Burford Oil Co. v. Commissioner

Burford Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent Burford Oil Co. v. Commissioner Docket No. 1499 United States Tax Court 4 T.C. 613; 1945 U.S. Tax Ct. LEXIS 247; January 24, 1945, Promulgated *247 Decision will be entered under Rule 50. The petitioner filed a timely income and declared value excess profits tax return, signed and sworn to by its treasurer only. Later, after time for filing had passed, an "amended" return, properly executed, was filed, wherein for the first time election was made to treat as expenses intangible drilling and development costs incurred as to oil properties, within section 23 (m) of the Internal Revenue Code, and Regulations 103, section 19.23 (m)-16 (d). Held, that the first filing did not constitute a return as required by section 52 (a) of the Internal Revenue Code, therefore did not constitute a "return for the first taxable year," within the above regulation, and that the election could not be exercised in the later untimely return; held, further, that, in the absence of a showing of reasonable cause and lack of willful neglect, petitioner is liable for penalty for failure to file excess profits tax returns. R. T. Thornton, Esq., and Claude Collard, C. P. A., for the petitioner. D. Louis Bergeron, Esq., for the respondent. Disney, Judge. DISNEY *613 This case involves deficiencies in Federal income, declared value excess profits, and excess *248 profits taxes and penalties on the excess profits taxes for the years and in the amounts as follows: Declared Year Income tax value excess Excess profits Penalties profits tax tax [1940] $ 3,087.18 $ 2,446.99 $ 2,562.95 $ 640.74 [1941] 3,406.19 4,017.83 1 1,004.46 The Commissioner's deficiency notice is dated and was mailed to petitioner on February 5, 1943. *614 Three questions are presented for determination: (1) Whether the petitioner is entitled to deductions from income for the calendar years 1940 and 1941 on account of intangible drilling and development costs as to oil and gas properties. (2) Whether the petitioner is entitled to claim net operating loss deductions for the calendar years 1939 and 1940 in arriving at its net income for the calendar year 1941. The answer to this question will be governed by the decision with respect to the first, and the parties have stipulated that the matter of the net operating loss deductions may be disposed of under Rule 50. (3) Whether *249 the petitioner is liable for a 25 percent penalty on the excess profits taxes asserted by the Commissioner for the calendar years 1940 and 1941 for failure to file excess profits tax returns (Form 1121). Effect will be given in the Rule 50 computation to other uncontested adjustments made by the Commissioner in his deficiency notice. FINDINGS OF FACT. We incorporate herein by reference and make a part hereof the stipulation of facts which the parties have filed in this proceeding. The following is, so far as necessary to consideration of the issues, a summary of these stipulations, together with additional facts the finding of which is based upon evidence adduced at the trial. Petitioner was organized on March 24, 1933, according to the laws of the State of Oklahoma, under the name of X Y Z Oil & Gas Co. On July 22, 1940, the charter of the X Y Z Oil & Gas Co. was amended, whereby the corporate name was changed to Burford Oil Co. On March 15, 1940, petitioner filed for the first time with the collector of internal revenue for the district of Oklahoma its corporation income and excess profits tax return (Form 1120-A) for the calendar year 1939. The return was signed and sworn to by *250 O. S. Warfield, treasurer, only. About the middle of January 1941, E. V. Campbell was employed by petitioner as its accountant. He later became treasurer. He conducted an examination of petitioner's records for the calendar year 1939 and, based upon the information disclosed by that examination, concluded that various items pertaining to certain oil and gas leases situated in Louisiana, which had not been reported in petitioner's 1939 return, should have been included. As a result thereof, he prepared a so-called amended return on Form 1120-A (corporation income and excess profits tax return) for the calendar year 1939, which was filed on behalf of the petitioner on March 13, 1941, with the collector of internal revenue for the district of Oklahoma. No extension of time had been granted for the filing of such return. It was signed and sworn to by G. E. Burford, the president of the petitioner, and by E. V. Campbell as secretary. Campbell was at that date also treasurer. *615 On March 13, 1941, petitioner filed with the collector of internal revenue for the second district of Texas its corporation income, declared value excess profits, and defense tax return (Form 1120) for the calendar *251 year 1940. This return took drilling and development expenses into the computation and showed, as excess profits net income, a loss of $ 19,168.35. On March 4, 1942, petitioner filed with the same collector its corporation income and declared value excess profits tax return (Form 1120) for the calender year 