Commissioner of Internal Revenue v. Ashland Oil & Refining Co.

Company pro- The Swiss in the oil HAMILTON, Judge, dissent- Circuit ducing Kentucky. business in Eastern ing. unprofitable Prior to business was 1925 its procure produc- and it determined to more properties. years tive For several di- or rectors discussed the of lands belonging leases to the Union Gas & Oil Kentucky. For with reasons concerned, which we are not here Union properties, to sell its refused but Combs, 29, 1924, on July President Swiss, Thraves, stockholder, acting Swiss, option for an secured to Dol- all lars, the Union stock for Five Million payment first which upon By was to made exercise. terms Union stock was escrow, placed then to be Union Prescott, Washington, D. C. A. F. operate property to continue until to Morris, Key, (James W. Sewall A. F. proceeds operations the net from should C, Prescott, Washington, D. on all of the equal $1,000,000, the sum of this when of Internal Reve- brief), for Commissioner paid amount was to be to Union stock- nue. payment. second holders balance Davis, City, New York W. John purchase price evidenced McClure, Washington, E. D. C. John promissory mortgage notes secured Davis, City, (John of New York W. Wes- comple- upon Upon oil leases. Vernon, Miller, Jr., Robert N. ton delivery of the second McClure, C., Washington, E. all of D. John alternative, capital the if stock and 1925. Swiss the being January last the until raise, cost, to part, notes not of funds were its was enti- strenuous efforts to tled They of payment. un- to deduction for ex- meet were amortization the initial pense successful, finally was and discount on the notes. and Combs author- dispose option ized on the best to Shortly upon before hearing the the terms, possible done if could not be this petition review, Swiss for Commission- the expiration, lapse. its to it to Before allow position: er taxpayer abandoned the that the however, agreement behalf made on was through had properties the reor- Pyn- firm of of with the securities Swiss ganization, and in al- an amended answer York and Chica- of New chon & leged taxpayer that the realized had a taxa- terms, Pynchon, go. By to whom the its $2,906,043.32 gain acquisition ble of their at assigned and on-whose be- was first liquida- that 1926. He the contended exercised, agreed been to re- it had half wholly tion of Union was to be treated as Swiss, together with convey to independent purchase of of its cash, $1,750,000 in consideration In arriving profits alleged the Com- Pynchon delivery $2,000,000 of Swiss to taxpayer’s missioner asserted to year notes and Swiss stock three $5,000,000, disregarding 7% notes $2,000,000. to par Swiss was of a value process acquiring stock issued payment of first apply the Union the differ- purchase price of the installment ence between that amount admitted Pynchon’s and to assume obli- Union stock properties. position value of the gation the balance. for taxpayer acquisition was that Union Pynchon agreements with The Swiss liquidation company stock and the of that During merely carried out. steps unitary plan and with Union were were in a ac- operated quire oil and leases were producing properties, 1925' the Union oil supervision, and out of net gain Union’s and that no taxable was realized since pur- earnings properties the second by it, were still owned interest, stock, plus price of chase even if the Commissioner’s is ac- by declaring paid cepted dividends of Union treated agent paying by separate transaction, held the escrow gain as a alleged Union stockholders. The last them to have been realized was erroneous be- '30, 1925, made -on December payment was cause of exclusion of the notes and stock mortgages to the notes and and thereafter elements cost. remaining portion pur- secure the A division the Board sustained the price executed delivered. chase were (The Commissioner. was not re- decision by stock was delivered by full Board.) viewed It was held that 2, 1926., January agent, and- on escrow originally while Combs was authorized to properties liquidated as- Union was 'negotiate of either the as- signed to Swiss. Union, sets or stock of the contract actual- properties ly entered into was agreed that the of Union It is with over Swiss had a fair value for the of stock. Union was not when taken Commissioner, transaction, party afid $7,906,043.32. how- to this dissolu- deficiency immediately ever, contemplated note tion in his determined depletion taxpayer’s deduc- since its existence was to continue until an formerly properties owned Union amount called the contract should tion whereupon paid earnings, prop- as when of be same hands out to be Union, $2,800,000. namely, erty mortgaged The Commis- its notes was that Swiss be over, to its More- determination delivered old stockholders. sioner’s operate properties by virtue did hold non- year, reorganization. during He also deter- for almost a tax- taxable $2,000,000par as sole capi- payer stockholder received all value bene- mined paid earnings. fit and dividends from its Be- fact, controversy proclaim resulting from a it. Nor empt gains does the from taxation by Co. the Union stock was Swiss for properties Pinellas Ice held for cash. sale of year destroy transitory almost a Commissioner, 53 S.Ct. char U.S. 287 v. 428; Speciality v. acter of such holding Co. when terms of Cortland L.Ed. 77 937, 939; Cir., Commissioner, F.2d Sar the contract are considered. 