Rollestone Corp. v. Commissioner

THE ROLLESTONE CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE ROLLESTONE INVESTMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE FREELAND PROCESS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE MIDWEST INVESTMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE SOUTHERN INVESTMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. THE SOUTHWESTERN DEVELOPMENT COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Rollestone Corp. v. Commissioner Docket Nos. 44576, 44577, 44578, 50216, 50217, 50218, 50219, 50220, and 50221. United States Board of Tax Appeals 38 B.T.A. 1093; 1938 BTA LEXIS 786; November 8, 1938, Promulgated *786 1. Distributions made during the taxable years were distributions in liquidation rather than dividends for income tax purposes, where prior to the taxable years the corporation had sold substantially all of its assets; thereafter it did not engage in its former business operations during the years in question; and its stockholders had agreed that it should be liquidated. 2. Previous distributions in 1922 and 1923 were ordinary dividends under section 201 of the Revenue Act of 1921 and did not serve to reduce the petitioners' basis for gain or loss on their stock. 3. The basis for gain or loss on the stock to two of the petitioners is the same as that of the prior owners who transferred the stock to those petitioners in an exchange covered by section 203(b)(4) of the Revenue Acts of 1924 and 1926. Sec. 204(a)(8), Revenue Acts of 1924 and 1926. 4. The basis for gain or loss on the stock to the third petitioner is the cost of the stock to it, because the transfer was a reorganization and the stock was that of a party to the reorganization so that the general rule of section 204(a) of the Revenue Acts of 1924 and 1926 applies rather than any of the exceptions. *787 Thomas D. Lyons, Esq., and T. C. Hart, Esq., for the petitioners. Hartford Allen, Esq., for the respondent. MURDOCK *1094 The Commissioner determined deficiencies in income taxes as follows: Petitioner Docket No. Year Deficiency Rollestone Corporation 44578 [1924] $40,255.09 Do 44578 [1925] 14,754.44 Do 50218 [1926] 5,382.38 Rollestone Investment Co 44577 [1924] 3,118.57 Do 44576 [1925] 1,001.47 521.41 Do 50220 [1926] 1 130.35 Freeland Process Co 50217 [1924] 9,927.75 Do 50217 [1925] 8,465.17 Do 50217 [1926] 2,634.24 262.55 Midwest Investment Company 50219 [1926] 1 65.64 Southern Investment Co 50216 [1926] 337.47 Southwestern Development Co 50221 [1925] 1,218.16 Do 50221 [1926] 2,319.60 The principal question to be decided is whether or not certain distributions received by the Rollestone Corporation, the Rollestone Investment Co., and the Freeland Process Co. during 1924, 1925, and 1926, from the Continental Petroleum Co., constitute dividends or represent distributions in complete or partial liquidation. If those sums represent distributions*788 in complete or partial liquidation, then the proper amounts to be included in the taxable income of those petitioners for the years involved must be determined. There is also presented for determination the question of whether the net losses, and their amount, if any, claimed to have been sustained in 1925 and 1926 by the Puritan Mining Co. and the A. A. Rollestone Co., subsidiaries of the Rollestone Corporation, are proper deductions from the consolidated income of the latter corporation. It is agreed, apparently, that if any or all of the foregoing questions are determined in favor of the petitioner, the respondent will make proper adjustments in the tax deficiencies of the Southern Investment Co., the *1095 Southwestern Development Co., and the Midwest Investment Co. for the years properly before the Board. The petitioners did not offer any proof relating to the other issues raised by the pleadings, or make reference to them in their arguments, and it is assumed that they are abandoned. If not abandoned, the petitioners must lose for failure of proof. FINDINGS OF FACT. The petitioners, the Rollestone Corporation, the Rollestone Investment Co., and the Freeland Process*789 Co., were corporations organized under the laws of Delaware. The other petitioners were trusts organized under the laws of Oklahoma. All the petitioners had offices located at Bristow, Oklahoma. Petitioner Rollestone Corporation was the parent company of petitioner Southern Investment Co. The A. A. Rollestone Co. and the Puritan Mining Co. were other subsidiaries of the Rollestone Corporation. Petitioner Rollestone Investment Co. was the parent company of petitioner Midwest Investment Co. Petitioner Freeland Process Co. was the parent company of petitioner Southwestern Development Co. Each parent company and its subsidaries filed consolidated income tax returns for the years 1924, 1925, and 1926, with the exception of the year 1924 when the Rollestone Corporation, the Rollestone Investment Co., and their subsidiaries filed a consolidated return. The Continental Petroleum Co. (hereinafter called Continental) was organized under the laws of Delaware in 1919, for the purpose of engaging in the oil and gas development business. Thereafter, in the same year, A. A. Rollestone, E. H. Rollestone, and C. L. Freeland transferred certain undeveloped oil leases to Continental in exchange*790 for some of its stock. The number of shares of Continental stock acquired by those individuals and the cost of the shares to them were as follows: Shares Cost Cost per share A. A. Rollestone 80,554 $181,246.50 $2.25 E. H. Rollestone 5,866 1/2 13,199.62 2.25 C. L. Freeland 14,327 1/2 32,236.87 2.25 A. A. Rollestone transferred his stock in Continental to the Rollestone Corporation on January 10, 1922, in exchange for 99 percent of the latter's capital stock. E. H. Rollestone transferred his stock in Continental to the Rollestone Investment Co. on January 10, 1922, in exchange for 99 percent of the latter's capital stock. C. L. Freeland transferred his stock in Continental to the Freeland Process Co. on January 10, 1922, in exchange for 99 percent of the latter's capital stock. *1096 The fair market value of the Continental stock on January 10, 1922, was $25 per share. Continental had not more than 159,608 shares of stock outstanding on that date, all of which was common stock. Continental entered into a contract on December 21, 1921, with the Transcontinental Oil Co. (hereinafter called Transcontinental) to sell to the latter*791 certain of its assets. That contract, which was duly executed by the officers of Continental, was as follows: This agreement made this 21st day of December, 1921, by and between The Continental Petroleum Company of Delaware a Delaware corporation, herein designated "first party", and Transcontinental Oil Company, a Delaware corporation herein designated "second party." Witnesseth, That for and in consideration of the sum of Five Hundred Dollars ($500.00), lawful money of the United States paid by second party to first party the full receipt of which at or before the ensealing and delivery hereof is hereby acknowledged, and for and in consideration of the several covenants, stipulations, conditions and payments hereinafter mentioned and provided to be kept, performed and paid by either of the parties to and with the other, it has been agreed as follows: First. That first party will on or about the 25th day of January, 1922, sell, assign and transfer, free and clear of all liens and encumbrances with clause of general warranty, by proper recordable instrument, fully delivered, the entire leasehold estates, title and interest for oil and gas purposes, in, of and concerning all*792 those certain lands situate in Creek County, State of Oklahoma, more particularly defined and specified in and by that certain schedule hereto attached, marked Exhibit 1 and made part hereof, in consideration of the payments then to be made and to be secured as next hereinafter mentioned. Second. Second party shall upon delivery of proper instruments of sale, transfer and conveyance, to be made as last above provided, pay or cause to be paid the sum of Five Million Dollars ($5,000,000.00), less credit for the hand money herewith paid, in the following form and manner: (A) One Million Dollars ($1,000,000) in cash, lawful money of the United States; (B) Five Hundred Thousand Dollars ($500,000) lawful money of the United States, at three (3) months thereafter, to be evidenced by proper promissory note and secured as hereinafter mentioned. (C) Five Hundred Thousand Dollars ($500,000), lawful money of the United States, at six (6) months thereafter, to be evidenced by proper promissory note and secured as hereafter mentioned; (D) Five Hundred Thousand Dollars ($500,000), lawful money of the United States, at nine (9) months thereafter, to be evidenced by proper promissory note*793 and secured as hereinafter mentioned; (F) Two Million Five Hundred Thousand Dollars ($2,500,000), lawful money of the United States, payable out of, and only out of, one-half (1/2) of all oil produced (and as and when produced) to the account of the leasehold interests herein agreed to be conveyed in and under any and all of the leasehold estates so sold, transferred and conveyed. Provided, however, that at, upon and after the acceptance by second party of the instruments of transfer and conveyance for said leasehold properties, there shall be credited and allowed to second party in reduction of the One Million Dollars ($1,000,000) cash consideration then to be paid, all money received or accrued to the interest of first party out of one-half of the crude oil run from said leasehold premises from and after 7 a.m. December 24th, 1921, to the date of delivery of such instruments; and that there *1097 shall be credited to second party (but retained by first party and applied upon the amount of Two Million Five Hundred Thousand Dollars ($2,500,000) as provided in sub-paragraph (F) above), all money received or accrued to the interest of the first party out of the remaining one-half*794 of the crude oil run from said leasehold premises from and after 7 a.m. December 24th, 1921, to the date of delivery of instruments, subject, however, to prior deductions therefrom by first party, of all expenses for drilling and operation incurred during such period upon said leasehold premises, or any of them. Third. That the deferred payments aggregating One Million Five Hundred Thousand Dollars ($1,500,000) mentioned in clauses (B), (C), and (D) of Paragraph Second above, and the notes evidencing the same, are to be secured by purchase money mortgage, deed of trust, vendor's lien, or such like instrument of security establishing a first lien upon said properties, as shall be stipulated by first party and approved by attorneys for second party; and such instrument of security may further recite the method and amounts of payment to be made out of one-half of the oil produced from said leasehold properties, as provided in clause (F), Paragraph Second above. Fourth. All