
    413 F.2d 548
    FS SERVICES, INC., A DELAWARE CORPORATION, AS SUCCESSOR BY MERGER TO ILLINOIS FARM SUPPLY COMPANY, AN ILLINOIS CORPORATION v. THE UNITED STATES
    [No. 409-64.
    Decided July 16, 1969]
    
      
      Arthur E. Bryan, Jr., attorney of record, for plaintiff. Charles E. Hussey II, Don S. Hamack and McDermott, Will & Emery, of counsel.
    
      J oseph Kovner, with whom was Assistant Attorney General Johrmie M. Walters, for defendant. Philip B. Miller and William Laveriek, of counsel.
    
      Before CoweN, Ohief Judge, LaramoRE, Dureee, Collins, Skelton, and Nichols, Judges.
    
   Per Curiam :

This case was referred to Chief Trial Commissioner Marion T. Bennett with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Buie 57(a). The commissioner has done so in an opinion and report filed on May 28,1968. Exceptions to the commissioner’s opinion, findings and recommended conclusion of law were filed 'by defendant. The case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, 'as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Therefore, plaintiff is entitled to recover and judgment is entered for plaintiff with further proceedings to be held pursuant to Buie 47(c).

OPINION OE COMMISSIONER

Bennett, Ohief Commissioner: This is a suit to recover federal income tax and assessed interest paid for the fiscal year ended August 31, 1957. The suit arises as a result of defendant’s disallowance of a deduction claimed for “['l]'oss on sale of investment acquired to secure source of supply.” Defendant ruled that said deduction constituted a capital loss rather than a deduction from ordinary income. For reasons appearing hereafter, the deduction claimed was proper and plaintiff taxpayer is entitled to judgment.

Plaintiff is successor by merger to Illinois Farm Supply Company (hereinafter referred to as taxpayer or as Illinois), a statewide farm cooperative organization which served as a wholesaler to local member companies. These local cooperatives would purchase goods (principally petroleum products, feed and fertilizer) from taxpayer for resale to their members who were actively engaged in farming. A portion of taxpayer’s earnings were set aside annually for distribution to its local cooperatives in the form of patronage dividends. The local cooperatives likewise distributed patronage dividends to the farmers who dealt with them.

Petroleum was taxpayer’s most important single product, accounting for 60 percent of annual sales and 80 percent of taxpayer’s employees throughout the relevant period. Taxpayer’s market for petroleum products was greatly expanded during and immediately following World War II as many commercial distributors discontinued delivery to individual farms. Since taxpayer concentrated on this rural market, it and its local cooperatives became principal suppliers in the areas abandoned by commercial suppliers.

Taxpayer customarily obtained its petroleum products under annual contracts with large oil companies. These contracts, varying from 1 million to 60 or 70 million gallons each, were negotiated on a calendar-year basis, except that burner fuel contracts were normally negotiated in late summer to cover a September-to-September period.

In early 1947 .taxpayer began to experience a shortage of petroleum products. By July of that year the situation was such that a rationing program was instituted whereby taxpayer limited the amount of gasoline it would supply to each individual local cooperative. A conservation program was also undertaken to encourage consumers to minimize their use of the scarce petroleum products. Throughout 1947 the shortage worsened, and by November taxpayer found itself 13 million gallons short of its minimum estimated requirements of burner fuels. These fuels were unavailable in the open market, as were range heat oil and kerosene. With its total needs projected at 190 million gallons, taxpayer had contracts for only about 100 million gallons of petroleum products by the winter of 1947-48.

The results of the shortage were especially severe during that winter. On occasion taxpayer found itself unable to supply its local cooperatives with fuel oil, and some farmers were consequently left with unheated homes. Under these circumstances taxpayer considered itself to be faced with possible destruction; if enough local cooperatives felt constrained to sever their relations with taxpayer permanently in order to seek supply elsewhere (three had done so), taxpayer’s operation could be ruined. Nor would the problem automatically subside with, tlie coming of warm weather, were equally dependent upon taxpayer for gasoline to be used in their planting and harvesting seasons.

In the face of these potentially destructive consequences, taxpayer was forced to seek solutions to its supply problems. The initial step was to authorize the temporary release of the local cooperatives from their exclusive purchase agreements, thus freeing them to purchase elsewhere if they could for the duration of the emergency. This measure was intended to develop a sense of participation in the solution of a common problem. Meanwhile, taxpayer occasionally purchased small quantities of petroleum products in the open market at premium prices. This, however, was not a satisfactory solution, for this premium could not be passed on to the consumer via an increase in the retail price.

Throughout its history taxpayer had traditionally opposed the acquisition of petroleum refining and production facilities. Although production was undertaken in other product areas, such as feed and fertilizer, the much larger investment required to purchase a refinery was considered prohibitive. On two occasions taxpayer had rejected opportunities to purchase refineries, the last occurring in January 1947. Nevertheless, the severity of the situation facing the taxpayer during the shortage caused it to reconsider this no-refinery policy and to include possible acquisition of refining facilities among the alternatives considered.

Discussions and negotiations were held in the fall and winter months of 1947 regarding possible purchase of various refineries. Some were disregarded on grounds that they were unable to direct sufficient proportions of their output to the immediate use of taxpayer. Of the refineries considered, two were found to be suited to both the needs and the economic capacity of the taxpayer. These were Pana Defining Company (hereinafter referred to as Pana) of Pana, Illinois, and Premier Oil and Defining Company of Texas (hereinafter referred to as Premier of Texas).

After approximately 1 month of negotiations taxpayer purchased all the stock of Pana, together with the assets of a related concern (Louden Pipeline Company) for a price of $1,200,000. Pana was a small refinery located within taxpayer’s marketing area, with, an annual output of approximately 35 million gallons of finished products. (Pana is not directly involved in the present litigation.)

While the Pana negotiations were in progress, taxpayer was also engaged in discussions aimed at acquisition of other refining facilities. In this undertaking, taxpayer combined its efforts with those of two Minnesota cooperatives which were likewise adversely affected by the petroleum shortage. These other cooperatives were Midland Cooperative Wholesale, Inc. (hereinafter called Midland) and Farmers Union Central Exchange (hereinafter called Farmers Union). Together the three cooperatives were negotiating for the purchase of a group of refining properties (hereinafter referred to collectively as the Premier Properties). These properties consisted of the stock of Premier of Texas, the assets of Baird Refining Company (hereinafter called Baird), and the assets of Octane Refining Company (hereinafter called Octane). The principal assets of these companies were five refineries, of which four were then operative, plus related assets (mainly pipeline systems). The refineries had an estimated annual output of 180 million gallons of the types of finished products useful to taxpayer’s patrons. The taxpayer expected to receive roughly one-third of this amount if the purchase were consummated.

