Freeman v. Comm'r of Internal Revenue, Docket Nos. 2416-65— 2418-65
| Decision Date | 28 April 1967 |
| Docket Number | 1362-66.,Docket Nos. 2416-65— 2418-65 |
| Citation | 48 T.C. 96 |
| Parties | NORMAN FREEMAN AND ERNESTINE H. FREEMAN, ET AL.,1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Leland C. Fiske, for the petitioners.
George W. Ledbetter, for the respondent.
A partnership composed of petitioners made an agreement with Shell Oil Co. to grant to it certain, oil, gas, and sulphur interests by five separate conveyances, two of which were to cover several tracts and the other three to cover one tract each, for which a bonus was to be paid. The leases were executed, the bonus paid, and depletion deductions of 27 1/2 percent of the bonus claimed and allowed to the partnership in its computation of its distributable income in years prior to 1962. In 1962 the leases expired as to certain of the tracts without production having been obtained on those tracts. Some of the tracts as to which the leases expired were contiguous to and others not contiguous to tracts which had also been covered in the five leases on which production had been obtained and which were held by production. Held: Depletion previously taken on the bonuses as to any ‘property’ as defined in sec. 614(a), I.R.C. 1954, as to all of the acreage of which the lease was terminated without production having been obtained must be restored to the partnership income in 1962. Depletion previously taken on the bonus as to any ‘property’ as defined in sec. 614(a), I.R.C. 1954, as to only a portion of the acreage of which the lease was terminated without production having been obtained, the remaining portion being held by production obtained during the term of the lease, is not required to be restored to partnership income in 1962. The various tracts or interests which constitute separate ‘properties' under sec. 614(a), I.R.C. 1954, are determined from the facts.
Respondent determined deficiencies in the income tax of petitioners for the taxable year ended December 31, 1962, in the following amounts:
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¦Docket No. ¦Petitioners ¦Deficiency ¦
+------------+-----------------------------------+------------¦
¦2416-65 ¦Norman and Ernestine H. Freeman ¦$8,772.28 ¦
+------------+-----------------------------------+------------¦
¦2417-65 ¦Albert H. and Lee Benson Halff ¦8,410.30 ¦
+------------+-----------------------------------+------------¦
¦2418-65 ¦Mayer H. and Maureene Halff ¦24,090.93 ¦
+------------+-----------------------------------+------------¦
¦1362-66 ¦George W. and Betty Halff Llewellyn¦22,330.86 ¦
+-------------------------------------------------------------+
In their respective petitions, petitioners Norman and Ernestine H. Freeman and petitioners Albert H. and Lee Benson Halff claim overpayments in their income tax for the calendar year 1962.
The issue for decision is whether percentage depletion deductions taken against bonus income received on the grant of oil and gas leases in 1955 should be returned to income in 1962 on those tracts which were not held by production beyond expiration of the lease in 1962 and, in the alternative, whether partial extension of a lease without consideration by a lessor, who with his immediate family owns all the stock of the corporation to which the lease was assigned shortly before its expiration date, precludes restoration by all lessors, of depletion previously taken on nonproductive tracts.
The case was submitted under Rule 30 of the Rules of Practice of this Court, with the facts fully stipulated. The stipulated facts including the exhibits submitted with the stipulation are found accordingly.
Norman Freeman and Ernestine H. Freeman, husband and wife who resided at the date of the filing of this petition herein in Dallas, Tex., filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue at Dallas, Tex. Albert H. Halff and Lee Benson Halff, husband and wife who resided at the date of the filing of their petition herein in Dallas, Tex., filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue at Dallas, Tex. Mayer H. Halff and Maureene Halff, husband and wife who resided at the date of the filing of their petitioner in this case in Richardson, Tex., filed a joint Federal income tax return for the taxable year 1962 with the district director of internal revenue at Dallas, Tex. George W. Llewellyn and Betty Half Llewellyn, husband and wife who resided at the date of the filing of their petition in this case in Dallas, Tex., filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue at Los Angeles, Calif.
