Commissioner of Internal Revenue v. Moore

• Decision Date: 14 March 1931
• Docket Number: 205,206.,No. 202,203,202
• Citation: 48 F.2d 526
• Parties: COMMISSIONER OF INTERNAL REVENUE v. MOORE, and three other cases.
• Court: U.S. Court of Appeals — Tenth Circuit

48 F.2d 526 (1931)

COMMISSIONER OF INTERNAL REVENUE v. MOORE, and three other cases.

Nos. 202, 203, 205, 206.

Circuit Court of Appeals, Tenth Circuit.

March 14, 1931.

Allin H. Pierce, Sp. Atty., Bureau of Internal Revenue, of Washington, D. C. (G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Mr. John H. McEvers, Sp. Assts. to Atty. Gen., and C. M. Charest Gen. Counsel, Bureau of Internal Revenue, of Washington, D. C., on the brief), for petitioner.

Hubert L. Bolen and D. B. Welty, both of Oklahoma City, Okl., for respondents.

Before PHILLIPS and McDERMOTT, Circuit Judges, and KENNEDY, District Judge.

McDERMOTT, Circuit Judge.

The sole question involved on these appeals is whether the profit derived from the sale of certain oil stock should be charged into the income of the taxpayers for the year 1918, when the contract of sale was made, or whether it should be charged into the years in which the payments on the purchase price were actually received. The Board of Tax Appeals held that the entire profit was taxable in the year 1918, and, since the statute of limitations had run on the assessment of taxes for that year, that there was no taxable liability. The Commissioner appeals. The facts are not in dispute.

In the year 1918 the taxpayers owned 200 shares of the capital stock of the Garfield Oil Company, that being one-half of its issued capital; the other half was owned by the Exchange Oil Company, a subsidiary of the Sinclair Oil & Gas Company. In 1918 the taxpayers undertook to negotiate a sale of their stock to the Exchange Oil Company. After some dickering, the parties agreed upon a sale price of $3,000,000, of which $500,000 was to be paid in cash, the balance to be paid by assigning 20 per cent. of the oil runs to the sellers until they had received $2,500,000, with the guaranty that such runs would equal at least $500,000 a year. Because of the greater financial responsibility of the parent Sinclair Company, it was agreed that that company should guarantee the deferred payments. The terms being agreed upon, it was left to the attorneys for the Sinclair Company to draw the papers. Such attorneys devised the plan of two contracts, one of them being an outright contract of purchase between the taxpayers and the Exchange Oil Company, by which the Exchange Company purchased the stock for $500,000 in cash and the delivery of oil and gas income certificates entitling the taxpayers or their assigns to 20 per cent. of the gross income of the Exchange Company, as and when received. The second contract was between the taxpayers and the Sinclair Company, by which the taxpayers purported to grant to the Sinclair Oil & Gas Company an option to purchase such certificates for the sum of $2,500,000. By that agreement the certificates, indorsed in blank, were delivered to a trustee named in the instrument. The taxpayers were to receive the income from the oil and gas certificates until such receipts equaled $2,500,000, when the Sinclair Company became the owner of such certificates. The Sinclair Company agreed that if in any one year the income from such certificates did not amount to the sum of $500,000, it would advance to the taxpayers the difference, without interest, and bound itself to purchase such certificates, five years from the date of the agreement, for a total consideration of $2,500,000. It is obvious that this is a firm contract of purchase, and not an option.

Reading these instruments together, as they must be, it is entirely clear that the taxpayers sold their stock for $3,000,000, $500,000 in cash and $2,500,000 in deferred payments, the Sinclair Company binding itself to the extent of $500,000 a year for five years. The taxpayers could receive no more than $3,000,000 for their property in any event, and the Sinclair Company was firmly bound to pay that amount in any event. This is not only the clear purport of the writings when read together, but is also the understanding of the taxpayers. One of them testified that $3,000,000 "was the fixed price. There was no question about that. * * * There was not any other view entertained by us but what we were receiving $3,000,000 as the purchase price for that property. * * * That was determined before we completed the sale." The understanding of the taxpayers is further evidenced by the fact that, notwithstanding that their income tax returns were on a cash basis, they did not account for the entire profit on the sale in their 1918 returns, but accounted only for the $500,000 received that year, and in each of the five succeeding years accounted for so much of the profit as was represented by the amounts received by them during the year in question.

Disagreement arose between the taxpayers and the Commissioner as to certain questions of depletion and other matters not here pertinent. During these negotiations with the Commissioner, the taxpayers maintained their original position that profits on the sale should be distributed over the five years. The negotiations with the Commissioner were so prolonged that the statute of limitations ran upon any additional assessment for the year 1918. The taxpayers then contended that the sale was complete in 1918; that, in fact, no part of the purchase price of the stock sold was received in the years 1919 to 1923, inclusive, despite their returns to the contrary; that the transaction with the Exchange Oil Company was separate and distinct from the transaction with the Sinclair Company; that what they had in fact done was to exchange their stock in the Garfield Oil Company for $500,000 in cash and oil and gas income certificates which had a ready market value; that, under section 202 (b) of the Revenue Act of 1918 (40 Stat. 1060), the sale should be treated as an exchange of property; the contemporaneous transaction with the Sinclair Company should be disregarded; and no part of the sale price should be charged to them for the years 1919 to 1923, inclusive. The statute having run on the 1918 assessment, the result of their contention, if sound, is that four-fifths of the profit from this sale escapes any taxation.

The Board of Tax Appeals sustained the contention of the taxpayers, and held that the transaction with the Exchange Oil Company was "complete in itself. * * * There were two transactions, each separate and distinct from the other and each giving rise to income." With this holding we cannot agree. The first contract, considered separately, does not express the agreement of the parties. If the Board of Tax Appeals is correct, the sale price of the stock was an unascertained and unascertainable amount, with $500,000 as a minimum, and that sum plus 20 per cent. of all the oil recovered under the leases as a maximum. But all the evidence is that the sale was bottomed on a fixed price of $3,000,000, of which $500,000 was to be paid in cash and the balance in deferred payments. This was the original agreement which the attorneys for the Sinclair Company were instructed to, and which they did, reduce to writing. That two contracts were drawn to effectuate that purpose cannot change the substance of the transaction. See O'Meara v. Commissioner, 34 F.(2d) 390, where this court construed two writings as reflecting but one transaction. Taxation is a practical matter, and the courts uniformly penetrate the form to get at the substance. Tyler v. United States, 281 U. S. 497, 50 S. Ct. 356, 74 L. Ed. 991, 69 A. L. R. 758; Chicago, M. & St. P. Ry. v. Mpls. Civic Ass'n, 247 U. S. 490, 38 S. Ct. 553, 62 L. Ed. 1229; Schoenheit v. Lucas (C. C. A. 4) 44 F.(2d) 476; Tsivoglou v. United States (C. C. A. 1) 31...