Union Texas International Corporation, f.k.a. Union Texas Petroleum Corporation v. Commissioner , 110 T.C. No. 25 ( 1998 )

110 T.C. No. 25UNITED STATES TAX COURT
UNION TEXAS INTERNATIONAL CORPORATION, f.k.a.
UNION TEXAS PETROLEUM CORPORATION, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
UNION TEXAS PETROLEUM ENERGY CORPORATION
SUCCESSOR BY MERGER TO UNION TEXAS PETROLEUM CORPORATION,
f.k.a. UNION TEXAS PROPERTIES CORPORATION, Petitioner
v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 15182-94, 15183-94. Filed May 21, 1998.
R and P's predecessor, NP, executed a
series of three Forms 872 for 1985. R did
not know at the time of signing the Forms 872
that NP had merged with P and that NP no
longer had authority to extend the period of
limitations after Dec. 31, 1991.
Effective Dec. 31, 1982, P's
predecessor, OP, entered into an agency
agreement with PR, a sister company, to
process and sell propane for OP and NP to
unrelated third parties. OP and NP retained
title to its propane until PR sold it to
unrelated third parties. PR also sold its
own propane to T, a related retailer.
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Ps assert that they should be permitted
to use differing allocations for computing
the Windfall Profit Tax (WPT) and Percentage
Depletion Net Income Limitation (NIL).
1. Held: P, Energy, is estopped to deny the
validity of the Forms 872. Knowledge of the
merger is not attributed to R's WPT agents;
computerized information of the merger was
not accessible to them.
2. Held: Ps are independent producers,
because they did not sell their propane to T.
3. Held: Sec. 4988(b)(3)(A), I.R.C., requires
Ps to compute the NIL in the same manner
under sec. 4988(b)(3)(A), I.R.C. and sec.
613, I.R.C.
Jasper George Taylor III, Charles Washington Hall,
William H. Caudill, and John B. Kinchen, for petitioners.
Sheri Wilcox, for respondent.
OPINION
PARR, Judge: In these consolidated cases, respondent
determined the following deficiencies in windfall profit tax
(WPT) for the taxable periods of 1983, 1984, and 1985,
respectively: $3,471,045, $3,060,042, and $2,109,854. Respondent
determined the deficiencies against Union Texas Petroleum
International (International) for 1983 and 1984, and against
Union Texas Petroleum Energy (Energy) for 1985. In their
petitions, petitioners raised an issue pursuant to section
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6512(b)1, claiming overpayments of WPT for the taxable periods of
1983, 1984, and 1985, respectively, in the following amounts:
$6,107,901, $5,969,611, and $7,931,434, resulting from a
recomputation of the WPT net income limitation (NIL), or WPT NIL.
After concessions by the parties2, the issues for decision
are: (1) Whether petitioner, Energy, should be equitably
estopped to deny that the limitations period for the taxable
periods of 1985 were extended properly under section 6501(c)(4).
We hold it should. (2) Whether, pursuant to section 613A(d)(2),
Union Texas Petroleum Corporation (Old Petroleum) and Union Texas
Petroleum Corporation (New Petroleum), f.k.a. Union Texas
Properties Corporation (Properties) were independent producers
during the taxable years in issue. We hold they were.
(3) Whether petitioners are entitled to recompute Old Petroleum's
and New Petroleum's WPT NIL computations for the taxable periods
of 1983, 1984, and 1985, where the recomputations do not follow
1
All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
2
Subject to the issues discussed herein, including the
overpayment issue, petitioners conceded the remaining issues
raised in the notices of deficiency and petitions. Respondent
conceded that petitioners are entitled to exclude from gross
income a ratable portion of the lease bonus payments made with
respect to producing properties for purposes of computing the WPT
NIL and that petitioners are entitled to capitalize lease bonus
payments in determining "as if" cost depletion.
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the percentage depletion calculations claimed on their original
Federal income tax returns. We hold they are not.3
Some of the facts have been stipulated and are so found.
The stipulated facts and the accompanying exhibits are
incorporated into our findings by this reference. At the time
the petitions in these cases were filed, petitioners' principal
place of business was located in Houston, Texas. For
convenience, we present a general background section and combine
our findings of fact with our opinion under each separate issue.
General Background
Corporate Structure--1982 Reorganization
Until December 31, 1982, Old Petroleum (Employer
Identification Number, hereinafter EIN XX-XXXXXXX), a Delaware
corporation, was a subsidiary of Allied Corporation (Allied), a
New York corporation. Old Petroleum owned and operated 10
natural gas processing plants and held nonoperating interests in
additional gas processing plants. During that time, Old
Petroleum owned 100 percent of the stock of Texgas Corporation
(Texgas), a Delaware corporation, which was in the business of
retailing propane.
In a December 31, 1982, reorganization, Allied formed a new
corporation called Union Texas Petroleum Holdings, Inc.
(Holdings) (EIN XX-XXXXXXX) to serve as the parent of Old
3
We have considered each of the remaining arguments of the
parties and, to the extent that they are not discussed herein,
find them to be unconvincing.
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Petroleum and a new corporation called Union Texas Products
Corporation (Products), a Delaware corporation.4 Pursuant to the
reorganization, Old Petroleum contributed all of the assets of
its hydrocarbons division to Products, including its natural gas
gathering lines, gas processing plants, storage facilities,
contracts for the sale of petroleum products, and all of the
stock of Texgas. In exchange, Old Petroleum received the stock
of Products, which it then distributed to Holdings. Thereafter,
Products was a direct subsidiary of Holdings, Texgas was a direct
subsidiary of Products, and Old Petroleum did not own stock in
Products or Texgas.
Corporate Structure--1984 Reorganization
In a December 31, 1984, reorganization, Old Petroleum
transferred all of its domestic oil and gas properties to New
Petroleum (EIN XX-XXXXXXX), a Delaware corporation and subsidiary
of Holdings, then known as Properties. On March 5, 1985, New
Petroleum changed its name from Union Texas Properties
Corporation to Union Texas Petroleum Corporation. Old Petroleum,
presently known as International, currently exists as a Delaware
corporation and is the petitioner in the instant case with
respect to 1983 and 1984.
Corporate Structure--1991 Reorganization
On October 15, 1991, Holdings became the parent of a new
corporation called Union Texas Petroleum Energy Corporation, or
4
Effective July 2, 1985, Allied sold one-half of the stock of
Holdings.
