Olympic Refining Co. v. Commissioner

OLYMPIC REFINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Olympic Refining Co. v. Commissioner Docket No. 50329. United States Board of Tax Appeals 32 B.T.A. 1056; 1935 BTA LEXIS 849; July 31, 1935, Promulgated *849 1. The ownership in the production under a certain oil and gas lease was divided into units evidenced by certificates. The management and operation of the property were under the supervision of a board of five men, designated as trustees, elected annually. These certificates were transferred by endorsement and surrender to the trustees for the issuance of new certificates. The petitioner purchased all of the units from the individual owners and thereafter merged all of the properties under the lease with its other properties and operations. Held, that the operation under the lease, prior to the purchase of the units, was an association taxable as a corporation; and, further, that the petitioner, by purchase of the unit certificates and the distribution to itself of all of the properties under the lease, became a transferee within the meaning of section 280 of the Revenue Act of 1926. 2. Notice of liability as transferee was mailed to the petitioner within the time prescribed by the statute. Arthur J. Hair, Esq., and George E. Walling, Esq., for the petitioner. J. H. Yeatman, Esq., for the respondent. TURNER *1056 The respondent*850 has determined deficiencies in income tax for the years 1924, 1925, and 1926, in the amounts of $2,706.28, $4,176.22, and $984.40, respectively, against an oil well project known as Barham ham Well No. 1, on the ground that it constituted an association within the meaning of the income tax statute for those years. This proceeding involves the liability of the petitioner as transferee of Barham Well No. 1. *1057 FINDINGS OF FACT. The petitioner is a corporation of the State of Washington, with its principal place of business at 2425 California Avenue, Long Beach, California, and is engaged in the operation and exploitation of oil and gas properties. Early in 1922 Walter B. Barham acquired from R. T. Colter an oil and gas lease covering lot C of the Hess Tract in the Signal Hill Oil Fields in the State of California. The lease required Barham to develop the properties within a specified time and allowed him, in return for such development, 75 percent of the gross production. On May 27, 1922, he entered into a contract with the firm of Rogers and Edwards for the drilling of a well on the property. This contract required the completion of a well to a depth of 3,400*851 feet, or less, if oil should be encountered in paying quantities before that depth was reached. The consideration to be paid for the drilling of the well was $86,000. To obtain the money with which to finance the drilling of the well, Barham divided his holdings under the lease into 2,000 units and offered them for sale at $100 per unit. By August 22, 1922, Barham had sold approximately 1,700 units. These sales had been accomplished through salesmen working on a commission basis. The interests of the purchasers were evidenced by written agreements. The terms of these agreements are shown by the agreement covering the purchase of 5 units by L. J. Adamson, as follows: No. 607 Part 5/2000 Amount $500.00 BARHAM WELL NO. 1 Signal Hill, Long Beach, California. THIS CONTRACT entered into by and between WALTER B. BARHAM, party of the first part, and the party, or parties, signing this contract, or contracts, identical with this, acting severally with said WALTER B. BARHAM, hereinafter called "Party of the Second Part," WITNESSETH: IT IS MUTUALLY AGREED by and between the parties hereto as follows: Party of the first part agrees to furnish all necessary funds for*852 the drilling of one (1) oil well to completion on that certain real property situated in Los Angeles County, California, particularly described as follows, to-wit: Lot "C" of the Hess Tract, as per map thereof recorded in Book 11, at page 23, of Maps, records of Los Angeles County; and said party of the first part agrees to see that said oil well is drilled in a workmanlike manner, and in accordance with that certain contract dated March 29th, 1922, by and between the said WALTER B. BARHAM and one R. T. COLTER, which contract is recorded in the County Recorder's office of Los Angeles County, California, IT IS UNDERSTOOD that "drilling a well to completion" means to drill a standard well, properly equipped, cased and finished, to a depth of three thousand (3,000) feet, unless oil or gas, or either of them, is found in paying quantities at a lesser depth. *1058 Party of the first part further agrees to make an assignment within thirty (30) days from this date of the interest in the production from said well belonging to him under the terms of said contract dated the 29th day of March, 1922, between said WALTER B. BARHAM and R. T. COLTER, to the several parties of the second*853 part hereto of the proportion purchased by them, respectively, herein; and still further agrees to pay his pro rata of the operating