Upon investigation by officers of taxpayer and the other cooperatives, it became apparent that the Premier Properties were not an attractive investment by purely objective standards. The refineries were small and poorly located in relation to the market area served by the cooperatives. Furthermore, they were not positioned so as to use pipeline or water transport, but were completely dependent upon rail transportation, a less economical medium.

Even more significant from the viewpoint of a potential investor, the refineries were technologically obsolete. Their equipment was of a pre-World War II variety which was not able to produce a product of competitive quality under normal market conditions. While the shortage lasted, petroleum products were in such demand that even lower quality products were readily salable. However, when the supply began to balance this surge in demand it seemed likely that only higher quality products, i.e., products from more modern refineries, would be able to compete effectively.

Nevertheless, the cooperatives considered purchase of the Premier Properties to be an appropriate step under the circumstances, because of their value as a source of supply during a period when alternative sources were virtually nonexistent. These properties controlled large crude oil reserves and, so long as the shortage continued, they were capable of converting the crude into marketable finished products. At this time the prevailing opinion in the oil industry was that the shortage would continue for 2 to 3 more years. Thus, the cooperatives had two alternatives: (1) purchase the Premier Properties to assure a source of supply, or (2) continue buying petroleum at premium prices and absorbing the resultant loss while seeking another solution. Since the shortage seemed certain to continue for several more years, they chose the former.

The purchase took place in July 1948. A new cooperative, Premier Petroleum Company (hereinafter referred to as Premier Petroleum), was formed to acquire and hold the Premier Properties. The three cooperatives subscribed for and purchased stock in Premier Petroleum as follows:

On or about July 26, 1948, Premier Petroleum borrowed $3,684,300 from the Central Bank for Cooperatives. Shortly thereafter the purchase was completed, with Premier Petroleum paying $7,500,000 for all the stock of Premier of Texas and $1,292,274 for the related properties of Baird and Octane.

Upon the insistence of the sellers, the contract of sale contained provisions that (1) Premier of Texas would be operated as a going concern for at least 3 years, and (2) during this period the pipeline systems of Premier of Texas would remain in that corporation. These requirements were deemed necessary to resolve a tax problem of the sellers. Immediately after the sale, all of the operative refineries of Premier of Texas were distributed to Premier Petroleum as a dividend in kind. The loan from the Central Bank for Cooperatives was secured by a first mortgage on the transferred refineries and a pledge of all the common stock of Premier of Texas.

Not long thereafter the shortage unexpectedly began to ease. As early as August 1948 the taxpayer began to experience a slight oversupply of petroleum products. Meanwhile, gasoline was beginning to become available at nonpremium prices on the open market and it soon became apparent that burner fuels were becoming more abundant. The winter of 1948-49 was much less severe than the one preceding, so that the demand for burner fuels was lower and prices thereon dropped accordingly. In the spring of 1949 gasoline prices similarly declined. At first these developments were considered temporary, but by the summer of 1949 the shortage period appeared to be over.

As anticipated, Premier Petroleum began to incur losses as soon as the shortage eased. These losses started by January 1949 and continued at an ever-increasing rate through the summer of that year. In July a financial consultant, Charles M. Horth, was retained to seek a means of stemming the losses. Both Mr. Horth and the president of Premier Petroleum were also asked to try to find a buyer for the properties, but neither was successful.

In November 1949 taxpayer’s board of directors held a special meeting to consider Mr. Horth’s recommendations and decide upon a plan of action. By this time the situation was critical, with Premier Petroleum on the verge of insolvency and far behind in payment of its obligations. After consideration of the various alternatives it was decided to adopt Mr. Horth’s proposals. In essence this involved a two-step plan: (1) improvement of Premier Petroleum’s situation through changes in financial, production, and persomiel policies, and (2) orderly disposition of the Premier holdings over a period of time. Implementation of the Horth program on point one soon improved Premier’s cash position.

Taxpayer actively continued to seek a purchaser interest in Premier Petroleum. As expected, Midland and Farmers Union flatly rejected taxpayer’s offer of sale. Mr. Horth resumed his efforts to locate a buyer and continued these efforts through 1950. Meanwhile, sales attempts were made by the president of Premier Petroleum and by officers of the three cooperatives, as well as an independent broker. None of these efforts met with success.

In 1951 Eugene M. Locke, a Dallas attorney with wide experience in oil operations, was retained to help arrange a sale. From that time until the eventual sale in 1956 he contacted numerous prospective purchasers, without success. It was standard practice in the oil industry to handle the sale of refining facilities in a confidential manner to avoid disruption of normal relations with customers, suppliers, and employees. For this reason, the Premier Properties were never advertised in industry publications nor was there any public solicitation of offers.

In the early 1950’s certain assets of Premier Petroleum were individually disposed of, with some being sold for salvage. During tins time some substantial improvements were made in certain of the Premier refineries through the installation of modern equipment. Such improvements were necessary to enable the company to produce gasoline of competitive quality and thus keep the company operational and, hopefully, salable.

In May 1956 the three cooperatives received their first offer of purchase. This offer was accepted and by contract dated June 80,1956, Premier Petroleum sold its Premier of Texas stock to City Products Corporation. Taxpayer reported $712,708.62 on its income tax return for fiscal 1957 as an ordinary loss deduction resulting from the sale.

The District Director of Internal Revenue disallowed this deduction, maintaining that the loss sustained was capital in nature. The resulting deficiency, plus interest, was consequently assessed and the plaintiff paid these amounts. A timely refund claim was filed and, upon disallowance of this claim, the present suit followed.

The narrow issue presented here is characterization of taxpayer’s loss as capital or ordinary. This, in turn, raises the question, of whether the stock of Premier Petroleum constituted a capital asset in the hands of the taxpayer. The statutory definition of the term “capital asset,” set forth in section 1221 of the Internal Pevenue Code of 1954, 68A Stat. 321, includes “property held by the taxpayer” with certain named exceptions. Since capital stock is normally thought of as “property,” and since none of the exceptions of section 1221 are applicable to the taxpayer’s situation, the literal wording of the statute would seem to encompass the Premier Petroleum stock.

