Opinion
Nos. K-368 to K-376.
May 31, 1932.
Separate suits by the Texas Pipe Line Company, by the Texas Pipe Line Company of Oklahoma, by the Texas Company, and by the Texas Company and others, against the United States.
Petitions dismissed.
These suits were brought by the plaintiffs, affiliated corporations, to recover $917,559.37, income and profits tax alleged to have been illegally assessed and collected for 1918, with interest from April 10, 1920. The question is whether under section 234(a)(8) of the Revenue Act of 1918 ( 40 Stat. 1077) the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma are entitled to deductions from gross income for amortization of pipe line facilities owned and operated by them during the period July 1, 1917, to December 31, 1918. The Commissioner of Internal Revenue denied the deductions claimed by these two corporations on the ground that they were common carriers and did not come within the provisions of section 234(a)(8) of the Revenue Act of 1918, which allows a reasonable deduction for amortization of facilities for the production of articles contributing to the prosecution of the war.
Special Findings of Fact.1. The Texas Pipe Line Company was at all times hereinafter mentioned, and now is, a Texas corporation, and all of its issued and outstanding capital stock, except qualifying shares, was at all times herein mentioned owned by the Texas Company.
2. The Texas Pipe Line Company of Oklahoma was at all times hereinafter mentioned, and now is, an Oklahoma corporation and all of its issued and outstanding capital stock, except qualifying shares, was at all times herein mentioned owned by the Texas Company.
3. The Texas Company was at all times hereinafter mentioned up to and including April 19, 1927, a Texas corporation, and owned all of the capital stock except qualifying shares of the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma.
April 19, 1927, the stockholders of the Texas Company by proper action at a meeting duly and lawfully called voted to dissolve said corporation, and on April 20, 1927, the Secretary of State of Texas issued a certificate of dissolution, all of which was in accordance with the law of the state of Texas.
Under the provisions of article 1389 of the Revised Civil Statutes of Texas of 1925, the corporation continued in existence for a period of three years after dissolution for the purpose of enabling those charged with the duty to settle its affairs, and these suits were instituted within said three-year period.
4. Ralph C. Holmes, Amos L. Beaty, Thomas J. Donoghue, Daniel J. Moran, George L. Noble, William W. Bruce, John J. Mitchell, James N. Hill, Elgood C. Lafkin, Frank D. Stout, John H. Lapham, Henry G. Lapham, and Albert Rockwell were directors of the Texas Company at the time of its dissolution on April 20, 1927, and were, under article 1388 of the Revised Civil Statutes of Texas 1925, trustees of the creditors and stockholders of the corporation, with authority to collect the outstanding debts and other accounts owing to the corporation, and to distribute and divide the moneys and other properties among the stockholders thereof after paying the debts and other obligations of the corporation after dissolution.
5. In February, 1917, by enactment of the Texas Legislature (chapter 30, General Laws of Texas 1917), oil pipe line companies were declared to be common carriers, and were placed under the jurisdiction of the Railroad Commission of that state. Under and by virtue of the provisions of chapter 31 of the General Laws of Texas 1917, companies owning or operating oil pipe lines were required to incorporate separately such pipe lines, and, in the case of ownership of oil pipe lines beyond the borders of Texas, additional pipe line corporations could be organized outside of the state, and such oil pipe lines could be sold and conveyed to them. In every case the organizing corporation could own all of the capital stock of the organized pipe line corporations.
6. The Texas Company, one of the plaintiffs herein, being a Texas corporation, complied with the mandatory provisions of chapter 30 of the General Laws of Texas 1917, referred to in the preceding finding, and on July 1, 1917, organized and incorporated the Texas Pipe Line Company, a Texas corporation, and transferred and conveyed to it all of its pipe line assets in the states of Texas and Louisiana; and, on the same date, organized and incorporated the Texas Pipe Line Company of Oklahoma, an Oklahoma corporation, and transferred and conveyed to this corporation all of its pipe line assets in the state of Oklahoma, and received in exchange therefor all of the capital stock of the two said pipe line companies.
Immediately thereafter the operations performed and the activities carried on by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma were in all substantial respects identical with those which had been previously performed and carried on by the Texas Company, and the two pipe line companies operated as a plant facility of the Texas Company, in that they formed the connecting links between the fields of production from which the Texas Company secured its oil and the refineries belonging to the latter company. Transportation operations continued as before, with no change in personnel, salaries, or administrative details except changes in the titles of the officers.