and administration expenses of said well. IT IS MUTUALLY UNDERSTOOD AND AGREED that three-fourths (3/4) of the production from said well belongs to the party of the first part herein under the terms of the hereinbefore mentioned contract dated the 29th day of March, 1922, between WALTER B. BARHAM and R. T. COLTER, which three-fourths is of an estimated value of $200,000.00, and each of the second parties shall share in said three-fourths production in the proportion that the amount paid by such parties hereunder to said WALTER B. BARHAM bears to $200,000.00. Each of said parties of the second part agrees to pay his pro rata part of the operating and administration expenses of said well; it being understood that said pro rata part is that part of the entire operating and administrating expenses which the amount paid by the second parties bears to $200,000.00. Until further mutually agreed in writing, parties of the second part hereby authorize the said party of the first part to sell, for not less than the current market price at the well at the*854 time produced, the production of said well belonging to the parties of the second part, and parties of the second part further hereby authorize the FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES, Fourth and Main Streets, Los Angeles, California, to receive, receipt for, and collect, all sums of money that may become due to the several parties of the second part from the sale of the production of said well, and further authorize the said FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES to pay therefrom each of the parties of the second part's pro rata share of the operating and administration expenses of said well for the previous month. Said party of the first part shall render an account monthly to said FARMERS AND MERCHANTS NATIONAL BANK OF LOS ANGELES of the operating and administration expenses of said well for the previous month. First party hereby acknowledges receipt of $500.00 in payment for 5/2000 undivided interest in three-fourths of all the production from said well in behalf of the second parties as herein set forth. IN WITNESS WHEREOF, we have hereunto set our hands this third day of June, 1922. Executed in triplicate. WALTER B. BARHAM, First Party.*855 L. J. ADAMSON, Second Party. 2323 So. Hoover St., Los Angeles, Cal. The unit purchase agreements were executed in triplicate. One copy was delivered to the purchaser, another to the Farmers & Merchants National Bank of Los Angeles, and the third retained by Barham. On August 22, 1922, Barham executed an assignment called for by the unit purchase agreements, and this assignment was duly recorded in the records of Los Angeles County, California. *1059 The well was completed and became a producer early in 1923. Prior to that time reports as to drilling progress had been made at intervals to the unit holders by Frank E. Leeper, who signed the reports as trustees. This continued until April 2, 1923, when the unit holders were notified in writing by Barham that a meeting would be held on April 15 for the purpose of electing a board of directors and trustees to act in conjunction with him in the management and further operation of the well. The report stated that Leeper, who had acted as trustee since the beginning of the proposition, also thought that it was only fair and proper to elect at least three more persons to act in conjunction with them upon the*856 different propositions which might come up from time to time. At the meeting held in accordance with the notice, John E. Carson, J. E. Harrison, and George F. Cotton were elected to serve with Leeper and Barham. Elections were thereafter held on an annual basis. This group held meetings approximately once a month, at which time they checked the cost of operation and the oil sales, and prepared and transmitted to the Farmers & Merchants National Bank of Los Angeles a statement of the bills to be paid and a list of the unit holders showing the amount to be distributed to them in accordance with the holdings of the various individuals. They also considered matters pertaining to the proper and efficient management and operation of the properties. The unit holders were kept informed by reports issued at intervals by the five individuals named, and signed by them as trustees. For a short time Barham and Leeper received salaries; the records show that on certain occasions the other three received fees of $10 each for attending meetings. On September 28, 1922, Barham with the assistance of Leeper negotiated and signed a contract with the California Gasoline Co. for the sale of gas*857 to be produced from the lease, and on February 27, 1923, signed a similar contract with the Standard Oil Co. for the sale of the oil produced. Sales were made from time to time by unit holders of their interests. The method adopted for accomplishing the transfer required the endorsement and surrender of the old agreement by its holder, whereupon a new and similar agreement was issued to the purchaser for the number of units so transferred. In 1926 Barham