1941, showing, as excess profits net income, a loss of $ 46,470.81. Excess profits tax returns on Form 1121 were not filed for the calendar years 1940 and 1941. During the taxable years herein involved the petitioner owned interests in five oil and gas leases. The Fuller and the two I. & G. N. leases were situated in the State of Texas, and the Terrebonne and B. & D. Unit leases in the State of Louisiana. During the years involved in this proceeding petitioner financed the development of the Texas leases by what are called "oil payments"; that is, the petitioner had another party drill the wells for an economic interest in the oil runs, and for this reason, on the basis of original cost, petitioner had no basis for cost depletion with reference to the Texas leases for any of the years 1939, 1940, and 1941. Four wells were drilled on the Fuller lease. During 1939 petitioner paid *252 $ 121.76 expense of clearing the lease for drilling operations, including the expense of moving and relocating an electric power line, staking locations, and running elevations. On the I. & G. N. lease a block or signal system for operating trains had to be removed so as not to interfere with the derricks and the drilling of the wells on that lease. During 1939 petitioner paid expense amounting to $ 100.27 in the removal of the block system. During 1939, 1940, and 1941 the petitioner financed drilling and development activities with respect to its Louisiana leases by bank loans, the method of repayment being an assignment of oil runs to the bank for payment of the obligation and payment of money directly to the bank. Under agreements ranging in date from May 16, 1939, to March 2, 1940, with a drilling contractor, the petitioner incurred and paid intangible drilling and development costs of $ 67,213.37 for 1939, $ 54,928.65 for 1940, and $ 3,386.66 for 1941. In petitioner's return for 1939, filed March 15, 1940, the expenses of $ 121.76 and $ 100.27 were deducted under an item designated as "Repairs and Supplies" in the amount of $ 2,160.74 under "Cost of Operations." That return does *253 not contain any reference to intangible drilling or development costs incurred during the calendar year 1939 with respect to the Louisiana leases. In a schedule appended to the return for 1939, filed March 13, 1941, petitioner claimed *616 a deduction of $ 67,213.27 for intangible drilling and development costs on the Louisiana leases. Of the drilling costs paid in 1939 on the B. & D. Unit lease, totaling $ 33,291.84, $ 31,231.94 represented the cost of a dry hole and $ 2,059.90 represented equipment lost in that hole. The $ 2,059.90 was allowed by the respondent. However, he disallowed $ 65,153.47, the remainder of the $ 67,213.27 claimed, and also disallowed $ 54,928.63 and $ 3,386.66 claimed as intangible drilling and development costs for the years 1940 and 1941, respectively. The respondent also, for the purpose of computing a net operating loss deduction for subsequent years, failed to give effect to the $ 67,213.27 drilling costs claimed by petitioner in its 1939 amended return. The first year within which the petitioner could make an election to expense or capitalize intangible drilling and development costs was the calendar year 1939. No written election to charge intangible *254 drilling and development costs to either expense or capital was attached by petitioner to either income tax return filed for 1939. OPINION. The first question is whether the petitioner had a right to deduct intangible drilling and development costs for the years 1940 and 1941. This depends upon whether it had elected to do so "in the return for the first taxable year in which the taxpayer makes such expenditures," within the language of Regulations 103, section 19.23 (m)-16, issued under the specific authority contained in section 23 (m) of the Internal Revenue Code. 1 The parties agree that petitioner "never made expenditures for drilling oil or gas wells prior to the first taxable year beginning after December *255 31, 1938"; that the first taxable year in which the taxpayer made such expenditures was the calendar year 1939; and that, therefore, the first year as to which the petitioner could make an election to expense or capitalize intangible drilling and development costs was the calendar year 1939. It is also admitted that petitioner failed to attach to any return which it filed for 1939 "a clear statement of his election under each of the options, together with a statement of the time at which, and the manner in which, such election was made," as required by the regulation. The failure on the part of the petitioner to attach such a written election to its return has, however, been held *617 not to be fatal. Commissioner v. Sklar Oil Corporation (5th Cir.), 134 Fed. (2d) 221 (affirming a memorandum opinion of the Board). Section 52 (a) of the Internal Revenue Code requires that a corporation return be sworn to by the president, vice president, or other principal officer and by the treasurer, assistant treasurer or chief accounting officer. These requirements are mandatory and can not be waived. Kavanagh v. First National Bank of