2 60 Swiss could Cir., Commissioner, liquidate 7 obtain the stock nor Union un Grocery Co. v. ther til its second had been F.2d 68. made. 63 Promptly did thereafter dissolve Union. however, remains, question The filing The consolidated return for transaction, whatever entire whether if the corporations two in 1925 is likewise unim intent, form, essentially in portant. It has so been considered proper result, purchase Swiss of Muskegon Specialties Board. Motor Com separate steps may ty, be treated its several Commissioner, pany v. 35 B.T.A. 851. pur given effect for tax ly an and each plan distinct poses though taxpayer constituted a each The of the to secure fully Swiss It is true that transaction. disclosed Union. this is not all the stock of But exhibits and in the witnesses the case. ownership of decisive, transitory for a This had occasion to court consider the necessarily legal significance. is not essential character of the transaction Bashford, Helvering Lamprecht 302 58 in v. U.S. identical v. Swiss record 307, 309, Cir., stipula Corp., By 82 been 32 L.Ed. 367. It has 6 F.2d 646. S.Ct. Oil too often to warrant citation that said tion the other evidence in exhibits practical matter, intensely imported is an been into this. We taxation case have said [page 647], thing and that the substance done desired there “It [Swiss] profitable govern. procure oil-producing proper form it not the took must This repeatedly ties,” principle again, clearly appears has been invoked “It to have applied by been, universal, gen Commissioner and the Board. not the at least the Publications, Inc., Commissioner, Carter v. officers eral of the and directors of 160; 28 Company B.T.A. Warner Co. v. Commis Swiss that it no recourse sioner, 1225; George 26 B.T.A. Whittell & but unless it Inc., Commissioner, Co., Company properties,” v. 34 B.T.A. 1070. Gas & Oil still regard again, Pynchon, And without whether reference the result “But imposition taxation, acceptance through relief the fact recognized repre have purchase controlling courts where the and its es nature of a sential transaction is the ac sentation directorate the Swiss quisition property, Company practically it will be viewed as became interested [it] whole, steps closely Company’s carrying related will out separated very proper either purchase, instance and in sense in taxpayer taxing authority. directly though or the effectively Prairie less — —se Motter, Cir., Gas Co. v. Oil & 309; 10 66 F.2d to the cured the Union Gas Commissioner, properties.” Tulsa Tribune Co. v. light In & Oil Cir., 937, 940; Realty Corp. 10 58 F.2d Lamprecht opin Ahles these statements Commissioner, Cir., 150; 2 carefully 71 Hel v. F.2d ion we have reviewed the record. vering Security Savings Bank, transaction, v. Cir., that the though 72 It seems clear Case, F.2d 874. Prairie Oil & Gas form a was in sub su pra, bears to the case gas at bar a close re stance a oil and leases They distinguished is not to be semblance. to Union. could belonging not other acquired. fact that the issue there wise be The reservation whether reorganization cash, oil, notes, was a so fix there as to the Union stockholders ac depletion prin- counts, clearly deductions. credits and securities indi- wholly ignores were But this the realities of the all that Union stockholders cates selling buying were situation. that Swiss was all mate- unused gas the oil and leases. Pynchon Prior to the deal with storage equipment hand and rial and taxpayer .option purchase proper had an opera- be useful would on the properties ty $5,000,000, Lamprecht reserved tions, .they were likewise Case, supra, reasonably was found to be apart from the subjects for barter future than worth more in excess of the were The Union 'agreed purchase price to the defendant obligations incurred other all taxes and corporation. The evidence in that payment, and to indemni- prior to the initial ranges something $8,- value 000,000 less than either tort any claims against fy Swiss as minimum to against. might accrue (cid:127)or contract maximum. Prior transac pay- cash prior the date tion this increment of value inherent in the agree- respects this In all essential ment. bargain with Union was unavailable segregated the oil ment to Swiss because it could not finance Unión and other assets from all of the Following deal. to transfer liability. Our from accrued freed them Pynchon, and there is little doubt that its form regardless of is that conclusion option transferred, was so the Board intended to was result that substantial .making finding contrary, no to the this in transac- parties both to effectuated Pynchon. crement of value was with But effectuated, awas tion, was fact Pynchon operator. was not an oil It dealt properties to oil and transfer of the securities, option subject and it held the being own- Swiss, still and these obligations financing to involved in the successor, no taxable Swiss or ed plan. When the was re-transferred gain been realized. has Swiss, to situation had com latter’s prop- purchase of Union Though the pletely changed. It now held cash more a non-taxa- recited was erty in the manner payment sufficient