EVANSVILLE OIL CORPORATION v. Commissioner, Docket No. 29642.
| Decision Date | 16 January 1953 |
| Docket Number | Docket No. 29642. |
| Citation | 12 TCM (CCH) 21 |
| Parties | Evansville Oil Corporation, Jack Coast, Liquidator v. Commissioner. |
| Court | U.S. Tax Court |
William H. Bronson, Esq., Commercial Bldg., Shreveport, La., for the petitioner. J. P. Crowes, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's tax liability and imposed penalties as follows:
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Declared Value
Taxable Excess Excess Delinquency
Year Ended Income Tax Profits Tax Profits Tax Fraud Penalty Penalty
11/30/42....... $ 334.90 ......... ......... .........
11/30/43....... 1,198.78 $1,863.05 $6,710.30 $4,886.07 $1,677.58
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Petitioner concedes certain adjustments but claims a net overpayment of $41,477.81 for the year ended November 30, 1942, resulting from respondent's non-recognition of a carry-back loss allegedly incurred in the taxable year ended November 30, 1943, and the non-recognition of a net operating loss carry-back of $886.64 incurred in the year ended November 30, 1944. No evidence that the latter sum in fact represented an operating loss having been introduced, this part of the claim is considered as abandoned. The questions presented are (1) whether petitioner sustained a loss during the taxable year ended November 30, 1943, from the sale of its assets; (2) whether petitioner's failure to file a timely excess profits tax return for the year ended November 30, 1943, was due to willful neglect, so as to render it liable for the 25 per cent delinquency penalty; (3) whether any part of the deficiencies determined against petitioner for the year ended November 30, 1943, is due to fraud with intent to evade tax.
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized under the laws of Louisiana in 1936 under the name of Ecco Oil Corporation. It adopted its present name in 1937. It filed Federal income and excess profits tax returns for the taxable year ended November 30, 1942, and a Federal income tax return for the taxable year ended November 30, 1943, with the collector for the district of Louisiana on the accrual basis.
J. P. Evans was president of the corporation and Byrd Hamilton, his personal secretary, was secretary-treasurer until March 10, 1943, when they resigned. Jack Coast was vice-president and general manager. Sometime after March 10, 1943, John Henry Cochran became a vice-president and Mrs. Georgia Watson became secretary-treasurer. Coast was 40 years old in December, 1951. He had studied petroleum engineering at the University of Oklahoma and had worked in the refining department of Barnsdall refining Company, in the experimental department of a refinery construction and engineering company, and as an operating refinery engineer with the latter company until 1936. He was interested in petitioner from its inception as a stockholder as well as officer.
According to petitioner's stock records, its outstanding stock was owned on March 21, 1943, as follows:
Minors: Joan Wise, Herschell
R. Schivally, Jr., Carl Coast.. 2 shares
J. P. Evans, Jr. ............... 50 shares
William S. Evans ............... 50 shares
Edith S. Evans ................. 50 shares
J. P. Evans..................... 515 shares
Charles L. Mayer, Trustee....... 25 shares
Jack Coast...................... 308 shares
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Total ........................ 1,000 shares
The organization of petitioner came about in the following manner: J. P. Evans owned some oil wells in the Sibley field in Louisiana, but was having difficulty in disposing of the oil produced. Coast felt that it was feasible to construct a small refinery to process the production of these wells. He recommended such construction to Evans, who agreed. Petitioner was organized to construct and own the refinery. Construction was begun in the fall of 1936, and completed early in 1937.
Gas produced from Evans' wells in connection with the production of crude oil had been released into the air and burned until 1937. In that year, orders from the Conservation Commission of Louisiana prevented this practice; consequently, these wells were shut in and the refinery's source of crude oil was cut off. Crude oil was purchased in the open market, but the refinery operated without profit through 1939. Arrangements were made about that time with the First National Bank of Shreveport, Louisiana, whereby petitioner borrowed money to finance the moving of its refinery to the Cotton Valley Field in Louisiana, so that it would be near a source of crude oil for its refining operations. Moving was completed by the spring of 1940, and was financed by petitioner's obligation to the bank endorsed by J. P. Evans personally. Coast continued to manage the refinery's operations after 1940.
