Hoffer Oil Corp. v. Commissioner

HOFFER OIL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Hoffer Oil Corp. v. Commissioner Docket No. 47364. United States Board of Tax Appeals 27 B.T.A. 98; 1932 BTA LEXIS 1126; November 18, 1932, Promulgated *1126 Where petitioner corporation acquired, in a nontaxable reorganization, certain oil leases from its predecessor, a trust taxable as a corporation, it is held not to be entitled to compute depletion upon the basis of discovery value when discovery was by such predecessor. Percy W. Phillips, Esq., for the petitioner. Henry A. Cox, Esq., for the respondent. LEECH *99 This appeal is from a deficiency of $30,800.63 in income tax determined by respondent for the year 1924. There is but one issue for our decision, this being petitioner's right to compute its depletion allowance upon the basis of discovery value. FINDINGS OF FACT. Prior to January 17, 1924, certain individuals placed in the hands of T. S. Hoffer, as trustee, sums of money contributed for the purpose of investment in and for the development and operation of mineral leases. Part of the trust fund was, on or about December 3, 1923, invested in certain oil and gas leaseholds in the "Seminole lease," covering forty acres of land in Seminole County, Oklahoma, the leases so acquired not being in proven tracts. On January 17, 1924, T. B. Hoffer executed a declaration of trust, *1127 a true copy of which appears as Exhibit B attached to the petition in the case. In compliance with the purposes of such trust, T. B. Hoffer, as trustee, developed the aforesaid Seminole lease and on March 14, 1924, a producing oil well was brought in, which yielded a revenue to the trust. The fair market value of the well within thirty days after discovery was not less than $342,818.52. The total reserves of oil in the leased property were 459,141 barrels at the date of discovery. During the year 1924, prior to April 30, 1924, the production of said well was 84,275 barrels. The Commissioner of Internal Revenue Determined that the trust, of which T. B. Hoffer was trustee, was an association taxable as a corporation, and in computing the tax liability thereof for the period January 1 to April 30, 1924, inclusive, allowed a deduction for depletion in the amount of $62,924.68. On April 9, 1924, the Hoffer Oil Corporation, the petitioner, was organized under the laws of the State of Delaware. The aforesaid Seminole lease and all other properties of said trust were transferred to petitioner on or about April 30, 1924, for and in consideration of the issuance of the capital stock*1128 of petitioner. The individuals composing the stockholders of the corporation were identical with the members of the trust, the members of the trust receiving stock in the petitioner in the ratio of their beneficial interests in the trust. In computing the deficiency, the Commissioner allowed the petitioner to deduct depletion upon the basis of the cost to the trustee of the depletable property. *100 OPINION. LEECH: Petitioner contends that, for purposes of computing its allowance for depletion, it must be considered as the taxpayer who made the discovery of oil and is entitled to use discovery value as a basis under section 204(c) of the Revenue Act of 1924, 1 because it acquired this property in a nontaxable corporate reorganization and stands as a successor to the actual discoverer with no break in the corporate life when considered for purposes of Federal income taxation. *1129 This precise question was decided in ; affd., , and in . The former case involved the right of a corporation to depletion on discovery value of property, allowable to the predecessor owner, a partnership. In the latter, a similar situation obtained, except both predecessor and successor owners of the property to be depleted were corporations of different states and par value of stock, but otherwise identical. The transfer of the property from the actual discoverer, to the petitioner, in both cases occurred in nontaxable transactions. In both cases the right to depletion on discovery value was denied the petitioner, on the ground that it was a different legal entity from the actual discoverer, and was not "the taxpayer" to whom, alone, section 204(c), above cited, grants the controverted right. The case of , the circuit court cited by counsel for petitioner, is not in point. Although the transaction there present was nontaxable, the issue decided was not the identity of the entities involved, *1130 but the legal character of the accumulated earnings of the predecessor corporation in the hands of its successor. Even if the reasoning of the Circuit Court in that opinion might be extended, a fortiori, to effect a change in the rule applied here, we do not deem that to be a sufficiently compelling reason to reverse this rule, affirmed, as indicated above. Judgment will be entered for the respondent. Footnotes 1. The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, but such depletion allowance based on discovery value shall not exceed 50 per centum of the net income (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. ↩