Greer v. CIR

• Decision Date: 08 July 1964
• Docket Number: No. 20483.,20483.
• Citation: 334 F.2d 20
• Parties: A. L. GREER and Ruth E. Greer et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

334 F.2d 20 (1964)

A. L. GREER and Ruth E. Greer et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 20483.

United States Court of Appeals Fifth Circuit.

July 8, 1964.

Wentworth T. Durant, Ronald M. Mankoff, Dallas, Tex., Robert Edwin Davis, Dallas, Tex., Durant, Mankoff & Davis, Dallas, Tex., of counsel, for petitioners.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Crane C. Hauser, Chief Counsel, IRS, John M. Morawski, Atty., IRS, Melva M. Graney, Stephen B. Wolfberg, Crombie J. D. Garrett, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before BROWN, WISDOM and BELL, Circuit Judges.

BELL, Circuit Judge:

This matter arises out of a petition to review a Tax Court decision upholding deficiency assessments.¹ The question presented turns on whether business expenses, admittedly deductible, accrued to petitioners as losses from a joint venture, or to a corporation, Oscura Company, Inc., the wholly owned subsidiary of another corporation, United Minerals, Inc., in which petitioners and their fellow venturers were the sole stockholders.

It is undisputed that the expenses were incurred by the subsidiary, Oscura Company, Inc., in the development and operation of a lead mine in Socorro County, New Mexico. Petitioners contend that Oscura was their agent, and that the expenses were for their account. They also contend that the expenses necessarily accrued to them under the circumstances because of their ownership of the minerals being mined. The burden was on petitioners to show that the expenses were theirs and not those of Oscura, and we affirm the holding of the Tax Court to the contrary.

Oscura Company, Inc., a New Mexico corporation, was organized in October, 1955 to construct and operate a lead mine on a leasehold which had previously been acquired by W. B. Hogg and petitioner A. L. Greer. It had paid in capital of $2,000. The funds to acquire the lease, for the capitalization of Oscura, and for initial expenditures under the lease came from Strategic Minerals, Inc., a Delaware Corporation, in which Hogg and Greer were stockholders. These funds were advanced for the accounts of Hogg and Greer as there were other stockholders in Strategic who were not interested in the venture. However, the stock ownership in Oscura was vested in Strategic. Taxwise, the expenditures on the venture during this period were treated as those of Greer and Hogg.

Needing further funds to develop the lease and project, Greer and Hogg entered into a contract on December 21, 1955, with W. W. Dyer and Fletcher G. Lippitt, Jr., which resulted in the formation of United Minerals, Inc., a Delaware corporation, with paid in capital of $1,000 and stock ownership vested pro rata in the four, Hogg, Lippitt, and petitioners Greer and Dyer.²

The next day United purchased all of the outstanding capital stock of Oscura from Strategic, and the notes and obligations which Greer and Hogg had personally incurred in initiating and carrying on the venture up to that time. The contract between the four parties relative to forming United, and to subsequent business endeavors to be undertaken, some of which were not related to the mining operation specified that United was to acquire the leasehold from Greer and Hogg. This did not prove to be the case since the leasehold was never conveyed to United. Instead, Greer and Hogg, on May 7, 1956, assigned one half of their interest in the leasehold to Dyer and Lippitt so that thereafter each owned a one-fourth interest in the properties.

On December 17, 1956, W. B. Hogg left the venture with the three remaining venturers assuming his outstanding liabilities in connection with the undertaking. During the same month the three adopted the name Portales Properties and filed an assumed name certificate with the County Clerk of El Paso, Texas. Earlier, in August 1956, a bank account had been opened with the El Paso National Bank in the name of Portales Properties. There were also other accounts in that name at the Preston State Bank at Dallas, Texas. Partnership returns were filed in the name of Portales for the calendar years 1956 and 1957.

During the course of the venture, United secured and advanced $588,722.04 for the construction and operation of the mill. This was done through disbursements to Oscura, with payments of the obligations of Oscura being made out of its bank accounts, or by payments from United directly to Oscura suppliers. The funds advanced by United were charged on its books as money due from Oscura. No funds were advanced to Oscura by the individuals. No expenses were paid by them. The evidence did show that the four individuals endorsed the corporate notes of United to enable the borrowing by United of the necessary capital. Lippitt put up property owned by him personally to secure the greater part of loans made, but all four either endorsed or guaranteed the indebtedness.

The sums advanced to Oscura which had been set up on the books of United as due from Oscura, were, in turn, set up on Oscura's books as due from Portales. This was done by general journal entry on September 30, 1956 and the books also reflected, through general journal entries on the same date, a transfer of operating assets and expenses from Oscura to Portales. There was no written assignment, bill of sale or other documentary basis for the general journal entries as of that date, and the entries were, or course, not simultaneous with the transactions reflected. They were simultaneous with the ending of Oscura's fiscal year. The books of Oscura had not theretofore indicated any direct financial relationship between it and the joint venture known as Portales. Its connection was with United.

Portales first showed the transfer of these operating assets and expenses on its books by general journal entry dated December 31, 1956, the date marking the end of its fiscal year. Thereafter periodic entries were made on the books of Portales and Oscura to reflect transfers of operating assets, and expenses incurred and paid by Oscura or by United on behalf of Oscura. Oscura employed and paid the necessary staff for its mine operations, and maintained all employee withholding and social security records and returns.

On July 31, 1957 Portales Properties, again by general journal entry, transferred back to Oscura all of the operating assets and expenses theretofore transferred from Oscura. This was done in an effort to present the strongest possible case to the Small Business Administration on a loan application. This transfer was confirmed in October 1957, when Oscura was authorized by its directors to acquire the leasehold, mining claims, and the mill and mine equipment of Portales upon the assumption of the debts owed by those making up Portales to United. Greer, Dyer and Lippitt individually, and Lippitt on behalf of Oscura executed the transfer on these terms.

The ore produced in the mine was delivered to the American Smelting and Refining Company beginning in August of 1956. Payments for ore were made to Portales, or for its account.

It is the position of petitioners that they retained title, as individuals, in the years in question to the leasehold which included the minerals, and that expenses and income go with that ownership. They also contend that Oscura was merely their agent in operating the mining properties, and hence the sums paid by Oscura which constitute the business expense in question were in fact paid by them. They seek to avoid the position that the corporate entity of Oscura should be disregarded as such.

In essence, since the expenses were paid...