Keen & Woolf Oil Co. v. Commissioner , 15 B.T.A. 542 ( 1929 )

KEEN & WOOLF OIL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Keen & Woolf Oil Co. v. Commissioner

Docket No. 19363.

United States Board of Tax Appeals

15 B.T.A. 542; 1929 BTA LEXIS 2834;

February 21, 1929, Promulgated

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">*2834 1. In determining the extent of ownership or control of property under section 331 of the Revenue Act of 1918, the issued capital stock of the corporation to which such property is transferred is to be considered and not the amount of authorized capital stock.

2. The execution of a contract by which a broker undertakes to sell a part of the unissued stock does not require that such unissued stock be considered in determining the extent of the ownership or control of the persons who transfer property to the corporation.

3. Section 331 has reference to the interest or control which exists at the time the property is transferred.

4. Where an ownership of more than 50 per cent of the voting stock of the transferee corporation remains in the prior owners of the property transferred, they control such property within the meaning of said section.

R. A Littleton, Esq., for the petitioner.

A. H. Fast, Esq., for the respondent.

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PHILLIPS

">*542 The Commissioner determined a deficiency of $9,358.90 in income and profits taxes for the fiscal year ended May 31, 1920. The petitioner instituted this proceeding for a redetermination of its liability, ">*2835 alleging that the Commissioner erred in determining the amount at which certain leases acquired in exchange for capital stock could be included in computing invested capital.

FINDINGS OF FACT.

The petitioner was duly incorporated under the laws of the State of Delaware on May 20, 1919. Its principal office is at Shreveport, La.

The certificate of incorporation provided for 30,000 shares of 8 per cent cumulative preferred stock of the par value of $100 per share ">*543 and 30,000 shares of common stock without nominal or par value. The preferred stock was not entitled to voting power unless six consecutive quarterly dividends remained unpaid or the comapny failed to comply with certain surplus fund provisions contained in the certificate of incorporation.

At a meeting of the board of directors of the corporation held on May 22, 1919, there was submitted an offer by C. D. Keen and William C. Woolf to assign to the corporation all their right, title and interest, both as individuals and as sole members of the firm of Keen & Woolf, in and to certain oil, gas and mineral leases on lands mentioned and described in such offer in exchange for 30,000 shares of the no-par-value">*2836 common stock and 1,100 shares of the preferred stock of the corporation, which offer was accepted by the directors. On the same day Keen and Woolf executed and delivered to the petitioner an assignment of said leases. On the same day the petitioner issued interim certificates to Keen and Woolf for 1,100 shares of the preferred stock and 30,000 shares of the common stock of the petitioner, which were registered by the registrar and countersigned by the transfer agent of the petitioner on the following day. The leases so transferred had cost Keen and Woolf $92,118.74 and at the date of transfer to petitioner has a fair market value of $200,000. On May 22, 1919, the petitioner entered into a contract with one Jester under which Jester agreed to use his best efforts to sell 3,900 shares of the preferred stock of the petitioner for cash at $100 per share. Jester agreed and guaranteed to sell 1,250 of the said shares on or before August 1, 1919, and 750 additional shares on or before October 1, 1919, failing which he agreed to purchase those shares and pay therefor on or before August 10, 1919, and October 10, 1919, respectively. The agreement further provided that as such stock was">*2837 sold $85 per share should be deposited with the bankers of the petitioner and certificates were to be issued to the purchasers of such stock. The agreement was to terminate on December 1, 1919, unless sooner terminated in accordance with its terms.

On May 22, 1922, an agreement was entered into between Jester as party of the first part and Keen and Woolf as parties of the second part, which recited the incorporation and capitalization of the petitioner, the ownership of 1,100 shares of preferred stock and 30,000 shares of common stock by Keen and Woolf, the simultaneous execution of the agreement above mentioned between petitioner and Jester, and the desire of Keen and Woolf to facilitate the sale of 3,900 shares of the treasury preferred stock of the company and wherein it was agreed that Keen and Woolf would issue and deliver to Jester common stock of the petitioner as Jester should sell the treasury preferred stock. Two shares of common stock were to be issued to ">*544 Jester for each of the first 300 shares of preferred stock which he sold and three shares of common stock for each share shold of the remaining 3,600 shares of preferred stock. This agreement also contained">*2838 provisions under which Keen and Woolf might require Jester to sell the 1,100 shares of preferred stock of the petitioner which they owned and by which they agreed that if they sold prior to October 15, 1919, Jester should have the sole and exclusive right to make such sale.

