Merillat v. Commissioner

CHARLES H. MERILLAT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Merillat v. Commissioner Docket No. 10594. United States Board of Tax Appeals 9 B.T.A. 813; 1927 BTA LEXIS 2497; December 23, 1927, Promulgated *2497 Certain payments made in accordance with the provisions of certain oil and gas leases held to constitute rentals and deductible in the year in which paid. Charles H. Merillat, Esq., pro se. W. H. Lawder, Esq., for the respondent. GREEN *813 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the year 1921, for which the respondent in his deficiency letter dated November 7, 1925, has determined a deficiency in the sum of $884.11. The petition alleges that the respondent in the determination of the deficiency committed the following errors: In holding that monies paid annually in renewal of Indian oil and gas leases are not deductible from an oil and gas Indian lessee's income but must be charged to capital account and deducted only upon sale or development of the leases or final loss of the right of renewal of the leases. In holding that a bad debt from a promissory note given by a client for prior services is not deductible. The second assignment of error with respect to the "bad debt" was abandoned at the hearing. FINDINGS OF FACT. The petitioner is a resident of the District of Columbia, *2498 with offices in the Maryland Building, Washington, D.C. He is engaged in the practice of law, and since about 1912 he also has been engaged in the business of leasing Indian oil lands in the State of Oklahoma. Beginning with the year 1912, the petitioner as lessee secured several oil and gas leases from the Otoe and Missouria Tribes of Indians. The following provision was contained in all of the leases except one: That if lessee shall drill one well on some one tract covered by his leases of Otoe and Missouri allotted lands under restrictions within one year from date of approval of this lease, he shall be excused from drilling upon other tracts for a period not longer than ten years, provided he pay annually in advance to each lessor whose lands are not drilled the sum of twenty-five cents per acre for the first year, sixty cents per acre for the second year, and one dollar per acre for the third and each succeeding year, but such payments shall not be credits upon royalties afterwards accruing on production, except that if oil be actually produced, such proportion of the payment for that year shall be credited on the royalty on production in that year as that portion*2499 of the year subsequent to the beginning of production bears to the whole year. (Italics ours.) During 1921, in order to keep certain leases on which he had satisfied the drilling requirements, the petitioner paid $913.45 in accordance with the above provision. The leases also provided that in case *814 of production the petitioner was to pay "a royalty of 12 1/2 per cent of the gross proceeds of the oil produced, payable at the time of sale or removal of oil from the premises where produced." The lease excepted above, which was known as the Harvey R. Atkins lease, was substantially the same as all of the others, except that in this lease the annual payments were termed "advanced royalty" and "rental." The provisions of the Atkins lease relative to such annual payments were as follows: 3. Until a producing well is completed on said premises the lessee shall pay, or cause to be paid, to the officer in charge, for the use and benefit of the lessor, as advanced royalty, from the date of the approval of this lease, fifteen cents per acre per annum, in advance, for the first and second years; thirty cents per acre per annum, in advance, for the third and fourth years; *2500 seventy-five cents per acre in advance, for the fifth year; and one dollar per acre per annum, in advance, for each succeeding year of the term of the lease; it being understood and agreed that such sums of money so paid shall be a credit on stipulated royalties for the year for which the payment of advanced royalty is made, and the lessee hereby agrees that said advance royalty when paid shall not be refunded to the lessee because of any subsequent surrender or cancellation thereof; nor shall the lessee be relieved from his obligation to pay said advance royalty annually when it becomes due, by reason of any susequent surrender or cancellation of this lease. 4. The lessee shall exercise diligence in sinking wells for oil and natural gas on the land covered by this lease, and shall drill at least one well thereon within one year from the date of approval of this lease by the Secretary of the Interior, or shall pay to the officer in charge, for the use and benefit of the lessor, for each whole year the completion of such well is delayed, after the date of such approval by the Secretary of the Interior, for not to exceed ten years from the date of such approval, in addition to*2501 the other considerations named herein, a rental of one dollar per acre, payable annually; * * * (Italics ours.) During 1921 the petitioner paid for himself the amount of $145 as "advanced royalty" in accordance with section 3 of the Atkins lease and a like amount as "rental" in accordance with section 4 thereof. In case oil was produced on the Atkins lease the petitioner was to pay "as royalty, the sum of 12 1/2 per cent of the gross proceeds of all crude oil extracted from the said land, such payment to be made at the time of sale or removal of the oil." During 1921 the petitioner produced no oil on any of the leases and did not surrender or abandon any of the leases during that year. The respondent disallowed all of the above payments, totaling $1,203.45, on the ground that they were capital expenditures. OPINION. GREEN: We are of the opinion that the total payments of $1,203,45 itemized in the findings of fact constitute rentals and as such are deductible under section 214(a)(1) of the Revenue Act of 1921, *815 which provides that in computing net income there shall be allowed as deductions: * * * Rentals or other payments required to be made as a condition*2502 to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. Some of the payments were termed in the leases as "advanced royalty" and by the express provisions of the leases they could not be credited against any production other than that of the current year. Under such circumstances, we believe the amounts paid as such are deductible in the current taxable year. The petitioner gave some testimony as to payments in 1921 of $50 for a bond, $5 for making a record, and $10 for certain desired information, but as the petition did not assign any error with respect to such items we have not considered them in this opinion. Judgment will be entered on 15 days' notice, under Rule 50. Considered by STERNHAGEN, LANSDON, and ARUNDELL.