National Petroleum & Refining Co. v. Commissioner

NATIONAL PETROLEUM AND REFINING COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. National Petroleum & Refining Co. v. Commissioner Docket No. 45600. United States Board of Tax Appeals 28 B.T.A. 569; 1933 BTA LEXIS 1100; June 28, 1933, Promulgated *1100 1. Proceeds from the sale of oil impounded by a receiver appointed by the Supreme Court, held to be income in the year in which payment is made to the owner of the well by such receiver. 2. Depletion should be computed under the provisions of the revenue act effective at the date when such income is realized. Harry C. Weeks, Esq., for the petitioner. Frank B. Schlosser, Esq., for the respondent. LANSDON *569 The respondent has determined a deficiency in income tax for the year 1924 in the amount of $9,915.22. The only allegation of error pleaded in the petition is that: The respondent erroneously included as income for the calendar year 1924, funds received in that year from the operation of oil property which had been in receivership for several years, and the proceeds of which had been impounded, and the respondent likewise made an erroneous and inadequate allowance for depletion with respect to oil produced from said property. At the hearing petitioner was granted permission to file an amendment to its petition in the following terms: The respondent erred in holding and determining that the petitioner was taxable upon any*1101 of the funds received in 1924 from Frederick A. Delano, the receiver, appointed by the Supreme Court of the United States in the case of the State of Oklahoma vs. State of Texas, United States of America, intervenor, hereafter more fully referred to, and in not holding and determining that the said Frederick A. Delano, receiver appointed by the Supreme Court of the United States in the case of the State of Oklahoma vs. State of Texas, United States of America, intervenor, was while acting as such receiver, the fiduciary of a trust for the benefit of unknown and unascertained person and/or persons with contingent interests so that the receipts involved in this proceeding were taxable to him as such fiduciary under Section 219 of the Revenue Act of 1924. The parties have filed a stipulation, which we accept and adopt as our findings of fact. FINDINGS OF FACT. The petitioner is a corporation, chartered under the laws of the State of Delaware, with its principal office and place of business in Wichita Falls, Texas. During all of the times hereafter referred to it was engaged in the business of producing oil. For the year 1924 the respondent has fixed the net income of the*1102 petitioner at $79,321.79. In so doing, respondent included as gross income to the petitioner the sum of $158,643.58, which amount was received in the year 1924 by the petitioner from Frederick A. Delano, Esq., receiver, appointed by the Supreme Court of the United States, in the case of the State of Oklahomav.*570 Stateof Texas,United States of America, intervenor, , [sic] and other reports, under the circumstances hereafter referred to and allowed as a deduction for depletion with respect to the oil property, from which said sum was produced the sum of $79,321.79. On or about November 29, 1919, the petitioner acquired an oil and gas leasehold estate into and upon five acres of land out of Lot 5. Blk. 3, of the Sam Sparks First Subdivision of Red River Valley Lands in Wichita County, Texas, more fully described as follows: Beginning at the southeast corner of said lot; thence with its easterly lines to the northeast line of said lot No. 5, thence with the north lines of said lot No. 5, a sufficient distance to embrace five acres in this survey thence in a southerly direction parallel with the easterly line to the south line*1103 of said lot No. 5; thence with the south line to the point of beginning containing five acres of land, under the terms and conditions by virtue of which it, the petitioner was entitled to six-eighths of all of the oil produced from said property. Said oil and gas leasehold estate was acquired at a time and under circumstances which entitled the petitioner to revalue the property as a basis for depletion when and if oil was discovered upon the property by the petitioner, and the respondent has heretofore determined that the petitioner was entitled to an allowance for depletion based upon such a revaluation ordinarily termed "discovery depletion" and the depletion allowed the petitioner as above set forth was upon that basis. Subsequent thereto, the petitioner drilled a well for oil upon said property, which well was a paying, producing well completed on or about May 27, 1920. The gross production of oil from the property from the time the wellwas completed through the year 1924, was as follows: — 1920 — 75,636 barrels — 1921 — 29,995 barrels — 1922 — 21,994 barrels — 1923 — 18,840 barrels — 1924 — 5,954.16 barrels Total 152,418.16 barrels Before said well was completed*1104 a controversy arose between the State of Oklahoma and the State of Texas as