rigs, boilers, engines, casing, pipe lines, tanks, tools and equipment, or other property used or to be used in connection with said leases now owned by first party and situate on said leases, whether at well*795 or in warehouse, is to remain in place for use and improvement of said properties, and are hereby agreed to be sold, transferred and conveyed with the leases; first party is further to furnish rigs, casing and other material in condition for the drilling contractor to begin, and sufficient to complete wells No. 4, 5, 7, and 8 on the Ben Sharper land, and wells No. 1, 2 and 3 on the A. MacIntosh land, being lands set forth and defined in Exhibit 1 hereto attached, and will remain and be transferred with the proper leaseholds therefor. Fifth. That first party, until the full payment mentioned in Clause (F), Paragraph Second above has been made and realized out of one-half of the oil as therein provided, shall permit or cause to be run the one-half of the oil so applied to such pipe line or other purchaser, including as well the line or lines of second party hereto, as shall from time to time [be] connected to said leasehold properties, or any of them, for the running of oil owned by second party, subject to the usual terms prevailing in the vicinity as to division orders, gauging, deduction and time of payment therefor, and at the best price then prevailing in said territory and*796 posted by responsible purchasers. Sixth. First party shall forthwith begin delivery to second party at Tulsa, Oklahoma, of abstracts brought down to date covering lands referred to in Exhibit 1, and complete such deliveries at the earliest possible date. Settlement hereunder shall be made on or before the 25th day of January 1922, at Tulsa, Oklahoma, provided, however, that should there exist objection or defects in or to the title to any of said leasehold properties, other than such of said leasehold properties as are situate within Township Sixteen (16) North, Range Nine (9) East, or Township Fifteen (15) North, Range Ten (10) East, Creek County, Oklahoma, and the undivided one-half leasehold interest held with Phillips Petroleum Company in Northeast quarter Section Thirty-two (32) Township Sixteen (16) North, Range Ten (10) East, first party shall have reasonable time and does hereby covenant to procure necessary corrections of title provided the same can be done by faithful effort and within reasonable cost and expense considering the then market value of the particular leasehold premises. This agreement shall extend to and be binding upon the parties hereto their respective*797 successors and assigns. *1098 The foregoing contract was ratified by the board of directors of Continental on December 27, 1921. The contract and the action of the board of directors was approved by the stockholders at a meeting called for that purpose on January 18, 1922. The stockholders at that meeting authorized the executive committee to modify the terms of the contract. The stockholders, at the same meeting, upon motion duly made, seconded and unanimously carried, adopted the following resolutions: BE IT RESOLVED that it is hereby declared to be the sense of this meeting of the stockholders of Continental Petroleum Company, that the affairs of the corporation should be liquidated as speedily as possible, and that the assets of the company be distributed among the stockholders. BE IT RESOLVED that the Board of Directors of the company and its officers, be and they are hereby directed to sell all of the remaining assets of the corporation. On February 8, 1922, a final contract, entitled an "Assignment", was executed between Continental and Transcontinental. That contract, which differed in some respects from the December contract, was as follows: Assignment. *798 Know All Men by These Presents: That The Continental Petroleum Company, a corporation, organized and existing under and by virtue of the laws of the State of Delaware hereinafter, termed first party, for valuable consideration as hereinafter expressed, hereby grants, bargains, sells, conveys, assigns, transfers and set over to Transcontinental Oil Company, a corporation organized and existing under the laws of the said State of Delaware, an undivided three-fourths (3/4ths) interest, to M. L. Benedum of the City of Pittsburgh, State of Pennsylvania, an undivided one-fourth (1/4th) interest (said Transcontinental Oil Company and said M. L. Benedum, being hereinafter termed second parties) in and to all those certain oil and gas mining leases and the leasehold estates created thereby, all covering and affecting lands situated in Creek County, Oklahoma, and certain personal property, all more particularly described as follows, to-wit: [Here follows a detailed description of the leases transferred.] Second All rigs, boilers, engines, machinery, casing, pipe lines, tanks, and equipment, or other property used, or to be used, in connection with said leases and now situated on the*799 same, whether at well or wells or in warehouses, together with all oil produced thereon and not run prior to 7:00 o'clock A.M. on the 16th day of January, 1922, subject to reservations as to one-half thereof, as hereinafter provided. To have and to hold the same unto said second parties, their heirs, personal representatives, successors, and assigns, and to this end first party, covenants and agrees: (1) That at the time of the execution and delivery hereof it is the owner of said lease, leasehold and property with good right to sell, convey, and