## Facts

- Bu-Vi-Bar Petroleum Corp. owned a one-tenth interest in Kansas oil leases and equipment.
- In 1929, Bu-Vi-Bar contracted to sell its interest to Continental Oil Co. for $1,650,000 payable in installments through 1932, with 6% interest on the unpaid balance.
- Bu-Vi-Bar elected the installment method under § 44 of the Revenue Act of 1928 and reported gain as payments were received.
- By late 1930, Bu-Vi-Bar was wholly owned by two shareholders, Buell and Herndon, and the installment contract was its principal asset with a basis far below face value.
- To reduce tax on future installment collections, a plan was executed in 1930:
  - Portland Oil Co. was formed.
  - Buell and Herndon made cash gifts to family members, who contributed the cash to Portland in exchange for 25% of Portland’s stock.
  - Bu-Vi-Bar transferred the installment contract to Portland in exchange for the remaining 75% of Portland’s stock.
  - Bu-Vi-Bar liquidated the same day and distributed the Portland stock to Buell and Herndon.
- In 1931, Portland received the remaining principal and interest from Continental and reported no gain, treating its basis as essentially the remaining principal (a stepped-up basis).
- The Commissioner determined Portland had to use Bu-Vi-Bar’s basis (carryover basis), producing taxable gain in 1931 and a deficiency of $114,804.32; the Board of Tax Appeals sustained the deficiency.

## Issues

1. Whether Portland acquired the installment contract with a stepped-up basis or, under §§ 112 and 113 of the Revenue Act of 1928, had to use Bu-Vi-Bar’s carryover basis.
2. Whether the transfer of the installment contract to Portland qualified as a tax-free exchange under § 112(b)(5), triggering § 113(a)(8)’s carryover basis rule.
3. Whether § 44(d) (disposition of installment obligations) required gain recognition on the transfer or otherwise allowed a basis increase inconsistent with § 112 nonrecognition.
4. Whether a tax-reduction motive affected the application of the reorganization/nonrecognition and basis provisions.

## Decision

- The First Circuit affirmed the Board of Tax Appeals and upheld the deficiency.
- The court held the transfer of the installment contract to Portland was a tax-free exchange within § 112(b)(5).
- Under § 113(a)(8), Portland took the installment contract with the same basis it had in Bu-Vi-Bar’s hands.
- Because Portland had a carryover basis, it realized taxable gain in 1931 when it collected the remaining installments.
- Section 44(d) did not override § 112’s nonrecognition treatment for this qualifying exchange.
- The tax-motivated purpose did not negate the transaction’s statutory treatment where the exchange met the requirements of § 112(b)(5).

## Legal Principles

- In a § 112(b)(5) exchange (contribution of property to a corporation solely for its stock with requisite control immediately after), the transferee corporation’s basis is determined by § 113(a)(8): carryover basis from the transferor, adjusted only for any gain recognized.
- A taxpayer cannot obtain a stepped-up basis in an installment obligation merely by transferring it in a qualifying nonrecognition exchange; deferred gain remains taxable upon later collection by the transferee.
- Section 44(d)’s rule for dispositions of installment obligations does not apply to impose recognition or permit basis resetting when the transfer is governed by § 112 nonrecognition and § 113 carryover basis.
- A transaction undertaken for tax reasons is not disregarded solely for motive when it satisfies the statutory requirements, but the statute is applied to prevent unintended elimination of gain.

## Conclusion

The court treated the installment-contract transfer as a qualifying § 112(b)(5) exchange, required Portland to take Bu-Vi-Bar’s carryover basis under § 113(a)(8), and held that the deferred gain was recognized when Portland collected the installments in 1931; § 44(d) did not create a contrary result.


Portland Oil Co. v. Commissioner, 109 F.2d 479 (1st Cir. 1940)