7. At all times herein mentioned, and on and after April 6, 1917, the Texas Company was engaged in the business of producing, manufacturing, buying, and selling petroleum (oil) and its products, and the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma were, subsequent to the date of their incorporation on July 1, 1917, and throughout the period involved in this suit, engaged in the transportation of oil through their pipe line facilities. The Texas Company owned, operated, and maintained refineries at West Dallas, Port Arthur, and Port Neches, Tex., and West Tulsa, Okla., which refineries were supplied with crude oil by the pipe line facilities of the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, and it is with respect to these pipe line facilities that amortization is claimed. The transportation of oil by pipe lines from the oil fields to the refineries of the Texas Company was a proper and necessary part of the business operations of the Texas Company. The pipe line facilities with respect to which amortization is claimed were owned and operated by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, and were constructed, erected, installed, or acquired by these corporations on or after July 1, 1917, at an adjusted capitalized cost to the Texas Pipe Line Company of $6,205,929.73 and to the Texas Pipe Line Company of Oklahoma at an adjusted capitalized cost of $79,022.24, aggregating $6,284,951.97; 98.12 per cent. of the oil transported by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma through their pipe line facilities on which amortization is claimed was for the account of the Texas Company, and was oil belonging to said Texas Company.
8. In December, 1917, President Clemenceau, of France, forwarded to President Wilson a message, which is quoted as follows:
"At the decisive moment of this war, when the year 1918 will see military operations of the first importance begun on the French front, the French Army must not be exposed for a single moment to a scarcity of the petrol necessary for its motor lorries, aeroplanes, and the transport of its artillery.
"A failure in the supply of petrol would cause the immediate paralysis of our armies, and might compel us to a peace unfavorable to the Allies. Now the minimum stock of petrol computed for the French Armies by their commander in chief must be 44,000 tons and the monthly consumption is 30,000 tons. This indispensable stock has fallen to-day to 28,000 tons and threatens to fall almost to nothing if immediate and exceptional measures are not undertaken and carried out by the United States.
"These measures can and must be undertaken without a day's delay for the common safety of the Allies, the essential condition being that President Wilson shall obtain permanently from the American oil companies tank steamers with a supplementary tonnage of 100,000 tons. This is essential for the French Army and population. These tank steamers exist. They are sailing at this moment in the Pacific instead of the Atlantic Ocean. Some of them may be obtained from the fleet of new tankers under construction in the United States.
"President Clemenceau personally requests President Wilson to give the necessary Government authority for the immediate dispatch to French ports of these steamers.
"The safety of the allied nations is in the balance. If the Allies do not wish to lose the war, then, at the moment of the great German offensive, they must not let France lack the petrol which is as necessary as blood in the battles of to-morrow."
9. Pursuant to authority of law (Act Aug. 10, 1917, 40 Stat. 276), the President of the United States formed the United States Fuel Administration during the war period for the conservation of fuel resources to aid in the prosecution of the war. As a part of the Fuel Administration, there was created an oil division which controlled the distribution of oil and its products necessary to the prosecution of the war, in order to conserve such products and to prevent a threatened shortage thereof. The Fuel Administration placed petroleum and its products, including crude oil, in Class I upon its preferred list of necessities, and gave them preference over all articles not in the same class in the transportation and manufacture thereof. This is disclosed by the rules and regulations governing licensees engaged in the business of distributing fuel oil issued by the United States Fuel Administration, and approved by the President on March 20, 1918, as follows:
"Promulgated by the President under the power conferred on him by the Act of Congress approved August 10, 1917, entitled 'An act to provide further for the national security and defense by encouraging the production, conserving the supply, and controlling the distribution of food products and fuel.'
"These rules and regulations are promulgated by the President for the purpose of assuring an adequate supply and equitable distribution of fuel oil for purposes vitally essential to the national security and defense and to the successful prosecution of the war.
"The shortage in the amount of fuel oil which can be delivered because of transportation conditions is such that it is clearly a wasteful and unreasonable practice to deliver such fuel oil for uses which are not intimately and directly connected with the prosecution of the war.
