Pleasanton Gravel Co. v. Comm'r of Internal Revenue
| Decision Date | 30 June 1975 |
| Docket Number | Docket No. 6095-73. |
| Citation | 64 T.C. 510 |
| Parties | PLEASANTON GRAVEL COMPANY, PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Paul E. Anderson, for the petitioner.
William E. Saul and James Booher, for the respondent.
T Corp. entered into a contract under which J Co. had the right to remove sand and gravel from T Corp.‘s property, and which, as construed herein, did not require it to remove all or any specified portion thereof. J Co. undertook to pay for the sand and gravel removed at a price per ton geared to the wholesale selling price of sand and gravel then prevailing in the local market during the month such sand and gravel was removed. Held, T Corp. did not sell its minerals ‘in place’ but rather received royalty payments which constituted personal holding company income on account of which T Corp. was a personal holding company. Secs. 542(a)(1), 543(a)(3) and (b)(1), I.R.C. 1954. Held, further, because T Corp. failed to file with its return the schedule required by sec. 6501(f), I.R.C. 1954, the applicable period of limitation upon the assessment of taxes, as explicitly provided for in sec. 6501(f), was 6 years. Held, further: The words ‘Closed on Survey’ stamped on the face of T Corp.‘s tax returns indicated merely that in the process of ‘classification’ of those returns they were not selected for audit (or ‘examination’), with the consequence that an examination conducted thereafter was not a second ‘examination’ within the meaning of sec. 7605(b), I.R.C. 1954, nor did it constitute a reopening of cases closed after ‘examination’ within the meaning of sec. 601.105(j), Proced. & Admin. Regs. There was no procedural defect that would prevent the determination of deficiencies in respect of these returns. RAUM, Judge:
The Commissioner determined deficiencies in petitioner's Federal income taxes in the following amounts:
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¦TYE Oct. 31— ¦Deficiency ¦
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¦ ¦ ¦
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¦1967 ¦$23,570.73 ¦
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¦1968 ¦21,570.17 ¦
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¦1969 ¦26,133.00 ¦
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The ultimate issue in this case is whether petitioner is a personal holding company subject to the personal holding company tax imposed by section 541, I.R.C. 1954. The only substantial question bearing on this issue is whether petitioner's receipts from the sale of its sand and gravel deposits constituted royalty income or long-term capital gain. In addition to the substantive issue herein, there are presented two questions pertaining to the procedures followed by the Commissioner: (1) Is the Commissioner barred from the assessment and collection of the deficiencies herein due to the expiration of the applicable period of limitations, and (2) do the words ‘Closed on Survey,‘ stamped on the face of petitioner's returns by the Commissioner, indicate that the Commissioner conducted an examination of petitioner's books of account within the meaning of section 7605(b) or that the case was closed within the meaning of section 601.105(j), Proced. & Admin. Regs., as a result of which further examination by the Commissioner was barred?
The parties have stipulated most of the facts, and their several stipulations, together with accompanying exhibits, are incorporated herein by this reference.
Pleasanton Gravel Co. (petitioner) is a California corporation. At the time of filing its petition herein, its principal office was in Oakland, Calif.
Following its incorporation in 1956, petitioner issued 800 shares of $25 par stock to George W. Jamieson in return for $20,000. He has since remained petitioner's sole stockholder. Shortly thereafter petitioner acquired 173 acres of land (Pleasanton property) situated in the Livermore Valley near Pleasanton, Calif., from George W. Jamieson for $18,000. On January 1, 1959, petitioner entered into an agreement concerning the sand and gravel deposits on its property with Jamieson Co., a partnership consisting of George W. Jamieson and, for the years here in issue, his father, George G. Jamieson, as equal partners. By that agreement petitioner purported to ‘sell and grant to Buyer (Jamieson Co.) forever, all the rock, sand and gravel deposits in, on and under’ the therein described portion of the Pleasanton property. Pertinent terms and conditions of agreement were as follows:
1. Buyer shall have the right to operate upon the premises described in ‘Exhibit A’ hereto such number of gravel pits and quarries as may be proper under approved quarrying procedures and to excavate and remove from the said premises such rock, sand and gravel as may be proper and profitable under good quarrying practices. * * *
Buyer shall operate its gravel pits and quarries upon said premises in accordance with good quarrying practices and shall not abandon any gravel pit or refill the same with overburden or dirty water until Buyer in its judgment determines that all rock, sand and gravel that can profitably be recovered therefrom under good quarrying practices has been removed.
