Adams v. Comm'r of Internal Revenue
| Decision Date | 17 April 1972 |
| Docket Number | Docket Nos. 5461-68— 5463-68. |
| Citation | 58 T.C. 41 |
| Parties | ROBERT W. ADAMS AND ELEANOR ADAMS CORSON (FORMERLY ELEANOR C. ADAMS), ET AL., 1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Stanley L. Drexler, for the petitioners.
Charles H. Powers, for the respondent.
Petitioner Robert W. Adams in two related transactions first transferred all of his equity interest in Two States Uranium Corp. to Wyoming Mining & Milling Co. in exchange for Wyoming stock. Next, he sold a valuable mining claim to Wyoming and received in exchange Wyoming's note for $1 million. Wyoming then built a device to concentrate uranium ore at the mine site and leased the mining property and preconcentrator to Western for royalties and rent. Western advanced Wyoming $940,000 on the lease and Wyoming used this sum to complete payment of the note to petitioner. Before the advance payments had been worked off by Western as lessee, Wyoming and Western decided to terminate the lease contract, repay Western all of the unearned advances, and sell outright to Western the entire property and other assets of Wyoming. The value of the assets transferred in this sec. 337 liquidation sale was determined, and then the actual consideration passing from Western to Wyoming was adjusted to account for the refund due Western from the original lease agreement. Held, the original transfer of stock in Two States and the valuable mining property was a transfer to Wyoming within the terms of sec. 351. Held, further, petitioner received a valid debt instrument in the exchange, and such instrument is considered ‘other property’ within the meaning of sec. 351(b). Held, further, the value of the debt instrument was $1 million. Held, further, the sum advanced to Wyoming from Western was an advance rental and royalty payment, taxable in the years of receipt. Held, further, the unearned advance rentals and royalties were repaid pursuant to a legal obligation in a later year when Wyoming sold all of its assets to Western and reduced the amount of actual consideration due on the sale. Held, further, sec. 1341 may not be applied by this Court to a year not before this Court. Held, further, a corporation is not entitled to deferred development expenses incurred by another taxpayer in developing property which he subsequently sells to that corporation. Held, further, when a corporation which has received a depletion allowance against advance royalties sells the mineral property in question before the ore has been extracted, the corporation must realize additional income from the restoration of depletion attributable to that unextracted ore. FAY, Judge:
Respondent determined deficiencies in the Federal income taxes of the petitioners, as follows:
Additionally, respondent by an amended answer filed March 17, 1971, requested in docket No. 5463-68 an increased deficiency against Wyoming Mining & Milling Co. and increased transferee liability against Robert W. Adams, as shown:
+--------------------------------------------------------------------+
¦ ¦Amount of increased ¦Deficiency determined per ¦ ¦
+-------+---------------------+---------------------------+----------¦
¦Year ¦deficiency ¦notice of liability ¦Total ¦
+-------+---------------------+---------------------------+----------¦
¦ ¦ ¦ ¦ ¦
+-------+---------------------+---------------------------+----------¦
¦6/30/62¦$5,335.30 ¦$13,869.75 ¦$19,205.05¦
+-------+---------------------+---------------------------+----------¦
¦6/30/63¦56,663.46 ¦299.696.01 ¦356,359.47¦
+--------------------------------------------------------------------+
After certain concessions by each party, the following questions remain for our consideration:
(1) Whether an exchange of a uranium mine for a purported debt instrument was a transfer within section 351.2
(2) Whether the purported debt instrument was a stock or security as contemplated by section 351(a) or other property within the meaning of section 351(b).
(3) The correct value of the purported debt instrument.
(4) Whether a sum advanced to Robert W. Adams' wholly owned corporation was a loan or a payment of advance rentals and royalties.
(5) Whether Robert W. Adams' corporation repaid any of the advanced amount by way of adjusting the actual consideration paid in a section 337 liquidation sale.
(6) Whether section 1341 applies to the alleged repayment.
(7) Whether a corporation is entitled to a deduction for deferred development expenses incurred by another taxpayer.
