Quinn v. Commissioner , 26 B.T.A. 970 ( 1932 )

EVAN V. QUINN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PAUL H. QUINN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MARTIN M. QUINN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. L. BARCLAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Quinn v. Commissioner

Docket Nos. 8544, 8574, 8598, 8743.

United States Board of Tax Appeals

26 B.T.A. 970; 1932 BTA LEXIS 1213;

September 12, 1932, Promulgated

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1. Collection of the deficiency proposed against Paul H. Quinn for 1918 held not to be barred by the statute of limitations.

2. On the evidence held that the three petitioners Quinn acquired interests in an oil lease in 1917 by purchase.

3. On the subsequent sale of the interests of the Quinns and petitioner Barclay, it is held that respondent properly determined that income was realized in each of three years and that he properly determined the profit realized in each year by treating as cost a sum which was in the same ratio to total cost as the amount received in each year was to total receipts.

4. Claimed loss deduction on account of stock becoming worthless allowed in part.

John E. Hughes, Esq., and William Cogger, Esq., for the petitioners.

Arthur Carnduff, Esq., for the respondent.

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ARUNDELL

These proceedings were consolidated for hearing and report, and involve the redetermination of deficiencies in income taxes asserted by the respondent as follows:

Petitioner	Docket No.	1918	1919
Evav V. Quinn	8544	$1,192.22	$421.24
Paul H. Quinn	8574	1,748.07	872.66
Martin M. Quinn	8598	1,636.28	1,461.34
W. L. Barclay	8743	15,047.23	8,719.90

In the case of Paul H. Quinn, one of the issues raised is whether collection of the deficiency asserted for 1918 is barred by the statute of limitations.

The issue common to the cases of the Quinns is whether they derived taxable income from the sale of an interest in an oil lease, and if so [also applicable to the Barclary case], when the profit realized is taxable.

The respondent taxed part of the profit in 1918 and part in 1919. By an amendment to his answers he alleges that the whole is taxable in 1918, and asks that the deficiencies determined against each petitioner be increased because of his alleged error.

Petitioner Barclay also alleges that respondent erred in disallowing certain stock losses sustained in 1919.

FINDINGS OF FACT.

The Quinn Cases.

On October 5, 1917, Charles H. Lewis, who at that time owned a 21/64 interest in 1,270 acres of oil land, known as the Koogler lease, in Butler County, Kansas, assigned his interest therein to a group of individuals known as the Quinn Party, one of whom was petitioner Watson L. Barclay, and another was Martin F. Quinn, father of the other three petitioners. The Quinn Party agreed to pay Lewis for the assigned interest the sum of $1,600,000, of which $100,000 was to be paid at the time of sale and the balance to be paid at the rate of $100,000 each 60 days thereafter.

At or about the time of the assignment from Lewis to the Quinn Party, Martin F. Quinn assigned to each of his three sons an interest in his interest under the agreement between the Quinn Party and Lewis. The assignment was not reduced to writing. Thereafter the father turned over to his sons a portion of the receipts from oil runs from the property and the sons reported the amounts so received as income. The basis for computing gain or loss on the subsequent sale by the Quinn Party is $53,333.33 with respect to the interest of each of the Quinn brothers.

On April 18, 1918, the Quinn Party and others interested in the Koogler lease, including the Page-Lewis Oil Company, which was then operating the property, entered into an agreement with the Magnolia Petroleum Company, under which as far as it is material here, the Quinn Party agreed to sell two-thirds of its interest in the lease. The agreement provided in part that:

Magnolia desires to acquire an undivided one-half interest of, in and to said 1,270 acres, and the oil and gas produced therefrom.

The vendors are not able to give present title because of the executory contract of said Charles A. Lewis, outstanding, and are only able and willing to sell presently an undivided one-third on January 2, 1919, and the remaining undivided one-third interest on January 2nd, 1920, as hereinafter set forth.

In carrying out the agreement the Quinn Party assigned its interest to the Olean Trust Company of Olean, New York, which company upon receipt of payment from the Magnolia Petroleum Company, transferred to it one-ninth of the Quinn Party interest on each of the dates of May 1, 1918, January 2, 1919, and January 2, 1920, which three fractional interests aggregated one-third of the Quinn Party interest or a seven sixty-fourths interest in the entire lease. Another one-third of the Quinn Party interest was assigned by the Olean Trust Company to the Page-Lewis Company and the remaining one-third was assigned back to the Quinn Party. The Magnolia Petroleum Company agreed to pay for the two-thirds of the Quinn Party interest thus assigned to it and to the Page-Lewis Oil Company, as follows: $150,350 in cash on the execution of the contract; $410,000 cash on or before May 1, 1918; $452,833.33 in 6 per cent interest notes payable December 1, 1918; $473,263.08 payable in cash January 2, 1919; and $500,436.07 payable in cash January 2, 1920. The notes provided for in the contract were not given or delivered, but cash was paid instead. The Magnolia Petroleum Company further agreed to pay to Charles H. Lewis the balance owing to him by the Quinn Party, then amounting to $1,400,000, under the assignment of October 5, 1917, above descirbed.

