Opinion
Docket No. 375-R.
1950-06-30
LOWELL WOOL BY-PRODUCTS COMPANY, PETITIONER, v. WAR CONTRACTS PRICE ADJUSTMENT BOARD, RESPONDENT.
Edward C. Park, Esq., for the petitioner. Frederick N. Curley, Esq., for the respondent.
The petitioner is a limited partnership, with two general partners with power of control over the business, and five limited partners with power to dissolve the partnership at any time. During the fiscal year ending December 31, 1943, the petitioner had renegotiable sales of less than $500,000, but four of its limited partners were members, as wives, mother, and son-in-law, of three families which comprised the controlling ownership and directorship of Nichols, a corporation which had renegotiable sales exceeding $500,000, and the fifth limited partner was the wife of the president-treasurer of Alexander, a corporation, all of the preferred stock (non-voting) and half of the common stock of which was owned by members of the three families. The limited partners were entitled to receive 97.5 percent of petitioner's profits, the remaining 2.5 percent going to the general partners who were officers of Providence, another corporation owned by the three families. Petitioner's business was extracting and refining wool grease from liquors used in scouring wool. It was incidental to the wool combing business in which Providence and Alexander were engaged. In 1943, 95 percent of wool combing done by Providence was for Nichols, a purchaser of combed wool. Held, that petitioner and Nichols were in 1943 under common control within Section 403(c)(6) of the Renegotiation Act and its profits were renegotiable. Edward C. Park, Esq., for the petitioner. Frederick N. Curley, Esq., for the respondent.
This case involves war contract renegotiation. The period involved is the fiscal year ending December 31, 1943. The respondent determined that the petitioner's renegotiable profits in 1943 were excessive in the principal amount (before any adjustment for State taxes measured by income) of $15,000. The principal question involved is whether, within the meaning of section 403(c)(6) of the Renegotiation Act, petitioner was under the control of or under common control with Nichols & Co., Inc., a corporation. A stipulation of facts was filed which is adopted by reference. Only such facts, therein agreed, as it is considered necessary to set forth in examination of the issues will, with findings from evidence adduced, be stated in our findings of fact.
FINDINGS OF FACT.
The petitioner is a limited partnership organized in May 1943. It is and was during the period involved engaged in the business of extracting and refining wool grease from liquors made in scouring wool. Its place of business in Olneyville, Providence, Rhode Island. Petitioner's two general partners are Theodore W. Jenks and Foster Best. Its five limited partners are S. Kathaleen Alexander, Doris A. Nichols, Eleanor L. Hackett, Celia Wellman and George B. Bullock, Jr. The partners are entitled to share in the profits as follows:
+-------------------------------+ ¦Partner ¦Per cent¦ +----------------------+--------¦ ¦Foster Best ¦1.25 ¦ +----------------------+--------¦ ¦Theodore W. Jenks ¦1.25 ¦ +----------------------+--------¦ ¦S. Kathaleen Alexander¦19.50 ¦ +----------------------+--------¦ ¦Doris A. Nichols ¦11.70 ¦ +----------------------+--------¦ ¦Eleanor L. Hackett ¦27.30 ¦ +----------------------+--------¦ ¦Celia Wellman ¦14.00 ¦ +----------------------+--------¦ ¦George B. Bullock, Jr ¦25.00 ¦ +-------------------------------+
Jenks handled the financial and administrative business end of the limited partnership and Best the technical end, as far as his services were required. Jenks paid the bills, made sales, selected customers and determined prices.
