Spangler v. Comm'r of Internal Revenue
| Decision Date | 10 September 1952 |
| Docket Number | Docket Nos. 24452,24603. |
| Citation | 18 T.C. 976 |
| Parties | CHESTER E. SPANGLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LUCILLE SPANGLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, the exchange by stockholders of half their stock in a corporation for the pro rata distribution of stock in a newly created corporation which transferred all its stock to the distributing corporation in exchange for property of the distributing corporation was an exchange upon which no gain or loss will be recognized under the provisions of section 112(b)(3), I.R.C. Herbert W. Clark, Esq., and Leon de Fremery, Esq., for the petitioners.
H. A. Melville, Esq., and Chas. H. Chase, Esq., for the respondent.
The respondent determined deficiencies of $1,530.73 as to each of the petitioners' income taxes for the year 1943. The only remaining question after the abandonment by petitioners of several issues raised in the pleadings is whether the receipt of stock by petitioners was a taxable dividend, a nontaxable exchange or a capital gain or loss transaction.
The facts stipulated are so found.
The petitioners are husband and wife, residing in Glendale, California. Their income tax returns for 1943 were filed with the collector of internal revenue for the sixth district of California. In March 1930 the petitioners acquired, as community property, 10 shares of stock of the Western States Gasoline Corporation, hereinafter referred to as Western States. The petitioners acquired two more shares of Western States stock in March 1943. Chester E. Spangler was the auditor of Western States, and as such he was in charge of corporate accounting, insurance, taxes, and purchasing. Western States was incorporated in California in 1929, and its capital consisted of 3,000 shares of common stock of a par value of $100 per share. As of May 1, 1943, 2,990 shares of common stock were outstanding and the remaining 10 shares were held as treasury stock.
Western States was organized by Charles R. Gallagher, who had obtained contracts to manufacture casinghead gasoline from the natural gas (wet gas) produced in connection with the production of oil. The stockholders of Western States were required to execute a voting trust agreement with Gallagher as sole trustee. Gallagher was president and general manager of the corporation. Western States' first casinghead gasoline plant was constructed in the Kettleman Hills North Dome Area of California. An additional plant was later built in Ventura County, California. Western States treated the natural gas under contracts with various oil companies in both localities.
In 1934 Western States acquired almost 2,000 acres of oil leaseholds in California at a cost of $57,928.20. The total California oil leasehold acreage decreased after 1936 until, by 1942, only 80 acres were held, and the royalty from these California properties amounted to $523. In 1935 Western States began acquiring undeveloped oil and gas leases in the Slaughter Field in the State of Texas. In that year 12,014.19 wildcat acres were acquired at a cost of $15,075.01. Three leases (Coons, Frazier and Mallett) were developed and the first producing oil well was drilled on these properties in 1939. By May 1, 1943, a total of 43 producing wells had been drilled on the Texas properties. At that date Western States held 3,191 acres of producing leaseholds and 12,463.84 nonproducing acres in Texas. By May 1, 1943, the net expenditure made by Western States in connection with the Texas oil properties was $1,131,600.10. The monthly allowable oil production from the Texas properties for April 1943 was as follows:
+--------------------------------------------------------------+
¦ ¦Coons ¦Frazier ¦Mallett (A)¦Mallett (B)¦
+--------------------+--------+--------+-----------+-----------¦
¦Oil wells ¦5 ¦18 ¦3 ¦17 ¦
+--------------------+--------+--------+-----------+-----------¦
¦Barrels of oil ¦2,980 ¦12,180 ¦1,300 ¦8,436 ¦
+--------------------+--------+--------+-----------+-----------¦
¦Average well per day¦20 bbls.¦22 bbls.¦14 bbls. ¦15 bbls. ¦
+--------------------------------------------------------------+
The average price received for oil from these properties ranged from $.7649 per barrel in 1939 to $.9728 for the year 1943 up to May 1. The average price for this entire period was $.9258 per barrel of oil.
Difficulties were encountered in shipping the oil produced out of the oil field. Shipments were first made by tank truck, then by means of a 2-inch or 3-inch pipeline which required Western States to take its turn with other companies in shipping oil. The income from working interest barrels of oil during the period from 1939 through the first third of 1943, was as follows:
+------------------------------+
¦1939 ¦$60,726.14¦
+-------------------+----------¦
¦1940 ¦--- ¦
+-------------------+----------¦
¦1941 ¦169,789.01¦
+-------------------+----------¦
¦1942 ¦245,221.46¦
+-------------------+----------¦
¦1943 (1/1 to 4/30) ¦83,942.31 ¦
+------------------------------+
In 1938 Western States paid cash dividends totaling $321,790. In 1939 and 1940, $119,200 and $77,840, respectively, were paid in dividends. In 1941 cash dividends totaled $35,760; in 1942 and 1943 no dividends were paid. From 1929 until the end of 1942 Western States had paid $3,389,955 in dividends out of earnings of $4,974,689.04 for that period. The earned surplus carried on the corporate books at the end of 1938 was $1,878,116.63. The earned surplus on the records as of April 30, 1943, was $1,647,415.24. As of August 31, 1944, the earned surplus was $1,153,445.50. Dividends were not paid in 1942 because the company was pouring all available money into the Texas operation. The earnings available for Texas oil operations during the years 1939 to May 1, 1943, were as follows:
+-----------------------------------------------------------------------------+
¦ ¦1939 ¦1940 ¦1941 ¦1942 ¦1943 ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦ ¦ ¦ ¦ ¦ ¦(to Apr. ¦
¦ ¦ ¦ ¦ ¦ ¦30) ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Earnings: ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Natural Gasoline:¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Kettleman ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Hills ¦$463,071.29¦$272,583.81¦$261,119.94¦$274,231.70¦$116,142.47¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Ventura ¦(6,615.34) ¦(1,703.33) ¦(3,828.67) ¦17.739.97 ¦12,219.86 ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Oil Operations ¦(38,856.73)¦(26,301.53)¦(17,703.49)¦(7,293.47) ¦(2,160.87) ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Total earnings ¦$417,599.22¦$244,578.95¦$239,587.78¦$284,678.20¦$126,201.46¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Administrative ¦ ¦ ¦ ¦ ¦ ¦
¦and ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦general expense ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦of Texas ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦and California ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦operations ¦$102,868.29¦$103.127.10¦$107.584.64¦$107,788.48¦$53,085.42 ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦Earnings ¦ ¦ ¦ ¦ ¦ ¦
¦available ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦for Texas ¦ ¦ ¦ ¦ ¦ ¦
+-----------------+-----------+-----------+-----------+-----------+-----------¦
¦operations ¦$314,730.93¦$141,451.85¦$132,003.14¦$176,889.72¦$73,116.04 ¦
+-----------------------------------------------------------------------------+
The net income and cost for the Texas oil operations during these years were as follows:
+-----------------------------------------------------------------------------+
¦ ¦1939 ¦1940 ¦1941 ¦1942 ¦1943 ¦
+----------+-------------+-------------+-------------+------------+-----------¦
¦ ¦ ¦ ¦ ¦ ¦(to Apr. ¦
¦ ¦ ¦ ¦ ¦ ¦30) ¦
+----------+-------------+-------------+-------------+------------+-----------¦
¦Operating ¦ ¦ ¦ ¦( ¦ ¦
¦income or ¦($137,591.01)¦($75,267.74) ¦($199,484.12)¦$216,409.07)¦$21.201.80 ¦
¦(loss) ¦ ¦ ¦ ¦ ¦ ¦
+----------+-------------+-------------+-------------+------------+-----------¦
¦Outlay...To continue reading
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