Opinion
Docket Nos. 25931 25932.
1951-12-20
PRENTISS D. MOORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOHN I. MOORE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Wm. Bernard Clinton, Esq., and Clark G. Clinton, Esq., for the petitioners. John P. Higgins, Esq., for the respondent.
Loss claimed by petitioners (brothers) on exchange of property with corporation of which they became sole stockholders simultaneously with consummation of exchange, held properly disallowed under section 24(b)(1)(B), Internal Revenue Code. Wm. Bernard Clinton, Esq., and Clark G. Clinton, Esq., for the petitioners. John P. Higgins, Esq., for the respondent.
In these proceedings, which were consolidated for hearing, respondent determined deficiencies in income and victory tax for the calendar year 1943 as follows:
+---------------------------------------+ ¦Docket No.¦Petitioner ¦Deficiency¦ +----------+-----------------+----------¦ ¦25931 ¦Prentiss D. Moore¦$3,305.72 ¦ +----------+-----------------+----------¦ ¦25932 ¦John I. Moore ¦6,661.10 ¦ +---------------------------------------+
The sole issue is whether petitioners are entitled to deduct from gross income in 1943, under section 23(e)(1), Internal Revenue Code, alleged losses in the amount of $34,982.84 each on an exchange of a royalty interest owned by them for certain other royalty interests owned by a corporation of which petitioners were stockholders. The disallowance by respondent of additional loss of $1.62 each claimed by petitioners on the same exchange is not contested by petitioners, nor are other adjustments in the notices of deficiency. A portion of the facts were stipulated and are so found.
FINDINGS OF FACT.
Petitioners are each married individuals residing in Midland, Midland County, Texas, and the returns for the period here involved were filed on the community property cash basis with the collector of internal revenue for the second district of Texas. Petitioners are associated together in the business of development, production, and operation of oil and gas properties and buying and selling leases. The issue herein considered arose out of a transaction involving separate properties of the petitioners.
The facts involve three parties: (1) the petitioners, Prentiss D. Moore and John I. Moore; (2) Hadley Case and seven others whom he represented, hereinafter referred to as the Case Group; and (3) the Moore Exploration Company, a Texas corporation, hereinafter referred to as the Corporation.
On November 19, 1942, an agreement was entered into by Hadley Case for the Case Group and John I. Moore on behalf of himself and the Corporation, stating that whereas the Case Group owned 673 shares of stock in the Corporation and a $51,000 oil payment ‘and whereas it is the desire of the Case Group to sell their ownership in the stock of the Moore Exploration Company, and it is the desire of Moore to buy this stock, either for himself, on behalf of Moore Exploration Company, or for third parties,‘ John I. Moore was to purchase from the Case Group their 673 shares of stock in the Corporation and the $51,000 oil payment. In consideration for the stock and oil payment, he agreed to pay the Case Group the sum of $64,300 and to assign to them certain oil lease interests including two lease interests known as the W. T. Noelke and Noelke State leases. However, at the time of this agreement he did not own the Noelke lease interests; these interests were then owned by the Corporation. Petitioners, both directors and officers of the Corporation at the time of the agreement, owned the remaining 527 shares of the 1,200 outstanding shares of stock of the Corporation.
On December 5, 1942, John I. Moore and the Case Group entered into an escrow agreement with the Fort Worth National Bank, Fort Worth, Texas, whereby the 673 shares of stock and assignments of the oil payment to petitioners and of the Noelke lease interests from the Corporation to petitioners and from petitioners to the Case Group would be deposited with the escrow agent until such time as the final cash payment for the stock and oil payment would be made. On December 7, 1942, John I. Moore and Hadley Case amended the agreement of November 19, 1942. This amendment provided, in part:
1. The shares of stock of the Moore Exploration Company are to be bought on behalf of myself and P. D. Moore and not on behalf of myself and Moore Exploration Company.
The Corporation, on November 30, 1942, assigned to petitioners, among other interests, an overriding royalty interest in the W. T. Noelke and Noelke State oil leases. The instrument stated that ‘this assignment is effective as of 7 A.M. of December 1, 1942.‘ On December 1, 1942, petitioners assigned to Hadley Case the Noelke Lease interests, which assignments were delivered to the escrow agent as provided under the terms of the November 19, 1942, agreement and the December 5, 1942, escrow agreement. On December 24, 1942, petitioners assigned a certain producing overriding royalty interest, known as the Crane County overrides, to the Corporation. The instrument stated that ‘this transfer and assignment is effective as of 7 A.M. of December 1, 1942. ‘ Neither the Noelke lease interests nor the Crane County overrides were held by petitioners for productive use in trade or business or for investment.