"Rule 1. No licensee engaged in the distribution of fuel oil in that part of the United States east of the Rocky Mountains shall, without the consent of the United States Fuel Administrator, make any deliveries of fuel oil to any customer or consumer of any one of the classes mentioned below, whether the licensee is under any contract to make delivery to such customer or consumer or not, until such licensee shall have delivered to the customers or consumers of every class designated by a lower number with whom such licensee may have contracts, or to whom such licensee shall have been directed to deliver by order of the United States Fuel Administrator, all fuel oil to be delivered upon such last-mentioned contracts or such orders of the United States Fuel Administrator. Preferential deliveries as between members of the same class may be made only with the consent and under the direction of the United States Fuel Administrator. This rule shall apply to all deliveries of fuel oil, regardless of any contracts therefor heretofore or hereafter made.
"Provided that this rule shall not prevent the delivery of fuel oil by any licensee to any jobber or distributor if such fuel oil is to be used for a purpose for which the licensee could deliver such oil direct, nor in any case where the jobber or distributor shall have been licensed or designated by the United States Fuel Oil Administrator.
"The classes referred to and the order of their preference are as follows:
"1. Railroads, bunker fuel and oil refineries using or making fuel oil.
"2. Export deliveries or shipments for the United States Army or Navy.
"3. Export shipments for the navies and other war purposes of the Allies.
"4. Hospitals where oil is now being used as fuel.
"5. Public utilities and domestic consumers now using fuel oil (including gas oil).
"6. Shipyards engaged in Government work.
"7. Navy yards.
"8. Arsenals.
"9. Plants engaged in manufacture, production, and storage of food products.
"10. Army and Navy cantonments where oil is now being used as fuel.
11. Industrial consumers engaged in the manufacture of munitions and other articles under Government orders.
"12. All other classes.
"Rule 2. Licensees shall promptly comply with all orders of the United States Fuel Administrator with respect to the delivery of fuel oil, the submission of reports, and other matters proper and necessary to carry into effect the President's proclamation of January 31, 1918.
"Rule 3. Neither these rules and regulations nor the orders of the United States Fuel Administrator shall relieve any licensee from his obligation to deliver fuel oil which he has contracted to deliver as soon as the prevention resulting from such rules, regulations, or orders shall have ceased to operate and the fuel oil shall be available for delivery under such contracts.
"These rules and regulations shall apply to all licensees heretofore or hereafter licensed under the proclamation of the President dated January 31, 1918, and shall supersede the rules and regulations issued with the approval of the President on that day."
10. During the year 1918, and until the time the pipe line facilities hereinafter referred to were completed, the oil-producing area, known as the Ranger-Breckenridge district, was without pipe line transportation facilities. Because of embargoes and congestion due to inadequate railroad facilities, the transportation of crude oil from the district was difficult and uncertain. Furthermore, there was no railroad extension into Breckenridge, Tex., until 1920. Because of this condition, and at the urgent request and with the approval of the oil division of the United States Fuel Administration, the Texas Pipe Line Company extended its pipe-line facilities into the said area by building and constructing an 8" pipe line from Ranger, Texas, to West Dallas, Texas, a distance of 112.81 miles and a 6" line from Breckenridge, Texas, to Ranger, Texas, a distance of 16.85 miles, and made available the crude oil produced in this area to the refineries of the Texas Company at West Dallas, Tex., and Port Arthur, Tex. None of the crude oil so made available was sold to others, but was transported through said extensions to refineries of the Texas Company, where it was manufactured into petroleum products. Approximately 80 per cent. of the amount of amortization claimed is due to the said extensions of pipe line facilities into said Ranger-Breckenridge district.
11. During the period involved herein, the oil from the oil fields was transported by said pipe line company to the refineries of the Texas Company, where the same was manufactured into various petroleum products, principally gasoline, kerosene, fuel oil, and lubricants. A substantial part of these products was sold and delivered at Port Arthur by the Texas Company to the United States, Great Britain, France, and Italy, for use in the prosecution of the war.
12. Petroleum and its products were a vital necessity in the prosecution of the World War, and were used by the United States and its allies in the prosecution of war on land, on sea, and in the air. The war could not have been as successfully prosecuted by the United States and its allies without the use of petroleum and its products.
