604 Whitehead v. United States (C. C. A.). 360 Whitted, United States v. (C. C. A.). Wiback, In re (D. C.)..

991 Wiley v. United States (C. C. A.).

ARGUED AND DETERMINED

IN THE

UNITED STATES CIRCUIT COURTS OF APPEALS AND THE DISTRICT COURTS

LEWELLYN, Internal Revenue Collector, v. GULF OIL CORP.

(Circuit Court of Appeals, Third Circuit. October 8, 1917.)

No. 2254.

1. INTERNAL REVENUE 9-CORPORATIONS-INCOME TAXES.

Though a corporation and a number of subsidiary corporations all of whose stock (except directors' shares) it owned were engaged in a common enterprise, where the corporation and each of the subsidiaries attended to its own branch of the enterprise, and each of the subsidiary corporations owned its own assets, carried on its own business, owed its own debts, paid its own taxes and enjoyed its own income, there was no such identity between the main corporation and the subsidiaries as to render a dividend received by the main corporation from the subsidiaries nontaxable under Corporation Excise Act Aug. 5, 1909, c. 6, 36 Stat. 112, and Income Tax Act Oct. 3, 1913, c. 16, 38 Stat. 114.

2. INTERNAL REVENUE 9-CORPORATIONS-INCOME TAXES.

• Where the subsidiary corporations had accumulated earnings, none of which had become capital, but which had been used in carrying on the several enterprises in which the companies were engaged, but which had been sometimes used to aid others of the subsidiary corporations, instead of being used to promote the particular business that had earned them, and the subsidiary corporations declared dividends, which were not paid in cash, but were paid by the main corporation taking over the debtor and creditor accounts existing among the subsidiary corporations, the property received by it was received as a dividend, and was taxable under the Corporation Excise Act of 1909 and the Income Tax Act of October 3, 1913; it being immaterial that one of the stockholders received almost all of the dividend, or that the stockholder in question was itself a corporation, and not an individual.

In Error to the District Court of the United States for the Western District of Pennsylvania; Charles P. Orr, Judge.

Action by the Gulf Oil Corporation against C. G. Lewellyn, Collector of Internal Revenue. Judgment for plaintiff (242 Fed. 709), and defendant brings error. Reversed, with instructions.

E. Lowry Humes and B. B. McGinnis, both of Pittsburgh, Pa., for plaintiff in error.

J. H. Beal and W. A. Seifert, both of Pittsburgh, Pa. (Reed, Smith, Shaw & Beal, of Pittsburgh, Pa., of counsel), for defendant in error. Before BUFFINGTON, MCPHERSON, and WOOLLEY, Circuit Judges.

For other cases see same topic & KEY-NUMBER in all Key-Numbered Digests & Indexes 245 F.-1

MCPHERSON, Circuit Judge. In this suit the Gulf Oil Corporation seeks to recover the taxes for 1913 that were assessed against it under the act of October 3, 1913. Payment was made under protest, and repayment was refused by the Commissioner of Internal Revenue. The Corporation recovered a judgment of $128,524.95. 242 Fed. 709. The trial was without a jury, and for convenience we repeat here the findings of fact in the District Court:

"(1) The Gulf Oil Corporation is a corporation duly organized under the laws of the state of New Jersey. C. G. Lewellyn is the collector of internal revenue for the Twenty-Third district of Pennsylvania, being duly commissioned as such pursuant to the laws of the United States of America.

"(2) The Gulf Oil Corporation, on the 14th day of February, 1914, in compliance with the provisions of the act of Congress of October 3, 1913, made a return of its annual net income for the 12 months ending December 31, 1913, as required by said act. In making said return the Gulf Oil Corporation certified that it had not included in the statement of gross income for the year 1913 certain dividends, amounting to $11,424,440, received by it from subsidiary companies out of earnings and surplus of said subsidiary companies accrued prior to January 1, 1913.

"(3) In said return the Gulf Oil Corporation showed net income for the 12 months ending December 31, 1913, of $886,250.44, but under date of May 1, 1914, the said C. G. Lewellyn, collector, mailed to said corporation notice of an assessment of tax thereon amounting to $9,072.56. A claim for abatement of this overcharge, amounting to $210.06, was filed with the collector June 9, 1914, and on June 30, 1914, the Gulf Oil Corporation paid to the said C. G. Lewellyn, collector, the sum of $8,862.50, being the amount of said assessment, less the $210.06 for which abatement was claimed. Said claim for abatement having been disallowed, said Gulf Oil Corporation, on the 5th day of November, 1914, paid the said collector the additional sum of $210.06, with interest amounting to $6.30, making a total payment of $216.36.

