Commissioner of Internal Revenue v. Titus Oil & Invest. Co.
| Decision Date | 13 January 1943 |
| Docket Number | No. 2591,2592.,2591 |
| Citation | 132 F.2d 969 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. TITUS OIL & INVESTMENT CO. |
| Court | U.S. Court of Appeals — Tenth Circuit |
S. Dee Hanson, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, and Louise Foster, Sp. Assts. to Atty. Gen., on the brief), for petitioner.
Clark G. Clinton, of Dallas, Tex., for respondent.
Before PHILLIPS, BRATTON, and MURRAH, Circuit Judges.
This proceeding is here on petition to review an order of the Board of Tax Appeals. Titus Oil & Investment Company, herein called the taxpayer, was organized in 1933, and was engaged in the oil business. Its books were kept and its income tax returns made on an accrual basis. Its return for 1933 was filed on April 13, 1934, and disclosed no tax liability. Schedule K attached to such return was a balance sheet at December 31, 1933. In the assets column appeared an item "Incomplete Wells $10,486.88", which represented cost of equipment, $4,208.36, and intangible drilling expense, $6,278.52. These expenditures were made in 1933 in drilling the first oil well of the taxpayer. The well was not completed on December 31, 1933. It was in process of being cleaned out, and it was not then known whether it would be a commercial producer or would be abandoned. It was completed as a producing well early in 1934. At the end of 1933, the books and records of the taxpayer showed the expenditures made during the year for equipment and drilling, but it was not known whether additional expenditures would be required; and because the records were incomplete, allocation could not be made of expenditures between investment and expenses. No income from the well was shown in the return. But an amended return was filed in January, 1935, in which the taxpayer reported additional income from oil sales allocable to 1933, total gross income, total deductions, and a net loss — with no tax liability. The total deductions included the item of $6,278.52, above referred to, representing intangible drilling and development costs. The return of the taxpayer for 1934, filed on March 15, 1935, contained a deduction for intangible drilling and development costs; and its return for 1935, filed on March 14, 1936, contained a like deduction.
The Commissioner of Internal Revenue disallowed the deductions for intangible drilling and development costs, taking the ground that the taxpayer made a binding election in its original return for 1933 to capitalize such expenditures, and that the election was effective in subsequent years. Deficiencies resulted for the years 1934 and 1935. On redetermination, the Board held that the taxpayer made an effective election in the amended return to treat such costs as operating expenses; the deficiencies were accordingly reduced; and the Commissioner sought review.
Section 22 of the Revenue Act of 1932, 47 Stat. 169, 26 U.S.C.A. Int.Rev.Acts, page 487, defines gross income; section 23(a), 26 U.S.C.A. Int.Rev.Acts, page 489, provides that in computing net income all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business shall be allowed as deductions; section 23(l) provides that in case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance shall be made for depletion and depreciation, according to the peculiar conditions in each case, under rules and regulations to be made by the Commissioner of Internal Revenue, with the approval of the Secretary of the Treasury; Treasury Regulations 77, article 236(l), promulgated under the act, provides in effect that intangible drilling and development costs, such as expenditures made for wages, fuel, repairs, hauling, and supplies, incident to and necessary for the drilling of oil and gas wells and the preparation of such wells for production, may at the option of the taxpayer, be deducted from gross income as expenses or charged to capital; and article 236(d) provides among other things that a taxpayer who has never made expenditures for drilling oil or gas wells prior to the taxable year 1932 must make an election in respect to intangible...
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