than to initial meet the transaction, necessary by is still rea- it ble to Union stockholders and the increment challenge taxpayer’s to the cost son value bargain of inherent in its became compu- employed Board for the base something realizable. was before What depletion further examine to -of tation expectation capital asset, mere became a determined member division The decision. the cost greatly increased the of value Swiss $5,000,- as to Swiss of Union stock necessity and saved Swiss from the of op- named 000, the consideration liquidation. supra.) (See Lamprecht opinion, He stockholders. the Union tion from changed For this situation it was $2,000,000 delivered of notes treated willing, pay. pay obliged, indeed to Company having been Pynchon & to very ment was made in its stock. In a true $250,000, assign- of discount sold at a of sense fair value that stock was an of stock Swiss an no value to the ed prop element in the cost to it Union cost. He arrived at this deter- element erties, and should have been so considered ground that partly on the mination arriving upon at base which to com only $5,- received Union stock sellers of 000,000, depletion. pute Board member made partly what he called a “be- finding no of the value of the Swiss stock. comparison, reasoned and after” fore empowered to We are make none. obtaining might not cost of cash that be added property cost of therewith is that an to the It true inference as to expense for it was but value arises from determination purchased, This method of member of discount acquiring a asset. Board on Swiss permitted breaking down amortized of a trans- notes to be over the analysis is but the (cid:127) nature, compo- period they infer action, into its were to run. But such single subject infirmity our invasion ence does warrant parts, is nent Before the deal function of Board. Be finding noted. fact heretofore reasoned, op- sides, suggestion had the than Swiss there more a Pynchon, he cash, Pynchon had the value no while the memorandum that a tion but inferentially assigned option. $350,000 Thereafter no Swiss to the Swiss had cash cash, purposes amortizing option and the so for discount that all stock both notes, $2,000,000 upon any was based not acquired for its of notes Swiss on evi preferred suggested $2,000,000par stock in the case but set dence agreeable declined The notes were sold at to Swiss but $1,750,000of cash. tlement pure Compromise offers or and the stock was bonus. the Commissioner. a discount collectively All of for be substituted to acceptances are not Company the Union The deci- Oil & Gas questions of value. had evidence legal right sell stock be set aside their to Swiss Board should sion Company without determination consent of the cor- remanded for cause poration pass and such sale as an ele- did stock title value fair corporate presump- assets. It is a acquiring the Union fair in the cost of ment tion from base for the evidence in case that establishing fair for not sell its would assets because depletion. computing required it would be tax on upon the was decided presume is also fair to liquidation of the willing to take this chance. Swiss, and on the gain in taxable resulted majority opinion: stated conyeyed the stock theory that the value of “For reasons with we are not the cost formed element concerned, here Accordingly the stock to Swiss. of Union properties, July refused to sell but on depletion de- computation 29, 1934, Combs, Swiss, President $5,000,000, the discount to be termined Thraves, Swiss, stockholder, acting for notes over the be amortized secured all of the determined to run was period were to Dollars, Union stock Million for Five figure $600,000. was arrived The latter which a first inferentially by considering the at least its exercise.” dollar, cash, paid for dollar stock as $350,000, leaving of a value basis why I am unable to understand we are consideration for the cash sale not concerned with the of the Union $1,400,000. discount was This period over involved. The amortized the how it can contended that were ac- Commissioner, the conceiving that quired all of its of outstand- or decision is aside modified on Board’s set Ordinarily ing stock. the transfer of all raised, principal issues or both of either the corporate requires corporate assets action allowable deductions determination of regulated is The In- statute. stand, depletion should not and for discount regulations in found An- are Bums’ diana for review of Board’s deci- petitioned Statutes, Indiana notated Watson’s Revi- respect deple- and in to both discount sion 4, 24, sion, Chap. seq. 4822 et Vol. § years 1927 to 1930 tion inclusive. showing There is in the record of our conclusions view the main In majority opinion sale which the finds issues, be set the decision should aside in statutory corporate had either or year respect to deductions for each involved approval. practicability ap- rule The of redetermined. allowable deductions interpretation plies tax- of ing also their statutes but Ap- administra- The decisions of the Board of Tax The reason for the rule reversed, tion. is that peals are and the therefore causes ordinary falls on business tax transactions proceedings for further con- remanded ordinary way conducted business formity herewith. the records of