McAdams v. Comm'r of Internal Revenue, Docket Nos. 21931
| Decision Date | 19 September 1950 |
| Docket Number | 21932.,Docket Nos. 21931 |
| Citation | 15 T.C. 231 |
| Parties | HAZEL McADAMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.J. B. McADAMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Held, under the facts, that co-owner of two oil leases was not entitled to deduct in taxable years 1944 and 1945 sums paid by him in those years for his portion of his share of drilling expenses incurred in 1941, which he was unable to pay in that year and which were then paid in his behalf by another co-owner. Prentice Wilson, Esq., for the petitioners.
Joseph P. Crowe, Esq., for the respondent.
The respondent determined the following deficiencies in the income tax of petitioners:
+------------------------------------------+
¦Docket No.¦Petitioner ¦Year ¦Deficiency¦
+----------+-------------+------+----------¦
¦ ¦ ¦( 1944¦$1,612.58 ¦
+----------+-------------+------+----------¦
¦21931 ¦Hazel McAdams¦( 1945¦245.00 ¦
+----------+-------------+------+----------¦
¦ ¦ ¦( 1944¦1,331.11 ¦
+----------+-------------+------+----------¦
¦21932 ¦J. B. McAdams¦( 1945¦234.00 ¦
+------------------------------------------+
The sole question is whether the petitioners are entitled to deductions of $21,500 in 1944 and $2,225.59 in 1945 for amounts expended in those years to reimburse a co-owner of oil leases for expenditures made by him in 1941 in connection with the drilling and development of oil wells.
Petitioners, J. B. McAdams and Hazel McAdams, are, and were during the years in controversy, husband and wife, and the leases involved herein were community property.
During the taxable years 1940 to 1945, inclusive, petitioners operated their business and made income tax returns on a cash basis. Their returns for the taxable years were filed with the collector of internal revenue for the second district of Texas.
W. P. Luse is a brother-in-law of petitioner J. B. McAdams, hereinafter referred to as petitioner, having married petitioner's sister.
Prior to the year 1933, and during the year 1946 and thereafter petitioner had office space with W. P. Luse. The books of the petitioner are under the supervision of Frankie Frensley, bookkeeper and secretary for W. P. Luse, and Miss Frensley has prepared the income tax returns of the petitioner from approximately 1940 forward. Petitioner and W. P. Luse were jointly interested in leases other than those included in these proceedings.
On and prior to August 23, 1940, W. P. Luse, H. T. Luse, and petitioner were co-owners of an oil and gas lease covering 119 acres of land in Liberty County, Texas, the said W. P. Luse owning an undivided one-half interest in said lease, H. T. Luse an undivided 1/20, and petitioner an undivided 45/100 interest. The lease will hereinafter be referred to as the Hlavaty lease. Petitioner had acquired this lease before transferring interests therein to W. P. Luse and H. T. Luse.
On August 28, 1940, W. P. Luse executed a drilling contract with Harry L. Edwards Drilling Co., whereby said drilling company agreed, for the consideration therein provided, to drill one or more wells on the Hlavaty lease.
During the latter part of 1940 and early part of 1941, 5 wells were drilled on the Hlavaty lease. Four of the wells were producing wells, and the fifth well, completed in March 1941, was a gas distillate well and had no commercial value. The drilling and development cost in connection with these 5 wells amounted to $185,073.53, and petitioner's pro rate share thereof amount to 45/100, or $83,283.09.
In order to pay a portion of his pro rata share, petitioner, with the assistance of W. P. Luse, borrowed $52,500 on January 3, 1941, and $17,500 on January 10, 1941, from the Republic National Bank of Dallas, Texas, giving as security to the bank a deed of trust and assignment of petitioner's runs in the Hlavaty lease.
From the proceeds of the above loans, petitioner, in the same year, paid $7,918.88 to the Harry L. Edwards Drilling Co., and $13,620.28 to the Houston Oil Field Material Co., leaving a balance of $61,743.93 due by petitioner on his share of the drilling and development cost of the 5 wells on the Hlavaty lease. The latter amount was paid by W. P. Luse in 1941.
Petitioner paid W. P. Luse $40,259.36 of the $61,743.93 in the year 1941 from the proceeds of the bank loans, but having sustained a business loss in this year he was unable to pay the balance of $21,484.57.
Petitioner deducted as drilling and development cost the $40,259.36 which he had borrowed from the bank and paid to W. P. Luse in 1941, in computing his Federal income tax return for that year.
Petitioner had no taxable income for the years 1941 or 1943.
Petitioner paid W. P. Luse the sum of $19,259.98 in 1944 and the sum of $2,225.59 in 1945, thereby completing the payment of his share of the total amount of the drilling and development cost of the 5 wells on the Hlavaty lease which had been paid by Luse.
The $21,484.57 paid to W. P. Luse by petitioner in 1944 and 1945 in connection with the Hlavaty lease pertained to the drilling of the fifth well on that lease.
On October 10, 1940, petitioner and W. P. Luse were also co-owners of an oil and gas lease covering land located in St. Charles Parish, Louisiana, and known to the parties as the Peyregne Heirs lease. W. P. Luse had a two-thirds interest in said lease and petitioner a one-third interest. Petitioner had acquired this lease prior to transferring an interest to W. P. Luse.
On October 10, 1940, W. P. Luse and petitioner executed a drilling contract with the Dixie Drilling Co. to drill a test well on the Peyregne lease. Thereafter, the Dixie Drilling Co. began drilling operations which were completed in 1941 and resulted in the drilling of a dry hole. The total cost of this well was $27,870.72, of which $9,290.24 represented petitioner's pro rata share. In 1941 W. P. Luse paid the drilling contractor the entire amount due under the contract, including petitioner's share of $9,290.24.
In 1941 petitioner paid W. P. Luse $7,049.22 of his share of the drilling and development cost under the contract with the Dixie Drilling Co., and paid the remaining balance of $2,241.02 in 1944.
W. P. Luse kept an account in his ledger under the tabulation ‘Accounts Receivable.‘ To this account was posted the petitioner's share of the expenses at the end of 1941, in the amount of $21,484.57, on account of the drilling and development operations on the Hlavaty and Peyregne leases, which was paid by W. P. Luse. The balance of pe...
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