Berry Petroleum Co. v. Commissioner

Berry Petroleum Company (Berry) (plaintiff) and its wholly owned subsidiary, Bush, were in the oil business. Tosco Enhanced Oil Recovery Corp. (Teorco), a wholly owned subsidiary of Tosco Corp. (Tosco), held leasehold interests in four oil properties, one of which was called Placerita. Berry and Tenneco Oil Co. (Tenneco), another oil company, entered an acquisition agreement under which Bush purchased all Teorco’s stock and had the Placerita property sold to Tenneco, and Tenneco paid Berry in exchange. After Bush acquired Teorco, Teorco’s name was changed to C.J. Co., and C.J. had immediate net-operating-loss carryovers. Before the acquisition, Bush had enough cash for its purposes. However, the acquisition caused Bush to need additional cash, and therefore, C.J. gave Bush two cash advances in exchange for unsecured notes. Ultimately, Bush could not repay the advances, and C.J. issued Bush a dividend by cancelling repayment. Immediately after, Bush transferred all of its C.J. stock to Berry. C.J. was ultimately merged into Berry. Berry argued, in part, that the dividend from C.J. to Bush did not qualify as a corporate contraction because the dividend did not occur in connection with Teorco’s ownership change as required by § 382(e)(2) of the Internal Revenue Code. However, the Commissioner of Internal Revenue (the Commissioner) (defendant) argued that, because Bush never intended to repay the advances, the cancellation of repayment was a corporate contraction within the meaning of § 382(e)(2). The Commissioner further argued that the cash advances were connected to Teorco’s ownership change because Bush would not have needed the advances but for Bush’s acquisition of Teorco.