The original income-tax return of Paul H. Quinn was filed on or about March 12, 1919. In it he showed no income from oil runs nor any income from the sale of his interest in the Koogler lease. In an amended return filed on or about June 11, 1919, he reported income from oil runs from the Koogler lease in the amount of $8,363.12, against which he claimed a deduction for depletion in the amount of $4,942.28. In a second amended return, executed August 26, 1921, and filed with respondent in connection with a claim for refund, Paul H. Quinn reported income from oil runs for 1918 in the amount of $13,404.85, against which he claimed deductions for operating expenses and depletion in the respective amounts of $5,553.86 and $20,597.31. In this amended return he also reported a profit of $5,718.17 in 1918 on the sale of his interest in the Koogler lease. In this return he alleged that he purchased his interest in the lease on October 4, 1917, from Charles H. Lewis for $53,333.33.

In his original return for 1919 Paul H. Quinn reported income from oil runs from the Koogler lease in the amount of $5,355.34 and claimed a deduction for depletion in an equal amount. In an amended return for 1919, executed August 26, 1921, he reported income from oil runs in the amount of $10,473.14, against which he claimed deductions for operating expenses and depletion in the respective amounts of $5,236.57 and $13,956.28. He further reported a profit in 1919 of $11,470.76 on the sale of his interest in the lease. in the amended return he made the same representations as in his second amended return for 1918 with respect to the purchase of his interest in the Koogler lease and the cost thereof.

On February 10, 1925, Paul H. Quinn executed an affidavit which was filed with the respondent in which in support of his claim for additional depletion deductions he represented that "we of the socalled Quinn Group were Discoverers as to some of the Koogler Wells" and that in March, 1918, "we sold a 1/2 interest for over 100% profit." He further referred to "my share of the gross working interest" and "my share of the cost of drilling."

In determining the deficiencies asseted against the Quinn brothers the respondent determined that each owned an interest in the Koogler lease in 1918 which cost him $53,333.34, and that each sold one-half thereof, the cost of which half interest was $26,666.67. The respondent treated the sale evidenced by the contract between the Quinn Party and the Magnolia Petroleum Company as taking place in three years, namely, 1918, 1919 and 1920, and held that under that agreement each of the Quinn brothers sold one-half of his interest and received a part of the sale price in each of the three years. He determined that each of the brothers received a total of $51,596.88 in the three years for his half interest. He determined that each received in 1918 from the sale the amount of $16,666.67 for a portion of his interest, which portion had a cost of $8,613.33. This cost was computed by multiplying the total cost of the half interest of each ($26,666.67) by a fraction the numerator of which was the amount received in 1918 ($16,666.67) and the denominator of which was the total amount received ($51,596.88). For the year 1919 the respondent determined that each of the brothers received from the sale the amount of $22,194.35 for a portion of his interest and that the cost of such portion was $12,811.16. This cost was computed in the same manner as that for 1918, except that in the fraction used the amount of $22,194.35 was taken as the numerator.

Under the contract with the Magnolia Petroleum Company there was sold two-thirds of the interest of each of the Quinns (instead of one-half as determined by respondent), and, as determined by respondent, each received for the interest sold $51,596.88 during the years 1918, 1919 and 1920.

Each of the Quinn brothers kept his books on the cash receipts and disbursements basis.

As above stated, the original return of Paul H. Quinn was filed on or about March 12, 1919. On February 9, 1924, Paul H. Quinn executed a waiver relating to the years 1917 and 1918 extending the time for assessment and collection for a period of a year after the expiration of the statutory period. In March, 1924, the respondent made an additional assessment of $10,807.94 for the year 1918, against which the petitioner filed a claim for abatement. On January 10, 1925, the petitioner, Paul H. Quinn, executed a waiver extending the time for assessment and collection of 1918 taxes for a period of one year beyond the statutory period as extended by the Revenue Act of 1924 or by any waivers already on file. Both waivers were duly executed by the respondent. By letter of September 5, 1925, the respondent notified petitioner of his allowance of the abatement claim in the amount of $9,059.87 and the rejection thereof for the balance of $1,748.07. Upon that notice the present proceeding for redetermination is based.

