[1319]*1319OPINION.
Littleton :
Three issues are raised in these proceedings as follows:
1. Were tlie Lafayette Bank and the South Side Bank affiliated with the petitioner for 1919 and 1920?
2. Did the petitioner acquire intangible assets by the issuance of capital stock therefor at date of organization, and if so, what was its value at the date of such acquisition?
3. In the event the Board should hold that the petitioner did not acquire intangible assets by the issuance of capital stock therefor, is the petitioner entitled to a paid-in surplus on account of intangibles paid in as a result of its formation?
Affiliation is claimed under the provisions of section 240 (b), Kevenue Act of 1918, which reads as follows:
For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
There is no contention advanced in these proceedings that there was a common ownership by the same stockholders in the three corporations sufficient to justify affiliation under the foregoing provisions ; in fact, the evidence presented shows only one stockholder [1320]*1320common to the three corporations and his holdings were negligible as compared with the total stock outstanding. Likewise, it is not contended or shown that any one of the corporations owned stock in either of the other corporations. In effect, the claim advanced is that substantially all of the capital stock of the Lafayette Bank and the South Side Bank was controlled by the Lafayette-South Side Bank and that the parties owned its stock in such a manner as to satisfy the control contemplated by section 240 (b). This control, the petitioner says, was brought about through the amalgamation agreement of the two old banks and the trust agreements executed in connection therewith.
When the foregoing agreements were executed and carried into effect, the stockholders of the Lafayette Bank had a right to receive 371/2 per cent of the stock of the petitioner and the stockholders of the South Side Bank 6214 per cent.
Prior to the formation of the petitioner' bank, the stockholders of the Lafayette Bank assigned and delivered their stock to a group of trustees who caused the same to be canceled and new stock issued in the name of the trustees. The trustees then issued trust certificates to the old stockholders in lieu of the stock formerly held by them. Upon the formation of the petitioner bank, its stock, which would otherwise have been issued to the old stockholders of the Lafayette Bank, was issued to the aforementioned trustees, who in turn caused stock certificates to be issued to the appropriate old stockholders.
A similar method was pursued in the case of the South Side Bank, trustees being selected who functioned in a like manner to those selected in the case of the Lafayette Bank. In each case authority was given each group of trustees, under the trust agreements, to vote the stock of the old banks “ in favor of any resolution necessary to ratify said agreement or to carry it out.” Trustees testified at the hearing that they could vote this stock only in accordance with the authority outlined in the trust agreements.
The question is whether through the medium of the two groups of trustees, acting in conformity with their respective trust agreements and through the amalgamation agreement control existed necessary to bring about affiliation of the three companies.
In the Appeal of Isse Koch & Co., 1 B. T. A. 624, the Board defined “control ” as follows:
There is no authority in the section of law referred to or in its context so far as we can see, for assuming that Congress intended to use the word “ control ” in other than its ordinary and accepted sense. On the other hand, we believe that a proper construction of the statute, if it is to serve the purpose for which it was intended, requires us to hold that the “ control ” mentioned therein means actual control, regardless of whether or not it is based upon legally enforceable means. The control, however, must be shown to be a [1321]*1321genuine and real control actually exercised, and it can n<jt be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation.
Further, the Board said in Appeal of Canyon Lumber Co., 1 B. T. A. 473, that:
The control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.
We must, therefore, determine whether there was real control, actually exercised, of substantially all the voting rights of the stock of the Lafayette and South Side Banks by the Lafayette-South Side Bank. First, we find that in the trust agreement under which new stock was to be issued to the trustees, authority was given to the trustees to vote the stock for certain purposes, namely, in favor of any 'resolution necessary to ratify said agreement or to carry it out, and there is no evidence of unlimited authority vested in the trustees to vote the stock for any and all purposes. The old banks were to continue in existence for a certain period during which various acts must necessarily be performed incident to liquidation and disposal of their assets. The interest of the petitioner in the acts effecting the liquidation was that the terms of the so-called amalgamation or merger agreement be carried out — particularly, that nothing be done in liquidation that would be to the detriment of the new bank, and that the “ going-concern ” value of the old banks be effectually transferred to the petitioner in so far as it was desired by the petitioner. To this extent, the trust agreements provide a means by which control is maintained by the trustees over the voting rights of the stock, but this is very far from saying that there was a genuine control for all purposes. Conceivably, many acts might have been necessary in connection with the liquidation of the old companies which did not affect the agreement which gave rise to the new bank, and, as to these, we have no evidence that the trustees had any right to vote the stock as trustees, and hence no control to this extent.
