O'MEARA v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 9822
| Decision Date | 21 March 1928 |
| Docket Number | Docket No. 9822,20399,22557. |
| Citation | 11 BTA 101 |
| Parties | C. A. O'MEARA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ORLANDO PETROLEUM CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ELMHURST INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
D. R. Hite, Esq., for the petitioners.
Orris Bennett, Esq., for the respondent.
The deficiency notices which form the basis of these proceedings show deficiencies as follows: Elmhurst Investment Co., 1919, $153,846.15; Orlando Petroleum Co., period April 15, 1919, to December 31, 1919, $154,767.19; and C. A. O'Meara, 1919, $1,688.91.
The questions at issue are: (a) The jurisdiction of the Board in the appeals of the Orlando Petroleum Co. and the Elmhurst Investment Co.; (b) credit to which the Orlando Petroleum Co. and the Elmhurst Investment Co. are entitled as separate companies on account of the tax assessed and paid on a consolidated return filed by these companies; (c) whether the Elmhurst Investment Co. and C. A. O'Meara realized a taxable gain when they assigned and transferred an undivided interest in certain oil leases to the Orlando Petroleum Co.; (d) whether section 331 of the Revenue Act of 1918 is applicable in determining the invested capital of the Orlando Petroleum Co.
In accordance with the suggestion of counsel for the petitioners and because of the related character of the parties and the questions involved, the three appeals were consolidated and heard together.
The facts as set out below are for the most part covered by stipulations of the parties.
FINDINGS OF FACT.
The Elmhurst Investment Co. is a corporation having its office and place of business in Topeka, Kans., and the Orlando Petroleum Co. is a Kansas corporation with its office in Topeka. C. A. O'Meara is a citizen of the United States, residing in Topeka, Kans.
Prior to November 14, 1918, but subsequent to March 1, 1913, certain oil leases were owned by the following persons and corporations in the following proportions:
F. E. Rose ________________________________________ Undivided one-fourth
S. W. Forrester ___________________________________ Undivided one-fourth
Elmhurst Investment Co., a corporation ____________ Undivided one-half
November 14, 1918, F. E. Rose assigned and transferred his one-fourth interest to the Prudential Trust Co. of Topeka, Kans., trustee, to be held in trust. December 9, 1918, S. W. Forrester assigned and transferred his one-fourth interest to the same trustee and for the same purpose.
December 9, 1918, S. W. Forrester, C. W. Horn, N. B. Burge, C. B. Burge, and C. A. O'Meara notified the said Trust Company, trustee, that they were the owners of the undivided one-half interest in the following proportions:
S. W. Forrester __________________________________ 29/96ths
C. W. Horn _______________________________________ 12/96ths
N. B. Burge ______________________________________ 5/96ths
C. B. Burge ______________________________________ 1/96th
C. A. O'Meara ____________________________________ 1/96th
The remaining forty-eight ninety-sixths undivided interest was owned by the Elmhurst Investment Co.
While these leases were held in common, and on September 1, 1918, Well No. 1 on the Joliffe lease was drilled in dry and was finally abandoned as a dry hole.
February 4, 1919, while the leases were still held in common, Well No. 1 on the West Gillette lease was brought in with a flush production of 1,200 barrels.
March 31, 1919, the tenants in common last above referred to entered into the following contract:
Proposal for the Organization of The Elmhurst Petroleum Company (or such other name as may be agreed upon).
We, the undersigned, are the owners of the oil and gas leases hereinafter mentioned, in the following proportions:
The Elmhurst Investment Co ________________________ 48/96
S. W Forrester ____________________________________ 29/96
C. W. Horn ________________________________________ 12/96
N. B. Burge _______________________________________ 5/96
C. A. O'Meara _____________________________________ 1/96
C. B. Burge _______________________________________ 1/96
It has been found to be extremely awkward and inconvenient to make contracts or to do business with reference to the development and operation of said properties under such diverse ownership of the same. It is therefore agreed by and between said owners that for the purpose of placing the title to said leases under a single ownership, and for greater convenience in making contracts and doing business, that a corporation be created for the purpose of taking the title to said properties, holding and developing the same, and disposing of the products therefrom, all in the interest of the present owners thereof.