The Barclay Case.

As stated above, petitioner Barclay was a member of the Quinn Party, to whom Lewis assigned his interest in the Koogler lease by the assignment of October 5, 1917. Barclay's interest therein cost him $213,333.33. By the contract of April 18, 1918, Barclay sold two-thirds of his interest in the Koogler lease, receiving therefor a total of $205,552.42 during the years 1918, 1919 and 1920.

In determining the deficiency herein, the respondent determined that, under the contract with the Magnolia Petroleum Company, Barclay sold one-half of his interest, which half had a cost to him of $106,666.67. He treated the sale as taking place in three years, namely, 1918, 1919 and 1920. He determined that in 1918 Barclay received $66,666.66 from the sale for an interest that cost him $34,528. This cost was computed by multiplying total cost ($106,666.66) by a fraction the numerator of which was the amount received in 1918 ($66,666.66) and the denominator of which was the total amount received ($205,552.42). For the year 1919 the respondent determined that Barclay received $88,583.79 from the sale avd that the interest sold in that year cost $51,234.01. This cost was computed in the same manner as for 1918, except that the numerator of the fraction was $88,583.79.

Barclay purchased the following stocks:

Issuing company	Year of purchase	Cost
Emerson Motors Company	1916	$1,632
Mapes-Johnson Mining Company	1916	1,000
California National Gold Mining Company	1917	5,000
Penn-Kansas Oil Syndicate	1918	10,000
Palmer-Utah Oil Company	1919	500
Total		18,132

In 1919 Barclay advanced $4,000 to the California National Gold Mining Company to assist it in meeting its payroll and other expenses. By the end of 1919 the mining project of the company had proved to be a failure, and the company's liabilities exceeded its assets. It abandoned its properties early in 1920. The stock and Barclay's claim for advances became worthless in 1919.

In October, 1919, the Penn-Kansas Oil Syndicate went into the hands of a receiver, who operated the business for a year or two. No distribution was ever made to stockholders of the syndicate. The stock became worthless in 1919.

Barclay's books were kept on the cash receipts and disbursements basis.

OPINION.

ARUNDELL: The contention of petitioner Paul H. Quinn, that collection of the assessment against him is barred, seems to us to lack any tenable foundation. The assessment was timely made and the waivers executed kept the period for collection alive to a date beyond that on which the notice of deficiency was issued. We accordingly hold for the respondent on the limitations issue.

The principal controversy is the amount of income, if any, realized by the Quinn brothers in 1918 and 1919 out of the sale by the Quinn Party of its interest in the Koogler lease. Petitioners contend that the share of profits on the sale that came to them was a gift, inasmuch as they owned no interest in the lease. Alternatively, it is claimed that the profit should be computed on what they call the deferred payment basis, that is, that their entire cost should be recovered before any gain is realized. The respondent, by amended answer, alleged that all the profit was realized in 1918 and claims an increased deficiency for that year.

We have set out in the findings of fact the several representations of Paul H. Quinn that he was the owner of an interest in the Koogler lease, and that he had acquired his interest at the stated cost. Counsel for the parties agreed that the evidence in Paul's case should be taken as the evidence in the other cases. From this we take it that the other two Quinn petitioners made the same representations. Thus we have three petitioners, beginning with returns filed in June, 1919, alleging consistently over a period of years that they were owners of an interest in the property. As late as January, 1929, each of the three by amended petition asserts that he "does not dispute the cost determined by the respondent" in his computation of gain realized for 1919. Now, as against these cumulative representations of three of the interested parties, one of them testifies that he and the other two did not own any interest. We are not disposed to accept this testimony as overcoming the fact previously represented and insisted on and as found by the respondent. We accordingly hold that the three Quinn brothers each acquired an interest in the Koogler lease in 1917 at a cost to each of $53,333.33.

The respondent computed the profit realized by the Quinns on the theory that under the contract with the Magnolia Petroleum Company each sold one-half of his interest in the Koogler lease. The parties are now agreed that under that contract each sold two-thirds of his interest. As the parties are further agreed on the cost of the interest of each petitioner and the amount received on the sale thereof, the next question we are concerned with is the year or years in which the profit was realized.

