Mutual Oil Co. v. Commissioner , 14 B.T.A. 538 ( 1928 )

MUTUAL OIL CO. OF ARIZONA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mutual Oil Co. v. Commissioner

Docket No. 11795.

United States Board of Tax Appeals

14 B.T.A. 538; 1928 BTA LEXIS 2962;

December 4, 1928, Promulgated

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1. Held, that assessment and collection of deficiencies are not barred by expiration of the period of limitations.

2. Action of the respondent in reducing invested capital on account of tax assessed for prior years approved.

3. Petitioner Held not entitled to have its profits tax liability determined under section 328 of the Revenue Act of 1918.

Arthur B. Hyman, Esq., for the petitioner.

J. L. Backstrom, Esq., for the respondent.

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TRAMMELL

This proceeding is for the redetermination of a deficiency in income and profits taxes of $15,779.54 for the period beginning March 1, 1918, and ending December 31, 1918. The matters in controversy are: (1) Whether the assessment and/or collection of the deficiency is barred by the statute of limitation; (2) whether the petitioner's invested capital should be reduced by the various amounts assessed as additional tax liability for periods prior to March 1, 1918; (3) whether there existed such abnormalities in capital or income as to bring the petitioner within the purview of section 327 of the Revenue Act of 1918 and entitle it to have its profits-tax liability determined under section 328 of that Act. With respect to issue No. (3), the trial of the case was limited to the question of whether there existed such abnormalities in capital or income as bring the petitioner within the purview of section 327.

FINDINGS OF FACT.

The petitioner is a corporation organized in 1909 under the laws of Arizona and has its principal place of business at Denver, Colo. The petitioner was organized to engage in the oil business and in 1910 began active operations by acquiring locations from which to conduct business and by building tanks and other necessary structures. Operations have subsequently been extended over the States of Montana, Arkansas, Nebraska, South Dakota, and Missouri. During the period herein involved, the petitioner was engaged in the selling and distribution of gasoline, kerosene, and other products of a similar character.

The petitioner's authorized capital stock at the time of organization consisted of $150,000 common stock and $100,000 preferred stock. It was not, however, until about eight years after organization before all of the stock was issued. With the exception of a stock dividend of about $50,000 which was based on the capitalization of accumulated earnings, all of the original authorized stock was issued for cash and no commission was ever paid for the sale of the stock.

J. R. Greenless and J. B. Russell were the two principal subscribers for the stock of the corporation. Greenless was the first president of the petitioner, and Russell was president in 1918. O. H. Williams, who was the first secretary of the petitioner, was its secretary and treasurer during 1918. In 1918 both Russell and Williams were active in the management of the company and for the period here involved received salaries at the rate of $1,200 and $7,000 per year, respectively. Russell devoted only part of his time to the business of the petitioner while Williams devoted all of his time to the petitioner's business. No other compensation was received by them for their services. Larger salaries were not paid because of the willingness of the officers to continue their work and leave the money in the business so that it could be further expanded to the point where they could receive remuneration commensurate with the volume of business done and the profits of the business.

A great part of the petitioner's original capital went into plant and equipment. With the exception of the stock dividend referred to above no dividends were ever paid on the common stock but the earnings were retained for use in the business. From its inception the petitioner continuously borrowed large amounts of money, obtaining loans from its officers.

At the beginning of the period involved herein, the petitioner was using $265,000 of borrowed capital in its business. During the period the maximum amount of borrowed capital in use at one time was $500,000 or more. The average amount of borrowed capital was $400,000. The petitioner's sales for the period here involved were $3,957,934.08. The net income was $174,140.82, and the excess-profits tax $81,825.63. The petitioner's invested capital for the 12-month period ended February 28, 1919, was $715,158.33. The average invested capital for the prewar period was $139,790.68 and the average income for that period was $25,693.77. Net income for 1918 was $104,164.51 and for 1917, $187,314.04.