assign the same; (2) That all rentals necessary to be paid to continue said leases in force and effect as of the date hereof have been paid, and that the *1099 leases and leaseholds are in force and effect, and are valid and subsisting leases and leaseholds; (3) That the said leases and leaseholds are free from liens and incumbrances, except such as Lessee upon payment would be entitled to right of subrogation, and (4) That first party will forever warrant and defend the title to the same against the lawful claims of all persons whomsoever. Provided, however, this grant and assignment and the estate and interest granted and*800 assigned hereby is [sic] made and granted upon the following four conditions: 1st. There is reserved to first party to be run to its credit, free of cost by second parties into pipe line to which second parties may connect their lines one-half of all the lessee's share (the working interest), in all the oil produced, and when and as produced and saved from any and all of the above mentioned properties until the first party, at the best price then prevailing in said territory and posted by responsible purchasers, shall have received or been credited with the sum of Two Million, Four Hundred Seventy-One Thousand, Two Hundred Forty-One Dollars ($2,471,241.00), which said sum is payable out of, and only out of, such one-half interest in all oil produced and saved to credit of the working interest. 2nd. This grant and assignment is made upon the further condition that there is reserved to first party vendor's lien upon all the leases and leaseholds granted hereby (except the departmental leases hereinbefore described and specifically mentioned in condition No. 4th, hereinafter set out), and there is further reserved by and granted to first party a like lien upon all machinery, *801 lines, and other equipment of the character hereinbefore mentioned, proper to be, and while used in connection with operations conducted on any and all of said properties during the existence of such vendor's lien, whether such equipment and property now is or may hereafter be placed thereon to secure the payment of the deferred payment purchase money evidenced by notes as hereinafter provided. 3rd. That second parties covenant and agree that the interest and estate granted in each of the leases described is subject to all the terms and conditions in such leases set forth, and covenant to abide the terms and conditions thereof, and to perform the agreements therein contained, so far as incumbent upon the lessee, accruing from and after this date. 4th. That the leases described above opposite Nos. 34th and 44th, inclusive, are what are known as departmental leases, the same being leases covering restricted Indian lands, and subject to assignment only with the approval of the Secretary of the Interior, and that proper assignments thereof on departmental form in quadruplicate [sic], containing the express provision that the same shall be subject to the approval of the Secretary*802 of the Interior, are to be separately executed and delivered contemporaneously herewith to second parties. As consideration for the foregoing grant and bargain, and in addition to the covenants and agreements herein contained, the second parties have this day paid to the first party the sum of Six Hundred Thousand, Three Hundred Sixty One Dollars and Thirty-Eight Cents ($600,361.38) (the receipt whereof is hereby acknowledged) and has executed and delivered to first party contemporaneously herewith four negotiable promissory notes as follows: One: One note in the sum of Three Hundred Eighty Four Thousand Dollars ($384,000.00) payable to order of first party on or before the 15th day of March, 1922. Two: One note in the sum of Five Hundred Thousand Dollars ($500,000.00) payable to order of first party on or before the 15th day of June, 1922. *1100 Three: One note in the sum of Five Hundred Thousand Dollars ($500,000.00) payable to order of first party, on or before the 15th day of September, 1922. Four: One note in the sum of Five Hundred Thousand Dollars ($500,000.00) payable to order of first party, on or before the 15th day of December, 1922, each of said notes*803 carrying in the body thereof proper words identifying the same as one of said series of notes secured by the vendor's lien herein contained, all of which said notes, except the one maturing June 15th, 1922, are by parties, under separate collateral agreement, placed in escrow with First National Bank of Tulsa, Oklahoma. And second parties, for further consideration, agree to pay to said first party out of, and only out of, one-half of oil, credited to the working interest acquired by second parties hereunder, as and when produced and saved, the sum of Two Million Four Hundred Seventy One Thousand Two Hundred Forty One Dollars ($2,471,241.00), the same to be paid as provided hereinbefore in Condition No. 1. It is mutually understood and agreed that upon the payment of said notes in full first party will execute and deliver of record, or cause to be executed and delivered of record, proper release of the vendor's lien herein reserved, and upon the payment of the consideration payable in oil mentioned in the last preceding paragraph, to execute and deliver of record the proper evidence of the satisfaction of the reservation herein made to secure the same, and execute all necessary*804 transfer orders or other instruments of writing that may be necessary to declare the right of second parties