Bentex Oil Corp. v. Comm'r of Internal Revenue, Docket No. 27450.
| Decision Date | 29 May 1953 |
| Docket Number | Docket No. 27450. |
| Citation | 20 T.C. 565 |
| Parties | BENTEX OIL CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, the organization, of which petitioner was a member, was a joint venture or partnership engaged in an oil drilling operation, which joint venture was entitled to an election either to deduct as necessary expenses or to capitalize in intangible drilling costs. Marvin K. Collie, Esq., and C. E. Bryson, Esq., for the petitioner.
J. Marvin Kelley, Esq., and Paul M. Newton, Esq., for the respondent.
Respondent determined deficiencies in income and excess profits taxes of the petitioner for the taxable years 1942, 1944, and 1945, as follows:
+----------------------------+
¦ ¦Deficiency ¦
+----+-----------------------¦
¦ ¦ ¦Excess ¦
+----+----------+------------¦
¦Year¦Income tax¦profits tax ¦
+----+----------+------------¦
¦1942¦$2,960.03 ¦ ¦
+----+----------+------------¦
¦1944¦ ¦$42,853.92 ¦
+----+----------+------------¦
¦1945¦ ¦27,776.63 ¦
+----------------------------+
Petitioner alleges error only as to foregoing deficiencies in excess profits tax determined for the years 1944 and 1945.
The primary question presented is whether petitioner, in computing its excess profits credit for the years involved, is entitled to capitalize intangible drilling and development costs incurred and paid by Benedum-Trees Oil Company (Puig Operations) and deducted by it in 1938 and 1939, in computing the distributable income or loss on that operation. The allowance of deductions in the years 1937, 1938, and 1939 of intangible drilling and development costs, with respect to Hiawatha Oil and Gas Company Joint Venture, Duval County, Texas, and Benedum-Trees Oil Company, Troy Field Joint Venture, Nevada County, Arkansas, in the computation of petitioner's excess profits credit for the years before us, as set forth in the statement attached to the Commissioner's notice of deficiency, is not in controversy in this proceeding. If the expenses in question are capitalized the petitioner's base period net income for 1938 and 1939 must be increased and a corresponding increase must be made in its excess profits credit.
The respondent, in his amended answer, has alleged that the petitioner is here taking a position with respect to expensing the drilling and development costs of the Puig Lease Operations inconsistent with that taken by it in 1938 and 1939. The respondent has further alleged that should petitioner's present position be sustained, it will then owe additional income tax for the years 1938 and 1939 in amounts not less than $5,777.31 and $149.41, respectively, plus interest, which amounts respondent claims under section 734 of the Internal Revenue Code. Petitioner admits the inconsistency of its current position and concedes that if such present position be upheld, the foregoing claims by respondent are proper and correct.
The petitioner, Bentex Oil Corporation (sometimes herein called Bentex), is a corporation organized September 10, 1936, under the laws of the State of Texas. Petitioner maintains its principal office and place of business in Houston, Texas, and has, since its organization, been engaged in the business of producing oil and gas and other petroleum products. The income and excess profits tax returns of petitioner, for the years here concerned, were filed with the collector of internal revenue for the first district of Texas, at Austin, Texas.
Upon its organization, the petitioner acquired the full working interest in a lease known as the Harmon Lease. Development thereof was commenced in the latter part of 1936 by petitioner. T incurred and paid intangible drilling and development costs in the amount of $27,881.05. Such costs were capitalized in petitioner's 1936 income tax return pursuant to its exercise of the election provided in the pertinent regulations.
In 1937, the petitioner, with Benedum-Trees Oil Company, a corporation (sometimes herein called the Company, and M. E. Davis, jointly acquired and became the co-owners of an oil and gas lease on lands in Duval County, Texas, known as the Puig Lease, their respective interests being two-eights, five-eights, and one-eighth. Such ownership continued in 1938 and 1939.
After exploration, production of oil was obtained upon the Puig Lease. The wells thereon were drilled by drilling contractors. A certain percentage of the oil so produced was assigned to the drilling contractor in 1938 and 1939, and the pipe line company paid it $27,100.20 and $50,908.38, respectively, in those years.