such transactions from authorities taxing which the obtain infor- HAMILTON, (dissent- Judge kept ordinary in the mation are business ing)- way. opinion I am in the unable concur of shows, far the record So no sale of Court. appeared on Union assets its books and opinion applicable my taxing there is no opinion majority applies I believe requiring a tax statute it on income facts a manner which reaches realized its stockholders from the sale justified by general corpora end not either capital its entire of taxing corporation law A or statutes. taxing provide (cid:127)The statutes is not a fiction but creature income the law ownership acquisition loss gain or arises “its a nonconductor that subsequent disposition impossible property it either makes attribute an interest exchange. property for cash or in its its members. Donnell v. realized Co., when, as result of a Herring-Hall-Marvin 208 transaction between Safe U.S. person, 273, proper- 267, 288, 481.” owner another 28 S.Ct. 52 L.Ed. Klein the 19, Supervisors, 24, ty essentially 282 U.S. 51 is converted into v. Board different 16, 15, 140, property. 75 L.Ed. A.L.R. S.Ct. 73 594 (cid:127) opinion fact Tulsa majority ignores The the separate Co. v. Commissioner of Tribune Revenue, Cir., Internal dealing 937, three 10 58 that we are F.2d in- entities, capital of volved the (1) value stock for taxable tax purposes Company, 1918, (2) the cor- under the Oil & Gas Revenue Act § 326, 40 poration organizers & Gas Com- Stat. 1092. (3) Swiss Oil The corporation acquired pany. of another the assets corporation for a fixed sum and transferred Act (c) of Revenue Section 201 appellant them after 1926, 10, that ‘'amounts provides 44 Stat. sought purpose of to revalue them for the cor- complete liquidation of a distributed determining capital. its invested court The as in full poration shall be treated purchasers ruled assets stock,” gain exchange and “the for the promoters agents were poration. cor- resulting from distributee or loss to the helpful This to a deci- case not exchange shall be determined such sion here. recognized only to shall be section Realty Corporation In Ahles v. Com’r 203.” provided in section extent Revenue, Cir., 2 Internal 71 F.2d exceptions contained None of the taxpayer acquired capital all general applies. rule of of 203 section section corporation in ex- assets of another entire amount 203(a) is that the change for its stock and debentures. 202 shall excess of gain determined under section corporation After the transfer the old gain is recognized. That taxpayer subsequently dissolved and the exchange of realized the amount sold some and the real estate it real- The amount stock over its cost. the ized is sought to revalue proper- market value fair determining decided gain. court (c). ty (a) 202 received. Sec. reorganiza- property in a provisions (h) tion under the of Sec. assets under If the Union sold its (1) Act 26 U.S. of the Revenue opinion, majority in the stated (h) (1), now 26 C.A. § § U.S.C.A. gain from the realized tax on owed a yvas gain its basis at the date of stockholders- sale corporation. the old property to 201(c), Sec. tax under dissolution owed a The difference between the cited case dispute, facts, supra. show without bar is stated in the one at and of the court stockholder at was the sole that the Swiss [page as follows plain 151]: and .under the date of dissolution the Statute, language is taxable. of the acquired by “The real estate not petitioner liquidation proceedings, the majority opinion relieves the Swiss reorganization.” with a connection but liability at the date of as a stockholder on the that its dissolution Helvering v. In the case of Securities Union, acquire the assets of the not Bank, Cir., Bank Savings 4 72 F.2d the object to me that stock. It seems the its acquired stockholders of another from the was to work a dissolution of the Swiss bank, per im- their stock at share and $140 thereto, acquire and, an incident mediately put charge of the Bank its and when it caused a dissolution its assets and directors and simultane- officers own exchanged shares of the Union it of stock ously contract therewith entered into a Union, physical assets of acquire of its Bank to all assets with the property. essentially different liqui- declared itself It then a for cash. dating dividend less than the cost Motter, Cir., 10 Prairie Oil & Gas Co. v. computing In net income it claimed stock. as a There, 309, is this case. 66 F.2d unlike deduction the difference between corporation jointly bank stock and the of the dividends. cost with the Prairie sell the cor- contracted the Bank held that had The court direct porate assets and transfer was good the form of will intangibles in corporation. by There no books of the old bank and fur- shown agreement between the Swiss such of the assets the Bank the sale that not a free ther conveyance and no of assets. Union The direct voluntary sale because was made only question had it the Court before by officers who its own fixed sale Oil & Gas Case was in the Prairie superficial ap- has price. This case reorganiza- was a whether transaction here. the one plication to 204(a) (7) of the Revenue tion within Sec. Riggs v. National Burnet (a) (7), 26 935 now Act of U.S.C.A. § Cir., similar to Bank, very 4 F.2d 57

