COASTAL TERMINALS, INC. v. UNITED STATES, (E.D.S.C. 1962)

Citation Codes

Equivalent Citations

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Docket Number

Civ. A. No. 7562.

Attorney(S)

Arthur G. Howe, G.M. Howe, Jr., George E. Grimball, Jr., Charleston, S.C., for plaintiff. Terrell L. Glenn, U.S. Atty., Columbia, S.C., Thomas P. Simpson, Asst. U.S. Atty., Charleston, S.C., Louis F. Oberdorfer, Asst. Atty. Gen., Washington, D.C., Edward S. Smith, John F. Murray, Leon W. Vaseliades, Attys., Dept. of Justice, for defendant.

Judges

WYCHE, Chief Judge.

Acts

Internal Revenue Code — Income Taxes — Normal Taxes And Surtaxes — Gain Or Loss On Disposition Of Property — Common Nontaxable Exchanges — Exchange Of Property Held For Productive Use Or Investment

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Smart Summary

Factual and Procedural Background

The plaintiff, Coastal Terminals, Inc., instituted this suit to recover a tax refund, alleging that the District Director of Internal Revenue erroneously assessed taxes based on a finding that certain properties were sold on June 30, 1957, for $1,200,000 to Delhi-Taylor Oil Corporation. The core dispute concerns whether the transfer of properties between plaintiff and Delhi-Taylor constituted a taxable sale or a non-taxable exchange under the Internal Revenue Code.

Coastal Terminals owned and operated a deep water terminal in North Charleston, South Carolina, which was the subject of the transfer. Prior to the transaction, plaintiff had engaged in corporate planning and investigation of alternative terminal sites along an inland pipeline, acquiring options and preparing for potential expansion. Negotiations with Delhi-Taylor initially failed to produce a sale agreement. Instead, on May 11, 1957, the parties agreed on an alternative arrangement involving Delhi-Taylor acquiring and improving several properties, which were then exchanged with plaintiff for the North Charleston terminal on July 1, 1957.

The government contended the transaction was a sale by plaintiff to Delhi-Taylor, who acted as a conduit in a purchase and subsequent property transfer. The court found, however, that the parties intended an exchange of like-kind properties, with Delhi-Taylor acquiring and improving properties to facilitate the exchange, and that plaintiff continued in its same business after the transaction.

Legal Issues Presented

Whether the transfer of properties between Coastal Terminals, Inc. and Delhi-Taylor Oil Corporation constituted a taxable sale resulting in recognized gain,
Whether the transaction qualified as a non-taxable like-kind exchange under Section 1031(a) of the Internal Revenue Code of 1954,
Whether the transaction was a partial taxable exchange under Section 1031(b) of the Internal Revenue Code of 1954.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Portland Oil Co. v. Commissioner of Internal Revenue, 109 F.2d 479 (C.A. 1, 1940)	Purpose of Section 1031(a) to defer recognition of gain or loss where there is a mere change in form of ownership.	Supported the court's understanding that the statute aims to prevent immediate taxation when the taxpayer continues in the same business with like-kind property.
Commissioner v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981	Substance over form: the realities and intention govern over the means employed to accomplish an exchange.	Guided the court to focus on the parties' intent and the substance of the transaction rather than the formal steps taken.
Hamlin's Trust v. Commissioner of Internal Revenue, 209 F.2d 761 (C.A. 10, 1954)	Reinforcement of the principle that the substance of the transaction controls tax treatment.	Supported the court’s conclusion that the transaction was an exchange rather than a sale.
Sarkes Tarzian, Inc. v. United States, 240 F.2d 467 (C.A. 7, 1957)	Application of Section 1031(a) to exchanges of like-kind properties.	Used as precedent for treating the transaction as a like-kind exchange.
Century Electric Co. v. Commissioner of Internal Revenue, 192 F.2d 155 (C.A. 8, 1951)	Transaction must be viewed as a whole for tax purposes, focusing on actual intention and accomplishment.	Supported the court's refusal to separate the transaction into parts for tax purposes.
Howell Turpentine Co. v. Commissioner of Internal Revenue, 162 F.2d 319 (C.A. 5, 1947)	Permissibility of binding to exchange property not yet owned but to be acquired in the future.	Validated Delhi-Taylor’s acquisition and improvement of properties to facilitate the exchange.
W.D. Haden Co. v. Commissioner of Internal Revenue, 165 F.2d 588 (C.A. 5, 1948)	Same as Howell Turpentine Co.; binding future acquisition for exchange purposes.	Further supported the lawful nature of Delhi-Taylor’s arrangement to acquire and improve properties for exchange.

