Tex-Penn Oil Company v. Commissioner of Internal Revenue
| Citation | 28 BTA 917 |
| Decision Date | 08 August 1933 |
| Docket Number | 30989,30990.,Docket No. 11539 |
| Parties | TEX-PENN OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. F. B. PARRIOTT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. M. L. BENEDUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
John W. Davis, Esq., Montgomery B. Angell, Esq., Weston Vernon, Jr., Esq., J. C. Adams, Esq., and Harry Friedman, Esq., for all the petitioners.
John S. Weller, Esq., and John O. Wicks, Esq., appearing in addition for petitioner Benedum.
Brooks Fullerton, Esq., John D. Foley, Esq., and Ottomar Hamele, Esq., for the respondent.
BEFORE ARUNDELL, VAN FOSSAN, AND LEECH.
In the deficiency notices sent to these petitioners the respondent proposed deficiencies for the year 1919 as follows:
Tex-Penn Oil Co __________________________________ $22,067,960.03
F. B. Parriott ___________________________________ 9,797,662.78
M. L. Benedum ____________________________________ 12,007,315.11
By amended answers in the cases of the two individuals, Parriott and Benedum, the respondent asserted increases in the deficiencies and prayed that the deficiency in the case of Parriott be redetermined to be $12,156,005.86, and in the case of Benedum, $24,160,673.77. After the evidence was in, the respondent submitted revised computations proposing deficiencies as follows:
Tex-Penn Oil Co ___________________________________ $5,189,103.68
F. B. Parriott ____________________________________ 2,019,559.48
M. L. Benedum _____________________________________ 2,870,337.73
The revised computations take into account the fact that Tex-Penn has been dissolved and propose that Parriott and Benedum will assume its tax liability in the proportions of $1,672,303.83 by Parriott and $3,516,799.85 by Benedum. On this theory respondent has reduced by those amounts the income otherwise computed as received by these two from the receipt of Transcontinental Oil Co. stock on surrender of their Tex-Penn stock. It is understood that Parriott and Benedum will be required to assume whatever deficiency may be determined against Tex-Penn by reason of their receiving the Transcontinental stock to which Tex-Penn was entitled for its assets, thus leaving Tex-Penn without means of satisfying its tax liability. This, however, is not an issue in these cases.
The three cases arise out of a corporate reorganization whereby in 1919, a newly organized corporation, the Transcontinental Oil Co., acquired among other properties all the assets of Tex-Penn Oil Co., in which Parriott and Benedum were stockholders. There are three main issues: (1) Whether the reorganization was of the kind defined in section 202(b), Revenue Act of 1918, and article 1567, Regulations 45, upon which neither gain nor loss to the corporations or stockholders is recognized. (2) Assuming that the reorganization was one giving rise to gain or loss, whether income arose from the receipt of the stock by petitioners in view of a restriction on the sale or other disposition of the stock. (3) The fair market value of the Transcontinental stock received in the reorganization.
There were originally several minor issues, some of which have been abandoned, and two others, relating to the liquidation of Parriott's stock in the Pittsburgh-Texas Oil & Gas Co. and Benedum's stock in the Riverside Western Oil Co., are decided in this report. By amended answer, counsel for respondent alleged error in applying the surtax limitation in computing the tax on the profit realized by Parriott and Benedum on the sale of their interests in the Duke-Knoles oil and gas leases. This issue is decided in this report.
Upon motion of counsel for petitioners, a tentative severance of issues was granted and a hearing was had thereunder confined to the first two issues above set out and the so-called minor issues. Thereafter, and without decision of the issues first heard, the proceedings were set down for further hearing on all questions in dispute under the issues raised by the pleadings.
Upon motion of counsel for respondent the three proceedings were consolidated. By stipulation filed the parties agreed to offer their evidence in the case of Benedum, Docket No. 30990, and further that the evidence in that case should be taken as the evidence in the other two.
FINDINGS OF FACT.
(1) Tex-Penn Oil Co., the petitioner in Docket No. 11539, in 1919 was a corporation existing under the laws of West Virginia, with
its principal office at Pittsburgh, Pennsylvania. It was dissolved in June 1920, but under West Virginia statutes its corporate existence continues for the purpose of suing and being sued and otherwise protecting its rights.
(2) F. B. Parriott, petitioner in Docket No. 30989, is a resident of Tulsa, Oklahoma.