(8) Whether a corporation must realize additional income from the restoration of depletion.
(9) The proper salvage value for depreciable equipment used in taxpayer's trade or business.
(10) The proper amount of reserves for determining depreciation and depletion.
(11) The proper disposition of certain adjustments made to taxpayer's taxable income for the year 1964, which reflects respondent's interpretation of the foregoing issues.
Some of the facts have been stipulated, and the stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
The petitioners Robert W. Adams (sometimes hereinafter referred to as Adams or petitioner) and Eleanor Adams Corson (formerly Eleanor C. Adams) at docket No. 5461-68, were husband and wife during the calendar years 1961, 1962, and 1963. At the time the petition was filed, Adams resided in Denver, Colo., and Eleanor Adams Corson resided in Cheyenne, Wyo.
For the calendar years 1961, 1962, and 1963, the petitioners, Adams and Eleanor Adams Corson, filed joint income tax returns with the district director of internal revenue, Denver, Colo., on the cash method of accounting.
The petitioners Robert W. Adams and Rita A. Adams, at docket No. 5462-68, were husband and wife during the calendar year 1964, and both resided in Denver, Colo., on the date the petition was filed. For the calendar year 1964, the petitioners, Adams and Rita A. Adams, filed a joint income tax return with the district director of internal revenue, Denver, Colo., on the cash method of accounting.
The period of limitations on assessment for the taxable years 1962, 1963, and 1964 was open at the time of the issuance of the statutory notices of deficiency under consents executed pursuant to section 6501(c)(4).
Wyoming Mining & Milling Co. (hereinafter referred to as Wyoming), a Wyoming corporation, was an accrual basis taxpayer with a fiscal year accounting period. Adams, as transferee of Wyoming, transferor, agrees that he is liable for such deficiencies as may be determined at docket No. 5463-68 to be due from Wyoming. At the time of the issuance of the statutory notice of liability to Adams as transferee of Wyoming, the period of limitations on assessment was open pursuant to the provisions of section 6901(d).
During the years 1951 through the present, the Atomic Energy Commission (AEC) adopted various practices in order to promote the production of uranium. It is necessary to summarize these practices.
During the period March 1, 1951, through March 31, 1962, the AEC purchased all uranium ores under the terms set forth in Domestic Uranium Program, circular 5. This circular, among other things, provided that ores delivered prior to March 31, 1962, would be permitted, in addition to the circular 5 price, a haulage allowance of 6 cents per ton-mile for transportation to a purchase depot up to a maximum of 100 miles. On May 24, 1956, the AEC announced a new uranium procurement program. The purpose of this new program was to guarantee a Government market for U308 produced through 1966. Under this announcement, the AEC advised that the program would be commenced as of April 1, 1962, and the AEC would purchase uranium concentrate, U308, at a price of $8 per pound. This program was to continue through December 31, 1966. This new announcement did not provide for the continuation of the haulage allowance which was previously in effect.
On November 24, 1958, the AEC modified the 1962-66 procurement program which had been established by the May 24, 1956, announcement. The November 1958 announcement stated that under the 1962-66 procurement program the AEC would guarantee only the purchase of U308 from ore reserves developed prior to November 24, 1958. Any reserves developed after November 1958 would be purchased to the extent that requirements dictated. In support of this modification, the AEC then began awarding purchase allocations based on the amount of reserves developed prior to November 1958. Initially, these allocations, or quotas, were assigned to mineral property and ran with the property, conferring on the owners thereof the right to sell U308 to the AEC. The allocations could be met only from the specifically developed properties. Consolidation, a process by which unproductive properties with quotas could be combined with productive nonquota properties, was done on a very limited basis. Therefore, if consolidation could not be accomplished, many quotas assigned to unproductive properties went unmet.
On November 17, 1962, a further announcement reflected still another change in AEC policy for the years 1967 through 1970. The general feeling was that a private market would not develop for uranium until the late 1960s. In order to provide the uranium producers with a continuing industry to supply between 1966 and 1970,...
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