Comar Oil Co. v. Burnet

• Decision Date: 31 May 1933
• Docket Number: No. 9532.,9532.
• Citation: 64 F.2d 965
• Parties: COMAR OIL CO. v. BURNET, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — Eighth Circuit

64 F.2d 965 (1933)

COMAR OIL CO. v. BURNET, Commissioner of Internal Revenue.

No. 9532.

Circuit Court of Appeals, Eighth Circuit.

April 17, 1933.

Rehearing Denied May 31, 1933.

Truman Post Young, of St. Louis, Mo. (Thompson, Mitchell, Thompson & Young, of St. Louis, Mo., on the brief), for petitioner.

Hayner N. Larson, Sp. Asst. to Atty. Gen. (G. A. Youngquist, Asst. Atty. Gen., J. Louis Monarch, Sp. Asst. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and John H. Pigg, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before STONE, VAN VALKENBURGH and BOOTH, Circuit Judges.

BOOTH, Circuit Judge.

This is a petition by the Comar Oil Company for review of an order and decision of the Board of Tax Appeals rendered November 10, 1931, which redetermined the deficiency in the income taxes of petitioner for the calendar year 1923 at the sum of $96,579.88, thereby approving the determination of the Commissioner of Internal Revenue.

The facts are not in dispute. They are set out in the findings of the Board of Tax Appeals, which are as follows:

"Findings of Fact.

"The petitioner is a corporation with its principal office in St. Louis, Missouri. It is engaged in the production of oil and gas and in the acquisition of oil and gas leases.

"On July 26, 1921, the Goldelline Oil Corporation and Errett R. Newby, owners of a certain oil and gas lease, transferred that lease to the petitioner by an instrument duly signed and acknowledged. That instrument contained the following provisions:

"Whereas, on the 26th day of July, 1921, a certain oil and gas mining lease was made and entered into by and between Caswell C. Endicott and Laura A. Endicott, husband and wife, Lessors, and the Marland Refining Company, a corporation, Lessee, covering the following described land in the County of Kay, State of Oklahoma, to-wit: * * * said lease being recorded in the office of the County Clerk in and for said County in book 46 at page 36; and

"Whereas, the said lease and all rights thereunder or incident thereto are owned by the Goldelline Oil Corporation, of Oklahoma, an undivided one-half interest, and Errett R. Newby, an undivided one-half interest;

"Now Therefore, for and in consideration of the sum of Fifty Thousand ($50,000.00) Dollars in hand paid to the assignors herein by the Comar Oil Company, assignee hereunder, the receipt of which is hereby acknowledged, and the additional sum of One Hundred Thousand ($100,000.00) Dollars net to be paid out of the oil and gas as hereinafter set out, the undersigned, the present owners of said lease and all rights thereunder or incident thereto, do hereby bargain, sell, transfer, assign and convey unto the Comar Oil Company, all of the right, title and interest of the original lessee and present owners in and to the said lease and rights thereunder, in so far as it covers the following described lands, to-wit: * * * together with all personal property used or obtained in connection therewith to the Comar Oil Company and its successors and assigns.

"The above mentioned sum of $100,000.00 net shall be paid to the assignors herein out of one-eighth of the gross production of oil and gas produced from said property, by the assignees or its assigns, * * *

"It is understood that a lien is hereby retained by first parties on said one-eighth of the oil and gas until said sum of $100,000.00 is paid.

"And for the same consideration, the undersigned for themselves and their heirs, successors and assigns, do covenant with the said assignee, its successors or assigns, that they are the lawful owners of the said lease and rights and interests thereunder and of the personal property thereon or used in connection therewith; that the undersigned has good right and authority to sell and convey the same and that all rentals and royalties due and payable thereunder have been duly paid.

"In Witness Whereof, The undersigned owners and assignors have signed and sealed this instrument this 15th day of July, 1922.

