Paragon Oil Co. v. Commissioner

PARAGON OIL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Paragon Oil Co. v. Commissioner Docket Nos. 12628, 17859. United States Board of Tax Appeals 18 B.T.A. 57; 1929 BTA LEXIS 2124; November 9, 1929, Promulgated *2124 Thompson Oil & Gas Co.,15 B.T.A. 993, followed. Marcus Borchardt, Esq., for the petitioner. Harold Allen, Esq., for the respondent. MURDOCK *57 The Commissioner determined deficiencies in the petitioner's income and profits taxes for the calendar years 1919 and 1920 in the respective amounts of $3,659.97 and $9,519.25. The petitioner has alleged as to each year that the respondent erred in determining the reasonable depletion allowance for the year 1916 and subsequent years by reducing the cost or March 1, 1913, value of certain oil and gas producing leases by the amount of depletion as computed by the respondent during the period from March 1, 1913, to December 31, 1915, inclusive, instead of reducing said cost or March 1, 1913, value of these leases by the amount of depletion during the period from March 1, 1913, to December o1, 1915, inclusive, which, under the laws then in force, the petitioner was entitled to take as deductions for depletion. The only other issue in the cases was settled by the stipulation of the parties. In accordance with the agreement of counsel, the two cases are consolidated. The parties*2125 have entered into a stipulation which, with the exception of certain introductory words, we incorporate in our findings of fact. FINDINGS OF FACT. In lieu of the redetermination and relief sought by the petitioner under paragraphs "4a" "5a" and paragraph "a" of the prayers for relief of the respective amended petitions herein, the petitioner shall be entitled to deduct as a loss for the calendar year 1920, the sum of twenty-four thousand three hundred thirty-three dollars and thirty cents, $24,333.30, from the taxable income as computed by the respondent, by reason of part of the lands in Comanche County, Texas, having proven to be worthless during the said year 1920. Prior to March 1, 1913, the petitioner acquired by assignment an oil and gas mining lease covering SE. 1/4 of the NW. 1/4 of Section 9, in Township 17 North, Range 12 East, situated in Creek County, Oklahoma, and has at all times since March 1, 1913, been the lessee and operator of said property, the said lease being known and described in the amended petitions as the Luther Tucker lease. A copy of said lease, marked "Exhibit A", is attached hereto and made a part hereof. The original lease, assigned to said*2126 company as aforesaid, by express terms thereof, expired on the 19th day of November, 1921. On August 1, 1920, an agreement in writing was entered into between Art Harris and Freeman Rowe, *58 Guardians of the estate of Luther Tucker, a minor, and said Paragon Oil Company, wherein, for a cash consideration of $70,000.00 paid by said company to the guardians of said Luther Tucker, the term of said original lease was extended and remained in full force on said SE. 1/4 of the NW. 1/4 of Section 9, Township 17 North, Range 12 East, as long as oil and gas is produced in paying quantities from said land; as a further consideration for the extension of said lease, said Company agreed to pay one-eighth (1/8) of the gross proceeds of all the oil extracted from said land and also one-eighth (1/8) of the proceeds derived from the sale of casinghead gas and drip gasoline produced from said land, a copy of said agreement being attached hereto as "Exhibit B" and made a part hereof. The fair market value as of March 1, 1913, of the interest of the petitioner as lessee and operator under the above-mentioned original lease (the so-called Luther Tucker lease) in the oil recoverable under and*2127 by virtue of the terms of said lease was $147,057.88, and the quantity estimated as of March 1, 1913, of unmined merchantable oil underlying the lands covered by said original lease and which it was estimated as of March 1, 1913, could be removed during the life of said lease and which, if so removed, would belong to the petitioner under the terms thereof, was $370,498.62 barrels. The number of barrels of oil belonging to the petitioner under the terms of the aforesaid lease produced from the property covered by said lease during the period March 1 to December 31, 1913 and each of the calendar years 1914, 1915, 1916, 1917, 1918, 1919 and 1920 was as follows: Period or year: Number of barrels Period Mar. 1, 1913, to Dec. 31, 1913 32,327.81 Calendar year 1914 56,354.71 Calendar year 1915 62,510.91 Calendar year 1916 53,766.39 Calendar year 1917 46,354.82 Calendar year 1918 39,628.92 Calendar year 1919 32,042.84 Calendar year 1920 