Mountain Producers Corporation v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 44573.
|34 BTA 409
|23 April 1936
|Docket No. 44573.
|MOUNTAIN PRODUCERS CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
|U.S. Board of Tax Appeals
Harold D. Roberts, Esq., Randolph E. Paul, Esq., and Charles McInnis, Esq., for the petitioner.
R. P. Hertzog, Esq., Conway N. Kitchen, Esq., and V. F. Weekley, Esq., for the respondent.
The petitioner, Mountain Producers Corporation, is the parent corporation of the Wyoming Associated Oil Corporation. A consolidated return was filed for the year 1925. Petitioner duly appealed from a deficiency in income tax of $90,642.87 determined against it for that year by the respondent, expressed in a deficiency notice of March 14, 1929.
An amended petition was filed in 1933, and in 1935 a hearing was had. Stipulations are filed and adopted as a part of our findings of fact, but are set forth herein, in connection with other findings of fact on the evidence, only to the extent found necessary for the understanding and determination of the issues involved.
The errors assigned are, in substance, as follows:
1. The decrease in the amount of depletion deduction of the Wyoming Associated Oil Corporation from $2,215,862.23 to $1,674,677.92, asserted to have been based upon a wrong interpretation and application of section 204 (c) (2) of the Revenue Act of 1926, in that the depletion computed in the deficiency notice was based upon 27½ percent of an incorrectly computed gross income.
2. The increase of the net taxable income of the Wyoming Associated Oil Corporation by the restoration thereof of $185,438.83 so-called income from leased state lands.
3. In computing the net income of the Wyoming Associated Oil Corporation and the net income of it and the petitioner, the failure to allow as a deduction depletion based on cost to the Wyoming Associated Oil Corporation and/or its respective transferors and predecessor owners.
FINDINGS OF FACT.
The Mountain Producers Corporation and the Wyoming Associated Oil Corporation are Delaware corporations, the former organized on May 12, 1920, and the latter on July 11, 1919, the principal offices of both being at the same address in Denver, Colorado.
Throughout the year 1925 the petitioner owned all the capital stock of the Wyoming Associated Oil Corporation. It is stipulated that in computing the income tax liabilities of these corporations for 1925 the net income of the taxpayer should be computed, as in the deficiency notice of March 14, 1929, on a consolidated basis.
Immediately after its organization the Wyoming Associated Oil Corporation received from various parties deeds, assignments, and conveyances covering certain patented lands and interests in oil and gas leases in the Salt Creek Oil Field in Natrona County, State of Wyoming. With respect to these transactions it is stipulated that no Federal tax liability on the part of the Wyoming Associated Oil Corporation was incurred, or if incurred, it was paid.
On February 25, 1920, an act of Congress, known as the Oil and Gas Leasing Act, went into effect and under its so-called relief provisions, particularly those in sections 18, 18 (a), and 19, the lands acquired by the Wyoming Associated Oil Corporation as heretofore described became eligible for exchange into Government leases. Pursuant to said act, in 1920 and 1921 the Wyoming Associated Oil Corporation received from the United States, in lieu of its former placer mining locations, certain leases covering lands listed by governmental subdivisions, under the caption, "United States Government Leases", as stipulated herein.
On February 1, 1923, the Wyoming Associated Oil Corporation and the Midwest Oil Co., an Arizona corporation, executed a trust instrument effective throughout the taxable year 1925, wherein and whereby the Midwest Oil Co., the holder of a certain lease from the State of Wyoming, dated October 1, 1919, covering all of school section 36 in Natrona County, Wyoming, agreed to hold in trust for the benefit of the Wyoming Associated Oil Corporation an undivided 50 percent interest in the lease covering section 36, and in the benefits and net proceeds to be realized therefrom and from all renewals and extensions thereof. The trust agreement was to be effective as of February 1, 1923, and to completely supersede and replace all other declarations of interest in favor of the Wyoming Associated Oil Corporation.
