*1099 Where certain negotiations were in progress for the sale of eight oil leases owned in part by petitioner, and before any agreement of sale was entered into, petitioner, upon authority derived from duly adopted resolutions of its stockholders and directors, unconditionally distributed its interest in the leases in kind to its stockholders, who later in their own right and in pursuance of their own contract of sale sold their respective interests in the leases to the party with whom petitioner's vice president had carried on the negotiations, held, the sale of the leases was a sale by petitioner's stockholders for their own account, and the profits resulting therefrom were not taxable to petitioner as its income.
*1128 The taxable year involved is the fiscal year ended May 31, 1934, for which year the respondent determined a deficiency in income tax of $78,502.73 and a deficiency in excess profits tax of $27,070.66.
The principal issue is whether a sale of certain*1100 oil leases during the taxable year to the East Texas Oil Refining Co. was a sale of the leases by petitioner and the profits therefore taxable to it, or whether the sale was made by the stockholders of petitioner after petitioner had distributed the leases in question to the stockholders in partial liquidation of the corporation.
There were also two subsidiary issues, assignments of error (h) and (i) in the amended petition, which were disposed of at the hearing by stipulation of the parties.
FINDINGS OF FACT.
Petitioner is a corporation, duly incorporated on May 29, 1931, under the laws of the State of Texas and having its domicile therein, with its principal office in the city of Fort Worth, Texas. It kept its books and records and duly filed its returns on the accrual basis.
During the taxable year involved, petitioner's officers were Venita S. Weaver (widow of R. M. Weaver, Jr., who died in 1931 or 1932), president; John W. Herbert III, vice president; and Roy D. Golston, secretary-treasurer. Venita S. Weaver, the Herbert Oil Co. and Golston each owned during the taxable year involved one-third of petitioner's capital stock. One-half of Golston's stock was held by*1101 the First National Bank of Fort Worth as trustee for his former wife, but the voting rights remained in Golston.
*1129 On and prior to May 16, 1931, R. M. Weaver, Jr., held the legal title to five oil leases covering approximately 127 acres of land in Rusk County, Texas, known as the O'Quinn, Bell, Webb, Starr, and Roberson leases, which were in fact owned by R. M. Weaver, Jr., John W. Herbert (sometimes referred to as John W. Herbert III) and Roy D. Golston in equal shares. These five leases were in the customary form of oil and gas leases and had the legal effect of vesting in R. M. Weaver, Jr., as lessee, the fee simple title to seven-eights interest in the oil, gas, and other minerals as might be produced therefrom. Under date of May 16, 1931, R. M. Weaver, Jr., as first party, and the East Texas Refining Co., as second party, made and entered into a contract in writing with respect to these five leases, by the terms of which Weaver on May 19, 1931, assigned one-half of the seven-eighths interest in these leases to the East Texas Refining Co. in consideration of the latter undertaking to drill various wells on the leased premises. This contract contained the following*1102 provisions relative to any offer from a third party for the purchase of the entire seven-eighths working interest and notices to be given in case thereof:
In the event either party hereto obtains from a third party a bona fide offer for the purchase of all of the entire property herein, which such party desires to accept, such offer shall be by it immediately submitted in writing to the other party hereto, who shall within fifteen (15) days from receipt of such notice in writing advise such party whether he will accept the same and join in a conveyance thereof; or whether he will elect to purchase the other one-half (1/2) interest, upon the terms and at fifty (50%) per cent of the price offered therefor for the whole, and thereupon proper conveyances and assignments, to carry into effect, such decisions shall be made and delivered by the parties respectively.
* * * but neither party hereto shall have the right to dispose of his interest herein to any person not acceptable to the other party.
* * *
It is further agreed by and between the parties hereto that any notice provided herein to be served by either party hereto upon the other party to this contract shall be served*1103 in the following manner, to-wit:
By reducing said notice to writing and sending a copy thereof by United States Registered Mail, addressed to:
(a) R. M. Weaver, Jr., 9th Floor, Neil P. Anderson Building, Fort Worth, Texas.
(b) East Texas Refining Company, 1501 Allen Building, Dallas, Texas.
On June 10, 1931, R. M. Weaver, Jr., assigned and conveyed to petitioner an undivided one-half of the seven-eighths working interest in the above mentioned O'Quinn, Bell, Webb, Starr, and Roberson leases by regular instruments of assignment and conveyance duly executed and delivered. These assignments were made subject to the assignor's continued personal liability on the contract between Weaver and the East Texas Refining Co. under date of May 16, 1931.
