These two cases were argued together, turn upon like facts, and may be disposed of in a single opinion. They involve the legality of certain income taxes assessed against the plaintiff in error in the one case, and against the testator of plaintiffs in error in the other, under the income tax provisions of the Act of October 3, 1913, c. 16, 38 Stat. 114, 166, 167, by reason of certain distributions of corporate stocks received by the respective taxpayers under the following circumstances: In and prior to the year 1914, the Prairie Oil & Gas Company, a corporation of the state of Kansas, was engaged in producing, purchasing, and selling crude petroleum, and transporting it through pipe lines owned by the company in the states of Kansas and Oklahoma, and elsewhere. At the same time the Ohio Oil Company, a corporation of the state of Ohio, was engaged in producing and manufacturing petroleum and mineral oil and transporting the same through pipe lines owned by it in the states of Ohio, Indiana, Illinois, and Pennsylvania. In the month of June, 1914, it was judicially determined by this court (The Pipe Line Cases, 234 U.S. 548, 34 Sup. Ct. 956, 58 L. Ed. 1459), that with respect to the transportation business these companies were common carriers in interstate commerce, subject to the Act to Regulate Commerce as amended by Act of June 29, 1906, c. 3591, 34 Stat. 584 (Comp. St. § 8563), and as such subject to the supervision of the Interstate Commerce Commission. By Act of September 26, 1914, c. 311, 38 Stat. 717 (Comp. St. §§ 8836a-8836k), the remainder of their business became subject to the supervision of the federal Trade Commission. In order to avoid a probable conflict of federal authority in case the combined business of production and transportation should continue to be carried on as theretofore, it was in each case, upon advice of counsel, determined that the pipe line property should be owned and operated by a separate corporation. In the case of the Ohio company an added reason for segregation lay in the fact that by a section of the Ohio General Code its entire gross receipts, including those derived from business other than transportation, were subject to an annual assessment of 4 per cent. chargeable against the gross receipts of companies engaged in the transportation business. For these reasons, the stockholders of the Prairie Oil & Gas Company caused a corporation to be organized under the laws of the state of Kansas, by the name of the Prairie Pipe Line Company, to which all the pipe line property of the Prairie Oil & Gas Company was transferred in consideration of the issue and delivery of the entire capital stock of the new company, to be distributed pro rata to the stockholders of the Prairie Oil & Gas Company. And similarly, the stockholders of the Ohio Oil Company caused a corporation to be formed under the laws of that state, by the name of the Illinois Pipe Line Company, to which all the pipe line property of the Ohio Oil Company was transferred in consideration of the issue to it of the entire capital stock of the new company, which was to be distributed at once by the oil company to its stockholders pro rata. These arrangements were carried out in like manner in both cases, except that in the case of the Kansas companies the stock of the pipe line company was issued directly to the stockholders of the oil company, whereas in the case of the Ohio companies the pipe line company issued its stock to the oil company; but in the same resolution by which the contract was made, an immediate distribution of the new stock among the oil company's stockholders was provided for, and in fact it was carried out. The aggregate valuation of the Prairie pipe lines was $27,000,000, that of the Ohio pipe lines $20,000,000, and the total capitalization of the respective pipe line companies equalled these amounts.
In each case, the oil company had a surplus in excess of the stated value of its pipe lines and of the par value of the total stock of the corresponding pipe line company; so that the transfer of the pipe lines and the distribution of the stock received for them left the capital of the respective oil companies unimpaired and required no reduction in their outstanding issues.
Messrs. Rockefeller and Harkness, respectively, were holders of large amounts of the stock of both the Prairie and the Ohio oil companies and in the distributions each received an amount of stock in each of the pipe line companies proportionate to his holdings in the oil companies. This occurred in the year 1915. Neither Mr. Rockefeller nor Mr. Harkness nor the latter's executors sold any of the stock in the pipe line companies.