Bunnel v. Comm'r of Internal Revenue, Docket Nos. 5373-66

• Decision Date: 09 September 1968
• Docket Number: Docket Nos. 5373-66,5374-66.
• Citation: 50 T.C. 837
• Parties: ROBERT L. BUNNEL, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTROBERT L. BUNNEL and VOLA V. BUNNEL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 837

ROBERT L. BUNNEL, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTROBERT L. BUNNEL and VOLA V. BUNNEL, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 5373-66

5374-66.

Tax Court of the United States.

Filed September 9, 1968.

Kendall O. Schlenker, for the petitioners.

Marvin T. Scott, for the respondent.

Petitioners and their wholly owned corporation, which had in effect an election under subchap. S of the Code during 2 of the 3 years in issue, were in the business of dealing in oil leases. Respondent's notices of deficiencies for the 2 years in which the election was in effect were based in part on adjustments to the income of the corporation. Held, the notices of deficiency were valid notwithstanding the fact that such notices were not mailed to the corporation. Held, further, that the oil leases which petitioners and the corporation sold were property held for the sale to customers in the ordinary course of business. Held, further, that petitioners' underpayments of taxes were due to negligence.

TANNENWALD, Judge:

Respondent determined (a) deficiencies in petitioner Robert L. Bunnel's 1958 income tax in the amount of $1,267.31 and an addition to tax in the amount of $63.37 and (b) deficiencies in petitioners Robert L. Bunnell and Vola V. Bunnell's 1960 and 1961 income tax in the amounts of $24,691.10 and $10,804.89, respectively, and additions to tax in the amounts of $1,234.76 and $540.24, respectively. The cases were consolidated for trial. After concessions by both petitioners and respondent, three issues remain for disposition: First, whether the mailing to a corporation, which has made a valid election pursuant to subchapter S of the Internal Revenue Code (sec. 1371, et seq.), of a notice of deficiency is a prerequisite to assertion against its shareholders of a deficiency in tax, based upon adjustments in the income of the corporation; second, whether certain income was derived from the sale of property and, if so, whether such property was held primarily for the sale to customers in the ordinary course of business; third, whether there was any underpayment of tax due to negligence.

FINDINGS OF FACT

Some of the facts were stipulated and are found accordingly.

Robert L. Bunnell (hereinafter referred to as Robert) was unmarried at the end of 1958 and filed an individual income tax return for that year with the district director of internal revenue, Albuquerque, N. Mex. Robert married Vola V. Bunnell (hereinafter referred to as Vola) in 1959 and they were husband and wife in 1960 and 1961. They filed a joint income tax return for each of those years with said district director. Both were legal residents of New Mexico at the time of the filing of the petitions herein.

From 1946 until 1955, Robert was employed as office manager for an independent oil operator in Carlsbad, N. Mex. From 1955 until sometime in 1957, he worked for such operator on a part-time basis and began business activities for his own account. In 1957, he began devoting all of his time to his own business activities, most of which were related to the leasing of land owned by the Federal Government. Vola had been active in Federal leasing activities since 1953.

On March 13, 1959, in order to avoid the filing of liens against properties held in Robert's name in connection with judgments which had been obtained against him, petitioners organized Senemex, Inc., for the purposes of dealing in oil and gas properties. In exchange for $5,000 cash and certain oil and gas properties, including leases, petitioners each received 25 shares of Senemex stock, which at all times pertinent has constituted all of its issued and outstanding shares. During its fiscal years 1960 and 1961, a valid election under subchapter S was in effect for Senemex. During 1959, 1960, and 1961, Senemex was listed in the Sante Fe, N. Mex., telephone directory under the heading ‘Oil Properties.’ In addition, Senemex was listed in 1961 under ‘Oil Leases,‘ and ‘Oil Report Companies.’

The business activities of petitioners and Senemex consisted in large part of the acquisition of leases on land owned by the Federal Government by grant from the Government or by assignment from a third party. Some leases were obtained on land owned by State governments. An acquisition was often made by petitioners with the intention of subsequently assigning the lease to a third party, usually a company involved in the business of extracting oil. Petitioners carried out this intention by granting an option to the company to acquire the lease at such time as it desired and petitioners received payment for the assignment or for their services when the option was exercised.