The articles of limited partnership provide that a limited partner shall take no part in the control of the business. The four limited partners who were women took no part in the conduct of the business of petitioner. Throughout 1943 Bullock was in the United States Navy. The articles also provide that the limited partners may not transact any partnership business or act in any way in behalf of the partnership also, that the partnership shall be dissolved at any time upon the unanimous agreement of all limited partners; also, that the capital with which said partnership shall commence business is $30,000 in cash, and is to be contributed by the limited partners, as follows:
+-------------------------------+ ¦S. Kathaleen Alexander ¦$6,000 ¦ +-----------------------+-------¦ ¦Doris A. Nichols ¦3,600 ¦ +-----------------------+-------¦ ¦Eleanor L. Hackett ¦8,400 ¦ +-----------------------+-------¦ ¦Celia Wellman ¦4,820 ¦ +-----------------------+-------¦ ¦George B. Bullock, Jr. ¦7,180 ¦ +-----------------------+-------¦ ¦ ¦$30,000¦ +-------------------------------+
Jenks and Best were also officers of Providence Wool Combing Co., Inc., which operated a combing mill in Olneyville, Rhode Island. Neither Jenks nor Best, however, owned any shares in Providence Wool Combing Co., Inc., or in Nichols & Co., Inc., a Massachusetts corporation in which some of the limited partners owned shares (hereinafter sometimes called Nichols), or in any other corporation in which some of the limited partners owned shares.
Jenks had been in the wool combing business since about 1919, at the same location where petitioner is located. In 1919 he was employed by Hills & Nichols, a partnership, which after about 1927 was not very successful. Later he was employed by Hills. In 1940 Providence Wool Combing Company (hereinafter sometimes called Providence) was formed and in 1940 it purchased the wool combing plant of Hills & Nichols. Jenks continued with Providence. The Nichols in Hills & Nichols was a brother of John H. Nichols.
The petitioner was organized under the following circumstances:
Both Providence Wool Combing Co., Inc., and Alexander Wool Combing Company (hereinafter sometimes called Alexander) were in 1942 engaged in combing grease wool into tops and noils. Preliminary operations included scouring the wool. In that process scouring liquor was produced. Providence Wool Combing Co., Inc., had acquired in 1941 certain equipment for the extraction of wool grease from the scouring liquor. Alexander Wool Combing Company had acquired such equipment in 1942. In 1942 both companies as part of their operations extracted wool grease from the scouring liquors produced and sold the grease. Prior to the acquisition of such equipment both companies had treated the scouring liquor as a waste product which was allowed to go down the drain.
Shortly prior to the organization of Lowell Wool By-Products Company, the Boston Quartermaster Price Adjustment District Office had ruled that grease sales by Alexander Wool Combing Company and Providence Wool Combing Co., Inc., should be treated as a credit against costs for the purposes of renegotiating alleged excessive profits.
It had also ruled, over the objections of the companies, that the profits they had realized in 1942 were excessive. These rulings were believed by the officers of both companies to mean in effect that any profits realized on grease sales were to be paid over to the United States so that no return on the capital investment in the grease-extracting equipment could be realized. The officers of both companies were considering, therefore, selling the equipment and abandoning the business of extracting grease from scouring liquor. Both companies had been represented by the same counsel in conferences with the officers of the Boston Quartermaster Price Adjustment District Office. Counsel suggested that, instead of selling the equipment to persons who would not use it at the plants of the respective companies, a sale be made to a company which would contract to take the scouring liquor from the plant and extract from it the wool grease which at that time was in demand for war purposes. Counsel proposed that a single company be formed for this purpose. Lowell Wool By-products Company, the petitioner, was the company formed. Pursuant to the foregoing plan, Lowell Wool By-Products Company used the capital contributed by the limited partners to purchase from Providence Wool Combing Co., Inc., and Alexander Wool Combing Company their grease-extracting equipment.
S. Kathaleen Alexander is the wife of Albert I. Alexander, who is the president and treasurer of Alexander Wool Combing Company. Doris A. Nichols is the wife of John H. Nichols, Jr., a director of Nichols & Co., Inc. Eleanor L. Hackett is the wife of Robert P. Hackett, a director and vice president of Nichols & Co., Inc. Celia Wellman is the mother of Arthur O. Wellman, the president and a director of Nichols & Co., Inc. George B. Bullock, Jr., is the son-in-law of Arthur O. Wellman.
