Decision Date01 June 1928
Docket NumberDocket No. 13393.
Citation12 BTA 310
CourtU.S. Board of Tax Appeals

F. B. Kiley, C. P. A., and J. L. Lockett, Esq., for the petitioners.

Shelby S. Faulkner, Esq., for the respondent.

This proceeding involves deficiencies in income and profits taxes for the years 1920 and 1921 in the respective amounts of $144,774.50 and $58,270.38, all of which is in dispute. Petitioners assert the following errors: (1) Respondent erred in determining that petitioners were not taxable as a strict trust; (2) respondent erred in determining that the status of petitioners was that of an association; (3) respondent erred in determining that the principles outlined in Hecht v. Malley, 265 U. S. 144, justified the reopening of the case in 1926, the same having been disposed of in 1923; (4) respondent erred in undertaking to reverse the position which he had taken in 1923, which earlier ruling was made upon the same facts as the later ruling; (5) respondent erred in including in taxable income of petitioners for 1920 and 1921 amounts which were paid by certain companies directly to stockholders of the dissolved corporation, of which petitioners were trustees in liquidation; (6) respondent erred in the computation of excess profits in granting them only a part instead of full credit of $3,000; (7) respondent erred in computing the excess-profits taxes for 1920 in that he computed the invested capital not for a full taxable year but only a portion thereof, and (8) respondent erred in computing the excess-profits taxes for 1920 in that in the computing of that portion of income not in excess of 20 per cent of the invested capital and in computing that portion of the income in excess of 20 per cent of the invested capital, he used not the full amount of invested capital but only a proportionate part thereof. In the brief filed in his behalf, respondent concedes error as to contention (6).


The Gonzolus Creek Oil Co. was incorporated under the laws of the State of Texas on April 3, 1920, the purpose of its incorporation stated in its charter being as follows: "For the establishment and maintenance of oil companies with the authority to contract for the lease and purchase of the right to prospect for, develop and use coal and other minerals, petroleum and gas; also the right to erect, build and own all necessary oil tanks, cars and pipe necessary for the operation of the business of same." Its authorized capital stock, originally $125,000, was reduced by amendment to $90,000, all paid in, of which $30,000 was expended for the purchase of an oil lease on a 12-acre tract of land in Stephens County, Tex. (Breckenridge field), and $60,000 was paid as consideration for a contract to drill a well thereon. This well, which was known as No. 1, was completed about August 2, 1920, when oil was produced. The Gonzolus Creek Oil Co., prior to its dissolution as hereafter set forth, entered into a contract with a drilling contractor to put down a second well known as No. 2, for a consideration of $6 per foot, the contractor to furnish the rig, casing, fuel and water. The estimated cost of this well was $75,000. Agreements were made with the Gulf Pipe Line Co. and the Humble Oil & Refining Co. to purchase the oil, each company taking one-half. Two wells were sufficient to drain the 12-acre tract covered by the lease, and it was decided to dissolve and liquidate the corporation.

A certificate, in the manner and form provided by the laws of Texas, showing consent of all stockholders to dissolution of the corporation was filed in the office of the Secretary of State of Texas, at 8 o'clock a. m., August 14, 1920. Said certificate reads:

THE STATE OF TEXAS County of Stephens

KNOW ALL MEN BY THESE PRESENTS: That we, B. W. ARMSTRONG and BURKE BAKER, of Harris County, Texas, and G. C. BACHMAN, of Stephens County, Texas, being all of the stockholders of Gonzolus Creek Oil Company, a corporation created and existing under the laws of the State of Texas with its principal office and place of business in Stephens County, Texas, have agreed and consented, and do by these presents agree and consent, to the dissolution of said corporation, and do hereby direct the officers of this Company to certify this consent to the Secretary of State of the State of Texas, in order that the dissolution hereby agreed to may be accomplished.

Thereupon, the dissolution of the corporation became immediately effective under the laws of Texas.