*1130 On and prior to August 31, 1931, petitioner owned an oil lease covering approximately 148 acres of land in Rusk County, Texas, known as the Mason lease. On and prior to November 7, 1931, petitioner owned an oil lease covering approximately 77 acres of land in Rusk County, Texas, known as the Perkins lease.
Under date of August 31, 1931, petitioner, as first party, Bass & Dillard, a copartnership, as second party, and*1104 the East Texas Refining Co., as third party, made and entered into a contract in writing with respect to the Mason lease by the terms of which petitioner assigned one-seventh of its interest in the lease to Bass & Dillard and one-fifth of its interest in the lease to the East Texas Refining Co. Under date of November 7, 1931, the same parties made and entered into a similar contract in writing with respect to the Perkins lease by the terms of which petitioner assigned one-seventh of its interest in the lease to Bass & Dillard and one-fifth of its interest in the lease to East Texas Refining Co. The assignees under both contracts were to pay the consideration for the fractional interests in the leases assigned to them by drilling wells on the leased premises and furnishing well equipment and supplies. Both contracts contained identical provisions relative to any offer by a fourth party for the purchase of the entire interests of the parties, and notices to be given, as follows:
In the event one of the parties hereto obtains from a fourth party a bona fide offer for the purchase of all of the entire property herein, which such party is willing to accept, such offer shall be immediately*1105 submitted in writing to the other parties hereto, who shall have fifteen days from receipt of such notice in writing to advise such party whether they will accept the same and join in a conveyance thereof; or whether they, or either of them, elect to purchase the interest of the party receiving such offer and at the fractional interest (equal to the fractional interest in the property owned by the party receiving such offer) of the price offered therefor for the whole. If the two remaining parties desire to purchase said interest jointly, same shall be purchased by them in proportion to the ratio of their respective ownership in said property. If the offer submitted to one party by a fourth party is acceptable to all parties, then all parties agree, bind and obligate themselves to join in proper conveyances of the property herein contracted about.
If either of the parties hereto elect to purchase the interest owned by the party receiving such offer, then the party receiving the same hereby agrees, binds and obligates itself themselves to make proper conveyance of such property upon compliance with the terms of such offer.
* * *
The parties * * * agree, bind and obligate themselves*1106 not to sell, convey or dispose of its or their interest in the property herein contracted about to any person, firm or corporation not acceptable to the other party or parties hereto.
* * *
It is further agreed by and between the parties hereto that any notice provided herein to be delivered by any one or more of the parties unto the other party or parties to the contract, shall be served in the following manner, to-wit:
*1131 By reducing said notice to writing and sending a copy thereof by United States Registered Mail addressed to:
(a) Falcon Company,
9th Floor, Neil P. Anderson Building,
Fort Worth, Texas.
(b) Bass and Dillard,
Room 610, Bob Waggoner Building,
Wichita Falls, Texas, and
(c) East Texas Refining Company,
1405 Tower Petroleum Building,
Dallas, Texas.
On and prior to February 23, 1934, petitioner owned two oil leases covering tracts of approximately 10 acres and 1.69 acres, respectively, which were known as the McCord and Tipps leases, respectively. On and prior to February 23, 1934, these two leases were owned and held wholly by petitioner, with no kind or character of interest or claim thereon in any other person except the one-eighth*1107 royalty interest retained by original owner of the land.
During the time Venita S. Weaver was petitioner's president she was very inexperienced in business matters and relied entirely upon her attorney, S. C. Rowe.
On December 4, 1931, petitioner's board of directors adopted the following resolution:
RESOLVED that no contracts involving an obligation of this corporation in excess of Fifteen Hundred ($1,500.00) Dollars, shall be made by any officer of this corporation authorized under its By-laws to make same unless concurred in by the three stockholders who each own one-third of the capital stock.
Sometime prior to February 8, 1934, a representative of the Tide Water Oil Co. of Houston, Texas, sometimes hereinafter referred to as Tide Water, began negotiations with Herbert (who was then petitioner's vice president and is now petitioner's president) looking to the purchase of the entire seven-eighths working interest in the Mason, Perkins, O'Quinn, Bell, Webb, Starr, Roberson, McCord, and Tipps leases. Negotiations relative to the Starr lease were later dropped, but a verbal offer of $1,005,200 in cash and $265,000 payable out of one-third of seven-eighths of the oil was*1108 made to Herbert for the entire seven-eighths working interest in the remaining eight leases.
