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Full Opinion
OPINION
In this case plaintiff seeks refunds of Federal income taxes it paid for calendar years ending December 31, 1965 and December 31, 1966, plus appropriate interest as provided by law. There are two issues to be resolved in this opinion: first, whether the Internal Revenue Service (IRS) improperly disallowed plaintiff’s deduction in 1965 of certain net operating loss carryovers acquired from the 1964 liquidation of Elgin Gas and Oil Company (Elgin); and second, whether the IRS improperly classified amounts plaintiff received from a limited partnership in 1966 as the proceeds of a sale of a portion of plaintiff’s partnership interest.
Plaintiff was incorporated under Delaware law on July 12, 1961. Subsequently, all the assets and liabilities of Jupiter Oils, Ltd., a Canadian corporation, were transferred to plaintiff in exchange for plaintiff’s stock and Jupiter Oils, Ltd., was liquidated. Prior to 1960, Jupiter Oils, Ltd. had been engaged primarily in the oil and gas business.
In 1960, Jerrold Wexler (Wexler) purchased a block of stock in Jupiter Oils, Ltd. that gave him effective control of the management and business operations of the corporation. Wexler’s control carried over to plaintiff at the time Jupiter Oils, Ltd. was liquidated and Wexler remained in control of plaintiff throughout the tax years involved in this litigation. Under Wexler’s control, Jupiter Oils, Ltd., and subsequently plaintiff, began an active program of acquisition and diversification as part of a long-range plan to build plaintiff into a large conglomerate corporation. Hereinafter the singular term “plaintiff” shall embrace both The Jupiter Corporation and its Subsidiary Companies.
I.
Elgin’s Net Operating Loss Carryovers-
The Commissioner of IRS disallowed plaintiff’s deductions in 1965 of net operating loss carryovers incurred by Elgin during the calendar years 1960 through 1964 on two grounds. First, the Commissioner claimed that plaintiff’s deduction of Elgin’s losses was properly disallowed under Internal Revenue Code (IRC)
A. Plaintiff’s Acquisition of Elgin
Jupiter Oils, Ltd. first acquired an interest in Elgin on March 30, 1961, when it purchased 373,000 shares of Elgin stock in exchange for $24,800 and 8,111 shares of Jupiter Oils, Ltd. stock. Immediately following this transaction, Elgin had approximately 15,000 shareholders with a total of 1,492,000 shares of stock outstanding. The stock Jupiter Oils, Ltd. acquired in this transaction constituted approximately 25 percent of Elgin’s outstanding stock. The remainder of Elgin’s outstanding stock was publicly held in relatively small individual quantities. At this time Elgin lacked effective management and operational leadership, and its books and financial records were poorly kept.
Jupiter Oils, Ltd.’s ownership of 25 percent of Elgin’s outstanding stock gave it effective control of Elgin’s management and business operations. Immediately after the acquisition of Elgin’s stock, persons who were officers, directors or otherwise affiliated with Jupiter Oils, Ltd. constituted a majority of Elgin’s board of directors.
Plaintiff acquired Jupiter Oils, Ltd.’s interest in Elgin in the latter half of 1961 when Jupiter Oils, Ltd. was liquidated into plaintiff. At all times thereafter, until El-gin’s liquidation in 1964, plaintiff controlled Elgin’s management and business operation through its ability to elect a majority of Elgin’s board of directors.
Subsequent to its acquisition of the assets and liabilities of Jupiter Oils, Ltd., plaintiff continued this program of expansion in the oil and gas business. On March 1, 1962, plaintiff merged with Commonwealth Oil Company (Commonwealth Oil), a profitable oil and gas corporation. Commonwealth Oil’s operations were more extensive and diversified than Elgin’s and its management staff was more experienced and organized than Elgin’s. Plaintiff retained Commonwealth Oil’s managerial staff and assimilated Elgin’s operations into Commonwealth Oil’s pre-existing organizational structure.
Plaintiff developed a plan to combine El-gin and several other corporations in which plaintiff owned interests into a corporate organization within which to build another large diversified public corporation similar to plaintiff itself. The success of this development plan was considered to be contingent on the preservation of an American Stock Exchange listing of one of the corporations which was to be combined with El-gin. When this American Stock Exchange listing was extinguished, the development plan was discarded in late 1962. Subsequently, plaintiff’s plan to build a profitable oil and gas division centered on Commonwealth Oil rather than Elgin.