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Energy (EIN XX-XXXXXXX), a Delaware corporation. Effective
December 31, 1991, pursuant to Delaware Corporation Law, New
Petroleum merged into Energy and ceased to exist. Energy was the
surviving corporation under Delaware law and is the petitioner in
the instant case with respect to 1985.5
Issue 1. Equitable Estoppel for the Taxable Periods of 1985
1985 Forms 872--Consent To Extend the Time To Assess Tax
In the 1984 reorganization, Old Petroleum transferred its
domestic oil and gas properties to New Petroleum, then known as
Properties. Thus, the responsibility for filing WPT returns
shifted from Old Petroleum to Properties. On March 5, 1985,
Properties changed its name to New Petroleum. Despite the name
change, New Petroleum continued to file its Forms 720, Quarterly
Federal Excise Tax Returns (Forms 720), for the first three
taxable quarters of 1985 under the name of Properties.
To keep the period of limitations open while respondent
continued to conduct the WPT examination of New Petroleum for the
1985 taxable periods, respondent and New Petroleum began
executing a series of Forms 872, the last of which was meant to
extend the limitations period to June 30, 1994. At that time,
what respondent's WPT revenue agents (WPT agents or agents) did
5
When this opinion addresses the actions of the actual
parties to this litigation, the term "petitioners" refers to
Energy and International.
When references in this opinion apply to all of the
affiliated Union Texas Petroleum corporate entities, either the
term Union Texas companies or affiliated corporations is used.
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not know was that there had been another reorganization in which
New Petroleum merged with Energy, and as of December 31, 1991,
ceased to exist. As a result of the merger, New Petroleum no
longer had authority to extend the period of limitations after
December 31, 1991. Yet, New Petroleum, through its former
officers, Sanford M. Lobliner (Lobliner), and M.N. Markowitz
(Markowitz),6 executed the following three Forms 872 after it had
merged out of existence:
Extended Date Date New Petroleum Signed Date Respondent Signed
6/30/93 7/22/92 8/24/92
12/31/93 1/14/93 2/11/93
6/30/94 7/27/93 7/30/93
Each of these three consents was prepared by respondent's
Appeals Office in Houston, Texas. Each consent identified the
taxpayer as "Union Texas Petroleum Corporation (formerly Union
Texas Properties Corporation) (Successor to Union Texas Petroleum
Corporation XX-XXXXXXX)" and listed the EIN as XX-XXXXXXX. The
consents should have identified the taxpayer for 1983 and 1984 as
Union Texas International Corporation, F.K.A. Union Texas
Petroleum Corporation, and for 1985 as Union Texas Petroleum
Energy Corporation, successor by merger to Union Texas Petroleum
Corporation, F.K.A. Union Texas Properties Corporation. When New
Petroleum returned the consents to respondent, the Form 872
extending the assessment date to June 30, 1993, bore Lobliner's
signature, and the two Forms 872 extending the assessment dates
6
In 1992 and 1993, respectively, Lobliner and Markowitz were
the vice presidents of Energy and would have had authority to
have properly prepared a Form 872 on petitioners' behalf.
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to December 31, 1993, and June 30, 1994, respectively, bore
Markowitz's signature, both of whom signed as vice presidents of
New Petroleum.
On March 9, 1992, respondent sent New Petroleum the revenue
agent's report for the taxable periods of 1985, addressed to
Union Texas Petroleum Corporation, F.K.A. Union Texas Properties
Corporation, as was the consent. On April 24, 1992, in response
to the revenue agent's report, Lobliner submitted to respondent a
protest of respondent's determinations for 1985. The protest was
on a preprinted letterhead styled Union Texas Petroleum. The
case remained under consideration by respondent's Appeals Office
until May 26, 1994, when the notice of deficiency for 1985 was
issued.7
At no time before the petitions in these cases were filed
did anyone representing New Petroleum or Energy directly inform
the agents conducting the WPT examination or the Appeals officers
considering the cases that New Petroleum was defunct and had no
authority to act, that Lobliner and Markowitz were not officers
of New Petroleum and did not have authority to execute the Forms
872 for the 1985 taxable periods, that future correspondence
7
On May 26, 1994, respondent mailed two notices of deficiency
to petitioners' Houston address. The notice of deficiency for
1983 and 1984 was in the name of Old Petroleum with EIN 74-
6044301. Those years are not affected by the equitable estoppel
issue. The notice of deficiency for 1985 was in the name of New
Petroleum with EIN XX-XXXXXXX. This is the deficiency notice
subject to the equitable estoppel issue.
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should be directed to Energy, or that future Forms 872 should be
executed by Energy.
Discussion
Respondent contends that Energy should be estopped to deny
the validity of the last three Forms 872 signed by Lobliner and
Markowitz on behalf of New Petroleum, because Energy, through its
officers, agents or employees, intentionally deceived respondent
by failing to disclose New Petroleum's merger into Energy,
thereby causing respondent to withhold assessment in reliance
upon the consents. Energy asserts that it did not make any false
representations to, or maintain any misleading silences in
connection with, New Petroleum's merger into Energy.
Furthermore, Energy claims that when the last three Forms 872
were signed respondent not only knew of New Petroleum's merger,
but had a convenient means of acquiring such knowledge. Finally,
Energy contends that in preparing and executing the last three
Forms 872, respondent did not rely on any acts or statements made
by Energy's representatives, because respondent's agents prepared
the Forms 872 by looking only at prior Forms 872 and New
Petroleum's Federal income tax return for the year in issue.
Pursuant to section 6501(c)(4) a taxpayer and the Secretary
or his delegate, before the expiration of the period provided by
statute for assessment and collection of income tax, may consent
in writing to an extension of that period, and further extensions
may be made by subsequent written agreements entered into before
the expiration of the period previously agreed upon.
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Respondent concedes that because the Forms 872 were signed
by Lobliner and Markowitz on behalf of New Petroleum after it had
merged out of existence, and not on behalf of Energy, they were
invalid. Thus, respondent further concedes that since the notice
of deficiency for Energy's 1985 taxable periods was mailed more
than 3 years after Energy filed its Federal income tax return for
that year, assessment and collection of a deficiency for 1985 are
barred, unless we hold that the last three Forms 872 signed by
Lobliner and Markowitz are valid extensions of the statute of
limitations. Sec. 6501(a).
Generally speaking, equitable estoppel precludes a party
from denying that party's own acts or representations which
induced another to act to the other's detriment. Graff v.
