
    THE MONTANA POWER COMPANY v. THE UNITED STATES
    [No. 98-56.
    Decided April 8, 1959]
    
      
      Mr. Karl W. KoTbe, Jr., for plaintiff. Mr. E. Roy Gilpin was on the briefs.
    
      Mr. John A. Rees, with whom was Mr. Assistant Attorney General Charles K. Rice, for defendant. Messrs. James P. Garland and Philip R. Miller were on the brief.
   Whitaker. Judge,

delivered the opinion of the court:

This suit was originally filed by the American Power & Light Company, as transferee in dissolution of Glacier Production Company, the taxpayer here involved, to recover Federal income and excess profits taxes for the period January 1,1944, to December 14,1944. On June 18,1958, by leave of court, the Montana Power Company, the assignee of this claim, was substituted as party plaintiff. (Hereinafter American Power & Light Company will be referred to as American; Montana Power Company, as Montana; Glacier Production Company, as Glacier; and Inland Empire Ee-fineries, as Inland.)

The legal question presented is the deduction to which plaintiff is entitled, either as a loss or as an expense, if any at all, as a result of a settlement, effected in 1944, between Glacier and Inland, and the basis for the computation of that deduction.

Glacier, prior to its dissolution in 1944, was engaged in the producing and refining of natural gas and crude oil in Montana and adjacent areas. All of Glacier’s stock was owned by Montana, and in turn 93.73 percent of the voting stock of Montana was owned by American. Among other assets, Glacier owned 32,894 shares of stock in Inland, an independent company, which owned and operated a gasoline refinery at Spokane, Washington. Glacier also had a ten-year contract with Inland, entered into in 1938, in which Glacier promised to supply Inland with all its crude oil requirements.

Prior to December 1943 the Securities and Exchange Commission, acting under the authority of the Public Utility Act of 1935, 49 Stat. 803, ordered the dissolution of American Power and Light Company, a holding company. As a step toward complying with this order, Montana in November 1943 entered into an agreement with American, its parent, subject to the approval of the Securities and Exchange Commission, to sell to American all the outstanding stock of Glacier and $3,690,000 principal amount of Glacier’s ten-year 6 percent debentures. In return for this transfer, Montana was to receive $10,000,000 from American and, after Glacier’s dissolution, all of Glacier’s natural gas-producing properties. At the same time American entered into a contract with the Union Oil Company of California, an independent oil corporation, under which American agreed to sell Glacier’s oil production properties and the Inland stock, in return for which Union was to pay American $10,000,000.

In December 1943, American, Montana and Glacier instituted proceedings in the Securities and Exchange Commission seeking approval of this proposed transaction. Inland objected to this plan and intervened in the proceeding in an effort to defeat it. Inland at this time was in direct competition with Union as an oil refiner. By the sale of Glacier’s oil properties to Union, Inland would lose its basic source of supply of crude oil necessary for its business and the advantage of its long-term requirements contract with Glacier. This, and the undesirability of having approximately one-third of its stock in the hands of its competitor, was the basis of Inland’s objection to American’s plan.

The trial examiner of the Securities and Exchange Commission disapproved the proposed sale to Union on the ground that it was not fair and equitable to the persons affected, i.e., to Inland and its stockholders, other than Glacier. To satisfy Inland, an offer of settlement was made by Glacier, whereby Glacier would surrender to Inland the 32,894 shares of Inland stock which it then held and pay it the amount of $120,000. This settlement was accepted by Inland in settlement of all its claims against Glacier. This agreement was approved by the Securities and Exchange Commission in an opinion dated December 1,1944, and was duly carried out by the parties involved.

In its final income tax return for the period of January 1, 1944, to December 14, 1944, Glacier claimed a deduction of $448,940, representing the cash payment of $120,000 to Inland and $328,940, the alleged cost to Glacier of the 32,894 shares of Inland stock transferred by it to Inland. Upon audit a revenue agent allowed the deduction of the entire amount; but, upon reaudit by another revenue agent, only $220,000 was allowed, which represented the $120,000 cash payment to Inland and $100,000, which the Commissioner of Internal Revenue determined was the value of the Inland stock on the date ox its surrender by Glacier.

Plaintiff claims the deduction of the entire amount as a loss under section 23(f). In the alternative, it claims this amount as an ordinary and necessary business expense under section 23(a) (1) (A).

We can see no basis for the claim that the amount paid is deductible as a loss under section 23 (f). There was but one reason for the surrender to Inland of its stock held by Glacier: this was Inland’s protest against the transfer to its competitor of Glacier’s oil-producing properties, making it impossible for it to fulfill its obligations under its 10-year contract to supply Inland with crude oil, and its protest against the transfer to its competitor, at the same time, of 32,894 shares of its stock. This protest held up the whole plan. In order to eliminate this protest, and in order to be absolved of liability on its 10-year contract, Glacier surrendered Inland’s stock to it and paid it the cash consideration of $120,000.