When Jupiter Oils, Ltd. acquired an interest in Elgin in early 1961, its officers were led to believe that Elgin’s business operations could be profitably run. However, the data available for this belief was not complete nor entirely reliable, and reports of Elgin’s potential oil resources were inadequate and too speculative. It was clear, however, that Elgin needed money, improved equipment, machinery and management if it hoped to be a profitable company. Elgin was not a profitable company in 1961 when Jupiter Oils, Ltd. acquired 25 percent of Elgin’s stock. Elgin continued to operate at a loss in every year until it was liquidated in 1964.
Plaintiff advanced Elgin limited amounts of money to allow Elgin to continue its business operations. These advances were made initially on an informal, open-account system. Elgin’s non-interest indebtedness to plaintiff was neither secured nor documented by formal promissory notes. By the end of 1963, plaintiff’s books and records indicated that Elgin owed plaintiff $84,400 from these informal advances. At this time, plaintiff made a decision to obtain Elgin’s stock in cancellation of this $84,400 indebtedness. This decision was part of a newly-formulated policy whereby plaintiff intended to make future advances to Elgin only in exchange for Elgin stock. The informal open-account system was terminated by plaintiff on December 31, 1963. The record supports an inference that this decision to obtain Elgin stock in repayment of indebtedness was the start of plaintiff’s maneuvering to be in a position to utilize Elgin’s large net loss carryovers at an appropriate time in the future.
Elgin did not issue any stock to plaintiff as consideration for plaintiff’s cancellation of Elgin’s $84,400 indebtedness until July 6, 1964. By this date, plaintiff had advanced an additional $22,225 to Elgin. Elgin issued 1.316.250 shares of its stock to plaintiff on July 6, 1964 in satisfaction of Elgin’s total outstanding indebtedness as of that date. The issuance of these shares to plaintiff increased plaintiff’s stock ownership to 1.684.250 shares, which comprised 61 percent of Elgin’s total outstanding shares.
Plaintiff continued to advance Elgin money in exchange for relatively small quantities of stock during July, August, September, and November of 1964. Beginning in September, plaintiff began purchasing relatively small quantities of Elgin’s issued stock from private shareholders. Also during this period, plaintiff transfer
B. Section 269 of the Internal Revenue Code
When “control” of a corporation is acquired for the “principal purpose” of evading or avoiding Federal income tax by securing the benefit of a deduction which the acquiring corporation would not otherwise enjoy, section 269(a) gives the Secretary of the Treasury discretionary authority to disallow the deduction.
The determining factor * * * is the intention or purpose of [taxpayer] at the time of acquisition. [Taxpayer] having acquired control of [a corporation] for business reasons alone and without considering the tax aspects of the transaction, the intention or purpose “for which (such) acquisition was made” would not be changed from a business into a tax evasion purpose when it subsequently ascertained the tax consequences of the transaction.
See also Capri, Inc. v. Commissioner, 65 T.C. 162, 178-79 (1975).
(1) Acquisition of Control
With the acquisition in 1961 of approximately 25 percent of Elgin’s outstanding stock, Jupiter Oils, Ltd. acquired effective control of Elgin’s management and business operations. When plaintiff subsequently in 1961 acquired all the assets of Jupiter Oils, Ltd., it acquired effective control of Elgin. However, the acquisition of effective or actual control of a corporation’s assets and its management is not necessarily an acquisition of control to which section 269 applies. Section 269 contains its own definition of control, as follows:
Control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation.
Since Jupiter Oils, Ltd., and subsequently plaintiff, acquired only 25 percent of Elgin’s outstanding stock on March 30, 1961, neither corporation acquired “control” of Elgin within the first part of the definition quoted above which requires an acquisition of at least 50 percent of a corporation’s outstanding stock. Plaintiff cannot utilize the second part of the definition quoted above because there is not sufficient evidence in the record to determine the total value of all Elgin’s outstanding shares at that time.
