Laster v. Commissioner of Internal Revenue
| Decision Date | 27 December 1940 |
| Docket Number | 97713,97714,Docket No. 96550,97442,97716,100341.,100340 |
| Parties | E. C. LASTER, AND MRS. E. C. LASTER, PETITIONERS, ET AL., v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Harry C. Weeks, Esq., and R. B. Cannon, Esq., for the petitioners.
D. D. Smith, Esq., for the respondent.
These proceedings were consolidated for hearing and involve the redetermination of the following income and excess profits taxes in the cases indicated:
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| Income tax | Excess profits tax
Docket No. |----------------------------------|---------------------
| 1935 | 1936 | 1937 | 1935 | 1936
---------------------------|----------|-----------|-----------|----------|----------
96550 ____________________ | $851.16 |___________|___________|__________|__________
97442 ____________________ | 1,111.54 | $4,667.77 |___________| $131.38 | $1,058.12
100340 ___________________ |__________|___________| $1,757.45 |__________|__________
100341 ___________________ |__________|___________| 1,757.45 |__________|__________
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The remaining proceedings, Docket Nos. 97713, 97714, and 97716, involve transferee liabilities of the petitioners therein for the deficiencies in income and excess profits taxes asserted against E. C. Laster, Inc., for the years 1935 and 1936. Counsel for the petitioners admit that these petitioners are liable as transferees for whatever taxes may be found to be due from E. C. Laster, Inc.
The issues are:
I. Whether certain intangible drilling and development costs are deductible from gross income.
II. Whether the portion of the cost of pumping equipment paid to a contractor for installing the equipment is deductible as intangible drilling and development costs.
III. Whether the respondent properly computed the taxable income realized from certain oil payments.
IV. The proper basis for computing depreciation on oil well equipment acquired in a nontaxable exchange.
V. Whether a gain of $11,000 was realized by a lessee in connection with the drilling of certain oil wells for oil payments, payable out of all oil produced on the lease.
VI. Whether the sum of $2,105.40 representing the proceeds of sale of oil is taxable to petitioner or the holder of the oil payment.
VII. Whether income of $6,243.78 was realized upon the assignment of certain oil payments.
VIII. Whether attorney fees in the amount of $4,200 are deductible as ordinary and necessary business expenses.
FINDINGS OF FACT.
Petitioner E. C. Laster owned all of the stock of E. C. Laster, Inc., and the Retsal Drilling Co., Texas corporations. The petitioners kept their books and filed their income tax returns on the accrual basis of accounting.
On October 22, 1935, the Retsal Drilling Co. entered into a written agreement with the Producers Supply & Tool Co. involving the drilling and equipment of four wells, two of which were to be drilled on a lease known as the Maxwell lease and the other two on a lease known as the Lambert lease. The contractor was to furnish at its expense slush pits, surface pipe, new casing, new tubing, the casinghead hookup and connections, float shoe, upset tubing, casing ring, cement and cementing, and liner, together with all drilling equipment, labor, tools, and supplies incident to the drilling of the wells, and carry workmen's compensation and public liability insurance. The contractor was also to drill the wells in first-class, workmanlike manner and at its expense to set the casing, drill the wells in, and run liner and tubing. The Retsal Drilling Co. agreed to furnish, at the location, water, fuel, tanks and flow lines, swab the wells in after the plug had been drilled, and furnish a man to supervise the drilling of the sand area and the running of the casing. The wells were to be drilled to the Woodbine Sand, found at a depth of from 3,600 to 3,650 feet.
The Retsal Drilling Co. agreed to pay the sum of $11,600 for the drilling and equipping of each well on the Maxwell lease and $10,350 for each well on the Lambert lease. The consideration for the drilling of the wells was payable out of oil produced from the Maxwell, Lambert, and other specified leases and by the Retsal Drilling Co. at the end of two years in the event the consideration was not paid out of production by that time.
Petitioner E. C. Laster owned the Lambert lease and the drilling contract with the Producers Supply & Tool Co. was entered into for his account. During 1935 the Producers Supply & Tool Co. performed its part of the contract respecting the two wells on the Lambert lease, known as Lambert wells Nos. 1 and 2.