We, the undersigned, hereby agree to incorporate a company under the laws of the State of Kansas, to be known as The Elmhurst Petroleum Company (or such other name as may be agreed upon at the time), said company to have a capital stock of five million dollars ($5,000,000), divided into fifty thousand (50,000) shares of One Hundred Dollars ($100) each.
After the above-named company has been organized we will each convey to it our respective interests in said oil and gas leases being the following leases on lands situate in Township Twenty-two (22), Range Four (4), East, Marion County, Kansas.
(Here follows a detailed description of the leases involved.)
Amounting in all to twelve hundred acres.
It is further agreed by and between ourselves that stock shall be issued to us for the purpose of representing our respective interests in said property, in exact proportion thereto, and in amounts as follows:
Shares
Elmhurst Investment Co __________________________ 23,040
S. W. Forrester _________________________________ 13,920
C. W. Horn ______________________________________ 5,760
N. B. Burge _____________________________________ 2,400
C. A. O'Meara ___________________________________ 480
C. B. Burge _____________________________________ 480
______
Total ____________________________________ 46,080
The number of shares which will remain undisposed of will be about 3,920.
Directors and officers of said company shall be chosen as agreed upon among ourselves and any directors selected from outside our number shall be chosen with the understanding that they are to represent us.
We further agree that any moneys required for the development of these properties shall be furnished by us in proportion to our respective interests therein. For the purpose of protecting the credit of said company, shares of stock may be issued to cover the amounts so furnished in lieu of the issuance of obligations of the corporation if such plan is thought best. Under no circumstances will the corporation sell any of its stock to anyone other than the parties hereto.
In carrying out the contract of March 31, 1919, the Orlando Petroleum Co. was incorporated on April 15, 1919, under the laws of Kansas, with its principal office and place of business at Topeka, Kans., with an authorized capital stock of 50,000 shares of the par value of $100 each. The oil leases described in the foregoing contract of March 31, 1919, were assigned to the Orlando Petroleum Co., with the exception of one of the leases listed in the contract and known as the Holman lease. This lease has been sold to one De Golia, for $60,000, and the claim against De Golia in this amount was assigned to the Orlando Petroleum Co. and afterwards collected by it.
Pursuant to the contract of March 31, 1919, upon the request of S. W. Forrester, C. W. Horn, Napoleon B. Burge, C. B. Burge, and C. A. O'Meara, the beneficiaries under the aforementioned declaration of trust, the Prudential Trust Co. on April 15, 1919, executed to the Orlando Petroleum Co. an assignment of the respective interests of the beneficiaries in the oil leases heretofore mentioned. On the same day the Elmhurst Investment Co. executed to the Orlando Petroleum Co. an assignment of the remaining undivided interest in the leases.
The cost of all the property of every description transferred to the Orlando Petroleum Co. by the parties to the above-mentioned contract of March 31, 1919, was $105,423.21.
The fair market value of all the property of every description transferred to the Orlando Petroleum Co. by the parties to the aforementioned contract of March 31, 1919, at the time of the transfer on April 15, 1919, was $1,096,339.87.
At a meeting of the stockholders of the Orlando Petroleum Co. April 15, 1919, a resolution was adopted reciting and accepting the proposal to transfer the leases in consideration of the execution, issue and delivery of certificates of the capital stock of this company to the amount of 46,080 shares, to be issued to said parties in proportion to their respective ownerships in said leases, as follows, to wit:
Shares
Elmhurst Investment Company _________________________ 23,040
S. W. Forrester _____________________________________ 13,920
C. W. Horn __________________________________________ 5,760
N. B. Burge _________________________________________ 2,400
C. A. O'Meara _______________________________________ 480
C. B. Burge _________________________________________ 480
The resolution further provided:
The transfer of the above and foregoing leases to include the transfer of the drilling rigs, casing, tools, and all other personal property now on said leases, or used in connection therewith, or belonging thereto owned by the Elmhurst Investment Company and the Prudential Trust Company, or either of...
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