But judicial interpretation has further restricted the scope of the capital asset concept by application of a flexible method of analysis which looks to the taxpayer’s motivation for acquiring and holding the subject property. The leading case in this area is Corn Products Ref. Co. v. Commissioner, 350 U.S. 46 (1955). The taxpayer there regularly bought and sold com futures to guard against increases in the price of corn, a vital raw material in its business. The Court held that such transactions in futures, since they were undertaken to protect a part of the taxpayer’s manufacturing costs, constituted an integral part of its manufacturing business. Since the taxpayer was thus dealing in its capacity as a manufacturer, and not as an investor or speculator, any income or loss realized was ordinary in nature. “Congress intended that profits and losses arising from the everyday operation of a business be considered as ordinary income or loss rather than capital gain or loss.” 350 U.S. at 52.

Other cases, decided both before and after Com Products, have served to develop further this flexible interpretation of the term “capital asset.” For example, in Commissioner v. Bagley & Sewall Co., 221 F. 2d 944 (2d Cir. 1955), aff’g 20 T.C. 983 (1953), the taxpayer was required to post United States Government bonds as security for performance of a contract. Upon completion of tbe contract the bonds were returned to taxpayer, which thereupon sold them at a loss. It was held that, since the bonds were acquired solely to carry out taxpayer’s contractual obligation and since no investment was ever intended, the loss was deductible as a business expense rather than a capital loss.

Likewise, in Electrical Fittings Corp., 33 T.C. 1026 (1960), the taxpayer participated in the formation of a corporation to manufacture ductile iron, a raw material necessary to taxpayer’s operation, when its regular source of supply became unreliable. Later, when taxpayer was able to purchase readily another type of iron which was better suited to its needs, it sold at a loss its stock in the ductile iron corporation. Upon the taxpayer’s showing that it had no investment purpose in acquiring the stock, the Tax Court held that the stock was not a capital asset in the hands of the taxpayer and that the loss was thus a business loss fully deductible from ordinary income. See also Journal Co. v. United States, 195 F. Supp. 434 (E.D. Wis. 1961); Mansfield Journal Co. v. Commissioner, 274 F. 2d 284 (6th Cir. 1960); Byerlite Corp. v. Williams, 286 F. 2d 285, 291 (6th Cir. 1960); Smith & Welton v. United States, 164 F. Supp. 605 (E.D. Va. 1958); Tulane Hardwood Lumber Co., 24 T.C. 1146 (1955); Western Wine & Liquor Co., 18 T.C. 1090 (1952) ; Charles A. Clark, 19 T.C. 48 (1952).

The same reasoning was applied by this court in Booth Newspapers, Inc. v. United States, 157 Ct. Cl. 886, 303 F. 2d 916 (1962). The plaintiffs in that case were two newspaper publishing companies which joined forces to seek a solution to a newsprint shortage which developed in 1946 and 1947. Both plaintiffs had long been adverse to entering the manufacturing field, but upon the advice of consultants they bought all the stock of the Michigan Paper Company (hereinafter referred to as Michigan). Although Michigan then manufactured only fine quality writing paper and book paper, it was able to convert a part of its facilities to newsprint production while still maintaining its competitive position in its own product lines. Michigan supplied plaintiffs with substantial quantities of newsprint, at cost, from 1947 to early 1953, although, for a period of up to 13 months no such deliveries were made. The newsprint shortage began to ease in 1953, although its threat did not end conclusively until 1956. In 1951 plaintiffs negotiated a long-term supply contract with an independent supplier, deliveries to begin in 1954. Having assured their supply in this manner, plaintiffs decided in July 1953 to sell their Michigan stock. A sale was finally arranged in February 1954 with plaintiffs sustaining considerable losses. The court found these to be ordinary losses, stating the applicable rule as follows:

* * * if securities are purchased by a taxpayer as an integral and necessary act in the conduct of his business, and continue to be so held until the time of their sale, any loss incurred as a result thereof may be fully deducted from gross income as a business expense or ordinary loss. If, on the other hand, an investment purpose be found to have motivated the purchase or holding of the securities, any loss realized upon their ultimate disposition must be treated in accord with the capital asset provisions of the Code. 157 Ct. Cl. at 896.

In the present case, considering the evidence as a whole, it is found that taxpayer’s acquisition of Premier Petroleum stock was based upon proper and valid business considerations rather than an intent to make a capital investment. The circumstances surrounding the acquisition convincingly demonstrate taxpayer’s desperation in the face of possible destruction. With its customary sources of supply unable to meet its needs, taxpayer was unable to meet the needs of its local cooperatives and their patrons adequately. Stopgap measures were taken, as taxpayer instituted rationing and conservation programs and temporarily released its local cooperatives from their exclusive purchase agreements, but some more positive steps had to be taken. In such a situation taxpayer was forced to reconsider its traditional policy against purchase of refining facilities. With the shortage at a stage which proved to be its worst, a small refinery (Pana) was purchased and negotiations progressed toward purchase of the much larger Premier complex. Premier was acquired thereafter at a time when the shortage seemed certain to continue for at least another 2 years. At this time the purchasers were well aware that, absent the shortage, Premier was quite undesirable from tlieir dence shows clearly that the purchase was motivated by the temporary shortage.

Defendant contends that the taxpayer intended to make a permanent investment in a refinery complex, arguing that the integration of its oil operations was a logical step in taxpayer's overall growth pattern. As evidence of such an investment intent, defendant points to various extrinsic factors surrounding the Premier assets and the negotiations for their purchase. In particular, defendant stresses the crude oil reserves of Premier, which it views as the main factor motivating the purchase. Thus, says defendant, the principal purpose of taxpayer in acquiring Premier was to gain a long-range supply source and the means to convert it into finished products. This argument portrays the shortage as a mere coincidence unrelated to the purchase. To support this view, defendant emphasizes the acquisition of Pana and how the Premier crude oil reserves fit in with the needs of Pana. Such a contention is simply not justified by an examination of the entire record.

Defendant overlooks the taxpayer’s long-standing policy against integration of its oil operations and the fact that Premier was admittedly an extremely poor vehicle for changing this policy. Defendant likewise fails to consider the extensive testimony and documentary evidence to the effect that the Premier purchase was justifiable only while the shortage continued. It is not realistic to suggest that taxpayer purchased a minority interest in Premier, a $9 million operation, in order to develop its holdings in Pana, which cost only $114 million. Similarly, the fact that taxpayer had formulated no plan for disposing of its Premier interest at the time of purchase does not necessarily exhibit an investment intent. This might be equally indicative of an emergency condition which dictated a hasty business decision. In short, the weight of the credible evidence presented here supports the conclusion that taxpayer’s purchase of the Premier stock was made as a temporary expedient to insure an adequate supply of petroleum products.