Commissioner, 74 T.C. 743, 761 (1980), affd. per curiam 673 F.2d
784 (5th Cir. 1982). The doctrine of equitable estoppel is based
on the grounds of public policy, fair dealing, good faith, and
justice, and is designed to aid the law in the administration of
justice where without its aid injustice might result. Id. The
elements of equitable estoppel have been variously described, but
for our purposes they may be stated as follows: (1) There must
be a false representation or wrongful misleading silence by the
party against whom the estoppel is claimed; (2) the error must
originate in a statement of fact, not in opinion or a statement
of law; (3) the party claiming the benefits of the estoppel must
have actually and reasonably relied on the acts or statement of
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the party against whom the estoppel is claimed, and as a
consequence of that reliance must be adversely affected by the
acts or statements of the one against whom an estoppel is
claimed; and (4) the party claiming the benefits of estoppel must
not know the true facts. Century Data Sys., Inc. v.
Commissioner, 86 T.C. 157, 165 (1986); Graff v. Commissioner,
supra at 761; Steiner v. Commissioner, T.C. Memo. 1995-122. The
party affirmatively asserting an estoppel has the burden of
proving all the essential elements constituting the estoppel.
Steiner v. Commissioner, supra. Accordingly, respondent bears
the burden of proving each of the above elements. Rules 39,
142(a).
1. Misrepresentation or Misleading Silence
To sustain equitable estoppel, respondent must show that
Energy took "some action" which misled respondent. Century Data
Sys. Inc. v. Commissioner, supra at 166. Respondent contends
that Energy made false representations or wrongful misleading
silences, when it did not tell respondent that New Petroleum had
merged out of existence, and that its officers had no power to
act. Respondent further contends that the representations were
part of a pattern of false representations and misleading
silences that caused respondent to believe mistakenly that the
period of limitations had been extended. Respondent argues that
these material misrepresentations were bolstered by Energy's
continuing relations with respondent's Appeals officers, where 25
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items of correspondence were sent and received during the audit
process in the name of Union Texas Petroleum Corporation, without
any mention of a change in corporate structure. Respondent
further argues that Energy was aware of respondent's concern with
the accuracy of the name and signature on the Forms 872. In
fact, once respondent learned that Properties had changed its
name to New Petroleum, respondent immediately sought new Forms
872, reflecting the new name. Moreover, respondent notes that
during the examination of the taxable periods of 1983 and 1984,
Union Texas Petroleum's Chief Executive Officer gave respondent a
letter certifying Lobliner's authority to execute consents for
those years. Respondent contends that Energy's failure to inform
respondent that Lobliner, and subsequently Markowitz, no longer
had authority to act on behalf of New Petroleum was clearly
disingenuous.
We agree with respondent. We are not persuaded by
petitioner's attempt to obfuscate this issue with the testimony
of Joseph Wayne Cliett (Cliett), who was the supervisor of tax
audits for Old Petroleum, New Petroleum, Energy, and the other
affiliated corporations at the time of trial and during the
taxable years in issue. Cliett, as tax supervisor of the Union
Texas companies, knew of the tax returns being filed by each of
the different Union Texas companies. Moreover, he was
responsible for obtaining the appropriate signatures on the Forms
872. Cliett testified that upon receiving the first of the last
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three Forms 872 from the Internal Revenue Service (IRS) which
extended the assessment date to June 30, 1993, Cliett presented
it for signature to Lobliner, his supervisor during 1992. Upon
receiving the last two Forms 872 which extended the assessment
date to December 31, 1993, and June 30, 1994, respectively,
Cliett presented them for signature to Markowitz, who became his
supervisor sometime in 1993. Cliett alleges, however, that when
he presented the last three Forms 872 for signature to Lobliner
and Markowitz he did not know that New Petroleum had dissolved.
Cliett claims that he was not aware of the merger, because his
payroll checks failed to identify the specific entity for which
he worked, and he did not pay "much attention" to the Forms W-2
that he received.
We find Cliett's testimony to be implausible given his
extensive tax and accounting background, coupled with his vast
knowledge of petitioners' business organization and operations.
Cliett testified that he has worked nearly 30 years for
petitioners or one of their affiliated corporations, that he is
the supervisor for tax audits, and he is familiar with the
business organization and operations of the Union Texas
companies. At trial, Cliett was easily able to identify each
Union Texas company, to delineate the various departments within
each corporation, and to describe the primary functions of each
division within the various corporate departments. Thus, it is
most difficult to believe that at the time the last three Forms
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872 were signed, Cliett did not know of New Petroleum's
dissolution or did not know that Lobliner and Markowitz no longer
had authority to sign the Forms 872 on behalf of the defunct
corporation.
Assuming arguendo, that Energy knew of the error contained
in the last three Forms 872 (which it does not concede), Energy,
in reliance on Century Data Sys., Inc. v. Commissioner, supra at
170, asserts that it was under no affirmative duty to bring
respondent's mistakes to respondent's attention. We disagree and
find Energy's reliance on Century Data Sys., Inc. v. Commissioner
to be misplaced. Energy fails to mention this Court's
qualification of that proposition; namely, that there is no
obligation to correct respondent's mistakes provided the
"petitioner did nothing to encourage the faulty assumption." Id.
at 171. Here, Energy's entire course of conduct encouraged
respondent's faulty belief that New Petroleum existed at the time
the last three Forms 872 were signed. When Lobliner and
Markowitz signed the last three consents Energy knew that New
Petroleum did not exist, and that Lobliner and Markowitz were not
officers of that corporation. Energy not only failed to call
this error to respondent's attention, but intentionally fostered
it by continuing to communicate to the IRS through correspondence
that bore the name and EIN of the dissolved corporation. Thus,
based on the record and the facts discussed herein, we find that
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respondent has met his burden of proving that these actions
satisfy the first element of equitable estoppel.
2. Fact or Law
For equitable estoppel to apply, the misrepresentation or
wrongful misleading silence generally must originate in a
statement of fact and not in an opinion or a statement of law.
Graff v. Commissioner, 74 T.C. at 761.
While it could be argued that the effect of New Petroleum's
merger into Energy is a legal question, the misrepresentations or
silence relate to the facts herein; namely, that at the time the
last three Forms 872 were signed New Petroleum existed, and that
the individuals signing the consents were its properly authorized
officers. Given that Energy's misrepresentations or wrongful
misleading silences clearly originate in a statement of fact, we
find respondent has met his burden with respect to the second
element of equitable estoppel.
3. Detrimental Reliance
"It is fundamental to the doctrine of estoppel that the
party raising the issue must have been misled in reliance upon
the representations of his opponent." Century Data Sys., Inc. v.
Commissioner, 86 T.C. at 166; see also Atlas Oil & Ref. Corp. v.
