Maguire v. Commissioner of Internal Revenue, 11218.

• Decision Date: 19 May 1955
• Docket Number: No. 11218.,11218.
• Citation: 222 F.2d 472
• Parties: William G. MAGUIRE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

222 F.2d 472 (1955)

William G. MAGUIRE v. COMMISSIONER OF INTERNAL REVENUE.

No. 11218.

United States Court of Appeals Seventh Circuit.

May 19, 1955.

Joseph J. Daniels, Indianapolis, Ind., Francis D. Higson, New York City, William P. Nottingham, Washington, D. C., Baker & Daniels, Indianapolis, Ind., Steptoe & Johnson, Washington, D. C., of counsel, for petitioner.

H. Brian Holland, Asst. Atty. Gen., Grant W. Wiprud, Atty., U. S. Dept. of Justice, Washington, D. C., Ellis N. Slack, Hilbert P. Zarky, Sp. Assts. to the Atty. Gen., for respondent.

Before MAJOR, FINNEGAN and SCHNACKENBERG, Circuit Judges.

SCHNACKENBERG, Circuit Judge.

This is a petition for review of a decision of the tax court of the United States.¹ Involved is the income tax liability of petitioner (herein sometimes referred to as "taxpayer") for the year 1945. During that year, as well as before and since, taxpayer was and has been the owner of shares of stock of Missouri-Kansas Pipe Line Company (which, in this era of synthetic abbreviations, is referred to in this litigation as "Mokan").

The first question presented to us is whether certain corporate distributions by Mokan to taxpayer in 1945 were in part taxable dividends, or were amounts distributed in partial liquidation of Mokan under Section 115 of the Internal Revenue Code of 1939.² The tax court held that they were ordinary dividends, taxable as such. Taxpayer asserts that the decision should be reversed because said amounts received by taxpayer were distributed in partial liquidation of Mokan.

We now state the facts material to this appeal, which are set forth in a stipulation of facts and adopted by the tax court in its findings of fact.

Mokan is a Delaware corporation operating on a calendar-year, accrual basis. It was organized in 1928 to engage in the business of producing, transporting and distributing natural gas. Shortly thereafter Panhandle Eastern Pipe Line Company (herein referred to as "Panhandle") was organized and became a wholly-owned subsidiary of Mokan. In 1929, through its subsidiary Panhandle, Mokan commenced construction of a pipeline from Texas to Indiana. As a means of financing this project, Mokan sold one-half of its Panhandle stock in 1930 and, in effect, pledged the other half in 1931. Through the pledge and the sale, Columbia Oil & Gasoline Corporation (referred to herein as "Columbia") eventually became the owner in 1932 of all of the Panhandle stock, Mokan having gone into receivership in that year. In 1936 the United States government procured the entry of a consent decree in an antitrust suit, requiring Columbia to return to Mokan one-half of the Panhandle stock, and giving to Columbia and Mokan each rights to subscribe for 80,000 additional shares of Panhandle. Columbia exercised its rights, and as a result held 404,326 shares of Panhandle to 324,326 shares of Panhandle held by Mokan. Mokan, unlike Columbia, was required to distribute these rights to its stockholders.

Mokan's receivership ended in 1937 and, until 1943, Mokan tried to rid Panhandle of Columbia control.

In 1937, prior to release from receivership, at a meeting of Mokan stockholders the question of whether Mokan should be completely liquidated arose. The stockholders were divided on this issue, those favoring complete liquidation being represented by the Murphy committee, and those opposed being represented by the Maguire committee. The stockholders then elected directors backed by the Maguire committee.

On December 31, 1942, taxpayer as president of Mokan, wrote to its stockholders referring to management's policy of attempting to free Panhandle from control of Columbia, the principal objectives then being: (1) the acquisition by Panhandle of an extension to Detroit then wholly owned by Columbia; (2) cancellation of the voting power of 10,000 shares of class "B" 6% preferred stock, all owned by Columbia; (3) the retirement of 100,000 shares of class "A" 6% participating preferred stock, also owned by Columbia; and (4) the divestment of Columbia of its 50.1% common stock interest in Panhandle. The letter reported that the first three objectives had been accomplished, and also that on July 7, 1942, a new settlement was made by Columbia which, among other things, accomplished: (a) Columbia agreed to sell all its Panhandle common stock to Phillips Petroleum Company (herein referred to as "Phillips"), for the joint account of Phillips and Mokan, the letter indicating that Mokan would then own about 66% of Panhandle's common stock and Phillips would own about 25%, the balance being publicly held; and (b) all litigation between Mokan and Columbia would be terminated.