On February 8, 1934, Herbert, as petitioner's vice president, addressed a letter to Bass & Dillard, and sent a carbon copy thereof to the East Texas Oil Refining Co., sometimes hereinafter referred to as East Texas, the material part of which is as follows:
On Saturday last, February 3rd, the Tide Water offered us $1,270,200.00 for eight leases that we were interested in, of which $1,005,200.00 was cash and $265,000.00 was out of 1/3 of the oil. This offer contemplated the entire 7/8 working *1132 interest in all eight properties and represented approximately 80% cash and 20% oil.
* * *
The total consideration allotted to the Mason lease was $554,795.86 and $278,779.26 to the Perkins.
Reference is made to two contracts under date of August 31, 1931 and November 7, 1931, covering the above referred to Mason and Perkins leases, in which the East Texas Oil Refng. Company and you had the right of 15-days refusal to purchase our interest at similar price and terms offered, or to join us in the sale. In accordance, the writer immediately got in contact with Mr. Burford of the*1109 East Texas and yesterday was advised by Mr. Burford that East Texas thought (but would not definitely contract to do so) that they would rather purchase our interest than sell. The East Texas indicated also that they would either permit you to exercise your option to purchase your pro-rata part of our interest in those two leases; or permit you to remain in with them holding your present interest; or to purchase your interest at the same terms and figures as you would receive under the Tide Water sale. * * *
* * *
Of course, in the event you elected to stay in or elected to purchase your proportionate part of the interest we are selling, there would be no commission due and payable.
This is not a definite firm offer, insofar as the East Texas is concerned, but the writer would like to have you indicate to both the East Texas and him, what your probable action would be in the matter.
Very truly yours,
FALCON COMPANY
[Signed] By JOHN W. HERBERT
Vice-President.
Upon receipt of the above mentioned carbon copy of the letter dated February 8, 1934, Freeman W. Burford, the then president of East Texas, prepared a memorandum for distribution to his office force and*1110 attorneys, which read as follows:
New Falcon File. Confidential. Subject: Falcon Option. To blank from F. W. Burford, Dallas. February 15, 1934.
Carbon copy of their letter to Bass and Dillard probably constitutes notice to us. Therefore, we must notify Falcon and Company with reference our intention to buy or sell on the O'Quinn, Bell, Roberson and Webb Leases by noon, on February 23rd. If our reply should be delayed to the last day or two, we must notify Falcon Company at Fort Worth in writing that we elect to purchase their half interest in the above four leases, at the price offered by Tidewater, as reflected in the statement submitted to us by Mr. Herbert. This letter should be delivered to Falcon Company's Fort Worth office by Western Union messenger with request that receipt be returned to us. At the same time, we must notify them by separate letter that we do not choose to buy their interest in the Mason and Perkins Leases, or to sell our interest in these leases. No comment need be made in either of these letters with reference to the McCord and Tipps' Leases.
Copy of this memoranda is being passed to Scott, and to Mr. Chizum and Mr. Estes at Fort Worth, with*1111 the thought that we will not overlook proper disposition of this matter in the event any of us are absent from the city, or should forget the date.
*1133 In this connection, it will be well to endeavor to get more formal notice from the Falcon Company in the meantime, which I will undertake to do in telephone conversation with Mr. Herbert.
On February 16, 1934, Herbert, as petitioner's vice president, addressed a letter to East Texas, attention of Burford, the material part of which is as follows:
Pursuant to and in confirmation of our 'phone conversation of yesterday, this is to advise you that the Tide Water Oil Company has reaffirmed their bid covering eight properties in which they are interested in purchasing the 100% working interest; being the following leases in Rusk County, Texas
| T. O. Mason | Clara Webb |
| A. K. Perkins | H. L. Roberson |
| Jno. Bell | W. H. McCord |
| Martha O'Quinn | P. S. Tipps |
In view of the fact of an increase in allowable amounting to 7 1/2 barrels, they raised their bid $6,928.81 and suggested a different distribution based on relation of allowables. The increase in their bid did not contemplate any increase in cash payment but*1112 did increase the oil payment to the extent of $6,928.81 * * *.