therein, and it is further agreed, that upon the presentation by second parties to the County Clerk of Creek County, Oklahoma, of all of the said series of notes duly cancelled as paid, the said Clerk may, and is hereby authorized to make marginal endorsements of the satisfaction of such vendor's lien upon the record wherein this instrument is recorded, and such marginal endorsement reciting the presentation for inspection of said notes duly cancelled as paid shall be conclusive evidence to all persons other than holder or holders and second parties, of the satisfaction of said vendor's lien. It is further mutually understood and agreed that in the event of continued default in the payment of any of said series of notes, after ten days notice in writing after maturity by holder, such notice to be given by registered mail addressed to second parties at New Wright Building, Tulsa, Oklahoma, all the said notes shall thereupon become due and payable and the holder of said notes, or the holder of any of the same, shall be entitled to declare thereon for foreclosure of said vendor's*805 lien, in any which event it is agreed that the rights and remedies of the parties shall be as provided by Oklahoma Laws for the foreclosure of mortgages upon real estate in cases where appraisement and homestead exemption laws are not waived. The parties provided safeguards against defects in the title to the leases in a collateral agreement, also dated February 8, 1922. Practically all of the assets of Continental not transferred to Transcontinental were sold on March 11, 1922, to the Roland Oil Co. for $100,550, one-half of which was paid in cash and the balance in oil when produced. The contract of February 8, 1922, between Continental and Transcontinental was carried out in accordance with its terms. Continental's interest in the oil produced under the contract was run to its credit by pipe line companies. The oil was sold and the amounts received by Continental from its sale were treated as payments from *1101 Transcontinental. The payments provided in the contract were completed some time in 1929, and Continental thereupon released all its remaining interest in the leases and other property transferred by it under the contract. Continental employed a gauger*806 to check the oil run to its credit. One of its executives made daily inspections of the field operations on the leases transferred. It owned three 55,000-barrel tanks in which it stored oil not taken by the pipe lines. Continental's annual net income for the years 1919 to 1926, after deducting donations and income taxes, but without deducting discovery or percentage depletion, was as follows: 1919 (loss) ($4,454.59) [1920] 96,277.30 [1921] 122,890.01 [1922] 2,184,824.12 [1923] $238,319.45 [1924] 292,792.90 [1925] 276,158.02 [1926] 178,240.77 In computing net income for 1922 the amount of $700,676.98 was deducted for the cost of the properties transferred to the Transcontinental Oil Co. Of gross income for these years the portions shown hereunder are attributable to profits received from the Transcontinental Oil Co. in connection with the contract of February 8, 1922: Year Gross collections from Transcontinental Oil Co. [1922] $2,622,251.19 [1923] 240,592.07 [1924] 378,151.59 [1925] 433,843.06 [1926] 287,707.70 Continental made the following distributions to its stockholders, among which were the Rollestone Corporation, the Rollestone*807 Investment Co., and the Freeland Process Co.: Dates of distribution Total distribution Total of distribution per share Year 1922: Feb. 23 $164,864.50 Mar. 17 164,764.50 Apr. 15 164,964.50 May 15 164,864.50 $9.50 Jul. 1 329,729.00 Sept. 15 329,729.00 Dec. 15 247,296.75 1,566,212.75 Year 1923: Apr. 30 412,161.25 2.50 Year 1924: Apr. 30 1,071,619.25 6.50 Year 1925: May 31 141,543.50 June 10 86,257.75 2.00 Dec. 21 129,386.63 357,187.88 Year 1926: May 13 86,257.75 Jul. 10 43,128.89 Sept. 14 25,877.34 1.50 Dec. 15 25,877.34 181,141.32 *1102 Continental filed an income tax return for the year 1922, reporting a profit from the sale of assets to Transcontinental. On that return Continental reported capital assets including developed and undeveloped leases at the beginning of that year in the amount of $1,199,264.98. At the end of the same year those assets were reported in the amount of $708.50. It also reported as an asset, at the end of the year 1922, the sum of $2,709,071.83 representing the amount due from the sale of assets. Continental's income tax return for the year 1923 lists*808 capital assets at the beginning of that year in the amount of $708.50. The same return reports no operating income for that year, but reports income derived from "Interest on Bank Deposits," etc., and profit from the sale of capital assets. Continental's income tax returns for the years 1922 to 1927, inclusive, state that the corporation is in the process of liquidation. Continental filed a petition with the Board on march 23, 1927, at Docket No. 23915, contesting deficiencies determined for the years 1920, 1921, and 1922. It there alleged: The facts are as follows: The taxpayer disposed of all of its assets to the Transcontinental Oil Company and to the Roland Oil Company for $5,100,550.00 of which sum the Transcontinental Oil Company agreed to pay $5,000,000.00 and the Roland Oil Company $100,550.00. The terms in each instance were one-half in cash and notes and the balance in oil when produced. The stockholders authorized a distribution of all of the assets, converted into cash, as, if