Murphy v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 17 December 1927 |
| Docket Number | 26472.,Docket No. 7137 |
| Citation | 9 BTA 610 |
| Parties | J. E. MURPHY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
R. J. O'Connor, Esq., for the petitioner.
Donald D. Shepard, Esq., for the respondent.
The Commissioner determined a deficiency in income tax for the year 1922, in the amount of $7,762.99. It is claimed that the Commissioner erred in refusing to compute the tax under section 206 of the Revenue Act of 1921, upon that portion of petitioner's income derived from certain oil and gas leases and from sales and conveyances by petitioner of oil and gas rights in certain properties. Two deficiency notices were mailed for the fiscal year and separate petitions were filed. The proceedings were, upon motion made and granted, consolidated. The facts are found as stipulated.
The petitioner is and was during the year 1922, a resident of El Dorado, Ark., and filed his return for said year with the collector of internal revenue at Little Rock, Ark.
The net taxable income of petitioner for 1922, less capital net gains of $2,750, was $69,895.06, of which amount the sum of $64,987.70, represented net income from the sale or transfer of oil and gas leases and royalty interests.
During the year 1922, petitioner executed certain oil and gas leases to divers parties on lands in which he had held an undivided fee simple interest for more than two years prior to the execution of such leases. In this year petitioner also transferred by warranty deeds to divers parties, interests in the oil, gas, and other minerals in and upon lands which he had owned for more than two years prior to the date of each sale. Each conveyance was made subject to an oil and gas lease thereupon granted on the land described. The material provisions of all the leases and warranty deeds were in all respects similar. The material portion of one of the leases follows:
THIS AGREEMENT, Made and entered into this the 26th day of July, 1922, by and between J. E. Murphy and Nannie B. Murphy, his wife, of Union County, Arkansas, party of the first part, hereinafter called lessor (whether one or more), and the Simms Oil Co., a corporation, party of the second part, hereinafter called the lessee.
WITNESSETH, That the said lessor for and in consideration of NINE THOUSAND DOLLARS cash in hand paid, the receipt of which is hereby acknowledged, and of the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed, have granted, conveyed, demised, leased and let, and by these presents do grant, convey, demise, lease and let unto said lessee, for the sole and only purpose of mining and operating for oil and gas, and laying of pipe lines, and of building tanks, towers, stations and structures thereon to produce, save and take care of said products, and all that certain tract of land situated in the County of Ouachita, State of Arkansas, Northwest quarter of southwest quarter of section twenty-eight Township Fifteen south, Range fifteen west and containing 40 acres, more or less.
It is agreed that this lease shall remain in force for a term of _________ from this date, and as long thereafter as oil or gas, or either of them is produced from said land by the lessee.
In consideration of the premises the said lessee covenants and agrees:
1st. To deliver to the credit of the lessor, free of costs in tanks or pipe line to which it may connect its wells, the equal one-eighth part of all oil produced and saved from the lease premises.
2nd. To pay the lessor the market value of 1/8 of the production each year, for the gas from each well where gas only is found, while the same is being used off the premises, and lessor to have gas free of cost from any such well for all stoves and all inside lights in the principal dwelling houses on said land during the same time by making his own connection with the well at his own risk and expense 3rd. To pay lessor for gas produced from any oil well used off the premises at the rate of the market value of 1/8 of the production, for the time during which such gas shall be used, such payments to be made each three months.
If no well be commenced on said land on or before the 26th day of July, 1923, this lease shall terminate as to both parties, unless the lessee, on or before that date, shall pay or tender to the lessor, or to the lessor's credit in the Ouachita Valley Bank of Camden, Arkansas, or its successors, which shall continue as the depository regardless of changes in the ownership of said land, the sum of One Dollar per acre per year, which shall operate as a rental and cover the privilege of deferring the commencement of a well for one year from said date. In like manner and upon like payments or tenders the commencement of a well may be further deferred for the like periods in the same number of months successively. And it is understood and agreed that the consideration, first recited herein, the down payment, covers not only the privileges granted to the date when said first rental is payable as aforesaid, but also the lessee's option of extending that period as aforesaid, and any and all other rights conferred.
Should the first well drilled on the above described land be a dry hole, then, in that event, if a second well is not commenced on said land within twelve months from the expiration of the last rental period from which rental has been paid, this lease shall terminate as to both parties, unless the lessee on or before the expiration of said twelve months shall resume the payment of rentals in the same amount and in the same manner as hereinafter provided. And it is agreed that upon the resumption of the payment of rentals, as above provided, that the last preceding paragraph hereof governing the payment of rentals and the effect thereof, shall continue in force just as though there had been no interruption in the rental payments.
The provisions of one of the warranty deeds follow:
KNOW ALL MEN BY THESE PRESENTS: That, We, J. E. Murphy and Nannie B. Murphy, his wife for and in consideration of the sum of Seven Thousand Dollars, to us cash in hand paid by W. A. Haynes and J. L. Haynes, partners doing business under the firm name and style "Haynes Brothers" at Shreveport, La. receipt of which is hereby acknowledged, do hereby grant, sell and convey unto the said W. A. Haynes and J. L. Haynes, partners doing business under the firm name and style of "Haynes Brothers," and unto their successors, heirs, and assigns forever, an undivided one-half interest in and to all of the oil, gas and other minerals in under and upon the following described lands lying within the County of Ouachita, State of Arkansas, to wit:
Southwest quarter of Northwest quarter and Southwest quarter of Northwest quarter of Section 28, Township 15 South, Range 15 West, containing in all 80 acres more or less — subject, however to two certain oil, gas and mineral leases, as follows:
The SW ¼ of NE ¼ Sec. 28, Twp. 15 S. R. 15 West, leased to T. J. Murphy, by instrument dated July 27th, 1922, and filed for record on July 28th, 1922, but not yet recorded:
The SW ¼ of NW ¼ Sec. 28, Twp. 15 S. R. 15 West, leased to D. F. Hugus, Trustee, May 22, 1922, by instrument recorded in the Recorders Office of Ouachita County, Arkansas, Record Book 16 Page 247, and now assigned to Standard Oil Co., of La., as shown by instrument recorded Book 16 page 418.
And for said consideration we do hereby grant and convey unto the said W. A. Haynes and J. L. Haynes, doing business as partnership under name of Haynes Brothers, their heirs, and assigns, the right to collect and receive under the aforementioned leases one half of the oil and gas royalties due under said leases. It being the intention by this instrument to convey to the grantees herein what is commonly known as a one sixteenth royalty or one half of the one eighth royalty to come to the lessors in the leases above described.
TO HAVE AND TO HOLD the above mentioned property, together with all and singular the rights and appurtenances thereto in any wise belonging, unto the said W. A. Haynes and J. L. Haynes, as partners under name of Haynes Brothers, and unto their heirs and assigns forever, And we hereby covenant with the said grantees herein that we will forever warrant and defend the title to the above described lands and the rights therein conveyed against the lawful claims of all persons whomsoever, subject to the conditions above mentioned and described.
The net income of petitioner from the various transactions above referred to is summarized as follows:
Net income from the issuance of oil leases _____________________ $52,062.70
Net income from transfer oil and gas interests _________________ 12,925.00
___________
Total ____________________________________________________ 64,987.70
On the original return as filed by petition...
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