The final cash payment for the stock and oil payments was made on March 23, 1943. The escrow agent then delivered 673 shares of the common stock of the Corporation to petitioners and the $51,000 oil payment to John I. Moore or his nominees. At the same time, he delivered the assignment of the Noelke lease interests together with other overrides, oil payments, and cash to Hadley Case. The stipulation of facts states in part:
5. Prior to March 23, 1943, Petitioners were the owners of 527 shares of the common stock of a texas corporation known as Moore Exploration Company, and Hadley Case and Associates were the owners of the remaining 673 shares of the total of 1200 shares of issued and outstanding stock of said Corporation.
13. The transfer and delivery of the properties involved in the above-mentioned transactions between Petitioners and Moore Exploration Company and between Petitioners and Haley Case and associates was not effected until March 23, 1943, when the final cash payment of $34,000.00 was paid to the escrow agent.
The unrecovered cost basis of each of the petitioners in the Crane County overrides on March 23, 1943, was $36,566.84. The fair market value of the Noelke lease interests as of the same date was $1,584 for each petitioner.
OPINION.
OPPER, Judge:
The only theory on which petitioners can claim a loss for 1943, the single year in issue, is that their transfer of the Crane overrides to the corporation, which they say gave rise to the loss, was postponed pending completion of the other phases of the transaction which were covered by the escrow. The Crane assignment took place in 1942 but the escrow was in effect until the following March when the final cash payment and other details were consummated.
However, one of the matters covered by the escrow, and which resulted from its completion, was petitioners' acquisition of the remaining stock of the corporation. If the effectiveness of the Crane assignment is held in abeyance by reason of the escrow, the result is a transfer to a wholly-owned corporation, any loss from which is disallowed by the express terms of section 24(b), Internal Revenue Code.
(b) LOSSES FROM SALES OR EXCHANGES OF PROPERTY.—(1) LOSSES DISALLOWED.— In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchanges of property, directly or indirectly—(B) Except in the case of distributions in liquidation, between an individual and a corporation more than 50 per centum in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual;(2) STOCK OWNERSHIP, FAMILY, AND PARTNERSHIP RULE.— For the purposes of determining, in applying paragraph (1), the ownership of stock—(B) An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family;(D) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants;
The case relied on by petitioners, W. A. Drake, Inc. v. Commissioner (C.A. 10), 145 F.2d 365, does not hold otherwise. There the contract of sale giving rise to the claimed loss became effective simultaneously with the vendee's relinquishment of his control of the vendor-taxpayer. But there, as the Court made clear, the important aspect was that when the contract was entered into the control existed and the contract could not have resulted without it. Here, the important circumstances is that once the original contract had been signed, petitioners were assured of control of the acquiring corporation and could with impunity assign a valuable property to it at a loss, knowing that they were not actually disposing of anything and that the ‘loss‘ was purely illusory. Cf. Higgins v. Smith, 308 U.S. 473.
One of the purposes of section 24(b) was to prevent exactly this sort of thing.
* * * In H.R. 704, 73d Cong., 2d sess., it was said: ‘Experience shows that the practice of creating losses through transactions between members of a family and close corporations has been frequently utilized for avoiding income tax. It is believed that the proposed change will operate to close this loophole of tax avoidance.‘ The same language was repeated in S.R. No. 558, 73d Cong., 2d sess. (C.B. 1939-1, Part 2, p. 607); cf. Higgins v. Smith, 308 U.S. 473. * * * The ‘major purpose of‘ the 1937 bill was said to be ‘to close loopholes in the revenue laws of which numerous taxpayers have availed themselves.‘ (W. A. Drake, Inc., 3 T.C. 33, 39, affirmed W. A. Drake, Inc. v. Commissioner, supra.)
Whether or not the statute is ambiguous, we conclude that the congressional design was to have section 24(b) cover this kind of transaction and that, if necessary to accomplish this purpose, the acquisition or relinquishment of control simultaneously with the prohibited transaction should be viewed as ‘ownership‘ within the plain meaning of the legislation. Otherwise we should be opening the very ‘loophole‘ Congress though it was closing. We accordingly find no error in the determination.
Reviewed by the Court.
Decision will be entered for the respondent.