and when received. The company has not been engaged in producing or selling oil, the purpose for which it was organized, since it sold its assets, merely acting as a receiving and disbursing*809 agent for the funds realized from the sale. The Treasury Department is quite sure the company is in liquidation as it assessed the amount of tax it claimed due under a jeopardy assessment. All tax returns beginning with the year 1922 show that the company is in process of liquidation and the records themselves, which are the best evidence, show that liquidating dividends have been declared just as rapidly as money has been received. The records further show a distribution of assets and if the converting of all of the assets into cash and paying this cash to the stockholders, after they have authorized liquidation, is not liquidation we are at a loss to know just what it is. No new leases have been acquired, no new development has been instituted, nor anything else ever present in a going concern is apparent here. The Commissioner of Internal Revenue received an affidavit from Continental on April 2, 1927, as follows: With reference to information received by your office that The Continental Petroleum Company of Bristow, Oklahoma, has been dissolved. The minutes of the company have been mis-placed and cannot be made available to your representative at this time and in*810 their absence the following statement, sworn to, is presented: That at the time The Continental Petroleum Company disposed of all of its assets, the stockholders at a special meeting, approved the sale and authorized the liquidation of the company. As fast as the money was available it was *1103 distributed to the stockholders in the form of a liquidating dividend. More than 90% of the sale price has been collected and distributed. Final dissolution and cancellation of the outstanding capital stock will not take place until complete liquidation has been effected and all obligations paid. That with respect to the taxes assessed, approximately $82,000.00, an appeal has been made before the United States Board of Tax Appeals protesting the same and a bond has been filed with the Collector of Internal Revenue at Oklahoma City, Oklahoma, in the sum of $100,000.00, the same being Southern Surety Company bond #58076. Continental's income tax return for the year 1929, the year in which the payments from Transcontinental under the contract of February 8, 1922, were completed, report that its assets at the end of 1929 were valued at $151,261.90, none of which were capital assets. *811 Continental engaged in some drilling operations during the year 1930. The drilling expenses were paid from funds received as a loan from some of its stockholders in the amount of approximately $13,000. Other wells were drilled in 1933, with funds received as a Federal tax rebate in that year. Continental was in the process of complete liquidation beginning in 1922 and in the intervening years up to and including the year 1926. The distributions to its stockholders in the years 1924 and 1926, inclusive, were part of a series of distributions contemplating a complete liquidation of the corporation. Each distribution made in 1922 and 1923 was made out of the earnings and profits of the corporation accumulated prior to the date of the distribution. The distributions in liquidation received from Continental by the Rollestone Corporation, the Rollestone Investment Co. and the Freeland Process Co. during the years 1924 to 1926, inclusive, were as follows: Year Rollestone Corporation Rollestone Investment Co. Freeland Process Co. [1924] $523,601.00 $37,092.25 $91,822.75 [1925] 161,108.00 7,459.38 25,671.62 [1926] 120,831.00 6,182.34 15,153.89 Total 805,540.00 50,733.97 132,648.26 *812 The basis for gain or loss of the 80,554 shares of Continental stock owned by the Rollestone Corporation is $25 per share or $2,013,850, its cost to the Rollestone Corporation in the transaction by which it was acquired from A. A. Rollestone. The basis for gain or loss of the 5,866 1/2 shares of Continental stock owned by the Rollestone Investment Co. is $2.25 per share or $13,199.62, the cost of the stock to E. H. Rollestone, its transferor. The basis for gain or loss of the 14,327 1/2 shares of Continental *1104 stock owned by the Freeland Process Co. is $2.25 per share, or $32,236.87, the cost of the stock to C. L. Freeland, its transferor. The distributions received by the petitioners from Continental in the years 1924, 1925, and 1926 are taxable as income in those years to the extent that the amounts received exceed the basis for gain or loss of the Continental stock of each petitioner. The A. A. Rollestone Co. and the Puritan Mining Co. did not sustain net losses in 1925 and 1926. OPINION. MURDOCK: Ordinary dividends are not taxable to corporations, since they are deductible in computing net taxable income, but distributions made in partial or complete*813 liquidation, to the extent that they exceed the corporation's basis for gain on the stock, are taxable when received by corporations, since they are not deductible. Secs. 234(a)(6)(A), 201(a), (c), (d), and (g), Revenue Act of 1924, and corresponding sections of the Revenue Act of 1926. The principal question here is whether the distributions made by Continental to its stockholders, the Rollestone Corporation, Rollestone Investment Co., and Freeland Process Co., in 1924, 1925, and 1926 were ordinary dividends or whether they were amounts distributed in complete or partial liquidation of Continental. That question is not res adjudicata. It was not decided in the case cited by the petitioners. 