On June 30, 1917, the petitioner entered into a contract with the Northwestern Oil Refining Co. located in Cowley, Wyo., for the purchase of gasoline and kerosene. The contract provided in part as follows:

That for and in consideration of the cancellation of the certain agreement heretofore entered into by and between the parties hereto under date of August 16th, 1913, and of the settlement of all differences in connection therewith and of every other kind down to the date hereof, it has been and is hereby mutually convenanted and agreed by and between said parties as follows, to-wit:

1. The party of the first part (The Northwestern Oil Refining Company), agrees to sell to the party of the second part (The Mutual Oil Company), except as herein otherwise provided for, all kerosene and gasoline manufactured by said first party at its plant located at Cowley, Wyoming, for a period of three years, commencing on the date hereof and ending on June 30th, 1920, and said second party agrees to purchase said products from said first party, all upon the following terms and conditions:

Gasoline. The base price of gasoline to be sold second party by first party hereunder shall be fifteen and one-half cents per gallon in tank cars F.O.B. Cowley, Wyoming. Said price is based on the present general tank wagon market price of gasoline in the State of Montana. Should there be an advance in such general tank wagon market price said first party shall receive the benefit of such advance or advances, and should there be a decline in said general tank wagon market prices, said party of the second part shall receive the benefit of such decline or declines.

3. Kerosene. The base price of kerosene to be sold said second party by said first party hereunder shall be five and one-fourth cents per gallon in tank cars F.O.B. Cowley, Wyoming. Said price is based on the present general tank wagon market price of kerosene in the State of Montana. Should there be an advance in such general tank wagon market price said first party shall receive the benefit of such advance or advances, and should there be a decline in such general tank wagon market price said second party shall receive the benefit of such decline or declines.

4. Change in freight rates. The above mentioned base price of gasoline and kerosene respectively is based upon the present freight rates from first party's refinery at Cowley, Wyoming, to distributing stations of second party in the State of Montana. In case such present freight rates are hereafter, during the life of this contract, increased or decreased from time to time the said base prices of gasoline and kerosene shall not be affected or varied by any such change in said freight rates. If the general tank wagon market prices of gasoline or kerosene, or both, in said State of Montana are increased or decreased otherwise than to the extent of any such change in said freight rates the prices hereinabove specified shall reflect such change in accordance with the terms and provisions hereof.

During that period in 1918 involved herein, the petitioner was enabled under the above contract to obtain gasoline at about 2 cents per gallon less and kerosene at about 1 cent per gallon less than it would have had to pay in the open market for the same grade of these products. On the purchases made during the taxable period from the Northwestern Oil Refining Co. of gasoline alone there was a difference of approximately $50,000 between the price paid by the petitioner and what it would have had to pay in the open market.

All of the gasoline and kerosene purchased under the above contract was sold by the petitioner in the Montana territory, and this constituted practically all of those products sold by it in that territory. The gasoline sold by the petitioner in the territory surrounding Kansas City and including Kansas, Nebraska, and South Dakota was purchased from refiners in Kansas and Oklahoma, at prices averaging 2 cents more per gallon, freight being considered, than that under the contract with the Northwestern Oil Refining Co.

In determining the deficiency here involved, the respondent denied the petitioner's application for a determination of its profits-tax liability under the provisions of section 328 of the Revenue Act of 1918.

On August 15, 1919, the petitioner filed its return for the fiscal year ended February 28, 1919. The following undated instrument (the directions for executing being omitted) bears a stamp indicating that it was received in the Bureau of Internal Revenue on February 25, 1924:

INCOME AND PROFITS TAX WAIVER

In pursuance of the provisions of subdivision (d) of Section 250 of the Revenue Act of 1921, Mutual Oil Company of Arizona, of Kansas City, Mo. and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said corporation for the year 1918 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled "An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes", approved August 5, 1909. This waiver is in effect from the date it is signed by the taxpayer and will remain in effect for a period of one year after the expiration of the statutory period of limitation, or the statutory period of limitation as extended by any waivers already on file with the Bureau, within which assessments of taxes may be made for the year or years mentioned.

MUTUAL OIL CO.

Taxpayer.

By (Signed) O. H. WILLIAMS,

President.

(Signed) D. H. BLAIR,

Commissioner.

The following instrument (directions for executing being omitted) bears a notation indicating that it was received in the Bureau on May 15, 1925:

INCOME AND PROFITS TAX WAIVER

(For taxable years ended prior to March 1, 1921)

In pursuance of the provisions of existing Internal Revenue Laws Mutual Oil Company of Arizona, a taxpayer of Kansas City, Missouri, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year(s) 1918 under existing revenue acts, or under prior revenue acts. This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1925, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

MUTUAL OIL COMPANY OF ARIZONA,

Taxpayer.

By (Signed) A. HERNING, Secretary.

