O'DONNELL v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 29 August 1935 |
| Docket Number | Docket No. 52987,62979. |
| Parties | THOMAS A. O'DONNELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Thomas R. Dempsey, Esq., and A. Calder Mackay, Esq., for the petitioner.
I. Graff, Esq., for the respondent.
These consolidated cases involve deficiencies in income tax as follows: 1924, $335.57; 1925, $505.59; 1926, $3,966.54; 1927, $7,003.28; 1928, $5,392.81; and 1929, $979.41. No evidence relative to the year 1924 was introduced and respondent's determination as to the deficiency of $335.57 for that year is approved.
As to the remaining years, petitioner alleges that the income in question came from the development and operation of oil and gas wells in which he had an economic interest and that respondent erroneously refused to allow him depletion under section 204 (c) (2), Revenue Act of 1926, for the year 1925, and for the period from January 1, 1926, to August 4, 1926.
Petitioner claims that on August 4, 1926, he assigned his property interest in the right to receive the income in question to his wife, and from that date through the remaining taxable years the income belonged to and was paid to his wife, who returned it for taxation, but it is alleged that notwithstanding this assignment the respondent erroneously included the income arising from the oil properties in petitioner's income and determined deficiencies thereon without allowing depletion.
Petitioner further alleges as an alternative that in the event it is decided that respondent properly included the income paid to his wife under the contract in his taxable income, he is entitled to depletion thereon under section 204 (c) (2), Revenue Act of 1926, and section 114 (b) (3), Revenue Act of 1928.
The facts were established by evidence given by deposition and by written stipulation, from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioner, Thomas A. O'Donnell, and Winifred W. O'Donnell were married in December 1925, and lived together as husband and wife in California during the taxable years. Petitioner was in the oil and gas production business and at the times in controversy was considered a person of substantial wealth. Among his holdings had been one third of the issued and outstanding capital stock of the San Gabriel Petroleum Co., which he sold to the Petroleum Midway Co., Ltd., by written contract of January 9, 1918. The contract was filed with the stipulation of facts as an exhibit. By the terms of the contract it was provided that the purchaser, as owner of all of the stock of the San Gabriel Petroleum Co., would acquire all of its assets and then dissolve it. The contract further provided:
Second party agrees to purchase, and does hereby purchase, all of said first party's stockholdings in said San Gabriel Petroleum Company, and agrees to pay therefor, at the times and in the manner hereinafter specified, one-third ( 1/3 ) of the net profits received by it, its successors or assigns, from the development and operation of the properties described and enumerated in the leases, contracts and agreements now owned by said San Gabriel Petroleum Company, for and during the full, unexpired term or terms of said leases, contracts and agreements, and each of them.
In accordance with the contract the Petroleum Midway Co., Ltd. (name since changed to California Petroleum Corporation of California), acquired all of the assets of San Gabriel Petroleum Co. and dissolved it, and developed and operated the oil properties thus acquired and paid petitioner one third of the net profits from the date of the contract to August 4, 1926. Payments to petitioner in 1925 were $50,270.02 and in 1926 were $12,842.48. Desiring to provide a separate private income for his wife and make suitable provision for her maintenance and support, petitioner in March 1926 told her that he would give her his interest, income, or rights under the San Gabriel Petroleum Co. contract. He does not remember the exact words he used, but his purpose was to make her a gift of his entire interest in the San Gabriel contract and it was to be irrevocable. The question of diminishing his income tax was not considered and was not the moving cause of the gift and assignment. About the same time he made his will, making other provisions for his wife, but the San Gabriel contract was not mentioned therein.
On or about August 4, 1926, the petitioner delivered to the operating company a document which was in words and figures as follows:
Thos. A. O'Donnell 906 Security Building Los Angeles August 4, 1926. California Petroleum Corporation of Calif Security Building Los Angeles, California.
Gentlemen:
Please be advised that the income accruing to me in connection with the San Gabriel Petroleum Company agreement has been transferred as of March 31, 1926, to Mrs. Thos. A. O'Donnell, to whom you will make all future payments.
Yours very truly Signed THOS. A. O'DONNELL
Genor:
Pls. send statements and checks to my office same as in the past.
The C H N above referred to was C. H. Norton, authorized agent of Mrs. O'Donnell.
Between August 4, 1926, and March 11, 1929, petitioner's wife received payments made by the company pursuant to the terms of said agreement in the following amounts:
1926 ___________________________________ $15,535.85
1927 ___________________________________ 27,069.99
1928 ___________________________________ 21,451.24
1929 ___________________________________ 4,080.95
The respondent has included in petitioner's income, as shown in the deficiency notices, all of the above amounts received by petitioner's wife during the years 1926, 1927, 1928, and 1929, and no deductions for depletion have been allowed.
All of the payments to Mrs. O'Donnell were sent first to C. H. Norton, her authorized agent. Norton deposited the checks in bank to the credit of Mrs. O'Donnell, who had the exclusive use and ownership thereof and used it for her own purposes, and reported it for taxation on her own separate income tax returns. Petitioner did not receive any of the income after August 4, 1926, and did not have any right to or use of the bank account, nor did he subsequently exercise control over the contract or its proceeds in any way.
The assets taken over by the Petroleum Midway Co., Ltd., included oil and gas leases, and all the payments to petitioner and to his wife were made from profits derived from the production and sale of oil, gas and other hydrocarbon substances produced from the properties covered by the leases.
The respondent does not question the good faith of the parties, contending that it is merely a question of law as to which party is taxable upon the sums received. It is the contention of the respondent that the mere transfer or assignment of income to be acquired in the future without the transfer or assignment of the contract from which the right to the income arises is not sufficient to relieve the assignor (petitioner) from liability for income tax thereon.
On the other hand, the petitioner contends that the only beneficial interest arising under the contract after the sale of his interest in the San Gabriel Petroleum Co. properties was the right to receive one third of the net profits from the development and operation of those properties; that this right was a property right, which was assignable either with or without the contract itself; and that subsequent income therefrom was not taxable to the petitioner.
In the case of William Ernest Seatree, 25 B. T. A. 396, we said:
It is well settled that an assignment of income...
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