On sundry dates between June 1, 1919, and December 31, 1924, the Wyoming Associated Oil Corporation disposed of, by sale or exchange, certain of its properties and interests. As a result of these transactions the Wyoming Associated Oil Corporation on January 1, 1925, owned and held — omitting any reference to section 36 — oil lands and interests subject to depletion and from which oil was produced. The number of barrels of oil produced during the year 1925 from the numerous tracts of land and interests covered by the various lease agreements, exclusive of the state school lease (section 36, separately considered) is set forth in detail in stipulation filed and adopted by reference as a part of our findings of fact. Likewise, so stipulated and adopted, are the gross income from each property, its field operating expense, income received at contract price, general and overhead expense, net income of taxpayer, 27½ percent of gross income, 50 percent of net income, and allowable depletion.
During the same period between June 1, 1919, and December 31, 1924, the Wyoming Associated Oil Corporation expended sundry sums of money for the acquisition of adverse titles or outstanding interests in land so held by it, which sums constituted additional capital investment by it in said lands. The amounts have been distributed by the Wyoming Associated Oil Corporation over the several tracts benefited thereby in the amounts and years tabulated and also stipulated.
About February 1, 1923, the Wyoming Associated Oil Corporation, the Midwest Oil Co., and the Wyoming Oil Fields Co. entered into an agreement with the Midwest Refining Co. in which the first three named parties are called "Producing Companies" and the Midwest Refining Co. is called "Refining Company." The producing companies owned certain leases covering lands in the Salt Creek Oil Field, Natrona County, Wyoming, as follows: The Midwest Oil Co. and the Wyoming Associated Oil Corporation each owned an undivided 50 percent interest in the so-called "Schoonmaker Lease." The Wyoming Associated Oil Corporation and the Wyoming Oil Fields Co. each owned an undivided 50 percent interest in the so-called "Iba Lease." The Midwest Oil Co. and the Wyoming Associated Oil Corporation each owned an undivided 50 percent interest in the so-called "Stock Lease." The Midwest Oil Co., for the benefit of itself and the Wyoming Associated Oil Corporation, owned an undivided 50 percent interest for each in the so-called "State School Lease" covering the aforesaid school section 36.
It was agreed that from February 1, 1923, until January 1, 1934, the producing companies would, subject to certain conditions (not necessary to be here set out), sell, exclusively, unto the refining company all the oil produced from said lands (except oil used for drilling, etc.) upon a sliding scale of prices fully stipulated, but not here necessary to be set out.
From the date of the agreement until January 1, 1934, the producing companies were to give the refining company free use of all storage facilities, pipe lines, buildings, and equipment owned by the producing companies or either of them, upon said lands and also give, free of charge, oil and gas reasonably necessary for drilling, for domestic service, and for production thereon.
The refining company agreed to purchase from the producing companies currently as produced all of the oil of the several producing companies (except oil for drilling, etc.) at the prices indicated in the contract. The contract provided in part:
From the date of this Agreement until the First day of January, 1934, as part of the price for oil purchased hereunder, the Refining Company will drill, case and maintain all wells, find and supply water, install and operate pumps when necessary, clean, shoot and otherwise stimulate production of wells as necessary, and conduct all development and production operations upon said lands necessary or proper for the protection and conservation of the oil and gas contained therein and for the production of oil therefrom in such amounts and from such wells as will prevent the drainage of the oil content of said lands through wells belonging to other operators, and will, at all times, during said term, maintain the development of and production from said lands at such rate that the production of oil therefrom shall be proportionate to the production of oil in other parts of the Salt Creek Field. * * *
It was further provided in the contract that the "Refining Company will take delivery of the oil purchased hereunder at the outlet gates of the measuring tanks located at or near the wells on said lands."
The contract also provided that:
Section Thirty-six (36) is subject to royalties in favor of the State of Wyoming, and that the other tracts of land are severally subject to various royalties in favor of others, and it is agreed that whenever the State of Wyoming, or any other royalty owner having the right to take his royalty in kind shall elect to exercise such right, then the royalty oil, with respect to which such right is exercised, shall not be subject to this purchase agreement but shall be delivered by the Refining Company to such royalty owner in accordance with such directions as the royalty owner may rightfully give therefor, but the Refining Company shall have the right, if it and royalty owner can reach an agreement, to purchase any such royalty oil from the owner thereof on any terms mutually agreeable to them.
Royalty paid the State of Wyoming was in barrels of oil in kind and...
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