G. C. Bachman was president and also a director of the Gonzolus Creek Oil Co. at and before its dissolution, and Burke Baker and B. W. Armstrong were the other two of its three directors. These three immediately executed and delivered to the Gulf Pipe Line Co. and Humble Oil & Refining Co., respectively, an order, effective at 7 o'clock a. m. August 14, 1920, for payment direct to the parties listed in said orders, of all money becoming due for oil run to the pipe lines after said hour and date. The order to the Gulf Pipe Line Co. is in words and figures as follows:

GONZOLUS CREEK OIL COMPANY having been dissolved at 8.30 o'clock A. M. on the 14th day of August, 1920, the undersigned, being the directors of said Company at the time of such dissolution, as Trustees for the liquidation of said Company, hereby direct that all moneys due to or for account of said Company from oil run and to be run into the pipe lines of the Gulf Pipe Line Company, be paid as follows:—

FIRST:—Amount of money due said company for oil run up to 7 o'clock A. M. of August 14th, 1920, shall be paid out of the first moneys due, to Breckenridge State Bank & Trust Company, for account and to the credit of Gonzolus Creek Oil Company.

SECOND:—Thereafter, until further order from the undersigned, all such sums shall be paid to the parties below named, in the proportions set opposite their respective names, to-wit:—

                                            |                                                          | Interest
                        Name                |               Address                                    |  of 7/8
                Miss Jess Johnson _________ | Breckenridge, Texas ____________________________________ |   25/900
                Homer Brown _______________ | ____do _________________________________________________ |   50/900
                Mrs. Nellie Jarnagin ______ | ____do _________________________________________________ |   10/900
                J. E. King ________________ | ____do _________________________________________________ |    5/900
                J. S. Pierce ______________ | ____do _________________________________________________ |   75/900
                A. V. Smith _______________ | Abilene, Texas _________________________________________ |    5/900
                W. C. Holt ________________ | Breckenridge, Texas ____________________________________ |   30/900
                David Ball ________________ | (Send check to Breckenridge State Bank & Trust Co.,      |   26/900
                                            |   Breckenridge, Texas).                                  |
                P. S. Luttrell ____________ | Breckenridge, Texas ____________________________________ |    1/900
                Miss Hazel McCoy __________ | Tulsa, Oklahoma ________________________________________ |   15/900
                James J. Lyons ____________ | (Make check payable to Breckenridge State Bank & Trust   |   15/900
                                            |   Co., Breckenridge, Texas).                             |
                John Brook ________________ | Breckenridge, Texas ____________________________________ |    3/900
                J. M. Luttrell ____________ | Mineral Wells, Texas ___________________________________ |    2/900
                W. O. Wood ________________ | Breckenridge, Texas ____________________________________ |    1/900
                G. C. Bachman _____________ | ____do__________________________________________________ |   69/900
                Thos. A. Creekmore ________ | ____do__________________________________________________ |   50/900
                P. S. Quinn _______________ | ____do__________________________________________________ |    5/900
                A. C. Ford ________________ | 1616 Carter Building, Houston __________________________ |   60/900
                R. H. Baker _______________ | 618 Union Natl. Bank Bldg., Houston ____________________ |   50/900
                Burke Baker _______________ | ____do__________________________________________________ |   50/900
                Don Hall __________________ | 613 Carter Building, Houston ___________________________ |   50/900
                E. L. Neville _____________ | 112½ Main Street, Houston ______________________________  |  25/900
                J. M. West ________________ | 15th Floor Carter Building, Houston ____________________ |   25/900
                                            |                                                       |  Interest
                           Name             |                          Address                      |  of 7/8
                Frank Andrews _____________ | 12th Fl., Union Bank Bldg., Houston _________________ |    20/900
                John G. Logue _____________ | ____do_______________________________________________ |    10/900
                Edward H. Andrews _________ | ____do_______________________________________________ |     6/900
                Mrs. Frank Andrews ________ | ____do_______________________________________________ |     2/900
                Kate Ebdon ________________ | ____do_______________________________________________ |     1/900
                Julia C. Smith ____________ | ____do_______________________________________________ |     1/900
                Hattie E. Ralston _________ | ____do_______________________________________________ |     1/900
                R. H. Kelley ______________ |

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