The respondent has not established to our satisfaction his claim that the entire profit was realized in 1918. He offered no evidence to establish that the promise of the Magnolia Petroleum Company to pay for the assigned interests had any value. As the claim in this respect is one for an increased deficiency, the burden is on the respondent to establish it, and he has failed to do so.

In determining the deficiencies the respondent spread the receipts over the three years in which they came in, and determined the profit by treating as cost of the portion sold in each year a sum which was in the same ratio to total cost as the amount received within the year was to total receipts.

Counsel for petitioners were requested to furnish the Board with a method of computation that, in their opinion, would correctly reflect income on the basis of the cost and selling prices which are in the record in these proceedings. They have failed to do so. In their brief they take the position that none of the receipts constitute taxable income until such time as the full cost is recovered, relying principally on , and ; affd., . In the Bolster case a widow elected to take under her husband's will in lieu of dower, and the question was whether the annual payments she received pursuant to her election were income before they aggregated a sum equal to the value of her relinquished dower rights. The court held that they were not, on the theory that the case was similar to the purchase of an annuity and that there could be no income until the premiums were returned. That is not the case here. This case involves the sale of property. Nor is the Logan case in point. There, a part of the consideration was a promise to pay, which was contingent on the amount of ore removed from a mine, and there was no requirement for the mining of either a minimum or maximum tonnage. Here, we have promises to pay definite specified amounts in no way contingent upon operation.

By respondent's method he spreads cost in proportion to receipts. Under other circumstances this method might not be proper. But under the facts developed here, the respondent's method seems to us to reflect income more correctly than any other method proposed. We accordingly affirm the respondent's allocation of income from the sale over the period in which payments were received, subject to correction of amounts as stipulated by the parties.

Our holding on the question of income from the sale of the Koogler lease, while so far directed to the Quinn cases, is equally applicable to the Barclay case. In all of them the parties have agreed on the amount of income realized if the respondent's method is correct.

The next question, which is in the Barclay case only, is the amount of loss sustained, if any, by reason of the claimed worthlessness of stock occurring in 1919. Prior to 1919 Barclay bought stock in several corporations at an aggregate cost of $18,132. In addition to this, he advanced $4,000 to one of the companies in 1919 to help it meet its expenses. He claims that all the stock became worthless in 1919 and that he is entitled to a loss deduction by reason thereof in the amount of $22,132.

We are satisfied that the stock of the California National Gold Mining Company became worthless in 1919. The company operated during part of 1919, but it was evident before the close of the year that the venture was hopeless. Early in 1920 the promoter of the enterprise visited the properties and immediately thereafter they were abandoned. It is in evidence that Barclay sold the stock to his son in 1920 for $10. This is explained, however, as due to Barclay's belief that it was necessary to make some sort of a sale to establish a loss. We accordingly hold that a deduction for the cost of the stock, $5,000, is proper for the year 1919.

The sum of $4,000 advanced to the California Company, while technically not an assessment on the stock, was nevertheless paid in to meet operating expenses solely by reason of petitioners' stockholdings. It was evident within the year that no recovery could be had. We think the sum is deductible as a loss.

The Penn-Kansas Oil Syndicate went into the hands of a receiver in October 1919, and the stockholders never received any distributions on their stock. Olcott Payne, a director and general manager of the company, and Hartman, secretary to Barclay, testified to the worthlessness of the stock in 1919. We are satisfied that the loss was suffered in that year, and the deduction should be allowed.

The evidence respecting the status of the other companies in 1919 is too meager to permit the finding of any facts. Barclay's former bookkeeper testified that he was told in 1919 by "the stock manager of Elkins, Morris & Company" that the stock of the Emerson Motors Company had no value. He further testified that Barclay was told in 1918 or 1919 by M. F. Quinn that the Mapes-Johnson Mining Company "had become defunct." This evidence is obviously insufficient to support the claim of worthlessness in the year 1919. There is no evidence concerning the Palmer-Utah Oil stock, except the statement of the bookkeeper that it became worthless in 1919.

The original petitions filed in the Quinn proceedings alleged error in the depletion deductions computed by the respondent. At the hearing counsel for the parties agreed that if the respondent's contention as to 1918 is correct, then depletion is not an issue, but if incorrect, depletion would be computed under Rule 50. It is not exactly clear to us what the parties meant by this agreement; consequently we leave the matter of depletion open for settlement under the rule mentioned. We may say, however, that we understand from statements of petitioners' counsel at the hearing that claim for depletion on discovery valuation has been abandoned, and they are foreclosed from making any further claim on that basis.

Decision will be entered under Rule 50.