Court's Reasoning and Analysis

The court analyzed the transaction by focusing on the substance and parties’ intent rather than the form or steps taken. It found that the parties intended a like-kind exchange under Section 1031(a) of the Internal Revenue Code of 1954. The court rejected the government's characterization of the transaction as a sale followed by a purchase through a conduit, concluding instead that Delhi-Taylor acquired and improved properties specifically to exchange them with plaintiff’s terminal. The court emphasized that plaintiff did not cash out nor reinvest in a different business but continued in the same business with like-kind property. Precedents cited reinforced that the realities of the transaction control tax treatment, and that binding to exchange future property is lawful. Therefore, the court held that the transaction qualified as a non-taxable exchange under Section 1031(a).

Holding and Implications

The court held that the transaction between Coastal Terminals, Inc. and Delhi-Taylor Oil Corporation constituted a non-taxable like-kind exchange under Section 1031(a) of the Internal Revenue Code of 1954.

As a result, Coastal Terminals is entitled to recover a tax refund, subject to adjustments and interest to be calculated by the Treasury Department. The decision directly benefits the plaintiff by reversing the tax assessment but does not establish new precedent beyond applying established principles to the facts of this case.

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COASTAL TERMINALS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

WYCHE, Chief Judge.

This suit was instituted by the plaintiff taxpayer to recover refund of taxes which it alleges the District Director of Internal Revenue erroneously assessed against it in holding that certain of its properties were sold on June 30, 1957, for $1,200,000.00 to Delhi-Taylor Oil Corporation.

The issue is whether the transfer by plaintiff of certain of its properties to Delhi-Taylor Oil Corporation for certain properties transferred by it to plaintiff was a sale resulting in a taxable gain, a non-taxable exchange within the meaning of Section 1031(a) of the Internal Revenue Code of 1954, 26 U.S.C.A. § 1031(a), or a partial taxable exchange within the meaning of Section 1031(b) of the Internal Revenue Code of 1954.

Plaintiff is a corporation which was formed by and designed to serve a group of independent oil jobbers. It performed its function by owning and providing facilities for the storage of petroleum products. In this connection it owned and operated a deep water terminal in North Charleston, South Carolina. This terminal was ultimately transferred to Delhi-Taylor Oil Corporation and it is this transfer which constitutes the subject matter of this action.

In compliance with Rule 52(a), Rules of Civil Procedure, 28 U.S.C.A., I find the facts specially and state my conclusions of law thereon, in the above cause, as follows:

FINDINGS OF FACT

1. Years prior to the transfer there became available to plaintiff's stockholders and jobbers in the interior an inland source of oil supply on what was called the plantation pipe line. Plaintiff, taking into consideration the cost of transporting oil from Charleston, to the interior, commenced investigating the possibility of acquiring terminal sites along this pipe line and as a result acquired options at Doraville, Georgia; Belton, South Carolina, and Salisbury, North Carolina. While investigating the feasibility of developing these sites plaintiff found that steel with which storage tanks could be built was in short supply and was able to obtain commitments from a steel concern so that the same would be available in the event plaintiff found actual need for the same. There existed at this time an operating terminal at Wilmington, North Carolina, which was owned by Coastal Terminals of North Carolina, a separate and distinct corporation of which plaintiff owned sixty (60%) per cent. of the stock, but which plaintiff hoped in the future to acquire and own outright. Plaintiff lacked the capital to purchase and develop these sites, and the obtaining of options and the other things done in connection therewith, at this time constituted no more than investigation and future corporate planning.