Secondly, the express words and tenor of the agreement are to the effect that the petitioner desired only certain assets of the old banks and great care was exercised in seeing to it that only approved assets came to the petitioner. Special guarantee funds were provided to protect the petitioner against certain contingent losses and also that losses occurring during the first three years on account of certain assets should be borne by the old banks. In other words, there is abundant evidence that the petitioner was to acquire certain assets and that that part of the business which it did not desire was to remain separate and distinct from the petitioner. What the petitioner did not take over remained as the property of the old banks to be disposed of by them. Losses suffered would be chargeable to [1322]*1322the old.
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[1319]*1319OPINION.
Littleton :
Three issues are raised in these proceedings as follows:
1. Were tlie Lafayette Bank and the South Side Bank affiliated with the petitioner for 1919 and 1920?
2. Did the petitioner acquire intangible assets by the issuance of capital stock therefor at date of organization, and if so, what was its value at the date of such acquisition?
3. In the event the Board should hold that the petitioner did not acquire intangible assets by the issuance of capital stock therefor, is the petitioner entitled to a paid-in surplus on account of intangibles paid in as a result of its formation?
Affiliation is claimed under the provisions of section 240 (b), Kevenue Act of 1918, which reads as follows:
For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.
There is no contention advanced in these proceedings that there was a common ownership by the same stockholders in the three corporations sufficient to justify affiliation under the foregoing provisions ; in fact, the evidence presented shows only one stockholder [1320]*1320common to the three corporations and his holdings were negligible as compared with the total stock outstanding. Likewise, it is not contended or shown that any one of the corporations owned stock in either of the other corporations. In effect, the claim advanced is that substantially all of the capital stock of the Lafayette Bank and the South Side Bank was controlled by the Lafayette-South Side Bank and that the parties owned its stock in such a manner as to satisfy the control contemplated by section 240 (b). This control, the petitioner says, was brought about through the amalgamation agreement of the two old banks and the trust agreements executed in connection therewith.
When the foregoing agreements were executed and carried into effect, the stockholders of the Lafayette Bank had a right to receive 371/2 per cent of the stock of the petitioner and the stockholders of the South Side Bank 6214 per cent.
Prior to the formation of the petitioner' bank, the stockholders of the Lafayette Bank assigned and delivered their stock to a group of trustees who caused the same to be canceled and new stock issued in the name of the trustees. The trustees then issued trust certificates to the old stockholders in lieu of the stock formerly held by them. Upon the formation of the petitioner bank, its stock, which would otherwise have been issued to the old stockholders of the Lafayette Bank, was issued to the aforementioned trustees, who in turn caused stock certificates to be issued to the appropriate old stockholders.
A similar method was pursued in the case of the South Side Bank, trustees being selected who functioned in a like manner to those selected in the case of the Lafayette Bank. In each case authority was given each group of trustees, under the trust agreements, to vote the stock of the old banks “ in favor of any resolution necessary to ratify said agreement or to carry it out.” Trustees testified at the hearing that they could vote this stock only in accordance with the authority outlined in the trust agreements.
The question is whether through the medium of the two groups of trustees, acting in conformity with their respective trust agreements and through the amalgamation agreement control existed necessary to bring about affiliation of the three companies.
In the Appeal of Isse Koch & Co., 1 B. T. A. 624, the Board defined “control ” as follows:
There is no authority in the section of law referred to or in its context so far as we can see, for assuming that Congress intended to use the word “ control ” in other than its ordinary and accepted sense. On the other hand, we believe that a proper construction of the statute, if it is to serve the purpose for which it was intended, requires us to hold that the “ control ” mentioned therein means actual control, regardless of whether or not it is based upon legally enforceable means. The control, however, must be shown to be a [1321]*1321genuine and real control actually exercised, and it can n<jt be established by mere assertions or agreements between majority and minority stockholders unsupported by facts. Potential control of stock is not sufficient in itself to justify consolidation.
Further, the Board said in Appeal of Canyon Lumber Co., 1 B. T. A. 473, that:
The control, however, referred to in the statute, whether it be legal or otherwise, means control of the voting rights of stock.