to the correct location of the boundary line between the two states. This controversy resulted in the institution of an original action in the Supreme Court of the United States by the State of Oklahoma, as complainant, against the State of Texas, as defendant. In this suit the United States of America intervened. At the time this action was instituted there was a large quantity of land in the bed of Red River and adjacent to said river in the northern portion of Wichita County, Texas, which was considered valuable for oil and some of which was then producing oil in large quantities. The Supreme Court of the United States appointed Frederick A. Delano, Esq., as receiver to take charge of and to operate and develop this oil land and prospective oil land, to collect and receive the proceeds thereof, and to hold and dispose of the same under the further orders of the court. All of the facts relating to said receivership and its operations and to said suit are more fully shown by the official reports of the Supreme Court of the United States and by its orders and the papers in said cause, all of which are*1105 hereby referred to and made a part hereof. *571 The property of the petitioner was in the area placed in the hands of said receiver, and he took charge of same on or about the time said well was completed, and from that date until some time in the year 1924, he operated said property and said well and collected and received all of the proceeds from the oil produced from said property, and until the year 1924, the petitioner received no part of said proceeds except an allowance and reimbursement for a portion of the costs incurred by it in drilling and equipping said well, which was received prior to 1924. No other wells were drilled upon said property during the time here involved. The well of the petitioner heretofore referred to was found to be south of the boundary line between the State of Oklahoma and the State of Texas, and to be within the State of Texas, and this cleared the well the that portion of the tract of land south of said boundary line, as well as the proceeds of the oil produced therefrom, from all adverse claims, and thereby it was finally and judicially determined that said well and the proceeds derived therefrom to the extent of petitioner's six-eighths*1106 interest were the property of petitioner. In the year 1924, the said receiver, acting under the orders of the Supreme Court, paid over and delivered to the petitioner the sum of money heretofore set out, which was the net amount due the petitioner from the proceeds of the oil produced from said property after making due deduction for the two-eighths interest due others who owned the ordinary one-eighths royalty and an overriding one-eighth royalty in said property, and for the expenses of operating said property and the petitioner's proportionate part of the administrative expenses connected with said receivership, and for production taxes due the State of Texas, and after adding thereto the petitioner's proportionate part of interest, discounts and other income received by the receiver from the funds, in his hands, all of which payments, deductions and additions were made under proper order and decree of the Supreme Court of the United States. Not more than $12,384.65 of said payment came from the oil produced from said property in the year 1924, and all of the remainder thereof constituted the net proceeds of petitioner's share of the oil produced from said property in years*1107 prior to 1924 and to its share of the interest, discounts, etc., earned in prior years. OPINION. LANSDON: The petitioner contends (1) that the receipts of its well prior to 1924, impounded by a receiver appointed by the Supreme Court and received by it on order of such Court in 1924, should not be regarded as taxable income in that year; and (2) that for the years prior to 1924 depletion allowances should be computed under the Revenue Act of 1921. Since the petitioner has not proved and does not argue that all its property was in the hands of the Federal receiver, we think the proceeding here is completely controlled by the decision of the Supreme Court in . Cf. . On this point the determination of the respondent is affirmed. In support of its second point, petitioner argues that inasmuch as the actual production of oil from its property was for the most part in years in which the Revenue Act of 1921 was effective, allowable *572 depletion should be computed in conformity with the provisions of that act. We are unable to agree with this*1108 contention. Allowances for depletion represent the return of capital cost free from tax and are applicable to years in which income is derived from the property. As we have decided above that all the income in question was received in the taxable year, we think it is clear that deduction for depletion allowances must be taken under the Revenue Act of 1924, which was in effect when the income in question was realized. Reviewed by the Board. Decision will be entered for the respondent.