(Signed) D. H. BLAIR, Commissioner.

The following instrument (directions for executing being omitted) bears a stamp indicating that it was received at the Bureau on November 28, 1925:

INCOME AND PROFITS TAX WAIVER

For Taxable Years Ended Prior to January 1, 1922.

IT:E:SM-1

S.R.:A-16205

NOVEMBER 6, 1925.

In pursuance of the provisions of existing Internal Revenue Laws Mutual Oil Company of Arizona, a taxpayer of Kansas City, Missouri, and the Commissioner of Internal Revenue hereby waive the time prescribed by law for making any assessment of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of said taxpayer for the year 1918 under existing revenue acts, or under prior revenue acts.

This waiver of the time for making any assessment as aforesaid shall remain in effect until December 31, 1926, and shall then expire except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board.

MUTUAL OIL CO. OF ARIZONA,

Taxpayer.

By (Signed) A. HERNING, Secretary.

(Signed) D. H. BLAIR, Commissioner.

The notice of the respondent's determination of the deficiency was mailed to the petitioner on December 12, 1925, and the petitioner's original petition was filed with the Board on February 8, 1926.

OPINION.

TRAMMELL: With respect to the question of the expiration of the period of limitation presented in the first assignment of error, counsel for the petitioner in his brief contends that the statutory period for assessment and/or collection of the tax for the period of 1918 here involved had expired prior to the issuance of the respondent's notice of the deficiency, and any authority for assessing and collecting the tax must be based on the petitioner's consent to assessment after the expiration of the statutory period therefor and upon the petitioner's consent to collection after the expiration of the statutory period for collection. It is further contended that while assessment might be made under a waiver, collection can not now be made for the reason that the petitioner has not consented in writing to collection after expiration of the statutory period.

The first written consent was received in the Bureau on February 25, 1924. This extended the time for determination, assessment and collection of the amount of income and profits taxes due for the taxable period involved to August 15, 1925. Before the expiration of that period and on May 15, 1925, another written consent was filed, which extended the time for making assessment of the amount of income and profits taxes due for 1918 until December 31, 1925 "except that if a notice of a deficiency in tax is sent to said taxpayer by registered mail before said date and (1) no appeal is filed therefrom with the United States Board of Tax Appeals then said date shall be extended sixty days, or (2) if an appeal is filed with said Board then said date shall be extended by the number of days between the date of mailing of said notice of deficiency and the date of final decision by said Board." Before the expiration of the period agreed upon in the preceding written consent and on November 6, 1925, another written consent was entered into which extended the time for making assessment until December 31, 1926, with the same exception as contained in the preceding written consent and quoted above.

The notice of the deficiency here involved was mailed to the petitioner on December 12, 1925. On that date neither of the periods agreed upon in the last two written consents had expired.

With respect to the petitioner's contention that assessment of the deficiency is barred, we have heretofore considered the effect of a written consent signed during the statutory period, consenting to the assessment of a tax after the expiration of such period and continued by the subsequent filing of written consents, and have held that such consents were effective for extending the time within which assessment of the tax might be made. ; . Our decisions in those cases are applicable and controlling here and the consents given by the petitioner served to continue in force the time within which assessment can be made.

With respect to the contention that while assessment might be made under the written consent, collection can not now be made because the petitioner did not consent to collection after the expiration of the statutory period, it appears that the written consent received in the Bureau on February 25, 1924, in addition to providing an extension of time for assessment of tax for 1918, also specifically provided for an extension of time for collection. The written consents signed in May and November, 1925, did not contain any provision relating to the collection of the deficiency after assessment. In , where the facts were very similar to those presented here, we considered the effect of renewal consent agreements which did not contain any provision with respect to collection after assessment. We there said:

* * * At the time of execution of those consent agreements, however, the Revenue Act of 1924 had been enacted, under the provisions of which the time for collection was extended for six years after the assessment of the tax. Since the statute had made provision for the collection of the tax after assessment, it was not necessary to have the time for collection extended by agreement. * * *

Both parties to the written consents are presumed to have had a knowledge of the law as to the effect of their consent on collection of the tax after the statutory period had expired. If the tax were assessed pursuant to the written consent, the respondent, by specific statutory authority, had six years thereafter to collect the tax.