26 U.S.C.A. § Riggs I controversy. opinion There the am of the from facts in one in Comptroller Bank, this case and the reasonable inferences at solicitation 1922, purchased Currency January therefrom, and deductions Sav- deliberately the Hamilton & stock of Oil Gas refused to all of year sur- ings resulting the same sell its assets because tax Bank June purchased just all of burden rendered that the Swiss deliber- assets, liqui- ately purchased exchange Bank the stock the Union with loss. acquire old bank intent to dated the at dissolve it and thus doing, so assets assumed the tax wheth- question in the case was The sole falling burden on time of it at the dissolu- corporation a deducti- sustained er the had tion. Act ble loss under Revenue [page 983j: Stat. 227. The Court said There is showing no in this record that Company reported profit the Union Oil respondent on & Gas made a “Had profit any paid any liquida- growing taxes out transaction as shown the time transfer of its unquestionably have had to assets would Corporation. Oil It profit, and it must follow is fair to a tax on assume so far as this case is the loss concerned there has it should be allowed to deduct escape liability been an entire can be from tax making up There its tax return. profits profit exchange realized in or a loss time to calculate better between liquidation. assets the Union and the Swiss ex- as of the date of than cept paid by Union stockholders on the separate corporate entities of “The of their sale stock. Riggs National Bank Savings Bank I am that the entirely ignored consider- to be are not received cash Company though ing question, entire this even tile with which the stock the other stock of one owned of the Union should not be added to the were affiliated.” in determining Union stock purpose of Swiss to The ultimate liquidation. This transaction was acquire cannot alter the assets simply borrowing by Pyn acquired the stock actually fact that it money chon nearly year to it for and held title the stock. The orders of Board should liquidation. preventing agreement . be affirmed acquire the Union assets title to did stockholders, the contract with its title to after The Government must measure ex- actions acts in fact done and a taxpayer obligation discharges his basing his Government tax on NATIONAL BONDHOLDERS CORPORA- fact realized. McCLINTIC, Judge. TION et al. v. corporate separate entity No. 4406. recognized a basic one all inter- Appeals, separate Circuit Court of nal revenue statutes. A Fourth tax is irh- corporations posed on their distribu- 10, Nov. 1938. only to stockholders are taxed in tions way. Specifically limited enumerated cor- exempt porations are from tax and dis- corporate tributions of assets in type are a distinct of income. corpo- It is cases unusual may disregarded rate form in determin- liability. ing tax Burnet v. Commonwealth Improvement Company, 415, 420, 287 U.S. 198, 199, S.Ct. 77 L.Ed. 399. cir- in this are not cumstances so unusual justify exception. Dalton v. Bow- ers, 287 U.S. 53 S.Ct.

