Source: http://www.ecases.us/case/scotus/c102792/helvering-v-tex-penn-oil-co
Timestamp: 2020-07-09 04:40:03
Document Index: 524382057

Matched Legal Cases: ['§ 202', '§ 202', 'Art. 1567', '§ 202', '§ 202', 'art. 1567', '§ 202', '§ 202', '§ 202', 'art. 1567', '§ 202', '§ 202', '§ 202', 'Art. 1563']

Helvering v. Tex-Penn Oil Co., United States Supreme Court, Supreme Court, Federal Courts, COURT CASE
TEX-PENN OIL CO.[*]
Argued December 14, 1936. Reargued February 1, 2, 1937. Decided March 29, 1937. CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.
*482 Mr. Thurman Arnold, with whom Solicitor General Reed, Assistant Attorney General Jackson, Assistant Attorney General Morris, and Messrs. Sewall Key and A.F. Prescott were on the brief, for petitioner.
Mr. John W. Davis, with whom Messrs. Montgomery B. Angell, Weston Vernon, Jr., J.C. Adams, Harry Friedmaan *483 John S. Weller, John O. Wicks, and David D. Johnson were on the brief, for respondents.
In each of these cases there is involved an item claimed by petitioner to be taxable income of respondent for 1919. In 1925 the commissioner gave notice of deficiencies. These claims were based on a transaction in 1919 which included transfer by Tax-Penn Oil Company of all its assets to Transcontinental Oil Company, the issue and delivery by the latter of 1,007,834 shares to Benedum and Parriott, the stockholders of Tex-Penn, and the dissolution of that company. The commissioner claims that the consideration for the transfer included not only the stock but also $350,000 in cash paid by Transcontinental to Tex-Penn. Respondents petitioned the Board of Tax Appeals for redeterminations. The cases were consolidated for hearing; the board made findings of circumstantial facts on the basis of which it concluded in an "ultimate finding" that the consideration for the transfer by Tex-Penn to Transcontinental included cash, and that therefore the transaction was not one in which, under Revenue Act of 1918, § 202 (b), 40 Stat. 1060, "no gain or loss shall be deemed to occur." It redetermined deficiencies of $2,871,085, $1,925,466, and $908,470, respectively. 28 B.T.A. 917. Respondents petitioned the Circuit Court of Appeals for review. It reversed the orders with directions that the board enter judgments of no deficiencies. 83 F. (2d) 518.
The first question for decision is whether that conclusion is supported by evidence. If well grounded, the transaction is not within the non-recognition of gain provision *484 of § 202 (b). That section declares that "when in connection with the reorganization, merger or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged."
Treasury Regulations 45, Art. 1567,[1] contains an interpretation of that provision: "In general where two (or more) corporations unite their properties by . . . the sale of its property by B to A and the dissolution of B . . . no taxable income is received from the transaction . . . provided the sole consideration received by B and its stockholders . . . is stock .. . of A . . ."
*485 In October, 1918, they caused Tex-Penn to be incorporated. Its authorized capital stock was $2,000,000, divided into 80,000 shares of $25 each. It issued 4,000 shares for par to the five lease owners ratably according to their interests; they transferred a fourth interest in the leases to the company. It agreed to develop the properties at its own expense; they agreed that one-half of their shares of the proceeds might be used to make up deficits in the company's operating expenses.
Benedum and Parriott were also interested as owners in the Riverside Eastern Oil Company, the Riverside Western Oil Company, and the Pittsburgh-Texas Oil & Gas Company. In early 1919, they decided to cause to be organized the Transcontinental Oil Company to acquire and operate the properties of these companies and of Tex-Penn together with the individually owned interests in the leases. Benedum's four associates, by writing dated June 2, 1919, gave him authority to sell the assets of Tex-Penn and all individual interests in the leases for $12,000,000 and agreed to accept their pro rata share of the net proceeds of the sale for their holdings in Tex-Penn and their individual interests in the leases.