The offer amounts to $1,005,200.00 in cash and $271,928.81 out of 1/3 of the oil. * * *
As indicated, their offer amounts to $635,856.04 cash and $172,013.08 in oil for our interest in the entire properties; $94,723.36 cash for Bass and Dillard's, with $25,624.78 out of 1/3 of the oil; and $274,620.60 in cash and $74,290.95 out of 1/3 of the oil for your interest.
* * *
We would thank you to advise us just as soon as possible whether or not you elect to join us in this sale or whether you will elect to purchase our interest in all of the leases in which the Tide Water has made an offer.
Very truly yours,
FALCON COMPANY,
[Signed] By JOHN W. HERBERT,
Vice-President.
P.S. We have just this moment received word from Bass and Dillard that they might desire to join you in purchasing their proportionate part of our interest in the Mason and Perkins leases. You can, therefore, be guided accordingly.
On February 19, 1934, Herbert, on the stationery of the Herbert Oil Co., wrote a letter to Tide Water informing that company that if Burford exercised his option to purchase, "why then in that event*1113 we will not be in a position to negotiate further with you. I will advise you as to the definite outcome as soon as I shall be advised."
After several conferences, petitioner's directors definitely decided that petitioner would not sell the properties in question to Tide Water or any one else. One of the principal reasons for arriving at this decision was the large amount of taxes which the corporation would have to pay if it made the sale of the leases.
*1134 Under date of February 23, 1934, at a meeting of petitioner's stockholders held at 1 p.m. in its office at Fort Worth, Texas, a resolution was unanimously approved that there should be distributed to petitioner's stockholders, as a partial liquidating dividend, all of petitioner's interests in the eight oil leases in question, namely, the Mason Perkins, O'Quinn, Bell, Webb, Roberson, McCord, and Tipps leases, estimated to constitute 60 percent of petitioner's assets, which resolution further provided for the execution and delivery of conveyances of the leases to petitioner's stockholders, who should thereupon surrender for cancellation 60 percent of petitioner's stock, and the officers of petitioner were authorized*1114 and directed to execute and deliver such conveyances as were required to effectuate such distribution and to operate as a conveyance of the leases to petitioner's stockholders.
Under date of February 23, 1934, at a meeting of the directors of petitioner held at 2 p.m., a resolution was unanimously approved declaring a partial liquidating dividend consisting of petitioner's interests in the eight leases in question, and the resolution fully authorized petitioner's officers to execute and deliver proper and sufficient conveyances of the properties in question to petitioner's stockholders.
Under date of February 23, 1934, and in pursuance of the authority given by prior resolutions, the officers of petitioner, previously authorized so to do, executed and delivered to petitioner's stockholders an instrument of conveyance bearing date of February 23, 1934, whereby there were conveyed all of the rights and titles of petitioner in the eight leases in question in the proportion of one-third thereof to Venita S. Weaver, one-sixth to Golston, one-third to the Herbert Oil Co. of Texas, and one-sixth to the First National Bank of Fort Worth, trustee. Such conveyance was in the customary*1115 form, and its recitals were such as to thereby assign and convey unto the assignees all of the right, title, and estate theretofore held by petitioner in the leasehold estates in question, without reservation, limitation, or condition of any nature, so as to vest in the assignees absolute, unconditional, and unqualified title to an ownership of the property so conveyed. The instrument of conveyance was duly filed for record in the office of the county clerk of Rusk County, Texas, on March 1, 1934, and was duly recorded on March 14, 1934.
On the same day, February 23, 1934, petitioner's stockholders turned in to petitioner all of their capital stock of the par value of $12,100 and received new certificates of the total par value of $4,840. This was a reduction of capital stock in the percentage of 60 percent of the original amount. Rowe was asked by Herbert to prepare the necessary affidavit required by article 1332 of the Revised *1135 Civil Statutes of Texas, but, due to an oversight on the part of Rowe, who was engaged in other matters, the affidavit was not filed with the Secretary of State until January 10, 1939. All dividends declared by petitioner after February 23, 1934, were*1116 based upon an outstanding capital stock of $4,840.
Sometime in the afternoon of February 23, 1934, after the meetings of petitioner's stockholders and directors had been held, and after the leases had been disttibuted to petitioner's stockholders, Burford delivered to Herbert in the office of the East Texas Oil Refining Co. in Dallas, Texas, a letter addressed to petitioner's stockholders, which is as follows:
February 23, 1934
Herbert Oil Company,
Mr. Roy D. Golston,
Mrs. Venita S. Weaver,
First National Bank, Trustees,
915 Neil P. Anderson Building,
Fort Worth, Texas.
