Allen v. Comm'r of Internal Revenue, Docket No. 31798.
| Decision Date | 20 April 1954 |
| Docket Number | Docket No. 31798. |
| Citation | 22 T.C. 70 |
| Parties | W. O. ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. The petitioner was married and owned an oil and gas business on July 26, 1945, the effective date of the Oklahoma community property law. In 1946, a net loss was sustained. Held, for carry-back purposes the portion of the loss resulting from the cancellation of leases, which were property acquired by petitioner prior to July 26, 1945, was his loss, and the remainder, in the absence of any evidence tracing all or some portion of it to property acquired by him prior to that date, was a community loss as determined by the respondent.
2. The net loss sustained from the operation of the business in 1946 must be reduced by the excess of percentage depletion over cost depletion experienced in 1944, in accordance with the provisions of section 122 of the Internal Revenue Code, before being applied as a net operating loss deduction against 1944 income. Graham Loving, Jr., Esq., and L. Karlton Mosteller, Esq., for the petitioner.
John P. Higgins, Esq., for the respondent.
The respondent determined deficiencies in the income tax of petitioner in the amounts of $3,362.06 for the year 1944 and $1,038.03 for the year 1945.
Various issues raised by the pleadings are no longer in controversy by reason of concessions made at the trial. Two issues remain:
(1) To what extent may a loss from the operation of a business in 1946 be treated as a community loss in determining the net operating loss of the husband for purposes of carry-back to 1944 and 1945?
(2) Should the net loss sustained from the operation of the business in 1946 be reduced by the excess of percentage depletion over cost depletion experienced in 1944 before being applied as a net operating loss deduction against 1944 income?
Since 1917 petitioner and his wife have been residents of Tulsa, Oklahoma. They filed separate income tax returns for the years 1944 and 1945 and a joint return for the year 1946 with the collector of internal revenue for the district of Oklahoma.
During the years 1944, 1945, and 1946, and for many years prior thereto, petitioner engaged in the oil and gas business, which consisted of trading and investing in mineral royalties and leases, developing and operating oil properties, and purchasing oil properties for major oil companies on a commission basis. His wife never invested any separate funds in this business. In operating the business petitioner used capital, judgment, and personal effort.
The capital investment in the foregoing business (measured by the difference between aggregate cost and outstanding liabilities) on pertinent dates was as follows:
+--------------------------------------------+
¦Date ¦Capital investment (Net worth)¦
+-------------+------------------------------¦
¦Dec. 31, 1944¦$173,721.64 ¦
+-------------+------------------------------¦
¦July 25, 1945¦170,278.84 ¦
+-------------+------------------------------¦
¦Dec. 31, 1945¦167,621.53 ¦
+-------------+------------------------------¦
¦Dec. 31, 1946¦73,986.78 ¦
+--------------------------------------------+
In 1945 petitioner withdrew $22,586.37 from the business for personal use and in 1946 withdrew $18,581.16 for personal use.
As of July 26, 1945, the business was owned entirely by petitioner and all investments in it as of that date were his separate property.
Petitioner has been borrowing money ever since he has been in the oil business. His notes payable as of December 31, 1944, amounted to $132,000 and as of December 31, 1946, to $185,000. During 1946, he borrowed $10,000 on some property which he owned in Illinois and undisclosed amounts on his insurance and on properties which he owned in Oklahoma. It was his intention to repay these borrowings from current income of the business. His wife joined with him on the note given for the Illinois loan because the laws of that State required her signature.
