Petersen v. C.I.R., 012571 FEDTAX, 4525-67

Docket Nº:4525-67.
Opinion Judge:TANNENWALD, Judge:
Attorney:George R. Blue and A. J. Schmitt, Jr., for the petitioner. Bruce A. McArdle, for the respondent.
Case Date:January 25, 1971
Court:United States Tax Court

30 T.C.M. (CCH) 95




No. 4525-67.

United States Tax Court

January 25, 1971

George R. Blue and A. J. Schmitt, Jr., for the petitioner.

Bruce A. McArdle, for the respondent.



Respondent determined a deficiency of $23,943.27 in petitioner's income taxes for 1959.

The central issue for decision is the extent to which petitioner incurred a net operating loss in 1961 which, pursuant to section 172,[1] can be carried back and offset against his income for an earlier year.


All of the facts have been stipulated and are found accordingly.

Petitioner Morton Q. Petersen was a resident of Shreveport, Louisiana, at the time the petition herein was filed. He filed timely returns on a cash basis for the taxable years 1958 through 1961 with the district director of internal revenue, New Orleans, Louisiana.

At all times pertinent hereto, petitioner was the sole shareholder of three corporations, Petersen Petroleum Corporation (hereinafter ‘ Petroleum’ ), Petersen Exploration, Inc. (hereinafter ‘ Exploration’ ), and Marlin Exploration, Inc. (hereinafter ‘ Marlin’ ), which were engaged in various phases of the oil and gas business. He acquired all of the outstanding stock of Exploration by way of gift from his father on September 26, 1959; the stock was without value on that date.

On February 1, 1960, all of the assets and liabilities of Petroleum and Exploration as represented on the corporate books were as follows:

