Bliss v. Commissioner of Internal Revenue

• Decision Date: 20 April 1932
• Docket Number: No. 6225.,6225.
• Citation: 57 F.2d 984
• Parties: BLISS v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

57 F.2d 984 (1932)

BLISS v. COMMISSIONER OF INTERNAL REVENUE.

No. 6225.

Circuit Court of Appeals, Fifth Circuit.

April 20, 1932.

S. L. Herold and S. P. Cousin, both of Shreveport, La., for petitioner.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Shelby S. Faulkner, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before BRYAN, FOSTER, and WALKER, Circuit Judges.

WALKER, Circuit Judge.

This is one of four cases which involved deficiencies assessed against taxpayers, respectively, the petitioner Abel Bliss, his wife, George W. Wetherbee, and his wife, as results of the disallowance of deductions claimed by the taxpayers, respectively, in their income tax returns for the years 1923 and 1924. The cases being identical except that the petitioners therein were different persons, pursuant to stipulation only the record in this case was printed, it being agreed that the decision in this case would be followed in the other cases. During 1923 and 1924 petitioner and George W. Wetherbee comprised the partnership of Bliss & Wetherbee, and one-half of each partner's income for each of those years was reported for taxation by his wife under the community property laws of Louisiana.

About the year 1910 Bliss and Wetherbee (herein referred to as the firm) acquired approximately 11,000 acres of land in Louisiana. Prior to November 23, 1921, adverse claims to oil and gas in parts of the lands owned by the firm had been asserted, and R. O. Roy had entered upon some of those lands the mineral rights in which he so claimed, and had proceeded to drill ten wells thereon, seven of which were dry holes, and three of which were producers. On November 23, 1921, the firm employed attorneys to conduct such litigation as should be necessary to determine the right to the oil and gas in and under the lands the mineral rights in which were adversely claimed, and in writing agreed to pay the attorneys as fees 20 per cent. of what might be realized from the mineral rights as a result of the services of the attorneys, the agreement providing that out of all funds arising from contracts made by the firm concerning mineral rights adversely claimed "20 per cent will be set aside in bank to be paid at the time earned under the terms of this contract." During the month of November, 1921, the firm entered into an oil and gas lease with the Gulf Refining Company of Louisiana covering a tract of land, the mineral rights in which were adversely claimed, and entered into an oil and gas lease with the Humble Oil Company covering another tract of land the mineral rights in which were adversely claimed. The Gulf Refining Company agreed to pay for its lease $20,000 "when the lessors' title to the entire tract of land and to the oil, gas and other minerals thereunder had been perfected and the adverse claims of all parties thereto cancelled and removed," and to pay lessors the additional sum of $60,000 out of one-half of the proceeds of the sale of oil, should it drill and produce oil on the property. The Humble Oil Company agreed to pay for its lease $50,000 when the adverse claims "have been judicially decided by the court of last resort to be illegal and the title of Bliss and Wetherbee to the minerals underlying the lands designated in said paragraph 3 above quieted and confirmed"; and it agreed to pay also $162,000 out of one-half of the first oil produced. After Roy had drilled his tenth well, the firm, through the attorneys employed, brought two suits to have it judicially determined that the adverse claims asserted were invalid, each of those suits being an action for slander of title, otherwise termed by the Louisiana law a jactitation suit. In each of those suits it was adjudged by the Supreme Court of Louisiana in 1923 that the adverse claims asserted were invalid, but that court decided, as to a reconvention claim set up by Roy, that he was entitled to be reimbursed for his entire outlays and expenditures in the drilling of the ten wells, seven of which were dry holes. Wetherbee v. Railroad Lands Co., 153 La. 1059, 97 So. 40; Wetherbee v. Railroad Lands Co., 153 La. 1070, 97 So. 44. After the rendition of those decisions the Gulf Refining Company of Louisiana and the Humble Oil Company in 1923 paid to the firm the cash bonuses agreed upon, and in 1923 and 1924 those companies paid to the firm further sums under the provisions of the contracts relating to the payment of additional bonus out of oil produced. Out of each of the sums so paid to the firm it deducted and paid to its attorneys the proportion stipulated in the above-mentioned contract of employment. The petitioner claimed one-fourth of the amounts so paid as deductions in his income tax returns for years in which the payments were made. The Commissioner of Internal Revenue and the Board of Tax Appeals disallowed those deductions. In 1923, the firm, in accordance with the decision of the Supreme Court of Louisiana, paid to Roy the amount of his outlays and expenditures in drilling the ten wells as above stated. In his income tax return for the year 1923 the petitioner claimed as a deduction from gross income his pro rata part of the amount so paid by the firm to Roy to reimburse him for his expenditures in drilling the dry holes. That deduction was disallowed by the Commissioner and by the Board...