North American Oil Consolidated v. COMMISSIONER OF INTERNAL REVENUE
| Citation | 12 BTA 68 |
| Decision Date | 24 May 1928 |
| Docket Number | 16107.,Docket No. 8714 |
| Parties | NORTH AMERICAN OIL CONSOLIDATED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Charles D. Hamel, Esq., and Lee I. Park, Esq., for the petitioner.
A. George Bouchard, Esq., for the respondent.
In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1917, 1918, and 1919, for which the Commissioner has determined deficiencies of $109,239.61, $62,228.66, and $59,097.03, respectively.
The petitioner alleges error on the part of the Commissioner:
(1) In proposing an additional tax for the year 1917, after the assessment and collection of such tax was barred by the statute of limitations provided by section 250(d) of the Revenue Act of 1921 and section 277 of the Revenue Act of 1924;
(2) In disallowing as a deduction in 1917, $8,000 paid to the Oil Industry Association;
(3) In disallowing as deductions amounts spent for the repair and replacement of oil derricks damaged by fire as follows: 1917, $5,271.50; 1918, $7,096.41;
(4) In including in taxable income for 1917, $20,441.18, representing 4 per cent of the oil recovered during the year from section 2, and paid to the petitioner's attorneys for legal services in defending title to property;
(5) In disallowing as expense for the year 1917, $5,765.94 spent for gas pumping enginees, sucker rods, small receiving oil tanks, well casing and tubing, and for the year 1918, $17,598 and for the year 1919, $5,049.28 expended for gasoline engines used in operating the pumps at the various oil wells;
(6) In determining inadequate amounts as depletion deductions for 1917, 1918, and 1919 on account of oil extracted during such years from section 16, township 32 south, range 23 east. This issue involves the determination of the value of the oil deposit in section 16 at March 1, 1913;
(7) In reducing invested capital for 1917 in an amount of $33,882.51 and in 1918 in an amount of $1,589.04, representing profits realized in 1917 and 1918 on a 1914 contingent sale;
(8) In reducing invested capital for 1918 in an amount of $1,646.19 and for 1919 in an amount of $5,146.19, representing fire losses in 1917 and 1918, respectively;
(9) In reducing invested capital on account of depletion sustained during prior years by the following amounts: 1917, $602,820.96; 1918, $707,819.73; 1919, $819,751.89;
(10) In reducing invested capital for 1918 in an amount of $65,274.34 and for 1919 in an amount of $33,217.57, representing additional taxes for the previous year, pro rated over the taxable year;
(11) In reducing invested capital in all years by $1,638,611.21, representing excess valuation of property. This issue involves the determination of the value of property acquired for stock and bonds on February 10, 1910, and August 25, 1910.
The Commissioner, in his answers to the various petitions and amendments thereto, alleges affirmatively:
(a) That he erred in failing to include as taxable income in 1917 an amount of $253,150.96 received by the petitioner in that year, representing the revenue derived from section 2, township 32 south, range 23 east, which amount was impounded during the litigation between the petitioner and the United States in 1916 and 1917 and released in 1917;
(b) That he erred in determining invested capital and depletion allowance for 1917 by adding to the capital sum remaining in 1916 the amount of $287,687.03, representing the cost of well development on section 16 during 1916, whereas this amount was expended as follows: 1910, $51,727.64; 1911, $235,959.39; that the additions to capital should have been made in 1910 and 1911 in the amounts thus expended instead of 1916; that the invested capital for 1917 as shown in deficiency letter dated September 28, 1925, should be decreased by $131,930.22, and that the depletion allowance for 1917 as shown by said deficiency letter should be reduced by $11,224, that the invested capital for 1918 and 1919 as shown by the deficiency letter of April 9, 1926, should be decreased by $120,706.22 and $112,420.62, respectively, and that the depletion allowances for 1918 and 1919 as shown by said letter should be reduced by $8,285.60 and $8,029.67, respectively;
(c) That he erred in allowing depletion deductions in 1918 and 1919 based upon discovery value of oil wells located in section 2, township 32 south, range 23 east;
(d) That he erred in allowing as a deduction for 1918, $21,730.60 and for 1919, $35,795.45 paid to attorneys for legal services in perfecting title to a portion of the petitioner's property and alleges that the sums paid were capital expenditures.
At the hearing the petitioner conceded and abandoned issue number (7) and the respondent conceded and abandoned his affirmative allegation designated issue (c).
FINDINGS OF FACT.