Even if the purchase is found to be motivated by valid business considerations, with no investment intended initially, defendant contends that by the time of the sale in 1956 taxpayer did hold the Premier stock as an investment. That is, defendant urges the court to hold that the original business purpose of the taxpayer had changed to an investment purpose at some time prior to disposition of the stock. Cited in support of this view are Gulftex Drug Co., 29 T.C. 118 (1957), aff'd, 261 F. 2d 238 (5th Cir. 1958), and Missisquoi Corp., 37 T.C. 791 (1962). Defendant stresses the fact that the Premier stock was not sold until 1956, a full 7 years after the shortage period ended. Plaintiff counters with the argument that taxpayer made every reasonable effort to dispose of the securities and did so at its first opportunity. The issue is thus narrowed to a question of whether taxpayer held the Premier stock for an unreasonable length of time after the business necessity for doing so ceased to exist.

The decision of the Tax Court in Gulftex Drug Co., supra, is not really in point here. The taxpayer there, during a whiskey shortage, purchased stock in a distilling company in order to obtain certain whiskey purchase rights attaching to the stock. After purchasing the stock and exercising the rights (which were nonrenewable), the taxpayer continued to hold the stock for about 9 years before disposing of it. The court denied ordinary loss treatment, emphasizing the fact that the distillery stock was listed on the New York Stock Exchange and thus readily salable at all times. Such is not true of the present case, for the evidence amply demonstrates the low marketability of the Premier stock which was unlisted.

The Missisquoi decision, supra, is perhaps more helpful. The taxpayer there acquired debentures in 1950 to assure its supply of a raw material which was then scarce. By 1951 the demand for this material had declined, and by 1952 the taxpayer was using another type of material. Nevertheless, the debentures were retained until 1955, over 3 years after the necessity for holding them was past. The court discussed a number of factors, particularly those relating to the somewhat half-hearted efforts of the taxpayer to sell the debentures and the taxpayer’s past history as an investor and then reached the following conclusion i

* * * While perhaps none of these factors, taken alone, would prove that Missisquoi was holding these debentures for investment purposes, they are evidence that they were being held for that puipose 'and they tend to negate petitioner’s contention that they were being held only until a buyer could be found. * * *. 37 T.C. at 798.

Applying this same analysis to the facts of the present case, it seems that the taxpayer did take reasonable steps to dispose of its interest in Premier Petroleum when the necessity for holding it was over. Taking due notice of the need to proceed without fanfare, the taxpayer’s efforts to negotiate a sale were sufficient to take this case out of the rule stated by the Gulftex and Missisquoi cases. Furthermore, the evidence amply bears out plaintiff’s contention that its subsequent investments in Premier were designed solely to maintain and protect its marketability. While there are valid factors and arguments in favor of both parties, the evidence taken as a whole demonstrates that taxpayer stood ready to sell the Premier stock at all times after it became unnecessary to hold it, that it made every reasonable attempt to do so, and that only the low marketability of the securities caused the taxpayer to retain them for so long.

In light of the decided cases and the evidence presented, it is concluded that the stock of Premier Petroleum was acquired by taxpayer as an integral and necessary act in the conduct of its business and continued to be so held until its disposition. Accordingly, taxpayer was entitled to deduct its loss sustained thereon as a deduction from ordinary income for the fiscal year 1957, pursuant to the Internal Revenue Code of 1954, §§ 162(a), 165(a), 68A Stat. 45, 49. See Booth Newspapers, Inc. v. United States, supra.

Nichols, Judge,

concurring:

I join in the decision of the court to adopt the commissioner’s recommended decision Per Curiam. I do not understand defendant to deny — it admitted on oral argument — that if the commissioner’s fact findings are correct, this court’s decisions in Booth Newspapers, Inc. v. United States, 157 Ct. Cl. 886, 303 F. 2d 916 (1962), is wholly controlling as to the law. Defendant’s initial effort before us was to refute some of the findings, but under Rule 66 the presumption is that they are correct, and I do not see defendant’s burden as

sustained. Therefore, this case does not stand for any legal proposition except that courts should follow their own precedents when applicable.

Plaintiff, not satisfied with its fact advantage, it is true did argue for a 'broader view of the law, 'and defendant then took issue, but this debate is not, as I understand it, in any way reflected in our decision.

FINDINGS on Fact

1. Plaintiff taxpayer is a corporation organized and existing under the laws of the State of Delaware and having its principal office and place of business at 1701 Towanda Avenue, Bloomington, Illinois. On August 31, 1962, Illinois Farm Supply Company (hereinafter referred to as Illinois), a corporation organized under the laws of the State of Illinois, was merged into plaintiff. Plaintiff brings this suit as successor by merger to Illinois.

2. Illinois was incorporated in 1927 in the State of Illinois under the provisions of the Illinois Cooperatives Act of 1923. At all times material, Illinois kept its books and records and filed its income tax returns on the accrual basis of accounting and on the basis of fiscal years ending August 31.

3. Illinois Agricultural Association (hereinafter referred to as Association) is an association of Illinois County Farm Bureaus and is a member organization of the American Farm Bureau Federation. Illinois was organized by the Association at the request and urging of seven county farm bureaus. Its purpose was to serve farmers of the State of Illinois by making available to them, at minimum cost, products and supplies used in their farming operations.

4. Illinois was, and plaintiff as its successor is, a cooperative, and its members are and have been the local farmers’ cooperatives (hereinafter sometimes called Member Companies) which were affiliated with the local farm bureaus in their respective communities. Only one Member Company exists in each trade territory. Although a trade territory may include a larger area, it usually consists of a single county. The Member Companies purchased their products exclusively from Illinois pursuant to a membership agreement. In 1947 Illinois had about 100 Member Companies.

5. The Member Companies are owned or run by persons (hereinafter referred to as Members) who are actively engaged in or otherwise interested in farming. These Members are also members in a local county farm bureau and are the patrons of the Member Companies.

6. Plaintiff acquires products (consisting principally of petroleum products, feed and fertilizer) for resale at the wholesale level to its Member Companies. The Member Companies in turn resell these products to their local members at the retail level. A portion of the earnings of Illinois is used to provide necessary reserves, which are allocated on the books of Illinois to the Member Companies on the basis of patronage. Thereafter, the net earnings of Illinois are distributed to the Member Companies on the basis of the patronage of each such company. Similarly, the earnings of each Member Company are allocated and distributed to the individual Members thereof on the basis of patronage, with the net effect being a reduction in the cost of the goods to the individual Member.

7. The board of directors of Illinois (hereinafter referred to as the Board) employed the Illinois Agricultural Service Company (hereinafter referred to as Agricultural) to manage Illinois. The general manager of Illinois during the relevant period (1948 to 1950) was jointly employed by Illinois and Agricultural, although his salary was paid entirely by Illinois.