We must, therefore, determine whether there was real control, actually exercised, of substantially all the voting rights of the stock of the Lafayette and South Side Banks by the Lafayette-South Side Bank. First, we find that in the trust agreement under which new stock was to be issued to the trustees, authority was given to the trustees to vote the stock for certain purposes, namely, in favor of any 'resolution necessary to ratify said agreement or to carry it out, and there is no evidence of unlimited authority vested in the trustees to vote the stock for any and all purposes. The old banks were to continue in existence for a certain period during which various acts must necessarily be performed incident to liquidation and disposal of their assets. The interest of the petitioner in the acts effecting the liquidation was that the terms of the so-called amalgamation or merger agreement be carried out — particularly, that nothing be done in liquidation that would be to the detriment of the new bank, and that the “ going-concern ” value of the old banks be effectually transferred to the petitioner in so far as it was desired by the petitioner. To this extent, the trust agreements provide a means by which control is maintained by the trustees over the voting rights of the stock, but this is very far from saying that there was a genuine control for all purposes. Conceivably, many acts might have been necessary in connection with the liquidation of the old companies which did not affect the agreement which gave rise to the new bank, and, as to these, we have no evidence that the trustees had any right to vote the stock as trustees, and hence no control to this extent.
Secondly, the express words and tenor of the agreement are to the effect that the petitioner desired only certain assets of the old banks and great care was exercised in seeing to it that only approved assets came to the petitioner. Special guarantee funds were provided to protect the petitioner against certain contingent losses and also that losses occurring during the first three years on account of certain assets should be borne by the old banks. In other words, there is abundant evidence that the petitioner was to acquire certain assets and that that part of the business which it did not desire was to remain separate and distinct from the petitioner. What the petitioner did not take over remained as the property of the old banks to be disposed of by them. Losses suffered would be chargeable to [1322]*1322the old. banks and any gains realized would accrue to them, not to the petitioner.
Thirdly, the trustees did not in their individual capacities together own a controlling interest of petitioner’s stock. The amalgamation agreement provided who should be officers and directors of the petitioner and the two groups of trustees were selected from the directors so named. The trustees under the trust agreement with the stockholders of the Lafayette Bank were old stockholders of the Lafayette Bank and similarly the other group of trustees were old stockholders of the South Side Bank. But from these facts we can not say that the acts of the trustees would be acts of the petitioner and that the control given to the trustees would be control by the petitioner of the two old banks.
The trust certificates, which were issued by the trustees to the stockholders of the old banks in lieu of the stock of the old banks' formerly held by them, were not introduced in evidence and no information was submitted to show the provisions contained therein other than that which may be gathered from the trust agreements themselves. Whether there were any rights reserved therein under which the holders thereof could function with respect to the remaining assets of the old banks, we are not informed. The trust agreements show limited authority vested in the trustees to vote the stock of the old banks issued to them. Apparently the remaining authority rested during the period of liquidation, in the stockholders of the old banks. Since the stockholders, prior to the execution of the trust agreement, had authority to vote their stock as owners of the same and if only a part of such right of control was granted to the trustees, it would seem reasonable to assume that at least a partial control yet remained in the old stockholders.
From a consideration of the entire evidence, we fail to find that control existed in the petitioner or its stockholders over the voting rights of the stock of the old banks which we consider necessary for affiliation. Undoubtedly, there was a certain degree of control exercised by the petitioner over the old banks during their period of liquidation and that, through the amalgamation agreement, restrictions were placed on the exercise of certain functions by the old banks. This however, is far from saying that control existed which would result in affiliation as contemplated by the statute. Even though corporation A, through an agreement which it has with the stockholders of corporation B, may be able to dictate certain policies-of corporation B, control could not be said to exist to any greater extent than that evidenced by the agreement itself. In order to bring about an affiliation, control must exist for all practical purposes — not merely for certain limited purposes.
[1323]*1323The next question is whether intangible assets were acquired by the petitioner through the issuance of capital stock therefor at the date of incorporation. At the outset, it should be noted that the question is not whether the petitioner acquired good will heretofore possessed by the two old banks, but rather, whether stock was specifically issued for the good will. The evidence is clear that the petitioner was to receive and did receive certain good will of the old banks. This is admitted by the Commissioner in the brief which he filed. The point contended for by the petitioner is that stock was issued both for tangible and intangible assets, and that in the determination of its invested capital, its capital stock as issued at organization should be apportioned between the tangible and intangible assets upon the basis of their valuation at that time.
When it was proposed to form the petitioner, an agreement was entered into between the two old banks as to the assets which were to be transferred, the method of determining the value of the assets and other features incidental to the acquisition of the assets of the old banks by the petitioner, and the formation of the petitioner. All of this was set out in detail and with great particularity.