2. The Seller makes no warranty to Buyer as to the amount of rock, sand and gravel that may profitably be quarried in, on or under the lands * * * , however, if the water table should fall below one hundred (100) feet, Buyer may expect to profitably remove three million (3,000,000) tons of rock, sand and gravel from the deposits herein sold to Buyer.
3. The Buyer shall pay to Seller for every ton of rock, gravel or sand removed by Buyer, a specific amount for each ton so removed by Buyer. The price to be paid by Buyer for each ton so removed will depend on the average wholesale selling price in Pleasanton, California, during the month of removal for the materials so removed. Attached hereto as ‘Exhibit B’ is a schedule setting forth the price that will be payable by Buyer for each ton of rock, gravel or sand removed (Column II) based on the base wholesale price per ton in Pleasanton, California, for rock, gravel and sand (Column I).
Buyer shall deliver to Seller a report in writing showing the number of tons of gravel, rock and sand removed from said premises during the preceding month on or before the 15th day of the calendar month next succeeding the calendar month in which Buyer makes its first removal of gravel, rock or sand from said premises and shall deliver to Seller a like report on or before the 15th day of each calendar month thereafter that Buyer is conducting quarry operations on the premises, and Buyer shall pay to Seller a sum equal to the total purchase price for all gravel, rock and sand as shown in the report due on the 15th day of the preceding month.
4. If at any time during quarrying operations Buyer determines that rock, gravel and sand can no longer be profitably quarried and removed from the lands described in ‘Exhibit A’ hereto, Buyer shall have the option to terminate this agreement upon sixty (60) days notice to Seller.
6. Buyer may erect upon the lands particularly described in ‘Exhibit A’ hereto such machinery, trackage and buildings roads (sic) as it may deem necessary or convenient for the proper and economical operation of the gravel pits and quarries upon said premises. * * * 9. Buyer shall keep the lands * * * free from any liens arising out of any work performed for, materials furnished to or obligations incurred by Buyer.
10. Buyer shall, at its sole cost and expense, comply with all the requirements of all Municipal, State and Federal authorities now in force or which hereafter may be in force pertaining to its operations upon said premises, and shall faithfully observe in its operations on said premises all Municipal ordinances and State and Federal statutes now in force or which may hereafter be in force. * * *
The attached Schedule B referred to in paragraph 3 of the agreement provided that petitioner was to be paid a minimum of $0.05 per ton of rock, sand, and gravel removed plus an additional $0.01 per ton for each $0.30 (or part thereof) increment in the wholesale selling price above $1.50 per ton. Thus, for example, if the per ton wholesale selling price of rock, sand, and gravel was $1.90 per ton, petitioner was entitled to receive $0.07 per ton from Jamieson Co.; if it were $2.20 per ton, petitioner would receive $0.08 per ton, and so on. This payment schedule was amended on January 1, 1962, to provide that—
In event (sic) and whenever one million (1,000,000) or more tons of Rock, Sand and Gravel is sold by Pleasanton Gravel Company to Jamieson Company in any one calendar year then the purchase price to be paid shall be reduced 20% as applied to Exhibit B * * *
Under this agreement, Jamieson Co. mined the sand and gravel which it then processed with machinery located on the same property. The processing consisted of washing, sizing, screening, crushing, and stockpiling the various materials mined. Jamieson Co. thereupon sold these materials to Rhodes-Jamieson, Ltd., a corporation which, for the years in issue, also was owned by George W. Jamieson and his father, 49 percent and 51 percent, respectively. Rhodes-Jamieson Ltd., used the gravel and sand both for ready-mix concrete and for sales to third parties. Neither petitioner nor Jamieson Co. had any employees; instead, they each paid a fee to Rhodes-Jamieson, Ltd., to perform their respective activities, including the operation of the processing machinery. In addition, Jamieson Co. leased the processing machinery from Rhodes-Jamieson, Ltd.
Petitioner's primary source of income since its incorporation has been the proceeds received from Jamieson Co., pursuant to their agreement. Despite their estimate in the agreement that Jamieson Co. would be able to remove a total of 3 million tons of material, Jamieson Co. in fact removed over 14 million tons by the close of petitioner's fiscal year...
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