13. June 12, 1919, the Texas Company filed a consolidated income and profits tax return for 1918 for itself and subsidiary companies, which included the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, and the amount of taxes shown to be due thereon, to wit, $3,900,059.81, was duly paid. In said return a deduction from income was claimed for the amortization of war facilities under section 234(a)(8) of the Revenue Act of 1918, including facilities of the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma. The deduction for amortization was supported by schedules filed with the return and by amended schedules filed with the collector of internal revenue at Austin, Tex., on or about February 17, 1920, showing the facilities upon which amortization allowances were claimed, the cost thereof, time of purchase, construction, erection, installation, or acquisition and the amount of allowance claimed on each item.
14. January 12, 1920, the Commissioner of Internal Revenue, advised the Texas Company that an audit of its tax returns and those of its subsidiary companies for the period from January 1, 1915, to December 31, 1918, disclosed an additional tax liability of $27,278,978.55, of which $13,681,911.44 was for the fiscal year ended June 30, 1918, and $11,639,547.96 was for the six-month period ended December 31, 1918. In this audit the Commissioner made no allowance and permitted no deduction for the amortization of any facilities acquired by the Texas Company and/or any of its subsidiaries on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German government.
15. April 2, 1920, as a result of further examination of the returns, the Commissioner advised the Texas Company that the tax liability of $27,278,978.55 disclosed by the letter dated January 12, 1920, and referred to in the preceding finding, had been adjusted and reduced, subject to such further adjustments which might be necessary because of tentative allowances for depreciation and depletion, to $13,054,012.88, of which $9,080,280.27 was for the fiscal year ended June 30, 1918, and $4,377,915.54 was for the six-month period ended December 31, 1918. In this audit and determination the Commissioner made no allowance and permitted no deduction for the amortization of any facilities acquired by the Texas Company or any of its subsidiaries on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German government.
16. March 1, 1920, the Commissioner demanded of and received from the Texas Company the sum of $10,000,000 as part payment of the additional tax liability referred to in the preceding finding, said payment of $10,000,000 being made by the Texas Company on its own behalf and on behalf of its subsidiaries, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma.
The said total sum of $13,054,012.88, referred to in the preceding finding, was duly assessed by the Commissioner of Internal Revenue on the March, 1920, list, and the above-mentioned payment of $10,000,000 was credited thereon, and notice and demand were made by the collector of internal revenue at Austin, Tex., for the payment of the balance of said assessment, to wit, the sum of $3,054,012.88, which sum was paid by the Texas Company on its behalf and on behalf of its subsidiaries, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, on April 13, 1920.
17. June 22, 1920, the Commissioner advised the Texas Company of a further adjustment in the tax liability, and increased the same by $4,027,764.26 over the liability as disclosed by the letter of April 2, 1920, referred to in finding 15 above, making a total additional tax liability of $17,081,777.14. The additional sum of $4,027,764.26 was duly assessed by the Commissioner on the July, 1920, list. In making the additional assessment, the Commissioner made no allowance and permitted no deduction for the amortization of any facilities acquired by the Texas Company or any of its subsidiaries on and after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German government.
Pursuant to notice and demand from the collector of internal revenue for the payment of the additional assessment of $4,027,764.26, the Texas Company on its own behalf, and on behalf of its subsidiary companies, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, paid to said collector the sum of $1,158,804.45 on July 15, 1920, and filed a claim for abatement of the balance of said assessment amounting to $2,868,959.81, which claim for abatement was based upon items other than amortization of war facilities.
18. All payments of taxes mentioned herein, with the exception of the payment made on the basis of the original return mentioned in finding 13, were made involuntarily and under protest by the Texas Company on its behalf and on behalf of its subsidiaries, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma. All of said payments were turned over by the collector of internal revenue at Austin, Tex., to the Treasury of the United States. Proper proportions of the payments made by the said the Texas Company were charged to its subsidiaries in proportion to the amount of taxes due from each, and the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma passed credit for its proportionate part of said payments to the said the Texas Company.
19. February 23, 1922, the Texas Company, on its own behalf, and on behalf of its subsidiary companies, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, filed with the collector of internal revenue at Austin, Tex., claims for refund of taxes amounting to $1,116,086.33 for the fiscal year ended June 30, 1918, and $656,942.39 for the six-month period ended December 31, 1918.
20. Thereafter the Commissioner, upon consideration of the claim for abatement of $2,868,959.81 and claims for refund of $1,116,086.33 and $656,942.39, issued a certificate of overassessment for $3,352,604.21 for 1918. The amount of $2,867,773.92 was abated, $35,568.80 was credited to assessments for other years, and the balance of $449,261.49 was refunded to the Texas Company and its subsidiary companies on or about December 19, 1924.
