districts.

That if the stock ownership was between 95 per cent and 50 per cent, the parent company must furnish the information called for in the return by questions 11 to 14, page 3. . .

That the department preferred that the total tax assessed against the affiliated companies be allocated to and paid by the parent company to the collector of its district.

The information return of subsidiary or affiliated corporation, Form 1122, contained the following instruction:

The department prefers that the entire tax shown on a consolidated return be paid by the parent or principal reporting corporation instead of being apportioned among the corporations composing the affiliated group.

The official Form No. 1120, filed for the year 1920 by the Shuttleworth Co. as its consolidated return (including taxpayer), directed the corporation to state whether it owned or controlled over 50 per cent of the stock of another corporation, and, if so, to state whether the corporation had filed an affiliated corporations questionnaire for 1917 or subsequent taxable years, and stated that, if such a questionnaire had been filed, a further questionnaire need not be filed; it further required the parent company to state whether substantially the same conditions as set forth in such prior questionnaire obtained during the taxable year 1920.

The Shuttleworth Co. answered all questions in the affirmative and filed no further questionnaires for the year 1920.

The Shuttleworth Co., prior to the filing of the consolidated return as above set forth, notified each of the companies proposed to be included therein that a consolidated return was required and requested each of them to send statements to it, together with their checks for the amount of tax shown to be due upon a separate computation of their tax liability. The Congress Warehouse & Forwarding Co.; George A. Fink Co.; Shuttleworth, Holly Co.; W. E. Shuttleworth & Co.; Shuttleworth, Dumouchel Co.; Shuttleworth Wollny Co.; Gallen Paper Co.; and Shuttleworth, Hogg & Mather, Inc., forwarded such statements, together with remittances of the

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