8. During the early history of its petroleum operations, Illinois acted as a broker for its Member Companies in the purchase of petroleum supplies. This meant that Illinois would place orders with oil suppliers on behalf of Member Companies. The Member Companies would be billed directly by the supplier and the product would be shipped directly to the Member Companies. The supplier would pay a brokerage commission to Illinois for its part in the transaction.

Later commencing in the mid- to late 1930’s, Illinois adopted a new petroleum wholesaling method whereby it would purchase the products in its own name for resale to the Member Companies. The Member Companies in turn would resell to the Members at prices competitive with commercial sources. At about the same time Illinois began acquiring petroleum transport equipment (trucks, tugboats and barges) and constructing marine terminals to expedite shipment of petroleum products.

9. During World War II and thereafter through 1946, a large number of commercial petroleum distributors discontinued tank wagon delivery of petroleum products to individual farms of the Midwest. This abandonment of the rural market created many new customers for the Member Companies, resulting in increased demand upon Illinois for petroleum products. Illinois concentrated upon the rural market, selling approximately 95 percent of its petroleum products to Member Companies. The balance was sold at retail by Illinois through its service stations. While Member Companies could sell to anyone, only Members would receive a patronage refund upon their purchases.

10. Petroleum products customarily exceeded 60 percent of the annual dollar sales volume of Illinois throughout the relevant period. Illinois’ sales of petroleum products as compared to total sales for fiscal years 1946 through 1951 were as follows:

Approximately 80 percent of the employees of Illinois were employed in the petroleum division.

11.(a) Illinois’ primary sources of petroleum products during 1941-48 were the Phillips Petroleum Company, J. D. Streett and Company, Globe Oil and Defining Company, Continental Oil and Befining Company, and Wood Biver Oil & Befining Company. Illinois entered into annual contracts for the purchase of such products, with the prices determined by reference to the low quotations in the Chicago Journal of Commerce. These contracts would vary in size from 1 million to 60 or 70 million gallons. Contracts for the purchase of burner fuels were normally negotiated in late summer to cover a September-to-September period, while other petroleum contracts were negotiated on a calendar-year basis.

(b) Thus, Illinois was required to estimate its petroleum needs approximately 1 year in advance. Such estimate was based upon estimates compiled by Member Companies and by the management of Illinois, adjusted to reflect increases in demand (i.e., growth) experienced in the prior 2 to 3 years. When possible, Illinois contracted in advance for nearly all of its estimated needs. However, a small amount was customarily left open for later purchase as a means of testing the market. For calendar year 1948 Illinois estimated its needs at between 185 million and 190 million gallons.

12. During 1945 and 1946 the supply of petroleum products available to satisfy market requirements was restricted but adequate. Beginning in early 194T it became apparent that a shortage of these products was forthcoming. It was felt by the management of Illinois that tins condition would probably continue for a 2- to 3-year period. By early summer of 1947 the shortage had materialized. On July 2,1947, Hlinois adopted for the first time a policy of allocating or rationing gasoline to its Member Companies. This meant that because Illinois was unable to purchase gasoline in the desired quantities from its suppliers, it limited the amount it would supply to each Member Company. Purchases by each Member Company during June, July, and August 1946 were used as a basis for the allotments during the corresponding period of 1947. In addition, Illinois initiated a program whereby it undertook to encourage Member Companies and their Members to conserve petroleum.

13. In the late summer and early fall of 1947 Illinois was required to pay a premium of 2 to %y2 cents per gallon for the products which it purchased in the open market (i.e., those 'amounts not under contract). By November 1947, Illinois was 13 million gallons short of its minimum estimated requirements of burner fuels and could not acquire more even at a premium. Kange heat oil and kerosene were unavailable at any price.

14. Illinois, as it entered the winter of 1947, was unable to supply the needs of Member Companies fully for burner fuels. By this time three suppliers had refused to renew their contracts with Illinois. Facing a projected need of 190 million gallons of petroleum products, Illinois had contracted for about 100 million gallons. Since Member Companies were bound by their membership agreement to purchase exclusively from, Illinois, they were directly affected by any disruption of Illinois’ supply.

15. Occasionally during the winter of 1947 the developing shortage left the Member Companies with empty bulk plants and their Members with cold homes. The management of Illinois greatly feared such consequences, for if the confidence of the Member Companies was to be lost, Illinois could easily be destroyed.

The Members were dependent upon petroleum products from Illinois to heat their homes and farm buildings and to carry on their planting and harvesting operations. If a Member Company went out of business or severed its affiliation, Illinois would lose its market in the trade area served by that company. Thus, failure to meet the requirements of the Members and the Member Companies would have drastic consequences for all concerned.

16. During this period, great pressure was brought to bear on the management and directors of Illinois by the Member Companies. In response to this, Illinois earnestly sought for a solution to the shortage. In addition to the allocation and conservation programs discussed above, other steps were undertaken. In December 1947 the Board adopted a resolution authorizing the temporary release of Member Companies from their exclusive purchase agreements, allowing them to purchase petroleum products on the open market until the end of the emergency. Although it felt that the Member Companies would be able to purchase only limited amounts in the open market due to the scarcity of product, Illinois nevertheless considered this to be an effective means of defending itself against destruction. By allowing the Member Companies to participate in the problem, Illinois made them aware of the situation as it was then developing.

In addition, Illinois purchased some petroleum products in the open market at premiums averaging 2 to 3 cents per gallon. This was an unsatisfactory measure, however, for practical considerations prevented Illinois from premium on to the ultimate consumer.

Illinois next explored the possibility of acquiring supplies of crude oil, domestic or foreign. When this alternative also proved unsuccessful, the acquisition of refining properties was considered.

17. The manager of Illinois, Chester H. Becker, testified that prior to the period involved here Illinois “was traditionally opposed to the ownership of refining and production facilities in petroleum.” Although the Board was not opposed to ownership of production facilities in other product areas (e.g., feed and fertilizer), it took a different view as to refining facilities. This difference was due to the much larger financial involvement required in the case of a petroleum refinery.

In accordance with this policy, Illinois, prior to the shortage period, had received and rejected two separate opportunities to purchase refineries. The first occurred during World War II and involved a refinery located in the State of Illinois. The other offer, concerning an Oklahoma refinery, was rejected by the Board in January 1947.

Illinois first departed from this no-refinery policy in July 1947, when the Board instructed management to include possible acquisition of refining facilities among the alternatives to be considered in seeking a solution to the impending shortage.

