Bayou Verret Land Co. v. Comm'r of Internal Revenue, Docket No. 6308-66.
| Decision Date | 23 September 1969 |
| Docket Number | Docket No. 6308-66. |
| Citation | 52 T.C. 971 |
| Parties | BAYOU VERRET LAND CO., INC.,1 PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
deQuincy V. Sutton, for the petitioner.
William O. Lynch, and Harold Friedman, for the respondent.
In each of the years 1959 through 1963, petitioner received bonuses upon the execution of oil and gas leases, and claimed percentage depletion thereon. In each of the succeeding years, 1960 through 1964, respectively, the lease of the immediately preceding year was terminated without production, and, pursuant to sec. 1.612-3(a)(2), Income Tax Regs., petitioner returned as income a sum equal to the depletion deduction claimed for the immediately preceding year. Respondent determined that petitioner was subject to the personal holding company tax for 1959, 1960, 1961, 1963, and 1964. Held, the bonuses, but not the sums which corresponded with amounts previously deducted as depletion and reported as income in the succeeding year, were personal holding company income within the meaning of sec. 543(a), I.R.C. 1954, and petitioner's deductions allowable under sec. 162 constituted 15 percent of petitioner's gross income only in 1961, with the result that petitioner was a personal holding company in 1959, 1960, and 1963, but not in 1961 and 1964. Held, further, on the facts, petitioner, for income tax purposes, is entitled to deduct the full amount paid each year on notes given for certain loans.
Respondent determined deficiencies in petitioner's Federal income and personal holding company taxes as follows:
+-------------------------------------+
¦ ¦ ¦Deficiencies¦ ¦
+--------------+------------+---------¦
¦Year ¦Personal ¦ ¦
+--------------+------------+---------¦
¦ ¦Income ¦holding ¦Total ¦
+-----+--------+------------+---------¦
¦ ¦tax ¦company ¦ ¦
+-----+--------+------------+---------¦
¦ ¦ ¦tax ¦ ¦
+-----+--------+------------+---------¦
¦ ¦ ¦ ¦ ¦
+-----+--------+------------+---------¦
¦1959 ¦None ¦$3,285.81 ¦$3,285.81¦
+-----+--------+------------+---------¦
¦1960 ¦None ¦3,408.25 ¦3,408.25 ¦
+-----+--------+------------+---------¦
¦1961 ¦$104.34 ¦2,409.19 ¦2,513.53 ¦
+-----+--------+------------+---------¦
¦1962 ¦604.05 ¦None ¦604.05 ¦
+-----+--------+------------+---------¦
¦1963 ¦697.54 ¦8,211.86 ¦8,909.40 ¦
+-----+--------+------------+---------¦
¦1964 ¦511.53 ¦2,805.07 ¦3,316.60 ¦
+-----+--------+------------+---------¦
¦Total¦1,917.46¦20,120.18 ¦22,037.64¦
+-------------------------------------+
Certain issues have been settled by the parties. The issues remaining for decision are:
(1) Whether cash bonuses received as consideration for oil and gas leases in the years 1959, 1960, 1961, and 1963, respectively, constitute personal holding company income within the meaning of section 543(a)(8).2
(2) Whether amounts equal to the percentage depletion deductions taken by petitioner in 1959, 1960, 1962, and 1963, respectively, and reported as income when the leases were terminated without production in 1960, 1961, 1963, and 1964, respectively, constitute personal holding company income under pre-1964 section 543(a)(8) and present section 543(a)(3).
(3) Whether, under pre-1964 section 543(a)(8), (a) directors' fees, (b) depletion, (c) real estate taxes, (d) interest, and (e) a net operating loss carryover constitute deductions allowable under section 162.
(4) Whether, for income tax purposes, petitioner is entitled to deduct as interest under section 163(a) the full amount paid in 1962, 1963, and 1964 on notes given in connection with certain loans obtained in 1962.
Bayou Verret Land Co., Inc. (hereinafter referred to as petitioner), had its principal office in New Orleans, La., at the time of the filing of its petition. Petitioner filed its Federal corporate income tax returns for the calendar years 1959 through 1964, inclusive, on a cash basis with the district director of internal revenue, New Orleans.
During the years in question petitioner owned approximately 1,271 acres of land in Jefferson Parish, La. Its income was derived from oil and gas leases covering portions of its land.