The stock surrendered and cash paid were amounts spent to be relieved of an obligation and to effectuate a plan the taxpayer thought advantageous to it under the existing conditions. They are deductible, not as a loss, but as a business expense. E.g., C. Ludwig Baumann & Co. v. Marcelle, 203 F. 2d 459.

The rule for determining the amount of such a deduction with respect to the stock is to take the fair market value of the thing transferred to accomplish the taxpayer’s purposes, that is to say, in this case, the fair market value at the time of the transfer of the Inland stock. The Commissioner of Internal Revenue assigned a value to it of $100,000. Whether this is the right figure will be determined upon further proceedings.

Glacier is also entitled to a capital loss, in addition to the amount allowable as an expense. In the agreed statement of facts it is stated that Glacier had received these shares of stock in payment for crude oil it had delivered to Inland at an agreed value of $328,940. If this agreed value was its true value, and if $100,000 was the value of the stock at the time it was surrendered to Inland, then Glacier has sustained a capital loss of $228,940.

Had Glacier and Inland agreed on a figure to be paid in cash and, to raise the cash, Glacier had sold its Inland stock to a third party, plainly it would have been entitled to deduct as a capital loss the difference between the cost of acquisition and its selling price. Here, instead of selling the stock and paying cash to Inland, it transferred the stock to it directly. In either case it is entitled to a capital loss measured by the difference in the cost of acquisition and the value at the time of the transfer.

It results, therefore, that plaintiff is entitled to deduct, in addition to the $120,000 payment, the fair market value of the Inland stock at the time it was surrendered, as a business expense, and it also is entitled to deduct the difference between the cost of acquisition of this stock and its fair market value on the surrender date, as a capital loss. Judgment will be entered to this effect. Since there is a dispute between the parties as to both the fair market value and the cost of acquisition, it is necessary to refer the case to a commissioner of this court, pursuant to Rule 38(c), to determine these values.

It is so ordered.

Laramore, Judge; Madden, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the stipulation of the parties, and the briefs and argument of counsel, makes findings of fact as follows:

1. The Montana Power Company, hereinafter called Montana, pursuant to provisions in Rule 25(c), is substituted for the original parties who filed the petition in this cause on February 23, 1956, and now is the real party in interest. Montana is a corporation organized and existing under the laws of the State of New Jersey, with its principal place of business and office in Butte, Montana, engaged primarily in the electric light and power business and also in the sale of natural gas.

2. American Power & Light Company, hereinafter called American, was a corporation organized and existing under the laws of the State of Maine with an office in New York City. It engaged primarily in the business of holding and owning the voting securities of public utility operating companies that were manufacturing, transporting, and selling gas and electrical energy. American owned 98.13% of the voting stock of Montana.

3. Glacier Production Company, hereinafter called Glacier, was a corporation organized and existing under the laws of the State of New Jersey engaged in the business of producing natural gas and oil in the State of Montana, and also in the business of marketing such gas and oil in Montana and in adjacent States. It was a wholly-owned subsidiary of Montana during the period January 1 to December 14,1944.

4. Inland Empire Befineries, Inc., hereinafter called Inland, prior to and during the period January 1 to December 14,1944, was a corporation organized and existing under the laws of the State of Nevada engaged in the business of owning and operating a refinery in Spokane, Washington. From March 15,1940, to December 5,1944,32,894 shares of Inland’s stock were owned and held by Glacier, and this represented 32.42% of Inland’s outstanding capital stock. Glacier acquired this block of stock from Inland in exchange for crude oil at an agreed price of $328,940, representing the par value ■of $10 for each share of said stock. Glacier included in gross income in its income and excess profits tax returns for 1939 and 1940 an aggregate of $328,940, being an amount equivalent to the 32,894 shares of $10 par value stock of Inland received by Glacier in payment of oil.

5. Glacier and Inland had entered into a ten-year contract in 1938 in which Glacier promised to supply Inland with its crude oil requirements up to a stated amount per month. Inland, in turn, promised to take certain minimum amounts per month. Under the terms of the contract, it was not assignable by one party without the consent of the other. This contract, although amended, was in full force at the time of the transaction involved in this case.