Commissioner, 22 T.C. 552, 559 (1954) (taxpayer must be shown to
have taken some action which led Commissioner to postpone until
after the period of limitations expired the issuance of a notice
of deficiency that he was otherwise prepared to mail on a timely
basis).
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Here, Energy's critical act was to sign the consents without
informing respondent that the individuals signing them were not,
as they represented themselves to be, officers of New Petroleum.
Had respondent known that Lobliner and Markowitz were not
officers of New Petroleum and that the corporation did not exist,
respondent could have obtained either a correct consent from
Energy or issued a notice of deficiency before the period of
limitations expired with respect to 1985. Accordingly, we find
that respondent reasonably relied to his detriment on
petitioner's misrepresentations or silences with respect to the
merger transaction.
4. Knowledge of the Facts
To meet the fourth prong of equitable estoppel, the
Government must prove not only that respondent was "'destitute of
knowledge of the real facts as to the matter in controversy, but
should also have been without convenient or ready means of
acquiring such knowledge.'" Southwestern Inv. Co. v.
Commissioner, 19 B.T.A. 30, 47 (1930) (citing Brant v. Virginia
Coal and Iron Company, et. al, 93 U.S. 326, 337 (1876)).
Respondent contends that neither the agents nor Appeals
officers involved with the WPT audit had actual knowledge of New
Petroleum's dissolution at the time the last three Forms 872 were
signed. Moreover, respondent points to the fact that petitioners
stipulated that both Energy and New Petroleum failed to inform
the WPT agents of the true situation regarding the merger.
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Energy asserts that even if the WPT agents did not have
actual knowledge of the merger (a fact which it does not
concede), numerous documents submitted to respondent's service
center constituted sufficient notice to respondent that New
Petroleum had ceased to exist at the time New Petroleum signed
the last three Forms 872, on July 22, 1992, January 14, 1993, and
July 27, 1993, respectively. It is stipulated that no later than
May 11, 1992, more than 3 months before the first Form 872 was
signed, the Austin Service Center received New Petroleum's final
quarterly employment tax return (Form 941) marked "cancel
corporation merged out of existence." Energy further points out
that respondent stipulated that no later than September 8, 1992,
respondent's Austin Service Center received copies of a statement
of merger as required under section 1.368-3, Income Tax Regs.,
and a certificate of merger of New Petroleum into Energy,
respectively, that were attached to the 1991 consolidated Federal
income tax return (Form 1120), filed by Holdings, New Petroleum's
parent company. Finally, in reliance on Badger Materials, Inc.
v. Commissioner, 40 T.C. 725, 733, withdrawn and modified in part
by Badger Materials, Inc. v. Commissioner, 40 T.C. 1061 (1963)
(not affecting this issue), Energy contends that as of December
17, 1991, when the certificate of merger was filed with the
Delaware secretary of state indicating that as of December 31,
1991, New Petroleum would cease to exist, such information became
a matter of public record and readily available to respondent.
Accordingly, petitioner contends that respondent not only had
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actual knowledge of the merger, but also had the means by which
respondent's WPT agents could have readily acquired such
knowledge. Southwestern Inv. Co. v. Commissioner, supra.
In Paramount Warrior, Inc. v. Commissioner, T.C. Memo. 1976-
400, affd. without published opinion 608 F.2d 522 (5th Cir.
1979), a case which is in many respects similar to the instant
case, we declined to decide whether the notification of a merger
in correspondence with one of respondent's service centers, or in
a parent company's consolidated return, constituted sufficient
knowledge on the part of respondent, because we found as a fact
that the field agents involved with the examination had actual
knowledge that the corporation, on whose behalf the Forms 872
were signed, had merged out of existence. Id. In the instant
case, we are faced with precisely the question deferred in
Paramount Warrior.
Energy asserts that the two groups of documents filed with
respondent's Austin Service Center should be considered notice of
New Petroleum's dissolution, and therefore such knowledge should
be attributable to the WPT agents who conducted the examination
and who drafted the last three Forms 872. The first group of
documents on which Energy relies consists of the 1991
consolidated Form 1120 filed by Holdings along with the merger
documents attached thereto. The second group of documents
consists of the 1991 employment tax returns (Forms 940 and 941)
filed in New Petroleum's name. Energy argues that the WPT agents
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should be charged with knowledge of the information contained in
these documents.
Respondent contends that the revenue agents and Appeals
officers involved in the WPT cases could not have been expected
to learn of New Petroleum's merger from the information submitted
to the Austin Service Center in Holding's 1991 Form 1120. For
income tax purposes, New Petroleum was a member of a consolidated
group headed by Holdings. Accordingly, the statement of merger
and certificate of merger which New Petroleum filed were attached
to Holdings' Form 1120 as pages 573 and 574, respectively, of a
632-page consolidated Federal income tax return. The income tax
return was filed under the name and EIN of Holdings, which was
different from Energy's EIN. Moreover, neither page 573 nor page
574 contained Energy's EIN. Thus, respondent contends that the
computer transcripts requested by the WPT agents using New
Petroleum's EIN did not reflect the changes in its corporate
status shown on Holdings' Form 1120.
We agree with respondent. It is stipulated that the Austin
Service Center received Holdings' Form 1120 on September 8, 1992,
after the first of the three Forms 872 was signed. However, an
inspection of the actual Form 1120 reveals that the return was
not surveyed by the income tax examination group until January
14, 1995, nearly 18 months after the last consent in issue was
signed. Thus, based on the facts discussed herein, we shall not
attribute knowledge of New Petroleum's merger, which may have
been acquired by revenue agents conducting an unrelated income
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tax audit of petitioners for the taxable years in issue, nearly
18 months after the last consent was signed, to the agents or
Appeals officers conducting the WPT examination. Cf. King v.
Commissioner, 857 F.2d 676, 680 (9th Cir. 1988) (adopting general
theory that knowledge acquired by the IRS in unrelated
investigations is not necessarily imputed from one division to
another and citing United States v. Zolla, 724 F.2d 808, 810-811
(9th Cir. 1984)), affg. 88 T.C. 1042 (1987). Furthermore, we
find that New Petroleum did not provide respondent with notice of
the merger by filing Forms 940 and 941 in 1991 (employment tax
filings), because, as in the income tax situation, those filings
address a different tax, a different form, and are subject to
review by a different IRS division. Id.With respect to the information available to the WPT agents
in the IRS' computer system, the record establishes that although
a computer updating procedure existed for income tax return
audits which would have reflected a change in New Petroleum's
corporate status, there was no such system in place for audits of
WPT or employment tax returns. At trial, Revenue
Agent Bruce Rhames (Agent Rhames), the group manager assigned to
conduct the WPT examination for 1985, credibly testified that
where, as in the instant cases, the income tax returns were not
under his control and something changed which did not pertain
exactly to his taxpayer, such as a change in the taxpayer's name,
its EIN, or the amount of tax paid, he was not notified of the
change. Rhames explained that New Petroleum's merger into Energy
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was not reflected in the computer transcripts generated using New
Petroleum's EIN, which were used to confirm that the information
on the last three Forms 872 was correct.