The only lease in evidence to which petitioner is a party is one entitled ‘Oil, Gas and Other Hydrocarbons Lease,‘ executed on August 12, 1963, by petitioner and Churchill Farms, Inc., as joint lessors, and Frank Ashby, Jr., as lessee. In consideration of $1,000 and ‘other good and valuable consideration,‘ petitioner and Churchill Farms, Inc., leased a total of 552 acres of their land, giving the lessee ‘the exclusive right to enter upon and use the land’ for ‘the exploration for, and production of, oil, gas and other hydrocarbons.’ If drilling operations were not commenced on or before August 1, 1964, the lease was to terminate unless the lessee paid the lessors delay rentals of $25 per acre for the land retained under the lease, in which event the lease would be extended for 1 year and ‘Thereafter, annually, in like manner and upon like payment, on or before August 1 of each succeeding year,’ for a term of 5 years. The lessee was given the right to surrender all, or part, of the leased premises and to be relieved of all obligations as to the released acreage, subject to a provision for a minimum rental of $7,500 per annum. The lessee was obligated to pay the lessors royalties of one-sixth of all oil and gas produced (or the value thereof). The lessors warranted and agreed to defend title to their premises, but the lease provided that, in case of failure of title, ‘Lessee shall not be entitled to claim or recover any monies already paid Lessor as bonus, rentals, or royalty.’
Petitioner returned as income for 1959 an amount received for a ‘shooting-and-selection’ lease, and for 1960 through 1963 amounts designated as ‘Royalty Bonus' received upon the execution of oil and gas leases. Petitioner deducted 27 1/2 percent thereof as depletion allowances as follows:
+-------------------------------------+
¦ ¦Amount ¦Depletion ¦
+--------------+----------+-----------¦
¦Taxable year ¦received ¦deduction ¦
+--------------+----------+-----------¦
¦1959 ¦$10,260.00¦$2,821.50 ¦
+--------------+----------+-----------¦
¦1960 ¦9,576.00 ¦2,633.40 ¦
+--------------+----------+-----------¦
¦1961 ¦6,995.00 ¦1,923.63 ¦
+--------------+----------+-----------¦
¦1962 ¦2,600.00 ¦715.00 ¦
+--------------+----------+-----------¦
¦1963 ¦17,862.50 ¦4,912.19 ¦
+-------------------------------------+
Petitioner reported no bonuses as having been received in 1964. In each of the years 1960 through 1964, the leases of the immediately preceding year were terminated without production, and petitioner reported as income an amount equivalent to the depletion deduction taken in the immediately preceding year. For the taxable years in question petitioner claimed the following deductions:
+-----------------------------------------------------------------------------+
¦ ¦1959 ¦1960 ¦1961 ¦1962 ¦1963 ¦1964 ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Depletion ¦$2,821.50¦$2,633.40¦$1,923.63¦$715.00 ¦$4,912.19¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Taxes ¦98.52 ¦167.86 ¦187.37 ¦210.56 ¦374.22 ¦$280.51 ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Directors' fees ¦1,500.00 ¦2,500.00 ¦2,500.00 ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Legal and auditing ¦ ¦1,031.95 ¦650.00 ¦1,150.00¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Insurance ¦ ¦ ¦347.77 ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Other ¦ ¦ ¦131.25 ¦348.69 ¦ ¦150.00 ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Professional ¦40.00 ¦ ¦ ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Interest ¦ ¦ ¦ ¦2,013.53¦2,325.12 ¦2,325.12¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Accounting ¦ ¦ ¦ ¦ ¦150.00 ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Net operating loss ¦1,078.67 ¦ ¦ ¦ ¦ ¦ ¦
¦deduction ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦Total deductions ¦5,538.69 ¦6,333.21 ¦5,740.02 ¦4,437.78¦7,761.53 ¦2,755.63¦
¦claimed ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-------------------+---------+---------+---------+--------+---------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------------------------------------------------------------------------+
The loan transactions pertaining to issues (3)(d) and (4) arose in the following manner. Sometime before August 1961, petitioner's vice president, J. Folse Roy (hereinafter Roy), arranged for petitioner to borrow $85,000 from Wainer Bros. (hereinafter Wainer), a New Orleans lending institution. At that time it was contemplated that petitioner would use the borrowed funds to acquire...
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