6. In December 1948, pursuant to the requirements of the Public Utility Holding Company Act of 1935, and an order of the Securities and Exchange Commission, hereinafter called SEC, requiring the dissolution of American, proceedings were instituted before SEC seeking approval of a proposed sale by Montana to American of all the outstanding stock of Glacier and the sale by American to Union Oil Company of California, hereinafter called Union, of the oil production properties of Glacier and the block of 32,894 shares of Inland stock. American and Montana, under the Public Utility Holding Company Act of 1935, were required to secure approval of the SEC in order to carry out the proposed transactions. The proposed plan of sale and transactions mentioned above included an agreement by American (a) to pay to Montana the sum of $10,000,000 for the stock of Glacier, (b) to transfer to Montana the gas properties of Glacier, and (c) to transfer to Union for the sum of $10,000,000 the oil properties of Glacier and also the 32,894 shares of Inland stock then owned and held by Glacier, and (d) dissolve Glacier.

7. Inland protested the proposed transfer to Union, and sought and was granted permission to intervene and be heard in the SEC proceedings. Union then was an active competitor of Inland in the distribution of refined oil products in Spokane and vicinity. The refinery owned by Inland was dependent for its crude oil supply upon its contract with Glacier, which, in turn, secured, its crude oil from its ownership of producing oil properties in the producing field near Cut Bank, Montana. At the suggestion of SEC that the interested parties attempt to compromise and settle their differences arising from the objections of Inland to the original plan, such settlement was reached as embodied in an agreement with the Inland intervenors, under which Glacier would surrender the block of 32,894 shares of Inland stock to Inland and also pay Inland $120,000 in cash. Inland, in turn, agreed to release all its claims against Glacier.

8. The original agreement between Montana and American was modified so that Montana would sell to American, after the Glacier payment to Inland and transfer of the shares of Inland stock back to Inland, all of the securities of its wholly owned subsidiary, Glacier, to American for $9,900,000 in cash, and the original agreement between American and Union was modified so that all of the oil production properties of Glacier, including the latter’s refinery, would be transferred to Union by American for $9,900,000. The plan originally submitted to SEC, modified by the new agreement, was resubmitted to and approved by SEC on December 1, 1944, without objection from Inland. At that time, SEC formally ordered Glacier to surrender and transfer to Inland the 32,894 shares of Inland stock, and to pay to Inland $120,000 in cash. This was done on December 5, 1944. American acquired from Montana all of the outstanding stock of Glacier on December 14,1944, and Glacier was liquidated by American on December 14,1944.

9. A Federal income and excess profits tax return for Glacier for the period January 1 to December 14, 1944, claimed a deduction from gross income of $448,940, representing the cash payment of $120,000, and the $328,940 cost of the Inland stock transferred on December 5,1944, as stated above. Such claimed deduction was recommended for allowance in full in a revenue agent’s report dated June 9, 1949, but a subsequent report dated April 24, 1950, disallowed $228,940, and only allowed the cash payment of $120,000 and $100,000 stated in said report as the fair market value of the 32,894 shares of Inland stock on December 5,1944. The explanation of the disallowance contained in the agent’s report reads as follows:

Adjustment is made to amount claimed in settlement of claim with Inland Empire Refineries, Inc. Deduction is limited to cash paid and fair market value of 32,894 shares of Inland transferred by taxpayer to Inland.

10. The revenue agent’s recommended disallowance of $228,940 as a deduction on the tax return of Glacier for 1944 was approved by the Commissioner of Internal Revenue who, by reason of such disallowance and another adjustment, timely assessed a deficiency in excess profits tax of $142,233.36, including $108,452.60 as tax, and $33,180.76 as interest, against American as transferee of the assets in liquidation of Glacier. Payment of $142,233.36 was made by American to the Collector of Internal Revenue at Helena, Montana on June 14, 1950. A formal claim for refund timely was filed by American with such Collector for the full amount so paid. This claim was disallowed in full with statutory notice to American on January 12,1955. Such claim now is the property of Montana under an assignment from American that was made under circumstances set forth in a motion filed in this cause on May 29, 1958, and allowed by the Court on June 18,1958.

CONCnUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to deduct the sum of one hundred twenty thousand dollars ($120,000), plus the fair market value of the Inland stock at the time it was surrendered, as a business expense, and it is also entitled to deduct the difference between the cost of acquisition of the Inland stock and its fair market value on the date of surrender as a capital loss. Judgment will be entered to that effect. The amount of recovery computed on this basis will be determined pursuant to Rule 38(c). 
      
       Section 23(f), (26 U.S.C. 1952 ed.) : “Losses ty Corporation. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.”
     
      
       Section 23(a) (1) (A) (26 U.S.C. 1952 ed.) : “In general. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * *
     
      
       On June 22, 1960, the parties entered into a stipulation of dismissal, having previously settled the ease to their mutual satisfaction.
     