Plaintiff takes the position that it received control of Elgin, within the statutory definition, on December 31, 1963. In its briefs, however, plaintiff’s discussion of its position is not persuasive. It does not cite any case law in support of its position nor does it provide any cogent analysis as to why its position should be adopted. It does cite Rev.Rul. 69-591, 69-2 C.B. 172 in support of its position that no significance should attach to the fact that Elgin did not issue stock certificates to plaintiff until July 6, 1964. However, that Ruling deals with a different provision of the Internal Revenue Code and different circumstances and thus lacks applicability, by analogy or otherwise, to the facts of this case. Plaintiff’s books and records indicate that Elgin’s outstanding indebtedness to plaintiff of $84,400 was cancelled and plaintiff’s total investment in Elgin was increased by an equal amount on December 31,1963. Plaintiff’s treasurer testified that sometime in this period Elgin’s management authorized the issuance of 844,000 shares of Elgin stock to plaintiff in exchange for plaintiff’s cancellation of Elgin’s indebtedness.
Ownership of shares in a corporation is a contractual relationship created by the agreement and consent of the corporation and the shareholder. See Pacific Nat’l. Bank v. Eaton, 141 U.S. 227, 234, 11 S.Ct. 984, 985, 35 L.Ed. 702 (1891). In Don Johnston Drilling Co. v. Howard, 347 P.2d 640, 647 (Okl.1959), the court set forth the prerequisites for the creation of a shareholder’s interest in a corporation as follows:
When a corporation has agreed that a person shall be entitled to a certain number of shares for a consideration permitted by law and executed by the person, those shares come into existence and are owned by him.
In the present case, plaintiff’s failure to prove when Elgin agreed to issue 844,000 shares to plaintiff in exchange for the cancellation of Elgin’s indebtedness prevents a determination that these shares came into existence prior to the date the stock certificates were actually delivered to plaintiff, i.e., July 6, 1964.
A stock certificate is merely “a muniment of title.” Don Johnston Drilling Co. v. Howard, supra, 347 P.2d at 647. “[T]he issuance of the certificate is not a prerequisite to the acquisition of ownership.” Swenson v. Commissioner, 309 F.2d 672, 674 (8th Cir.1962). See also Hawley v. Upton, 102 U.S. 314, 26 L.Ed. 179 (1880); Babbitt v. Pacco Investors Corp., 246 Or.
Elgin issued a total of 1,316,250 shares to plaintiff on July 6, 1964, bringing plaintiff’s percentage ownership of Elgin’s outstanding stock to 61 percent. Since it was on this date that plaintiff’s percentage ownership of Elgin’s outstanding stock first equalled or exceeded 50 percent, plaintiff acquired control of Elgin, within the statutory definition, on July 6,1964.
In its 1964 tax return, plaintiff reported its liquidation of Elgin on December 31, 1964, and set forth a schedule of the unused net operating loss carryovers of Elgin as follows:
1960 return $1,924,874
1961 return 5,911
1962 return 1963 return 26,410 29,137
1964 return 812,406
$2,798,738
(2) Principal Purpose of Acquisition
With the date that plaintiff acquired control of Elgin established, the difficult and troublesome task remains of determining whether, on July 6, 1964, plaintiff acquired control of Elgin for the principal purpose of evading or avoiding Federal income taxes. The detailed findings of fact which accompany this opinion spell out the facts and circumstances germane to the acquisition of control by plaintiff of Elgin. No attempt will be made here to restate these voluminous findings. As in many involved tax cases, the myriad factual circumstances and the utilization of and convoluted references to financial data serve more often to confuse and obfuscate rather than enlighten relative to the crucial issue of motive and intent attendant to plaintiff’s acquisition of control of Elgin.
Treasury regulations § 1.269-3(a) provide the following guidance for making the determination referred to above:
If the purpose to evade or avoid Federal income tax exceeds in importance any other purpose, it is the principal purpose. This does not mean that only those acquisitions fall within the provisions of section 269 which would not have been made*66 if the evasion or avoidance purpose was not present. The determination of the purpose for which an acquisition was made requires a scrutiny of the entire circumstances in which the transaction or course of conduct occurred, in connection with the tax result claimed to arise therefrom.
