Parris v. Commissioner of Internal Revenue
| Decision Date | 25 July 1930 |
| Docket Number | Docket No. 29437. |
| Citation | 20 BTA 320 |
| Parties | WILLIAM PARRIS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Hal. M. Black, Esq., for the petitioner.
L. A. Luce, Esq., and Phil M. Clark, Esq., for the respondent.
The respondent has asserted a deficiency in income tax for the calendar year 1920 in the amount of $73,429.17. Only that portion of the deficiency is in controversy which arises from the respondent's determination that certain oil royalties in the amount of $38,860.95 were constructively received in the taxable year although not actually received until 1923, and that the unpaid balance of a promissory note amounting to $30,000 should be included at its face value in computing profit from the sale of an oil and gas royalty interest.
At the hearing the respondent was permitted to amend his answer by alleging affirmatively (1) that he has allowed excessive depletion deductions with respect to the north half of the northwest quarter of section 20 based upon a one-eighth royalty interest, whereas, in fact, petitioner's royalty interest was one-sixteenth plus 885/1250 of one-sixteenth; and (2) that if the Board finds the respondent erred in including as income constructively received in 1920, the amount of $38,860.95, then the sum to be eliminated is that amount reduced by the applicable depletion deductions heretofore allowed.
FINDINGS OF FACT.
Petitioner is an individual residing at Glendale, Calif. During the taxable year and for many years prior thereto he resided in Kansas.
On January 24, 1916, the petitioner executed an oil and gas lease to one S. M. Thorpe, covering a 320-acre farm in Butler County, Kansas, which he had owned since 1889. The lease which was in the regular form reserved to petitioner a one-eighth royalty in all oil and gas produced from the premises. Thorpe at once assigned the lease to the Butler County Oil Co., which in turn assigned it to the Rose Hill State Bank of Rose Hill, Kansas, as security for a loan. On July 16, 1918, the lease was sold at auction by the bank to one Jones, the Butler County Oil Co. having defaulted on its note. Jones assigned the lease on the south 240-acre tract to Smith & Richardson, which firm sold the operating interest to the Arkansas River Valley Gas Co., hereinafter sometimes referred to as the Arkansas Co.
Early in 1917 petitioner brought an action against Thorpe and the various assignees claiming under him to have the lease set aside and canceled, alleging that the lessors had failed to pay rental and that the lease had been obtained by misrepresentation. From that time until March, 1923, the lease was in constant litigation, numerous suits being filed by and against the petitioner. In March, 1923, the petitioner entered into a settlement with the Arkansas Co. whereby he received $35,000 cash as consideration for the execution of a new lease.
Oil was discovered on petitioner's land in the latter part of 1919 and a substantial production was obtained in 1920. The operating lessee of the south 240-acre tract disposed of all the oil produced, including petitioner's royalty, to the White Eagle Oil & Refining Co., hereinafter sometimes called the White Eagle Co. In accordance with the custom of refining and pipe-line companies, payment for oil purchased was made only after a "division order" had been signed. The material portions of the division order required in the instant case are as follows:
DIVISION ORDER _____________________192__
The undersigned certify and guarantee that they are the legal owners of _____________ wells Nos. 1 and up on the ________________ farm located in _________________ State, ___________ County and until further notice you will give credit for oil received from said wells as per directions below:
_____________________ _________________________ _________________________ Credit to Division of interest Post-office address Tank Nos.__________________________________________
White Eagle Oil and Refining Company is hereby authorized until ________ ______ to receive oil from said wells for purchase from said parties severally in the proportions named, subject to the following conditions:
FIRST — The oil run in pursuance of this division order shall become the property of the White Eagle Oil and Refining Company as soon as the same is received into its custody.
SECOND — Said oil shall be paid for to the owners or their assigns in proportion to their respective interest shown above, at ____________. * * *
* * * * * * * FOURTH — It is understood and agreed in case of adverse claim of title to the land from which any such oil may be produced, or adverse claim of title of any oil sold and purchased in pursuance of this division order, White Eagle Oil and Refining Company may retain the purchase price of such oil until such adverse claim is fully settled and determined or until the party or parties claiming to be owners thereof shall furnish satisfactory indemnity.
WITNESS: ____________________________ ____________________________
The petitioner did not sign a division order until the litigation was settled in 1923, when he received the royalties herein involved amounting to $38,860.95. Throughout the litigation it was not disputed that petitioner was the owner of the royalty interest, excepting such portion thereof as he may have sold. He could have obtained the royalty by executing a division order but he believed and was advised that he would, by implication at least, be admitting that he was not entitled to the entire oil runs from the land as he was contending.
The petitioner sold a one-sixteenth royalty interest in the south 240-acre tract, which was being operated by the Arkansas Co., to W. R. Jones, Fred B. Stanley, W. H. Stanley, and Clarence R Sowers for a total consideration of $130,000. On January 20, 1920, $86,666.66 in cash was paid and a note was given by Sowers for the balance of $43,333.33, which represented a one-third interest in the royalty. Two assignments were executed dated December 31, 1919, and January 20, 1920, respectively, each covering a one thirty-second interest. Each assignment contained the following clause which was inserted to prevent any interference with petitioner's lawsuit and to protect the parties if he was successful in having the lease canceled:
It is further understood and agreed between the parties hereto that if the above mentioned oil and gas leases or either of them should at any time lapse or be forfeited by the owner or owners thereof, that the first parties shall have sixty (60) days from the date of such lapse or forfeiture to execute a new oil and gas lease on said premises, and shall receive as their own property any bonus they may be able to secure for the execution of same; and that if such new lease provide for a greater royalty either of oil or gas, than the leases above mentioned, that said first parties shall be entitled to have and receive as their own property all of such excess royalty; provided and it is expressly understood that in any event, said second parties herein shall be entitled to and receive the one thirty-second part of all oil which may be produced from said premises by any person, firm, or corporation operating under any such lease or other wise and an undivided one fourth (¼) of all gas royalties under any such new leases;
It is further understood and agreed that if the lease first herein mentioned should at any time lapse or be forfeited and the first parties fail to execute a new lease within said period of sixty days, then said second parties or assigns shall have the right to execute a new lease on said premises to such persons as they see fit, and first parties shall be entitled to and receive all bonuses and all the royalties provided for in such new lease or leases after paying to the second parties one thirty second (1/32) royalty for all the oil produced from said premises as aforesaid and an amount equal to one fourth (¼) of the gas royalty now provided for in the above mentioned lease.
Sowers was a practicing attorney in Wichita, Kans., who had represented petitioner throughout the litigation involving the lease and who secured the purchasers for the royalty interest. He had received no fee for his services. In order to partially compensate him for his efforts in petitioner's behalf, he was permitted to...
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