Court Opinion

ID: 4593848
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:11:40.057012+00
Date Added: 2024-06-11T07:51:08.417132
License: Public Domain

SANTA MARIA GAS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Santa Maria Gas Co. v. CommissionerDocket No. 11507.United States Board of Tax Appeals10 B.T.A. 1412; 1928 BTA LEXIS 3890; March 15, 1928, Promulgated 1928 BTA LEXIS 3890">*3890  Gain or loss arising from the sale of certain pipe determined.  Walter C. Fox, Esq., for the petitioner.  A. H. Fast, Esq., for the respondent.  TRAMMELL 10 B.T.A. 1412">*1412  This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921 in the amount of $1,398.74.  The question involved is the gain or loss resulting to the petitioner from the sale of a portion of its pipe-line properties acquired in 1920.  In its petition the petitioner alleged error on the part of the respondent in reducing invested capital for 1921 in the amount of $559.04 on account of income and profits tax for the calendar year 1920.  This issue was abandoned by the petitioner at the hearing.  FINDINGS OF FACT.  The petitioner is a corporation organized and existing under the laws of California with its principal office and place of business at Santa Maria.  In July of 1920 the petitioner purchased as of July 1, for the sum of $388,000, certain properties from the Midland Counties Public Service Corporation, including among other things a pipe-line 172,775 feet in length, running from the Santa Maria Oil field to Avila, Calif.1928 BTA LEXIS 3890">*3891  , hereinafter referred to as the Graciosa pipe-line, which said pipe-line upon said date was dedicated to public use and used for the purpose of sale and distribution of natural gas.  That section of the Graciosa pipe-line lying between Betteravia and Avila was 125,827 feet in length.  Prior to the time of the organization of the petitioner corporation a contract was entered into between the Santa Maria Gas & Power Co., a California corporation, to purchase the assets of the Midland Counties Public Service Corporation, subject to the approval of the Railroad Commission of California and that corporation.  The Santa Maria Gas & Power Co. had agreed by contract dated February 11, 1920, with one H. L. Emerson, of San Francisco, to sell to him a certain 8-inch pipe-line known as the Graciosa pipe-line, which is here involved, containing 125,827 feet, for $108,000.  The petitioner, however, was formed for the purpose of taking over the assets of the Midland Counties Public Service Corporation 10 B.T.A. 1412">*1413  and the Santa Maria Gas & Power Co., and acquired the assets as aforesaid, subject to the contract to convey the 125,827 feet to Emerson, subject to the approval of the Railroad Commission. 1928 BTA LEXIS 3890">*3892  Petition to abandon this 125,827 feet had been filed with the Railroad Commission by the Santa Maria Gas Co., the petitioner, prior to its acquisition thereof.  A hearing was had and the Railroad Commission entered an order dated June 19, 1920, permitting the abandonment and removal of this pipe-line.  It was stated in the opinion of the Railroad Commission, upon which its order was based, as follows: The salvage value of this pipe is $108,000 and may be considered as a minimum basis of investment when determining the cost of service.  By verbal agreement entered into between Emerson and the petitioner it was agreed to eliminate 8,000 feet of the pipe which Emerson had agreed to purchase.  Emerson, however, was to remove this pipe from the ground.  He was to receive a credit for the 8,000 feet at the rate of 90 cents per foot, to be applied against his contract.  This left 117,827 feet of pipe to be sold to Emerson, and the contract obligation was reduced to $100,800.  The petitioner agreed to pay Emerson for his services in removing the pipe.  Emerson was to pay for the pipe when removed.  In December, 1920, Emerson ceased removing the pipe altogether.  He became involved with1928 BTA LEXIS 3890">*3893  his creditors and was unable to proceed further with the undertaking.  Thereupon, the petitioner took over the work and removed the remaining pipe on its own account.  During 1920, Emerson removed 62,353.58 feet and paid the petitioner therefor $63,553.87.  Emerson did not remove any pipe during 1921, but the petitioner removed and sold 46,334.42 feet and received a gross amount therefor of $46,302.93.  Some of the pipe was abandoned and not removed.  To thousand and forty feet were in the Santa Maria river bed and were not removed.  In addition thereto, 470 additional feet were abandoned.  Most of this was located under cement pavements or for other reasons could not be profitably removed.  In 1921 the petitioner paid out $12,502.70 on account of the removal of the pipe.  At the time the assets were acquired by the petitioner there was no allocation of the purchase to any particular part of the assets.  It was estimated that the value of the Graciosa pipe-line as of January 1, 1920, as on operating concern devoted to public use and as part of the system of the Midland Counties Public Service Corporation, was $224,398, or approximately $1.30 per foot for the entire pipe-line in1928 BTA LEXIS 3890">*3894  operation.  10 B.T.A. 1412">*1414  It was estimated that the property sold had a salvage value of $100,000 in 1920.  The respondent used this estimate of $100,000 value and considered that this represented the cost of the 125,827 feet.  The cost of the 125,827 feet was $108,000.  OPINION.  TRAMMELL: The question here to be decided is the taxable gain received by the petitioner in 1921 from the sale of that part of the pipe line which was sold in that year.  Considerable testimony was introduced relating to the transactions in 1920, but those transactions have no bearing here except as they show the cost of the property which was sold in 1921.  By the end of 1920, Emerson had become financially involved to such an extent that he could not carry on his contract and ceased his operations in removal of the pipe.  Both parties to the transaction treated the contract as having been revoked with respect to the pipe which Emerson had not removed and paid for.  Thereupon, the petitioner proceeded to remove the pipe and to sell it.  In 1921 the petitioner incurred expenses in connection with the removal and sale of the pipe in the amount of $12,502.70.  The petitioner sold to Emerson during 1921, 1928 BTA LEXIS 3890">*3895  46,334.42 feet of pipe, which was included in the original contract, at $46,302.93 gross.  With respect to the cost of this pipe it appears that, prior to the date of purchase by the petitioner, as the result of a hearing before the Railroad Commission of California, it was determined by that body that the salvage value of this 125,378 feet of pipe was $108,000.  A contract had at that time been entered into with Emerson to purchase this pipe at that price.  This is an actual transaction between persons dealing at arm's length and, in our opinion, this is stronger evidence as to the allocation of the cost to the pipe in question than opinion evidence as to the salvage value of this property.  When it was acquired by the petitioner, it was known that this property was not to be used by it in its business but was to be abandoned and sold after the Railroad Commission gave its authority therefor, in accordance with the contract.  The value thereof as a part of a going business has little weight in determining its cost in the transaction.  It was contended by the petitioner that all of the assets acquired in connection with the pipe-line company were acquired as a unit and that the sale1928 BTA LEXIS 3890">*3896  of a portion thereof did not amount to such a transaction as to give rise to gain or loss until the entire unit was sold.  We do not agree with this theory.  The property was separately sold.  When the property was acquired the purchase price should be allocated to respective portions or parts making up the whole to determine the gain or loss on the sale of any part.  10 B.T.A. 1412">*1415  Of this basis the gain or loss of the petitioner should be determined by allocating the $108,000 of the purchase price to the 125,827 feet known as the Graciosa line.  This would amount to 85.8 cents per foot.  Forty-six thousand three hundred and thirty-four and forty-two one-hundredths feet of the said pipe was sold for the gross amount of $46.392.  Expenses were incurred in connection with the removal of the pipe in the amount of $12,502.70.  Reviewed by the Board.  Judgment will be entered on 15 days' notice, under Rule 50.