Mapco Inc. v. United States

• Decision Date: 15 June 1977
• Docket Number: No. 287-74.,287-74.
• Citation: 556 F.2d 1107
• Parties: MAPCO INC. v. The UNITED STATES.
• Court: U.S. Claims Court

556 F.2d 1107

MAPCO INC. v. The UNITED STATES.

No. 287-74.

United States Court of Claims.

June 15, 1977.

J. W. Bullion, Dallas, Tex., atty. of record, for plaintiff. Buford P. Berry and Thompson, Knight, Simmons & Bullion, Dallas, Tex., of counsel.

Patricia B. Tucker, Washington, D.C., with whom was Acting Asst. Atty. Gen. Myron C. Baum, for defendant. Theodore D. Peyser, Jr., Washington, D.C., of counsel.

Before DAVIS, Judge, SKELTON, Senior Judge, and KASHIWA, Judge.

OPINION

PER CURIAM:

This tax refund action comes before the court on plaintiff's and defendant's exceptions and briefs to the recommended decision of Senior Trial Judge Mastin G. White, which he has submitted in accordance with Rule 134(h) on August 25, 1976. Neither party has taken exception to any of the trial judge's proposed findings of fact; however, both parties have taken exception to the trial judge's recommended conclusion of law. Upon consideration of the parties' briefs and after having heard oral argument, the court agrees with the trial judge's opinion and findings and adopts the same, with the following modifications, as the basis for its judgment in this case.¹

Pipeline Revenues

To reach his recommended conclusion of law that the transaction in issue did not correspond with the concept of a sale, the trial judge focused upon two ultimate facts: that the plaintiff obligated itself to produce future pipeline revenues (T.J. op. 16) and that the transaction was contrived solely for income tax purposes (T.J. op. 17). However, we believe that more important than these facts are the facts that Rock Creek was only to receive a sum certain at an interest rate which approximated the standard prevailing rate; that Rock Creek had no risk of eventual nonpayment; that Rock Creek had none of the usual risks or benefits associated with ownership of property; that Rock Creek had no dominion or control over the revenue payments; that Mapco was not free to do as it wished with the proceeds of the transaction; and that Mapco indirectly secured the repayment of Rock Creek's loan to Chemical Bank.

The three participants in the instant transaction are: Mapco, the plaintiff-tax-payer; Chemical Bank; and Rock Creek. On December 22, 1966, the participants executed the documents necessary to effectuate the transaction. Plaintiff, in return for $4 million in cash, assigned to Rock Creek a 75 percent interest in its future, unearned revenues until such time as Rock Creek had received $4 million plus interest on the outstanding balance. The $4 million which Rock Creek paid to the plaintiff was borrowed by Rock Creek from Chemical Bank; as security for the loan from Chemical Bank, Rock Creek assigned only its interest in plaintiff's future revenues to the bank. Contemporaneously with the above transaction, plaintiff used the $4 million received to purchase certificates of deposit issued by Chemical Bank. The maturity dates of the certificates of deposit were selected to coincide with the anticipated dates for the repayment to Chemical Bank of the $4 million borrowed from that bank by Rock Creek. Chemical Bank held plaintiff's certificates of deposit. After receiving notification from plaintiff about every two weeks, the bank would deposit the proceeds from the matured certificates into plaintiff's account and then transfer enough from that account to pay Rock Creek its profit margin and to credit the remainder against the outstanding balance of the bank's loan to Rock Creek and the interest due on such loan.

Rock Creek did not report the pipeline revenues as income when earned by Mapco, but only treated the interest differential, viz., three-eights of 1 percent, as income. Also, Rock Creek never notified the customers of Mapco that the pipeline revenues had been assigned. In 1966 plaintiff reported the $4 million as income for tax purposes only; on its financial statements, plaintiff included the relevant pipeline revenues as income in 1967. Although plaintiff admits that it did not need or use the $4 million for any business purpose, except to create in 1966 taxable income to offset a net operating loss carryover which otherwise was scheduled to expire, defendant does not claim that the transaction was devoid of legal effect or that the consideration received was inadequate.

