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plaintiffstatutecorporation

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Prairie Oil & Gas Co. v. Motter, 66 F.2d 309, 3 USTC P 1142, 12 A.F.T.R. 996, 1934-1 C.B. 183

Facts

Prior to 1926, the Olean Petroleum Company acquired oil properties for about $300,000. In 1926, the Prairie Oil & Gas Company purchased these properties for $3,350,000. A contract was signed to transfer the leases and equipment, with the Prairie acquiring only the physical properties while the Olean retained its intangible assets. The Olean Company was dissolved shortly after the sale, leading to the dispute over the appropriate basis for depletion calculations.

The Prairie went into possession and paid the $3,350,000 to Larkin and Quigley, the authorized agents of the Olean and its stockholders.

Issue

Should the depletion of the oil properties be calculated based on the Prairie Oil & Gas Company's purchase price of $3,350,000 or the original cost of $300,000 incurred by the Olean Petroleum Company?

The right to an allowance for depletion is a matter of grace on the part of the taxing power, and one claiming it must establish its right thereto.

Rule

The basis for the depletion allowance is determined by the actual cost of the property to the taxpayer, as provided in Section 204(c) of the Revenue Act of 1926, unless the transaction falls within specific exceptions.

Section 204(c), Revenue Act 1926 (26 USCA § 935 (c), provides that the basis for the depletion allowance shall be the same as is provided in subdivision (a) for the purpose of determining gain or loss upon the sale of property.

Analysis

The court analyzed the transaction and determined that it did not constitute a reorganization as defined by the tax code. The court emphasized that the actual cost of the properties to the Prairie Oil & Gas Company was $3,350,000, and that the transaction was a straightforward purchase rather than a merger or consolidation. The court rejected the collector's argument that the transaction should be treated as a reorganization, citing previous case law that distinguished between outright purchases and reorganizations.

These authorities leave no doubt that a purchase for cash of all the properties of one corporation by another cannot be considered as a reorganization, merger or consolidation of the two companies.

Conclusion

The court reversed the lower court's judgment, ruling that the Prairie Oil & Gas Company is entitled to calculate its depletion based on the actual cost of $3,350,000.

The plaintiff, on the admitted facts, is entitled to judgment. The cause is reversed for further proceedings in accordance with this opinion.

Who won?

Prairie Oil & Gas Company prevailed in the case because the court found that the depletion should be based on the actual purchase price rather than the original cost to the previous owner.

The clear intent of the statute is to allow depletion based on actual cost to the taxpayer.

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Estate of Makransky v. C. I. R., 5 T.C. 397

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