The petitioner, the Company, and M. E. Davis jointed together for the purpose of operating the Puig Lease for profit, and, by virtue of such operation, the owners thereof shared the income and losses in proportion to their respective interests in the venture. That venture has been carried on as a business operation from 1937 up to the present time.
The co-owners had no formal agreement or definite arrangement with respect to the exploration or operation of the lease. Such agreement as existed was entirely oral. As a matter of procedure, the parties would orally agree periodically regarding the drilling or deepening of a particular well. No co-owner could force or commit another co-owner to undertake any exploration or operation. Any party could dissent with respect to an action and abstain from participation therein. Each sold his or its share of the production directly to and received the proceeds therefor directly from a purchaser. At no time did any co-owner have the authority to sell any other co-owner's share of the production nor did any co-owner actually sell another's share.
Subject to a termination at the will of each co-owner, the Company received bills for the expenses incurred in the operation and development of the Puig Lease, and at the end of each month billed the other co-owners for their respective parts for such expense and thereupon was reimbursed. Petitioner kept its own books on the income and expenses involved.
A partnership return of income for the year 1937 was filed with the respondent on Form 1065 in the name of Benedum-Trees Oil Company, Duval County, Texas (Puig Operations). In that return it is stated that the nature of the organization is a ‘joint venture.‘ Also, in that return, a gross profit of $70,548.76 was reported and deductions of $131,243.41 were claimed. Among the deductions taken were the following:
+-----------------------------------------------------+
¦Accrued interest ¦$2,781.30 ¦
+------------------------------------------+----------¦
¦Depreciation ¦2,385.19 ¦
+------------------------------------------+----------¦
¦Depletion ¦3,143.13 ¦
+------------------------------------------+----------¦
¦Drilling expenses (intangible drilling and¦ ¦
+------------------------------------------+----------¦
¦development) ¦122,581.93¦
+-----------------------------------------------------+
The net loss thus reported was $60,694.65. This loss was distributable to the members of the joint venture in proportion to their respective interests. This partnership return for the year 1937 was not examined by the respondent or his agents.
A partnership return of income (Form 1065) for the year 1938 in the name of Benedum-Trees Oil Company, for the Puig Lease Operations, was filed with the respondent. In that return it was stated that the nature of the organization was a ‘joint venture.‘ In the return for 1938 a gross profit of $272,551.56 was reported. Among the deductions taken on the return were the following:
+-----------------------------------+
¦Interest on indebtedness¦$1,254.80 ¦
+------------------------+----------¦
¦Taxes ¦5,336.58 ¦
+------------------------+----------¦
¦Accrued interest ¦13,453.25 ¦
+------------------------+----------¦
¦Depreciation ¦7,911.14 ¦
+------------------------+----------¦
¦Depletion ¦77,862.76 ¦
+------------------------+----------¦
¦Drilling expense ¦191,676.39¦
+-----------------------------------+
The return showed a loss of $25,096.72 which was distributed to the partners as shown in Schedule J thereof.
A similar return was filed with the respondent for the year 1939 for the Puig Lease Operations. Again, in this return, it was stated that the nature of the organization was a ‘joint venture‘ and a gross profit of $242,518.76 was reported. Among deductions claimed therein were the following:
+----------------------------------------+
¦Interest on indebtedness ¦$6,938.08¦
+------------------------------+---------¦
¦Taxes ¦17,495.84¦
+------------------------------+---------¦
¦Loss on sale of capital assets¦38.67 ¦
+------------------------------+---------¦
¦Depreciation ¦16,981.85¦
+------------------------------+---------¦
¦Depletion ¦70,294.10¦
+------------------------------+---------¦
¦Drilling expenses ¦32,259.51¦
+----------------------------------------+
The return showed ordinary net income of $99,098.92 distributable to the partners as shown in Schedule J thereof.
The foregoing partnership returns were filed on the Puig Lease Operations upon the advice of counsel that the then rulings of the respondent required such filing and treatment. These rulings were later modified.
The partnership returns for the years 1938 and 1939 were examined by respondent's agents, and the intangible drilling and development expenses claimed as deductions in the returns were, at first, disallowed. At a later date, after protest of the...
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