Respondent's argument rests on the premise that any
knowledge of New Petroleum's merger obtained by personnel at the
Austin Service Center should not be attributed to the WPT agents,
because respondent did not have a computer system in place at the
time the last three Forms 872 were drafted, which would have
enabled the agents to access this information easily. We agree
with respondent. See also Southwestern Inv. Co. v. Commissioner,
19 B.T.A. 30 (1930) (citing Brant v. Virginia Coal & Iron Co., 93
U.S. 326, 337 (1876); cf. Abeles v. Commissioner, 91 T.C. 1019(1988).
In Abeles v. Commissioner, supra at 1035, our decision
turned on the then-existing availability of computer-generated
information using the taxpayer's Social Security number. There,
we held that for purposes of determining whether a notice of
deficiency has been properly mailed to the taxpayer's last known
address, an agent issuing a deficiency notice generally is
charged with knowledge of a taxpayer's last known address which
appears on the taxpayer's most recently filed tax return. In
Abeles, we found as a fact that the then-existing computer
capabilities of the IRS were such that an agent responsible for
issuing a notice of deficiency had the ability to conduct, within
a few moments, a search of the IRS computer files for a more
recent address for the taxpayer. Id. at 1033-1035. In so
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holding, we noted that "the state of the IRS' computer
capabilities is such that a computer search of the information
retained with respect to a certain taxpayer, including their last
known address, may be performed by respondent's agent without
unreasonable effort or delay." Id. at 1033.
Here, the IRS' computer system did not provide the ability
to conduct within a reasonable time a cross-check of the
taxpayer's income tax, WPT, and employment tax returns that would
have revealed the taxpayer's change in corporate status, using a
single EIN. Thus, Abeles v. Commissioner, supra, while
analogous, is clearly distinguishable from the case at hand.
Finally, we address Energy's argument that respondent easily
could have determined that New Petroleum had merged out of
existence by checking with the Delaware secretary of state, which
as of December 17, 1991, had the certificate of merger on file.
In making this argument, Energy relies on Badger Materials, Inc.
v. Commissioner, 40 T.C. 725, 733 (1963), withdrawn and modified
in part by Badger Materials, Inc. v. Commissioner, 40 T.C. 1061(1963) for the proposition that filing of merger documents with
the secretary of state constitutes notice of merger to the IRS.
We disagree and find Energy's reliance on Badger Materials, Inc.
to be misplaced. In Badger Materials, Inc., the taxpayer
corporation was dissolved and generally ceased to exist.
Following the dissolution, the treasurer of the defunct
corporation executed consents purporting to extend the period for
assessment of Federal income tax. Within the period of
- 23 -
limitations as purportedly extended, the IRS issued a notice of
deficiency to the corporation and a notice of transferee
liability to the transferee of the corporation's assets. The
corporation and the transferee denied the validity of the
consents on the ground that they were executed after the
corporation had been dissolved. The IRS argued that the
corporation and transferee were equitably estopped from denying
the validity of the consent forms. We disagreed and held for the
taxpayers.
However, the facts in Badger Materials, are distinguishable
from the facts herein. In Badger Materials, we found as fact
that there was no lack of knowledge of the corporation's
dissolution on the part of the IRS. Energy argues that Badger
Materials stands for the proposition that the Government had
knowledge of the corporation's merger at the time the consent
forms were signed, because the corporation had filed articles of
dissolution with the secretary of state of Wisconsin, thus making
the matter "public record". However, the filing of dissolution
documents was merely one fact that this Court relied on in
holding for the taxpayers. There, the taxpayer corporation also
filed a final Federal income tax return with the IRS under its
own name and listing its EIN. The return included a statement
concerning the liquidation and a copy of the minutes of the
stockholder's meeting adopting the plan of dissolution. Here, as
previously discussed, the statement of merger and the certificate
of merger filed by New Petroleum were attached as pages 573 and
- 24 -
574 of a 632-page consolidated Federal income tax return filed by
Holdings, New Petroleum's parent corporation. Moreover, in
Badger Materials, we attributed the merger information contained
in the taxpayer's Federal income tax return to the agent
conducting the income tax audit, not to an agent responsible for
an unrelated audit of a different kind of tax.
Finally, although neither party addresses this point, we
note that the returns under audit herein for the taxable periods
of 1985 were New Petroleum's Quarterly Federal Excise Tax Returns
(Form 720). On Form 720, there is a line which states that if
the taxpayer will not be liable for returns in succeeding
quarters, then the word "FINAL" should be entered. Had New
Petroleum entered the word "FINAL" on the appropriate line, that
might have been sufficient to put respondent on notice of New
Petroleum's merger into Energy. However, Energy's failure to
introduce into evidence New Petroleum's final 1991 Form 720 leads
us to infer that no such entry appears on the form. See Wichita
Terminal Elevator Co. v. Commissioner, 6 T.C. 1158, 1165 (1946),
affd. 162 F.2d 513 (10th Cir. 1947).
Thus, based on the record and the facts discussed herein, we
hold that Energy is equitably estopped to deny that the
limitations period for the taxable periods of 1985 was extended
properly under section 6501(c)(4).8
8
Even if we were to find that the error in the extension was
the result of mutual mistake, rather than any deliberate
deception on petitioner's part, the Court has the power to reform
(continued...)
- 25 -
Issue 2. Independent Producer Issue9
Background
Pursuant to the 1982 reorganization, Old Petroleum
contributed all of the assets of its hydrocarbons division to
Products, including all of the stock of Texgas. In exchange, Old
Petroleum received the stock of Products, which it then
distributed to Holdings, the parent company of Products and Old
Petroleum. Thereafter, Products owned 100 percent of the stock
of Texgas, a retailer of propane,10 and Old Petroleum no longer
owned stock in Products or Texgas. In the December 31, 1984,
reorganization, Old Petroleum transferred all of its domestic oil
and gas properties to New Petroleum, which was also a subsidiary
of Holdings. Petroleum, Products, and Texgas were related
persons within the meaning of section 613A(d)(3).