18. In early December 1947, Illinois began negotiations with the Pana Refining Company (hereinafter referred to as Pana), a small refinery in southern Illinois. Although old, it was ideally located and its output was not committed to long-term contracts. Pana produced about 35 million gallons of finished products annually, and had a 3- to 4-year supply of crude oil. The stockholders of Pana offered to sell all of their stock in Pana together with all of the assets of a related partnership, Louden Pipeline Company, for a price of $1,200,000 plus the value of Pana’s quick assets inventories, accounts receivable, and cash in banks). This proposal was altered to include a 6-month call on the crude oil production controlled by one of the stockholders of Pana, for an additional $50,000. The Board authorized the purchase on December 30, 1941, and tbe transfer was completed in January 1948.

19. (a) Another alternative considered by Illinois was possible purchase of the Delta Refining Company of Memphis, Tennessee. Delta had no crude supply of its own. It was a small but reasonably modem refinery with an annual output of 40 to 45 million gallons. Of this amount only 10 to 12 million gallons (later increased somewhat) were uncommitted and available to Illinois, and diversion of this amount from the local Memphis market seemed likely to have political repercussions. Illinois had previously determined that a minimum of 24 million available gallons per year would be required to justify a purchase. The uncertainty of the crude supply together with ominous political overtones caused this alternative to be rejected.

(b) About this same time, Illinois considered the purchase of the Wood River Oil & Refining Company (hereinafter referred to as Wood River). In this instance, Illinois negotiated on behalf of itself and two other cooperatives, Midland Cooperative Wholesale, Inc., of Minneapolis, Minnesota, and Farmers Union Central Exchange of St. Paul, Minnesota (hereinafter referred to as Midland and Farmers Union, respectively). Wood River was well located, with some refining facilities situated within Illinois’ sales territory, but the asking price of $30 million was considered exorbitant. Because the three cooperatives felt Wood River to be overpriced, and because additional investments in crude oil would be required shortly, they rejected the offer to sell and made no offer to buy.

20. Other available refining properties were brought to the attention of the three cooperatives (Illinois, Midland, and Farmers Union) at the annual meeting of the American Petroleum Institute in November 1947. These properties (hereinafter referred to collectively as the Premier Properties) consisted of the stock of the Premier Oil Refining Company of Texas (hereinafter referred to as Premier of Texas) and the assets of Baird Refining Company (hereinafter referred to as Baird) and of Octane Refining Company (hereinafter referred to as Octane). Discussions regarding these properties were held with an independent broker during the above-mentioned meeting and Texas during the following week.

The principal assets of the Premier Properties were five refineries, including one which was not operating. These refineries had capacities as follows:

*Not then in production. Daily throughput capacity was approximately 4,000 barrels of distillate. Ceased operations in 1946 when its supply of distillates was cut off.

It was estimated that the Premier Properties would produce annually approximately 180 million gallons of petroleum products useful to farmers, of which Illinois could expect to receive about one-third. In addition to these refineries, the Premier Properties included over 600 miles of pipeline and gathering system, a bulk station, and miscellaneous other assets.

21. In February 1948, A. M. Ault, controller of Illinois and former manager of its petroleum division, was sent to Texas to examine the Premier Properties, accompanied by a representative of Midland. Ault’s report pointed out that the refineries were poorly located to serve the needs of Illinois, since they were completely dependent upon rail transportation rather than the lower cost pipeline or water transport. In addition, these refineries were small and technologically obsolete in that all had thermal cracking units. (It was felt that once the shortage ended a more modern or catalytic variety of cracking unit would be required to produce gasoline of competitive quality.) In short, Mr. Ault would not have recommended the purchase of the Premier Properties in normal times, but he did not recommend against their purchase because of the economic factors facing Illinois. He merely pointed out the weaknesses and shortcomings inherent in these properties and left the final decisions to management.

In a memorandum of March. 4, 1948, plaintiff’s manager, C. H. Becker, recommended plaintiff purchase a one-third interest in Premier Properties, stating in part: “This appears to be a logical step under present conditions — even though it would not make sense under normal conditions.”

22. Throughout the negotiations with the owners of the Premier Properties, Joseph P. Nolan acted as the principal negotiator for the cooperatives. Mr. Nolan had wide experience in the petroleum industry and had been since 1931 manager of the petroleum operations of Farmers Union. Accordingly, the management of Illinois trusted and relied upon his judgment in considering whether to complete the purchase. In early 1948 Mr. Nolan was of the opinion that the petroleum shortage would continue for another 2 to 3 years. This was the general attitude among people in the oil industry at that time. In light of this expectation of continuing short supply, Mr. Nolan advocated purchase of the Premier Properties despite their several shortcomings. In a letter to the manager of Illinois dated March 4, 1948, Mr. Nolan summarized his opinion as follows:

If we can solve our present supply problems at some margin to ourselves by acquiring a property which has every reasonable expectation of paying out in a period short enough so we cannot reasonably anticipate any material change in the present tight supply situation, and end up with control of substantial quantities of crude even though the other physical facilities may at the end of the period have little more than salvage value — and acquire all this at a figure which will not unduly strain us to finance, it appears to me it is a sound program to undertake.

This same letter set forth in detail the unfavorable aspects of the proposed purchase as well as the expected benefits. Specifically, Mr. Nolan felt the refineries to be small and likely to become obsolete as soon as the shortage terminated. Wartime production had been keyed to the manufacture of aviation gasoline, a higher quality product than normal civilian gasoline. Facilities and techniques developed in this period were expected to generate an octane race as soon as the supply situation eased. This occurrence would render older and less modern refineries incapable of competing on a large scale. Furthermore, the refineries were located far outside the marketing territories of the three cooperatives. Kail-road tank cars, a relatively expensive means of transport, would be the principal shipping medium.

Despite these drawbacks, Mr. Nolan considered the refineries to be worth while for the cooperatives because of their large crude oil reserves. The refineries controlled some 18,000 barrels of crude oil per day, rendering them highly desirable during a period when crude oil was in short supply. So long as the shortage continued, the refineries could continue to produce a competitive product while showing a profit. If this continued for 2 to 3 years (as expected), the refineries would have paid for themselves. This was preferable to the continued purchasing of products at premium prices which resulted in a loss to Illinois and the other cooperatives.

23. During the course of negotiations, the parties entered into an agreement whereby the Premier refineries would begin shipping petroleum products to the three cooperatives on order, at a price 1 cents per gallon above the low quotation of the Chicago Journal of Commerce. If and when the purchase was consummated, each cooperative would be given credit for the cent-and-a-half premiums paid by it. This agreement took effect in early April 1948, and remained in effect until the purchase date. Illinois purchased substantial quantities under this agreement.

