Paraffine Oil Co. v. Commissioner

PARAFFINE OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. RELIANCE OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Paraffine Oil Co. v. Commissioner Docket Nos. 24453, 28330, 28331, 29034. United States Board of Tax Appeals 28 B.T.A. 207; 1933 BTA LEXIS 1157; May 31, 1933, Promulgated *1157 1. Assessment and collection held not barred by the statute of limitations. 2. Petitioners transferred certain assets to a new enterprise in which petitioners' stockholders had subscribed for stock. Held, the transfers were sales by petitioners to the new enterprise, rather than, in effect, distributions in kind to petitioners' stockholders. Fred R. Angevine, Esq., for the petitioners. P. M. Clark, Esq., for the respondent. SMITH *207 These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income and profits taxes as follows: Name of petitioner Docket No. Year Deficiency Paraffine Oil Co 24453 [1918] $36,053.64 Do 24453 [1919] 6,878.07 Reliance Oil Co 28330 [1917] 76,307.76 Paraffine Oil Co 28331 [1917] 165,782.47 Do 29034 [1920] 9,355.65 The issues in Docket Nos. 24453 and 29034 relate to invested capital and are dependent upon the Board's action in the proceedings concerning the year 1917. The parties have agreed that no further consideration need be had of the issues involved in these two dockets until the proceedings are set for hearing under Rule*1158 50. The issues in Docket Nos. 28330 and 28331 are (1) whether the deficiencies there determined are barred by statute; and (2) whether the respondent erred in determining that petitioners sold certain assets during the year 1917, it being petitioners' contention that they distributed such assets in kind to their stockholders. FINDINGS OF FACT. Petitioners are corporations, organized and existing before and since 1910 under the laws of the State of Texas. The income and excess profits tax returns for the year 1917 of each petitioner were filed on April 30, 1918. Subsequently, petitioners filed with the respondent duly executed waivers of the statute of limitations for making any assessment and/or collection of income and excess profits taxes found due for the year 1917 as follows: Paraffine Oil Co. Reliance Oil Co. Executed To expire Executed To expire Feb. 16, 1921 Unlimited Feb. 26, 1921 Unlimited Feb. 23, 1923 Feb. 23, 1924 Mar. 12, 1924 Apr. 30, 1924 Mar. 12, 1924 Apr. 30, 1924 Mar. 26, 1924 Mar. 26, 1925 Feb. 10, 1925 Dec. 31, 1925 Feb. 3, 1925 Dec. 31, 1925 Nov. 19, 1925 Dec. 31, 1926 Nov. 19, 1925 Dec. 31, 1926 Oct. 28, 1926 Dec. 31, 1927 Oct. 28, 1926 Dec. 31, 1927 *1159 *208 The last mentioned waiver executed in the case of each petitioner on October 28, 1926, contained the following provision: This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1927, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board. A notice of a deficiency in tax was sent to the Reliance Oil Co. by registered mail on March 29, 1927, and a notice of a deficiency in tax was sent to the Paraffine Oil Co. by registered mail on April 13, 1927. Each petitioner filed a petition with this Board on May 10, 1927. Petitioners were organized for the purpose of engaging in the oil business. The Reliance Oil Co. was organized with a capital stock of $100,000, and the Paraffine Oil Co., $10,000. H. C. Wiess and family owned*1160 about 80 percent of the stock of the Reliance Oil Co. and about 90 percent of the stock of the Paraffine Oil Co. The balance of the stock was owned either by employees of petitioners or close friends of the Wiess family. Wiess was president and manager of both petitioners for several years prior to 1917. In 1914 an important producing property had been developed in the Humble Oil Field which was partially owned by the Paraffine Oil Co. and a partnership composed of Blaffer and Farish. Likewise in 1914 and 1915, Wiess and Blaffer and Farish had become associated in the operation of oil properties in the Goose Creek Oil Field near Houston. Other individuals and small corporations were also interested in these particular fields, all the several interests being independent producers. About 1915 Wiess and his associates and other independent oil producers conceived the idea that a consolidation of their respective interests into one corporation of sufficient size to engage in the transportation and refining of oil, as well as the production thereof, would constitute a desirable and mutually profitable enterprise. *209 During February and