Texas-Empire Pipe Line Co. v. Commissioner of Int. Rev.
| Decision Date | 23 March 1942 |
| Docket Number | No. 2376.,2376. |
| Parties | TEXAS-EMPIRE PIPE LINE CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Tenth Circuit |
B. H. Bartholow, of New York City (Irving H. Bull, W. G. Dunnington, and Roswell Magill, all of New York City, on the brief), for petitioner.
Warren F. Wattles, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch and Gerald L. Wallace, Sp. Assts, to the Atty Gen., on the brief), for respondent.
Before PHILLIPS, HUXMAN, and MURRAH, Circuit Judges.
This is a petition to review an order of the Board of Tax Appeals.
Two questions are presented: (1) whether the Texas-Empire Pipe Line Company1 realized a taxable gain upon the liquidation of its wholly-owned subsidiary corporation, the Texas-Empire Pipe Line Company of Illinois,2 on December 1, 1932, and if so, the amount of that gain; (2) whether the dividend in the amount of $312,572.50, which the subsidiary declared and paid on November 30, 1932, was an ordinary or a liquidating dividend.
The facts are not in dispute except as to the value of the assets liquidated.
In the fall of 1928, the Texas Corporation3 and Empire Gas & Fuel Company,4 whose subsidiary corporations were producers of crude oil in the Mid-Continent area, agreed to join in the construction of a pipe-line system for the transportation of crude oil from the Mid-Continent area to the refineries of such subsidiaries in Illinois and Indiana. It was intended that the pipe line would be used primarily to provide the requirements of such subsidiaries. Accordingly, on October 31, 1928, they organized the parent under the laws of the state of Delaware with an authorized capital stock of $18,000,000, divided into 720,000 shares of common stock of the par value of $25 per share. The parent was authorized to engage in and carry on the business of transporting petroleum and its products by pipe line and to construct, purchase, or otherwise acquire, and to own, maintain, and operate pipe lines, gathering branches, oil tanks, and water and gas lines in order to carry on such transportation.
The capital stock of the parent of the par value of $16,700,000 was issued equally to Texas and Empire at par for cash.
The laws of Illinois did not permit the parent to exercise the right of eminent domain for the purpose of acquiring lands and rights of way within Illinois. To overcome this obstacle, the parent organized the subsidiary, under the laws of the state of Illinois, with an authorized capital stock of $1,000,000. The subsidiary had substantially the same corporate powers as its parent.
The entire authorized capital stock of the subsidiary was issued to the parent and the subsidiary was credited with $1,000,000 on the books of the latter.
Construction of a pipe-line system from the Mid-Continent area to the refineries of subsidiaries of Texas and Empire at Lockport and Lawrenceville, Illinois, and at East Chicago, Indiana, was started in 1928 and completed in October, 1929.5
The subsidiary owned that part of the pipe-line system constructed east of the center of the Mississippi River, including six pumping stations in Illinois, and tankage, communications system, and general equipment located in Illinois and Indiana.
The subsidiary, on December 3, 1928, filed an application with the Illinois Commerce Commission for a certificate of public convenience and necessity to construct and operate a pipe line in Illinois. The certificate was granted January 9, 1929.
Acquisition of rights of way in Illinois and Indiana was started in September, 1928, and completed in July, 1929. Construction of the pipe-line system in Illinois and Indiana was started November 30, 1928, and completed in October, 1929.
The parent paid the cost of construction of that part of the pipe-line system, including pumping stations, tankage, communications system, and general equipment, owned by the subsidiary, but charged on its books all such expenditures to the subsidiary.
Transportation of oil began in October, 1929. The number of barrels of oil transported by the subsidiary for the years 1929 to 1932, inclusive, is set forth in the margin.6
The parent paid the operating expenses and the taxes of the subsidiary and charged on its books all such expenditures to the subsidiary.
All contracts for the transportation of crude oil were made between the shippers and the parent. The latter collected the charges for the transportation of the crude oil at rates contained in published tariffs filed with the Interstate Commerce Commission and apportioned the charges between itself and the subsidiary on a pro rata mileage basis. On its books, the parent credited the subsidiary with the share so apportioned to it.