The petitioner is a corporation organized in 1910 under the laws of the State of California with principal office at 915 Balfour Building, San Francisco, Calif.
On February 10, 1910, the petitioner acquired from Louis Titus in exchange for 82,500 shares of capital stock of a par value of $8,250.000 and $825,000 face value of bonds, certain properties in accordance with a resolution adopted by the directors in a meeting of February 10, 1910. The portions of the resolution dealing with the lands involved in this proceeding were as follows:
WHEREAS, Louis Titus has offered to sell and to convey to this corporation, free and clear of all encumbrances, the following lands situate, lying and being in the County of Kern, State of California, described as follows, to-wit:
North half of Northeast quarter of Southeast quarter (N ½ of NE ¼ of SW ¼), South half of Southwest quarter (S ½ of SW ¼) of Section Sixteen (16);
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and to sell and convey to this corporation all his interest in the following lands, situate in the County of Kern, State of California, described as follows, to-wit:
The South half of Southeast quarter (S ½ of SE ¼); Northwest quarter of Southeast quarter (NW ¼ of SE ¼); South half of Northeast quarter (S ½ of NE ¼) of Southeast quarter (SE ¼); South half of Southwest quarter of Northeast quarter (S ½ of SW ¼ of NE ¼); South five (5) acres of North half of Southwest quarter of Northeast quarter (N ½ of SW ¼ of NE ¼); North half of Southwest quarter (N ½ of SW ¼), of Section Sixteen (16);
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East half of Northeast quarter (E ½ of NE ¼); Northwest quarter of Northeast quarter (NW ¼ of NE ¼); North fifteen (15) acres of North half of Southwest quarter of Northeast quarter (N ½ of SW ¼ of NE ¼), in Section Sixteen (16);
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All In Township Thirty-two (32) South, Range Twenty-three (23) East, Mount Diablo Base and Meridian; and to sell to this corporation all personal property and equipment now upon and used in connection with, or in the operation of, said lands or leases, or any part thereof; all in consideration of the issuance to said Louis Titus of Eighty-two Thousand Five Hundred (82,500) shares of the capital stock of this corporation, fully paid up, and the delivery to him of First Mortgage Six Per Cent Gold Bonds of this corporation aggregating Eight Hundred and Twenty-five Thousand ($825,000.) Dollars, in par value of said bonds, which bonds are to be secured by a First Mortgage on the lands and leases so conveyed by said Louis Titus; and in further consideration of the assumption by this corporation of all obligations of the leases so offered to be assigned, and of the assumption by this corporation of liability for all unpaid bills incurred for labor or material used upon any of said lands or leases, and in further consideration of the assumption by this corporation of all bills and obligations of Hartford Oil Company, a corporation, which bills and obligations have heretofore been assumed by said Louis Titus.
Part of the obligations assumed by the petitioner represented the balance of the purchase price still owing upon certain of the lands described above.
On August 25, 1910, the petitioner purchased the fee to 135 acres in the northeast quarter of section 16, of which land the petitioner was lessee, in accordance with a resolution adopted in a meeting of the board of directors on August 10, 1910, which reads as follows:
RESOLVED, that this corporation purchase from Lockwood Company, a corporation, all the right, title and interest now owned or claimed by said Lockwood Company in or to the Northeast quarter and the South half of Section 16, in Township 32 South, Range 23 East, M. D. B. & M., including the remainder in fee owned by said Company in about one hundred and thirty-five (135) acres in the Northeast quarter of said Section, a claim to an interest in fee in a triangular piece of land along the southerly boundary of the Southeast quarter of said Section, and an undivided one-half interest in two strips of land along the Southerly and Westerly boundary lines of the Southwest quarter of said Section and that with said lands, this corporation purchase a release from any and all obligations to said Lockwood Company incurred by it under all leases of lands of which this company is lessee in said Section 16, and also purchase a release of all its obligations of every kind now owned or held by or owing to said Lockwood Company, except the promissory note of this corporation, dated May 17, 1910, for the sum of $38,116.25, and that in consideration of the transfer of said interests in land and of the release of said obligations by said Lockwood Company to this corporation, this corporation pay to said Lockwood Company the sum of $2,244.50 and deliver to said Lockwood Company bonds of this corporation aggregating $200,000 in face value thereof, and also issue and deliver to said Lockwood Company 2,000 shares of the capital stock of this corporation;
On March 1, 1909, Louis Titus, acting on behalf of the Hartford Oil Co., one of the predecessors of the petitioner,...
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