March 1917, an agreement was reached*1161 as to the relative or proportionate value of the properties that were to go into the new corporation. On April 3, 1917, a meeting of the stockholders of both petitioners was held and certain resolutions adopted. The resolutions in the case of each petitioner are identical, except as to the amounts involved. The material portion of the resolution of the Reliance Oil Co. is as follows: WHEREAS an agreement has been reached between the officers of this company and the Humble Oil Company and others whereby the property of this company, hereinafter described, is to be sold and transferred to the Humble Oil Company or some other company capitalized at * * * ($4,000,000.00) * * * with a paid up stock of approximately * * * ($3,500,000.00) * * * said stock to be paid for by * * * the property hereinafter described at a valuation of * * * ($175,000.00) * * * the details of such trades to be hereafter worked out by the officers of this company and the other interested parties, and whereas said trade was conditioned upon the ratification and approval of this company: NOW, THEREFORE, BE IT RESOLVED: that the trade above outlined in general terms, and the sale of the property*1162 above described, upon the terms and in the manner and for the amount of stock above be and the same is hereby ratified and confirmed and the President of this company is hereby authorized and directed to proceed with the consummation of said sale along the general lines above indicated, and he is hereby authorized and empowered to make such agreements and decide upon such details and methods for consummating and carrying out said trade as to him may seem necessary or proper. [Italics supplied.] The minutes of the meeting of April 3, 1917, were prepared by L. A. Carlton, an attorney who at the time was also acting for the new enterprise. On April 15, 1917, E. E. Townes, formerly a partner of Carlton, became counsel for the new enterprise. Townes had been attorney for the Wiess family for a long time prior thereto, and when he became associated with the new enterprise the individuals looked to him to work out the details. His first problem was to investigate and determine the best form of organization for the new enterprise, and in that connection the question of how the properties were held and how they would be brought into the new company came up as a necessary incident. *1163 It was decided that the new enterprise should be a Texas corporation. After his study of the matter Townes advised that under the laws of the State of Texas neither the Paraffine Oil Co. nor the Reliance Oil Co. had a right to own stock in other corporations in the same line of business and that the secretary of state would not permit a corporation to become a subscriber for stock in another corporation. *210 With this situation in mind, Townes thereupon worked out a plan whereby all of the individual stockholders of both petitioners became subscribers to stock in the new company, which was named the Humble Oil & Refining Co. The stock subscription agreement executed by the stockholders of the Reliance Oil Co., in so far as material, is as follows: We, the undersigned, constituting all of the stockholders of the Reliance Oil Company, hereby subscribe for the number of shares of stock set opposite our respective names in the Humble Oil & Refining Company * * * In payment for the stock so subscribed for by us, we have or will procure to be conveyed to the Humble Oil Company, (all of whose capital stock will be owned by the Humble Oil & Refining Company when organized), *1164 by the Reliance Oil Company, properties generally described as follows, to-wit: * * * We, the undersigned stockholders of the Reliance Oil Company, hereby agree that said conveyance of said property may be made, and we hereby authorize the directors and officers of the company to prepare, execute, and deliver such deeds of conveyance. The above stock subscription agreements in each instance were in the same proportion as the stockholdings of the subscribers in the Paraffine Oil Co. and Reliance Oil Co. On May 15, 1917, both petitioners held directors' meetings and adopted identical resolutions, except as to the amounts involved. The resolution of the Reliance Oil Co. provided, inter alia: WHEREAS, there is now being organized a Texas corporation * * * said organization being formed upon the plan outlined and explained at a meeting of the stockholders of The Reliance Oil Company