Cartan v. Comm'r of Internal Revenue

• Decision Date: 16 May 1958
• Docket Number: Docket Nos. 56818,56819,56821.
• Citation: 30 T.C. 308
• Parties: HENRY CARTAN AND BARBARA SESNON CARTAN, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

30 T.C. 308

HENRY CARTAN AND BARBARA SESNON CARTAN, ET AL.,1 PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 56818

56819

56821.

Tax Court of the United States.

Filed May 16, 1958.

Everett S. Layman, Esq., and Arthur J. Lempert, Esq., for the petitioners.

Leslie T. Jones, Esq., for the respondent.

1. Petitioners deposited $45,000 pursuant to an agreement to prevent wasteful depletion of gas pressure and consequent reduction in the amount of oil recoverable from a producing field. Held, this expenditure should be allocated over a term of years.

2. Held, no portion of the $45,000 expended represents the cost of a future interest in minerals.

3. Held, entertainment and travel expenses incurred by petitioner W. T. Sesnon, Jr., are deductible in part.

4. Held, expenses incurred by W. T. Sesnon, Jr., for food and lodging while away from home in connection with the affairs of the American Red Cross are deductible as charitable contributions.

The respondent determined deficiencies in petitioners' income tax as follows:

+---------------------------------------------------------------+
                ¦Docket  ¦                                    ¦         ¦       ¦
                +--------+------------------------------------+---------+-------¦
                ¦No.     ¦Petitioner                          ¦1949     ¦1950   ¦
                +--------+------------------------------------+---------+-------¦
                ¦56818   ¦Henry and Barbara Sesnon Cartan     ¦$9,018.27¦0      ¦
                +--------+------------------------------------+---------+-------¦
                ¦56819   ¦W. T., Jr., and Jacqueline K. Sesnon¦10,797.28¦$351.94¦
                +--------+------------------------------------+---------+-------¦
                ¦56821   ¦Porter and Helen F. Sesnon          ¦7,210.01 ¦0      ¦
                +---------------------------------------------------------------+
                

There are three issues. First, is the sum of $45,000, expended by the petitioners in the year 1949 to prevent the depletion of gas pressure and consequent reduction in the amount of oil recoverable from a producing field, an expenditure recoverable over a term of years or may it be deducted in the year expended under section 23(a) of the Internal Revenue Code of 1939? Second, does $4,500 (10 per cent of $45,000) represent the nondepreciable cost of an interest in minerals? Third, are certain travel and entertainment expenses claimed in Docket No. 56819 deductible expenditures?

Another issue in Docket No. 56819 concerning the deductibility of a bad debt was settled prior to trial.

FINDINGS OF FACT.

Most of the facts are stipulated, the stipulations being incorporated herein by this reference.

Henry Cartan and Barbara Sesnon Cartan are husband and wife, computing their income on the cash basis of accounting. They reside in San Francisco, California, and filed joint income tax returns for the years 1949 and following with the collector of internal revenue at San Francisco.

W. T. Sesnon, Jr., and Jacqueline K. Sesnon are husband and wife, computing their income on the cash basis of accounting. They reside in Beverly Hills, California, and filed joint income tax returns for the year 1949 and following with the collector of internal revenue at Los Angeles.

Porter Sesnon and Helen Sesnon are husband and wife, computing their income on the cash basis of accounting. They reside in San Francisco, California, and filed joint income tax returns for the years 1949 and following with the collector of internal revenue at San Francisco.

Porter Sesnon, W. T. Sesnon, Jr., and Barbara Sesnon Cartan are brothers and sister and, for convenience, are hereinafter referred to as petitioners.

The Aliso Canyon Oil Field in the county of Los Angeles contains a productive area known as the Sesnon Zone. This zone contains a reservoir of gas and oil in solution, herein usually called the ‘oil belt,‘ pressure-connected with a reservoir of gas therein usually called the ‘gas cap.’ Pressure exerted by the gas cap on the oil belt is the dominant oil recovery mechanism in the Sesnon Zone but pressure of gas in solution is also used to drive the oil to the well bore. Production of gas from the gas cap or production of excessive quantities of gas (either of gas escaping from solution in oil or of gas-cap gas), in relation to the oil recovered from such production, would wastefully decrease the reservoir pressure in the Sesnon Zone, resulting in leaving millions of barrels of oil in place, unrecovered and unrecoverable under any presently known commercial method.

