Pleasanton Gravel Co. v. Comm'r of Internal Revenue

• Court: U.S. Tax Court
• Writing for the Court: KORNER
• Citation: Pleasanton Gravel Co. v. Comm'r of Internal Revenue, 85 T.C. 839, 85 T.C. No. 49 (T.C. 1985)
• Decision Date: 25 November 1985
• Docket Number: Docket No. 22723-81.
• Parties: PLEASANTON GRAVEL CO., SUCCESSOR IN INTEREST TO RIO GRAVEL, INC., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

85 T.C. 839

85 T.C. No. 49

PLEASANTON GRAVEL CO., SUCCESSOR IN INTEREST TO RIO GRAVEL, INC., Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 22723-81.

United States Tax Court

Filed November 25, 1985.

Upon the facts, HELD, that 1. Payments received by a corporation which merged into P constituted royalties and are includable in personal holding company income under sec. 543(a)(3), rather than being rents excludable under sec. 543(a)(6). 2. Waivers executed by P, as successor in interest to a corporation which merged into P, validly extended the period of limitation on assessment and collection of deficiencies owed by the merged corporation. THOMAS M. ROHALL, for the respondent.

DAN L. SHEHI, for the petitioner.

KORNER, JUDGE:

Respondent determined deficiencies in Federal income tax against Pleasanton Gravel Co., Successor in Interest to Rio Gravel, Inc. (hereinafter ‘petitioner‘), as follows:

+------------------------------+
                ¦Tax year ended   ¦Deficiency  ¦
                +-----------------+------------¦
                ¦July 31,1968     ¦$6,588      ¦
                +-----------------+------------¦
                ¦July 31,1969     ¦13,498      ¦
                +-----------------+------------¦
                ¦July 31,1970     ¦12,700      ¦
                +-----------------+------------¦
                ¦July 31,1971     ¦17,233      ¦
                +-----------------+------------¦
                ¦June 30,1972     ¦20,616      ¦
                +------------------------------+
                

After concessions, the issues remaining for decision are: (1) Whether, for the taxable years ended July 31, 1968, through June 30, 1972, Rio Gravel, Inc., a corporation which was merged into petitioner, was a personal holding company subject to the personal holding company tax imposed by section 541; ¹ and (2) whether respondent is barred from the assessment and collection of the deficiencies herein, due to the expiration of the applicable period of limitation.

This case was submitted to the Court under the provisions of Rule 122, upon a set of stipulated facts and exhibits. The stipulation of facts and joint exhibits attached thereto are incorporated herein by this reference and form the basis of our findings of fact.

FINDINGS OF FACT

At the time of filing its petition, petitioner was a California corporation with its principal office in Pleasanton, California. At all times herein pertinent, the stock of petitioner was owned by its president, George W. Jamieson. Rio Gravel, Inc. (hereinafter ‘Rio Gravel‘) was a California corporation, the stock of which at all times herein relevant was owned by Jamieson Company (hereinafter ‘Jamieson Co.‘), a partnership consisting of George W. Jamieson and George G. Jamieson. George G. Jamieson died on February 5, 1971, and his interest in Jamieson Co. was subsequently purchased by George W. Jamieson, who continued the business as a sole proprietorship. Thus, in effect, after the death of George G. Jamieson, the stock of Rio Gravel, as well as the stock of petitioner, was all owned by George W. Jamieson.

