Helvering v. Oil Co Same v. Benedum Same v. Parriott 8212 209
| Decision Date | 29 March 1937 |
| Docket Number | Nos. 207,TEX-PENN,s. 207 |
| Citation | 300 U.S. 481,81 L.Ed. 755,57 S.Ct. 569 |
| Parties | HELVERING, Commissioner of Internal Revenue, v. OIL CO. SAME v. BENEDUM. SAME v. PARRIOTT. —209. Re |
| Court | U.S. Supreme Court |
Messrs. Homer S. Cummings, Atty. Gen., and Thurman Arnold, of New Haven, Conn., for petitioner.
Mr. John W. Davis, of New York City, for respondents.
[Argument of Counsel from page 482 intentionally omitted] Mr. Justice BUTLER delivered the opinion of the Court.
In each of these cases there is involved an item claimed by petitioner to be taxable income of respondent for 1919. In 1925 the Commissioner gave notice of deficiencies. These claims were based on a transaction in 1919 which included transfer by Tex-Penn Oil Company of all its assets to Transcontinental Oil Company, the issue and delivery by the latter of 1,007,834 shares to Benedum and Parriott, the stockholders of Tax-Penn, and the dissolution of that company. The Commissioner claims that the consideration for the transfer included not only the stock but also $350,000 in cash paid by Transcontinental to Tax-Penn. Respondents petitioned the Board of Tax Appeals for redetermination. The cases were consolidated for hearing; the Board made findings of circumstantial facts on the basis of which it concluded in an 'ultimate finding' that the consideration for the transfer by Tex-Penn to Transcontinental included cash, and that therefore the transaction was not one in which, under Revenue Act of 1918, § 202(b), 40 Stat. 1060, 'no gain or loss shall be deemed to occur.' It redetermined deficiencies of $2,871,085, $1,925,466, and $908,470, respectively. 28 B.T.A. 917. Respondents petitioned the Circuit Court of Appeals for review. It reversed the orders with directions that the Board enter judgments of no deficiencies. Tex-Penn Oil Co. v. Com'r, 83 F.(2d) 518.
1. The first ultimate finding is (28 B.T.A. 917, at page 950): 'The consideration received by Tex-Penn on or about August 1, 1919, in exchange for its assets consisted of $350,000 in cash and 1,007,834 shares of Transcontinental stock of no par value.'
The first question for decision is whether that conclusion in supported by evidence. If well grounded, the transaction is not within the nonrecognition of gain pro- vision of section 202(b). That section declares that 'when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.'
Treasury Regulations 45, art. 1567,1 contains an interpretation of that provision: 'In general where two (or more) corporations unite their properties by * * * the sale of its property by B to A and the dissolution of B * * * no taxable income is received from the transaction * * * provided the sole consideration received by B and its stockholders * * * is stock * * * of A * * *'
The pertinent substance of the circumstantial facts found follows:
In 1917 and early 1918, respondents Benedum and Parriott and three others, Kirkland, Lantz, and Wrather, acquired 31 Texas oil and gas leases called the 'Duke-Knoles' group. The leases reserved to lessors a one-eighth royalty. The interest of the five in what the findings refer to as the remaining seven-eighths interest were Benedum six-sixteenths, Parriott and Kirkland three-sixteenths each, Lantz and Wrather two-sixteenths each.
In October, 1918, they caused Tex-Penn to be incorporated. Its authorized capital stock was $2,000,000, divided into 80,000 shares of $25 each. It issued 4,000 shares for par to the five lease owners ratably according to their interests; they transferred a fourth interest in the leases to the company. It agreed to develop the properties at its own expense; they agreed that one-half of their shares of the proceeds might be used to make up deficits in the company's operating expenses.
They authorized Parriott to receive their shares of the proceeds, to carry out the agreement with the company, and to invest the remaining half of the proceeds in the company's stock. Accounts of transactions between the company and him, as agent, were kept under the name of 'Parriott Attorney.' Pursuant to the agreement, he from time to time purchased at par stock of the company amounting to 9,120 shares; it used the money in developing the leased properties.
Benedum and Parriott were also interested as owners in the Riverside Eastern Oil Company, the Riverside Western Oil Company, and the Pittsburgh-Texas Oil & Gas Company. In early 1919, they decided to cause to be organized the Transcontinental Oil Company to acquire and operate the properties of these companies and of Tex-Penn together with the individually owned interests in the leases. Benedum's four associates, by writing dated June 2, 1919, gave him authority to sell the assets of Tex-Penn and all individual interests in the leases for $12,000,000, and agreed to accept their pro rata share of the net proceeds of the sale for their holdings in Tex-Penn and their individual interests in the leases.