24. On June 24, 1948, the cooperatives formed Premier Petroleum Company (hereinafter referred to as Premier Petroleum), a Minnesota cooperative corporation, to be used for acquiring and holding the Premier Properties. Premier Petroleum was incorporated with an initial capitalization of $5,500,100 in cash, as follows:

The cooperative form was chosen because (a) the parties wished in part to finance the purchase through the Central Bank for Cooperatives, and (b) earnings were to be distributed on the basis of patronage rather than stock ownership.

25. Premier Petroleum borrowed $3,684,300 from the Central Bank for Cooperatives on or about July 26, 1948. This sum consisted of a facility loan of $2,947,400 and an operating capital loan of $736,900 'but for all practical purposes the two loans may be considered as one. Soon thereafter in July 1948, the cooperatives caused Premier Petroleum to purchase the Premier Properties, paying $7,500,000 for all the stock of Premier of Texas and $1,292,274 for the related properties of Baird and Octane. Also, in accordance with the loan agreement, Premier purchased 1,834 shares of the capital stock of Central Bank for Cooperatives at a total cost of $184,300. The excess of the financing over the purchase price, $207,826, was retained by Premier Petroleum as additional working capital.

26. In connection with the purchase of the Premier Properties, a problem arose as to the manner in which Premier Petroleum was to hold its newly acquired refineries. The sellers, for their own tax purposes, preferred a sale of the stock of Premier of Texas rather than ia sale of the individual assets. The buyers favored an asset purchase and the Central Bank for Cooperatives insisted upon obtaining a mortgage on the assets. Since Premier of Texas was not a cooperative, it was ineligible for a loan from the Central Bank for Cooperatives. Thus, it was necessary for Premier Petroleum to acquire title to the assets in order to mortgage them. This conflict was resolved by insertion in the contract of sale of a provision whereby the buyer (Premier Petroleum) agreed (a) that it would operate Premier of Texas as a going concern for at least 3 years, and (b) that for such a period it would not permit the pipeline systems to be declared out of the corporation as a dividend. Upon completion of the purchase, all of the refineries owned by Premier of Texas (with the exception of the inoperative Cotton Valley refinery) were distributed to Premier Petroleum as a dividend in kind.

The loan was secured by a first mortgage on these transferred refineries and by a pledge of all the common stock of Premier bf Texas.

27. At the time Premier Petroleum was formed the three cooperatives entered into an informal oral agreement whereby each would be entitled to a portion of the available production of the refineries roughly equivalent to its proportion of ownership. The operative refineries of Premier Petroleum had a potential annual capacity of about 210 million gallons of finished petroleum products. Part of this output was committed to other markets, and part was of a type not handled by Illinois; nevertheless, Illinois anticipated an eventual supply from Premier Petroleum of approximately 60 to 70 million gallons annually. From the time of the purchase through the end of 1948, Illinois acquired 9,419,355 gallons of refined petroleum products from Premier Petroleum.

28. By autumn of 1948 the shortage appeared to be easing somewhat, with petroleum products becoming available more freely. As early as August 1948, Illinois began to experience a slight oversupply of these products, partly due to decreased demand brought about by the conservation and rationing programs instituted by Illinois and partly due to an unexpected increase in the amounts supplied to Illinois by Premier Petroleum. At about this time, gasoline began to become available on the market at nonpremium prices. Shortly thereafter it became apparent that burner fuels would be more plentiful than they had been during the preceding winter. The winter of 1948-49 was considerably warmer than the one preceding, so that the supply of burner fuels was much greater and the prices thereon dropped accordingly. In the spring of 1949, the gasoline market underwent a similar adjustment. Initially, Illinois viewed these developments as temporary conditions, but by late spring or early summer of 1949 it appeared that the shortage period was over.

29. With the shortage drawing to a close, Premier Petroleum began to incur losses from its operations. Through November 1948 the company showed a profit, but by January 1949 the price of burner fuel had been forced downward and the refineries had begun to lose money. During the first 4 months of 1949, Premier Petroleum showed a net loss (after depreciation of $390,177.93) of $469,137.88. This continued through spring and summer of 1949. Meanwhile, lubricating oil prices bad similarly declined, thus increasing Premier’s losses.

30. The Board of Illinois was concerned by the losses incurred by Premier Petroleum and determined that Illinois should adopt a general policy against any extension of credit or additional investment of funds in the company. Midland and Farmers Union were likewise unwilling to put up additional money.

In July 1949 management representatives of the three cooperatives met with Charles M. Horth, a financial consultant with the firm of Duff, Anderson & Clark. At this meeting, Mr. Horth was asked to help find a solution to the problems of Premier Petroleum and to help find a buyer for the properties. Mr. Sylvester Dayson, president and general manager of Premier of Texas, was similarly asked to seek a buyer. Neither Horth nor Dayson was successful in locating a buyer at this time.

31. The Board of Hlinois held a special meeting on November 7, 1949, to receive and consider the reports of a special committee which had been studying the Premier Petroleum situation and of Mr. Horth, who had been retained to help seek a solution. The above-mentioned committee report stated that the company’s cash position was deteriorating rapidly and that by November 15 there would be a cash deficit of approximately $84,000. The loan from the Central Bank for Cooperatives was then overdue to the extent of $450,000, with another $250,000 installment due within 3 weeks. An income tax payment of $45,574 was likewise past due with the next installment, $172,393, due within a month. Thus, Premier Petroleum was in danger of being forced into involuntary bankruptcy by any of its creditors, and meanwhile the shortage of cash left the company largely unable to pay its current bills. The cash loss was approximately $1,500 per day and continuing. Under the circumstances, the committee concluded that Hlinois should conclusively adhere to the policy against investment of additional funds in Premier Petroleum, and that one of the following plans should be adapted:

(a) Illinois might offer to sell its stock in Premier Petroleum to the other two stockholders, asking $1 million but attempting to secure a counteroffer if necessary. The committee did not expect the other shareholders to to this plan.

(b) Premier Petroleum might be made to adopt the plan proposed by Mr. Horth to improve its financial position. This plan consisted essentially of the following steps: (i) reduction of expenditures to prevent further cash loss; (ii) a cutback in operations; (iii) replacement of certain management personnel; (iv) orderly disposition of the Premier holdings over a long period of time; and (v) designation of some person vested with adequate authority to implement these plans.

(c) If neither of the above plans was found acceptable, Illinois might simply cease purchasing from Premier Petroleum and take its loss. This was recognized as a drastic step and one to be avoided if at all possible.

Finally, the committee found that Illinois must “realistically reappraise its own financial position” in light of the circumstances.