1 Continental disposed of the principal part of its assets on February 8, 1922, under its agreements with Transcontinental. Practically all of its remaining assets were sold to Roland Oil Co. on March 11, 1922. Thereafter, Continental was merely receiving the payments under the aforesaid contracts. It had no income during the period here in controversy from any other operations. It did not engage in any drilling operations during that period. It received from Transcontinental during*814 the period from 1922 to 1926, inclusive, $3,962,545.61, and distributed to its stockholders during that period $3,588,322.45. The stockholders, on January 18, 1922, had resolved that the corporation should be liquidated as speedily as possible and the assets distributed to the stockholders. Everything that it did thereafter during the period here in controversy was consistent with this resolution to liquidate. Continental, in its petition to the Board and on its income tax returns, alleged that it was in the process of liquidation and was not engaged in producing or selling oil, but was merely acting as a receiving and disbursing agent for the funds realized from the sale. Continental furnished an affidavit to the Commissioner to the same effect. The evidence clearly establishes the fact that Continental was in the *1105 process of liquidation during 1924, 1925, and 1926, and that the distributions here in question were amounts distributed in partial or complete liquidation of the corporation within the meaning of those terms as defined in the Revenue Acts of 1924 and 1926. *815 It should be noted that "amounts distributed in partial liquidation" is defined as meaning a distribution by a corporation in complete cancellation or redemption of part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock. Each of the distributions here in question seems to have been one of a series of distributions intended to be in complete cancellation or redemption of all of the stock of the corporation when the series was completed. The following quotation from Fred T. Wood,27 B.T.A. 162, is in point: * * * Liquidation has been defined as the operation of winding up the affairs of a corporation by realizing upon its assets, paying its debts and appropriating the amount of its profit or loss. W. E. Guild,19 B.T.A. 1186, and cases there cited. It differs from the normal operation of the corporation for current profit in that it ordinarily results in the winding up of the corporation's affairs. There must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. *816 It contemplates an impairment of capital or a retirement of outstanding stock, though a distribution, if one of a series of distributions in liquidation, may be a liquidating dividend even if it, of itself, does not impair capital. Liquidation can not be brought about by mere declaration, and the question of whether a corporation is in liquidation is therefore one of fact. See W. E. Guild, supra;James P. Gossett,22 B.T.A. 1279, affd., 60 Fed.(2d) 484; Martha Briggs Phelps,20 B.T.A. 866; affd., 54 Fed.(2d) 289; E. G. Perry,9 B.T.A. 796; Milton Tootle, Jr.,20 B.T.A. 892. It does not make any difference that a part of the distributions made in the taxable years might be deemed to have been from earnings and profits. Hellmich v. Hellman,276 U.S. 233; Gossett v. Commissioner, 59 Fed.(2d) 365; Holmby Corporation v. Commissioner, 83 Fed.(2d) 548. Nor does the fact that the stock continued to be held by the stockholders without formal dissolution, prevent the distributions from being in liquidation. *817 Frelmort Realty Corporation,29 B.T.A. 181. The drilling operations engaged in in 1930 and 1933 were insignificant and unimportant, since even then there was no intent to maintain the corporation as a going concern. Holmby Corporation v. Commissioner, supra.Neither is it important that Continental was allowed depletion on the interest in the leases until the terms of the contract were fulfilled in 1929. The next question is whether the basis of these petitioners for gain or loss on the Continental shares was reduced by the distributions in 1922 and 1923. The Commissioner does not concede that the effect of those distributions is determined by the Revenue Act of 1921. However, he does not make any argument or cite any authorities to *1106 the effect that the Revenue Act of 1921 is not controlling. That act differed materially from subsequent acts, since it contained no provision for reducing the basis by distributions made in partial or complete liquidation. Distributions under that act were presumed to be from earnings, if earnings were available, in cases like this, and distributions from accumulated earnings were taxable only*818 as dividends. The Commissioner states in his brief that he can not tell whether or not Continental had accumulated earnings sufficient to pay these distributions of 1922 and 1923, but the evidence shows to our satisfaction that earnings were available. There is no provision in the Revenue Acts of 1924 and 1926 making the provisions of those acts relating to the reduction of basis by distributions in liquidation retroactive so as to cover distributions made prior to the enactment of those acts. Therefore, we conclude that the distributions of 1922 and 1923 did not serve to reduce the petitioners' bases for gain or loss on the Continental shares. Cf. Elizabeth