GREENSBORO GAS COMPANY v. Commissioner of Internal Revenue
| Decision Date | 31 July 1934 |
| Docket Number | Docket No. 73708. |
| Parties | GREENSBORO GAS COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Hoyt A. Moore, Esq., Douglas M. Moffat, Esq., and Joseph C. White, Esq., for the petitioner.
J. E. Marshall, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for the period January 1 to March 31, 1926, in the amount of $82.09. Petitioner alleges that there is no deficiency due, but that it is entitled to a refund on account of overpayment of its tax in the amount of $8,061.83. The issue involves the amount of the deduction to which petitioner is entitled for depletion of its natural gas properties, but two specific questions under this issue are raised; namely, (1) whether the total amount received by the petitioner from the sale of its gas to consumers after transportation constitutes "the gross income from the property" within the meaning of section 204 (c) (2) of the Revenue Act of 1926, and (2) whether or not an amount equal to rents and royalties should be excluded or deducted in computing such gross income.
FINDINGS OF FACT.
The facts were stipulated by the parties as follows:
(1) Petitioner is and was a corporation organized in 1904 under the laws of the State of Pennsylvania. Its former address was 2017 Farmers Bank Building, Pittsburgh, Pennsylvania; and its present address is 800 Union Trust Building, Pittsburgh, Pennsylvania.
(2) Petitioner filed its corporation income tax return for the three months' period ended March 31, 1926, with the Collector of Internal Revenue at Pittsburgh, Pennsylvania. In said return * * * petitioner set up and claimed a deduction for depletion on its gas properties of $67,900.69 and $599.31 on its oil properties, making a total amount of depletion claimed and set up in its return of $68,500.00. Of the amount of $67,900.69 so set up and claimed by the petitioner in its said return as a deduction for depletion on its gas properties, the Commissioner allowed $67,292.63 and disallowed $608.06 in determining a deficiency of $82.09 against the petitioner for the period from January 1, to March 31, 1926.
(3) The sole business of petitioner, aside from the production and sale of oil, is and was the purchase, production, transportation and sale of raw or natural gas to consumers in the Counties of Fayette, Greene, Washington and Westmoreland, State of Pennsylvania, and particularly in the following towns:
Allenport Elco Madison Speers
Ardara Fredericktown Masontown Stockdale
Brownsville Granville Merrittstown Sunlevy
California Grapeville Millsboro Suterville
Carmichaels Greensboro Newell Vesta
Centerville Herminie New Geneva Vesta No. 4
Charleroi Irwin Phillipsburg West Brownsville
Coal Center Jacksonville Republic West Newton
Collinsburg Jeannette Rices Landing
Cowansburg Lock No. 4 Roscoe
Donora Lowber So. Brownsville
Petitioner has never engaged in the transportation of gas other than for itself.
(4) The gross sales of oil produced by petitioner from January 1 to March 31, 1926, amounted to $2,781.79; and from January 1 to March 31, 1926, petitioner purchased 52,344 thousand cubic feet of gas in its raw or natural state at a cost of $11,012.69, transported the same through its gas mains, and sold the gas to its consumers for $20,949.33.
(5) From January 1 to March 31, 1926, petitioner produced gas from 308 gas wells located on various tracts of land in which it held 262 leasehold interests and also from 5 gas wells on three tracts of land in which it held the gas rights in fee. All of these properties are located in the territory comprising the Counties of Fayette, Greene, Washington and Westmoreland, State of Pennsylvania. The distance between the various points of production and consumption of the gas varies from less than a mile to approximately 25 miles. Before any of the gas in question reached the points of consumption and sale, it had to be transported through petitioner's gas mains under the surface of property not belonging to it.
