Petersen v. Commissioner

• Citation: 30 TCM (CCH) 95,1971 TC Memo 21
• Decision Date: 25 January 1971
• Docket Number: Docket No. 4525-67.
• Parties: Morton Q. Petersen v. Commissioner.
• Court: United States Tax Court

30 T.C.M. (CCH) 95 (1971)

T.C. Memo. 1971-21.

Morton Q. Petersen v. Commissioner.

Docket No. 4525-67.

United States Tax Court.

Filed January 25, 1971.

George R. Blue and A. J. Schmitt, Jr., Suite 300, The Howard Triangle, 833 Howard Ave., New Orleans, La., for the petitioner. Bruce A. McArdle, for the respondent.

Memorandum Findings of Fact and Opinion

TANNENWALD, Judge:

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.

Findings of Fact

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:

                ----------------------------------------------------------------------------------------------
                    Assets                                Petroleum                Exploration
                ----------------------------------------------------------------------------------------------
                  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
                                                      ==========                  =========
                  Inventories
                    Rig supplies ..................     1,308.20                   ........
                    Tubular goods .................       393.22                   ........
                    Crude oil .....................       398.42       2,099.84    ........
                                                      ==========                  =========
                    Prepaid insurance .............                    2,237.44                    1,488.14
                  Investments:
                    Royalties .....................     2,185.94                   ........
                    Undeveloped leases ............     1,580.01                   9,493.21
                    Producing leases ..............       491.17       4,257.12    ........        9,493.21
                                                      ==========                  =========
                ----------------------------------------------------------------------------------------------
                
                

                ----------------------------------------------------------------------------------------------
                    Assets                                Petroleum                Exploration
                ----------------------------------------------------------------------------------------------
                  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
                                                                   ===========                   ===========
                ----------------------------------------------------------------------------------------------
                ----------------------------------------------------------------------------------------------
                    Liabilities                           Petroleum                Exploration
                ----------------------------------------------------------------------------------------------
                  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 notes. 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...