The determination of the principal purpose behind the acquisition of control of Elgin on July 6,1964, is essentially a factual determination. R.P. Collins & Co. v. United States, 303 F.2d 142, 145 (1st Cir.1962). In cases such as this, this determination, of necessity, requires careful consideration of the motive and intent of top management officials of the acquiring company. D’Arcy-MacManus v. Masius, Inc., 63 T.C. 440, 449 (1975). Too, inferences, because of the amorphous nature of motive and intent, play a greater role in cases such as this and thus make the job of the trier of fact an extremely difficult one. See Scroll, Inc. v. Commissioner, 447 F.2d 612, 614, 619 (5th Cir.1971); Industrial Supplies, Inc. v. Commissioner, 50 T.C. 635, 648 (1968). An examination of the entire circumstances surrounding plaintiff’s acquisition of control of Elgin preponderates in favor of a finding that in late 1963 and thereafter plaintiff’s primary and dominant motive and intent in acquiring such control was for the principal purpose of tax avoidance.
It is clear and uncontroverted from the evidence in the record that Jupiter Oils, Ltd., and subsequently plaintiff, were motivated primarily, if not exclusively, by valid business reasons when the initial interest in Elgin was acquired in 1961. Jupiter Oils, Ltd. and plaintiff acquired 25 percent of Elgin’s stock in 1961 with plans to develop Elgin’s oil and gas properties and to use Elgin as a vehicle for the development of a conglomerate corporation in much the same way that Jupiter Corporation, the plaintiff itself, was developing at that time. Plaintiff’s principal officers testified convincingly that in 1961 plaintiff was expected to continue operating at a loss in the reasonable future while it carried out its plan of expansion and diversification. Plaintiff’s management therefore did not envision any immediate benefit which could be obtained from the acquisition of Elgin’s net operating losses at that time or the reasonable future. It was not until late 1963 that plaintiff could reasonably foresee that El-gin’s net operating tax loss carryovers might be of benefit in 1965 when plaintiff’s financial situation was expected to be considerably different than it was previously. Plaintiff, since 1961 (reported total income of $21,314.27 for the short taxable year July 12, 1961-December 31, 1961), had experienced significant growth. In 1963, plaintiff reported total revenues of $32,317,454, and on its 1963 income tax return reported gross profit of $9,618,248. In 1964, plaintiff reported total revenues of $69,769,739, and on its 1964 income tax return reported gross profit of $42,555,337. In 1965, plaintiff reported total revenues of $79,584,124, and on its 1965 income tax return reported gross profit of $43,451,984. It is also clear from the record that plaintiff’s management, particularly its chief financial officer, was aware in 1961 and at all times thereafter of Elgin’s large 1960 net operating tax loss carryover ($1,924,374), and was also aware of the fact that use of such a large loss carryover would expire after the 1965 tax year. Such awareness, while not controlling, certainly merits serious consideration in determining whether the acquiring corporation was motivated by tax avoidance in its corporate maneuvering. See Scroll, Inc. v. Commissioner, supra, 447 F.2d at 618; J.G. Dudley Co. v. Commissioner, 298 F.2d 750, 753 (4th Cir.1962); Fawn Fashions v. Commissioner, 41 T.C. 205, 213 (1963). Compare D’Arcy-MacManus & Masius v. Commissioner, 63 T.C. 440, 451-52 (1975).
After its initial acquisition of some 25 percent of Elgin stock in 1961, plaintiff made undocumented, non-interest loans to Elgin. As of the end of 1963, these loans totaled $86,100. Plaintiff’s management decided to obtain Elgin stock in cancellation of this indebtedness. Further, it was also decided that any future advances to Elgin would only be made in exchange for Elgin stock. In this manner, plaintiff obtained additional shares of Elgin stock such that
Plaintiff’s stock activity in late 1963 and 1964, in conjunction with its expected need for additional net operating tax loss carryovers to reduce its anticipated otherwise taxable profit in 1965, creates a strong inference that tax avoidance was the dominant motive and the intent when it acquired control of Elgin in July 1964. Since a very large portion of Elgin’s operating tax loss carryover, incurred in 1960, and totaling $1,924,873.94, would expire if not used in 1965, one is “entitled to believe that no businessman in his right mind would allow this plum to go unplucked. To do nothing was to foresake forever the hope of a tax savings * * Scroll, Inc. v. Commissioner, supra, 447 F.2d at 618.
