Maguire v. Comm'r of Internal Revenue (In re Estate of Maguire), Docket No. 3359-64.

• Decision Date: 24 April 1968
• Docket Number: Docket No. 3359-64.
• Citation: 50 T.C. 130
• Parties: ESTATE OF WILLIAM G. MAGUIRE, DECEASED, MARIAN L. MAGUIRE, ROBERT M. MORGENTHAU AND UNITED STATES TRUST COMPANY OF NEW YORK, EXECUTORS, AND MARIAN L. MAGUIRE, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

50 T.C. 130

ESTATE OF WILLIAM G. MAGUIRE, DECEASED, MARIAN L. MAGUIRE, ROBERT M. MORGENTHAU AND UNITED STATES TRUST COMPANY OF NEW YORK, EXECUTORS, AND MARIAN L. MAGUIRE, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 3359-64.

Tax Court of the United States.

Filed April 24, 1968.

Ben Herzberg, Richard E. Aikman, and Eugene S. Linett, for the petitioners.

James Q. Smith and Robert M. Pearl, for the respondent.

In 1944, Mokan offered to redeem the stock of any stockholder in exchange for a proportionate share of its assets. Such offer remained in effect at least through 1966, and in 1960, the petitioners received distributions of the earnings and profits of Mokan, not in redemption of their stock. The Tax Court held that Mokan was not in the process of complete liquidation in 1945 and that its distributions out of earnings and profits during such year were not liquidating distributions, but that decision was reversed by the Seventh Circuit. Held, collateral estoppel does not apply in the circumstances of this case, and Mokan was not in the process of complete liquidation in 1960.

SIMPSON, Judge:

The respondent determined a deficiency of $213,909.24 in income taxes of the petitioners for the taxable year 1960. In this case, we have two issues—whether the corporation Mokan was in liquidation in 1960, and whether the respondent is collaterally estopped from raising that issue as a result of an earlier decision holding that Mokan was in liquidation in 1945.

FINDINGS OF FACT

Some of the facts were stipulated, and those facts are so found.

The petitioners were husband and wife and legal residents of New York, N.Y., at the time the petition was filed in this case. They filed a joint Federal income tax return for the taxable year 1960 with the district director of internal revenue, Manhattan, New York. William G. Maguire died on September 28, 1965, and his executors, Marian L. Maguire, Robert M. Morgenthau, and the United States Trust Co. of New York, were substituted for him as petitioners in this case.

Throughout 1960, the petitioners owned stock in the Missouri-Kansas Pipe Line Co. (Mokan). Mokan had outstanding two classes of stock, common and class B; each share of class B was entitled to one-twentieth of any distribution made on a share of common. In 1960, Mokan made quarterly cash distributions to its shareholders totaling $1,523,922.73, which was $3.60 per share of common stock and $0.18 per share of class B stock. Mokan's earnings and profits for the year exceeded $1,523,922.73. Mr. Maguire's share of the cash distributions made by Mokan in 1960 was $293,169.08, and Mrs. Maguire's share was $32,940.72. In their return for 1960, the petitioners reported their total shares of the cash distributions made by Mokan as liquidating distributions, and, since they reported that their cost bases for the shares had been exhausted, they included such amounts as long-term capital gains.

Mokan was organized in 1928, and a wholly owned subsidiary of Mokan, Panhandle Eastern Pipe Line Co. (Panhandle), was organized in 1929. In 1930, Panhandle began construction of a natural gas pipeline from the panhandle of Texas to a point near the Illinois-Indiana border.

During the period 1930-1943, Columbia Gas & Electric Corp. (Columbia Gas) was one of the largest public utility holding companies in the United States. To raise funds for the construction of the pipeline, Mokan sold to a subsidiary of Columbia Gas, Columbia Oil & Gasoline Corp. (Columbia Oil), one-half of the Panhandle stock in 1930 and in effect pledged the remaining half in 1931. In a number of States, Columbia Gas, which sold manufactured gas, was in direct competition with Panhandle.

On March 18, 1932, Mokan was placed in receivership. On March 6, 1935, the United States commenced an antitrust suit against Columbia Oil, Columbia Gas, and others. On January 20, 1936, a consent decree was entered in that suit under which Columbia Oil was required to return to Mokan one-half of the Panhandle stock. Under the terms of the decree, Mokan received 324,326 shares and rights to subscribe to 80,000 shares. These rights were required to be distributed by Mokan to its stockholders. Columbia Oil retained 324,326 shares and rights to subscribe to 80,000 shares, which it exercised. Such exercise gave Columbia Oil 404,326 shares and control of Panhandle. In 1937, Mokan was released from receivership.