"(4) On the 30th day of December, 1914, the said C. G. Lewellyn, collector, acting under instructions from the Commissioner of Internal Revenue at Washington, D. C., mailed notice and demand for tax assessment against the Gulf Oil Corporation for the year ending December 31, 1913, amounting to $114,034.34. In fact, this additional assessment amounted to $114,244.40, being the 1 per cent. upon the entire amount of the dividends received by the Gulf Oil Corporation from subsidiary companies out of surplus accrued to such subsidiaries prior to January 1, 1913, and payable to the Gulf Oil Corporation prior to March 1, 1913, and said additional assessment was based solely on said dividends. In making the assessment, however, the Commissioner of Internal Revenue reconsidered and allowed the previous claim or abatement of $210.06, erroneously assessed against the corporation in the original assessment, and credited the same as having been paid upon the assessment of December 30, 1914, leaving the net balance of such assessment $114,034.34 as stated.

"(5) The notice and demand of the said C. G. Lewellyn, collector, for the payment of this additional tax recited that if the tax is not paid on or before January 8, 1915, it would be the duty of the collector to collect said tax, together with 5 per cent. additional and interest at the rate of 1 per cent. per month until paid.

"(6) That subsequently the plaintiff filed with the defendant for presentation to the Commissioner of Internal Revenue a claim for the abatement of said income tax amounting to $114,034.34, a copy of which claim is attached to and made a part of plaintiff's statement as Exhibit A. That after an examination of said claim for abatement the Commissioner of Internal Revenue rejected the same.

"(7) On February 17, 1915, the said Gulf Oil Corporation paid to the said C. G. Lewellyn, collector, said additional income taxes assessed for the period ending December 31, 1913, in the sum of $114,034.34, and at the same time filed with said C. G. Lewellyn a written protest, a copy of which protest is attached to and made a part of plaintiff's statement as Exhibit B.

"(8) That subsequently the plaintiff filed with the said C. G. Lewellyn for presentation to the Commissioner of Internal Revenue a claim for the refund of the net amount of the assessment of said income tax, to wit, $114,034.34, and also the amount of the credit allowed thereon of $210.06, representing an overassessment against the corporation on the basis of its return as originally filed, the two amounts constituting the entire amount of the additional assessment in the sum of $114,244.40. A copy of the said claim for refund is attached to and made a part of plaintiff's statement as Exhibit C.

"(9) That after consideration of said claim for refund, the Commissioner of Internal Revenue rejected the same, and the said C. G. Lewellyn was instructed to notify the Gulf Oil Corporation, and on or about April 13, 1915, did so notify said corporation, that said claim was rejected, a copy of which notice is attached to and made a part of plaintiff's statement as Exhibit D.

"(10) That plaintiff is a holding company, and continuously since its organization in February, 1907, it has been the owner of all of the capital stock of the J. M. Guffey Petroleum Company, the Gulf Pipe Line Company, the Gulf Pipe Line Company of Oklahoma, and for many years has been the owner of all of the capital stock of the Indiana Oil & Gas Company and the Gulf Commissary Company, except in the case of each company of directors' qualifying shares, and was the owner of said shares during all of the period in which the earnings have accumulated out of which the dividends in question in this case were declared and paid.

"That with the exception of the Indiana Oil & Gas Company and the Gulf Commissary Company, and a dividend of the J. M. Guffey Petroleum Company hereafter referred to, no dividends were paid by any of the above-named subsidiary companies prior to December 31, 1912. All of the earnings of said companies prior to said date were either invested as earned in the extension and development of the properties and business of the companies mentioned or allowed to accumulate in the treasuries of such companies respectively, and all of the said earnings were actually used and required in carrying on the business of the subsidiary companies.

"In January of 1913 the officers of the Gulf Oil Corporation, plaintiff, decided that the accumulated earnings and surpluses of these subsidiary companies should be taken over by the plaintiff company in the form of dividends and accordingly:

“(11) On February 7, 1913, the J. M. Guffey Petroleum Company declared and authorized out of its accumulated surplus earned prior to January 1, 1913, the immediate payment of a dividend of which the Gulf Oil Corporation received $3,749,750. Payment of said dividend was made April 11, 1913.

"(12) On February 7, 1913, the Gulf Pipe Line Company declared and authorized out of its accumulated surplus earned prior to January 1, 1913, the imme diate payment of a dividend, of which the Gulf Oil Corporation received $4,724,055. Payment of said dividend was made April 11, 1913.