Petroleum was in the oil and gas exploration and production
business. Products was in the business of processing and
marketing oil and natural gas and their derivatives, including
propane, for Petroleum as well as for unrelated oil and gas
producers.
8
(...continued)
the written instrument to conform to the agreement and intent of
the parties. See Woods v. Commissioner, 92 T.C. 776, 789 (1989).
9
When references in this opinion apply to both Old Petroleum
and New Petroleum, the term "Petroleum" is used.
10
Propane is a product derived from natural gas under sec.
1.613A-7(r)(3), Income Tax Regs. Accordingly, references herein
to natural gas include propane.
- 26 -
Effective December 31, 1982, Old Petroleum and Products
entered into a service agreement under which Products agreed, for
a cash fee, to act as an agent for Petroleum to process and sell
its propane to unrelated third parties. As Petroleum's agent,
Products handled Petroleum's marketing, distribution, storage,
sales, and collection efforts. Pursuant to the service
agreement, Petroleum retained title to its propane until Products
sold the propane on Petroleum's behalf to unrelated third
parties. Neither Products nor Texgas was a buyer or seller under
Petroleum's sales contracts with unrelated third parties.
Petroleum produced natural gas from individual wells, which
went to 10 different processing plants. From 3 of the 10
processing plants, Petroleum moved its propane by pipeline to a
storage terminal at Mont Belvieu, Texas. By exchange agreements,
Petroleum exchanged the volumes of propane at the 7 other plants
for a like volume of propane held by Products. Petroleum's use
of the exchange agreements as a substitute for physical
transportation was both economically efficient and a common
practice in the oil and gas industry. Moreover, the propane
owned by Petroleum and Products satisfied strict industry
standards so that the propane volumes could be easily commingled
and exchanged.
As Products sold Petroleum's propane, the accounting group
recorded those sales as Petroleum's sales in accordance with
Petroleum's accounting practices, which were customary in the oil
and gas business and were consistently applied. Petroleum's
- 27 -
general ledger showed the sale of Petroleum's propane inventory
by Petroleum, with Products as agent, to unrelated third parties
in bulk sales. Petroleum's handling of its propane inventory was
consistent with industry practice.
As agent for Petroleum, Products collected from third party
purchasers payments due to Petroleum, and it was responsible for
pursuing any unpaid propane bills. If, however, a bill remained
unpaid, it was Petroleum, not Products, that had to bear the
loss. For the taxable years in issue, Petroleum, Products, and
Texgas had the following volumes and values of propane
production:
Parties Propane Sales Propane Sales
1983 Volume (gallons) Value
Old Petroleum 8,521,279 $3,918,477
Products 290,982,398 142,699,588
Texgas 152,234,737 131,469,955
1984
1
Old Petroleum 5,349,081 $2,307,907
Products 351,855,506 161,166,870
Texgas 159,090,931 136,352,438
1985
New Petroleum 7,930,188 $2,994,311
Products 289,494,801 116,275,633
Texgas 151,400,579 124,263,589
1
Petitioners concede that due to an accounting error, the $2,307,907
amount shown as Old Petroleum's propane sales for 1984, although reflected in
Petroleum's books, does not include gross receipts received by Old Petroleum
from its sales of 818,708 gallons of propane in December 1984. The highest
price per gallon of propane during 1984 was approximately 58 cents. Thus, Old
Petroleum's gross receipts from its December 1984 propane sales would have
been no more that approximately $475,000, resulting in annual gross receipts
of no more than $2,782,907 for that year.
For 1983, 1984, and 1985, respectively, Products sold
155,614,505, 156,887,148, and 155,225,544 gallons of propane to
Texgas. Given that Products was able to obtain all the propane
- 28 -
it needed from sources other than Petroleum, Petroleum's
production was not necessary for Products to meet its supply
obligations to Texgas.
Discussion
Respondent determined for the taxable years in issue that
pursuant to section 613A(d)(2)(A)11 and section 1.613A-7(r)(2),
11
Section 613A provides, in pertinent part, as follows:
SEC. 613A(d)(2). Retailers Excluded.--Subsection (c) shall
not apply in the case of any taxpayer who directly, or
through a related person, sells oil or natural gas
(excluding bulk sales of such items to commercial or
industrial users), or any product derived from oil or
natural gas (excluding bulk sales of aviation fuels to the
Department of Defense)--
(A) through any retail outlet operated by the taxpayer
or a related person, or
(B) to any person--
(i) obligated under an
agreement or contract with the
taxpayer or a related person to use
a trademark, trade name, or service
mark or name owned by such taxpayer
or related persons, in marketing or
distributing oil or
natural gas or any product derived
from oil or natural gas, or
(ii) given authority, pursuant to an
agreement or contract with the taxpayer
or a related person to occupy any
retail outlet owned, leased, or in any way
controlled by the taxpayer or a related
person.
Notwithstanding the preceding sentence this paragraph shall
not apply in any case where the combined gross receipts from
the sale of such oil, natural gas, or any product derived
(continued...)
- 29 -
Income Tax Regs.12, Petroleum was not an independent producer,
because it sold propane through Texgas, a related retailer.
Petitioners assert that Petroleum qualifies as an independent
producer because it sold its propane in bulk to unrelated third
parties and in no year did its own sales exceed $5 million.
Respondent's argument is premised on the presumption that
the 1982 reorganization was a "scheme" developed by Petroleum's
tax department to allow Petroleum to qualify as an independent
producer for the taxable years in issue. To foster the illusion
that Petroleum's propane was being sold to unrelated third
parties, respondent argues, Old Petroleum entered into the
service agreement and exchange agreements with Products to
disguise the fact that Petroleum was selling propane through
Texgas. Thus, respondent contends that Products did not act as
Petroleum's agent, but that it acquired (took title to)
Petroleum's propane and subsequently sold the propane to Texgas.
11
(...continued)
therefrom, for the taxable year of all retail outlets taken
into account for purposes of this paragraph do not exceed
$5,000,000. * * *
12
Sec. 1.613A-7(r)(2), Income Tax Regs., provides in pertinent
part:
(2) * * * A taxpayer shall be deemed to be selling oil or
natural gas (or a derivative product) through a retail
outlet operated by a related person in any case in which a
related person who operates a retail outlet acquires for
resale oil or natural gas (or a derivative product) which
the taxpayer produced or caused to be made available for
acquisition by the related person pursuant to an arrangement
whereby some or all of the taxpayer's production is
marketed. * * * [Emphasis added.]