Table I
Assets Petroleum
Cash in bank:
Nat'l. Bank of Commerce $ 2,852.34 $ 83.46
Commercial Nat'l. Bank 1,013.23 6.65
Total Cash in Bank $ 3,865.57 $ 90.11
Utility deposits 120.00 --
Accounts receivable:
Trade $ 8,375.24 $ 199.40
Tax refund claim 7,932.70 --
Officers 13.83 --
M. Q. Petersen 7,700.00 80.00
Petersen Drilling Co., Inc. 6,419.68 700.87
Marlin Exploration, Inc. 2,745.33 1,239.96
Petersen Exploration, Inc. 3,000.00 36,186.78 -- 2,220.23
Rig supplies 1,308.20 --
Tubular goods 393.22 --
Crude oil 398.42 2,099.84 --
Prepaid insurance 2,237.44 1,488.14
Royalties 2,185.94 --
Undeveloped leases 1,580.01 9,493.21
Producing leases 491.17 4,257.12 -- 9,493.21
Fixed assets:
Lease equipment 130,312.65 --
Drilling equipment 119,083.48 163,962.68
Transportation equipment 8,090.18 11,238.65
Office equipment 1,861.32 259,347.63 1,275.14 176,476.47
____-- ____--
Total assets $308,114.38 $189,768.16
Notes Payable-
N. B. C. $188,000.00
Accounts payable:
Trade $ 2,890.47 $ 1,535.16
Petersen Drilling Co., Inc. 3,343.78 10,615.54
Petersen Petroleum Corp. -- 3,000.00
Marlin Exploration, Inc. 517.41 $ 6,751.66 -- 15,150.70
Accrued expenses:
La. corp. franchise 114.00 10.00
Mississippi income 71.44 --
Severance tax 88.28 273.72 -- 10.00
Reserves for depreciation:
Lease equipment 113,999.38 --
Drilling equipment 85,549.84 26,514.05
Transportation equipment 1,934.24 1,910.00
Office equipment 1,861.32 203,344.78 152.43 28,576.48
____-- ____-
Total liabilities $210,370.16 $231,737.18
Per books:
Capital Stock $ 56,500.00 $ 12,500.00
Surplus 41,244.22 (54,469.02)
On the same day, February 1, 1960, Petroleum and Exploration were dissolved. Also on the same day, these assets and liabilities were transferred to petitioner and from petitioner to Marlin, with the following exceptions: (a) Accounts payable by petitioner to Petroleum in the amount of $7,700 and to Exploration in the amount of $80 were cancelled. (b) An account payable by Exploration to Petroleum in the amount of $3,000 was cancelled. (c) Accounts payable by Marlin to Petroleum in the amount of $2,745.33 and to Exploration in the amount of $1,239.96 were retained by petitioner. The account on Exploration's books entitled ‘ Notes payable-N.B.C.’ represented two notes, in the amounts of $158,000 and $30,000, respectively, owed to the National Bank of Commerce, New Orleans, Louisiana. Both of these notes were personally guaranteed by petitioner. On February 1, 1960, the books and records of Marlin reflected that petitioner was personally indebted to Marlin in the amount of $31,700. Against the transfer of the net assets of Exploration and Petroleum to Marlin, petitioner's account on the books and records of Marlin was credited with $47,995.20, [2] resulting in a credit balance, per said books and records, due petitioner in the amount of $16,295.20. On the same day, Marlin executed a note payable to the National Bank of Commerce, New Orleans, Louisiana, for $188,000 and the notes of Exploration for $158,000 and $30,000 were cancelled. Petitioner personally guaranteed the new note. No payments on any of the notes were made prior to August 7, 1962. In his 1960 tax return, petitioner reported a gain of $41,244.22 from the liquidation of Petroleum and treated this gain as ordinary income pursuant to section 333. He also reported a loss of $54,469.02 from the liquidation of Exploration and treated this loss as a short-term capital loss.[3] His 1960 return showed an offset against this amount of $3,606.36 in long-term capital gains and the utilization of $1,000 of the net capital loss as a deduction against ordinary income. The remaining balance of $49,068.52 was carried forward to 1961 and utilized as an offset against a larger amount of capital gains in that year. In 1962, petitioner sought and received a tentative carryback adjustment to 1959, pursuant to section 6411, based on his claim that he suffered a net operating loss for his 1961 taxable year. He received a refund of $23,943.27 of tax previously paid with respect to his taxable year 1959. Subsequent to petitioner's receipt of the refund, petitioner's books for 1960 and 1961 were examined by an internal revenue agent. At the time of this first examination, both 1960 and 1961 were open years. No deficiencies were asserted at that time. A second examination of petitioner's 1961 records was conducted some fourteen months later, after the statute of limitations for 1960, but not for 1961, had expired. A series of agreements were signed by petitioner extending the time in which respondent could assess a deficiency with respect to petitioner's 1961 taxable year to June 30, 1967. The statutory notice upon which this proceeding is based was mailed on June 14, 1967. In this notice, respondent adjusted petitioner's net operating loss for the taxable year 1961 by eliminating the capital loss carryforward from the taxable year 1960. [4] OPINION Petitioner's first contention is that the proposed deficiency is barred by the statute of limitations. He argues that the events giving rise to at least $49,068.52 of the claimed loss occurred in 1960, a barred year, and that respondent cannot base a deficiency upon a treatment of the 1960 events which is different from the treatment petitioner accorded the same 1960 events in his 1960 return, even though those events were a significant element in determining the amount of his net operating loss for 1961. In so arguing, petitioner misconceives the scope of inquiry with respect to 1961, a year which the parties agree is still open. See section 6501(h). The situation can best be viewed by considering this issue against a factual situation where no operating loss was involved and determining whether respondent could question the right of petitioner to claim the capital loss carryforward from 1960 against otherwise taxable capital gains. Since the events of 1960 would affect the petitioner's tax liability for 1961, such an inquiry would be entirely proper. Lord Forres, 25 B.T.A. 154, 158 (1932); cf. Lawrence W. Carpenter, 10 T.C. 64 (1948).[5] The fact that a net operating loss carryback is involved does not enlarge petitioner's rights. Dynamics Corporation of America v. United States, 392 F.2d 241, 249 (Ct. Cl. 1968); Phoenix Coal Co. v. Commissioner, 231 F.2d 420, 421-422 (C.A. 2, 1956), affirming a Memorandum Opinion of this Court; Commissioner v. Van Bergh, 209 F.2d 23, 25 (C.A. 2, 1954), reversing and remanding on another issue, 18 T.C. 518 (1953); Industrial Suppliers, Inc., 50 T.C. 635, 648 (1968); State Farming Co., 40 T.C. 774, 781, 783 (1963); W. M. Rietter Lumber Co., 30 B.T.A. 231, 277-278 (1934). Petitioner's reliance on Edward G. Leuthesser, 18 T.C. 1112 (1952), Ione P. Bouchey, 19 T.C. 1078 (1953), and Deakman-Wells Co. v. Commissioner, 213 F.2d 894 (C.A. 3, 1954), is misplaced. All of those cases involved the right of respondent to question events in a barred year where respondent's claim was for a deficiency with respect to that year. See Phoenix Coal Co. v. Commissioner, supra, 231 F.2d at 422. Nor does the fact that respondent failed to question the capital losses for 1960 as a result of the first examination of the return for that year in any way estop him from inquiring into those events in determining a deficiency for 1961. Wiles v. United States, 312 F.2d 574, 577-578 (C.A. 10, 1962); Municipal Bond Corporation, 41 T.C. 20, 31-32 (1963), reversed on other grounds, 341 F.2d 683 (C.A. 8, 1965); see First National Bank of Montgomery v. United States, 176 F.Supp. 768 (M.D. Ala. 1959), affirmed per curiam, 285 F.2d 123 (C.A. 5, 1961). Cf. Dixon v. United...

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