Boone County Coal Corporation v. United States

• Decision Date: 25 July 1941
• Docket Number: No. 4808.,4808.
• Citation: 121 F.2d 988
• Parties: BOONE COUNTY COAL CORPORATION v. UNITED STATES.
• Court: U.S. Court of Appeals — Fourth Circuit

121 F.2d 988 (1941)

BOONE COUNTY COAL CORPORATION v. UNITED STATES.

No. 4808.

Circuit Court of Appeals, Fourth Circuit.

July 25, 1941.

Frederick L. Thomas, of Charleston, W. Va. (Price, Smith & Spilman, of Charleston, W. Va., on the brief), for appellant.

Arthur L. Jacobs, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, Helen R. Carloss, and S. Dee Hanson, Sp. Assts. to the Atty. Gen., Lemuel R. Via, U. S. Atty., of Huntington, W. Va., and Charles M. Love, Jr., Asst. U. S. Atty., of Charleston, W. Va., on the brief), for appellee.

Before PARKER, SOPER, and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This is an appeal from a judgment entered February 12, 1941, by Judge Barksdale, sitting in the United States District Court for the Southern District of West Virginia dismissing, in favor of the appellee, the action filed by the appellant (hereinafter called the taxpayer) for the recovery of corporate income and excess profits taxes in the aggregate principal amount of $5,531.86, plus interest, paid for the calendar year 1935.

The taxpayer, a West Virginia corporation, with lands in Logan County, West Virginia, during the calendar year 1935, incurred expenses of $42,664.33, representing intangible drilling and development costs in connection with the drilling of gas wells on its property.

On taxpayer's books of account for the year ending December 31, 1935, the amount accumulated in the construction accounts of taxpayer's independently drilled wells was entered in a capital account by taxpayer's bookkeeper without consultation with, or specific direction from, any officer of the company. It had been customary to capitalize each and every sum spent by taxpayer in the development of coal properties, and the bookkeeper similarly treated on taxpayer's books all the cost of developing gas properties. He acted in good faith, but without specific direction and without knowledge of the election afforded gas producers by Article 23(m)-16 of Treasury Regulations 86. Neither he nor any officer of the taxpayer corporation was familiar with the gas production business.

When, during the first quarter of the year 1936, the taxpayer's accountant prepared the taxpayer's 1935 income tax return, he prepared it from the data appearing on the taxpayer's books, which showed the intangible drilling and development costs as capital account and not as expenses. There were no sales of gas and no income from taxpayer's independently drilled wells during the year 1935. The president of the taxpayer seems to have been under the impression that, inasmuch as there was no income from the gas properties during the year in question, it was unnecessary at this time to determine the question of whether the intangible drilling costs should be treated as capital or expenses. At all events, the accountant did not attach to the 1935 return any statement indicating a clear election as to the treatment of intangible drilling costs, as prescribed by Treasury Regulations 86, Art. 23 (m)-16 (d).

In the latter part of October, 1936, the officers of taxpayer and its advisers held a conference, at which it was decided that the taxpayer should charge the intangible drilling and developing costs of its independently drilled wells to expenses rather than to capital. The bookkeeper of the taxpayer was, accordingly, ordered to change the books in conformity with this decision. It was further decided at this conference that an amended return for the year 1935 should be filed with the Collector of Internal Revenue, in which amended return there should be included a clear statement of the taxpayer's election to treat these intangible drilling costs as expenses and not as capital. In May, 1937, a special meeting of the board of directors of the taxpayer was held at which a resolution was unanimously adopted, approving the conclusions reached at the conference just mentioned. And, at this meeting of the directors, an amended tax return for the calendar year 1935 was submitted, approved, and ordered to be filed with the Collector of Internal Revenue. On May 13, 1937, the amended return was filed with the Collector of Internal Revenue. The amended return, however, was untimely in that it was filed after the expiration of the statutory period for filing the return, and after the expiration of any period of time for which an extension for such filing could legally have been granted by the Commissioner of Internal Revenue.

There is thus presented for our determination only one question: whether the taxpayer, by not deducting the so-called intangible costs of drilling and developing its gas wells in its original tax return for the year 1935, and by treating these drilling costs in the original return as capital items, thereby made an election to charge such costs to capital account, and consequently was precluded from deducting them as operating expenses in an amended return filed more than a year later, after the time in which an amended return could be filed. In this connection, as we have indicated, the original return was prepared by the taxpayer's tax accountant according to the taxpayer's books, on which the drilling costs in question were all treated as items of capital account. Judge Barksdale in the District Court answered this question in the affirmative and dismissed the taxpayer's action. We think the conclusion he reached is quite sound.

The apposite federal statute provides that, under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary of the Treasury, there shall be a reasonable allowance for deductions for depletion and depreciation of improvements according to the peculiar conditions in the case of oil and gas wells. Section 23(m), Revenue Act of 1934, 26 U. S.C.A. Int.Rev.Code, § 23(m). The pertinent interpretive regulations promulgated pursuant thereto (Article 23(m)-16, Treasury Regulations 86) provide:

"(a) (1) * * * All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenience been termed intangible drilling and development costs.

* * * * * *

"(d) This article does not grant a new option or election. Any taxpayer who made an election or elections under article 243 of Regulations 74 or under article 223 of Regulations 69 or under article 236 of Regulations 77 is, by such election or elections, bound with respect to all optional expenditures whether made before January 1, 1934, or after December 31, 1933, in connection with oil and gas wells. Any taxpayer who has never made expenditures for drilling oil or gas wells prior to the first taxable year beginning after December 31, 1933, must make an election as to intangible drilling and development costs in general in the return for the first taxable year in which the taxpayer makes such expenditures, and a taxpayer who has never made expenditures for a non-productive well prior to the first taxable year beginning after December 31, 1933, must make an election as to the cost of such wells in the return for the first taxable year in which the taxpayer completes such a well. Any election so made is binding for all subsequent years. A taxpayer is considered to have made an election in accordance with the manner in which the respective types of optional items are treated (1) in his return for the first taxable year ending after December...