2. With this background, and years later, Delhi-Taylor Oil Corporation contacted plaintiff and expressed an interest in acquiring plaintiff's deep water terminal at North Charleston. After a few days of negotiations, the parties concluded that they could not agree upon a sale. Instead, on May 11, 1957, they entered into an alternative agreement under which they agreed Delhi-Taylor Oil Corporation would acquire the terminal in Wilmington, North Carolina, the sites at Belton, South Carolina; Salisbury, North Carolina, Charlotte, North Carolina, (Doraville, Georgia, later being substituted for Charlotte); improve the same and exchange them with plaintiff for its terminal in Charleston. Thereafter, Delhi-Taylor Oil Corporation acquired and improved these properties, and on July 1, 1957, exchanged them with plaintiff for its terminal in Charleston. Plaintiff's terminal in Charleston consisted of real estate, pipe lines and storage tanks. The four tracts it acquired from Delhi-Taylor Oil Corporation were of like kind, and after receiving them, plaintiff continued in the same business in which it had been engaged, utilizing the four properties for the same purpose for which it had formerly used the single property in North Charleston.

3. Contrary to the Government's contention that the true nature of the transaction was that plaintiff sold to Delhi-Taylor, and that Delhi-Taylor thereafter acted as a mere momentary conduit through whom plaintiff purchased property and passed title and who assumed and liquidated liabilities incurred by plaintiff for the construction of terminals, the evidence compels but the one conclusion that the parties from the inception intended an exchange; that the improvements made by Delhi-Taylor such as the construction of tanks and pipe lines were done by and on behalf of Delhi-Taylor so as to put it in a position to accomplish an exchange; and that an exchange of like properties in fact and in law took place.

4. The substance of the transaction was one in which plaintiff owned a deep water terminal which Delhi-Taylor Oil Corporation wanted to acquire; they were unable to agree upon a sale; that as a result of prior corporate investigation and planning, which at the time had no connection with this transaction, plaintiff knew of certain property which it would be willing to accept in exchange for its terminal provided Delhi-Taylor Oil Corporation would acquire and improve the same, and that Delhi-Taylor did acquire and improve the same on its own behalf so that it would be in a position to make an exchange, and that an exchange in fact took place. Plaintiff did not "cash in" and invest the same in another business nor did it receive cash and reinvest the same in like property, but merely exchanged its property with Delhi-Taylor Oil Corporation for like property and continued on as before in its identical business.

CONCLUSIONS OF LAW

1. The Court has jurisdiction of the parties and of the subject matter of this action.

2. Section 1002 of the Internal Revenue Code of 1954, provides that upon the sale or exchange of property the entire amount of the gain or loss shall be recognized except as otherwise provided.

3. Section 1031(a) of the Internal Revenue Code of 1954, provides: "No gain or loss shall be recognized if property held for productive use in trade or business or for investment * * * is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment."

4. The purpose of Section 1031(a) is to save the taxpayer from the immediate recognization of a gain, or to intermit the claim of a loss where as a result of the transaction there has been a mere change in the form of ownership and the taxpayer has not really cashed in on the theoretical gain or lost out on a losing venture. Portland Oil Co. v. Commissioner of Internal Revenue, (C.A. 1, 1940) 109 F.2d 479.

5. The realities or substance of the transaction and the intention of the parties govern, and the means employed by them to accomplish an exchange rather than a sale are unimportant. Comm'r. v. Court Holding Co., 324 U.S. 331, 65 S.Ct. 707, 89 L.Ed. 981; Hamlin's Trust v. Commissioner of Internal Revenue, (C.A. 10, 1954) 209 F.2d 761; Sarkes Tarzian, Inc. v. United States, (C.A. 7, 1957) 240 F.2d 467.

6. This transaction cannot be separated for tax purposes into its component parts. The actual intention of the parties and what was accomplished rather than the separate steps taken govern. Century Electric Co. v. Commissioner of Internal Revenue, (C.A. 8, 1951) 192 F.2d 155.

7. It was entirely proper and lawful for Delhi-Taylor Oil Corporation to bind itself to exchange property it did not own but could acquire in the future. Howell Turpentine Co. v. Commissioner of Internal Revenue, (C.A. 5, 1947) 162 F.2d 319; W.D. Haden Co. v. Commissioner of Internal Revenue, (C.A. 5, 1948) 165 F.2d 588.

8. It is my opinion that the facts in this case compel the conclusion that the substance of the transaction clearly brings it within the provisions of Section 1031(a) of the Internal Revenue Code of 1954.

It has been conceded that in the event plaintiff prevails it would not be entitled to recover the full amount prayed for in the complaint and that the same would require adjustment. Therefore, plaintiff should have judgment against the defendant for the amount now determined by adjustment due it, together with interest thereon, to be calculated by the Treasury Department.

Accordingly, an appropriate order for judgment may be submitted.