The petitioner entered into the occupation and operation of the leases in the latter part of May or the early part of June and thereafter continued to transact its corporate business. On or before December 1, 1919, Jester had sold 3,900 shares of the preferred stock of the petitioner and such stock had been issued by petitioner and the proceeds received by it at the rate of $85 per share. Common stock of the petitioner was issued to Jester or his nominees in accordance with the terms of his agreement with Keen and Woolf. On December 3, 1919, there were outstanding 5,020 shares of the preferred stock of the petitioner, of which Keen and Woolf owned 1,100 shares, and 30,000 shares of the common stock, of which Keen and Woolf owned 16,500 shares.

The Commissioner determined that the leaseholds acquired from Keen and Woolf on May 22, 1919, in exchange for capital stock could be included in the invested capital">*2839 of the petitioner only to the extent of the cost thereof to Keen and Woolf, viz, $92,118.74, and determined the deficiency here in question on that basis.

OPINION.

PHILLIPS: The single question in dispute in this proceeding is whether the leases acquired by the petitioner on May 22, 1919, from Keen and Woolf may be included in invested capital at their fair market value on that date (sec. 326(a)(2), Revenue Act of 1918) or whether the transaction falls within the provisions of section 331 of the Revenue Act of 1918, which provides that in the case of the change of ownership of a trade or business or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons or any of them, then such asset transferred or received from the previous owner shall, for the purposes of determining invested capital, be taken at the cost of acquisition to the previous owner. In the present case the property in question was transferred by the previous owners to the corporation in exchange for all of its common stock and 1,100 shares of its preferred stock. It seems obvious that this situation">*2840 comes within section 331 unless the agreements made by the petitioner and by the individuals, Keen and Woolf, with Jester, on the same day, take the transaction out of that section.

">*545 The substance of petitioner's contention is stated in its brief as follows:

Under the plan outlined in said contract of May 22, Keen and Woolf were at no time the beneficial owners of more than 16,500 shares of the common stock and 1,100 shares of the preferred stock, which was approximately 27% of the whole of the common and preferred stock authorized to be issued.

This assumes to take the transaction out of section 331 on the grounds:

(1) That the authorized capital stock is to be considered rather than the issued capital stock.

(2) That the contracts vested beneficial ownership elsewhere than in the individuals to whom all the outstanding stock was issued.

(3) That the "interest or control" of the former owners did not exceed 27 per cent.

No one of these seems to us correct.

All of the issued stock was owned by Kenn and Woolf. If, as the petitioner suggests, the held a part of it in trust, it would not affect the situation. If they were trustees for the petitioner, ">*2841 they still remained the sole owners of the only stock outstanding which was not owned by the petitioner. Certainly they did not hold it as trustee for Jester, whose rights were merely contractual. But if by any stretch of the imagination it could be said they were trustees for Jester, they still owned more than 50 per cent of the common stock and all the issued preferred stock. Only by treating the unissued preferred stock, which Jester had agreed to attempt to sell, as owned or controlled by persons other than the petitioner or Keen and Woolf, could it be said that these individuals did not have a 50 per cent interest in these leases. Section 331 has reference to the interest or control which exists at the time the stock is issued for property; not to the situation which may exist at some future time if the new company is successful in selling more of its stock. We must look to the situation on May 22, 1919; not to that which existed on December 3, 1919. At that time we find the entire ownership and control in Keen and Woolf.

But even on December 3, 1919, after the contract with Jester had been fully completed, Keen and Woolf remained in control of more than 50 per cent">*2842 of the property transferred to them. They owned more than 50 per cent of the common stock, the only stock having voting rights at that date. In speaking of the control which an individual may have in property which he has transferred to a corporation, Congress must have had in mind control of the property through control of the corporation. Such control is exercised by stockholders by means of their votes; this is the control which is legally recognized. Remaining in control of more than 50 per cent of the voting stock, Keen and Woolf controlled this property within ">*546 the meaning of section 331 even after the agreements with Jester had been carried out.

Decision will be entered for respondent.