The option device was employed because of acreage restrictions on leases of Federal oil and gas properties and because, in some cases, the third party did not wish its interest to be publicly known. Options often did not appear on the records of the Bureau of Land Management of the Department of the Interior, which was responsible for administering the leasing program. Where there were no acreage restrictions or other need for secrecy, petitioners would buy or sell leases on behalf of and in the names of third parties on a commission basis.

The regulations of the Bureau of Land Management with respect to offers to lease required the offeror to state whether or not he was the sole party in interest and to set forth the names of interested parties, the extent of their interests, and whether the agreement with third parties was oral or written. In the case of those leases which were reported in the returns for the years in question of Senemex and petitioners as having been sold following a holding period of more than 6 months, the abstracts of the Bureau of Land Management (with one exception, not involved herein) showed ownership in third parties and did not indicate either Senemex or petitioners to be a party in interest.

During 1958, 127 applications for leases of Federal land were filed in the name of Robert and 10 in the name of Vola. Robert filed 43 other applications on behalf of third parties. As a result of these filings, 13 leases were issued in Robert's name and four in the names of other persons. During 1959, petitioners and Senemex together filed 88 applications to lease Federal lands on their own accounts. In addition, throughout these years, petitioner acquired 19 and Senemex 26 State leases, most of which were transferred by assignment. During the period from June 1957 through December 1961, Robert, Vola, and Senemex engaged in approximately 80 brokerage transactions. Robert also had interests in the drilling of 28 oil wells during the period 1957 through 1961.

On his 1958 return, Robert reported the sale of 14 leases. Two were reported as giving rise to long-term gain of $5,030.95¹ and 11 as giving rise to short-term gain of $11,948.23. Petitioners reported, on their joint Federal income tax returns for the years 1959 through 1962, the sale of 14 leases as giving rise to long-term capital gains totaling $55,093.79. Senemex reported on its returns for the fiscal years ending September 30, 1959, through September 30, 1962, the sale of 36 leases. Short-term capital gains of $67,737.77 were reported on the sales of 10 leases and long-term capital gains of $140,277.93 on the sales of 26 leases. Some portion of the aforementioned amounts reported by petitioners and Senemex as short-term capital represented compensation for services rendered.

Among the reasons for the sales of the leases by petitioners and Senemex in question in 1958, 1960, and 1961 were the following: (a) To raise funds to liquidate obligations incurred in other enterprises; (b) to invest funds in other enterprises; (c) because continued ownership would have required additional investment in lease development.

ULTIMATE FINDING OF FACT

To the extent that the leases in question were sold, the sales were of property held primarily for sale to customers in the ordinary course of a trade or business.

OPINION

We deal first with the question whether the notices of deficiency herein, insofar as they relate to adjustments in the income of Senemex, satisfy the statutory requirements of sections 6212(a) and 6213(a) and (c)² that a notice of deficiency must be sent to the ‘taxpayer.’ Petitioners argue that the information return, which under section 6037 must be filed by an electing corporation, is expressly made subject to the statute of limitations on assessment of deficiencies by respondent. From this fact, they assert that an electing corporation must be the ‘taxpayer,‘ since otherwise, as they put it, ‘there is no point in the * * * reference to the statute of limitations.’ They therefore conclude that the failure to issue notices to Senemex with respect to the tax deficiencies allegedly arising from its 1960 and 1961 income makes the notices issued to them invalid to the extent of such deficiencies.

Respondent answers that, since section 1372(b)(1) provides that an electing corporation ‘shall not be subject to the taxes imposed by this chapter,’ therefore Senemex is not the ‘taxpayer’ within the meaning of the relevant Code sections. He asserts that the reference to the statute of limitations is required in the event that it is determined that the election was not effective.

We hold for the respondent.

Sections 6212(a) and 6213(a) and (c) require the Secretary of the Treasury or his delegate to give notice to the ‘taxpayer’ of the asserted deficiency in taxes imposed by subtitles A and B as a prerequisite, except under exceptional circumstances, to ultimate collection from a reluctant obligor. None of these sections defines the term ‘taxpayer.’ Section 7701(a) does provide a definition; it requires that, unless the definition of taxpayer in subdivision (14) thereof is ‘manifestly incompatible with the intent of’ such sections, that definition is to be applied. Section 7701(a)(14) provides: ...