Guyan Oil Co., Inc. v. Commissioner
| Decision Date | 06 October 1988 |
| Docket Number | Docket No. 5463-86. |
| Citation | 56 TCM (CCH) 433,1988 TC Memo 486 |
| Parties | Guyan Oil Co., Inc. v. Commissioner. |
| Court | U.S. Tax Court |
Mark L. Garren, 409 11th St., Huntington, W.Va., for the petitioner. D. Lyndell Pickett, Jack M. Panitch, and James B. Martin, for the respondent.
This case is before us on petitioner's motion for litigation costs pursuant to Rule 2311 and section 7430.
At trial, petitioner and respondent were ordered to file simultaneously their opening briefs on January 4, 1988. Reply briefs were to be filed 45 days later on February 18, 1988. By motion filed January 4, 1988, and granted January 5, 1988, respondent requested an extension of time for filing opening briefs to January 18, 1988. On January 20, 1988, respondent conceded his case. As of the concession date, neither party had filed an opening brief. Pursuant to Rule 231(c), taxpayers submitted a Stipulation as to Settled Issues which stipulation noted that the parties had settled all issues in the case other than that relating to petitioner's claim for litigation costs. We have come to understand the theory and circumstances in this case based upon stipulated facts and accompanying exhibits, which are incorporated into our opinion by this reference; the transcript of the trial in this case; petitioner's motion in support of its receiving litigation costs; petitioner's affidavit; and respondent's written response to petitioner's motion and affidavit.
In a notice of deficiency dated December 4, 1985, respondent determined a deficiency in petitioner's corporate Federal income taxes equal to $153,170.51 for petitioner's taxable year ended April 30, 1983, the taxable year of petitioner's corporate liquidation. In arriving at this deficiency determination, respondent increased petitioner's taxable income by $431,321. As an explanation for this increase, respondent stated:
It is determined that the proceeds of the transaction identified in your return as a sale of "Griffithville Oil Field" constitute ordinary income to the extent of $431,321.00 because this transaction did not constitute a sale or exchange subject to the nonrecognition provisions of Section 3372 of the Internal Revenue Code. Accordingly, your taxable income is increased $431,321.00. Footnote reference added.
The circumstances of the $431,321 sum are as follows. Petitioner entered into a contract on August 28, 1975, with the U.S. Department of Energy under which the Department provided petitioner approximately one and a half million dollars to finance an oil recovery experiment petitioner planned. An amount slightly in excess of $2,200,000 was provided as further financing for the experimental project by a group of investors referenced as the Pikeville Group. Finally, an additional $750,000 in financing for the project came from the sale of oil produced while experimental wells were being developed. The project involved the injecting of water and carbon dioxide into oil wells originally drilled in the early 1900's in an attempt to recover more oil from these old wells. The project covered a 2,772-acre parcel in West Virginia assembled through ownership, leases, and farm-out agreements. Ownership of the working interest in the experimental project was divided as follows: 63 percent to the Pikeville Group; 29 percent to petitioner; and 8 percent to four individuals who had contributed their services to the project.
Soon after commencement of the experimental project, petitioner ran into environmental problems and was the subject of an environmental suit brought against it. Discouraged by the slow progress of the project and the limitations placed on the project by the court reviewing the environmental claim, petitioner decided to transfer the project to Newmont Oil Company ("Newmont") and Adobe Oil and Gas Corporation ("Adobe") on May 12, 1982. In transferring the project, petitioner represented all holders of a working interest in the project.
Under the terms of the project's transfer, the transferors were to receive $2,000,000 and a 3½ percent overriding royalty from the sale of all oil produced, saved, and sold from the properties in the project. These received items were to be divided among all transferors based on their approximate ownership interests in the working interest of the experimental project.3 The Pikeville Group, nevertheless, received an amount of the $2,000,000 proceeds in excess of its 63 percent because petitioner and the holders of the remaining 8 percent of the project's ownership interests agreed to pay the Pikeville Group $119,000 as an inducement to this group to sign the papers relating to the transfer of the project. Furthermore, of the total $2,000,000 received, $50,000 was placed in escrow for the payment of expenses related to the transfer of the project. Of this total $50,000 escrow amount, $39,078.15 was later spent to cover costs.4 Petitioner timely filed Form 966, notice of Corporate Dissolution or Liquidation, after the requisite corporate action to dissolve was taken.
On the date of the project's transfer, May 12, 1982, petitioner's shareholders, Frank D. Smith and Darrell F. Smith, agreed to liquidate and dissolve petitioner.5 In accordance with the plan of liquidation and dissolution, petitioner distributed to the Smiths all its assets including its portion of the $2,000,000 in proceeds, its percentage interest in the overriding royalty, and its share of the escrow monies which remained after the payment of costs. This distribution was completed by April 30, 1983. On its corporation income tax return filed for the year of its liquidation, petitioner reported a $439,437.44 gain on the transfer and cited section 337 as support for its not recognizing this gain.6
To support its claim, petitioner alleged the following facts:
In answer, respondent denied petitioner's facts b., g., and i., and admitted fact f.
On May 5, 1987, the case was set for an October 5, 1987, trial date in Charleston, West Virginia. On August 24, 1987, respondent filed a motion to compel production of documents; the motion was granted September 2, 1987.
While in the process of retaining counsel, petitioner filed a motion for continuance on September 8, 1987. We subsequently denied this motion on September 11, 1987. On September 18, 1987, Mark Garren formally entered his appearance as counsel for petitioner.7 Mr. Garren represented petitioner in the instant case and was also to represent petitioner in another tax case pending before this Court.
In his trial memorandum respondent argued that, though the documents covering the transfer of the experimental project were drafted in terms of a purchase, such characterization was not controlling. He further argued that the retention of the overriding royalty represented an economic interest in oil and gas under the authority of Cox v. United States 74-1 USTC ¶ 9461, 497 F.2d 348 (4th Cir. 1974), cert. denied 419 U.S. 1047 (1974), and that such retention turned the project's transfer into a sublease. Consequently, he reasoned that a sublease would not qualify as a sale or exchange and that section 337 would not apply to the experimental project's transfer to Newmont and Adobe.
In its overdue trial memorandum, petitioner agreed that the issue revolved around whether petitioner's transfer of the project represented a sale or sublease. Petitioner suggested that its retention of the overriding royalty did not represent its retention of an economic interest in oil and gas and cited Strutzel v. Commissioner Dec. 32,150, 60 T.C. 969 (1973), as authority. Petitioner alternatively argued that, under the authority of Day v. Commissioner Dec. 30,210, 54 T.C. 1417 (1970), its overriding royalty represented a de minimis reserved right which would not change the character of the project's transfer from that of a sale to that of a sublease. Finally, petitioner argued that if its retained interest was described as an economic interest, thus making the transfer a sublease, petitioner would be entitled to a depletion allowance, pursuant to section 613, and an offset, pursuant to section 1255, against any remaining, recognized ordinary income.
At trial, Mr. Garren spent much time having petitioner's witnesses identify documents to which the parties had previously stipulated. Additionally, this Court noted a number of times at trial its dismay over petitioner's decision to retain counsel so late in the course of these proceedings.
After respondent's concession in this case, petitioner submitted its motion and affidavit in support of its receipt of litigation costs.8 In its motion, petitioner stated that it had incurred total litigation costs equal to $31,250.70. These costs represented the sum of $15,214.50 in legal fees,...
To continue reading
Request your trial