Gentlemen:
Referring to your communication directed to Bass and Dillard, dated February 8, 1934, and to your letter of February 16, 1934, to this company, and to memorandum submitted to us yesterday by Mr. Herbert, copy of which is enclosed herewith and is made a part and parcel of this letter, we hereby elect to exercise our option to purchase your one-half interest in the Bell, O'Quinn, Webb, and Roberson leases as described in our operating contract with R. M. Weaver, Jr., dated May 16, 1931.
We further elect to exercise our right to purchase, as provided in operating contract with R. M. *1117 Weaver, Jr., dated August 31, 1931, to your twenty-three-thirty-fifths interest in the Mason and Perkins leases. In addition to these properties, we accept your offer submitted to purchase your McCord and Tipps leases.
It is our understanding that the Tidewater Oil Company has offered to pay you for the above properties $807,869.12, of which $635,856.04 will be cash, and the balance of $172,013.08 will be payable out of one-third of the oil, if, when and as produced from your respective interest in each lease you are selling.
In the fourth paragraph of your memorandum yesterday, you refer to certain equipment on hand on the Mason lease not included in this consideration referred to above. In telephone conversation today, we have your assurance that any payment we make for equipment on that lease, inventory of which will be taken jointly, will not exceed $1,000.
Referring to the fifth paragraph of your memorandum with reference to a four inch pipe line we now own jointly with you connecting the O'Quinn and Bell leases, you advise that your share of the cost of this line was $1,094.14.
In reviewing the next to the last paragraph of your memorandum with reference to the*1118 Starr lease which we now own jointly on a 50-50 basis, you advise that your cost of this lease does not exceed $121.15, and that whatever one-half of the development expense for the well we have drilled and equipped on this lease amounts to, those charges will be cancelled in consideration of the assignment of your interest to us.
It is contemplated that you will be prepared to enter into a formal contract covering this sale and purchase within the next few days, and it is our understanding *1136 that you are having that contract prepared for submission to us, and that we shall have fifteen days from date of execution of this contract to examine titles and make the cash payment referred to above. It is understood that we are in nowise responsible for paying or participating in the payment of any commissions in connection with the purchases herein outlined.
Very truly yours,
EAST TEXAS OIL REFINING CO.
[Signed] F. W. BURFORD, President.
The memorandum referred to in the preceding letter of February 23, 1934, is as follows:
MEMORANDUM
Sale contract to be made between Venita S. Weaver, Roy D. Golston, Herbert Oil Company, and First National Bank - Trustees, *1119 parties of the first part, and East Texas Oil Refining Company, parties of the second part.
Cash consideration for first parties' interest $635,856.04, first parties to retain a one-third interest or title to the oil in place until they have received $172,013.08 out of said one-third of the oil in place. Each lease to pay only its part of oil payment.
Properties to be sold are to include Mason, Perkins, Bell, O'Quinn, Roberson, Webb, McCord, and Tipps, and which include eight standardized wells and two partially so.
There is to be included the interest of first parties in operating equipment on all of said leases, including such material and equipment as is actually installed and in daily use in the operation of said leases. There is excluded, however, any extra production equipment and all material and equipment on said leases, owned by first parties alone, or jointly with second party, which is not installed, or in actual use. Any equipment which has been ordered or installed, but not billed or paid for, is to be paid for extra by second party.
Second party agrees to purchase Falcon Company's interest in O'Quinn-Bell pipe line and pay therefor its cost to Falcon Company.
*1120 Second party is to make payment of all taxes for the year 1934, but the pro rata share of first parties, however, is to be deductible from the amount due first parties for their part of oil run during the months of October, or November, or December.
No production tax to be deducted from oil payments.
The effective date of sale shall be March 1st, 1934, and the cash to be paid within fifteen days from the signing of contract and to bear 5% interest on cash consideration from March 1st to the end of the fifteen-day period. Conveyances to be delivered when cash payment made.
First parties are to receive payment for their part of oil in stock as of 7:00 A.M., March 1st, 1934.
Prepaid insurance to be settled for and transferred on a pro rata basis.
Starr lease also to be assigned for an additional consideration equal to Falcon Company's investment in said lease and cancellation by second party of Falcon Company's liability for unpaid charges against said lease.
First parties to continue operation of Mason, Perkins, McCord and Tipps leases until cash consideration has been paid and to be reimbursed for operating expenses thereon from March 1st, 1934 to date of payment.