held in the company's office April 3rd, 1917; this being the corporation referred to and described in the resolution of the stockholders passed at said meeting; and, WHEREAS, the stockholders of this company have subscribed individually for * * * ($175,000) of the capital stock of said now*1165 corporation * * * and, WHEREAS, it has been agreed that said stock so subscribed shall be paid for by the transfer from The Reliance Oil Company to the Humble Oil Company, or to the Humble Oil & Refining Company, as may be directed by the latter * * * and, WHEREAS, all of the stockholders of this company have requested that this conveyance be made direct to the Humble Oil & Refining Company, or to the Humble Oil Company * * * said conveyance being for the benefit of the stockholders of this company, it being agreed also that said transfer for accounting purposes shall take effect as of March 1st, 1917. Now, THEREFORE, BE IT RESOLVED that the officers of this company be and they are hereby authorized and directed to make, execute and deliver to the Humble Oil & Refining Company, in due and proper form, conveyance of the properties above mentioned. * * * The real consideration for the said transfer is and shall be the delivery to the respective stockholders of this company of their proportionate part of $175,000 par value of Humble Oil & Refining Company stock, as above set out. *211 On May 15, 1917, petitioners executed certain instruments transferring the properties*1166 in question to the new corporation. These instruments provide in part: KNOW ALL MEN BY THESE PRESENTS: That Paraffine Oil Company [or Reliance Oil Company as the case may be] * * * for and in consideration of the sum of Ten Dollars ($10.00) and other good and valuable considerations to it in hand paid by the Humble Oil & Refining Company, receipt of which is hereby acknowledged, has granted, sold, transferred and assigned, and does hereby grant, sell, transfer and assign, unto said Humble Oil & Refining Company all of its right, title and interest in and to [the properties in question] * * *. Each petitioner, in recording the transfer of the properties to the new corporation, noted in its respective journal: "Above assets passed to ownership of stockholders, and conveyed at their direction * * *." The respondent determined that there was a sale by each petitioner of certain of its assets, and that a taxable profit was realized in an amount equal to the difference between the proper basis of the assets transferred, and the marked value of the stock of the new corporation delivered to the stockholders of petitioners. OPINION. SMITH: We will first consider the issue*1167 as to whether the deficiencies are barred by the statute of limitations. Regarding the Reliance Oil Co., the record shows that its returns for the year 1917 were filed on April 30, 1918. The respondent, under section 250(d) of the Revenue Act of 1921, had until April 30, 1923, to determine and assess any tax due, unless the parties consented to extend the time to a later date. The unlimited waiver filed February 26, 1921, extended such time to April 1, 1924. Henry M. Leland,8 B.T.A. 974. Prior to April 1, 1924, and prior to each extended date thereafter, as set out in our findings, valid waivers or consents in writing were filed under the provisions of section 250(d) of the Revenue Act of 1921, and section 278(c) of the Revenue Acts of 1924 and 1926, extending the time for assessment past the date on which the deficiency notice was mailed. In accordance with the foregoing, together with the specific provisions of the waiver filed October 28, 1926, which we have quoted in our findings, and section 277(b) of the Revenue Act of 1926, the assessment and collection of any deficiency against the Reliance Oil Co. for the year 1917 is not barred. Cf. *1168 Old Farmers Oil Co.,12 B.T.A. 203. In the case of the Paraffine Oil Co. the situation is the same as in the Reliance Oil Co., except that as far as the record shows the respondent permitted the statute to expire on February 23, 1924, and again on April 30, 1924. However, the waivers executed on *212 March 12, 1924, and February 10, 1925, being executed prior to the passage of the Revenue Act of 1926, were effective to revive and extend the statute which had theretofore tolled. Stange v. United States,282 U.S. 270. We, therefore, hold that the assessment and collection of any deficiency against the Paraffine Oil Co. for the year 1917 is not barred. On the