Handy & Harman v. Burnet

Background

A company that dealt in gold and silver (the petitioner) formed Hamilton & DeLoss, Inc. in 1916 to take over its stamping work. Six men owned most of the petitioner’s stock and over 75% of the new company’s stock. An individual named Hamilton received 20% of the new company, became its president, and his purchase was secured by bank notes endorsed by DeLoss. The two corporations operated as a business unit and the new company sustained losses. The Commissioner denied consolidated tax treatment for 1918 and early 1919; the Board of Tax Appeals and the Court of Appeals upheld that denial, and the Supreme Court reviewed the question.

Reasoning

The central question was whether the two corporations were "affiliated" under §240 of the Revenue Act of 1918 so they could file a single, consolidated return. The Court explained that the statute requires substantially all the stock of the corporations to be owned or controlled by the same interests. Mere practical or informal influence, attendance at meetings, a salaried office, pledges, or acquiescence do not substitute for legal or beneficial ownership of substantially all the stock. Because the 20% stock issued to Hamilton was pledged and not held as beneficial, and because the majority holders did not beneficially own substantially all shares of each corporation, the Court held the corporations were not affiliated and affirmed the denial of consolidated returns.

Real world impact

The ruling makes clear that companies cannot combine tax results based on informal control alone. Separate corporations that function together still must meet the statutory stock-ownership test to file consolidated returns. Losses in one corporation will not be automatically usable against profits of another unless ownership satisfies the statute.