disposed of his units to Erle Gerard and tendered his resignation as trustee, and the remaining trustees elected Gerard in his place. Notice of this action was contained in the report to the unit holders dated December 14, 1926. This report further stated that the well had been off production due to water and that there had been some discussion as to the advisability of selling the well. On *1060 January 12, 1927, the trustees issued a report calling a meeting of the unit holders for 10:30 a.m., January 24, 1927, for the purpose of taking a vote to authorize the disposition of their holdings. A card was enclosed asking for a vote, of those unable to attend the meeting, upon the question of authorizing the trustees*858 to act to the best of their discretion. On March 9, 1927, the unit holders were advised in Report No. 46 that about 1,700, or 85 percent, of the unit holders had voted authorizing the trustees to act and that no vote had been cast to the contrary. They were also informed that several propositions had been received and that the Olympic Refining Co.'s offer of $10 per unit had been accepted; and, further, that the Olympic Refining Co. had deposited $20,000 with the escrow department of the Farmers & Merchants National Bank of Los Angeles, to be paid out by the escrow department as the unit certificates were received by it. The trustees advised that they had already surrendered their certificates in accordance with the proposition. The offer of the Olympic Refining Co., dated February 21, 1927, reads as follows: OLYMPIC REFINING COMPANY, Refiners, Marketers and Exporters PETROLEUM AND ITS PRODUCTS P.O. BOX 544 BURNETT, LOS ANGELES COUNTY, CALIF., February 21, 1927. To The Unit holders of the Barham #1 Well Signal Hill, California DEAR SIRS: The undersigned Olympic Refining Company hereby agrees to purchase all or any part of the units of ownership*859 of the above property now outstanding at $10.00 per unit; payable in cash, it being understood and agreed that the total number of units issued and outstanding is two thousand. This offer is being made to the individual unit holders and the units will be accepted and paid for upon presentation, at the above office. Very truly yours, OLYMPIC REFINING COMPANY, 2425 California St. L.B. By [Signed] C. P. RITTER Pres. CPR:IBS C. P. Ritter, president of the petitioner, had originally approached the trustees with the proposition to buy the well and the lease. Upon advice of counsel, who questioned the right of the trustees to sell the property, he changed his plans and the offer above quoted, for the purchase of the unit certificates, was made. In accordance with the offer of the petitioner, all of the unit certificates were *1061 acquired except about five, which have never been acquired by the petitioner nor surrendered by the holders. The petitioner immediately took possession of the property and merged it with other property and operations belonging to it. The property of Barham Well No. 1 so acquired by the petitioner had a fair market value of $20,000*860 on the date of acquisition. The $20,000 deposited by the petitioner with the escrow department of the Farmers & Merchants National Bank of Los Angeles was paid out at the rate of $10 per unit as the unit certificates were surrendered. Fiduciary returns were filed in the name of Barham Well No. 1 for the years 1924, 1925, and 1926; the return for 1924 was filed on March 16, 1925; the return for 1925 was filed on March 15, 1926; and the return for 1926 was filed on March 15, 1927. Under date of July 13, 1928, the respondent addressed a deficiency letter to Barham Well No. 1, showing the determination of a deficiency for the year 1925 in the amount of $4,176.22, on the ground that Barham Well No. 1 was an association and under the income tax statute was taxable as a corporation. On September 11, 1928, a petition, styled "Barham Well No. 1, Petitioner, v. Commissioner of Internal Revenue, Respondent", was filed with this Board. This petition was verified by Walker S. Clute, designated therein as engineer, representative, and agent. Clute was not a unit holder and never acted as trustee. He had served, however, as tax consultant for Barham Well No. 1. The petition so filed was*861 dismissed by order of this Board under date of June 14, 1932, for failure to prosecute. Under date of March 14, 1929, a deficiency letter was mailed by the respondent to Barham Well No. 1, showing the determination of deficiencies for the year 1924 in the amount of $2,706.28 and for the year 1926 in the amount of $984.40. The basis for this determination was the same as that shown in the deficiency letter above referred to for the year 1925. Based on this letter, a petition was filed with this Board under date of May 10, 1929, under the style of "Barham Well No. 1, Frank E. Leeper, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent." The petition was verified by Frank E. Leeper as trustee. This proceeding was dismissed by order of the Board under date of February 6, 1932, for lack of prosecution. On August 15, 1930, the