Wyandotte, 139 Fed. (2d) 309, 312; Estate of Frederick L. Flinchbaugh, 1 T. C. 653, 655; *256 Uhl Estate Co. v. Commissioner, 116 Fed. (2d) 403, 406. Here, the return for 1939, filed on March 15, 1940, was signed and sworn to by the treasurer only. We are of the opinion, therefore, that petitioner's return filed March 15, 1940, is not a "return" under section 52 (a), therefore not a "return for the first taxable year" within the meaning of section 19.23 (m)-16 (d) of Regulations 103. Lucas v. Pilliod Lumber Co., 281 U.S. 245; Plunkett v. Commissioner, 118 Fed. (2d) 644, 649; Uhl Estate Co. v. Commissioner, supra;Commissioner v. Krug, 78 Fed. (2d) 57. We therefore do not pass upon whether anything therein contained could constitute an effective election if contained in a valid return. We do not consider that Dr. Salsbury's Laboratories v. United States, 133 Fed. (2d) 641, requires a contrary conclusion. Therein the court distinguishes that case from Lucas v. Pilliod Lumber Co., supra;Plunkett v. Commissioner, supra; and Uhl Estate Co. v. Commissioner, supra. Moreover, that case involved section 701 (d) of the Revenue Act of 1934, dealing with capital stock tax. Zellerbach Paper Co. v. Helvering, 293 U.S. 172, does not involve that part of the statute requiring that the return *257 "shall be sworn to by the president, vice president, or other principal officer and by the treasurer, assistant treasurer, or chief accounting officer." Did the income tax return for 1939, filed March 13, 1941, constitute the return required by the regulation? Being signed and sworn to by the president and secretary, who was treasurer, it complied in that respect. But it was filed long after the expiration of the ordinary filing date required by section 53 (a) (1) of the Internal Revenue Code, 2 and not within any period of extension which might have been granted under section 53 (a) (2). In our opinion, Joe Degnan, 47 B. T. A. 899; *618 affd., 136 Fed. (2d) 891; certiorari denied, 320 U.S. 778, requires a holding that the late filing is not sufficient election under the regulation. That case holds that a corporation may not, in a return filed out of time, elect to take percentage depletion under section 114 (b) (4) of the Revenue Act of 1938 and the Internal Revenue Code. We see no distinction in the present situation. See also Riley Investment Co. v. Commissioner, 311 U.S. 55; Commissioner v. Titus Oil & Investment Co., 132 Fed. (2d) 969; and Boone County Coal Corporation v. United States, 121 Fed. (2d) 988. *258 We hold that the petitioner did not by a timely and valid return, within the regulation, elect to treat intangible drilling and development costs as expenses in its return for 1939, the first taxable year it incurred such expenses, and was, therefore, not entitled to deduct them in its returns for 1940 and 1941. Under the above conclusion the petitioner was not entitled, in computing income for 1941, to any operating loss deduction for 1939 and 1940, depending upon deduction of the intangible drilling and development costs above *259 discussed. Likewise, it follows that the petitioner is liable for a 25 percent penalty on excess profits taxes for the calendar years 1940 and 1941 for failure to file excess profits tax returns. Without the benefit of the deductions above denied by us, the petitioner had excess profits net income in those years. It was required to file returns under section 729 of the Internal Revenue Code, as added by section 201, Second Revenue Act of 1940, and section 291, Internal Revenue Code, provides the penalty unless it is shown that the failure to file is due to reasonable cause and not due to willful neglect. No such showing has been made. The petitioner does not discuss the point in its briefs. Any belief that the returns were not necessary is not sufficient to discharge the penalty. West Side Tennis Club, 39 B. T. A. 149, 160; affd., 111 Fed. (2d) 6; certiorari denied, 311 U.S. 674. No error is shown in the addition of the 25 percent penalty. Decision will be entered under Rule 50. Footnotes 1. The penalty determined by the Commissioner in his deficiency notice was only $ 200.89. The increased penalty of $ 1,004.46 was asserted by the Commissioner in the alternative by an affirmative allegation in his answer to the petition.↩ 1. SEC. 23. DEDUCTIONS FROM GROSS INCOME. In computing net income there shall be allowed as deductions: * * * * (m) Depletion. -- In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. * * *↩ 2. SEC. 53. TIME AND PLACE FOR FILING RETURNS. (a) Time for Filing. -- (1) General rule. -- Returns made on the basis of the calendar year shall be made on or before the 15th day of March following the close of the calendar year. Returns made on the basis of a fiscal year shall be made on or before the 15th day of the third month following the close of the fiscal year. (2) Extension of time. -- The Commissioner may grant a reasonable extension of time for filing returns, under such rules and regulations as he shall prescribe with the approval of the Secretary. Except in the case of taxpayers who are abroad, no such extension shall be for more than six months.↩