Great Lakes Pipe Line Company v. United States, Civ. A. No. 17949-4

• Court: United States District Courts. 8th Circuit. Western District of Missouri
• Writing for the Court: Stephen J. Swift, Attorney-Tax Division, Department of Justice, for defendant
• Citation: 352 F. Supp. 1159
• Parties: GREAT LAKES PIPE LINE COMPANY, a corporation, and G. H. Hagle, Trustee in Dissolution, of Great Lakes Pipe Line Company, Plaintiffs, v. The UNITED STATES of America, Defendant.
• Docket Number: Civ. A. No. 17949-4,18615-4.
• Decision Date: 20 December 1972

352 F. Supp. 1159

GREAT LAKES PIPE LINE COMPANY, a corporation, and G. H. Hagle, Trustee in Dissolution, of Great Lakes Pipe Line Company, Plaintiffs,
v.
The UNITED STATES of America, Defendant.

Civ. A. No. 17949-4, 18615-4.

United States District Court, W. D. Missouri, W. D.

December 20, 1972.

352 F. Supp. 1160

Leon B. Seck, Harrisonville, Mo., for plaintiffs.

Stephen J. Swift, Attorney-Tax Division, Department of Justice, for defendant.

FINDINGS, OPINION AND JUDGMENT

ELMO B. HUNTER, District Judge.

This is a civil action brought by plaintiffs, Great Lakes Pipe Line Company and G. H. Hagle, Trustee in Dissolution, against the United States of America for

352 F. Supp. 1161

recovery of federal income taxes and deficiency interest alleged to have been overpaid for the calendar year 1965 and for the period January 1, 1966 to November 22, 1966. The causes were consolidated for pretrial proceedings and trial following the transfer of Action No. 18,615-4 to this division under Local Rule 13. This Court has jurisdiction under 28 U.S.C. § 1346

FINDINGS OF FACT

The parties have entered into a lengthy stipulation and have presented evidence to the Court without a jury. The stipulation of fact and evidence presented reveals the following course of events. Plaintiff, Great Lakes Pipe Line Company (Great Lakes) was incorporated in the State of Delaware on July 17, 1930. During 1965 and up until November 22, 1966 it continued to be a corporation organized and existing under the laws of the State of Delaware with its principal office in Kansas City, Missouri. Great Lakes was a common carrier of refined petroleum products by pipeline operating in the states of Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Oklahoma, South Dakota, and Wisconsin. The entire authorized capital stock of the corporation consisted of 600,000 shares of common stock of which 411,669 shares were outstanding in 1965 and 1966 and owned by the following corporations in the listed percentages: Continental Oil Company, 29.18%; Sunray DX Oil Company, 18.96%; Skelly Leasing Company, 14.22%; Texaco, Incorporated, 12.14%; Union Oil Company of California, 9.48%; Sinclair Delaware Corporation, 5.88%; Orange State Oil Company, 5.15%; and Phillips Investment Company, 4.99%.

The Executive Employment Contracts

In the latter part of 1964, the three majority stockholders of Great Lakes, Continental Oil, Sunray DX Oil, and Skelly Leasing, initiated plans to dispose of the assets of the Corporation. Further discussions regarding the proposed sale were had at the annual stockholders meeting in March of 1965. At that meeting, the plan to sell was made known for the first time to the management personnel of Great Lakes. On May 24, 1965, an announcement was made of an information meeting for prospective buyers to be held in New York on June 29, 1965. L. F. McCollum of Continental Oil, R. E. Foss of Sunray DX Oil, and Don Miller of Skelly Leasing comprised the executive committee of shareholders in charge of negotiating the proposed sale of the assets of Great Lakes.

Prior to the information meeting, in June of 1965, informal assurances were given to the president of Great Lakes, Richard L. Wagner, by representatives of the three majority stockholders. Mr. Wagner was assured that in the event of a sale of the assets of Great Lakes, he and the other key management personnel would be "taken care of" as far as employment was concerned. It was also stressed to Mr. Wagner that the majority stockholders were concerned with keeping the present management team intact to assure a smooth operation of the business pending any sale of assets, and in order to offer a purchaser an experienced management team. On July 14, 1965, the informal assurances given to Mr. Wagner were expressed at a meeting of representatives of the majority stockholders and key management personnel. The informal assurances were not reduced to writing except in the form of salary schedules given to the selected eight key executives of Great Lakes, Messrs. Wagner, Linsley, Welsh, Seck, Robb, Ryan, Springer, and Learmonth. This schedule set forth each executive's current salary for a five year period, and one-half of his current salary for the next five years, plus applicable fringe benefits until death or formal retirement. On July 16, 1965, this schedule was slightly modified to correct an error in computation and each of the named executives was presented with a new schedule. The schedules of July 14 and 16 given to the executives were not prepared