- 30 -
Accordingly, respondent argues that Petroleum is denied
independent producer status, because pursuant to section
613A(d)(2)(A) and section 1.613A-7(r)(2), Income Tax Regs.,
Petroleum is deemed to be selling its propane through a retail
outlet (Texgas) operated by a related person (Products).
We disagree. A taxpayer is generally free to structure its
business transactions as it pleases, though motivated by tax
reduction considerations, provided the transaction is imbued with
a sufficient business purpose. Gregory v. Helvering, 293 U.S.
465 (1935); Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir.
1990), affg. in part, revg. in part and remanding T.C. Memo.
1987-628; Rice's Toyota World, Inc. v. Commissioner, 81 T.C. 184,
196 (1983), affd. on this issue, revd. in part 752 F.2d 89 (4th
Cir. 1985). On brief respondent seems to be arguing that
Petroleum devised the 1982 reorganization to obtain tax benefits
associated with independent producer status. Respondent,
however, does not argue that the reorganization was devoid of
economic substance, nor does respondent challenge the validity of
Petroleum's corporate structure. Rather, respondent asks us to
disregard the provision of the service agreement which
establishes that Petroleum was to retain title to its propane
until Products sold the propane on Petroleum's behalf to
unrelated third parties. We decline to do so.13
13
Respondent does not dispute that Petroleum qualifies as an
independent producer if the terms of the service agreement are
respected. See Rev. Rul. 92-72, 1992-2 C.B. 118.
- 31 -
On the basis of the entire record, we are convinced tt not
merely in form, but in substance, Products acted as an agent for
Petroleum and pursuant to the service agreement did not purchase
any of the propane that it marketed for Petroleum. We note that
Petroleum's production was not necessary for Products to meet its
supply obligations to Texgas because Products was able to obtain
all the propane it needed from sources other than Petroleum.
Furthermore, it was Petroleum, not Products, that bore the risk
of loss if any propane bills remained unpaid. Thus, as discussed
supra, we find as a fact that Petroleum, under the service
agreement, retained title to its propane until Products sold the
propane on Petroleum's behalf. Accordingly, we hold that
Products did not acquire Petroleum's propane for resale to
Texgas, and that Petroleum, pursuant to section 613A(d)(2)(A) and
section 1.613A-7(r)(2), Income Tax Regs., is not deemed to be
selling its propane through Texgas, a retail outlet operated by
Products, a related person. Therefore, Petroleum qualifies as an
independent producer for the taxable years in issue.
Issue 3. Recomputation of Petroleum's WPT NIL Computations
Background
On its original Federal income tax returns for each of the
taxable years in issue, Petroleum claimed percentage depletion as
an independent producer. With certain statutory modifications,
Petroleum's original percentage depletion NIL calculations
paralleled its original WPT NIL calculations. When calculating
- 32 -
its original percentage depletion NIL, Petroleum generally
included the same amounts as overhead (indirect expenses) and
followed the same apportionment procedures as were included and
followed in its original WPT NIL computations.
In the petitions filed in these cases, petitioners asserted
for the first time that they should be permitted to modify their
allocation process for computing the WPT NIL.14 During May and
September of 1995, petitioners provided respondent with a revised
apportionment formula for computing the WPT NIL. To the amounts
that were included in overhead in their original computations,
petitioners contend that they should be permitted to include as
additional overhead six new categories of indirect costs, which
petitioners claim are attributable to the mining process. In
their revised computations, petitioners also changed their method
for allocating overhead among producing properties and between
gas and oil on a single property from actual revenue to
production, using a conversion ratio derived from relative market
prices of gas and oil.
Discussion
Respondent determined the following deficiencies in WPT for
the taxable periods of 1983, 1984, and 1985, respectively:
14
Respondent did not raise this issue in the notices of
deficiency.
- 33 -
$3,471,045, $3,060,042, and $2,109,854.15 On August 22, 1994,
each petitioner timely filed a petition with this Court
contesting the entire amount of the deficiencies asserted. In
addition thereto, petitioners claimed overpayments of WPT of
$6,107,901, $5,969,611, and $7,931,434 for the taxable periods of
1983, 1984, and 1985, respectively, resulting from a
recomputation of their WPT NIL calculations. At trial and on
brief, respondent contends that Petroleum's WPT NIL
recomputations are not in accord with section 1.613-5(a), Income
Tax Regs., because they impermissibly deviated from the
percentage depletion calculations claimed on Petroleum's original
returns.16 Accordingly, respondent argues that petitioners
15
The deficiencies as determined by respondent are in windfall
profit taxes for the taxable periods in issue and in the amounts
set forth below:
Taxable Period Ended Amount
Mar. 31, 1983 $898,508
June 30, 1983 882,297
Sept. 30, 1983 865,264
Dec. 31, 1983 824,976
Mar. 31, 1984 874,332
June 30, 1984 594,829
Sept. 30, 1984 649,637
Dec. 31, 1984 941,244
Mar. 31, 1985 554,711
June 30, 1985 516,123
Sept. 30, 1985 535,574
Dec. 31, 1985 503,446
Total 8,640,941
16
Respondent further argued that petitioners' new WPT NIL
calculations should be rejected, because they are not defensible
under cost accounting principles. We find it unnecessary to
(continued...)
- 34 -
should be proscribed from modifying the overhead allocation
process used in their original WPT NIL calculations and instead
be required to retain the method originally employed, which
parallels their percentage depletion calculations and which was
accepted by respondent during the examination process. Cf. sec.
1.613-4(d)(2), Income Tax Regs. (generally, if a taxpayer has
consistently employed a reasonable method of determining the
costs of the various phases of the mining and nonmining process,
such method shall not be disturbed).
In response to phased decontrol of crude oil prices
announced by President Carter in April 1979, and increased
worldwide crude oil prices, Congress determined that the
additional revenues of "windfall" that U.S. oil producers would
thereby receive were an appropriate object of taxation. H. Rept.
96-304 at 7 (1979), 1980-3 C.B. 81, 91; S. Rept. 96-394 at 6
(1979), 1980-3 C.B. 131, 142. Consequently, Congress enacted the
Crude Oil Windfall Profit Tax Act of 1980 (Windfall Profit Tax
Act), Pub. L. 96-223, 94 Stat. 229, which from March 1, 1980,
until its repeal effective August 23, 1988, imposed an excise on
the "windfall profit" from certain crude oil produced in the
16
(...continued)
address this issue given that we hold, based on respondent's
threshold argument, that petitioners cannot compute the NIL using
one allocation method for percentage depletion purposes, which
has the effect of increasing their deduction, and a different
method for WPT purposes, which has the effect of reducing their
WPT.