The capital stock of Providence Wool Combing Co., Inc., was held by the following persons in 1943:
+-----------------------------------------------------------------------------+ ¦Trustees for Marjorie W. Bullock, a daughter of Arthur O. Wellman ¦170 shares¦ +------------------------------------------------------------------+----------¦ ¦Trustees for Arthur O. Wellman Jr., a son of Arthur O. Wellman ¦150 shares¦ +------------------------------------------------------------------+----------¦ ¦Trustees for John G. Wellman, a son of Arthur O. Wellman ¦150 shares¦ +------------------------------------------------------------------+----------¦ ¦Robert P. Hackett, as guardian of Robert P. Hackett, Jr., a son of¦ ¦ +------------------------------------------------------------------+----------¦ ¦Robert P. Hackett ¦150 shares¦ +------------------------------------------------------------------+----------¦ ¦Robert P. Hackett, as guardian of Sarah E. Hackett, a daughter of ¦ ¦ +------------------------------------------------------------------+----------¦ ¦Robert P. Hackett ¦150 shares¦ +------------------------------------------------------------------+----------¦ ¦Doris A. Nichols ¦130 shares¦ +-----------------------------------------------------------------------------+
The capital stock of Alexander Wool Combing Company was held by the following persons in 1943:
+--------------------------------------------------------------+ ¦Common ¦ ¦ +----------------------------------------------------+---------¦ ¦ ¦ ¦ +----------------------------------------------------+---------¦ ¦Doris A. Nichols ¦30 shares¦ +----------------------------------------------------+---------¦ ¦Robert P. Hackett, guardian of Robert P. Hackett, Jr¦35 shares¦ +----------------------------------------------------+---------¦ ¦Robert P. Hackett, guardian of Sarah E. Hackett ¦35 shares¦ +----------------------------------------------------+---------¦ ¦Trustees for Arthur O. Wellman, Jr ¦50 shares¦ +----------------------------------------------------+---------¦ ¦Trustees for John G. Wellman ¦50 shares¦ +----------------------------------------------------+---------¦ ¦Albert I. Alexander, Jr ¦40 shares¦ +----------------------------------------------------+---------¦ ¦S. Kathaleen Alexander ¦80 shares¦ +----------------------------------------------------+---------¦ ¦Albert I. Alexander, 3rd ¦80 shares¦ +----------------------------------------------------+---------¦ ¦ ¦ ¦ +--------------------------------------------------------------+
Preferred Doris A. Nichols 30 shares Robert P. Hackett, Guardian of Robert P. Hackett, Jr 35 shares Robert P. Hackett, guardian of Sarah E. Hackett 35 shares Trustees for Arthur O. Wellman, Jr 50 shares Trustees for John G. Wellman 50 shares
The preferred stock had no voting rights.
Nichols & Co., Inc., is a ‘top maker‘ which means that it buys grease wool, which it causes to be sorted, scoured, graded and carded into wool ‘tops,‘ through wool combing mills, on a commission basis.
Nichols & Co., Inc., in 1943 had 3,000 common shares outstanding. Neither S. Kathaleen Alexander nor any member of her family owned any shares of Nichols & Co., Inc. Doris A. Nichols owned 71 common shares, and her husband owned 145 individually and 26 as guardian. Eleanor L. Hackett owned 40 common shares, and her husband owned 205 individually and 80 as guardian. Celia Wellman owned no common shares of Nichols & Co., Inc., but was the beneficiary of a trust owning 77 common shares. George B. Bullock, Jr., owned no shares of Nichols & Co., Inc., but his wife, Marjorie W. Bullock, owned 43 common shares and was the beneficiary of two trusts holding in the aggregate 222 common shares. All the shares of common stock of Nichols & Co., Inc., not held by the limited partners of Lowell Wool By-Products Company were held by other members of the Nichols, Hackett, and Wellman families or by trustees for their benefit.
The trustees of each of the separate trusts for Marjorie W. Bullock, Arthur O. Wellman, Jr., and John G. Wellman, mentioned in the three preceding paragraphs, were in each case Arthur O. Wellman, sole trustee, until July 15, 1943, when Old Colony Trust Company became a co-trustee, and July 22, 1943, when Paul M. Goddard became a co-trustee. Those three remained as co-trustees during the balance of 1943.