We have considered carefully all the evidence in this case. Although the various transactions were constructed with an obviously meticulous attention to detail, we agree with the trial judge that the assignment by Mapco to Rock Creek of its future revenues, in substance, was not a bona fide sale. Whether a bona fide sale has occurred depends not upon the form of the transaction but upon its substance.² In other words, we are merely employing the established principle that in resolving such questions as whether there was a sale, the court can consider motive, intent and conduct in addition to what appears in written instruments used by the parties to control rights among themselves.³ After examining the extrinsic evidence behind the assignment of revenues in this case, we believe that the transaction merely produced a loan-type investment secured by the right to future revenue. This is not to say that the assignment was invalid between the parties or that it was devoid of legal effect. We merely are saying that the transaction was not an economically real sale and, therefore, cannot be recognized as a sale for tax purposes.

We recognize that a transaction will not be disregarded merely because it was entered into for tax-saving motives if it otherwise has real substance.⁴ Since a taxpayer is free to use all lawful means to decrease taxes that he would otherwise be required to pay, the mere fact that an otherwise bona fide transaction was entered into to save taxes does not affect its validity for tax purposes. We also recognize that a taxpayer may sell a property right to future income. If the bona fide sale occurs at arm's length for adequate consideration, the seller is taxed in the year of sale on the amount of consideration he actually receives and the buyer is taxed on any excess of income received over his purchase price.⁵ However, if the purported sale of future income is not bona fide, the "seller" cannot include in current income the amount he was paid for "selling" his future income. Instead, he is taxed on that income in the later year when it is collected and paid to the "buyer."

In determining whether the instant transaction was a bona fide sale, we have concentrated on the economic substance of the transaction rather than the mere form in which it was cast. To us, the facts that valuable consideration was present and that the assignment had legal effect between the parties are insufficient to show that a substantive sale occurred. We readily admit that the distinction is narrow between selling a property right to future income and assigning anticipated income as collateral to secure financing. Nevertheless, we feel that the distinction seems logically and practically to turn upon an out-and-out economically realistic transfer of a substantial property interest. Where the line of demarcation should finally be placed we need not try to anticipate here.⁶ But we are certain that distinctions attempted on the basis of the various legal names given a transaction, rather than on its actual results between the parties, do not afford a sound basis for delimitation.

As we interpret the facts of this case, the assignment was actually in the nature of a nonrecourse secured loan. Because Rock Creek was to receive 75 percent of Mapco's pipeline revenues until it received $4 million, the transaction appears to be a loan for that amount. Further, although Rock Creek had no rights against Mapco, Mapco had a consistent record of earning pipeline revenues, of which Rock Creek and Chemical Bank were aware. Since Rock Creek had the right to receive payments until it was repaid, even if Mapco's revenues declined, Rock Creek was certain to be repaid eventually. This certainty of repayment is more characteristic of a loan than a sale.⁷ Further evidence that the risks were at most minimal is the fact that the interest rate calculated on the basis of the period of repayment was the then standard prevailing interest rate. Had the transfer involved risks of ownership one would expect a higher interest factor. Cumulatively, these factors lead us to the inescapable conclusion that there is no difference between the transaction in question and a nonrecourse secured loan at prevailing interest rates. In other words, the consideration was not consideration for a sale but principal loaned to a debtor.

In addition to the fact that the transaction bore a negligible risk factor, which evinces that it lacked commercial substance as a sale, the fact that Mapco deposited the $4 million proceeds in Chemical Bank certificates of deposit implies that Mapco indirectly guaranteed repayment. Although we understand the assignment contract specified that Mapco was not personally liable to Chemical Bank for Rock Creek's loan and the Rock Creek and Chemical Bank — as assignee of Rock Creek's rights under the Mapco-Rock Creek assignment — would look to the transferred future pipeline revenue for their return, we do not feel that the certificates of deposit were merely a handsel to Chemical Bank from Mapco. Quite the contrary, by depositing in Chemical Bank the proceeds of the Mapco-Rock Creek transaction, Mapco indirectly assured Chemical Bank that it would comply with the assignment of revenue agreement. Moreover, rather than directly underwrite the Chemical Bank-Rock Creek loan, Mapco indirectly ensured or sponsored that loan by converting its proceeds into those certificates. The maturity dates of the certificates of deposit were specifically selected to coincide with the anticipated dates for the repayment to Chemical Bank of the $4 million borrowed from that bank by Rock Creek. Nevertheless, plaint...