*1121 Burford addressed the letter of February 23, 1934, to petitioner's stockholders upon the request of Herbert.
*1137 Under date of March 2, 1934, Venita S. Weaver, Roy D. Golston, the Herbert Oil Co., and the First National Bank of Fort Worth, trustee, designated as sellers, and the East Texas Oil Refining Co., designated as buyer, made and entered into a contract in writing whereby the parties called sellers bound and obligated themselves (each for himself and only as to his interest) to sell and convey unto the party called buyer, effective as of March 1, 1934, at 7 o'clock a.m., for a cash consideration of $635,856.04 payable at the time of the delivery of conveyance and assignment and a further consideration of $172,013.08 payable out of designated fractions of the oil as to each separate lease if, as, and when produced, the eight leases in question then owned by the sellers and theretofore acquired by them in the manner hereinabove set out. The formal assignment and conveyance of the eight leases in question was executed by the above named sellers on March 15, 1934.
The consideration paid by the East Texas Oil Refining Co. was paid separately to each of the grantors*1122 for the interest conveyed by each, as was also the reserved oil payment, and no part of the consideration was paid to petitioner or in any manner utilized by or for petitioner.
The East Texas Refining Co., heretofore mentioned, is a pipeline company. It purchased and ran all of the oil produced on the leases in question. The East Texas Oil Refining Co. is an operating company. At the time the leases in question were assigned to petitioner's stockholders on February 23, 1934, no division orders were executed in favor of petitioner's stockholders. On or about March 12, 1934, the East Texas Refining Co. mailed checks payable to the order of "Falcon Company" in connection with each of the leases in question. Printed on the face of each check was this statement: "For proceeds of all oil run to and including February 28, 1934, as shown by accompanying statement in accordance with terms of Division Order." That part of the proceeds thus received by petitioner which represented payment for oil runs from February 23 to February 28, 1934, inclusive, on the leases in question was credited on petitioner's books to the accouns of its stockholders as having been collected for their account. *1123 Between February 27 and April 2, 1934, John R. Scott, as secretary of the East Texas Oil Refining Co., addressed five letters to "Falcon Company." In the first letter Scott asked petitioner for the abstracts of title covering six of the eight leases in question. In the second letter Scott said, "Title examination of properties involved in your transaction with us have not yet been completed" and requested certain tax receipts for four of the leases. The third letter read in part as follows:
Regarding curative work on leases involved in our transaction with you, it is noted from recent supplemental abstrats of title that you have conveyed *1138 your interest in said leases to certain individuals supposedly comprising the owners of Falcon Company.
A requirement will be made that papers evidencing the meetings and voting of the stockholders be furnished showing their written consent, etc., to the liquidation of the Company, together with papers evidencing the meetings of the Board of Directors of your Company and the Resolutions of the Board authorizing the sale of the propertis to the individuals and placing the necessary powers and authority in the officers or the officials*1124 of the Company to make the conveyances.
The fourth letter returned to petitioner certain papers "in connection with your recent transaction with us * * *." The fifth letter commenced: "Regarding our recent transaction with you, in which we acquired your interest in several leases in Rusk County, Texas", and requested certain original instruments pertaining to titles.
Between March 21 and May 21, 1934, five letters written by representatives of petitioner were addressed to the East Texas Oil Refining Co. The first letter concerned certain insurance policies in connection with the Mason and Perkins leases. The second letter, dated April 6, was as follows:
We have not been receiving copies of gauge reports showing production for the Mason, Perkins, Tipps and McCord leases.
We shall appreciate your forwarding these to us, so that we will have a record of this production. Thanking you in advance, we are * * *.
The third letter was in regard to certain statements covering expenditures made in connection with the leases in question during March, for which petitioner claimed the East Texas Oil Refining Co. was obligated. The fourth letter requested a reply to the letter written*1125 on April 6. The fifth letter concerned certain cement which Herbert said "did not go in with the trade * * *."
If petitioner is taxable on the profit realized on the sale of the leases in question, it is entitled to deduct as cost the amount of $97,001.70 instead of $64,513.18 allowed by the respondent, or an additional cost of $32,488.52 over and above the amount allowed in the deficiency notice.
The respondent determined that the sale of the eight leases in question was a sale by petitioner rather than petitioner's stockholders, and that the profits from the sale were petitioner's income.
OPINION.