merits petitioners contend that there were no sales of assets by petitioners to the Humble Oil & Refining Co., as determined by the respondent, but rather that there were, in effect, distributions in kind of such assets to petitioners' stockholders, resulting in no taxable gain to petitioners. Petitioners concede in their brief that the resolutions adopted at the meeting of petitioners' stockholders on April 3, 1917, refer to proposed sales by petitioners to the new enterprise, *1169 but contend that this plan was abandoned, as evidenced by the individual subscriptions to the stock of the new corporation by the stockholders of petitioners, and that the direct transfer by petitioners of the assets in question to the new enterprise was merely to avoid the expense and certain other inconveniences (such as probate court, trusteeship and guardianship proceedings where the stock of petitioners was held by trustees and minors) of a double transfer. Petitioners further contend that nothing was actually or constructively received by or accrued to petitioners from the transactions in question, citing in support of such contention W. P. Fox & Sons, inc.,15 B.T.A. 115, where the Board had before it a situation somewhat similar to the one here involved. We followed the Fox case in Lexington Ice & Coal Co.,23 B.T.A. 463, but renounced that holding in our more recent decision in Fred A. Hellebush et al., Trustees,24 B.T.A. 660. The Lexington case was reversed by the Circuit Court of Appeals for the Fourth Circuit, *1170 Burnet v. Lexington Ice & Coal Co., 62 Fed.(2d) 906, in which the court said in part: As recited above, the Board of Tax Appeals in the case of Hellebush et al. Trustees v. Commissioner, supra, has reversed this decision in the instant case and decided that a sale made under similar circumstances was a sale by the company. A similar question was before the Circuit Court of Appeals of the Fifth Circuit in Taylor Oil & Gas Co. v. Commissioner,47 F.(2d) 108, (certiorari denied, 283 U.S. 862), where the court said: "Conceding for the purpose of argument that the legal title to the property vested in the trustees by the dissolution, no part of the title passed to the stockholders thereby. The real owner was still the company until such time as its affairs were liquidated, the debts paid, and the residue distributed to the stockholders. The profit on the transaction was earned by the corporation, and the assessment of the taxes based thereon was valid." We agree with the conclusion reached in the Taylor Oil & Gas Co. case and by the Board of Tax Appeals in its more recent decisions that the sale was a sale by the*1171 taxpayer company and the profits were properly taxable. *213 To the same effect see Nibley-Mimnaugh Lumber Co.,26 B.T.A. 978; Boggs-Burnam & Co.,26 B.T.A. 988; Mrs. Grant Smith,26 B.T.A. 1178; and S. A. MacQueen Co.,26 B.T.A. 1337. In the instant proceedings the resolutions adopted on April 3, 1917, clearly indicate that petitioners contemplated selling the assets in question to the new enterprise. The resolutions adopted on May 15, 1917, recited that the new corporation was being formed "upon the plan outlined and explained at a meeting of the stockholders * * * held * * * April 3rd, 1917 * * *." The instruments conveying the assets to the new enterprise recited that petitioners received good and valuable considerations for the assets "granted, sold, transferred and assigned" to the new concern. Each petitioner conveyed title to the assets sold to the vendees; that was the sale (Cf. Charles W. Dahlinger,20 B.T.A. 176), the transaction producing the asserted gain. The assets of these petitioners were not distributed to or conveyed by their stockholders. *1172 The stockholders could cause the conveyance to be made, but they could not make the conveyance. Furthermore, there was no liquidation of either petitioner and we cannot ignore the formal corporate acts in making the conveyances, even although the consideration for the conveyance was distributed directly to the petitioners' stockholders. Cf. E. H. Nielsen Co.,26 B.T.A. 223. Upon the entire record, and in line with the more recent decisions referred to above, we think the substance of the transactions here involved is a sale by each petitioner of certain of its assets to the new corporation, rather than distributions in kind to petitioners' stockholders. The respondent's determinations are approved. Reviewed by the Board. Judgment will be entered under Rule 50.