To arrange for money with which to carry out the project, Benedum negotiated with bankers. Under the first plan, the bankers were to pay Transcontinental $23,000,000 for a part of its stock, and that amount was to be used to pay the $12,000,000. and $2,500,000 in equal parts to Riverside Eastern and Riverside Western to *486 retire preferred stock. The balance, $8,500,000, was to be retained by Transcontinental for working capital. By a later arrangement the amount to be paid by the bankers was reduced to $20,000,000 and that to be received by the five individuals to $9,000,000. Benedum's associates declined to accept less than their proportionate share of $12,000,000 as originally planned. In order that the undertaking should not fail, Benedum agreed to diminish by $3,000,000 the amount he was to have and so bore the entire reduction. On that basis, distribution of the $9,000,000 would be $1,500,000 each to Benedum, Lantz and Wrather and $2,250,000 each to Parriott and Kirkland.
Transcontinental was organized and authorized to issue 2,000,000 no-par-value shares, of which the bankers agreed to buy 500,000 at $40 per share. They exercised an option to buy 225,000 additional shares at $1.00 per share. Tex-Penn's assets were to pass to Transcontinental free and clear of all liabilities. July 12, Kirkland, Lantz and Wrather assigned and delivered their Tex-Penn shares to Benedum and Parriott for $30.[2]*487 July 15, the stock was transferred on the Tex-Penn stock book. July 22, new directors were elected to take the places of the assignors who, as stated in the minutes, had ceased to be stockholders.
July 24, Benedum and Parriott made a contract with J.M. Holliday, acting for the bankers and Transcontinental, in which they agreed to transfer to Transcontinental their interests in the leases for $3,400,000 in cash, to cause Tex-Penn to transfer to Transcontinental all its assets "for and in consideration of .. . $350,000 in cash and . . . 1,007,834 shares of the capital stock of . . . Transcontinental," and to cause Kirkland, Lantz and Wrather to transfer to Transcontinental their seven-sixteenths of the five-eights interest in the leases for $5,250,000 in cash.
The same day, Holliday addressed an offer to Tex-Penn to purchase all its assets "for . . . $350,000 in cash *488 and . . . 1,007,834 shares" of Transcontinental. By resolution of its directors, Tex-Penn accepted the offer, referring to the consideration as "$350,000 cash and . . . 1.007,834 shares" of Transcontinental. It was further resolved that, after the transfer of its property, the collection of debts due, and payment of those owed by, Tex-Penn, it would be dissolved and its assets distributed to its stockholders "and that to facilitate this, the . . . officers . . . direct Mr. Holliday that . . . $350,000 . . . shall be paid to the treasury of this company, and that the . . . shares . . . be issued and delivered to" Benedum and Parriott jointly.
Details are reflected in the accounts of "Parriott Attorney." Kirkland was given credit for $2,250,000 and Lantz and Wrather for $1,500,000 each as purchase prices of their shares of the five-eighths interest in the leases. *489 Each of the five, according to his interest in the leases, was charged with his share of the $350,000 with the explanation that "this amount was to be apportioned against the sale price received by all the individual interests."[3]
*490 On partial distributions by Parriott before final settlement, Kirkland, Lantz and Wrather gave receipts similar in form. That of Kirkland recited that the payment was on account of the purchase price of his interest "in and to . . . the leases . . . and to the stock of the Tex-Penn. . . . The balance . . . is to be retained until the final adjustment of the taxes and the affairs of . . . Tex-Penn . . . at the conclusion of which the said balance is to be paid to me, less my proportionate share of said expenses." Kirkland and Lantz died before the hearing. Wrather testified that he attached no great importance to the form of the receipt; that he knew there had been in form separate transfer of the lease interests and the Tex-Penn stock but that he and his associates considered only the ultimate objective.
Benedum and Parriott in their 1919 income tax returns reported their own profits from the sale of their lease interests upon the basis of the total price of $8,650,000. Tex-Penn's return stated that it had sold its assets for $350,000 cash and shares of stock. It also stated that the cost of the assets sold was $2,359,205.69, from which it deducted $350,000, leaving $2,009,205.69, and that amount was designated "value of stock." Neither the $350,000 nor the stated "value of stock" received was included in gross income. A schedule attached to the return stated that the cash consideration was accounted for in the return, and that the "no par value stock" received was not taxable income under § 202 (b) and T.D. 2924.