Plaintiff stresses that its liquidation of Elgin in late 1964 was due to the financial threats posed by Federal Power Commission actions which, if they materialized, could, according to the testimony of plaintiff’s treasurer, cause a financial drain on the corporation and indeed could put in issue plaintiff’s very existence. In light of plaintiff’s financial growth, at that time, the testimony of plaintiff’s official in this regard is viewed as hyperbole. Plaintiff, according to the treasurer’s testimony, embarked on cost-cutting measures to counter any future financial problems which included elimination of companies such as Elgin which were not profitable and served only as a drain on plaintiff financially.
Plaintiff relies principally on the testimony of its top management officials that it harbored no tax avoidance motive or purpose in acquiring control of Elgin. It goes without saying that the ascertainment of one’s subjective intent or purpose motivating actions on his or her part is most difficult. See Fawn Fashions v. Commissioner, supra, 41 T.C. at 213. In delving into the subjective intent and motives of plaintiff’s top management regarding the matter of tax avoidance, the inquiry must be based on objective facts which manifest this subjective intent. Capri, Inc. v. Commissioner, supra, 65 T.C. at 179. The self serving implications inherent in the testimony of these officials serves to reduce the weight to be accorded this testimony when considered in the light of the totality of the record. See F.C. Publication Liquidating Corp. v. Commissioner, 304 F.2d 779, 781 (2d Cir.1962). The objective facts in this record, and the inferences reasonably drawn therefrom, persuade that plaintiff’s intent and motive in acquiring control of Elgin was for the primary purpose of obtaining the benefit of Elgin’s large net operating tax loss carryovers. Thus, the testimony of these officials, even if deemed uncontradict-ed, is not sufficient on this record, to overcome the Commissioner’s determination that control of Elgin was motivated primarily by tax avoidance purposes. See Geiger v. Commissioner, 440 F.2d 688, 689 (9th Cir.1971), cert. denied, 404 U.S. 851, 92 S.Ct. 88, 30 L.Ed.2d 90 (1971).
The record clearly establishes that plaintiff paid substantially less for Elgin stock than the adjusted basis of the Elgin property plus the value of Elgin’s tax loss carryovers. Plaintiff paid about $221,777 for Elgin stock it owned as of July 6, 1964. Plaintiff’s books and records indicate that its total investment in Elgin at the end of 1964 was $423,443.55. In July 1961, Elgin’s balance sheet reported assets in access of $1 million. The record suggests that this figure is somewhat overstated. There is no reliable evidence in the record of the value of Elgin’s assets as of late 1964. When Elgin was liquidated, plaintiff claimed the benefits of Elgin’s $2,798,737.93 in net operating loss carryovers. Thus, for a total investment of $423,443.55, plaintiff acquired tax losses of over $2 million. Such circumstances also support an inference that tax avoidance was plaintiff’s primary purpose in acquiring control of Elgin, particularly where no effort was made to develop Elgin’s oil properties despite the reports of hired experts that such a course be followed, the unprofitability of Elgin’s operation, and the drain of Elgin on plaintiff financially. See Hart Metal Products Corp. v. Commissioner, 437 F.2d 946, 951 (7th Cir.1971); American Pipe & Steel Corp. v. Commissioner, supra, 243 F.2d at 127-28.
Since plaintiff’s purchase price for control of Elgin was substantially disproportionate to the aggregate of Elgin’s assets and transferable deductions, the provisions of section 269(c) are also for consideration.
Plaintiff carries a heavy burden of proof in attempting to overcome the determination of the Commissioner that it acquired control of Elgin for tax avoidance purposes. Scroll, Inc. v. Commissioner, supra, 447 F.2d at 618; American Pipe and Steel Corp. v. Commissioner, supra, 243 F.2d at 126. The fact that plaintiff’s situation also falls within the pale of the provisions of section 269(c), discussed above, adds further weight to the presumption of correctness which already exists in the determination of the Commissioner that plaintiff acquired control of Elgin for tax avoidance purposes. Glen Raven Mills, Inc. v. Commissioner, 59 T.C. 1, 16 (1972); D’Arcy-Mac-Manus & Masius, Inc. v. Commissioner, supra, 63 T.C. at 453. Plaintiff has failed to overcome this presumption and the Commissioner’s determination must stand.
