Palmer v. Bender

Decision Date09 January 1933
Docket NumberNo. 215,215
Citation287 U.S. 551,53 S.Ct. 225,77 L.Ed. 489
PartiesPALMER v. BENDER
CourtU.S. Supreme Court

Messrs. John H. Tucker, Jr., of Shreveport, La., Henry P. Dart and Henry P. Dart, Jr., both of New Orleans, La., and Fred R. Angevine, of New York City, for petitioner.

Mr. G. A. Youngquist, Asst. Atty. Gen., for respondent.

[Argument of Counsel from page 552 intentionally omitted] Mr. Justice STONE delivered the opinion of the Court.

Petitioner brought suit in the District Court for Western Louisiana to recover taxes alleged to have been illegally exacted for 1921 and 1922 upon income derived from oil properties by petitioner as a member of two partnerships, known, respectively, as the Smitherman and Baird partnerships. Both partnerships, after 1913, acquired oil and gas leases of unproved Louisiana lands and engaged in drilling operations on them which resulted in discovery of oil on March 30, 1921, in the case of the Smitherman leases and on August 23, 1919, in the case of the Baird leases.

In April, 1921, the Smitherman partnership executed a writing by which it conferred on the Ohio Oil Company the right to take over a part of the leased property on which the producing well was located, subject to the obligations of the covenants of the leases, in consideration of a present payment of a cash bonus, a future payment to be made 'out of one-half of the first oil produced and saved' to the extent of $1,000,000, and an additional 'ex- cess royalty' of one-eighth of all the oil produced and saved. The instrument in terms stated that the partnership 'does sell, assign, set over, transfer and deliver * * * unto the Ohio Oil Company' the described leased premises. The Baird partnership in November, 1921, gave a similar document to the Gulf Refining Company containing some additional features which, in the view we take are immaterial. It too stipulated for future payment of royalties in kind from the oil produced and saved.

Petitioner's tax returns for the years 1921 and 1922 reported his distributive share of the income from the Smitherman partnership, derived from the bonus payment and oil received under its contract with the Ohio Oil Company, and also his share in the income from the Baird partnership from oil received under its contract with the Gulf Refining Company. In the returns for both years, petitioner, relying upon the provisions of section 214(a)(10) of the Revenue Act of 1921 (42 Stat. 239), regulating depletion allowances in the case of oil and gas wells, made a deduction for depletion based on the value of the oil in place in the two properties on the respective dates of discovery.

The Commissioner refused to allow these deductions, on the theory that both transactions were sales of the leases by the partnerships, and that the only allowable deductions, in calculating taxable gain, are those based upon the cost of the respective properties to petitioner, in each case materially less than their value at the date of the discovery of oil. This resulted in the assessment and payment of an increased tax which is the subject of the present suit. Judgment of the District Court, 49 F.(2d) 316, denying petitioner the right to make the deductions claimed, was affirmed by the Court of Appeals for the Fifth Circuit, 57 F.(2d) 32. This court granted certiorari, 287 U.S. 586, 53 S.Ct. 79, 77 L.Ed. —-.

Both courts below, following earlier decisions of the Court of Appeals with respect to the two instruments involved here, held that they were assignments or sales of the leases for the stipulated consideration of bonus paid and royalties to be received. See Waller v. Commissioner (C.C.A.) 40 F.(2d) 892; Herold v. Commissioner (C.C.A.) 42 F.(2d) 942. The government rests its case on this conclusion. It concedes that, if any reversionary interest, according to the common law, however small, has been retained in the leased land by the two partnerships, the petitioner is entitled to the depletion allowances claimed, but insists that no such interest was reserved by the instruments in question. Petitioner contends that by the Louisiana law any transfer of an interest in land, yielding to the transferor, as consideration, the fruits of the land as they may be produced, such as the royalty oil in the present case, must be regarded as a lease. See Roberson v. Pioneer Gas Company, 173 La. 313, 137 So. 46. From this he concludes that the two instruments were subleases, and invokes the rule recently affirmed in Murphy Oil Company v. Burnet, 287 U.S. 299, 53 S.Ct. 161, 77 L.Ed. 318, decided December 5, 1932, that the lessor of an oil and gas well is entitled to a depletion allowance upon bonus and royalties received from the lessee, under section 234(a)(9) of the Revenue Act of 1918 (40 Stat. 1077). Section 214(a)(10) of the Revenue Act of 1921, which is applicable here, contains the same provisions.

It has been elaborately argued at the bar and in the briefs whether under Louisiana law the two instruments are assignments or subleases. We do not think the distinction material. Nothing in section 214(a)(10) indicates that its application is to be controlled or varied by any particular characterization by local law of the interests to which it is to be applied. See Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199, decided November 7, 1932. We look to the statute itself and to the decisions construing it to ascertain to what interests it is to be applied, and then to the particular interests secured to the two partnerships by the instruments in question to ascertain whether they come within the statutory provision. The formal attributes of those instruments or the descrip- tive terminology which may be applied to them in the local law are both irrelevant.

Section 214(a)(10) of the Revenue Act of 1921, so far as now material, is printed in the margin.1 It will be observed that the statute directs that reasonable allowance for depletion be made as a deduction in computing net taxable income, 'in the case of * * * oil and gas wells, * * * according to the peculiar conditions in each case.' The allowance to the taxpayer is not restricted by the words of the statute to cases of any particular class or to any special form of legal interest in the oil well. It is true that under article 215 of Treasury Regulations 62 the lessor of an oil or gas well is entitled to a depletion...

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