Harrington v. CIR

• Decision Date: 03 December 1968
• Docket Number: No. 25873.,25873.
• Citation: 404 F.2d 237
• Parties: H. M. HARRINGTON, Jr. and Marguerite Harrington, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

404 F.2d 237 (1968)

H. M. HARRINGTON, Jr. and Marguerite Harrington, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 25873.

United States Court of Appeals Fifth Circuit.

December 3, 1968.

H. M. Harrington, Jr., Longview, Tex., for petitioners.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Marselli, Marian Halley, Attys., Dept. of Justice, Washington, D. C., Lester R. Uretz, Chief Counsel, IRS, Washington, D. C., for respondent, Grant W. Wiprud, Atty., Dept. of Justice, Washington, D. C., on the brief.

Before BELL and SIMPSON, Circuit Judges, and ROBERTS, District Judge.

ROBERTS, District Judge:

Appellants appeal from the Tax Court's Opinion substantially affirming a ruling by the Internal Revenue Commissioner that appellants could not take a depletion allowance for the years 1959-61 on oil taken from slant-hole wells. The basis of the Commissioner's ruling was that appellants had no "economic interest" in oil pumped from a neighbor's lease through slanted wells. We affirm.

Appellants first challenge the Tax Court's ruling that they did not have the necessary "economic interest" in the oil pumped from wells drilled on their leases, but bottomed on neighboring leases, to qualify for a depletion allowance. Appellants contend that they had an economic interest sufficient to support their taking a depletion allowance because their leases were over a common pool of oil. Hence, appellants' theory of economic interest requires that depletion be computed on the basis of the amount of oil removed from the pool without regard to whether the well is bottomed legally or illegally.

Although appellants have an interest in the common pool of oil lying beneath their tracts, Harrington v. Railroad Comm'r, Tex.1964, 375 S.W.2d 892, they do not have the economic interest required for depletion purposes in the oil pumped illegally from their neighbors' tracts. To qualify for the depletion allowance, a taxpayer must have "acquired, by investment, any interest in the oil in place," and secured, "by any form of legal relationship, income derived from the extraction of the oil, to which he might look for a return of his capital." Palmer v. Bender, 1933, 287 U.S. 551, 557, 53 S.Ct. 225, 226, 77 L.Ed. 489. Appellants do not have the required interest in the oil pumped from the slanted wells in order to take the depletion allowance because the income derived from the extraction of the oil was not "secured by any form of legal relationship." Rather, the income from the oil was derived from a tortious conversion of neighboring landowners' oil. Harrington v. Texaco, Inc., 5th Cir. 1964, 339 F.2d 814.

Moreover, a reading of the relevant Supreme Court decisions indicates that the Court has usually limited a taxpayer's depletable "economic interest" to oil extracted while in place beneath the taxpayer's property. See, e. g., Palmer v. Bender, supra; Burton-Sutton Oil Co. v. Commissioner of Internal Revenue, 1945, 328 U.S. 25, 66 S.Ct. 861, 90 L.Ed. 1062, 162 A.L.R. 827; Kirby Petroleum Co. v. Commissioner of Internal Revenue, 1945, 326 U.S. 599, 66 S.Ct. 409, 90 L.Ed. 343. One departure from this limitation occurred in Commissioner of Internal Revenue v. Southwest Expl. Co., 1956, 350 U.S. 308, 76 S.Ct. 395, 100 L.Ed. 347, a case heavily relied upon by appellants. Their reliance, however, is misplaced. In this unusual case, the taxpayers owned upland properties that were by state law essential sites for slant-drilling into offshore oil deposits. They contributed these sites to the operating company in consideration for a share in production. The Court held that because the contribution of the sites was an investment in the offshore oil in place, the taxpayers were entitled to depletion on their share of production. In the instant case, however, appellants made no contribution to their neighbors' production of oil, and they were not legally entitled to share in the production of their neighbors' oil.

It is clear that the bridge built by appellants from their interest in the common pool to the oil depletion allowance is not supported by the weight of authority and crumbles from lack of merit.

Appellants' second point of error is that the Tax Court erred in not allowing depletion on well #2 on the Blackstone lease. The Blackstone lease supported two wells: #1-B, a deviated well, and #2, and undeviated well. Until both wells were ordered severed by the Railroad Commission in 1962, Blackstone #2 had an allowable of 187 barrels per day, one-half the total Blackstone lease allowable. A subsequent survey revealed that #2 was not deviated. Appellants sought depletion of this well, and the Tax Court ruled against them on the grounds that there was no evidence of production on this well. Appellants contend that during the years in question exactly one-half of the output of the lease came from #2. As proof of their position, appellants point to a report of the Railroad Commission made six months prior to the first year in question that shows #2 was producing. Appellants conclude that this report and the fact that #2 had an allowable of 187 barrels a day compel the conclusion that the Tax Court was clearly erroneous.

We disagree. The report of production by #2 a few months before the first year in question is no proof that the well was producing...