In 1949 it was estimated by engineers of the petitioners and other oil producers that 1,150 surface acres overlay the Sesnon Zone. Approximately 800 of these acres were owned in 1949 by the petitioners as tenants in common, Porter Sesnon, W. T. Sesnon, Jr., and Barbara Sesnon Cartan each owning an undivided third. Some of the lands owned by the petitioners were under lease to Tide Water Associated Oil Company (hereinafter referred to as Tide Water) in 1949, and some were under lease to Standard Oil Company of California (hereinafter referred to as Standard).

A small portion of the surface acreage overlying or in 1949 believed to overlie the Sesnon Zone was owned by Jane Cato Marquis and Lewis F. Marquis. This portion is hereinafter usually referred to as the Marquis property.

In 1949, in order to prevent waste by reason of production at excessive gas-oil ratios from wells drilled on the Marquis property, and loss of reservoir pressure by reason of wells on the Marquis property producing excessive quantities of gas in relation to the oil produced therefrom, i.e., at excessive gas-oil ratios, and the consequent loss of recoverable oil, Standard and Tide Water, together with the petitioners, entered into negotiations with the owners of the Marquis property. It was proposed by the petitioners that to prevent waste in the Sesnon Zone, Standard and Tide Water should lease or otherwise acquire the Marquis property and thus make it impossible for any outside parties to drill into the Sesnon Zone from the Marquis lands.

Standard and Tide Water at the outset refused to consummate the proposed lease unless petitioners would pay 15 per cent of the annual rental, which the petitioners declined to do. The petitioners countered with a proposal that each of the three petitioners would pay a lump sum of $15,000 or a total sum of $45,000, which was 15 per cent of $300,000, the aggregate of the rental for the first 20 years. The petitioners were willing to do this only in order to facilitate the transaction and thus conserve their properties and prevent any loss of income to them due to possible wasteful operation of the Marquis property. On November 14, 1949, Tide Water and Standard executed a lease for the Marquis property with Jane Cato Marquis and Lewis F. Marquis. This lease commenced on January 1, 1950, and extended for 40 years, but lessees were entitled to quitclaim the lease after December 31, 1969. Rent was payable by annual installments of $15,000. Petitioners were referred to in the lease as ‘neighboring producers.’

The lease provided that the oil companies might obtain from the neighboring producers a contribution to the annual rent due the lessors. Provisions of the lease made it unnecessary for the lessees to develop the leased property or utilize it for any purpose. The lease recognized that hydrocarbons were being extracted from lands owned by the lessees and the neighboring producers and that this might or would drain oil and gas from the leased premises. The lessees and the neighboring producers were released from liability for such detrimental results to the leased property. The lessor was entitled to royalties on oil, gas, and gasoline extracted or produced from the leased property. Royalties were payable only when the amount exceeded the annual rent. The terms of the lease inured to the benefit of the neighboring producers.

On or before November 14, 1949, Standard and Tide Water, as first parties, and petitioners, as second parties, executed an agreement providing in part as follows:

WHEREAS, a certain instrument entitled LEASE AND AGREEMENT and herein sometimes referred to as ‘lease and agreement’ of even date herewith, is about to be executed between JANE CATO MARQUIS and LEWIS F. MARQUIS, her husband, as Lessor, and First Party herein as Lessee, relating to certain property therein described in the City of Los Angeles, County of Los Angeles, State of California, in which lease and agreement Second Party is named as among the ‘neighboring producers' and as one of the owners of lands in the general area of the lands leased under said lease and agreement; and

WHEREAS, the said lease and agreement further provides that the said Lessee therein may obtain from said neighboring producers or from some or all of them or from others a sum or sums, either as a consideration for the execution of said lease and agreement by said Lessee or as a payment on account of or a contribution to the Fifteen Thousand Dollars ($15,000.00) annual rental payable thereunder by the said Lessee to the said Lessor; and

WHEREAS, Second Arty herein desires to deposit with Tide Water Associated Oil Company the sum of Forty-five Thousand Dollars ($45,000.00) with which the latter shall make payments as hereinafter provided;

NOW, THEREFORE, in consideration of the premises and of the agreements hereinafter contained, the parties hereto agree as follows:

Article 2. It is understood and agreed that this agreement shall become effective only if and when said lease and agreement is executed; and that if for any reason said lease and agreement is not executed, this agreement shall be wholly void.

Article 3. Immediately upon execution of this agreement and of said lease and agreement, Second Party agrees to deposit with Tide Water Associated Oil Company the sum of Forty-five Thousand Dollars ($45,000) for the purposes and subject to the provisions of this Article 3.

On or before the 31st day of March, 1950, and on or before the 31st day of March of each...