- 35 -
United States. See sec. 4986(a). Under the Windfall Profit Tax
Act, the applicable tax rate is applied to the windfall profit
per barrel. The windfall profit per barrel is generally
calculated under section 4988(a) by subtracting the applicable
adjusted base price of each crude barrel of oil, and a severance
tax adjustment, from the removal price. After this calculation
has been performed, section 4988(b)(1) limits the taxable
windfall profit on any barrel of crude oil to not more than 90
percent of the net income attributable to that barrel of oil.
Pursuant to section 4988(b)(2), the NIL attributable to a
barrel of oil for WPT purposes is generally calculated by
determining "taxable income from the property" from which a
barrel is produced for the taxable year, divided by the number of
barrels of taxable crude oil from such property taken into
account for such taxable year. In computing the "taxable income
from the property", a taxpayer deducts both direct and indirect
(overhead) expenditures related to that property.
The term "taxable income from the property" generally has
the same meaning that it has for purposes of the NIL on the
deduction for percentage depletion under section 613(a).17 As
17
Sec. 4988(b) provides, in pertinent part, as follows:
SEC. 4988(b)(3). Taxable income from the property.--For
purposes of this subsection--
(A) In general.--Except as otherwise provided in this
paragraph, the taxable income from the property shall be
(continued...)
- 36 -
such, Congress specifically provided the starting point whereby
taxable income from the property must be determined under section
613(a), and, by doing so, Congress adopted the focus on income
and expenses of individual properties historically applied under
section 613.
Taxable income from the property, pursuant to section 1.613-
5(a), Income Tax Regs., is defined as "gross income from the
property" (as defined in section 613(c) and sections 1.613-3 and
1.613-4, Income Tax Regs.) less:
all allowable deductions (excluding any deduction for
depletion) which are attributable to mining processes,
including mining transportation, with respect to which
depletion is claimed. These deductible items include
operating expenses, certain selling expenses,
administrative and financial overhead, depreciation,
taxes deductible under section 162 or 164, losses
sustained, intangible drilling and development * * *
expenditures, etc. * * * Expenditures which may be
attributable both to the mineral property upon which
depletion is claimed and to other activities shall be
properly apportioned to the mineral property and to
such other activities. Furthermore, where a taxpayer
has more than one mineral property, deductions which
are not directly attributable to a specific mineral
property shall be properly apportioned among the
several properties. * * *
Accordingly, section 1.613-5(a), Income Tax Regs., controls the
computation of the NIL for both percentage depletion and WPT
purposes.
17
(...continued)
determined under section 613(a). [Emphasis added.]
- 37 -
Petitioners, in reliance on Shell Oil Co. v. Commissioner,
89 T.C. 371 (1987), supplemented by 90 T.C. 747 (1988), revd. in
part and remanded in part 952 F.2d 885 (5th Cir. 1992), argue
that they are entitled to claim the benefit of changes in law,
new facts, or any other item that might affect the taxpayer's
liability. See secs. 6511, 6512(b); see also Stone v. White, 301
U.S. 532, 534-535 (1937); Bull v. United States, 295 U.S. 247,
260-262 (1935). Petitioners assert that this is precisely what
they did here, i.e., that after reviewing their records in
preparation for these cases, petitioners claimed in their
petitions the benefit of changes in law as set forth in Shell
Oil. Petitioners further assert that contrary to respondent's
contention, it is not necessary that they show authority
permitting their percentage depletion apportionment method to be
radically different from their WPT apportionment method.
We disagree. Given that petitioners claimed the benefits of
percentage depletion and are subject to the WPT, they are faced
with the dilemma of explaining what authority permits them to
compute an NIL for percentage depletion purposes and an NIL for
WPT purposes, both of which are calculated under section 1.613-
5(a), Income Tax Regs., in a way that achieves radically
different results.
Section 4988(b)(3)(A) expressly states that "the taxable
income from the property shall be determined under section
613(a)." (Emphasis added.) Thus, when Congress enacted the WPT,
- 38 -
it grafted the WPT NIL onto the existing body of percentage
depletion law by incorporating section 613(a) into section
4988(b)(3)(A). A plain reading of section 4988(b)(3)(A) requires
petitioners to compute the NIL for WPT purposes in the same
manner as they computed the NIL under section 613 for percentage
depletion purposes. See Chevron U.S.A. Inc. v. Natural Resources
Defense Council, Inc., 467 U.S. 837 (1984) (the court must give
effect to the unambiguously expressed intent of Congress). It is
unreasonable to believe Congress intended to allow taxpayers to
compute their NIL differently for percentage depletion purposes
and WPT purposes, where Congress explicitly incorporated by
reference, the section 613 NIL calculation into section 4988. If
taxpayers were able to utilize petitioners' approach they could
manipulate their allocation methods under sections 613 and 4988,
thereby allowing taxpayers to increase their percentage depletion
deductions by excluding certain items of overhead from the
allocation process, and decrease their WPT by including the same
items of overhead in the allocation process. Cf. Portland Golf
Club v. Commissioner, 497 U.S. 154, 166-170 (1990)(taxpayer was
required to use same method of allocating fixed expenses, in
determining whether nonmember sales activity was undertaken with
intent to earn profit, that it did in calculating its actual loss
from those sales).
Finally, we note that petitioners' reliance on Shell Oil Co.
v. Commissioner, supra, is misplaced, because in that case the
- 39 -
Court of Appeals for the Fifth Circuit was not faced with the
issue herein of whether a taxpayer must figure the NIL
consistently under sections 613 and 4988. Rather, the issues in
Shell Oil Co. v. Commissioner, supra, concerned the attribution
and allocation of expenses for the calculation of the taxable
income from the taxpayer's oil and gas properties under section
1.613-5(a), Income Tax Regs., for purposes of the WPT NIL. As
discussed supra note 16, in the instant cases we never reach the
issue of whether petitioners' allocation method is defensible
under cost accounting principles, because we find based on
respondent's threshold argument that petitioners are bound by
their original computations.
Thus, based on the record and the facts discussed herein, we
hold that petitioners are not entitled to recompute Petroleum's
WPT NIL computations for the taxable periods of 1983, 1984, and
1985, where the recomputations do not follow the percentage
depletion calculations claimed on their original Federal income
tax returns.
To reflect the foregoing,
Decisions will be entered
under Rule 155.