Lucas v. Daniel, 5983

• Decision Date: 25 November 1930
• Docket Number: No. 5983,5984.,5983
• Parties: LUCAS, Commissioner of Internal Revenue, v. DANIEL (two cases).
• Court: U.S. Court of Appeals — Fifth Circuit

45 F.2d 58 (1930)

LUCAS, Commissioner of Internal Revenue, v. DANIEL (two cases).

Nos. 5983, 5984.

Circuit Court of Appeals, Fifth Circuit.

November 25, 1930.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and Hayner N. Larson, Sp. Assts. to Atty. Gen., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and R. N. Shaw, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., for petitioner.

Robert Ash, of Washington, D. C., for respondents.

Before BRYAN and FOSTER, Circuit Judges, and DAWKINS, District Judge.

DAWKINS, District Judge.

These two cases involve appeals by the Commissioner of Internal Revenue from the adverse rulings of the Board of Tax Appeals upon asserted liability of the respondents for additional income taxes. They were tried and disposed of as one case by the board and will be treated in the same manner here.

The facts were stipulated, and we quote and adopt the board's summary thereof as follows:

"1. The petitioners, S. B. and Charles R. Daniel, reside in Wichita Falls, Texas.

"2. In 1902 and 1903, the petitioners' parents, S. M. and Hattie S. Daniel, acquired 640 acres of land in Wichita County, Texas. Some years prior to 1919 shallow oil production was discovered on this property, but the production was relatively small. In October, 1919, oil in large quantities was discovered at a depth of about 1300 feet. If depletion, based on discovery values is allowable, the amounts are as follows:

"1922 "S. B. Daniel, $9,797.60 "Charles R. Daniel, $9,797.60 "1923 "S. B. Daniel, $6,922.35 "Charles R. Daniel, $6,922.35

"3. The parents of the petitioners herein, deeded to Charles R. Daniel and S. B. Daniel, on November 19, 1919, an undivided two-thirds interest in the mineral rights on the property for the period to December 31, 1920. On December 8, 1920, the parents executed another deed conveying to the sons an undivided two-thirds interest in the mineral rights on the property until December 31, 1921. It was the parents' intention to give to the petitioners a two-thirds interest in the fee of the land or in case a sale took place to give them two-thirds of the receipts upon sale.

"In adjusting the tax returns of the petitioners for 1919, 1920 and 1921, the respondent permitted the petitioners to value the gift as of November 19, 1919, and to take advantage of all discovery valuations as the development of the property took place.

"4. During the latter part of 1921 the Magnolia Petroleum Company offered $150,000 in cash for the mineral rights on the property. The parents were willing to accept the offer and divide the money $50,000 to themselves and $100,000 to the sons.

"5. The sons deemed the sale inadvisable and agreed to pay to their parents $50,000 for the one-third interest which the parents had planned to retain. In accordance with this agreement, the parents on December 28, 1921, deeded to the petitioners for a consideration stated to be $10 and love and affection, 600 acres of this property. Forty acres of the total 640 acres were retained by S. M. and Hattie S. Daniel as a homestead.

"6. As a matter of fact, a two-thirds interest in the property was deeded in fee as a gift to the petitioners and a one-third interest was purchased in fee for $50,000 by the petitioners.

"7. In determining the petitioners' tax liability for the years in question the commissioner has allowed depletion to the petitioners on a mineral value of $50,000."

Only a question of law is involved, i. e., are the taxpayers entitled to depletion allowances upon the fair market value of the property as of the date of the donation, as found by the board, or must depletion be confined to the cost of the property?

The applicable statute is the Revenue Act of 1921 (42 Stat. 227), from which we quote what petitioner claims are pertinent sections, as follows:

"Sec. 214. (a) That in computing net income there shall be allowed as deductions: * * *

"(10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted."

"See. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that * * * "(2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *"

The commissioner contends that the taxpayer should be confined to the cost or sum actually paid out by the respondents, to wit, $50,000, because the last-quoted section says that depletion and depreciation shall be "based upon cost." However, subparagraph 10 of section 214(a) also contains a proviso that where mines, oil and gas wells, etc., are involved the taxpayer, for depletion purposes, shall be permitted to add to his capital the increase in value resulting from discovery of such minerals within a...