P. Patterson,33 B.T.A. 57; Lewis D. Newman,9 B.T.A. 158, 161. Another issue for decision is the basis for gain which the Continental shares had in the hands of the three petitioners. They acquired their Continental shares on January 10, 1922. Section 204 of the Revenue Acts of 1924 and 1926 provide that the basis for determining gain or loss from the sale of property acquired after February 28, 1913, shall be the cost of such property, with certain exceptions. One of the exceptions is*819 that "if the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in paragraph (4) of subdivision (b) of section 203 * * *, then the basis shall be the same as it would be in the hands of the transferor," where no gain or loss was recognized to the transferor under the law applicable to the year in which the transfer was made. Sec. 204(a)(8). These three petitioners acquired their Continental shares by the issuance of their stock in connection with a transaction described in paragraph 4 of subdivision (b) of section 203. The latter section provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for the stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. No gain or loss from those transfers was recognized under the Revenue Act of 1921, which was the law applicable to the year in which the transfers were made. See section 202(c)(3)(A) of the Revenue Act of 1921. *820 The provisions of the Revenue Acts of 1924 and 1926 above referred to apply to all such transfers made after December 31, 1920, by the express language of those provisions. The transactions whereby E. H. Rollestone and C. L. Freeland *1107 transferred their Continental shares to the Rollestone Investment Co. and the Freeland Process Co. were no part of any plan of reorganization and the Continental stock was not, as to these two petitioners, stock of a corporation a party to a reorganization. Consequently, the bases of the Continental stock in the hands of Rollestone Investment Co. and Freeland Process Co. are the same as the bases for gain or loss which the Continental shares had in the hands of E. H. Rollestone and C. L. Freeland, or $2.25 for each Continental share. The situation in regard to Rollestone Corporation needs further consideration. A. A. Rollestone owned and transferred to the Rollestone Corporation 80,554 shares of Continental stock. That was more than 50 percent of the total outstanding stock of Continental at that time. There was no other kind of stock outstanding at that time. Thus the transfer from A. A. Rollestone to the Rollestone Corporation*821 amounted not only to an exchange within section 203(b)(4), but also to a reorganization within the definition of that term as contained in section 203(h)(1)(A) of the Revenue Acts of 1924 and 1926. Thus, the Continental shares transferred by A. A. Rollestone to the Rollestone Corporation, being stock of a corporation a party to a reorganization (section 203(h)(2) of the Revenue Acts of 1924 and 1926), are expressly excluded from the exception made in 204(a)(8) and are subject to the general rule of (a), unless some other exception applies. 2 Such shares are specifically excluded from paragraphs (6) and (7). The other excepting paragraphs of section 204(a) obviously are likewise inapplicable. It follows that the basis of the Rollestone Corporation for gain or loss on the Continental shares is the cost of the shares to the Rollestone Corporation, as provided in the general rule of section 204(a). The Rollestone Corporation acquired the Continental shares by the issuance of all of its own stock then outstanding, and the cost of the Continental shares was the value of the Rollestone stock. That value, in turn, was the same as the total value of the Continental stock acquired, or*822 80,554 times $25. Ida I. McKinney,32 B.T.A. 450, 456; E. F. Simms,28 B.T.A. 988; Reliance Investment Co.,22 B.T.A. 1287; George A. Ricker,10 B.T.A. 11; William Ziegler, Jr.,1 B.T.A. 186; Manufacturers Paper Co. v. Commissioner, 89 Fed.(2d) 684. The issue relating to the deductibility of the alleged losses of the subsidiaries, the A. A. Rollestone Co. and Puritan Mining Co., in *1108 1925 and*823 1926 was not clearly presented. The amount of the losses claimed on the returns, as well as the amount disallowed by the Commissioner, does not appear. No amount is mentioned in the pleadings. The contention is made in the petitioner's brief that the petitioners are "entitled to a deduction of several hundreds of thousands of dollars for dry hole expenses." The evidence does not show how much was spent, how much might have been expense, how much capital, or the amount of any loss deductible in either year. The Board can not make any approximation for either year. The evidence fails to show that the Commissioner erred. Decisions will be entered under Rule 50. Footnotes 1. 25% delinquency penalty. ↩ 1. Alexander v. Continental Petroleum Co.,↩ 63 Fed.(2d) 927. 2. The excluding parenthetical clause "(other than stock or securities in a corporation a party to the reorganization)" of sections 204(a)(7) and (8) of the Revenue Acts of 1924 and 1926 were eliminated in the Revenue Act of 1928 in order to prevent possible evasion. See sections 113(a)(7) and (8) of the Revenue Act of 1928 and Finance Committee Report, Report No. 9870, 70 Cong., 1st sess., p. 27. This was new legislation and was not retroactive. Stires Corporation,28 B.T.A. 1; Holmby Corporation,28 B.T.A. 1092, 1102; John R. Thompson Securities Corporation,33 B.T.A. 1011; G.C.M. 7285↩, C.B. IX-1, 181.