(3) M. L. Benedum, the petitioner in Docket No. 30990, is a resident of Pittsburgh, Pennsylvania.
(4) During 1917 and the early part of 1918, Benedum and Parriott and three associates, W. E. Wrather, J. L. Kirkland, and J. B. Lantz, acquired some 31 undeveloped oil and gas leases covering between 3,500 and 4,000 acres of land lying chiefly in Comanche County and partly in Erath and Eastland Counties, Texas.
(5) The leases so assembled were typical oil and gas leases reserving to the lessor a one-eighth royalty.
(6) The respective undivided interests of the five individual lessees in the 31 leases were as follows:
M. L. Benedum ___________________________ 6/16ths of 7/8ths
F. B. Parriott __________________________ 3/16ths " "
J. L. Kirkland __________________________ 3/16ths " "
W. E. Wrather ___________________________ 2/16ths " "
J. B. Lantz _____________________________ 2/16ths " "
The petitioner Benedum's interest in these leases was carried in the name of the petitioner Parriott, who acted as Benedum's agent in this respect.
(7) At the time the above leases (hereinafter called the Duke-Knoles leases) were acquired by the five individuals, the area in which they were located was "wildcat" territory. Sometime during 1915 or 1916 a well had been drilled to a depth of 1,600 feet, with a showing of oil and gas, at the town of Desdemona, approximately a mile to the north of the northern boundary of the Duke-Knoles leases, but no oil in paying quantities had been discovered in the immediate vicinity of the Duke-Knoles leases.
(8) In the spring of 1918 drilling operations were commenced on the Duke-Knoles leases, and on September 2, 1918, the discovery well known as Duke Well No. 1 was brought in on the J. N. Duke lease with an initial daily production of 500 barrels. The field surrounding the discovery well was known for a time as the Duke-Knoles Pool, but later as development spread to the north toward the town site of Desdemona it became known as the Desdemona Field.
(9) The initial work in developing the Duke-Knoles leases was directed by Parriott, acting as agent for the five individuals. Money necessary for exploration and drilling was contributed by the five individuals in accordance with their respective interests in the leases.
(10) On or about October 31, 1918, the five individuals caused to be organized the Tex-Penn Oil Co. (hereinafter called Tex-Penn) for the purpose of taking over the development and operation of the Duke-Knoles leases. The authorized capital stock of Tex-Penn was $2,000,000, consisting of 80,000 shares of common stock of a par value of $25 per share. Parriott became president of Tex-Penn and Wrather, Lantz and Kirkland became directors.
(11) Upon the organization of Tex-Penn, the five individuals subscribed to 4,000 shares of its stock at par, the subscription being made ratably in accordance with their respective interests in the Duke-Knoles leases. Cash in the amount of $100,000 was paid in for the stock and was immediately paid back to the five individuals by Tex-Penn to purchase from them an interest, hereinafter called the two-eighths interest, in the Duke-Knoles leases.
(12) The two-eighths interest referred to in the preceding paragraph was assigned to Tex-Penn by an instrument dated October 31, 1918. The first portions of this instrument purported to convey the entire interests of the lessees in the Duke-Knoles leases. But under subsequent provisions there was reserved to the individuals a five-eighths interest with a further provision that one half of the proceeds of said reserved five-eighths interest (or five sixteenths of the proceeds) should be paid to Parriott to be used to make up any deficit in the operations of Tex-Penn. The instrument further reserved to the five individuals the right to purchase within five years the remainder of Tex-Penn stock at par. In the event such purchase was made Tex-Penn was to have the right to acquire from the individuals their reserved five-eighths interest for the sum of $1.
(13) Contemporaneously with the execution of the assignment of October 31, 1918, Parriott, individually and as agent for Benedum, and Kirkland, Lantz, and Wrather, entered into a trust agreement among themselves under which Parriott was designated to represent the five individuals in carrying out the above assignment of October 31, 1918, and to handle the accounting required by that agreement. The trust agreement provided that a duplicate should be served upon Tex-Penn, authorized it to deal with Parriott with the same force and effect as if Parriott were the only party to the assignment of October 31, 1918, and empowered Parriott to receive the moneys derived from the reserved interest owned by the five individuals. The trust agreement further required Parriott to invest one half of the moneys so received, after deducting enough to pay Federal and state income taxes, in stock of Tex-Penn, and to distribute such stock in the following proportions: F. B. Parriott, nine sixteenths (six sixteenths belonging to Benedum and three sixteenths to...
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