Henshaw v. Comm'r of Internal Revenue, Docket Nos. 48529
| Decision Date | 29 October 1954 |
| Docket Number | 48530.,Docket Nos. 48529 |
| Citation | 23 T.C. 176 |
| Parties | WALTER A. HENSHAW AND FRANCES ALLEN HENSHAW, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.PAUL A. HENSHAW AND GLADYS KIRBY HENSHAW, HUSBAND AND WIFE, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ben F. Foster, Esq., for the petitioners.
W. B. Riley, Esq., for the respondent.
Petitioners sued the owner and operator of a recycling plant for damages to oil in place underneath two oil leases of which petitioners were part owners. They secured a judgment against the defendant. Defendant appealed from the judgment and it was later settled by agreement. After deduction of expenses petitioners had a gain from the settlement, the amount of which is not in dispute. This gain petitioners returned as capital gain and the Commissioner has determined it to be ordinary income under section 22(a). Held, the amount petitioners received was compensatory damages for the compulsory or involuntary conversion (as a result of destruction in whole or in part) of property used in petitioners' trade or business and the gain is taxable as capital gain under the provisions of section 117(j), Internal Revenue Code of 1939.
These proceedings have been consolidated. Docket No. 48528, Walter A. Henshaw and Frances Allen Henshaw, petitioners, involves a deficiency in income tax of $7,428.88 for the year 1948. The deficiency is due in part to the addition to the net income reported on petitioners' joint return of the following:
+-------------------------------------------------------------+
¦(a) Ordinary income from the partnership increased¦$29,763.23¦
+--------------------------------------------------+----------¦
¦(b) Capital gain from partnership reduced ¦14,823.93 ¦
+--------------------------------------------------+----------¦
¦Net addition to income ¦$14,939.30¦
+-------------------------------------------------------------+
Docket No. 48530, Paul A. Henshaw and Gladys Kirby Henshaw, petitioners, involves a deficiency in income tax of $7,460.56 and is due in part to an adjustment similar to that which the Commissioner made to the income as reported by Walter A. Henshaw and Frances Allen Henshaw on their joint return.
Petitioners contest the correctness of the foregoing adjustments which have been made. Some minor adjustments made by the Commissioner in the partnership income are not contested.
The facts were all stipulated except the income tax returns of petitioners which were introduced in evidence and a consent agreement extending the period of limitation. There is no issue as to the statute of limitations.
The facts as stipulated are adopted as part of our findings of fact and are incorporated herein by this reference.
Walter A. Henshaw and Frances Allen Henshaw, husband and wife, resided at San Antonio, Texas, during the year 1948 and jointly filed their Federal income tax return for such year with the collector of internal revenue for the first district of Texas at Austin, Texas. Paul A. Henshaw and Gladys Kirby Henshaw, husband and wife, also resided at San Antonio, Texas, during the year 1948, and likewise jointly filed their Federal income tax return for such year with the same collector of internal revenue.
Walter A. Henshaw and Paul A. Henshaw, sometimes hereinafter referred to as the petitioners, are and during the calendar year 1948 were owners of equal interests in a co-partnership entitled, ‘Henshaw Brothers,‘ sometimes hereinafter referred to as the partnership, which partnership during the year 1948 was engaged in the business of drilling oil and gas wells and of producing and selling oil and gas from formations and sands under oil and gas leases owned by said partnership. Neither the petitioners individually nor the partnership, Henshaw Brothers, was engaged during said year in the trade or business of buying and selling producing oil and gas leases and such producing leases as were owned or held by them were so held in connection with their business of producing and selling the oil and gas derived therefrom, none of such leases being held by them or by the partnership primarily for sale to customers in the ordinary course of business.
Henshaw Brothers filed a partnership return of income for the calendar year 1948 reporting therein that the net income of said partnership was distributable in equal shares to Walter A. Henshaw and Paul A. Henshaw.
The partnership owned and used in connection with its trade or business an undivided one-fourth of seven-eighths interest in and to a certain oil, gas, and mineral lease covering the 131-acre tract of land known as the ‘Thigpen Lease,‘ and an undivided one-half of seven-eights interest in and to another certain oil, gas, and mineral lease covering approximately 32 acres of land known as the These leases are located in an oil and gas producing are generally referred to and known as the ‘East Alice’ or ‘Tom Graham’ oil field. Oil and gas was being produced from wells drilled on each of said leases. Said leases had been owned by the partnership or by the petitioners individually for a period of more than 6 months prior to the year 1948.
Skinner & Eddy Corporation, sometimes hereafter referred to as Skinner & Eddy, the owner and operator of a recycling plant in the East Alice oil field, had entered into a certain working arrangement with the owners or operators of certain leases in a unitized area of the East Alice field whereby that corporation acquired certain rights to take and produce gas from said utilized area.