On January 1, 1959, Rio Gravel entered into an agreement 2/ with Jamieson Co. concerning the removal of sand and gravel deposits from land owned by Rio Gravel. By this agreement Rio Gravel purported to ‘sell and grant to Buyer (Jamieson Co.) forever, all the rock, sand and gravel deposits in, on and under ‘ property situated in the Township of Washington, in Alameda County, California. Pertinent terms and conditions of the 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. * * *

3. The Buyer shall pay to Seller for every ton of rock, sand or gravel removed by Buyer ten cents (.10) for each ton so removed until Buyer shall have removed three million tons. After Buyer has removed three million tons, the price to be paid by Buyer for each ton so removed will depend upon the average wholesale price in Washington Township, County of Alameda, State of California, during the month of removal for the materials so removed, but in no event shall Buyer pay less than five cents (.05$) a ton for each ton of rock, gravel or sand removed from the premises described in ‘Exhibit A.‘ 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 in excess of three million tons (Column III) based on the base wholesale price per ton in Washington Township, County of Alameda, State of California, for rock and gravel (Column II) or 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 roads as it may deem necessary or convenient for the proper and economical operation of the gravel pits and quarries upon said premises. All of such machinery and trackage shall at all times be the property of Buyer and it may remove the same at any time prior to the termination of this agreement or within a period of sixty (60) days thereafter. Any such machinery and trackage not so removed by Buyer within sixty (60) days after the termination of this agreement shall be deemed to be abandoned by Buyer and shall become the property of Seller.

9. Buyer shall keep the lands described in Exhibit A‘ 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. * * *

In the event that the base wholesale price for sand shall exceed $6.50 per ton, and in the event that the base wholesale price for rock or gravel shall exceed $6.40 per ton, then the purchase price to be paid by Buyer to Seller shall increase one cent (.01) per ton for each full twenty cents (.20) that the base wholesale price exceeds $6.50 per ton for sand and $6.40 per ton for rock and gravel. ³

Rio Gravel's primary source of income during the years in issue was the proceeds received from Jamieson Co., pursuant to their agreement.

On July 11, 1972, Rio Gravel merged into petitioner, with petitioner being the surviving corporation. The agreement of merger provided (among other provisions):

Upon such merger the separate corporate existence of Rio Gravel, Inc. shall cease and the surviving corporation shall become the owner, without other transfer, of all the rights and property of the constituted corporation, and the surviving corporation shall become subject to all debts and liabilities of the constituent corporations in the same manner as if the surviving corporation had itself incurred them. The merger agreement did not specifically authorize the directors or officers of the surviving corporation to sign consents to extend the period of limitation on assessment of Federal tax deficiencies, nor did the agreement prohibit them from doing so.

The deficiencies in the present case relate to tax returns filed by Rio Gravel prior to the merger. For each of the taxable years ended July 31, 1968, July 31, 1969, July 31, 1970, July 31, 1971, and June 30, 1972 (final return), Rio Gravel timely filed a Federal Corporation Income Tax Return, Form 1120. On none of those returns did it indicate in the space provided that it was a personal holding company. Although the name and address of the shareholder were provided in an attachment to each of the returns, Rio Gravel did not provide any schedules enumerating the items of gross income and adjusted ordinary gross income. On each of the returns Rio Gravel described the payments it received from Jamieson Co. as ‘royalties.‘

A Form 872A (Special Consent Fixing Period of Limitation Upon Assessment of Income Tax) was executed by the parties on July 16, 1974, and covered each of the taxable years in issue. The Form 872A named Pleasanton Gravel, Inc., Successor in Interest to Rio Gravel, Inc., as the taxpayer, was signed by G. W. Jamieson in his capacity as president of Pleasanton Gravel Co., and purportedly extended the period of limitation on assessment to December 31, 1976. Form 872's (Consents Fixing Period of Limitation Upon Assessment of Income Tax) covering the same years mentioned above, were executed by the parties on September 16, 1974, October 1, 1976, September 19, 1978, and December 4, 1979, respectively. These also named Pleasanton Gravel Co., Successor in Interest to Rio Gravel, Inc. as the taxpayer, were signed by G. W. Jamieson in his capacity as president of Pleasanton Gravel Co., and purportedly extended the period of limitation on assessment to December 31, 1976, December 31, 1978, December 31, 1979 and June 30, 1981, respectively.

On June 4, 1981, responden...