Under date of November 3, 1943 taxpayer, as president of Mokan, again wrote to its stockholders. Pertinent parts of his letter revealed that on March 31, 1943 Mokan's efforts culminated in a settlement contract under which it acquired 202,163 additional shares of Panhandle at a cost of $26.12 per share, giving it an ownership of about twothirds of the total outstanding common stock of Panhandle; that the directors of Mokan on November 3, 1943 adopted a resolution reading:

"Whereas the principal objectives of the Missouri-Kansas Pipe Line Company have been accomplished; and

"Whereas giving due consideration and recognition to all existing facts, it is the consensus of the Board of Directors that appropiate steps should be taken to effect the orderly liquidation of Mokan and to guarantee the continued independent operation of Panhandle Eastern Pipe Line Company.

"Now, Therefore, be it

"Resolved that a committee to consist of Messrs. Maguire, Letts and Main be and hereby is appointed to undertake a study of the most appropriate means of accomplishing these ends and report their recommendations to this Board as soon as possible, consistent with adequate consideration of the problems involved."

that management "will undertake compliance with this resolution with all diligence" and would endeavor to place the recommendations of the board of directors before the stockholders at the annual meeting.

A notice of an annual meeting of stockholders of Mokan to be held March 21, 1944 referred to and enclosed a copy of a plan set forth in resolutions adopted by the board of directors on February 14, 1944. This plan, in substance, provided, in the First part, that the directors should provide for the purchase by Mokan stockholders of shares of Panhandle stock held by Mokan within thirty days after the registration statement therein provided was filed by Panhandle with the Securities and Exchange Commission, such rights to purchase to be issued to the registered holders of Mokan stock, giving the right to purchase 1/10 share of common stock of Panhandle owned by Mokan at a price of $30 per share for (a) each share of common capital stock, or (b) every 20 shares of class "B" capital stock of Mokan owned by them; the plan provided, in the Second part, that upon payment in full of Mokan's secured debt, its board of directors should immediately take necessary steps to offer to its stockholders the right to exchange in kind their shares for substantially all the remaining shares of Panhandle then owned by Mokan, under the terms and conditions therein stated, any shares of Mokan so exchanged to be cancelled and revert to the status of authorized but unissued stock, the proper officers of Mokan thereupon to cause a certificate of reduction in the capital stock to be executed and filed with the state of Delaware.

The resolution provided for its submission to the stockholders at the March 21, 1944 meeting, and that upon its ratification and approval by the stockholders, the officers of Mokan were authorized to take certain steps therein set forth to carry the plan into effect.

At an adjourned stockholders meeting held on March 27, 1944 the plan was approved, after an amending resolution failed for want of a second. This amending resolution, if adopted, would have provided that the stockholders present in person recommended to the management "to withdraw the liquidation and dissolution plan known as the `Mokan Plan'."

Later the Second part of the Mokan plan was extended from time to time for definite periods up to June 30, 1952, and then it was extended without limitation as to its expiration date, "subject to (a) the termination thereof at any time, by action of the stockholders or of the board of directors, at any meeting thereof called for the purpose and (b) the suspension thereof during any period or periods when it is not practicable to comply with the requirements of the Securities Act of 1933 applicable thereto."

In 1943 Mokan settled four litigated cases to which it was a party; two more cases in 1944; one in 1945; and in 1951 it settled the only remaining litigation to which it was a party.

In 1944 Mokan prepaid its secured debt of $5,050,000, sold its investment in Kentucky Natural Gas Corporation, and terminated by mutual agreement its contract with that corporation under which it had been rendering it certain technical services.

In 1943 Mokan had three full-time salaried officers and seven other full-time employees; in 1944 it had three salaried officers, one of whom was part-time, and six other employees, one of whom was part-time; in 1945 it had two salaried officers, one of whom was part-time, and five other employees, one of whom was part-time; in 1946 it had two salaried officers, one of whom was part-time; in 1947, 1948, 1949 and 1950 it had two salaried officers, one of whom was part-time, and two other employees, both of whom were part-time; and in 1951 and 1952 it had two salaried officers, one of whom was part-time, and two other employees, one of whom was part-time. In 1945 Mokan gave up all of its office space except two rooms, one of which was used as an office and the other as a storage room for corporate records.

In 1949 Mokan, as a stockholder of Panhandle, received as a dividend one-half share of ...