Baucum v. Commissioner

BAMMA BAUCUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Baucum v. Commissioner Docket No. 20085. United States Board of Tax Appeals 17 B.T.A. 1312; 1929 BTA LEXIS 2151; November 7, 1929, Promulgated *2151 1. Sale of royalty rights held to give rise to taxable gain. 2. Revenue received from sale of royalty interest held to be community income. Walter E. Barton, Esq., for the petitioner. Brice Toole, Esq., for the respondent. VAN FOSSAN *1312 This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1922, amounting to $6,530.84. The petitioner alleges as grounds for the relief requested: (1) That the respondent erred in not allowing a deduction on account of depletion for a fractional portion of petitioner's retained royalty interest in oil production conveyed by her during 1922, in consideration of the sum of $43,000. (2) That money received by petitioner as consideration for conveyance of the fractional part of her royalty interest in oil production was revenue belonging to the community of the petitioner and her husband and, therefore, if taxable, should be taxed one-half to her husband and one-half to petitioner. (3) That there should be allowed as a deduction from the petitioner's gross income for the year 1922 one-half of the loss incurred in the use and sale of a certain automobile*2152 acquired in 1922, and sold in the same year, and used by petitioner's husband, D. E. Baucum, for the purposes of the business of the community of petitioner and her husband. *1313 (4) That there should be allowed a deduction from the petitioner's gross income for 1922, amounting to one-half of the sum of $3,300, the total commissions paid to brokers in connection with the conveyance of the said fractional part of the petitioner's retained royalty interest in oil production. FINDINGS OF FACT. The petitioner and her husband, D. E. Baucum, reside in Haynesville, La., of which the petitioner's husband had been mayor from 1913 up to the date of the hearing in this proceeding. They were married in 1900 and have lived together since that date. In 1966 the petitioner inherited from her father 160 acres of land in Claiborne Parish, La. From 1906 to 1911 the petitioner's husband farmed the said 160 acres. In 1911 he rented the farm to a tenant and received a small amount of income from it. The tenancy was on shares and the petitioner's husband took the cotton and sold it, paying the tenant's bills with half the receipts and with the other half paying his own. During the*2153 years 1906 to 1922 the petitioner's husband managed the property as if it were his own and received the proceeds therefrom. The petitioner had no part in this management. There were no records or accounts kept of the income received from the farm. The petitioner never asked her husband to turn any of the money so received over to her. In 1921 oil was discovered near the petitioner's farm in Claiborne Parish. About 1922 farming operations on the property ceased. No drilling for oil was done by the petitioner or her husband but the husband leased the entire property to certain oil companies. The petitioner executed the leases to the oil companies, retaining a one-eighth royalty interest in the oil production. Thereafter, during 1922, the petitioner's husband negotiated through brokers conveyances of 75 per cent of the retained one-eighth royalty interest to various parties for a total consideration of $43,000. The instruments by which these conveyances were made are in form deeds whereby the petitioner granted to each of the grantees a specific fractional part of the oil, gas and other minerals in or under the premises described in the grant, subject however to the leases made*2154 to the oil companies for drilling purposes hereinbefore referred to. There is no dispute that these grants effected conveyance of 75 per cent of the petitioner's retained royalty interest in the oil production. All of the instruments referred to were executed by the petitioner. In connection with these transfers, petitioner's husband paid to certain brokers $3,300 as commissions for producing the buyers. From the date the drilling leases were executed up to the date of the hearing in this proceeding, the petitioner's husband administered *1314 the business connected with the oil properties. He received the total sum of $43,000 paid as consideration for the conveyance of the fractional part of the petitioner's retained royalty interest and also received checks paid by the oil companies on account of the petitioner's retained royalty interest, which she had not conveyed. He deposited all of the checks in bank, sometimes in his name and sometimes in the petitioner's, each having a bank account. The checks were drawn to the petitioner's order and her husband endorsed her name thereon. The petitioner did not see the checks when received. The petitioner's husband sometimes*2155 made investments out of the proceeds of these checks, purchasing property therewith or paying for living expenses such as groceries, dry goods and paying his own and his wife's personal expenses. Some of the property so purchased by the husband was bought in his own name and some in his wife's, as he saw fit. The petitioner and her husband never entered into any agreement that the income from her separate property should remain her separate property. Her husband used the petitioner's property as though he had bought and paid for it out of his personal funds. The living bills of the family were contracted in the husband's name. The petitioner never asked for any account nor for any interest on the revenue from the oil property. Both husband and wife