In 1937, prior to the release of Mokan from receivership, a meeting of Mokan's stockholders was held pursuant to the order of the Chancery Court of Delaware. At this time the question whether Mokan should be completely liquidated was raised. Two slates of directors were presented backed by two contending groups of stockholders, one group favoring complete liquidation of Mokan and the other, the Maguire Committee, opposing liquidation. The stockholders elected the slate of proposed directors supported by the Maguire Committee, and the petitioner, Mr. Maguire, became president of Mokan on August 17, 1937, a position he retained until the date of his death.

During the time Columbia Gas had control of Panhandle, an extension was added to the pipeline from the Illinois-Indiana border to Detroit, Mich. In February of 1942, Panhandle secured title to that extension from a subsidiary of Columbia Gas.

Prior to March of 1942, Columbia Oil owned all of a small issue of Panhandle preferred stock that carried the right to elect two out of the nine directors of Panhandle. The Securities and Exchange Commission ordered, in March 1942, the cancellation of those voting rights.

In 1943, Columbia Oil, as a result of various legal actions that had been brought against it by Mokan and of proceedings before the Securities and Exchange Commission, agreed to divest itself of its Panhandle stock, which was then acquired by Phillips Petroleum Co. (Phillips) for the account of itself and Mokan, each receiving one-half of such stock. Phillips also contracted to dedicate 175,000 acres of proven gas reserves to Panhandle. As a result of such agreement, Mokan held more than 65 percent of Panhandle's outstanding stock.

In November of 1943, Mokan's board of directors, acting upon Mr. Maguire's recommendation, stated in a resolution that the principal objectives of Mokan had been accomplished and appointed a committee, headed by Mr. Maguire, to study means of liquidating Mokan while at the same time continuing the operation of Panhandle as an independent company. In February of 1944, the committee made its report to the board of directors. The committee indicated that a merger with Panhandle was not feasible and opposed a statutory dissolution of Mokan on the ground that many large stockholders were unwilling to be confronted with a large capital gains tax. The committee also indicated that a statutory dissolution might entail long delay and large expenses. The committee proposed a plan that would, in the words of the committee, ‘offer the stockholders the greatest opportunity to work out their own individual tax problems to best advantages and still give the stockholders speedy and economical distribution pro rate of substantially all of the assets.’ The plan, later known as the Mokan Plan, consisted of two parts. The first part called for a sale by Mokan to its stockholders of about 163,000 shares of Panhandle at a price calculated to yield sufficient funds to discharge Mokan's then existing indebtedness of $5,050,000. The second part consisted of an offer to Mokan's stockholders to exchange for their stock the Panhandle stock owned by Mokan, at the ratio of 2 shares of Panhandle for every 9 shares of Mokan common or 180 shares of Mokan class B. The plan was approved by the board of directors and, on March 27, 1944, by the stockholders. At the stockholders meeting, a motion was made, but rejected, that urged Mokan's management to ‘withdraw the liquidation and dissolution plan, known as the ‘Mokan Plan’.'

Originally, the exchange offer to stockholders under the second part of the Mokan Plan was to be in effect only until April 15, 1945. The period of time during which stock could be exchanged was then extended to expire on October 15, 1945. Further extensions of time were approved by Mokan's board of directors, the last of which expired on June 30, 1952. Effective on that date, the period of time during which stock could be exchanged was extended indefinitely, subject to termination of the offer by action of the stockholders or board of directors.

Beginning in 1945, Panhandle several times split its stock, and the Mokan exchange offer was increased to give effect to the splits. In 1948, Panhandle organized Hugoton Production Co. (Hugoton) and transferred to Hugoton its gas reserves in Kansas in exchange for all of Hugoton's capital stock. Panhandle distributed that stock to its stockholders, and Mokan enlarged the exchange offer to include Hugoton shares as well as Panhandle shares.

Originally, Mokan had established a reserve of some of the Panhandle stock, and later of the Hugoton stock, to cover the estimated cost of final liquidation or other nonrecurring expenses, and Mokan withheld that reserve from the exchange offer. In July 1963, effective retroactively to January 1, 1962, Mokan determined that part of the reserve was unnecessary and enlarged the exchange offer to include additional shares of Panhandle and Hugoton stock.

In 1965, the Mokan board of directors adopted a resolution providing that the exchange offer should automatically reflect any additional shares of stock received by Mokan from Panhandle and Hugoton.

Throughout 1960, the taxable year involved in this case, the exchange offer provided for the exchange of 16 shares of Panhandle stock and 2 shares of Hugoton stock for 9 shares of Mokan common or 180 shares of Mokan class B stock.

At all times, the acceptance of the exchange offer was optional with the Mokan stockholders, and no action has been taken by...