21. February 29, 1924, the Texas Company and its subsidiary companies, including the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, filed a claim for refund amounting to $7,888,000 for the year 1918 based on amortization of war facilities pursuant to section 234(a)(8) of the Revenue Act of 1918. At the time of filing said claim for refund a request was made of the Commissioner to re-examine the returns of the Texas Company and its subsidiary companies for the purpose of redetermining the allowance for amortization of war facilities. The said claim for refund was accompanied by schedules showing the facilities upon which amortization allowances were claimed, the cost thereof, time of purchase, construction, erection, installation, or acquisition, and the amount of allowance claimed on each item.
22. Thereafter, on May 7, 1928, the Commissioner advised the Texas Company that a further audit of its income and profits tax returns and the returns of its subsidiary companies filed for the year 1918 disclosed that the taxes previously assessed and collected for said year had been overstated and a certificate of overassessment was issued in the amount of $909,556.81, which sum was refunded to the Texas Company. In the determination of the correct tax liability and the amount of the refund for 1918, the Commissioner stated that due consideration had been given to the allegations contained in the claim for refund in the amount of $7,888,000, referred to in finding 21. In such determination of the correct tax liability and the proper amount refundable, the Commissioner allowed a deduction from gross income for the amortization of war facilities, including pipe line facilities constructed, erected, installed, or acquired by the Texas Company on or after April 6, 1917, but rejected the claim for refund in so far as it was based upon a deduction from income for the amortization of the pipe line facilities acquired, constructed, erected, or installed on and after July 1, 1917, by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma.
23. By reason of the denial and rejection by the Commissioner of that part of the claim for refund based on the adjusted capitalized cost of $6,205,929.73 for pipe line facilities acquired, constructed, erected, and installed on and after July 1, 1917, by the Texas Pipe Line Company, this company was denied a deduction from gross income for amortization allowances under section 234(a) of the Revenue Act of 1918 in the amount of $1,031,307.11, and, by reason of a like denial and rejection of that part of the claim for refund based on the adjusted capitalized cost of $79,022.24 made by the Texas Pipe Line Company of Oklahoma, this corporation was denied a like deduction in the amount of $15,360.17. These deductions aggregate $1,046,667.28. Had the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma been allowed the deductions mentioned for amortization of their pipe line facilities from July 1, 1917, to December 31, 1918, an overpayment of income and profits tax in the amount of $713,915.94 would have resulted in excess of the amount determined and refunded by the Commissioner.
Harry T. Klein and James J. Cosgrove, both of New York City, for plaintiffs.
B.B. Gilman, of Washington, D.C., and Charles B. Rugg, Asst. Atty. Gen. (George H. Foster, of Washington, D.C., on the brief), for the United States.
Before BOOTH, Chief Justice, and LITTLETON, WHALEY, WILLIAMS, and GREEN, Judges.
The amortization deductions claimed in these cases are by the Texas Pipe Line Company, a Texas corporation, and the Texas Pipe Line Company of Oklahoma, an Oklahoma corporation, on pipe line facilities acquired by these corporations upon organization on July 1, 1917, and certain pipe line facilities thereafter constructed and installed by them. The pipe line properties acquired by these two corporations upon organization were paid in to them by the Texas Company in exchange for which the pipe line companies issued to the Texas Company their entire capital stock with the exception of qualifying shares and throughout the period from July 1, 1917, to December 31, 1918, the Texas Company owned all of the capital stock of the two pipe line corporations.
The controlling issue in the cases is whether the pipe line properties of the two pipe line corporations, the business of which was exclusively the transportation of oil from the oil wells of other corporations to the refineries of other corporations, were facilities constructed or acquired for the production of articles contributing to the prosecution of the war within the meaning of section 234(a)(8) of the Revenue Act of 1918, 40 Stat. 1057, 1077, 1078.
The Commissioner held, and the defendant here insists, that these pipe line companies, being common carriers, were not producing articles for the prosecution of the war within the meaning of the statute and the regulations; that the right to this deduction must be determined on the basis of the nature of the business engaged in by the pipe line companies and the purpose for which the facilities were acquired, constructed, and used by the taxpayer claiming the deduction.