Petitioners were plaintiffs in two tort actions against Skinner & Eddy tried before a jury in the District Court of the United States for the Southern District of Texas, at the trial term commencing on March 31, 1948, and concluding April 22, 1948. Said actions arose with respect to the above mentioned Thigpen and T.&N.O. Railroad leases and were consolidated with one other similar action and tried as a single case.
The petitioners set forth two alleged bases of recovery:
(a) Loss of profit caused by the activities of Skinner & Eddy Corporation; and
(b) Damage to the oil and gas in place caused by the activities of Skinner & Eddy Corporation.
The court in its charge to the jury gave no instruction with reference to the consideration of lost profits in assessing damages, but confined the measure of damages to the difference between the market value of the plaintiffs' interests in the properties immediately before and immediately after the alleged injuries.
In the court's charge to the jury, which was not excepted to by the plaintiffs, the following statements were made:
Plaintiffs further allege that after March 16, 1944, when it was discovered that the bottom hole pressure in the 5300-foot sand aforesaid had been reduced 122 pounds, defendant then commenced re-injecting gas into said 5300-foot sand in such quantities, and in such a short period of time, as to cause further channeling and coning and damage to said 5300-foot sand underlying plaintiffs' above described leases, which plaintiffs contend likewise resulted in damage to the oil column and plaintiffs being unable to produce from said 5300-foot sand the amount of oil they would have and could have produced had it not been for the above described acts of negligence on the part of defendant.
Plaintiffs further allege that the above described acts of negligence were the direct and proximate cause of the damage they claim to have sustained, and have introduced testimony in this case as to the amount of recoverable oil in place after the alleged damage, which plaintiffs say occurred during the period from February 5, 1944, and April 12, 1944. Plaintiffs have also introduced in evidence testimony as to the alleged difference between the reasonable market value of their respective oil interest immediately before and immediately after such alleged injury to said oil properties.
In discussing the measure of damages, the court charged the jury as follows:
In the event your verdict should be for the plaintiffs, then you are authorized to assess such damages against the defendant as will fairly reasonable (sic) compensate plaintiffs for the losses sustained by them, if any, as the proximate result of the negligent acts of the defendant.
The measure of damages is the difference, if any, between the market value of the plaintiffs' interests in the properties immediately before and immediately after the alleged injuries; or stated differently, the difference, if any, on February 5, 1944, and April 12, 1944, directly caused by defendant's negligence, if any.
‘Market value’ means the price which the property would bring when it is offered for sale by one who desires but is not obliged to sell, and is bought by one who desires to buy but is under no necessity of buying it.
The jury after hearing the evidence and the charge of the court rendered its verdict in favor of the plaintiffs, as follows:
+---------------------------------------------------+
¦Civil action ¦ ¦Amounts ¦
+--------------+-------------------------+----------¦
¦No. ¦Lease involved ¦awarded ¦
+--------------+-------------------------+----------¦
¦403 ¦Thigpen Lease ¦$72,207.76¦
+--------------+-------------------------+----------¦
¦405 ¦T. & N. O. Railroad Lease¦10,762.70 ¦
+---------------------------------------------------+
On May 3, 1948, two judgments were entered by the District Court in favor of petitioners herein, jointly and severally, against Skinner & Eddy...
To continue reading
Request your trial
-
Gilbertz v. U.S.
...110 (1st Cir.), cert. denied, 323 U.S. 779, 65 S.Ct. 192, 89 L.Ed. 622 (1944). See also Rev.Rul. 73-161, 1973-1 C.B. 366; Henshaw v. C.I.R., 23 T.C. 176 (1954). 4 In Raytheon, the First Circuit summarized the analysis to be followed by asking, "In lieu of what were the damages awarded?" 144......
-
Midwest Motor Express, Inc. v. Comm'r of Internal Revenue
...in 1952 was income within the meaning of section 22(a), Internal Revenue Code of 1939. Hort v. Commissioner, 313 U.S. 28. Walter A. Henshaw, 23 T.C. 176, relied on by petitioner in support of its contention that its property had been involuntarily converted into a claim for damages is clear......
-
Sirbo Holdings, Inc. v. CIR
...lease its premises, the identity of the person to whom it might lease them, and the conditions of occupancy. Similarly, in Walter A. Henshaw, 23 T.C. 176 (1954), and United States v. Pate, 254 F.2d 480 (10 Cir. 1958), the property of the taxpayer used in the trade or business (oil in place ......
-
Gail v. U.S.
...the resulting compensation would no doubt have been treated as gain from the involuntary conversion of assets." Id. (citing Henshaw v. C.I.R., 23 T.C. 176 (1954)) (emphasis Henshaw is the leading oil and gas tax characterization case. In Henshaw, the taxpayers recovered a judgment when anot......
-
Chapter 6 TAX ASPECTS OF SECONDARY RECOVERY OPERATIONS
...Timber and Development Co. (1934) 29 BTA 705; A. E. Bell Corp. v. Commissioner (9th Cir 1944) 145 F2d 157. [25] Walter A. Henshaw (1954) 23 TC 176. [26] Int Rev Code of 1954 § 1231. ...