The manager of Illinois, Mr. Becker, concurred in the committee’s recommendations and suggested that Mr. A. F. Schuck be partially released from his duties with Illinois in order that he, in conjunction with Mr. Horth, might oversee the financial affairs of Premier Petroleum. This proposition was adopted by the Board of Illinois. Implementation of the Horth recommendations satisfactorily resolved the cash position of Premier in 1950 but there is no evidence the company ever earned a profit after depreciation and depletion.

32. At various times throughout 1919, and thereafter, Illinois attempted to find a buyer for its interest in Premier Petroleum. As expected, Midland and Farmers Union were not at all interested in such a purchase. As early as July 1949, Mr. Horth and Mr. Dayson undertook separately to help the cooperatives make a sale, but both were unsuccessful. Later that year, Mr. Horth once again began to seek prospects for the sale of Premier Petroleum. He continued these efforts intermittently until 1950, at which time he felt he had exhausted his supply of prospects.

In February 1950, B. P. Hargis replaced Sylvester Dayson as president of Premier Petroleum. At that time the owners instructed him to do whatever he could to dispose of the entire Premier operation, with, the understanding that he would receive adequate compensation if he was successful.

During 1950, several attempts were made to sell the Premier operation by Mr. Hargis, J. P. Nolan of Farmers Union, Milo Dahl of Midland, and a broker named John D. Manley, in addition to those listed previously. None of these was successful. In addition to his personal efforts, Mr. Hargis retained Eugene M. Locke in 1951 to help locate a buyer. Mr. Locke was a Dallas attorney with numerous connections in the oil industry and wide experience in the financing of oil operations. At the time of the trial, Mr. Locke had recently been appointed United States Ambassador to Pakistan.

33. From 1951 until the eventual sale in 1956, Mr. Locke intermittently contacted prospective purchasers. In so doing, he would first make a personal contact then follow up with written material in those instances where there was apparent interest in the properties. The sales negotiations were handled in this confidential manner to avoid disruption of normal relations with employees, suppliers, and customers.

The following parties were contacted in writing:

Among those prospects contacted orally by Mr. Locke were the following:

Prospect: Date of Contact

First National Bank of Dallas--

Mercantile' National Bank of Dallas_June 1956.

Equitable Securities Corporation_May 1956.

Purvin & Gertz--

American liberty Oil Co_May 1956.

Cosden Oil Company__

Gene Constantine (of Dallas)_ Junel956.

None of Mr. Lock’s efforts met with, success.

34. Certain parts of the Premier Petroleum physical plant were disposed of in the early 1950’s, including the following:

(a) The lubricating oil plant of the Fort Worth refinery was dismantled and sold to a salvage company for approximately $65,000.

(b) The inoperative Cotton Valley refinery was disposed of for $450,000.

(c) The Arp refinery was sold for salvage.

35. Gasoline was the most important product of Premier Petroleum. During this period the gasoline produced by it was of such low quality that it could not compete effectively with the higher octane products marketed by its competitors. In order to keep the facilities operating long enough to find a buyer, the three cooperatives deemed it necessary to install equipment which would produce a higher quality product. Initially this was accomplished through the use of gasoline additives, but by 1952 it became apparent that new facilities would be necessary. Accordingly, Premier Petroleum installed the following equipment:

In connection with the last above-mentioned improvement, the three cooperatives loaned the company a total of $500,000'.

36.In May 1956 the cooperatives received from City Products Corporation (hereinafter referred to as Buyer) the first and only offer to purchase the remaining Premier Properties. This offer was accepted and a contract of sale was executed on June 30, 1956, whereby Premier Petroleum sold to Buyer all of the stock of Premier of Texas. All of the refinery assets had, in 1953, been transferred back to Premier of Texas by Premier Petroleum.

37* Premier Petroleum redeemed Illinois’ interests therein for a total consideration of $1,321,954.97. Illinois had a total cost basis in the stock of $2,034,636. As a result, Illinois sustained a loss of $712,681.03 in its fiscal year ended August 31,1957. The parties stipulated the loss at $712,708.62 which was claimed on both the original and amended returns and in the refund claim.

38. Illinois filed a timely income tax return for the taxable year ended August 31, 1957, with the District Director of Internal Bevenue at Chicago, Illinois, showing an income tax liability of $447,949.54, which amount was paid by Illinois. Illinois filed an amended income tax return covering this same taxable year on November 17,1958, showing an additional income tax liability of $70,074.91, exclusive of interest charges, which additional amount was duly paid.

39. On schedule K attached to its original and amended income tax returns mentioned above, Illinois claimed a deduction entitled “Loss on sale of investment acquired to secure source of supply” in the amount of $712,708.62. Upon audit, a tax deficiency of $345,357.13, together with interest in the amount of $111,706.47, was assessed. Both of these amounts were subsequently paid by the plaintiff on April 15, 1963.

40. The above-mentioned assessment resulted from the treatment of the loss as a capital loss rather than an ordinary loss. Said assessment was made pursuant to agreements entered into by Illinois and/or plaintiff whereby the period for assessment of additional taxes with respect to fiscal 1957 was duly extended through February 28, 1963.

41. On August 27, 1963, plaintiff filed a timely claim for refund in the amount of $475,151.08, plus interest, for the taxable year ended August 31,1957. By notice dated May 15,

1964, the District Director disallowed this claim for refund. The instant suit was brought by plaintiff on December 7, 1964.

ULTIMATE FINDING

42. Plaintiff taxpayer’s motive in acquiring an interest in Premier Petroleum was to obtain a temporary source of supply of petroleum products as a necessary of its operations in a time of business crisis when considered business judgment indicated that such a step was necessary in order to avoid financial disaster. There was no change in this motive prior to the disposition of Premier Petroleum and an investment purpose motivated neither the acquisition nor holding of the stock, which was disposed of as soon as reasonably possible after it no longer served the purpose for which acquired. Plaintiff sustained an ordinary loss of $712,681.03 on its disposition of its stock interest in Premier Petroleum Company in its fiscal year ended August 31,1957.

Conclusion or Law

Upon the foregoing opinion and findings of fact which are adopted by the court and made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover and judgment is entered to that effect. The amount of recovery is reserved for further proceedings pursuant to Rule 47(c). 
      
       The concurring opinion of Nichols, Judge, follows the opinion of the Trial Commissioner which has been adopted by the court.
     
      
      
         “Sec. 1221. Capital Asset Defined.
      “For purposes of this subtitle, the term ‘capital asset’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include—
      “(1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
      “(2) property, used in his trade or business, of a character which is subject to the allowance for depreciation provided in section 167, or real property used in his trade or business; * * 26 U.S.C. § 1221 (1964).
     