352 F. Supp. 1162

or signed by Great Lakes but were prepared and signed by representatives of Continental Oil and Sunray DX Oil, L. F. McCollum and R. E. Foss. The total amount of "salary assurances" reflected by the final schedule of July 16, 1965, was approximately $1,902,000.00. At this time it was understood that no amounts were to be paid under the "assurances" until and if the capital assets of Great Lakes were sold

On November 30, 1965, Great Lakes entered into an agreement with Williams Brothers Pipe Line Company (Williams Brothers) for the sale of all assets of Great Lakes for the sum of 287.6 million dollars.¹ This purchase agreement made no mention of any "salary assurances" or employment contracts between Great Lakes and its executives, or between the stockholders of Great Lakes and its executives.²

The "assurances" which had been given to the eight key executives of Great Lakes on July 14 and 16, 1965 by the representatives of the three majority shareholders were adopted in substantially the same amounts by the Board of Directors of Great Lakes at a meeting on March 28, 1966, at 9:00 a. m. At that meeting, the chairman presented to the meeting a form of letter contract dated March 29, 1966 to be executed with Williams Brothers, and a form of letter contract dated March 29, 1966 to be executed with each of the eight key executives of Great Lakes who had previously been given assurances by the majority stockholders. Both of the letter contract forms related to the employment future of the eight executives. It was resolved by the Board that the president or any vice president of Great Lakes be authorized to execute and deliver these proposed contracts to Williams Brothers and each of the eight executives under date of March 29, 1966. The Board of Directors also discussed a proposal whereby the three majority stockholders were to agree to make funds available for the satisfaction of these proposed employment contracts to the extent the obligation of Great Lakes exceeded a certain amount.

At 1:00 p. m. on March 28, 1966, the Stockholders of Great Lakes held a special meeting wherein they, among other things, ratified the action of the Board of Directors in authorizing the execution of the contracts with the executives and with Williams Brothers concerning employment of the executives. This ratification was conditioned upon the execution of the "excess obligation" agreement by the three majority stockholders.³ The "excess obligation" agreement which was presented to the stockholders at the meeting and subsequently executed under date of March 29, 1966, provided that the three majority stockholders would assume the liability of Great Lakes under the contracts to the extent it exceeded a certain amount.⁴

352 F. Supp. 1163

On March 29, 1966, the sales agreement between Great Lakes and Williams Brothers was finalized and the sale closed. Also, under date of March 29, 1966, the contracts between Great Lakes and the eight executives, and between Great Lakes and Williams Brothers, concerning the employment of the eight executives were executed. Under the terms of the contracts with the executives, no amounts were to be paid and the contracts were to have no effect until and if the assets of Great Lakes were sold. The executives agreed to accept employment with Williams Brothers if offered, and Great Lakes agreed to provide a guaranteed salary or employment or special leave of absence arrangement with Williams Brothers.⁵ Under the terms of the contract with Williams Brothers, Williams agreed to employ the eight executives at present salary and position "for the time being." Further it was agreed that if Williams Brothers no longer desired the services of any of the executives, it would place him on special leave of absence and continue to pay his salary if Great Lakes would make arrangements to reimburse the expenses incurred.⁶ The contracts reflected a potential

352 F. Supp. 1164

obligation to the executives of approximately $1,902,000.⁷

Following the sale of Great Lakes' capital assets on March 29, 1966, the eight mentioned executives, whose active employment by Great Lakes had been terminated by the sale, were employed by Williams Brothers in their previous positions and at their former salaries. Williams Brothers was under

352 F. Supp. 1165

no obligation to retain any of the executives in active employment, and in the latter part of April, 1966, Williams Brothers notified Great Lakes that it would no longer require the services of five of the executives.⁸ Informal notice of the intent of Williams to terminate was given to the five executives early in May, 1966. At this point, representatives of the three majority stockholders of Great Lakes initiated efforts to persuade Williams Brothers to retain some of the five executives. These efforts were unsuccessful, and the representatives of the three majority stockholders of Great Lakes, in conjunction with Williams Brothers, entered discussions with the five executives to renegotiate the terms of the March 29th employment contracts between Great Lakes and the executives. There was, among other things, disagreement as to whether the five executives were under a duty to seek other employment when released from the active employment of Williams Brothers. And, understandably, the majority stockholders were concerned with the amount payable by them under the "excess...