From its incorporation to the time when liquidation was undertaken in 1943, petitioner was continuously troubled with financial difficulties. It was undercapitalized. J. P. Evans was personally required to endorse further obligations, including those incurred for the purchase of crude oil, which often ran as high as 45,000 barrels a month at about $1.85 per barrel, and to guarantee the corporation's gasoline tax bonds to the State of Louisiana and to the United States government. Petitioner began to show a profit in the spring of 1940, and operated at a profit through the spring of 1943. For the fiscal year ended November 30, 1942, it reported a net income of $127,514.85, but petitioner had a low excess profits credit and the major portion of these earnings were subject to excess profits tax. Its financial difficulties were never relieved materially. Controls were placed on the operation of the refinery by the Petroleum Administration for War, and the refinery was shut down early in 1943 pursuant to a directive of that agency. Coast made a trip to Washington, and when it was ascertained that the directive was not intended to apply to a refinery such as that operated by petitioner, operations were resumed. While the refinery was shut down, Evans instructed Coast to arrange to dispose of the refinery. He had told Coast for some time that he wanted to get out of the refinery and the contingent, guarantor and endorser obligations that he had assumed in connection with its operations. Coast attempted to sell the refinery to John B. Atkins in Shreveport on a basis which would relieve Evans of his contingent liabilities. After giving it some consideration, Atkins refused to purchase the refinery on those terms.
In the early part of March 1943, in the course of a conversation with Justin R. Querbes, Evans asked Querbes if he would like to buy a refinery on terms which would relieve Evans of his contingent liabilities in connection with it. Querbes said that he might be interested, and Evans agreed to send Coast to discuss the matter further. Evans never mentioned to Querbes the purchase of any stock. Querbes was familiar with the stock ownership in petitioner, and knew that Evans owned a controlling interest. Coast conferred with Querbes in the latter's office, pursuant to Evans' instructions. Querbes told Coast that he would not consider purchasing the refinery unless he could work out some arrangement whereby Coast would operate it, since Querbes knew nothing about the refining business. Coast replied that he had been negotiating with the First National Bank of Shreveport for a loan in order to buy the refinery himself, and would notify Querbes the next day as to whether he would operate the refinery for Querbes if the latter purchased it. The following day they worked out an arrangement whereby Coast would operate the refinery in return for a 49 per cent interest therein if Querbes bought it, and Querbes would own the remaining 51 per cent interest.
Querbes had the refinery appraised and determined that if he purchased it and it could not be operated at a profit, he could sell it for salvage value and still not lose money. He then went to his attorney, Leon O'Quin, and told him that he had agreed to buy petitioner's physical assets on a basis that would relieve Evans of his contingent liabilities in connection with the refinery's operations; that he was actually acting for Motor Finance Company, Inc., in the transaction and that upon acquiring the assets he would form a partnership between himself, owning 51 per cent on behalf of Motor Finance Company, Inc., and Coast, owning 49 per cent and operating the refinery. Querbes advised his attorney that he had had the physical assets appraised and was satisfied that the salvage value was sufficient to insure him against any loss in the transaction. He instructed O'Quin to draw up the necessary papers and consummate the transaction for him so that Querbes would acquire the refinery and other physical assets on the basis outlined. In none of the conversations among Evans, O'Quin, Coast, and Querbes was the sale of stock in petitioner ever mentioned. Only the sale and purchase of the refinery was discussed.
Leon O'Quin is an attorney who has practiced in Shreveport, Louisiana, since 1919. Querbes is his client and has been since prior to 1943. O'Quin has never represented Evans as an attorney. Pursuant to Querbes' instructions, O'Quin prepared the necessary documents and attended to the other formalities by which Querbes, acting on behalf of Motor Finance Company, Inc., would acquire clear title to petitioner's refinery and other assets on a basis which would relieve Evans of his contingent liabilities in connection with...
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