(6) The leasehold interests held by petitioner from January 1 to March 31, 1926 were of various types. * * * The following is a summary, setting forth the number of leases of each type and the aggregate amount of rents or royalties paid or incurred under the terms of the leases of the various types from January 1 to March 31, 1926:
-------------------------------------------------
| | Rents or Royalties
| Number of | paid or
Type | Leases | incurred
----------------|-----------|--------------------
A _____________ | 239 | $20,054.57
B _____________ | 1 | 125.00
C _____________ | 7 | 13.92
D _____________ | 3 | 250.00
E _____________ | 9 | 803.95
F _____________ | 1 | $227.02
G _____________ | 2 | 29.32
|__________ |____________________
Total ____ | 262 | $21,503.78
-------------------------------------------------
Of the said rents or royalties of $21,503.78 so paid or incurred, $5,195.53 thereof was paid or incurred under the terms of certain of said leases on tracts of land on which wells and been drilled, but from which no gas was produced. The difference of $16,308.25 represents the total amount of rents or royalties paid or incurred under the terms of the leases on tracts of land on which wells had been drilled and from which gas was produced; and this latter figure of $16,308.25 includes rents or royalties of $575.00 paid or incurred where the separate gross income from six of the gas properties did not exceed or equal the rent or royalty paid or incurred with respect to each of such properties, the total of the gross incomes from said six properties being $411.24.
(7) In addition to its leases, gas rights in fee and gas well equipment, petitioner owns gas mains, compression stations and service pipes through which the natural gas in question was transported from the points of production to the consumers, as well as the meters which measured the gas as it was used by the consumers, and general equipment. As of January 1, 1926, the depreciated costs of these latter assets, as reflected by petitioner's books, were as follows:
Assets Amounts
Gas mains and compression stations ____________ $1,064,463.98
Service pipes _________________________________ 95,990.24
Meters ________________________________________ 81,491.05
General equipment _____________________________ 63,220.17
As of January 1, 1926, the depreciated cost of petitioner's gas well equipment, as reflected by its books, was $409,885.54.
(8) From January 1 to March 31, 1926, petitioner produced from wells on its properties 1,164,328 thousand cubic feet of gas for which (less gas lost in transit) it received $466,244.46. This amount of $466,244.46 represents the cost of the gas to the consumers, based upon the number of cubic feet of gas consumed, as shown by meters on the premises of the consumers, and calculated at a unit rate agreed upon by petitioner and the respective consumers. The gas was produced, transported, sold and used and consumed in its raw or natural state.
(9) From January 1 to March 31, 1926, petitioner paid or incurred expenses and sustained depreciation in the aggregate amount of $106,677.54 in the production of gas, and paid or incurred expenses and sustained depreciation in the aggregate amount of $116,485.12 in the transmission and sale of the gas so produced. (None of the figures set forth in this paragraph includes any depletion or rents or royalties paid or incurred.)
(10) In arriving at the gross income and the net income of the petitioner (computed without allowance for depletion), for the purpose of determining the allowable deduction for depletion, the Commissioner determined a gross income of $251,650.95, deductions of $106,677.54, and a net income of $144,973.41 from the properties for the period from January 1 to March 31, 1926. The Commissioner arrived at the said gross income of $251,650.95 by first computing separately the gross income from each of the several properties in question, and then adding together the gross incomes so computed. The Commissioner next arrived at the said net income of $144,973.41 by first computing separately the expenses paid or incurred and depreciation sustained with respect to each of the said properties, then adding together the expenses and depreciation so computed and subtracting the total thereof, namely, $106,677.54, from the total of the gross incomes from the several properties. This latter figure of $106,677.54 represents the total expenses paid or incurred and depreciation sustained in the production of the gas, and does not represent any part of the rents or royalties of $21,503.78 paid or incurred under the terms of the leases, nor any part of the expenses paid or incurred or depreciation sustained in the transmission and sale of the gas.
(11) In computing separately the gross income from each of the several properties, the Commissioner found and determined the market or field price of the gas before transportation from the properties to be 23¢ per thousand cubic feet, computed an aggregate gross income of $267,795.44 (1,164,328 thousand cubic feet × 23¢); and from such aggregate gross income, the Commissioner then deducted the sum of (1) the total amount of the rents or royalties of $15,733.25 ($16,308.25 — $575.00) paid or incurred under the terms of the leases on tracts of land on which wells had been drilled and...
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