The foregoing includes the substance of all the findings of circumstantial facts material to the questions under consideration. They must be taken as established if supported by substantial evidence. Helvering v. Rankin, 295 U.S. 123, 131. Old Mission Cement Co. v. Helvering, 293 U.S. 289, 294. Burnet v. Leininger, 285 U.S. 136, 138-139. Phillips v. Commissioner, 283 U.S. *491 589, 600. Old Colony Trust Co. v. Commissioner, 279 U.S. 716. There is no suggestions that they are not amply sustained. In addition to and presumably upon the basis of these findings, the board made its "ultimate findings." And upon that determination it ruled that the transaction was not within the non-recognition provisions of § 202 (b). The ultimate finding is a conclusion of law or at least a determination of a mixed question of law and fact. It is to be distinguished from the findings of primary, evidentiary or circumstantial facts. It is subject to judicial review and, on such review, the court may substitute its judgment for that of the board. Helvering v. Rankin, ubi supra.
As indirectly showing that the $350,000 constituted part of the consideration for transfer of Tex-Penn assets, the opinion cites the entry in the "Parriott Attorney" accounts showing that the effect of the payment of that *492 sum to Tex-Penn was to reduce the sale price of the interest in the leases from $9,000,000 to $8,650,000, the entries distributing that amount to the five individuals, and the tax returns of Benedum, Parriott and Tex-Penn.
The board's opinion shows that both parties relied on art. 1567 as a correct interpretation of the statute. The board held (p. 959) that it "requires, as a condition of nonrecognition of gain, that the sole consideration be stock or securities . . . The written agreements herein indicate clearly that there was a cash consideration to Tex-Penn of $350,000. We are not convinced by the oral evidence that that was not a fact. Accordingly, we hold that the petitioners have not brought themselves within section 202 (b) . . . and article 1567 . . . so as to escape recognition of gain."
The opinion of the Circuit Court of Appeals, after discussion of primary or evidentiary facts found by the board, states, 83 F. (2d) at p. 522: "A consideration of all the documentary evidence drives us to the conclusion that the $350,000 was not consideration passing from Transcontinental to Tex-Penn, but was money furnished by the lessees as individuals to pay the debts of Tex-Penn so that the transaction might be made according to agreement . . . In form the documents upon which the Board of Tax Appeals relied stated that the $350,000 was corporate consideration passing from Transcontinental, but in fact, it was not, and the rule is well settled that in determining tax liability taxing authorities must *493 look through form to fact and substance. It has been a long time since these transactions took place and most of the parties who were interested in them are dead, but every living person who was in any way connected with them testified without contradiction that the $350,000 was paid by the five lessees and not by Transcontinental."
The validity of the ultimate finding above quoted is to be tested by what in fact was done rather then by the mere form of words used in the writings employed, United States v. Phellis, 257 U.S. 156, 168. Curran v. Commissioner, 49 F. (2d) 129, 131. The board's findings of circumstantial facts definitely show the substance of the transaction as actually consummated. Summarily stated, the details of controlling significance are these:
Cash                  Shares
Riverside Eastern ......   $1,250,000                41,666
Riverside Western ......    1,250,000                41,667
Pittsburg-Texas ........    ---------               158,833
Benedum and Parriott ...    3,400,000             1,007,834
Parriott, Attorney .....    5,250,000             ---------
Tex-Penn ...............      350,000             ---------
____________             _________
$11,500,000             1,250,000
The $350,000 received by Tex-Penn from Transcontinental was to be used to the extent needed to pay Tex-Penn's *494 debts in order that its assets should be free and clear of liabilities. But no part of that amount was borne by Transcontinental. Upon authorization of Benedum and Parriott, it deducted that amount from the $3,750,000 payable by it to them. And by arrangement among themselves, the five individuals were chargeable with the $350,000 according to their interests in the leases:
Benedum ................................. $131,250
Parriott ................................   65,625
Kirkland ................................   65,625
Lantz ...................................   43,750
Wrather .................................   43,750
Benedum ............................... $20,720.73
Parriott ..............................  10,360.35
Kirkland ..............................  10,360.35
Lantz .................................   6,906.90
Wrather ...............................   6,906.90
Benedum ................. $1,500,000     $1,389,470.73
Parriott ................  2,250,000      2,194,735.35
Kirkland ................  2,250,000      2,194,735.35
Lantz ...................  1,500,000      1,463,156.90
Wrather .................  1,500,000      1,463,156.90
___________     _____________
$9,000,000     $8,705,255.23
*495 The board's findings of evidentiary details not only fail to support, but definitely negative, its conclusion that the consideration received by Tex-Penn in exchange for its assets included $350,000 in cash.