In their joint income tax returns for 1935, E. C. Laster and his wife deducted $12,676.05 for intangible drilling and development costs incurred in connection with the drilling of Lambert wells Nos. 1 and 2. The respondent disallowed $11,173.42, representing the portion of the expense paid to the contractor for labor and drilling, upon the ground that the wells were drilled under turnkey contracts.
In 1937 the Producers Contracting Co. performed work for petitioner E. C. Laster in connection with the drilling of an oil well known as F. A. Taylor No. 3. Under the terms of the oral agreement entered into for the work the Producers Contracting Co. was to drill the well to a certain depth, furnish the derrick, etc., pipe, drilling equipment, and tubing and set the pipe. E. C. Laster was to furnish water, fuel, and supervision and swab the well in. Upon the completion of the work the Producers Contracting Co. rendered the following invoice to E. C. Laster:
Drilling F. A. Taylor #3, 3593' at 85¢ per ft ______________________ $3,054.05
Derrick _________________________________________________________________ 550.00
Erecting Derrick and furnishing relays and bottom for drilling __________ 325.00
Cement, cementing service, hauling, and digging slush pit _______________ 450.00
Casing, tubing, hookup, etc. (per itemized list) ________________________ 5,575.00
_________
Total ______________________________________________________________ 9,954.05
The amount of the invoice, less $100, was paid in cash by E. C. Laster. Of the items of $3,054.05, $325 and $450 charged by the contractor and $400 for cable tool work, $465 for labor, $60 for swabbing, and $80 for trucking, representing amounts paid to others for work done on the well, a total of $4,834.05, Laster charged off $4,813.67 to intangible drilling and development costs. No charge was made by Laster for fuel and water furnished by him in the drilling operations.
Petitioner E. C. Laster owned a one-half interest in a lease known as the J. T. Brown lease. In 1937 the Producers Contracting Co. performed work for the leaseholders in the drilling of a well on the lease known as J. T. Brown No. 6. The Producers Contracting Co. performed the work under an oral agreement the terms of which were the same as those involved in the drilling of the well known as F. A. Taylor No. 3. Upon completion of the work the Producers Contracting Co. rendered the following invoice to the leaseholders:
Drilling J. T. Brown #6, 3723' at 92¢ per ft _________________ $3,425.16
Derrick ___________________________________________________________ 600.00
Erecting Derrick and furnishing relays and bottom for drilling ____ 360.00
Cement, cementing service, hauling, and digging slush pit _________ 500.00
Casing, tubing, hookup, etc. (per itemized list) __________________ 6,700.00
__________
11,585.16
To one-half of the items of $3,425.16, $360, and $500 in the invoice petitioner Laster added $21.25 for surveying, $50 for a permit to drill the well, $41.96 for labor, $2.18 for insurance, $35 for swabbing, and $8.35 for trucking, a total of $2,301.32, all of which was paid to others. He charged the amount to intangible drilling and development costs and deducted it in the joint return filed for himself and his wife for 1937.
The respondent disallowed the deductions of $4,813.67 and $2,301.32 taken on account of the drilling of F. A. Taylor well No. 3 and J. T. Brown well No. 6 upon the ground that the amounts represented expenditures under turnkey contracts.
On September 28, 1936, E. C. Laster, Inc., entered into the following contract with the Producers Supply & Tool Co. for the drilling of a well known as Rollins No. 6:
Confirming conversation between yourself and our Mr. Peters we will drill and equip your number 6 L. B. Rollins Lease for $10,750.00 cash, to be paid when we have completed contract on the well, as herein specified.
You are to furnish water, fuel, tanks and flow lines. We will dig the slush pit, furnish 87' galvanized pumping derrick erected, 200' of New 10" surface casing, 7" new 20# seamless casing, 2½ new seamless upset tubing, approximately 100' 5 3/16" perforated liner, cut the hole, drill the plug, wash the well and run the liner and tubing. You are to swab the well in. We will use 100 sacks of cement on the surface pipe and 300 sacks of cement for the 7" and will, of course, pay for the cementing service. We will furnish 7" float shoe and ring type Braden head. We will also furnish Christmas Tree and hook-up, as you desire, said not to exceed $125.00 resale price. Should you want Christmas Tree or hook-up which comes to more than this the difference between $125.00 and the resale price, is to be added to the above turnkey price of $10,750.00.
The well is to be drilled to the woodbine sand area,...
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