In a schedule attached to the joint return filed by petitioner and his wife for the year 1946 he reported ‘Income from Business Calendar Year 1946,’ as follows:
+--------------------------------------------------------------------+
¦Income from oil and gas sales—Schedule C–1 attached ¦($26,191.66)¦
+-------------------------------------------------------+------------¦
¦Commissions earned ¦296.63 ¦
+-------------------------------------------------------+------------¦
¦Lease sales ¦59,126.06 ¦
+-------------------------------------------------------+------------¦
¦Less—cost of lease sales ¦(18,281.13) ¦
+-------------------------------------------------------+------------¦
¦Lease rentals received ¦843.32 ¦
+-------------------------------------------------------+------------¦
¦Lease bonuses received ¦1,929.17 ¦
+-------------------------------------------------------+------------¦
¦Less—27 1/2% depletion thereon ¦(530.52) ¦
+-------------------------------------------------------+------------¦
¦Royalty sales non-producing ¦790.57 ¦
+-------------------------------------------------------+------------¦
¦Less—cost of royalties sold ¦(166.67) ¦
+-------------------------------------------------------+------------¦
¦Gross income ¦$17,815.77 ¦
+-------------------------------------------------------+------------¦
¦Less—Direct expenses ¦ ¦
+-------------------------------------------------------+------------¦
¦Leases canceled and surrendered ¦$26,821.27 ¦
+-------------------------------------------------------+------------¦
¦Lease rentals paid ¦20,504.62 ¦
+-------------------------------------------------------+------------¦
¦Commissions and participation of profits in lease sales¦10,474.52 ¦
+-------------------------------------------------------+------------¦
¦Abstract expense ¦922.70 ¦
+-------------------------------------------------------+------------¦
¦General leasing expense ¦1,859.63 ¦
+-------------------------------------------------------+------------¦
¦Traveling ¦5,708.85 ¦
+-------------------------------------------------------+------------¦
¦Ad valorem taxes, business property ¦31.01 ¦
+-------------------------------------------------------+------------¦
¦Federal documentary stamp assessment Oklahoma leases ¦422.95 ¦
+-------------------------------------------------------+------------¦
¦Seismograph service, Oklahoma ¦525.00 ¦
+-------------------------------------------------------+------------¦
¦Dry holes drilled Schedule C–1b ¦12,081.92 ¦
+-------------------------------------------------------+------------¦
¦Indirect expenses Schedule C–1c ¦21,823.01 ¦
+-------------------------------------------------------+------------¦
¦Total expenses ¦$101,175.47 ¦
+-------------------------------------------------------+------------¦
¦Net operating loss ¦($83,359.70)¦
+-------------------------------------------------------+------------¦
¦Add—Income Rose L. Allen ¦ ¦
+-------------------------------------------------------+------------¦
¦Schedule C–1d ¦1 4,812.73 ¦
+-------------------------------------------------------+------------¦
¦ ¦($78,546.97)¦
+--------------------------------------------------------------------+
Schedule C–1, ‘Income from Oil and Gas Sales,’ discloses that net income after depletion was realized in varying amounts from oil and gas sales on 40 properties, but, because of net losses sustained on 4 leases on which operating and developing expenses substantially exceeded income, the net loss from oil and gas sales amounted to $26,191.66.
In their joint return for 1946, the petitioner and his wife reported a loss of $79,246.93, which was computed by adding to the foregoing loss of $78,546.97, a loss of $50.66 from the sale or exchange of a capital asset and claimed personal deductions in the amount of $649.30.
On December 11, 1947, petitioner and his wife each filed an application for tentative carry-back adjustment. These applications contained the following computation of operating loss carry-back to 1944 and 1945:
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¦Net loss disclosed line 3, page 3, Form 1040, 1946.¦ ¦$79,246.93¦
+---------------------------------------------------+----------+----------¦
¦Less—Personal deductions ¦$649.30 ¦ ¦
+---------------------------------------------------+----------+----------¦
¦Percentage depletion claimed ¦10,606.10 ¦ ¦
+---------------------------------------------------+----------+----------¦
¦Excess under section 117(j) (Loss) ¦(50.66) ¦ ¦
+---------------------------------------------------+----------+----------¦
¦Net adjustments ¦ ¦11,204.74 ¦
+---------------------------------------------------+----------+----------¦
¦Net loss carry-back—Calendar year 1944 ¦ ¦68,042.19 ¦
+---------------------------------------------------+----------+----------¦
¦Less—Net...To continue reading
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