2. The board's second ultimate finding is (p. 950). "The cash received by Wrather, Lantz and Kirkland from Transcontinental was consideration for both their *496 stock in Tex-Penn and their interests in the Duke-Knoles leases." The board (p. 959) deemed that conclusion an additional ground for its ruling that the transaction is not within the non-recognition provisions of § 202 (b). In support of that view the commissioner maintains that "the nominal sale of stock, the transfer of the assets of Tex-Penn, and the sale of the individual interests in the leases, constituted a single indivisible transaction."
On the point under consideration, the commissioner's position before the board is not in harmony with his contention here. There he made four computations: two were of Tex-Penn taxes, the other two were respectively those of the other respondents. In all his calculations, he attributed to the consideration for Tex-Penn assets the 1,007,834 shares of Transcontinental and to the *497 Benedum and Parriott lease interests their shares of the cash, $9,000,000, less the amount thereof used to pay Tex-Penn debts. All these shares went to Benedum and Parriott who owned all the Tex-Penn stock. The deficiencies claimed by the commissioner and the amounts determined by the board rest upon the fact that Benedum and Parriott as the only stockholders of Tex-Penn became the owners of the 1,007,834 Transcontinental shares. And, as shown by the board's findings, the balance of the cash without more went to Kirkland, Lantz and Wrather for their lease interests.
3. The commissioner seeks reversal upon the grounds that the transaction was not a tax-exempt reorganization because Tex-Penn sought to realize a profit rather than merely to change the form of its ownership and that § 202 (b) does not exempt from taxation exchanges of property for stock. Specifically he argues that, assuming that the Transcontinental stock was the sole *498 property exchanged for Tex-Penn assets, the transaction was not within the non-recognition of gains provision. Concededly, this contention is contrary to the interpretation put upon § 202 (b) by art. 1567 which was promulgated September 26, 1919 by the commissioner with the approval of the Secretary of the Treasury and has since been followed.[4] The parties presented their respective claims to the board and to the lower court on the theory that, if neither Tex-Penn nor its stockholders as such received any cash from Transcontinental, the transaction would be within § 202 (b). The commissioner's notices of deficiency do not suggest the construction for which he now contends. He sought no ruling upon the question from the board or the lower court and is therefore not entitled to have it decided here. Helvering v. Minnesota Tea Co., 296 U.S. 378, 380. The taxpayers were entitled to know the basis of law and fact on which the commissioner sought to sustain the deficiencies. His failure earlier to present the question leaves this court without the assistance of decision below.[5] His petitioners for these writs did not present the question to this court. We are not called on to consider the construction of § 202 (b) now proposed.[6]
*499 4. As the sole consideration to Tex-Penn was Transcontinental shares and as Kirkland, Lantz and Wrather received from Transcontinental no cash for their Tex-Penn stock, the transaction is within the non-recognition of gains provisions. The judgments must therefore be affirmed.
In the absence of such value, the ownership of the shares did not lay the basis for the computation of a gain at the time they were received, or for a tax as of that date under the applicable statute. § 202 (b). Treasury Regulations 45, Art. 1563.
[*] Together with No. 208, Helvering, Commissioner, v. Benedum; and No. 209, Helvering, Commissioner, v. Parriott. Certiorari to the Circuit Court of Appeals for the Third Circuit.
[1] "In general, where two (or more) corporations united their properties, by either (a) the dissolution of corporation B and the sale of its assets to corporation A, or (b) the sale of its property by B to A and the dissolution of B, or (c) the sale of the stock of B to A and the dissolution of B, or (d) the merger of B into A, or (e) the consolidation of the corporations, no taxable income is received from the transaction by A or B or the stockholders of either, provided the sole consideration received by B and its stockholders in (a), (b), (c), and (d) is stock or securities of A, and by A and B and their stockholders in (e) is stock or securities of the consolidated corporation, in any case of no greater aggregate par or face value than the old stock and securities surrendered. . . ."