deficiency letter herein was mailed to the petitioner. OPINION. TURNER: The first question presented for our determination is whether or not the Barham Well No. 1 was properly classified by the respondent as an association, taxable under the income tax statute as a corporation for the years 1924, 1925, and 1926, and, if so, whether the*862 petitioner herein is transferee of said Barham Well No. 1 within *1062 the meaning of section 280 of the Revenue Act of 1926. If these issues are determined for the respondent, it will then be necessary to consider the questions raised by the petition to the effect that the statute of limitations had run prior to August 15, 1930, the date on which the notice of deficiency herein was mailed by the respondent. In , we considered very carefully the questions as to whether or not Barham Well No. 1 was properly classified as an association, taxable as a corporation for the year 1923 under section 2 of the Revenue Act of 1921 and articles 1502 and 1504 of Regulations 62. We concluded that Barham Well No. 1 was an association within the meaning of the statute and regulations for the year 1923, and our finding on this point has since been affirmed by the . We have very carefully considered the evidence in the record in this case and are convinced that the same ruling should obtain for the years 1924, 1925, and 1926, and feel that nothing can be added*863 to the discussion in , on this point. In that case we did not have before us the question as to whether or not the petitioner is a transferee of Barham Well No. 1 within the meaning of section 280 of the Revenue Act of 1926, but we did decide that the petitioner purchased the shares of the unit holders and not the assets of the association, and we find nothing in the record of this case to cause a change of our views on the nature of the transaction. The facts here show that upon the acquisition of the various units or shares of Barham Well No. 1 by the petitioner the property of the former was taken over and merged with other property and operations of the petitioner. On these facts, it is clear that the petitioner became the transferee of Barham Well No. 1 within the meaning of section 280, supra. Having determined that the petitioner is a transferee of Barham Well No. 1, it becomes necessary to consider and dispose of the contention that the period within which the deficiencies herein involved could be assessed against and collected from the petitioner had expired prior to August 15, 1930, the date on which the deficiency letter herein*864 was mailed. Under section 277(a) of the Revenue Act of 1924 and section 277(a)(2) of the Revenue Act of 1926, it is provided that income taxes for the calendar year 1924 must be assessed within four years after the return was filed. Under section 277(b) of the Revenue Acts of 1924 and 1926, however, it is provided that where a deficiency notice has been mailed under subdivision (a) of section 274 of those acts and a petition has been filed with the Board, the running of the statute of limitations on the making of assessment is suspended until the decision of the Board has become final and for 60 days thereafter. Section 280(b)(1) of the Revenue Act of 1926 provides *1063 that assessment of liability of a transferee must be made within one year after the expiration of the period of limitation for assessment against the taxpayer. With reference to the years 1925 and 1926, the statutory provisions are the same, except that the period within which income taxes must be assessed against the taxpayer is three years from the date of the filing of the return instead of four years allowed for 1924. The petitioner takes the position that neither of the petitions filed in respect*865 of the deficiencies determined against Barham Well No. 1 for the years 1924, 1925, and 1926 effected the suspension of the running of the statute of limitations. With reference to 1924, it is claimed that Leeper had previously, on or about March 1, 1927, disposed of all his right, title, and interest in and to the said Barham Well No. 1, and had no authority whatever to file a petition in its behalf. With reference to 1925, the petitioner relies on the fact that Walker S. Clute was never at any time a unit holder or trustee of Barham Well No. 1, and that he likewise was without any authority to file a petition. If these petitions did suspend the running of the statute of limitations until their final disposition and for a period of sixty days thereafter, it would not be necessary to trace in detail the various dates which might otherwise affect or mark the running of the statute of limitations, since we have found as a fact that the petitions were not finally disposed of until 1932, which was more than a year after the deficiency notice herein was mailed to the petitioner. In our opinion the filing of these petitions did suspend the running of the statute of limitations. *866 . Decision will be entered for the respondent for deficiencies in the amounts shown by the deficiency letter, plus interest as provided by law.