Among the provisions of the aforementioned agreement we find the following:
First party, for and m payment of the three thousand shares of the New, Banlc to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its corporation, either in cash or other net assets of the character and value hereinafter defined, the sum of $468,000.00 over and above liabilities; and second party, for and m payment of the five thousand shares of the New Banlc to be subscribed for by its nominees, shall pay to the said Lafayette-South Side Bank of St. Louis, at the time of its incorporation, either in cash or other net assets [italics ours] of the character and value hereinafter defined, the sum of $780,000.00, over and above liabilities; making, for the said Lafayette-South Side Bank of St. Louis, net assets of $1,248,000.00 and corresponding credits as follows:
Capital Stock_$800, 000.00
Surplus Fund_ 400,000.00
Undivided Profits_ 48,000.00
Then follows this description of the “ other net assets ” which would be acceptable in lieu of cash in payment for the stock:
In lieu of all cash, or together with cash, in an amount sufficient to make up and pay for said subscriptions, either party may turn over such of its bank credits, bonds, stocks, real estate located in the City of St. Louis (but not elsewhere), real estate loans, mortgages, notes, bills of exchange, drafts or other securities, negotiable, or non-negotiable, lawfully held and owned by it, in its own right absolutely, at the date of such incorporation of the New Bank, including interest items accrued to that date, all of an actual and guaranteed value at date of incorporation of the New Bank, equal to the amount of cash in lieu of which such other assets are to be substituted. And the cash [1324]*1324and other assets so to be turned over by the Lafayette Bank, the first party, must be $468,000.00 in excess of all its liabilities which the New Bank may agree to assume, and the amount of cash and other assets so to be turned over by the South Side Bank of St. Louis, the second party, must be $780,000.00 in excess of all its liabilities which the New Bank may agree to assume.
It will be noted that no reference is made in either of the foregoing provisions for the payment in of good will as consideration for the issuance of the stock.
Next we find that the parties provided committees to value the tangible assets to be transferred and for an arbitrator to act in case of dispute between the committees as to the valuation of the tangible assets to be received. Apparently, the thought uppermost in their minds was that only assets of a “gilt edged” and thoroughly acceptable character should be paid in for the stock. Special provisions were made to protect the petitioner against any loss which might occur in the acquisition of such assets.
Further, it was provided that:
If, at the date of the valuation of the assets of the respective Banks, preliminary to the incorporation of the New Bank, it appears that either Bank will not be able to turn over to the New Bank, in cash or other acceptable assets, the amount hereinbefore agreed to be put by it (the Lafayette Bank $468,000.00 and $100,000.00 Special Reserve Fund, and the South Side Bank of St. Louis $780,000.00 and $100,000.00 Special Reserve Fund), then the other Bank may correspondingly reduce the payment to he made by it for account of capital stock, surplus and undivided profits; that is to say, on the basis herein-before provided, each party was to pay in, for capital stock, surplus and undivided profits, the sum of $166.00 per share for the shares subscribed for it, and therefore if the amount in cash and other assets which can only be so contributed by either party be less than $156.00 per share, the amount to be paid in per share by the other party shall be similarly reduced. [Italics ours.]
Provision is then made in this language for the acquisition of such of the good will of the old banks as the petitioner desired:
From the date of the incorporation of the New Bank, and when it has been authorized by the Bank Commissioner to engage in business, the' parties hereto agree to turn over to the New Bank the good-will of their banking businesses and the customers thereof, so far as the New Bank may desire them; and to enable the New Bank to become fully possessed of such good-will and forever afterwards to enjoy the same, the parties hereto agree that they will-not, at any time thereafter, engage in any branch of the banking or safe-deposit business, except to liquidate their remaining assets and distribute them to their stockholders, and they agree to wind up their affairs and to procure a dissolution of their charters whenever their affairs have been wound up, and not later than five years from the incorporation of the New Bank.
In the next section of the agreement, we find these words:
Nor is any valuation to be placed on “ good-will,” “ business ” or “ going value” of either Bank, nor on its books of account, card system, or stationery.
The Board has heretofore had occasion to consider whether a bank which was prohibited by banking laws from carrying good will on [1325]*1325its books as an asset would thereby be deprived of good will for invested capital purposes under the Revenue Acts, and we held that good will properly acquired, should be included in invested capital, regardless of the inhibition in the banking laws for its appearance on the books of the bank as an asset. Merchants National Bank v. Commissioner, 6 B. T. A. 1167. There was, however, in that proceeding no question' of the manner of acquisition of the good will which is the issue in these proceedings.
