John Provence #1 Well v. Comm'r of Internal Revenue, Docket Nos. 78153-78160
| Citation | 37 T.C. 376 |
| Decision Date | 29 November 1961 |
| Docket Number | 78163,Docket Nos. 78153-78160,78164. |
| Parties | JOHN PROVENCE #1 WELL, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Robert F. Banks, Esq., for the petitioners.
David L. Ketter, Esq., for the respondent.
Petitioners are several gas wells drilled on leaseholds obtained by J. O. Boyle, who made assignments of fractional interests in the wells in return for funds supplied to him by the assignees. Boyle retained all managerial rights, including the sole authority to sell the gas produced. Boyle also retained fractional interests in the respective wells. Held, petitioners are associations taxable as corporations. Held, further, the incomes of petitioners include the entire receipts derived from sales of gas from the wells.
The respondent determined deficiencies in income tax of petitioners in the years and amounts as follows:
The parties have stipulated that the dividend issue raised in Docket No. 78164is to be decided consistently with our determination of the issues raised by Docket Nos.78153 through 78160 and Docket No. 78163. They have stipulated further that the petitioners in Docket No. 78164 incurred net operating losses in stipulated amounts in 1956 and 1957, which are available for carryback to said petitioners' taxable year 1955.
Two issues remain for our consideration: (1) Were the petitioners in Docket Nos. 78153 through 78160 and Docket No. 78163 associations which are taxable as corporations; (2) if the petitioners in Docket Nos. 78153 through 78160 and Docket No. 78163 were associations taxable as corporations, did their respective taxable incomes include income attributable to the respective interests in each of J. O. Boyle.
Many of the facts have been stipulated and are incorporated herein by this reference.
The petitioners, J. O. Boyle and Winifred Boyle, in Docket No. 78164, are husband and wife residing at 12 South Fifth Street, Youngwood, pennsylvania. None of the petitioners in Docket Nos. 78153 to 78160, inclusive, and Docket No. 78163 filed income tax returns for any of the years involved.
J. O. Boyle practiced dentistry in Youngwood, Pennsylvania, from 1919 to 1952. He became active in the gas well business in 1941, when he purchased interests in a number of wells and obtained an oil and gas lease on a piece of property. In 1943 he purchased a drilling rig and thereafter engaged in the separate business of drilling and servicing gas wells. This drilling and servicing business was operated as an individual proprietorship until April 1,1953. From April 1, 1953, to July 31, 1955, it was operated as a corporation. At no time did Boyle transfer to this corporation any leasehold interest in oil and gas held by him.
In 1944 Boyle registered with the Pennsylvania Securities Commission as a dealer and broker. This registration was required of persons selling fractional interests in oil and gas wells.
Oil and gas leases obtained by Boyle covered properties on which wells were drilled as follows:
+----------------------------------------+
¦Docket No. ¦Name of well ¦
+------------+---------------------------¦
¦78153 ¦John Provence #1 Well ¦
+------------+---------------------------¦
¦78154 ¦Hillis Well ¦
+------------+---------------------------¦
¦78155 ¦John B. Kline #1 Well ¦
+------------+---------------------------¦
¦78156 ¦G. R. Goode #1 Well ¦
+------------+---------------------------¦
¦78157 ¦Hoover Well ¦
+------------+---------------------------¦
¦78158 ¦Albert Donahoo #3 Well ¦
+------------+---------------------------¦
¦78159 ¦Albert Donahoo #2 Well ¦
+------------+---------------------------¦
¦78160 ¦Youngwood Coal Company Well¦
+------------+---------------------------¦
¦78163 ¦Welty Unitized #2 Well ¦
+----------------------------------------+
The several leases contain no differences material to these cases. The lease on the property on which John Provence #1 Well was drilled provided in part as follows:
That the said Lessor * * * has granted, demised, leased and let unto the Lessee, his heirs, executors,administrators, and assigns all the oil and gas in and under all that certain tract of land and also, said tract of land hereinafter described, with covenants of general warranty, and that the Lessor has the sole right to convey the premises to the Lessee, with the exclusive right of drilling and operating thereon, for and producing oil and gas, and all rights necessary, convenient and incident thereto; * * *
After acquisition of a given lease, and in connection with the gas wells here involved, Boyle sent prospectuses or advertising to prospective purchasers of fractional working interests. These materials described the property and well and told the cost of interests.
Persons who paid Boyle for fractional shares received ‘assignments.’ The several forms of assignment did not differ in any manner material to these cases.2 Assignments of fractional shares in the John Provence #1 Well provided in part as follows:
ASSIGNMENT OF PART INTEREST
KNOW ALL MEN BY THESE PRESENTS, I/We J. O. Boyle— Youngwood, Pa. Owner—Assignor— for value received— do hereby assign, and set over unto: Lester W. Albright, Box 347 R.D. #2, Greensburg, Penna. hereinafter called the Assignee, One sixty-fourth (1/64) working interest in Well No. 1 to be drilled through the Fifth sand horizon, or where it should be found in the locality, unless a commercial well is found at a lesser depth on the John Provence leasehold, which is owned by the Assignor, containing 160 acres, located in Anwell Township, Washington, County, bounded and described as follows:
WITH ALL RIGHTS AND PRIVILEGES in law or equity, subject to the terms of the lease, and to the conditions contained herein, to have and to hold during the term of the well. No partnership is here created or intended, but tenancy in common.
J. O. BOYLE— YOUNGWOOD, PA.SHALL act as Agent/Trustee/Attorney in fact/for Assignee, with exclusive powers to sell any or all gas and oil produced from this lease, and to sign all orders and papers incident to the operation and management of the well and property. The Agent shall make regulate statements and return of receipts of sales less expenses.
A. IF THE WELL IS PRODUCTIVE the Assignee shall pay the proportionate share herein assigned of the cost of the materials and expenses, including torpedoing, incident to the production, operation, and sale of the product of the well, as determined by the Assignor, within twenty days after delivery of notification at the above address.
— See below: ‘The proceeds of salvage, etc.’
B. SHOULD THE ASSIGNOR DESIRE to drill to a deeper sand, or to drill an additional well or wells on the leasehold, the Assignee shall pay the proportionate share herein assigned of the approximate cost, as determined by the Assignor, within fifteen days after delivery of notification at the above address .
C. IF THE PAYMENT IS NOT MADE in response to notice by registered delivery at the above address, the Assignee shall forfeit all interest in the well stated in the notice, and in the remaining undeveloped part of the lease, the interest so forfeited to revert to the Assignor. Excepting, see below: ‘The proceeds of salvage, etc.’
D. THIS INTEREST SHALL BE SOLD whenever the ownership of a majority in quantity of interest in the well or wells and lease desire, and the right is reserved for the Assignor/Agent/Trustee/Attorney in fact/to transfer this interest, but the proceeds of this interest sold shall be paid to the Assignee, less any indebtedness against this interest.
E. IF COMMERCIAL PRODUCTION IS FOUND at lesser depth than the bottom of the Gordon sand horizon, without expense for maintaining or deepening the hole, a share of the saving shall be credited to lessen the cost of materials and expenses as stated in (A) above. If this is done, the Assignee shall pay the share of any later drilling costs as stated in (B) above.
F. THE PROCEEDS OF SALVAGE or the net receipts for materials disposed of other than receipts for the production of the well, shall be returned pro rata to those who paid for them as stated in (A) above, not to exceed the amount so paid.
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