24,959.81 The Commissioner of Internal Revenue allowed to the petitioner as depletion, on account of oil produced during the years 1919 and 1920 under the aforesaid Luther Tucker lease, the following amounts, namely - For the year 1919 $12,718.44 For the year 1920 10,300.13 *2128 The aforesaid amount of oil depletion allowed by the Commissioner for the year 1919 ($12,718.44) was arrived at by dividing the aforesaid figure of $147,057.88 (being the fair market value as of March 1, 1913 of the interest of the petitioner as lessee under the above-mentioned original lease - the so-called Luther Tucker lease - in the oil recoverable under and by virtue of the terms of said lease) by the figure 370,498.62 (being the number of barrels estimated as of March 1, 1913 of unmined merchantable oil underlying the lands covered by said original lease and which it was estimated as of March 1, 1913 could be removed during the life of said lease and which if and when so removed would belong to the petitioner under the terms thereof, thus obtaining a depletion unit of $.396918 per barrel, and by multiplying said depletion unit by the figure 32,042.84 (being the number of barrels of oil belonging to petitioner under the terms of aforesaid lease produced from the property covered by said lease during the year 1919.) *59 Of the 24,959.81 barrels of oil belonging to petitioner under the terms of the aforesaid lease produced from the property covered by said lease during*2129 the year 1920, 14,533.35 barrels were produced prior to August 1, 1920 and 10,426.46 barrels after that date. The amount of oil depletion allowed by the Commissioner for that part of the year 1920 prior to August 1, 1920 (namely $5,768.58) was arrived at by multiplying the aforesaid depletion unit of $.396918 by the number of barrels of oil produced during 1920 prior to August 1, 1920. The quantity estimated as of August 1, 1920 of unmined merchantable oil underlying the lands covered by the aforesaid lease and the aforesaid renewal or extension thereof which, if and when removed, would belong to the petitioner under the terms of said lease and the extension or renewal thereof was 191,654.10 barrels. The amount of oil depletion allowed for that part of the year 1920 subsequent to August 1 ($4,531.55) was arrived at by dividing the figure $83,339.54 by the above-named figure of 191,754.10, representing as stated above, the quantity estimated as of August 1, 1920 of unmined merchantable oil underlying the lands covered by the aforesaid lease and the aforesaid renewal or extension thereof which, if and when removed, would belong to the petitioner under the terms thereof, and*2130 multiplying the result thus obtained by 10,426.46 (being the number of barrels of petitioner's oil produced in 1920 on and after August 1, 1920.) The figure $83,339.54, used in the paragraph immediately preceding this, was arrived at by subtracting from the aforesaid sum of $147,057.88 (being the fair market value as of March 1, 1913 of the interest of the petitioner as lessee and operator under the above-mentioned original lease - the so-called Luther Tucker lease - in the oil recoverable under and by virtue of the terms of such lease) the sum of $133,968.34 (being the total amount of depletion for the period of March 1, 1913 to August 1, 1920 computed in the same manner as it is stated above the Commissioner computed the amount of depletion allowed for the year 1919) and adding to the remainder thus arrived at the sum of $70,250.00 (being the amount of cash paid for the extension of the aforesaid Luther Tucker lease ($70,000) plus attorney's fees in the amount of $250). The gross value at the mouth of the mine of the oil belonging to the petitioner under the terms of the aforesaid Luther Tucker lease produced from the property covered by said lease during the period March 1*2131 to December 31, 1913 and each of the calendar years 1914 and 1915; 5% of such gross value; and the amount of depletion computed for the period March 1, 1913 to December 31, 1913, and for the years 1914 and 1915, in the same manner as it is stated above the Commissioner computed depletion under the aforesaid Luther Tucker lease for the year 1919 are as follows: Oil Period of year Gross value 5 per cent of Computation on at mine such gross same basis as for value 1919 and 1920 Mar. 1, 1913, to Dec. 31, 1913 $31,727.53 $1,586.38 $12,831.55 [1914] 43,151.63 2,157.58 22,368.31 [1915] 53,717.29 2,685.86 24,811.83 The fair market value as of March 1, 1913 of the interest of the petitioner as lessee under the above-mentioned original lease (the so-called Luther Tucker lease) in the casinghead gas recoverable under and by virtue of the terms of *60 said lease was $10,500.00, and the quantity estimated as of March 1, 1913 of unmined merchantable casinghead gas underlying the lands covered by said original lease and which it was estimated as of March 1, 1913 could be removed during the life of said lease and which, if and when so removed, *2132 would belong to the petitioner under the terms thereof, was 320,880,000 feet. The number of feet of casinghead gas belonging to the petitioner under the terms of the aforesaid lease produced from the property covered by said lease during the period March 1 to December 31, 1913 and each of the calendar years 1914, 1915, 1916, 1917, 1918, 1919 and 1920 were as follows: Period or year: Number of feet Period March 1, 1913 to December 31, 1913 None. Calendar year 1914 36,478,000 Calendar year 1915 38,914,000 Calendar year 1916 35,685,000 Calendar year 1917 41,034,000 Calendar year 1918 38,325,000 Calendar year 1919 33,900,000 Calendar year 1920 24,926,000 The Commissioner of Internal Revenue allowed to the petitioner as depletion, on account of casinghead gas produced during the years 1919 and 1920 under the aforesaid Luther Tucker lease, the following amounts: namely - For the year 1919 $1,109.21 For the year 1920 815.57 The aforesaid amount of casinghead gas depletion allowed by the Commissioner for the year 1919 ($1,109.21) was arrived at by dividing the aforesaid figure of $10,500.00 (being the fair market value as of March 1, 1913 of*2133 the interest of the petitioner as lessee and operator under the above-mentioned original lease - the so-called Luther Tucker lease - in the casinghead gas recoverable under and by virtue of the terms of said lease) by the figure 320,880 (being the number of thousands of feet (320,880,000 feet) estimated as of March 1, 1913 of unmined merchantable casinghead gas underlying the lands covered by said original lease and which it was estimated as of March 1, 1913 could be removed during the life of said lease and which if and when so removed would belong to the petitioner under the terms thereof) thus obtaining a depletion unit of $.03272 per thousand feet, and multiplying said depletion unit by the figure 33,900 (being the number of thousands of feet (33,900,000 feet) of casinghead gas belonging to petitioner under the terms of aforesaid lease produced from the property covered by said lease during the year 1919). The aforesaid amount of casinghead gas depletion allowed by the Commissioner for the year 1920 ($815.57) was arrived at by dividing the aforesaid figure of $10,500.00 (being the fair market value as of March 1, 1913 of the interest of the petitioner as lessee under the above-mentioned*2134 original lease - the so-called Luther Tucker lease - in the casinghead gas recoverable under and by virtue of terms of said lease) by the figure 320,880,000 (being the quantity estimated as of March 1, 1913 of unmined merchantable casinghead gas underlying the lands covered by said original lease and which it was estimated as of March 1, 1913 could be removed during the life of said lease and which if and when so removed would belong to the petitioner under the terms thereof), thus obtaining a depletion unit of $.03272 per thousand feet, and by multiplying said depletion unit by the figure 24,926 (being the *61 number of thousands of feet (24,926,000 feet) of casinghead gas belonging to petitioner under the terms of the aforesaid lease produced from the property covered by said lease during the year 1920. The gross value at the mouth of the mine of the casinghead gas belonging to the petitioner under the terms of the aforesaid Luther Tucker lease produced from the property covered by said lease during the period March 1 to December 31, 1913, and each of the calendar years 1914 and 1915; 5% of such gross value; and the amount of casinghead gas depletion computed for the period*2135 March 1, 1913 to December 31, 1913 and for the years 1914 and 1915, in the same manner as it is stated above the Commissioner computed casinghead gas depletion under the aforesaid Luther Tucker lease for the year 1919 are as follows: Gas Period of year Gross value 5 per cent of Computation on at mine such gross same basis as for value 1919 and 1920 March 1, 1913 to December 31, 1913 None. None. None. [1914] $5,065.67 $253.28 $1,193.56 [1915] 5,242.47 262.12 1,273.27 During 1914 the petitioner acquired by assignment an undivided one-eighth (1/8) interest in an oil and gas mining lease covering the E. 1/2 of NE. 1/4 of section 17, Township 21 North Range 12 East, Tulsa County, Oklahoma, known as the Lou McLane lease, for a cash consideration of $18,500.00, of which $2,397.63 represented the cost of physical equipment at date of purchase the balance of said leasehold