3. Substantiation
In the notice of deficiency, the Commissioner denied plaintiff’s 1965 deduction of net operating loss carryovers required from the liquidation of Elgin in 1961 on the alternate ground that plaintiff failed to substantiate the losses Elgin claimed in its 1960-1964 tax returns. This determination that plaintiff failed to substantiate the loss deductions is endowed, as indicated previously, with a presumption of correctness. Welsh v. Helvering, supra, 290 U.S. at 115, 54 S.Ct. at 9; Montgomery Coca-Cola Bottling Co. v. United States, supra, 222 Ct.Cl. at 366, 615 F.2d at 1322. To overcome this presumption, plaintiff has the burden of presenting “substantial evidence as to the wrongfulness of the Commissioner’s determination. * * * Once the taxpayer has met this burden the presumption disappears and the court must resolve the question upon the basis of all of the evidence before it.” KFOX, Inc. v. United States, supra, 206 Ct.Cl. at 151-52, 510 F.2d at 1369; see also Alterman Foods, Inc. v. United States, 222 Ct.Cl. 218, 611 F.2d 866, 867-68 (1979). For the reasons set forth below, it is determined that plaintiff has failed to overcome the presumption of correctness which attaches to the Commissioner’s determination on the matter of substantiation.
Plaintiff claimed the benefit of the following net operating loss carryover deductions, identified by the taxable year in which Elgin incurred them:
Year Incurred Amount of Loss
1960 $1,978,280.94
1961 5,910.71
1962 26,409.97
1963 29,137.03
1964 812,406.24
Elgin’s entire 1960 net operating loss and the bulk of its 1964 net operating loss were reportedly caused by the abandonment or sale (at a loss) of oil and gas leases. No leases were abandoned or sold at a loss in 1961, 1962 or 1963.
Elgin’s tax returns for the years 1960 and 1964 did not identify the leases which were reported as abandoned in those years. The
1960 “Abandonment losses — $1,371,862.50”
1964 “Abandonments — $ 254,836.52”
The leases sold at a loss were reported in 1960 on “Schedule D,” the schedule required for reporting gain and losses from sales or exchanges of property. This schedule identified the leases sold at a loss in 1960 simply as “Texas Leases” which were foreclosed on by the First National Bank of Lubbock, Texas, resulting in a reported loss of $606,-418.44. Elgin’s 1960 schedule D also reported that the leases were acquired in 1956 for $1,238,314.63 and that $242,018.18 had been allowed (or allowable) as depletion and/or depreciation deductions between 1956 and 1960. The gross sales price (the amount of the mortgage indebtedness satisfied by the foreclosure) was reported as $398,878.01.
Elgin’s 1964 tax return reported the leases sold at a loss in the schedule of “other deductions.” The deduction was identified simply as a “Loss on Sale of Properties ... $384,130.33.” The 1964 tax return produced in evidence did not include a schedule D. The return did not report the information required on a schedule D, such as a description of each property sold or exchanged, the dates the properties were acquired and sold, the sale price received for the properties, the depletion and/or depreciation deductions taken over the period of the ownership of the properties, the expense of selling the properties, and the gain or loss from the sale or exchange of each property.
Plaintiff was unable to produce significant documentation to substantiate the losses Elgin reported on its 1960 through 1964 tax returns. The bulk of Elgin’s financial records relating to these years were apparently destroyed either by a 1969 fire in the storerooms of plaintiff’s accounting firm, Philip Rootberg & Company, or by the normal and systematic destruction of old files conducted by Touche Ross & Company, the successor to Elgin’s 1960 accounting firm, Ballin, Milstein, and Feinstein. There is no indication in the record that Elgin’s financial records relating to the losses claimed on its 1960 and 1964 tax returns were destroyed intentionally, fraudulently or in bad faith. Nevertheless, the accidental loss or destruction of records supporting a tax deduction does not alleviate or diminish plaintiff’s burden to adequately substantiate the deduction claimed. Allen v. Commissioner, 117 F.2d 364, 368 (1st Cir.1941); A