To arrange for money with which to carry out the project, Benedum negotiated with bankers. Under the first plan, the bankers were to pay Transcontinental $23,000,000 for a part of its stock, and that amount was to be used to pay the $12,000,000, and $2,500,000 in equal parts to Riverside Eastern and Riverside Western to retire preferred stock. The balance, $8,500,000, was to be retained by Transcontinental for working capital. By a later arrangement the amount to be paid by the bankers was reduced to $20,000,000 and that to be received by the five individuals to $9,000,000. Benedum's associates declined to accept less than their proportionate share of $12,000,000 as originally planned. In order that the undertaking should not fail, Benedum agreed to diminish by $3,000,000 the amount he was to have and so bore the entire reduction. On that basis, distribution of the 9,000,000 would be $1,500,000 each to Benedum, Lantz, and Wrather and $2,250,000 each to Parriott and Kirkland.
Transcontinental was organized and authorized to issue 2,000,000 no-par-value shares, of which the bankers agreed to buy 500,000 at $40 per share. They exercised an option to buy 225,000 additional shares at $1 per share. Tex-Penn's assets were to pass to Transcontinental free and clear of all liabilities. July 12, Kirkland, Lantz and Wrather assigned and delivered their Tex-Penn shares to Benedum and Parriott for $30.2 July 15, the stock was transferred on the Tex-Penn stock book. July 22, new directors were elected to take the places of the assignors who, as stated in the minutes, had ceased to be stockholders.
July 14, the individual owners and Tex-Penn executed an assignment to Transcontinental of all their interest in the leases and gave it to Parriott in escrow for delivery upon payment of $5,250,000 to Kirkland, Lantz and Wrather, or to Parriott for their account. They stipulated that if payment was not made by August 1, the assignment and stock would be returned to them. And, in order that Tex-Penn assets might be free from liability, they authorized Parriott to deduct from their shares seven-sixteenths of not exceeding $500,000 to pay debts and obligations of the company. Benedum and Parriott were to bear nine-sixteenths. The auditor of Tex-Penn reported that approximately $350,000 would be required.
July 24, Benedum and Parriott made a contract with J. M. Holliday, acting for the bankers and Transcontinental, in which they agreed to transfer to Transcontinental their interests in the leases for $3,400,000 in cash, to cause Tex-Penn to transfer to Transcontinental all its assets 'for and in consideration of * * * $350,000 in cash and * * * 1,007,834 shares of the capital stock of * * * Transcontinental,' and to cause Kirkland, Lantz and Wrather to transfer to Transcontinental their seven-sixteenths of the five-eighths interest in the leases for $5,250,000 in cash.
The same day, Holliday addressed an offer to Tex-Penn to purchase all its assets 'for * * * $350,000 in cash and * * * 1,007,834 shares' of Transcontinental. By resolution of its directors, Tex-Penn accepted the offer, referring to the consideration as '$350,000 cash and * * * 1,007,834 shares' of Transcontinental. It was further resolved that, after the transfer of its property, the collection of debts due, and payment of those owed by, Tex-Penn, it would be dissolved and its assets distributed to its stockholders 'and that to facilitate this, the * * * officers * * * direct Mr. Holliday that * * * $350,000 * * * shall be paid to the treasury of this company, and that the * * * shares * * * be issued and delivered to' Benedum and Parriott jointly.
July 30, Tex-Penn conveyed its assets to Transcontinental. Holliday directed the latter to deliver to Benedum and Parriott jointly certificates for 1,007,834 shares, to deliver $5,250,000 to Parriott Attorney, $3,400,000 to Benedum and Parriott and $350,000 to Tex-Penn. The next day, these directions were carried out by Transcontinental.
There was available for use by Tex-Penn in payment of its expenses $286,891.29, derived from one-half of the proceeds from the individually owned five-eighths interest in the leases. It also had receivables and oil and the $350,000 with which to discharge its liabilities. The $350,000 was deducted by Transcontinental from the amount to be paid Benedum and Parriott for their interest in the leases. But that deduction was in fact borne not by them alone, but ratably by the five owners. Payment of Tex-Penn's liabilities did not require use of all the $350,000. There remained $55,255.24. And that sum was distributed to the five individuals according to their interests in the leases.
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