BLACK: The issue to be decided is whether the sale of the eight oil and gas leases in question to the East Texas Oil Refining Co. was a sale by petitioner, or whether the sale was made by petitioner's stockholders for their own account.
Petitioner claims that the transactions, as intended by the parties and as actually recorded by the minutes of the corporation and by *1139 the documentary evidence which evidences the transactions, show that the sale was made by the stockholders after they became the owners of the leases in their own right and that the profit, if any, *1126 is taxable to the stockholders and not to petitioner. It relies chiefly upon .
The respondent contends that the sale was made by the corporation, or if not by the corporation itself, then by its stockholders as agents for the corporation, and cites the case of , as a case almost exactly in point.
We think petitioner must be sustained, on authority of the Chisholm case. See also , and . In the Chisholm case, the facts were briefly as follows: Taxpayers (George and Harry Chisholm) each owned 300 shares of the Houde Engineering Corporation. On September 26, 1928, taxpayers and certain other stockholders of Houde for a valuable consideration gave Krause & Co. the right for a period of 30 days to purchase all the stock of Houde for $4,000,000 in cash. On October 11, 1928, taxpayers were advised by letter from Krause & Co. "that we elect to exercise our option as of this date * * *." On October 20, 1928, the taxpayers, the two Chisholm brothers, *1127 executed an agreement of partnership between themselves, to commence on October 22, 1928, and continue for ten years. The capital contribution of each partner was stated as 300 shares of Houde stock. The assignments of the stock to the partnership were made expressly subject to the option. On October 24, 1928, the partnership received payment for the stock. The partnership remained in existence and did not distribute any of the proceeds to the partners. On these facts the Board decided for the Commissioner but was reversed by the Second Circuit, and the Supreme Court denied certiorari, .
In the instant case a brief resume of the facts shows that the petitioner, Falcon Oil Co., was the one-half owner of a seven-eights working interest in four certain oil and gas leases in which East Texas was the owner of the other one-half working interest. Petitioner was the part owner of two other leases in which a partnership by the name of Bass & Dillard owned an interest and East Texas also owned an interest. Petitioner was also the owner of a seven-eighths working interest in two other leases in which no one else held any interest except the owner of the one-eighth*1128 overriding royalty.
Petitioner on February 3, 1934, received an offer from the Tide Water Oil Co. to purchase these eight leases for a consideration of $1,005,200 in cash and $265,000 to be paid out of oil If and when produced from the leases. This offer included not only petitioner's interest in the leases but also the interests of Bass & Dillard and East Texas.
*1140 On February 8, 1934, this offer was submitted by petitioner's vice president, Herbert, to Bass & Dillard and East Texas to find out whether they wanted to join petitioner in a sale or to elect to purchase under certain options contained in prior agreements. The nature of these options is fully set out in our findings of fact. In pursuance of giving further consideration to Tide Water's offer to purchase, petitioner's directors and stockholders held conferences at petitioner's office in Fort Worth, Texas, at one of which they received report of tax counsel to the effect that a large tax would be due the Federal Government of petitioner made a sale to Tide Water. After considerable discussion these directors and stockholders definitely decided that petitioner would not sell to Tide Water, but instead would*1129 distribute in liquidation to its stockholders its interest in the eight leases in question. It was estimated that petitioner's interest in the eight leases in question constituted 60 percent of its total assets and that 60 percent of each stockholder's stockholdings should be turned in for cancellation and retirement in consideration for the liquidating dividend in question. This plan was carried out in the manner agreed upon, which is detailed in our findings of fact. Petitioner is still in existence and active in business, but with a capital stock reduced to 40 percent of what it was prior to the liquidating dividend in question. Petitioner has declared several cash dividends since that time, always on the basis of its reduced capital stock.
After the distribution by petitioner to its stockholders of its interest in the eight leases in question, these stockholders, through Herbert, notified East Texas at its office in Dallas, Texas, of what had been done. Herbert also informed East Texas that the four parties to whom the leases had been assigned by the corporation were willing to sell to East Texas for the same consideration offered by Tide Water. Thereupon, Freeman W. Burford, *1130 president of East Texas, addressed an acceptance of this offer to the four stockholders who had received the leases in liquidation, agreeing to purchase the leases at the same price previously offered by Tide Water. This acceptance was conditioned upon the parties entering into a formal contract of purchase and sale, satisfactory to all parties.