Cases have also been before the Board where a mixed aggregate of tangible and intangible assets were acquired for capital stock and the Commissioner had applied a sufficient amount of the stock to equal the value of the tangible assets before considering any stock as having been issued for intangible assets on the theory that there was a presumption that the stock was first issued for the tangibles and that only the excess of the par value was applicable to good will. We held against such a presumption and permitted an allocation of the stock between the two classes of assets. St. Louis Screw Co., 2 B. T. A. 649; Mandel Brothers, 4 B. T. A. 341. There was, however, a specific finding in each case that the stock ivas issued not only for tangibles, but also for intangibles.
A proceeding closely analogous to these proceedings was before the Board in Charles Rubens & Co., 6 B. T. A. 626, wherein an allocation was denied as not coming within the principle of St. Louis Screw Co., supra. There an individual owned a business whose assets consisted of tangibles and intangibles which were acquired by a new corporation which was formed. The agreement under which the assets were transferred provided that stock should be issued for the tangible assets and that the intangible assets should be conveyed for the nominal consideration of one dollar. Even the nominal consideration was not paid. There was evidence that there was good will possessed by the individual which he desired to transfer to the corporation and that the only consideration which flowed to the individual in the sale was the capital stock of the corporation. The Board was reminded there as here that contracts should be interpreted as a whole so as to give effect to each term. The Board, in denying petitioner’s claim, said:
We are impelled, however, by a fair reading of the written evidence of the transaction, to decide against the petitioner in this -respect. The express language of the offer, the resolution and the contract, as well as the certificate of subscription filed with the Secretary of State, are unequivocal and unambiguous and leave no room for construction. The parties themselves deliberately and with unmistakable clearness chose to have the tangible property alone paid in for capital stock and the intangible property separately treated. This was their manifest intention and it was legally fulfilled. The fact that a subsequent revenue law makes their choice less fortunate to them than it might otherwise have been and imposes upon the corporation a greater tax than if another course had been adopted, can not serve to justify an interpre[1326]*1326tation of the transaction, at variance with the clear language of the instruments by which it was performed. (The argument that contracts should be interpreted as a whole and so as to give effect to each term is beside the point, for it is by thus reading the documents that we are led to the conclusion reached.
Likewise, see Nature's Rival Co., 6 B. T. A. 294, wherein these statements appear:
Prom the evidence it is not possible to decide that the petitioner’s invested capital should include any amount for the alleged good will or other intangible property. The statutory invested capital includes intangible property only when “ paid in for stock or shares.” The evidence clearly shows that the only property paid in for stock or shares at the time of organization was $10,000 cash and merchandise which was paid in for $10,000 of stock. This has been allowed in invested capital by respondent. The evidence is also clear that the intangible property acquired from the Arizona Company and the Form Company was turned in to the petitioner at the same time. It was of such a nature that apart from the business it was of no value and hence it would be idle to argue that it was withheld by the individuals until 1913. And the witnesses testified that it was not withheld but was at once turned in to the new company. This being so, such value as it had could only be a paid-in surplus. If so, it was not within the statute.
The Board is of the opinion that the principle decided in the two preceding cases is conclusive of the question here involved. Section 326, Revenue Act of 1918, recognizes intangibles as invested capital only when paid in for stock or shares. An examination of the entire agreement under which the good will came to the petitioner shows not only that the consideration for the issuance of stock was not g-ood will, but also that every precaution was taken to keep it from being so considered. The parties provided with meticulous care exactly the character of assets which would be acceptable consideration for the stock of the petitioner, and good will was not among these assets. In a separate provision of the instrument, it is provided that, “ From the date of the incorporation of the New Bank and when it has been authorized by the Bank Commissioner to engage in business,”- then such good will of the old banks as the petitioner desired was to be turned over. We fail to see how the agreement can leave any doubt that the stock was to be issued for tangibles alone and that the intangibles were to come to the petitioner under the terms of the agreement, but without consideration. Any allocation of stock to intangibles must, therefore, be denied.
Since the value of the tangibles was in excess of the capital stock issued, the only manner in which the value of the intangibles could find their way into invested capital would be as a paid-in surplus. The Board, however, has already held that a paid-in surplus can not be allowed on intangibles. Herald-Despatch Co., 4 B. T. A. 1096.
Reviewed by the Board.
Judgment will be entered for the respondent.