The directors of Nichols & Co., Inc., in 1943, were Arthur O. Wellman, Robert P. Hackett, John H. Nichols, and John H. Nichols, Jr. The officers were Arthur O. Wellman, president; John H. Nichols, treasurer; Robert P. Hackett, vice president; John H. Nichols, Jr., assistant treasurer; Robert P. Kellaway, clerk; and W. Brewster Southworth, assistant treasurer.
The directors of Providence Wool Combing Co., Inc., were Theodore W. Jenks, Foster Best, and John H. Dixon. The officers were Theodore W. Jenks, president and treasurer, and Foster Best, secretary.
The directors of Alexander Wool Combing Company were Albert I. Alexander, Jr., S. Kathaleen Alexander, and Henry Bright. The officers were Albert I. Alexander, president and treasurer, S. Kathaleen Alexander, vice president, and Henry Bright, clerk.
No limited partner or any relative or friend of a limited partner ever directed Jenks as to how to conduct the business of petitioner and he and Best conducted it without any directions from anyone else. Jenks managed Providence in about the same manner as he managed the petitioner.
There was a vote of the board of directors of Providence when the grease business was transferred from Providence to petitioner, and the stockholders of Providence ratified. Jenks, as president of Providence, took his instructions from the stockholders of Providence. The stockholders elected directors and the directors elected Jenks. Providence had a manager of the mechanical department. In 1943, 95 percent of the wool combing Providence did was for Nichols.
The customers to whom the petitioner sold were not customers of Providence, Nichols, or Alexander. The grease business was incidental to the combing business. Operation of the machine required, for each shift, only one man. It was not a highly skilled occupation. The equipment occupied a small room about 12 by 16 feet in the back part of the Providence mill. Nichols had never engaged in the grease business.
Prior to the formation of petitioner, Arthur O. Wellman, Sr., the president of Nichols, suggested by telephone to Jenks that he come to Boston. Jenks went to the office of Edward C. Park, who was attorney for the petitioner, Nichols, and Providence; also, Alexander. There was talk about the formation of the petitioner partnership. Jenks furnished figures and description of the grease extraction plant. There was discussion, including mention of Best's name as the other general partner. There had prior to that time been discussion as to general partner. There had prior to that time been discussion as to the effect of the ruling of the Boston Port Price Adjustment District Board treating grease sales as a credit against costs, and whether Providence should continue to operate the grease extraction plant. Jenks did not talk with Albert I. Alexander. He received the partnership agreement in a letter from Park. He paid a bill which Park rendered to the petitioner. He first learned that he was a general partner when he received the agreement of partnership.
The petitioner's gross sales for the fiscal year ending December 31, 1943, were $98,390.07 before discounts of $620.15 taken by customers, leaving sales after discounts, $97,769.92. The renegotiable sales of Nichols in 9143 were substantially in excess of $500,000.
The petitioner's renegotiable profits in 1943 were excessive in the principal amount (before any adjustment for State taxes measured by income) of $15,000.
OPINION.
DISNEY, Judge:
Since we have found that the petitioner's gross sales, after discounts of $620.15 for the fiscal year, are $97,769.92, it is apparent therefore that its renegotiable profits are no more than that amount, therefore are less than $500,000, and that the petitioner is, within the language of section 403(c)(6) of the Renegotiation Act, exempt from renegotiation, unless, under the same section, as the respondent contends, it was ‘under the control of or controlling or under common control with‘ Nichols, the renegotiable sales of which were more than $500,000. We, therefore, examine the situation as to such common control— for it is not argued that petitioner controls or is under the control of Nichols.
The petitioner argues, first, that control means legally enforceable control. Though conceding that the phrase ‘under common control‘ has no fixed meaning, further, that ‘control‘ of a corporation, or common control of two, amy be used more broadly than to consider it to be only in those who own a majority of the stock, the petitioner nevertheless says that the situation here should be controlled by Handy & Harman v. Burnet, 284 U.S. 136, holding that, for the purpose of consolidation of tax returns, ‘control‘ may not depend upon control of stock without title, beneficial ownership or legal means to enforce it, and under Atlantic City Electric Co. v. Commissioner, 288 U.S. 152, is not satisfied by acquiescence or business considerations without binding force, in the absence of legal title or beneficial ownership.