L.Ed. notes mortgage for Davis, Polk, Reed, Wardwell, & Gardiner was to be delivered to stock City, Chevalier, New York and Miller agent. agreed escrow It was Washington, C., brief), D. carry the sale of the should Refining Oil & Co. Ashland oil, money, accounts, any notes, with it PUCKS, SIMONS, and Before HAM- belonging Union on or securities to credits ILTON, Judges. delivery Circuit day of they belong to the should Union stock- SIMONS, Judge. proportion to their stock hold- holders equipment ings. material Unused Upon petition taxpayer, storage hand and Corporation, merged with now others Oil sale, likewise reserved were Refining the name Oil & Ashland provision pur- were questions principal to Company, we have two price exceeding at a chased The first is whether tax- decide. original cost. The by liquidating another in 1926 cor- payer obligations and other wholly all taxes were stock of own- poration, the prior company incurred to the exer- ed, notwithstanding orig- gain, realized option, indemnify and were to liquidated cise purpose to cor- acquire the inal claims, against any either tort properties, and not its stock. The Swiss poration’s might contract, prior accrue involves correctness second payment. date the initial Appeals’ determination of Board of Tax appealed the notes. Swiss the Board assigned his inter- Thereafter Thraves Combs, Appeals, de- asserting Tax its base for est in Combs later consideration, pletion was the assigned Swiss. For Union, acquired Union, $7,906,043.32, granted several extensions were

Notes

notes tal stock and sides, separate taxpayer part Union was a dur- formed joined ing 1925 and Swiss in acquiring stock and a con- cost of the Union any part year. solidated return for entitled to Swiss was therefore not pur- therefore concluded that on was for amortization discount deduction separate ciple governing single decision was that a and in a of Union the stock chased singly dissolu- transaction must be considered assets acquired its transaction tion, steps, might not be divided into its several each these and that circumstances separate to be considered as a purposes. transaction disregarded for tax respect liability. to tax acquisi now conceded that It is not, purpose It is not decisive that of Union stock acquire of Swiss to Commission originally determined agreements for not recited formal “reorganization,” executed er, pursuance bring statutory about result if definition such it is settled that the beyond ex disclosed circumstances which be stretched reorganization cannot

notes and, them, if it refused to sell

Case Details

Case Name: Commissioner of Internal Revenue v. Ashland Oil & Refining Co.

Court Name: Court of Appeals for the Sixth Circuit

Date Published: Nov 18, 1938

Citation: 99 F.2d 588

Docket Number: 7541, 7542

Court Abbreviation: 6th Cir.