All petitioners are members of a partnership know as Halff Interests which owns oil and gas mineral rights in Texas. The partnership filed its Federal partnership return of income for the calendar year 1962 with the district director of internal revenue at Dallas, Tex.
Halff Interests entered into an agreement with Shell Oil Co. (hereinafter referred to as Shell) on March 7, 1955, to grant to Shell leases on certain tracts of land in Upton County, Tex. Shell agreed that it would, subject to examination and approval of title and leases by its attorneys, buy five leases from petitioners.2 The basic provisions to be incorporated into each of the five leases were set forth in the agreement. The agreement provided for a bonus to be paid by Shell upon delivery of the leases and approval of title by Shell of ‘$93,000 plus an additional sum determined by multiplying $100.00 times the number of net mineral acres covered by said leases.’ The agreement also provided that as to each of the tracts to be included in the five leases, the lessors granted to Shell the option to purchase a new lease which should be dated on the date of the termination of the expired lease and have the same provisions as the original lease except that at Shell's election any of the leases should be for a primary term of 5 years and that ‘within 60 days after delivery of a new lease by virtue of this option Shell shall pay to those entitled thereto a bonus of $100.00 times the number of acres covered by that particular new lease.’ Three of the leases were executed as of March 7, 1955, and two as of April 1, 1955, because the tracts covered by these two conveyances were under lease to Humble Oil & Refining Co. until the day before April 1, 1955.
Also executed on April 1, 1955, was a contract which provided the manner in which the bonus, which totaled $1,279,635.86 for all five leases, was to be paid. An amount of $99,597.86 was to be paid on delivery of the leases, and the remaining $1,180.038 was to be paid in six equal annual installments of $196,673, the first due on January 15, 1956.
The leases which were granted to Shell, referred to respectively as leases No. 1, 2, 3, 4, and 5, pertained to a total of 26,081.705 surface acres. The leases were dated, provided for a primary term, and covered the number of acres and tracts as follows:
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¦ ¦ ¦ ¦ ¦ ¦Number of ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦Lease No.—¦Dated ¦Primary ¦Number of ¦Number of ¦bonus acres¦
¦ ¦ ¦term ¦tracts ¦acres ¦ ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦ ¦ ¦Years ¦ ¦ ¦ ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦1 ¦Mar. 7, ¦3 ¦10 ¦8,074.975 ¦1 ¦
¦ ¦1955 ¦ ¦ ¦ ¦3,402.73 ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦2 ¦-----do ¦7 ¦18 ¦14,919.07 ¦6,599.73 ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦3 ¦-----do ¦7 ¦1 ¦640.00 ¦640.00 ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦4 ¦Apr. 1, ¦3 ¦1 ¦640.00 ¦320.00 ¦
¦ ¦1955 ¦ ¦ ¦ ¦ ¦
+----------+-----------+-----------+---------------+--------------+-----------¦
¦5 ¦-----do ¦7 ¦1 ¦1,807.66 ¦903.83 ¦
+-----------------------------------------------------------------------------+
Each lease was to extend after the primary term as long as oil, gas, or sulphur was produced from the land. Each lease provided for a percentage of production royalty on oil or gas produced or sulphur mined.
The size of the tracts conveyed in the leases differed. Some tracts comprised only a fraction of a survey section while others comprised one or more survey sections. The following table lists the tracts in each lease and shows its location, surface acreage, and history subsequent to the grant to Shell.
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CHAPTER 12 INCOME TAXATION OF GEOTHERMAL RESOURCES
...[150] Regs. Sec. 1.614-1(a)(5) Ex. 4. [151] Regs. Sec. 1.614-1(a)(3). [152] Berkshire Oil Co., 9 T.C. 903 (1947), Acq.; Norman Freman, 48 T.C. 96 (1967). [153] Rev. Rul. 58-231, 1958-1 Cum. Bull. 247. Accord: Central Oil Co. v. United States, 27 AFTR 2d 71-410 (S.D. Miss. 1971). [154] See t......