could draw checks on either bank account. When checks were deposited to his wife's credit the husband drew checks against the amount so credited, signing his wife's name to the checks, and the bank honored them upon presentation. In February or March, 1922, petitioner's husband purchased a Lexington automobile costing $3,175, and paid for it out of the said sum of $43,000. He used this automobile for attending to the business*2156 of the oil fields at the farm; he went out to the fields, inspected the wells to see that the gauges worked, watched the oil gauged, looked after the drilling and saw the wells "come in" when they came in. The car became worn out when it had traveled less than 6,000 miles and in 1922 petitioner's husband sold the car for $400, after it had been used for less than six months. On evenings and Sundays, when the car was not in use for trips to the oil fields, it was used by petitioner's family. Approximately 90 per cent of the use of the car related to the oil business. In March, 1923, the petitioner and her husband duly filed separate income-tax returns for the calendar year 1922. Under Schedule C - "Profit from Sale of Real Estate, etc.," the petitioner reported said sum of $43,000 as received from the "sale of 3/32nds royalty interest." Under "Net Profits" in Schedule C, she stated "none." In Schedule B - "Income from Rents and Royalties," she reported income received by her from the companies to which she had leased the property for drilling purposes, such income representing the 1/32 *1315 royalty interest which she had not conveyed. Neither in Schedule C nor Schedule*2157 B did petitioner claim that the sums therein stated belonged to the community consisting of herself and her husband. Petitioner's husband, D. E. Baucum, in his income-tax return for the year 1922, reported income from property purchased in his name out of the proceeds of the oil properties, but did not report it as community property. In neither of these returns was any claim made for deduction on account of the loss now claimed on the automobile or for sums paid as commissions in connection with the transfer of the fractional part of petitioner's retained royalty interest. At the hearing it was stipulated that with respect to the 25 per cent of the retained royalty interest which was not conveyed by petitioner during 1922, the petitioner was allowed by the respondent a discovery value of $34,987.20 for depletion purposes. The petitioner's husband was advised by the individual who drafted his income-tax return for the calendar year 1922 that the depletion would equal said amount of $43,000 and that there would therefore be no tax payable on said sum. For this reason such sum was not claimed to be community property in the petitioner's return. OPINION. VAN FOSSAN: The*2158 first issue is whether or not the petitioner is entitled, under the provisions of section 214(10) of the Revenue Act of 1921, to deduct an allowance for depletion from the sum of $43,000 received by her as consideration for the conveyance of 75 per cent of her retained royalty interest. If she is entitled to such deduction, admittedly there is no income tax payable on said sum. The petitioner argues that the courts of Louisiana, in which State the oil property is located, have held that grants of the right to drill for oil and reduce it to possession when found, are not sales of the oil in place but are leases. (Citing Frost-Johnson Lumber Co. v. Heirs of Stallings,150 La. 756; 91 So. 207; Reeves v. Gulf Refining Co.,135 La. 178; 62 So. 623; Strother v. Manghan,138 La. 437; 70 So. 426; Ohio Oil Co. v. Indiana,177 U.S. 190; and other cases.) The petitioner further argues that the grants of fractional parts of the retained royalty interest were subleases and that therefore the amount received by her as the consideration for such grants was rent from which*2159 she is entitled to deduct a proper allowance for depletion under section 214(10). It is, of course, well settled that in Louisiana instruments of the character of the grants now under discussion are not sales of soil in situ. Nevertheless, we are of the opinion that the instruments in question effected such a sale of property that the profit from the transaction is taxable under the provisions of section 202 of the *1316 Revenue Act of 1921. The petitioner sold the right to receive royalties. The facts are essentially the same as those involved in the case of Anna Taylor,3 B.T.A. 1201. In the Taylor case and in this proceeding, the oil property was situated in Claiborne Parish, Louisiana, and in both cases the petitioners conveyed fractional parts of retained royalty interests. In the Taylor case we held that such a conveyance is the sale of property - not the sale of oil in place, but the sale of "the right to receive royalties on oil recovered." In the Taylor case we said: Section 214 of the Revenue Act of 1921, which allows a deduction to taxpayers for the depletion of oil based on discovery value, except in so far as such a deduction*2160 reduces the basis, is not applicable to determine gain or loss from the sale of property. The only basis recognized for determining gain or loss, is the cost or the March 1, 1913, value of property. Discovery value has no connection or relation to such a basis. * * * We are, therefore, of the opinion that the transaction now in question was the sale of property, the profit from which is taxable under section 202 of the Revenue Act of 1921. It is not contended in the present proceeding that the right to drill for oil had any value on March 1, 1913. Therefore, since the land was acquired by the petitioner prior to