Commissioner of Internal Revenue v. Felix Oil Co.
| Decision Date | 02 August 1944 |
| Docket Number | No. 10448.,10448. |
| Citation | 144 F.2d 276 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. FELIX OIL CO. FELIX OIL CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Helen R. Carloss, F. E. Youngman, and Warren F. Wattles, Sp. Assts. to Atty. Gen., for Commissioner.
Paul S. Marrin and Robert L. Bridges, both of San Francisco, Cal., for Felix Oil Co.
Before DENMAN, STEPHENS, and HEALY, Circuit Judges.
This case is before us on petitions of the Commissioner and the taxpayer to review a decision of the United States Tax Court entered upon a proceeding for the redetermination of deficiencies. The deficiencies were assessed as a result of the Commissioner's disallowance of depletion deductions claimed by the taxpayer in its income returns for 1937, 1938, and 1939, under §§ 23(m) and 114(b) (3) of the Revenue Acts of 1936 and 1938, 26 U.S.C. A. Int.Rev.Code, §§ 23(m), 114(b) (3). The facts were stipulated.
In December 1928 the taxpayer was the owner in fee of 160 acres of land located in the Kettleman Hills in California. At that time it entered into a written agreement purporting to lease the land to the Petroleum Securities Co. for the term of twenty years and so long thereafter as oil or gas might continue to be produced. This agreement has since remained in full force and effect. It is in form a lease, and save in one particular its provisions are very similar to those of the typical oil and gas lease. The peculiarity lies in this: instead of retaining a gross royalty, the lessor was to receive 50% of the "net profits." The term "net profits" was defined as the proceeds of sale of the oil less the expenses of the lessee in drilling, pumping, storage, and the like, less also a number of other items such as state and county taxes, insurance, and general operating costs. While the agreement recites that it was given in consideration of the sum of $10, the actual amount paid to the lessor at the time of execution was $150,000.
The Commissioner, resting his argument mainly on the provision for the payment of net profits, asserts that the contract is an absolute sale rather than a lease, that is to say, that the contract effected a disposition of all the taxpayer's economic interest in the oil in place. The consideration, he contends, was the $150,000 payment plus a share of the net profits of the operation with no retention of any interest in the underlying oil. If the Commissioner's interpretation of the contract is correct the taxpayer would be entitled to no depletion allowance. Helvering v. Elbe Oil Land Development Co., 303 U.S. 372, 58 S.Ct. 621, 82 L.Ed. 904; Anderson v. Helvering, 310 U.S. 404, 60 S. Ct. 952, 84 L.Ed. 1277; Blankenship v. United States, 5 Cir., 95 F.2d 507; McLean v. Commissioner, 5 Cir., 120 F.2d 942. However, the Tax Court, while recognizing the rule contended for by the government, was of opinion that the contract did not amount to a sale of the oil before severance. It accordingly held that the deficiency assessments were unwarranted.
Under the terms of the agreement the taxpayer retained all rights of ownership except those specifically disposed of therein. It retained reversionary rights in the property, and the right of forfeiture in the event of the lessee's failure timely to prosecute drilling; also certain rights in fixtures and equipment upon termination of the lease. As stressed by the Tax Court, the instrument gave the lessee the right to explore the land for oil, and in the event oil were found, to operate on the land for the recovery thereof. Said the Court: "Ownership of the oil in place remained in petitioner as owner of the land and did not pass to the lessee before severance." It was thought that the provision for an...
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Oil Co v. Commissioner of Internal Revenue 25 8212 28, 1946
...paid out to one, they are rents or royalties received by the other.2 The decision below conflicts in principle with Commissioner v. Felix Oil Co., 9 Cir., 144 F.2d 276. Kirby Petroleum Co. v. Commissioner, 326 U.S. 599, 66 S.Ct. 409, involved payments of a share of net income by a producer ......
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...Thomas v. Perkins, 301 U.S. 655, 57 S.Ct. 911, 81 L. Ed. 1324;3 Spalding v. United States, 9 Cir., 97 F.2d 697; Commissioner of Internal Revenue v. Felix Oil Co., 144 F.2d 276; and Commissioner of Internal Revenue v. Caldwell Oil Corporation, 5 Cir., 141 F.2d 559, where, as here, there was ......
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