Portland Oil Co. v. Commissioner

Messrs. Buell and Herndon were the sole shareholders of Bu-Vi-Bar Petroleum Corporation (Bu-Vi-Bar). Bu-Vi-Bar’s sole asset was a right to receive installment payments from a sale of an interest in certain lease agreements. Bu-Vi-Bar’s basis in the installment contract was considerably lower than the amount of principal it was to receive. Accordingly, Bu-Vi-Bar realized taxable gain upon receipt of the first installment payment. Buell and Herndon executed a plan in an effort to eliminate the tax burden of the remaining installment payments. Under the plan, Bu-Vi-Bar contributed the installment contract to the newly formed Portland Oil Company (Portland) (plaintiff) in exchange for Portland stock. Also pursuant to the plan, Buell and Herndon gifted money to members of their families, who in turn contributed the money to Portland in exchange for Portland stock. The family members held 25 percent of Portland’s stock, and Bu-Vi-Bar held the remaining 75 percent. Bu-Vi-Bar then liquidated on the same day as the transfer, distributing its assets to Buell and Herndon. Portland reported its basis in the installment contract as equal to principal owed and thus did not report any gain when the remainder of the contract was paid. The commissioner (defendant) of the Internal Revenue Service (IRS) determined a tax deficiency. The commissioner determined that Portland’s basis in the installment contract carried over from its basis in the hands of Bu-Vi-Bar. Portland brought suit in the United States Board of Tax Appeals, challenging the commissioner’s determination. The United States Board of Tax Appeals affirmed the commissioner’s determination, and Portland appealed.