March 1, 1913, under the provisions of section 202 the entire amount of $43,000 received as consideration for the transfer of a fractional part of the petitioner's retained royalty interest is taxable gain. The question whether the said sum of $43,000 was revenue belonging to the conjugal partnership or community must be answered in the affirmative. The fact show that from the time petitioner's farm was inherited by her in 1906, her husband administered it, farmed it until he leased it to a tenant, collected the acquets and gains and applied the proceeds thereof*2161 to the purposes of the conjugal partnership. After the discovery of oil in the neighborhood of the farm, the husband negotiated leases to the oil companies, received and deposited the proceeds thereof in bank, sold a fractional part of the retained royalty interest, collected the consideration thereof and spent it as if it were his own, without interference or objection on the part of the petitioner. There is not a scintilla of evidence that in so doing the husband was acting as his wife's agent with respect to her paraphernal property. On the contrary, it is shown conclusively that in administering the farming operations and the oil property the husband was acting as head of the conjugal partnership. These facts clearly bring the case within the provisions of articles 2385 and 2386 of the Louisiana Civil Code. Article 2385 provides as follows: The paraphernal property, which is not administered by the wife separately and alone, is considered to be under the management of the husband. *1317 Article 2386 provides, in part, as follows: When the paraphernal property is administered by the husband, or by him and the wife indifferently, the fruits of their property, whether*2162 natural, civil, or the result of labor, belong to the conjugal partnership, if there exists a community of gains. In other words, where there is a community of acquets and gains, the fruits and income of the wife's paraphernal property administered by her husband, belong to the conjugal partnership or community. Fleitas v. Richardson,147 U.S. 550. Article 2399 of the Louisiana Civil Code provides that every marriage contracted in the state "superinduces of right partnership or community of acquets or gains, 'if there be' no stipulation to the contrary." There was no "stipulation to the contrary" between the petitioner and her husband. It follows, in our opinion, that the sum of $43,000 which was gain from the sale of a portion of the petitioner's retained royalty interest, was revenue belonging to the community consisting of the petitioner and her husband. Reddick v. White,46 La. 1206; 15 So. 487; Succession of Sangpiei,114 La. 767; 38 So. 554; *2163 Peters v. Klein,161 La. 664; 119 So. 349; In re Lynch, 3 Fed.(2d) 82. In Louisiana a wife's half interest in community property is not a mere expectancy during marriage, but is vested in her the moment the property is acquired by the community or by the spouses jointly, even though it be acquired in the name of only one of them. Phillips v. Phillips,160 La. 814; 107 So. 584; Zemurray v. United States,64 Ct.Cls. 657. Under the provisions of article 2414 of the Louisiana Civil Code, however, the husband is the head and master of the community of gains and as such he administers its effects, disposes of the revenue which they produce, and may alienate them by an onerous title, without the consent of his wife. The petitioner's husband administered the proceeds of the sale of the fractional part of the retained royalty interests. Had he elected to make a joint return for himself and the petitioner or had he reported in his individual tax return for the year 1922 the proceeds of the sale as income received by him, he would have been liable for the total amount of tax payable and*2164 in that event the husband and wife would not be permitted to make individual amended returns by which each would be charged with the receipt of half of the proceeds of the sale and the resulting tax thereon. Section 223, Act of 1921; section 1212, Act of 1926; R. Downers, Jr.,5 B.T.A. 1029; Joe R. Miller,6 B.T.A. 94; Zemurray v. United States, supra.In this case, however, the petitioner and not her husband reported the whole of the income received from the sale of the fractional part of the royalty interests in question. Although she had a vested interest in half of the proceeds of the sale, she had no interest in the other half. The other half *1318 belonged to her husband under the state law applicable to the marital community and should have been returned by him. Petitioner having filed a separate return accounting for the entire sum is entitled to have her income reduced by an amount equal to one-half of the net proceeds of the sale. With respect to the petitioner's claim for a reduction of one-half of the "loss" on the automobile used for the business of the community, it is admitted that during 1922 the car*2165 was used by petitioner's family as well as for the business of the conjugal partnership. This use was estimated not to exceed 10 per cent of the total use thereof. We believe the evidence fairly established that the major part of the depreciation of the car was due to its trips to the oil fields. We consequently allow a total deduction of $2,000 to cover depreciation of the car, one-half of which may be deducted by petitioner. The sum of $3,300 which was paid by petitioner's husband as commissions for procuring buyers of a portion of her retained royalty interest should be deducted from the sale price to ascertain the net profit on the sale. Reviewed by the Board. Decision will be entered under Rule 50.