The plaintiffs' pipe line companies contend that the amortization deduction provided in the statute is properly allowable on facilities of a pipe line company, a member of a consolidated group, engaged in the production of petroleum products where all the stock of the pipe line companies is owned by the parent company and such facilities are operated as a plant facility of the consolidated group; that the properties of the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma on which amortization deductions are claimed in this suit were acquired or installed by the members of a consolidated group during the war period, and were used for the production of war articles.
During the war period the Texas Company was engaged in the production of petroleum and its products, which were articles contributing to the prosecution of the war. This corporation owned, operated, and maintained oil wells and refineries, and, until July 1, 1917, owned and operated as a part of its business certain pipe line facilities for conveying crude petroleum from the wells to its refineries.
In February, 1917, the Legislature of the state of Texas, by enactment of chapter 30 of the General Laws of Texas, 1917, declared oil pipe line companies to be common carriers, and placed them under the jurisdiction of the Railroad Commission of the state.
By the provisions of chapter 31 of the General Laws of Texas 1917, the Legislature required all Texas corporations owning or operating oil pipe lines separately to incorporate such pipe lines, and, in the case of ownership of oil pipe lines beyond the border of Texas, authorized additional pipe line corporations to be organized outside of the state and the transfer of such pipe line properties to them. In every such case the statute permitted the oil-producing companies to acquire and own all of the capital stock of the separate pipe line corporations.
July 1, 1917, the Texas Company conveyed to the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma all of its pipe line properties then owned in the states of Texas and Louisiana, and, on the same date, conveyed to the Texas Pipe Line Company of Oklahoma all of its pipe line properties then owned in the state of Oklahoma. These transfers were due to the Texas statute above mentioned declaring all pipe line companies to be common carriers and requiring that such companies be separately incorporated.
The pipe line properties with respect to which amortization is claimed were constructed by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma after July 1, 1917. As common carriers, these corporations were required to and did offer their services to the public for the transportation of oil at prescribed shipping rates; 98 per cent. of the oils transported by these pipe line companies was for the Texas Company. The Texas Company owned all of the capital stock of the two pipe line companies, and these corporations were therefore affiliated within the meaning of section 240 of the Revenue Act of 1918 ( 40 Stat. 1081). In 1919 the Texas Company prepared and filed a consolidated income and profits tax return for 1918 for itself and the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, affiliated companies. A deduction for amortization of war facilities was shown. The commissioner allowed an amortization deduction to the Texas Company for pipe line properties constructed and owned by it up to July 1, 1917, but denied the deduction for amortization of any of the properties owned by the two pipe line corporations after that date, on the ground that the cost of acquisition and the cost of construction of the pipe lines were borne by the Texas Pipe Line Company and the Texas Pipe Line Company of Oklahoma, transportation corporations, not entitled under the statute to such a deduction.
Section 234(a)(8), supra, provides that: "In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the case of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer. * * *" A similar provision is found in section 234(a)(8) of the Revenue Act of 1921, 42 Stat. 227, 255. Article 183 of Regulations 62 (1922 edition), promulgated February 15, 1922, under the provisions of the Revenue Act of 1921, provides as follows:
"Art. 183. Property Cost of Which May be Amortized. — The taxpayer may deduct from gross income a reasonable allowance for amortization of the cost of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired on or after April 6, 1917, for the production of articles contributing to the prosecution of the war against the German Government, and of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of such war.
"The allowance may be deducted only by taxpayers who after April 6, 1917, have constructed or otherwise acquired plant or other facilities for the actual production of articles contributing to the prosecution of the war. It is not sufficient, to entitle the taxpayer to the allowance, that the nature of his business is such as to contribute to the production of articles. For example, a taxpayer, such as a railroad, whose business activities are confined to transportation (other than water transportation) is not entitled to the allowance. A taxpayer, the nature of whose business is the actual production of articles, however, may claim the allowance with respect to the cost of all buildings, machinery, equipment, or other facilities which were constructed for use or which were used in connection with the production of such articles, both in the acquisition and transportation of raw material, the actual process of manufacture or other conversion, and the transportation and marketing of the finished product."
The Treasury Department has consistently held, and we think correctly, that a taxpayer whose business activities are confined to transportation, other than transportation by water, of articles or men contributing to the prosecution of the war, is not entitled to the amortization allowance provided in the statute. The department has also consistently held, as provided in the regulations, that a particular taxpayer, the nature of whose business is the actual production of articles contributing to the prosecution of the war, may claim an allowance with respect to the cost of all buildings, machinery, equipment, or other facilities which were constructed for use or which were used in connection with the production of such articles, both in the acquisition and transportation of raw material, the actual process of manufacture or other conversion, and the transportation and marketing of the finished product.