The respondent, Contra, points out that regulations promulgated by the War Contracts Price Adjustment Board, section 348.4 as to tests of control, provide, inter alia, that ‘actual control is a question of fact‘; further, that such regulation was promulgated under the Renegotiation Act of 1942, and acquires force of law because that Act was reenacted without change in this respect in 1943. Congressional intent, the respondent argues, was to permit renegotiation of any unit operated in common with another, as it is contended there is here. After study of the cases, we have concluded that those involving consolidated returns, under different statutes, do not here control. In Hug Co. v. War Contracts Price Adjustment Board, 14 T.C. 621, we recently took the view that actual control, and not legally enforceable control, is the proper test under the Renegotiation Act. We follow that view here. We, therefore, proceed to examine the facts as to whether there was in fact common control of Nichols and petitioner. The petitioner further argues that there was none, even if legally enforceable control is not the criterion, for it is contended, in substance, by petitioner that it can only at the most be said that those controlling petitioner were subject to mere possibility of influence in fact unexercised by those controlling Nichols. Moreover, petitioner says ‘common control‘ means something more than control by the same persons, and does not apply to two businesses unrelated to each other. We have on the last point in Moening v. War Contracts Price Adjustment Board, 14 T.C. 589, in effect, held otherwise, for there we held there was common control where two different businesses were owned by the same parties, equal general partners.
The facts, duly stipulated and found, disclose that Nichols & Co., Inc., was owned and controlled by members of the Nichols, Wellman and Hackett families, including the son-in-law of Arthur O. Wellman, president-director; that those families furnished all capital and all of the limited partners of petitioner, except S. Kathaleen Alexander, but that she is the owner of 20 percent of the common stock in, and wife of the president-treasurer of Alexander Wool Combing Company, owned by the Nichols, Wellman and Hackett families as to all of the preferred stock (which was non-voting stock) and half of the common stock; also, that the general partners of petitioner were officers of Providence, owned by the Wellman, Hackett and Nichols families; that the limited partners of petitioner had power at any time to terminate the partnership at will and thus to control it; that Jenks had been employed from about 1919 to about 1927 by a firm, one of whose two partners was a brother of John H. Nichols, director of Nichols & Co., Inc., and from 1940 by Providence; and that the grease business was incidental to the wool combing business and was carried on by petitioner in a small room in the back of the premises occupied by Providence. The machine used required only one man on each shift with no requirement of skilled labor. Petitioner was formed by counsel common to Nichols, Providence, and Alexander, because of question arising as to renegotiation of Alexander and Providence, and in order to prevent abandonment of the grease extraction business.
From all of these circumstances and all the facts before us, we consider it clear that it would be altogether unrealistic to hold that there was not common control over Nichols and petitioner. That the Nichols, Wellman, and Hackett families could control the situation, at all times, and the existence of petitioner, as well as Nichols, seems to us, upon the factual basis adopted in the Hug case, obvious. That in the period here involved they did not in fact exercise such control is not seen as the important element. They had power of control, which in our view is the concept of the statute, and within its object. Petitioner on brief agrees that the interpretation of ‘control‘ or ‘'common control’ * * * must depend upon the mischief which it was intended to prevent.‘ We think that it was within the intent of Congress to prevent the division of a business otherwise renegotiable among members of one family or organization. The petitioner's view, in substance, that there was no entity in the members of the three families is met, we think, by the manner in which they participate in the various companies, including petitioner. The organization of these different companies by members of the same families, including wives, a mother and son-in-law, as stockholders, is proof of intent to control them, and may not be overlooked with any regard for realism. The same principle which requires family matters to be strictly scrutinized indicates that we should not fail to recognize the fact of influence of the family relation upon the members. We conclude and hold that Nichols and petitioner were under actual common control, within the meaning of section 403(c)(6) of the Renegotiation Act; therefore that petitioner is subject to renegotiation.
Reviewed by the Court.
An order will be entered, accordingly, that the petitioner's renegotiable profits in 1943 were excessive in the principal amount (before any adjustment for State taxes measured by income) of $15,000.