cost being $16,102.37. The quantity estimated as of said date of assignment of unmined merchantable oil underlying the lands covered by said Lou McLane lease and which it was estimated as of said date of assignment could be removed during the life of said lease and*2136 which, if so removed, would belong to the petitioner under the terms thereof, was 17,443.08 barrels. The number of barrels of oil belonging to the petitioner under the terms of the aforesaid lease produced from the property covered by said lease during the year 1914 subsequent to the assignment of said lease and each of the calendar years 1915, 1916, 1917, 1918, 1919 and 1920 was as follows: Period or year: Number of barrels Portion of 1914 3,464.25 Calendar year 1915 2,926.41 Calendar year 1916 3,136.31 Calendar year 1917 1,777.24 Calendar year 1918 1,314.48 Calendar year 1919 1,121.29 Calendar year 1920 769.11 The Commissioner of Internal Revenue allowed to the petitioner as depletion, on account of oil produced during the years 1919 and 1920 under the aforesaid Lou McLane lease, the following amounts, namely - For the year 1919 $1,035.10 For the year 1920 709.99 *62 The aforesaid amount of oil depletion allowed by the Commissioner for the said Lou McLane lease for the year 1919 ($1,035.10) was arrived at by dividing the aforesaid figure of $16,102.37 (being the cost as of said date of assignment of the interest of the*2137 petitioner as lessee under the above-mentioned lease - the Lou McLane lease - in the oil recoverable under and by virtue of the terms of said lease) by the figure 17,443.08 (being the number of barrels estimated as of said date of assignment of unmined merchantable oil underlying the lands covered by said lease and which it was estimated as of said date of assignment could be removed during the life of said lease and which if and when so removed would belong to the petitioner under the terms thereof), thus obtaining a depletion unit of $.92313 per barrel, and by multiplying said depletion unit by the figure 1121.29 (being the number of barrels of oil belonging to petitioner under the terms of aforesaid lease produced from the property covered by said lease during the year 1919). The aforesaid amount of oil depletion allowed by the Commissioner for the said Lou McLane lease for the year 1920 ($709.99) was arrived at by dividing the aforesaid figure of $16,102.37 (being the cost as of said date of assignment of the interest of the petitioner as lessee under the above-mentioned original lease - the Lou McLane lease - in the oil recoverable under and by virtue of the terms of said lease) *2138 by the figure 17,443.08 (being the number of barrels estimated as of said date of assignment of unmined merchantable oil underlying the lands covered by said lease and which it was estimated as of said date of assignment could be removed during the life of said lease and which if and when so removed would belong to the petitioner under the terms thereof), thus obtaining a depletion unit of $.92313 per barrel, and by multiplying said depletion unit by the figure 769.11 (being the number of barrels of oil belonging to petitioner under the terms of the aforesaid lease produced from the property covered by said lease during the year 1920). The gross value at the mouth of the mine of the oil belonging to the petitioner under the terms of the aforesaid Lou McLane lease produced from the property covered by said lease during the portion of 1914 subsequent to the date of assignment and the calendar year 1915; 5% of such gross value; and the amount of oil depletion computed for the portion of 1914 subsequent to the date of assignment and for the calendar year 1915, in the same manner as it is stated above the Commissioner computed oil depletion under the aforesaid Lou McLane lease for the*2139 year 1919 are as follows: Oil Period of year Gross value 5 per cent of such Computation on same basis at mine gross value as for 1919 and 1920 Portion of 1914 $2,609.43 $130.47 $3,197.95 [1915] 1,970.81 98.54 2,701.46 In computing the petitioner's income tax liability for the period March 1, 1913 to December 31, 1913 and the years 1914 and 1915 under the Revenue Act of October 3, 1913, the petitioner's depletion allowance could not exceed 5% of the gross value at the mine of the output for the year for which the computation is or was made. *63 OPINION. MURDOCK: In , we fully discussed the same question which is raised by the petitioner's allegation in this case. We decided that question adversely to the contention made by the petitioner herein. Our decision in that case was followed in . Following those cases, our judgment on this point is for the respondent. Judgment will be entered under Rule 50.