"On October 5, 1922, Henry Rosenthal, owner of a certain oil and gas lease, conveyed that lease to the petitioner by an instrument, duly signed and acknowledged, containing the following clause: * * *

"That the first party hereto has this day bargained, sold and assigned and transferred to second party hereto, all of his interest in the said oil and gas lease upon said lands hereinabove described, same being an undivided one-fourth interest, for the consideration of One Hundred Thousand ($100,000.00) Dollars cash, and Fifty Thousand ($50,000.00) Dollars to be paid to the party of the first part by party of the second part out of one-half of their portion of the first oil or gas produced, same to be made when and as the oil is sold. * * *

"On November 20, 1922, a written agreement was entered into between Alcorn Oil Company and the petitioner, whereby Alcorn Oil Company assigned to petitioner three designated oil and gas leases. The pertinent provisions of the agreement read: * * *

"Third: The party of the second part agrees to pay for said three leases the sum of Three Million Dollars, ($3,000,000.00); One Million Seven Hundred Fifty Thousand Dollars ($1,750,000.00) shall be paid in cash upon the approval of titles as above provided, the balance, amounting to One Million Two Hundred Fifty Thousand Dollars, ($1,250,000.00) shall be paid by Comar out of fifty per cent (50%) of the oil produced as represented by the working interest in said properties. The title to all of the working interest in the oil produced from said properties subsequent to the date of this agreement shall be in Comar Oil Company, and as oil is produced Comar Oil Company shall pay to the Alcorn Oil Company sums of money equivalent to the value of Fifty per cent (50%) of the oil produced, as aforesaid. * * *

"All the leases above mentioned were, at the times when acquired by petitioner, located in unproven and undeveloped territory, although drilling operations had been started on some of the leased lands.

"Pursuant to the terms of the above mentioned instruments, petitioner paid during 1923, out of proceeds from oil and gas produced from said leased territories, the following amounts:

                  To Goldelline Oil Corporation   $  100,000.00
                  To Henry Rosenthal                  43,104.02
                  To Alcorn Oil Company            1,247,001.22
                                                  _____________
                                                  $1,390,105.24
                        ("In its income tax return for 1923
                    all amounts collected from the sale of oil
                    and gas produced were included in gross
                    income by the petitioner, who treated
                    the above payments as capital expenses
                (y) and made no deduction respecting them
                    The respondent accepted that treatment
                    of those expenditures, but disallowed $1,107,487.69
                    of the amount claimed by the
                    petitioner as a depletion deduction.)
                

"It is conceded by petitioner that, if its payments in 1923 on account of the leases, amounting to $1,390,105.24, are capital transactions then the respondent's determination as to depletion deductions is correct.

"All of the leased oil lands involved were located in Oklahoma, and each instrument in question was executed according to the requirements in that State for executing conveyances of interests in land."

Petitioner has pointed out that the finding which we have marked "y" is likely to cause confusion and misunderstanding unless accompanied by petitioner's explanation, which we have set out in the margin.¹

The broad question involved in this appeal is whether the payments by petitioner to Goldelline Oil Corporation, Henry Rosenthal, and the Alcorn Oil Company should be included in the taxable income of petitioner. This question, in the argument of petitioner, is subdivided into two: (1) Whether the payments were proper to be included in the income of petitioner at all; (2) whether, if they were so included, they should not have been thereafter eliminated as allowable deductions.

Gross Income.

The relevant sections of the 1921 Revenue Act (42 Stat. 227) pertaining to gross income, net income and deductions are set out in the margin.²

It will be apparent upon examination of the statute (section 213 (a) that the term "gross income" is broad in scope; broad enough to include, in the case of a lessor, rents or royalties paid to him by the lessee, Von Baumbach v. Sargent Land Co., 242 U. S. 503, 37 S. Ct. 201, 61 L. Ed. 460; United States v. Biwabik Mining Co., 247 U. S. 116, 38 S. Ct. 462, 62 L. Ed. 1017; Murphy Oil Co. v. Burnet, 287 U. S....