"(13) On February 7, 1913, the Gulf Pipe Line Company of Oklahoma declared and authorized out of its accumulated surplus earned prior to January 1, 1913, the immediate payment of a dividend of which the Gulf Oil Corporation received $2,597,660. Payment of said dividend was made April 11, 1913. "(14) On January 8, 1913, the Indiana Oil & Gas Company declared and authorized out of its accumulated surplus earned prior to January 1, 1913, the immediate payment of a dividend, of which the Gulf Oil Corporation received $338.000, and on February 24, 1913, declared and authorized the immediate payment of a dividend, of which the Gulf Oil Corporation received $10,000. Payment of the dividend declared January 8, 1913, was made on that day and payment of the dividend declared February 24, 1913, was made on February 25, 1913.

"(15) On December 17, 1912, the Gulf Commissary Company declared and authorized out of its accumulated surplus earned prior to December 17, 1912, the payment of a dividend, of which the Gulf Oil Corporation received $4,975. Payment of said dividend was not made until January 4, 1913.

"(16) Payment of said dividends by the J. M. Guffey Petroleum Company, the Gulf Pipe Line Company, and the Gulf Pipe Line Company of Oklahoma was made as follows:

"The several companies mentioned, together with certain other companies, constituted a single enterprise carried on by the plaintiff; that enterprise con sisting in a general way of the production and purchase of crude oil, the transportation of oil, and the refining and marketing thereof. During the period in question the business of producing and purchasing oil was carried on principally in the state of Oklahoma, where also the oil was gathered and stored; the transportation of oil by pipe lines from points in the state of Okla. homa and in Texas to the Gulf of Mexico, where the company owned refineries in which the refined products were manufactured. The marketing of these products was carried on over a large part of the United States and in foreigr countries, and for the purpose of shipping such refined products the company owned and operated its own fleet of carrying vessels.

"At the time of the declaration of the dividends before referred to all of the earnings of the subsidiary companies had been retained in those companies, treating the subsidiary company collectively, although for the purposes of the enterprise as a whole, it was necessary that the funds or credit of one subsidiary be loaned to and used by another. As a result of this at the time of the declaration of said dividends there existed among the subsidiary companies considerable indebtedness, evidenced by book accounts; such indebtedness arising almost entirely through transactions between such companies in the purchase and sale of oil or property.

"All of these funds were either invested in properties or actually required in the carrying on of the business of the subsidiary companies, so that the subsidiary companies were without moneys with which to make payment of this intercompany indebtedness. For the purpose of clearing the transaction the matter was consummated on the same day, to wit, April 11, 1913, and in this way:

"The Gulf Oil Corporation took over upon its books the amount of the dividends before mentioned (other than the Indiana Oil & Gas Company and the Gulf Commissary Company, which it had already received) and at the same time set up upon its books accounts receivable owing to it by various subsidiaries aggregating the amount of the dividends so received. Upon the books of the subsidiary companies entries showing the same facts were made, and all of these entries were made upon vouchers passed between the parties to the transactions.

"As a result, the subsidiary companies collectively, after the payment of this dividend, owned substantially the same amount as prior thereto had been owing to some of the subsidiaries by other subsidiaries, but such indebtedness was shifted so that it was owing entirely to the Gulf Oil Corporation; and the Gulf Oil Corporation, after the payment of the dividends, had no property assets which prior thereto was not represented in the shares of stock of the subsidiary companies owned by it, but it had upon its books accounts receivable of subsidiary companies, which together with the shares of stock of the various subsidiary companies owned by it represented the same property and assets as was represented by the shares of stock alone prior to the declaration and payment of said dividends.

"(17) The only dividend declared by the J. M. Guffey Petroleum Company prior to January 1, 1913, was a dividend of $2,024,865, declared and paid in the year 1912, but the moneys out of which that dividend was paid arose out of the sale by the J. M. Guffey Petroleum Company to the Gulf Refining Company (another subsidiary of the plaintiff company) of certain ships owned by it and was merely the carrying out of a change of ownership of the property from one subsidiary to another.

"(18) That the said J. M. Guffey Petroleum Company, Gulf Pipe Line Company, Gulf Pipe Line Company of Oklahoma, Indiana Oil & Gas Company, and Gulf Commissary Company were all corporations subject to the payment of the excise tax imposed by the act of Congress of August 5, 1909 (36 Stat. 11112), and that all of said companies had in fact paid all of the taxes imposed upon them under the provisions of the said act, including such taxes on the earnings from which said dividends were declared."

We may summarize the facts as follows: For a number of years the Corporation has owned all the stock (except directors' shares)