The tariffs filed by the parent were similar to or identical with tariffs filed by other carriers of crude oil by pipe line from the Mid-Continent area to Illinois and Indiana refineries. Tariffs by carriers of crude oil by rail from the Mid-Continent area to refineries in Illinois and Indiana were approximately 50 per cent higher than tariffs by carriers of crude oil by pipe line.
The net income of the subsidiary, before deduction of Federal income taxes, for the years 1929 to 1932, inclusive, was as follows:
1929 ........................... $ 86,047.42
1930 ........................... 1,544,921.28
1931 ........................... 2,624,460.17
1932 (to Dec. 1) ............... 2,048,040.79
_____________
Total ...................... $6,303,469.66
The Federal taxes for those years assessed against and paid by the subsidiary were as follows:
Year Rate Amount
1929 ......... 12% $ 9,465.22
1930 ......... 12% 185,390.55
1931 ......... 12% 314,935.23
1932 ......... 13¾% 282,212.35
___________
Total ............... $792,003.35
The parent and the subsidiary filed consolidated Federal income tax returns for the taxable years prior to 1932. In 1932, each filed a separate return. There was imposed for 1932 an additional income tax of ¾ of 1 per cent where consolidated returns were filed for that year.
On December 1, 1932, the estimated remaining economic life of the pipe-line system of the subsidiary was approximately 20 years based upon an average annual operation of 75 per cent of maximum capacity.
The total undepreciated cost of the pipeline system, including pumping stations, tankage, communications system, and general equipment, owned by the subsidiary on December 1, 1932, was $6,221,332.11. The depreciated cost on that date was $6,021,665.67. The estimated replacement cost on that date, without diminution for depreciation, was $5,910,000, and the estimated replacement cost, diminished by depreciation at rates allowed for income tax purposes, was $5,100,000.
The rates to be charged by pipeline companies are subject to regulation by the Interstate Commerce Commission. 49 U.S.C.A. § 1(1) (b); the Pipe Line Case (United States v. Ohio Oil Co.), 234 U. S. 548, 34 S.Ct. 956, 58 L.Ed. 1459. The Interstate Commerce Commission is empowered to make a valuation of the property of carriers, including pipe-line companies. 49 U.S.C.A. § 19a. It was stipulated that the Interstate Commerce Commission had made a tentative valuation report on the entire pipe-line system for ratemaking purposes on December 31, 1934, wherein it fixed the valuation of the pipeline system at $14,503,918. The valuation embraced a consideration of appreciation, depreciation, going concern value, and working capital. It was further stipulated that such valuation might be considered as a final valuation report by the Interstate Commerce Commission.
On January 9, 1932, the subsidiary filed an application with the Illinois Commerce Commission for authority to transfer its assets to the parent. Authority was granted on June 8, 1932. See Opinions and Orders, Illinois Commerce Commission, Vol. II. On December 1, 1932, at a meeting of the stockholders of the subsidiary, action was taken authorizing the complete liquidation of the subsidiary and the conveyance of all its property to the parent, its sole stockholder. On the same day, the subsidiary conveyed to the parent all its property, and in return therefor the parent canceled the indebtedness due it from the subsidiary in the amount of $4,701,705.44, assumed all the other liabilities of the subsidiary in the amount of $406,583.03, and surrendered to the subsidiary for cancellation all of the latter's stock which had a cost in the hands of the parent of $1,000,000.
On December 16, 1932, the subsidiary was duly and legally dissolved.
The books of account of the parent were kept and its Federal income tax returns were made on the accrual basis.
It was the regular practice of the subsidiary to pay out at the end of approximately three-month periods all its earnings and profits to the parent as dividends.7 On November 30, 1932, it paid dividend No. 12 in the amount of $312,572.50.
The Commissioner computed the profit on the liquidation as follows:
Assets Received
Plant account at cost ............... $ 6,921,332.11
Material and supplies at
cost ............................... 29,790.69
Accrued pipeage and prepaid
items at cost ...................... 56,832.11
Value of intangibles ................ 8,959,445.05
Dividend received 11/30/32 .......... 312,572.50
_____________
Total assets received ............... $16,279,972.46
Less
Liabilities assumed ... $ 406,383.03
Depreciation
Reserve .............. 899,666.44
Advances to
subsidiary ........... 4,701,705.44
Cost of capital
stock ................ 1,000,000.00 7,007,954.91
_____________ ______________
Net Profit on
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