Coalinga-Mohawk Oil Co. v. Commissioner

COALINGA-MOHAWK OIL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Coalinga-Mohawk Oil Co. v. Commissioner Docket No. 14974. United States Board of Tax Appeals 25 B.T.A. 261; 1932 BTA LEXIS 1550; January 20, 1932, Promulgated *1550 Petitioner purchased 200 acres of land in 1918 for $80,000 in cash. The land was purchased solely as an oil prospect, or for its supposed oil content. The value of the land, exclusive of any value as an oil prospect, was $2,000. In 1921 the petitioner determined that said land was not oil bearing and was worth only $2,000. Held, that no deductible loss was sustained in 1921. J. Gilmer Korner, Esq., Joseph C. Myerstein, Esq., and W. S. Renz, Esq., for the petitioner. Henry A. Cox, Esq., for the respondent. TRAMMELL *262 This is a proceeding for the redetermination of a deficiency in income and profits taxes for the calendar year 1921 in the amount of $10,673.03. The sole issue is whether or not the petitioner is entitled to a deduction from income for the year 1921 on account of an alleged loss on a tract of land purchased in 1918 as an oil prospect, but which the petitioner determined in 1921 did not contain oil. FINDINGS OF FACT. The petitioner is a California corporation, with its principal office in San Francisco. During the years from 1918 to 1922, inclusive, and prior thereto, the petitioner was engaged in the business*1551 of producing and selling oil. In 1918 it purchased a tract of land containing 200 acres, situated in section 1, township 27 north, range 21 east, in the Lost Hills District of California, and paid therefor the sum of $80,000 in cash. Said land was purchased by the petitioner solely as an oil prospect, or because of its supposed oil content. Because of its proximity to a proven oil field it was regarded by the petitioner as "semi-proven" at the time of purchase. The petitioner did not contemplate immediate drilling when the land was purchased, but contemplated drilling when the proven area approached its land. There was no drilling on the land in question prior to 1922 and prior to that year no test well was drilled closer than 1 7/8 miles to said land. The nearest oil production prior to 1922 was in the extreme south end of the Lost Hills field, 2 1/8 miles west of the southwest corner of said land. At the time of purchase in 1918, the value of petitioner's land as an oil prospect depended upon two possibilities: (1) that the geological structure of the Lost Hills field might extend to its tract, and (2) that a parallel structure to the Lost Hills field would be discovered*1552 and that its tract would be found to be embraced in such parallel structure. The Lost Hills field was an old oil field, in which the southerly and easterly limits, which were nearest to the petitioner's 200-acre tract, had been determined in 1914, 1915 or 1916 within the drilling depths to which it was practicable to drill at that time. There was no drilling on the southeasterly border of the Lost Hills field known to the petitioner between 1918 and 1921. During the period from 1918 to 1921 information gradually obtained by the petitioner's officers indicated that its tract of land was "off structure" and that the prospect of discovering oil on it was remote. In the last mentioned year the petitioner finally determined that its land was not oil bearing and offered it for sale at $10 per acre, or $2,000 for the entire tract, which was its value as grazing *263 land, exclusive of any value as an oil prospect. Petitioner was unable to sell its tract of land at said price in 1921. At the beginning of 1922 petitioner leased its land for 15 cents per acre, or $30 for the tract, per annum. In 1923 petitioner disposed of the said land, along with its other properties, to*1553 the Mohawk Oil Company at its book value of $2,000. In 1926 the Mohawk Oil Company transferred its properties, including said 200 acres of land, at a price of $2,000, to the California Petroleum Company, and in 1928 the latter company sold the land to the Texas Corporation at the same price. In its tax return for the year 1921 the petitioner deducted from income the amount of $78,000 claimed as a loss in the value of its land in said year. The respondent refused to allow the deduction, and restored said amount of $78,000 to the petitioner's income in computing the deficiency. OPINION. TRAMMELL: The sole question here is whether or not the ascertainment in 1921 that land purchased as oil-bearing land in 1918 for $80,000 was not oil-bearing property and thus worth only $2,000 represents a sustained loss of $78,000 deductible from 1921 income. The respondent admits that during the taxable year the land was determined to contain no oil and was worth only $2,000, but contends that no deductible loss was sustained or realized in 1921, because throughout that year the petitioner continued to own or hold the legal title to the land and to derive income therefrom. The petitioner*1554 contends that its loss was fully sustained or realized in 1921, during which year (1) it determined that the land contained no oil, (2) abandoned or discarded the land from use in its business, and (3) reduced the value of the land on its books from $80,000 to $2,000, thus eliminating the value of the land in excess of $2,000 from its assets account. In our opinion, the petitioner has not sustained a deductible loss in 1921. It purchased land for $80,000 and continued to hold the land throughout the taxable year. The fact that it had become reduced in value does not entitle the petitioner to a deduction. The petitioner did not acquire the land and the right to explore for oil separately, but merely purchased the land. It is not necessary to discuss a situation which might have been presented if the petitioner had purchased the land for a certain price and the oil rights separately. It is a well recognized principle that depreciation in the value of property does not give rise to a deductible loss. Any reduction in value of the property can not be taken as a deduction until the loss is realized by a closed transaction. It may well *264 be that deeper drilling may have*1555 disclosed oil, or other minerals may have been found. Other events might have occurred which might have shown that the land was worth more than the purchase price, or at least not less. In the case of , we considered a case presenting this same question. There we said: Counsel for the Commissioner admitted the facts alleged in the petition and agreed that said facts may be considered as proven. Said petition, in substance, alleges that in April, 1918, the taxpayer purchased the fee simple title to eighty acres of land in Oklahoma and paid therefor the sum of $8,500, and that he made said investment on the belief that said land would produce oil. Soon after said purchase, test wells were drilled on adjacent tracts of land and all of said test wells proved nonproductive of oil, which result destroyed the value of taxpayer's land for oil purposes. The value of the tract for farm purposes was only $2,500. The taxpayer had not sold or otherwise disposed of his fee simple title to the land in 1920. There being no closed transaction to establish loss to the taxpayer, the determination of the Commissioner is approved. *1556 See also , and . It may well be that a taxpayer might purchase land which he considered suitable for the growing of a certain kind of crop and later discover that it was not suitable for that particular kind of crop, and that for other crops the land had less value, but we do not consider that this is such a transaction as gives rise to a deductible loss. We do not consider that the cases relied upon by the petitioner, ; ; and , are applicable to this case. The case of a brewing company which acquired and used buildings for the purpose of its business and later, on account of prohibition legislation, found that it could no longer use them in that business, has no application to a case where a person purchases land for one purpose and finds that he can not use it for the particular purpose acquired and that it has less value than was originally put upon it or was contemplated. *1557 In this case the land was purchased as unproven oil property. The taxpayer took the chance of finding oil. It could not be said that it was used in the business in order to make applicable the analogy between this case and the obsolescence cases of brewery property decided by the Supreme Court. The usefulness in the business was not terminated. If the property had no oil, it was never at any time useful in the oil business. The property was merely a potential oil reserve. The petitioner was in the "oil production business." It does not follow that a tract of land which was bought in the expectation that future *265 developments might disclose that it contained oil was actually being used in that business. It would doubtless have been used in the business if it had contained oil. This is a case where future events showed that the property could never be used in the business, rather than that it being so used was abandoned in that business. There was here no unforeseen cause by reason of which any property was discarded. Nor do we think this case is similar to those cases in which leases, after discovery that no oil was obtainable, were abandoned and given up. *1558 We are of the opinion that the position of the respondent is correct. Judgment will be entered for the respondent.