Tunnel Railroad of St. Louis v. Commissioner

4 B.T.A. 596, 1926 BTA LEXIS 2253

• Court: United States Board of Tax Appeals
• Decided: July 30, 1926
• Docket: Docket Nos. 2713, 2714.
• Status: Published

Opinion

OPINION.

ARttndbll

: The facts may be briefly summarized. The Terminal Association leases and operates all the properties of the petitioners. As rent for these properties it pays to the petitioners a nominal sum to cover cost of maintaining their' corporate existence, agrees to discharge the bonded indebtedness of the .petitioners by payment of principal and interest direct to the bondholders, and agrees to pay direct to stockholders of the petitioners the dividends on their stock. The Terminal Association owns and votes all of the common stock of the Bridge Company in the amount of $2,500,000. The remainder of the capital stock of the Bridge Company, being first preferred in the amount of $2,490,000 and second preferred in the amount of $3,000,000, and the capital stock of the Tunnel Company, which is common stock in the amount of $1,250,000, is owned by persons other than the Terminal Association but is voted by officers of the Terminal Association under proxies given to it annually by the stockholders.

Under these facts, are the petitioners entitled to affiliation with the Terminal Association?

The petitioners say that the lease under which their properties are operated is tantamount to vesting title to the properties in the Terminal Association in fee. This contention seems immaterial for affiliation, under the statutes, is not based on ownership of corporate property — it must be based, if it exists, on ownership or control of stock.

As to the property being leased under an agreement which may amount to a lease in perpetuity, we have held in the Appeal of Old Colony R. R. Co., 1 B. T. A. 1067, and Appeal of Norwich & Worcester R. R. Co., 2 B. T. A. 215, that .the fact that one corporation operates the property of another by virtue of a long-term lease is not sufficient basis for affiliation, as we could not so far disregard the language of the statute as to hold that control of the pfoperty and business of the corporation is control of the stock.

The petitioners make no claim that affiliation rests on stock ownership. This is easily understood from the fact that the Terminal Association owned none of the Tunnel Company stock and owned only 25,000 of a total of 79,900 shares of the Bridge Company stock.

Thus by elimination we come to the proposition that, if affiliation exists, it must be by reason of stock control through proxies,, which over a period of twenty years have been given to officers of the Terminal Association by holders of all the preferred stock of the Bridge Company and all the common stock of the Tunnel Company, both classes of stock having voting rights. The proxies given in these cases were in the usual form of unrestricted proxies. The rights and duties generally of holders of proxies at stockholders’ meetings are too well known to require discussion here. Our concern is whether the proxies vested a sufficient control in the donees to bring -the companies here involved within the affiliation statutes.

The giving .of proxy is not a relinquishment by the donor' of any of the rights of ownership or control. It is merely a delegation of one of the incidents of ownership — the right to vote the stock — ■ and this delegation at the most makes the proxy holder an agent of the donor. And this agent must vote in accordance with the instructions given either openly or tacitly to him by the owner of the shares. Buche v. Central Leather Co., 78 N. J. Eq. 484; 81 Atl. 571. Nor can the giving of a proxy be regarded in fact as a separation of the voting power from the ownership of stock, since the property right remains in the stockholder. In Warren v. Pim, 66 N. J. Eq. 353; 59 Atl. 773, 784, it is said:

A proxy confers only a power upon the stockholder's deputy and not a right. The right still inheres in the stockholder.

Furthermore, the agency thus created is limited. A proxy to vote stock in the ordinary concerns of the corporation — and proxies are to be so construed unless their terms are special — is no authority to vote for the reorganization of the corporation, Farish v. Cieneguita Copper Co., 12 Ariz. 235; 100 Pac. 781; or its consolidation with another corporation, or for the sale of all of its property, Abbot v. American Hard Rubber Co., 33 Barb. (N. Y.) 578; or for a voluntary liquidation of its affairs. McKee v. Home Savings & Trust Co., 122 Iowa, 731; 98 N. W. 609.

The petitioners cite the case of Hyams v. Calumet & Hecla Mining Co., 221 Fed. 529, where it is said, at page 541:

A control purposely gained and exercised by a minority stockholder with the aid of proxies of other stockholders may have the same effect as a control by actual stock majority. See United States v. Union Pacific R. R. Co., 226 U. S. 61, 33 Sup. Ct. 53, 57 L. Ed. 124.

Thiá holding of the court is not open to dispute, for the principle set out therein is well known. It is simply that the holder of the voting rights of a majority of stock may control the corporation as fully as the owners of a majority. An even stronger case on this point is found in United States v. Union Pacific R. R. Co., 226 U. S. 61, where the Union Pacific owned 46 per cent of the stock of a competing railroad, but this 46 per cent ownership was by a compact, united body, while the remainder was distributed among many stockholders. Here the court reached “ the conclusion that the Union Pacific thus obtained control of a competing railroad system.” Neither of these cases are in point here, for they deal with corporate control by minority stockholders. The statute with which we have to deal requires ownership or control of substantially all the stoclc of another corporation. Plainly, to meet the terms of the statute it is not sufficient to show control of a corporation by minority stockholders; what must be shown is ownership or control of substantially all the stoclc. We have pointed out above that acquisition of voting power by proxy does not carry with it control of the stock.

We are accordingly of the opinion that the petitioners are not entitled to be considered as affiliated companies with the Terminal Railroad Association of St. Louis.

The deficiency for the years 1917, 1918 and 1919 in the case of the Tunnel Railroad of St. Lowis is $£,051.80, and in the case of the St. Louis Bridge Go. is $1,691.88. Order of re-determination will be entered accordingly.

Love and Steknhagen dissent.