The question before the court in these cases does not fall within the last-mentioned rule provided in the regulations and followed by the Treasury Department, inasmuch as we are here dealing with separate and distinct corporations. The Texas Company was engaged in the production of articles contributing to the prosecution of the war, but the transportation of crude oil from which those articles were manufactured through the facilities, upon which amortization is here claimed, was not made by the Texas Company and was not a part of its business; such transportation was carried on by the pipe line companies, separate and distinct taxpayer corporations. Under the Texas statutes, the pipe line companies were common carriers engaged in the business of transporting for profit such articles as should be entrusted to them by the public. Their income was derived from charges on transportation of oil; they did not sell or produce any article; they carried raw material, and delivered the same to the consignee in the same natural state in which received from the shipper. For the purpose of the deduction provided in the statute, their activities were in no wise different from those of a railroad company. In Hampton L.F. Ry. Co. v. Noel (D.C.) 300 F. 438, a railroad company enlarged its facilities to provide service during the war for the Langley Field aviation station and engaged in the transportation of articles for the prosecution of the war. It sought a deduction for amortization of war facilities in its return for the year 1918. The claim was disallowed by the Commissioner, and this action was upheld by the court. The court pointed out that the statute clearly did not intend to permit land transportation companies to take such a deduction. The reasoning of the court and the decision denying deduction are applicable to the question involved in these cases. See, also, L.O. 1074, V-C.B. 159. But the plaintiffs in this case contend that the amortization deduction provided in the statute is allowable to the pipe line companies, because they were members of a consolidated group of corporations, one of which consolidated group, i.e., the Texas Company, was engaged in the production of petroleum products which were articles contributing to the prosecution of the war. The fact that a particular taxpayer whose business is in no wise the production of articles is affiliated with another corporate taxpayer which is engaged in the production of articles contributing to the prosecution of the war does not alone bring the first corporation within the provisions of section 234(a)(8). Affiliation does not destroy the corporate entity nor change the separate identity of each member of the affiliated group. The consolidated group of corporations is not the taxpayer. The fact that one member of the consolidated group may be entitled to a certain deduction under the statute does not give the other members of the affiliated group the right to claim such deduction if, as separate and distinct taxpayers under the statute, they are not entitled to it.
Items of gross income and deductions are not consolidated for the purpose of determining the net income and the tax. It is only the net income of the separate corporate taxpayers, members of the affiliated group, that is consolidated and treated as the consolidated net income for the purpose of computing the tax to be allocated and assessed to the several corporations in accordance with the net income properly assignable to each. Swift v. United States, 67 Ct. Cl. 322. The consolidated group, therefore, may only receive the benefit of the deduction for amortization of the facilities in question if the pipe line companies individually and as separate corporate taxpayers are entitled under the statute to the deductions. As such separate taxpayers, and independently of the business carried on by the Texas Company, the pipe line companies did not come within the provisions of section 234(a)(8), and were not entitled to a deduction for amortization of their properties. The ownership of their stock by the Texas Company, which, as a separate and distinct taxpayer corporation, was entitled to the amortization deduction on its facilities, does not change the situation. First National Bank of Chicago v. United States, 38 F.2d 925, 69 Ct. Cl. 312; Id., 283 U.S. 142, 51 S. Ct. 378, 75 L. Ed. 913. The properties and facilities upon which the deduction for amortization is claimed were purchased or installed by the pipe line companies. The costs of acquisition and construction of pipe line facilities were the costs of the pipe line companies. The statute allows the deduction for amortization only to the corporations bearing the cost of acquisition or construction, which, in this case, were the pipe line companies. Appeal of Military Equipment Co., 2 B.T.A. 36.
We have considered the cases of Appeal of G.M. Standifer Construction Corp., 4 B.T.A. 525, and United States Refractories Corp., 9 B.T.A. 671, relied upon by plaintiffs, but the facts and circumstances in the cases before this court distinguish them from the cases mentioned before the United States Board of Tax Appeals.
The plaintiffs are not entitled to recover, and the petitions are therefore dismissed. It is so ordered.