[2] The terms of the transfers were evidenced by two letters to Parriott accompanying delivery of the assignments. Words within brackets were in the first letter but not in the second; words in italics were in the second letter but not in the first.
"We understand that you and Mr. Benedum are transferring to .. . Transcontinental . . . a considerable amount of property that you and he own . . . including your interests in the Tex-Penn leases, and that you and he are to be paid for all these properties partly in cash and partly in stock of . . . Transcontinental . .. . Our entire interests in the stock of the Tex-Penn Company and in the leases covered by the assignment above referred to are paid for in full by the [$5,250,000 that is to be paid us in this transaction.] considerations agreed upon between us."
[3] This corrected an entry of August 1 which charged Tex-Penn with the $350,000 and credited $140,000 to Benedum and $210,000 to Pariott with the explanation that the $350,000 had been taken out of their share of the purchase price of the Duke-Knoles properties. The correcting entry (December 31, 1919) is as follows:
W.E. Wrather .................................  $43,750.00
J.B. Lantz ...................................   43,750.00
J.L. Kirkland ................................   65,625.00
F.B. Parriott ................................   65,625.00
M.L. Benedum .................................  131,250.00
Tex-Penn Oil Co .......................... $350,000.00
W.E. Wrather ..............................  $1,456,250.00
J.B. Lantz ................................   1,456,250.00
J.L. Kirkland .............................   2,184,375.00
F.B. Parriott .............................   2,184,375.00
M.L. Benedum ..............................   1,368,750.00
Total .................................  $8,650,000.00
[4] Cf. Brewster v. Gage, 280 U.S. 327, 336. Fawcus Machine Co. v. United States, 282 U.S. 375, 378. Federal Land Bank v. Warner, 292 U.S. 53, 55.
[5] Cf. Virginian Ry. v. United States. 272 U.S. 658, 675. Lawrence v. St. Louis-San Francisco Ry., 274 U.S. 588, 596. Hammond v. Schappi Bus Line, 275 U.S. 164, 171-172. Baltimore & Ohio R. Co. v. United States, 279 U.S. 781, 787. Beaumont, S.L. & W. Ry. v. United States, 282 U.S. 74, 86. Public Service Comm'n v. Wisconsin Telephone Co., 289 U.S. 67, 69-70.
[6] Alice State Bank v. Houston Pastace Co., 247 U.S. 240, 242. Webster Co. v. Splitdorf Co., 264 U.S. 463, 464. Steele v. Drummond, 275 U.S. 199, 203. Gunning v. Cooley, 291 U.S. 90, 98. Johnson v. Manhattan Ry. Co., 289 U.S. 479, 494. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 182. Helvering v. Taylor, 293 U.S. 507, 511. Clark v. Williard, 294 U.S. 211, 216. Morehead v. N.Y. ex rel. Tipaldo, 298 U.S. 587, 605.
DocketNumber： Nos. 207—209
Citation Numbers： 300 U.S. 481, 57 S. Ct. 569, 81 L. Ed. 755, 1937 U.S. LEXIS 1149
Alice State Bank v. Houston Pasture Co. , 247 U.S. 240 ( 1918 )
Webster Co. v. Splitdorf Co. , 264 U.S. 463 ( 1924 )
Fed. Land Bank v. Warner , 292 U.S. 53 ( 1934 )
Helis v. Ward , 308 U.S. 365 ( 1940 )
Helis v. Ward , 308 U.S. 365 ( 1939 )
Aaron L. Kolom, Et Ux. v. Commissioner of Internal Revenue , 454 U.S. 1011 ( 1981 )
United States v. E. L. Bruce Co., Inc , 180 F.2d 846 ( 1950 )
Collamer v. Commissioner of Internal Revenue , 185 F.2d 146 ( 1950 )
A. C. Burton & Co. v. Commissioner of Internal Revenue , 190 F.2d 115 ( 1951 )
Ketler v. Commissioner of Internal Revenue , 196 F.2d 822 ( 1952 )
Lively v. Elkhorn Coal Co , 206 F.2d 396 ( 1953 )
George K. Ford and Helen L. Ford v. Commissioner of ... , 217 F.2d 886 ( 1954 )
Kraft Foods Company v. Commissioner of Internal Revenue, (... , 232 F.2d 118 ( 1956 )