The consents in writing dated January 19, 1925, and March 3, 1926, made no reference to the time of collection but the statute supplied that omission. The statute extends the time for the collection of the tax six years after assessment, if the assessment is made within the statutory period prescribed in section 277, or as extended in section 278.

Our holding in that case is applicable to the contention raised by the petitioner. Since the written consents have been effective for extending the time within which the assessment can be made, and as the respondent has 6 years within which to make collection after assessment of the tax, the period for collection has not expired.

With respect to the assignment of error relating to the reduction of the petitioner's invested capital by the respondent on account of additional taxes assessed for periods prior to March 1, 1918, no evidence directed to this issue was submitted, nor is any reference made thereto in the brief of counsel for the petitioner. We therefore conclude that the assignment of error was abandoned by the petitioner and consequently decide the issue in favor of the respondent.

The remaining matter in controversy is the correctness of the respondent's action in refusing to determine the petitioner's tax liability in accordance with the provisions of sections 327 and 328 of the Revenue Act of 1918. Since the trial was limited to the question of whether there existed such abnormalities in capital or income as bring the petitioner within the purview of section 327, our consideration of the issue will be limited to this question.

The petitioner relies on four grounds in support of its contention that there existed such abnormalities in income or capital as entitle it to have its tax computed under section 328. The first of these is that officers' salaries were only nominal. The petitioner did not, however, submit any evidence directed to the reasonable value of the services rendered by the officers during the period involved, or whether the salaries paid the officers were materially inadequate for the services rendered. While the evidence shows that Williams' salary in 1919 was increased more than twice what it was during the period here being considered, we are unable to determine to what extent this was the result of his responsibilities and duties being proportionately increased, along with a corresponding increase in the volume of business in the subsequent year. From the facts before us, we are unable to hold that the salaries paid by the petitioner to its officers resulted in an abnormality in income. .

Another ground relied upon by the petitioner as entitling it to the benefits of the relief provisions of the Act is its contract with the Northwestern Oil Refining Co. whereby it was enabled to purchase gasoline and kerosene at prices of about 2 cents and 1 cent, respectively, per gallon under the prevailing market prices and as a result of which its earnings were about $50,000 greater than if purchases had been made in the open market. The contract discloses, however, that the petitioner agreed to take the entire output of the refinery. The advantageous price appears to have been due to the wholesale or output purchase. A purchaser buying in a large quantity can as a rule obtain a better price than one who purchases in small quantities. From all the record discloses this arrangement might have been the usual or normal basis of selling the entire output of a refinery for quantity purchases as distinguished from purchases in smaller lots from time to time. In , we held that where a taxpayer is able to market its products less expensively through an organization of its own than through brokers and consequently markets its products through its own organization, the saving resulting therefrom does not create an abnormality of income.

In our opinion a saving resulting from the manner in which goods in this case are purchased does not create such an abnormality as is contemplated in section 327.

The third ground relied upon by the petitioner as constituting an abnormality is that it was enabled to transact the volume of business transacted on the amount of the invested capital it had because of borrowed capital of an amount of $400,000 used in the business. While the record does not show the amount of the petitioner's invested capital for the period here involved, the amount for the 12 months ended February 28, 1919, was $715,158.33. In the absence of any evidence that the amount of borrowed capital used by the petitioner was unusual or abnormal in the business of selling and distributing gasoline, kerosene, and other products of similar character, there is nothing upon which we may base an opinion that the use of borrowed money created an abnormality. .

Another ground relied upon by the petitioner as constituting an abnormality is that its "income began to show a splendid development shortly after its inception, when in 1912 it reached an income of $48,000 and due to distressing business conditions throughout the country, received a tremendous set-back in the following year," and that when "these conditions were obviated, it immediately bounded ahead, showing a net income for 1916 of $104,164.57 and for 1917, $187,314.04." The petitioner contends that because there was not an increase in income for 1913 an abnormality was created. In our opinion the fact that the petitioner's income for 1913, due to a general business depression in that year, failed to show an increase or was less than in the preceding year or in subsequent years does not constitute an abnormality within the provisions of the statute.

From a consideration of all the evidence in this case in connection with the various contentions raised by the petitioner, we are of the opinion that during the period here involved there did not exist any abnormalities in income or capital which would entitle the petitioner to have its profits-tax liability computed under the provisions of section 328 of the Revenue Act of 1918.

Reviewed by the Board.

Judgment will be entered under Rule 50.