Quintana Petroleum Company v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 100314-100321.
| Decision Date | 03 June 1941 |
| Docket Number | Docket No. 100314-100321. |
| Parties | QUINTANA PETROLEUM COMPANY, PETITIONER, ET AL., v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Whitfield H. Marshall, Esq., for the petitioners.
Donald P. Moyers, Esq., and Frank B. Schlosser, Esq., for the respondent.
These proceedings, consolidated for hearing, are for the redetermination of a deficiency in income tax of the Quintana Petroleum Co., Docket No. 100314, in the amount of $14,712.37. The other petitioners are before the Board as transferees of the assets of the Quintana Petroleum Co., which was liquidated and dissolved in December 1938. They all admit their liability as transferees for any deficiencies which may be determined against the Quintana Petroleum Co. (not exceeding $14,712.37) except Katherine T. Cullen, transferee, Docket No. 100319, who received assets of not more than $8,125.91 upon the liquidation or distribution. She is, therefore, not liable as a transferee to an amount in excess of $8,125.91.
The questions in issue are (1) whether the Quintana Petroleum Co., hereinafter called the petitioner, is entitled to deduct from gross income for 1937, $7,142.28 representing one-fourth of the net proceeds from the operation of the Duval County Ranch Co. lease paid to the assignor of the lease, and (2) whether the petitioner is entitled to include in the basis for the allowance of depletion, in respect of other leases, portions of the bonuses or advance royalties paid prior to 1937 but allocable to products sold in 1937.
FINDINGS OF FACT.
The petitioner, prior to its dissolution in December 1938, was a Texas corporation with its principal office in Houston. Its income tax return for 1937 was filed with the collector of internal revenue for the First District of Texas at Austin.
In 1922 the Duval County Ranch Co., as lessor, executed to the Gulf Production Co., as lessee, an oil, gas, and mineral lease covering certain described property in Duval and Webb Counties, Texas.
On January 17, 1933, the Gulf Production Co. assigned the lease to Trinity Drillers, Inc. (the assignor reserving all sulphur rights) so far as it covered certain described tracts of land, subject to the condition that Trinity Drillers, Inc. (hereinafter called Trinity), drill two oil wells on the leased property upon demand by the Gulf Production Co. and that it assume and comply with all the terms of the original lease. The assignment was also made subject to the terms and conditions of a separate agreement between the parties, executed the same day, which provided that:
* * * If as a result of Trinity's operations on said land, oil and gas should be produced therefrom in paying quantities, then, after paying all of the costs and expenses incurred in drilling, equipping, and operating said well, Trinity shall account to Gulf monthly for one-fourth (¼th) of the net proceeds of such operations.
The agreement then specified the costs and expenses deductible by Trinity in computing the amount of the payments to be made to the Gulf Production Co.
On February 6, 1933, Trinity assigned a one-half interest in the lease to petitioner "free and clear of any charge or deduction on account of the one-fourth (¼th) of the net proceeds of operations so reserved or retained by, or provided to be paid to, Gulf Production Company, by Trinity Drillers, Inc."
At the same time Trinity and petitioner entered into an agreement whereby Trinity agreed, upon demand either by the Gulf Production Co. or petitioner, to drill two wells on the property, and petitioner agreed to pay Trinity $6,500, one-half upon completion of the first well and one-half upon completion of the second well.
The other one-half interest in the lease, charged with the whole of the obligation to the Gulf Production Co., passed through various parties and was finally acquired by petitioner as follows:
(a) A one-fourth interest in the lease was assigned to petitioner by J. R. Wheless, Jr., on October 12, 1933, the assignment providing that the interest should be "subject to its proportionate part of any charge or deductions on account of one-fourth (¼th) of the net proceeds of operations reserved and retained by or provided to be paid to Gulf Production Company, as set out in contract and assignment between Gulf Production Company and Trinity Drillers, Inc., dated January 17, 1933." For such assignment petitioner agreed to pay Wheless $15,000, but the obligation was settled for a total payment of $11,967.53.
(b) The remaining one-fourth interest was assigned to petitioner by the S. R. & C. Oil Corporation on November 7, 1933, the instrument providing, as in the assignment from Wheless, that the interest transferred should be subject to the charge or deduction on account of the one-fourth of the net proceeds of operations reserved or retained by, or provided to be paid to, the Gulf Production Co. By the terms of the assignment the S. R. & C. Oil Corporation retained a $10,000 oil payment, payable out of one-eighth of the first seven-eighths of oil produced. Petitioner also paid $10,000 in cash to the S. R. & C. Oil Corporation at the time the assignment was made.
As a result of the transfers and assignments above referred to petitioner acquired the entire interest assigned by the Gulf Production Co. to Trinity and petitioner was under the obligation to account to the Gulf Production Co. monthly for one-fourth of the net proceeds of operations on the leased property. During the taxable year petitioner paid $7,142.28 to the Gulf Oil Corporation (successor to Gulf Production Co.), hereinafter called Gulf, on account of this obligation.
The total production of oil from the Duval County Ranch Co. lease in 1937 was $46,895.65. In its income tax return for 1937 the petitioner claimed and was allowed a depletion allowance of $12,896.30 representing 27½ percent of the total production. In addition it claimed the deduction of $7,142.28 paid to Gulf as profit-sharing payments. This amount was disallowed by the respondent in the determination of the deficiency.
In connection with the acquisition in prior years of certain oil and gas leases from which production was had during the taxable year petitioner paid cash bonuses. In his computation of the allowable depletion the respondent has deducted from the gross income of each of these leases that proportion of the bonus allocable to the products sold from the lease during the taxable year. The total of the amounts so deducted is $915.42, which sum is stipulated to be correct if respondent's treatment is proper.
The first question for decision is whether petitioner is entitled to deduct from the gross income of 1937, $7,142.28 representing the total of profit-sharing payments paid to the Gulf Oil Corporation in connection with the operation of an oil and gas lease. The petitioner...
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