The evidence further shows that immediately thereafter the attorneys representing the four stockholders who had received the leases in liquidation and attorneys representing East Texas were set to work to draw up the required contract of purchase and sale. After consultation between the attorneys extending over a period of several days, the contract was drawn and signed by all parties thereto on March 2, 1934.
On March 15, 1934, the formal assignments and conveyances of the eight leases in question were executed by Venita S. Weaver, Roy D. *1141 Golston, the Herbert Oil Co., and the First National Bank of Fort Worth, Texas, as trustee, as sellers, to East Texas, as purchaser.
Each seller received a separate check payable to him for his part of the consideration and deposited it to his own bank account and never in any way*1131 turned it over to petitioner, or used it for petitioner's benefit. Under these circumstances we see no reason to hold that the sale was made by petitioner and the profits therefrom taxed to it. On the contrary, we think that under authority of ,, and , we should, and do, hold that the sale was not made by petitioner but was made by the four named parties to whom the leases were distributed in liquidation, and the profits resulting from the sale are taxable to them and not to the petitioner.
As has already been stated, the Commissioner urges , as the case most nearly in point to the facts of the instant case. In that case, the taxpayer was an Ohio corporation. All its stock was owned by two Nace brothers. In 1921 he brothers transferred to the corporation as paid-in capital or surplus a 99-year lease, renewable forever on Inlot #49 , which lease carried with it an option to purchase the fee for $55,000 upon 60 days' notice. On August 26, 1926, the Nace Realty Co., granted to the Postmaster General*1132 of the United States an option to purchase prior to December 1, 1926, the fee simple to Inlot #491 for $150,000, which option the Postmaster General assigned to Jacob Kulp. On November 24, 1926, the corporation joined in a four-party agreement with Kulp as purchaser, Harvey Cashott, who owned property adjoining Inlot #491, as a vendor, and a bank as trustee. Under this agreement the Nace Realty Co. and Cashott agreed to sell their respective properties to Kulp, each at the price of $150,000 cash, to be paid upon delivery of proper deed. Conveyances were to be made within 60 days, and unrestricted possession given Kulp immediately. Kulp deposited $30,000 with the bank, to be returned to him should the vendors fail to carry out the transaction. On January 3, 1927, but effective from January 7, 1927, the lease on Inlot #491 was reassigned by the Nace Realty Co. to the Nace brothers for a consideration of $12,061.36. On January 7, 1927, the Nace brothers delivered to Kulp an assignment of the lease to Inlot #491, and received Kulp's check for $95,000, $12,061.35 of which was paid to the corporation. Kulp in a separate transaction on December 16, 1926, and January 7, 1927, acquired*1133 the fee to lot #491 from the heirs of the original grantor for $55,000. On these facts we held that the corporation had already entered into a binding contract of sale prior to the assignment by it of the lease to the two Nace brothers, and that, in consummating the sale which the corporation was already legally bound itself *1142 by contract to make, the Nace brothers were merely acting as agents for the corporation, the Nace Realty Co. Other cases cited by respondent: ; ; ; ; ; ; and , are distinguishable on similar grounds.
The court in , distinguishes this same line of cases on the same ground as we have here given. So did the Board in *1134
Respondent in his brief lays considerable stress on several letters written by East Texas to petitioner and vice versa after the date of the consummation of the sale, which were introduced in evidence on behalf of the respondent. Respondent calls attention to the fact that references in these letters were to "your transaction with us", "your recent transaction with us", "regarding our recent transaction with you", etc. From these expressions in the letters, respondent argues that the parties themselves considered that the transaction was between petitioner and East Texas and that the stockholders never became the owners of the leases.
We admitted these letters in evidence because we thought they were relevant to the issue to be decided. We still think so. We do not think, however, that the expressions in these letters are sufficient to overcome the documentary evidence in the record which shows that the sale was not made by petitioner and that it was not intended that petitioner should make the sale.
Herbert, vice president of petitioner, testified that all the letters written on behalf of the stockholders after the sale had*1135 been consummated were sent in the name of the Falcon Co. merely for convenience, because they all had their offices together in the same building, and that the correspondence had theretofore been carried on in the name of the Falcon Co. and it was continued in this manner for the convenience of the parties as to the few items that had yet to come up for consideration in one way or another.
For reasons already stated, we sustain petitioner in the only issue left for our decision, all other issues having been either abandoned or agreed upon.
Reviewed by the Board.
Decision will be entered under Rule 50.
TURNER dissents.