Sneed v. Commissioner of Internal Revenue

• Decision Date: 29 June 1934
• Docket Number: Docket No. 45694.
• Citation: 30 BTA 1121
• Parties: J. T. SNEED, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

30 B.T.A. 1121 (1934)

J. T. SNEED, JR., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 45694.

Board of Tax Appeals.

Promulgated June 29, 1934.

Harry C. Weeks, Esq., Charles F. Keffer, Esq., and Walter G. Russell, Esq., for the petitioner.

Frank B. Schlosser, Esq., and R. B. Cannon, Esq., for the respondent.

In assailing respondent's determinations of deficiencies in income tax for 1925 and 1926 in the respective amounts of $1,168.21 and $27,917.64, petitioner contends, first, that all the lands acquired by him subsequent to his marriage are community property; second, that an interest in his father's estate was acquired by petitioner from his brother after marriage and is community property; third, that delay rentals and bonuses received in connection with oil and gas leases upon his lands were community income, whether the lands were community or separate property; and, fourth, that the amount of the delay rentals and bonuses to be included in his income should be reduced by the deduction of an allowance for depletion. With respect to the deficiency for 1925, he further contends that its collection is barred by the statute of limitations, for the reason that the consent extending the statutory period upon which respondent relies is invalid.

FINDINGS OF FACT.

Petitioner is a resident of Amarillo, Texas. He was married on June 30, 1913, and has continuously been a resident of Texas since that date. All of the income here involved was reported as community income, divided one half to each in separate returns filed by petitioner and his wife for the years here before us. His father died in March 1912. For some years prior to that date, petitioner was engaged as a partner, first with his brother, and later with his father, who bought out the brother's interest, in a partnership operating in the ranching and cattle business.

Petitioner owns a ranch of about 85,000 acres in Moore County, Texas, and various tracts of these lands are embraced in oil and gas leases granted by him during the years now before us. A part of petitioner's holdings was purchased by him prior to his marriage; additional acreage was conveyed to him in the partition of his father's estate under decree of July 28, 1913; the remainder he acquired by purchases subsequent to his marriage, the deeds thereto being in evidence as Exhibits 8 to 11, inclusive. We adopt by reference as a part of our findings, Exhibits 1 and 2, which disclose, among other things, the source and date of acquisition of the various portions of the ranch embracing oil and gas leases later granted. Only as to the leased tracts is the time of acquisition material in this controversy.

Respecting the lands acquired by petitioner upon the partition of his father's estate, we find that for some years prior to March 1912, when his father died, petitioner was engaged with him as an equal partner in the ranching and cattle business. The partnership owned a ranch of about 77,000 acres, in which a one-half interest belonged to petitioner upon the dissolution of the partnership by the death of the father. Petitioner inherited a one-seventh interest in his father's estate, or a one-fourteenth interest in the partnership lands. Petitioner's brother, J. B. Sneed, inherited a like interest. About this time, the latter was in serious difficulty and heavily in debt. On some of his indebtedness petitioner and other relatives were secondarily liable. By deed dated June 7, 1913, recorded on June 18, 1913, acknowledging receipt of a cash consideration of $50,000, J. B. Sneed conveyed to petitioner a one-seventh undivided interest in the lands formerly owned by the partnership. (The record does not explain why J. B. Sneed purported to convey a greater interest than he had, which both parties agree upon brief was a one-seventh undivided interest in the father's estate.) The consideration recited was not in fact paid at that time. Between the brothers, it was understood that the conveyance was made for purposes of accommodation; to pass title to petitioner that he might obtain a loan secured by his lands, and with the proceeds make payment of the purchase price to J. B. Sneed, who, in turn, would then discharge his indebtedness upon which petitioner and other members of the family were secondarily liable. It was further understood between the brothers that petitioner was not to have the land unless he paid for it; that if he failed to raise the funds by which to make payment, he was to reconvey to J. B. Sneed; that the latter was free to seek another purchaser for the property in the meantime, and that petitioner would convey to that purchaser should such a sale be arranged before petitioner had paid the recited consideration. The agreement between petitioner and his brother was entirely oral.

On July 29, 1913, a decree was entered in the suit between the Sneed heirs pending in the District Court of Moore County, partitioning the lands owned by the former partnership. In those proceedings petitioner claimed as his own the interest of his brother, to which he held title, and, accordingly, that interest was included along with petitioner's partnership interest and his own inheritance in the lands vested in him, which totaled 55,847 acres (after an adjustment to the other heirs for their shortages of some 326 acres). In November 1913 petitioner borrowed $120,000, secured by deed of trust, in which Mrs. Sneed joined, upon all his lands, including the acreage received in the partition, and from these funds made payment to his brother of $50,000.

During 1925 and 1926 petitioner granted about fifty oil and gas leases covering various portions of his ranch lands. The leases were in the form and upon the terms generally used in that field, most of them carrying provisions for bonuses and delay rentals. During these years petitioner devoted about three fourths of his time to conferences with prospective lessees and other matters incident to the granting of the leases, most of which were negotiated through a broker.

In 1925 petitioner received bonuses of $10,400 and delay rentals of $10,364, a total of $20,764, of which respondent has treated $20,164 as separate income and the balance, $600, as community income. In 1926 he received bonuses of $210,857.18, and delay rentals of $26,605.11, a total of $237,462.29, of which respondent has treated $180,218.29 as separate income and the balance, $57,244, as community income. Expenses in connection with the making of the leases aggregated $559 in 1925 and $23,860 in 1926. These amounts were allowed by respondent as deductions from income, divided between separate and community income in the same ratio as he divided the bonuses and rentals. No dispute exists respecting the amounts received as bonuses and rentals, nor as to the amount of the expenses, the whole controversy being as to the status of the income, whether community or separate, and the allocation of the expenses between the two estates. Exhibits 1 and 2, previously mentioned, show in detail the leases from which the bonuses and rentals arose. The income arising from leases of lands owned by petitioner prior to his marriage, from leases upon lands acquired by him in the partition of his father's estate (including the acreage representing the interest purchased from J. B. Sneed), and a part of the income arising from leases of lands purchased by him after marriage, respondent has treated as separate income.

In 1922 a gas well was brought in on a lease previously granted embracing a tract nearly in the center of petitioner's lands. While the well was capable of producing (though whether in paying commercial quantities we do not know), no gas was removed during the years 1925 and 1926, for no pipe line was laid until after that time. In 1925 the whole of petitioner's ranch was regarded as proven oil or gas territory, probably productive of oil or gas, or both.

Petitioner's return for the year 1925 was filed on May 14, 1926. Respondent's notice of deficiency was issued on July 18, 1929. In January 1929, the revenue agent in charge at Dallas, Texas, transmitted to petitioner the usual form of consent extending the statutory period for assessment of tax for the year 1925, requesting its execution and return. Petitioner complied with that request under date of January 5, 1929, but wrote into the consent as a limitation upon the amount of deficiency, "not exceeding the sum of $1,168.21." Thereafter, on January 10, 1929, the revenue agent wrote petitioner in part as follows:

You are advised that the waiver form as modified is not acceptable to this office, therefore, unless the taxpayer desires to submit an unqualified waiver extending the period within which an additional assessment may be made for the year 1925 to December 31, 1929, it will be necessary to transmit Agent Dubb's report to Washington for review and assessment at an early date.

* * * * * * *

Unless the enclosed waiver forms properly executed are received in this office within 10 days from the date of this letter it will be necessary to transmit the case to the Bureau at Washington for review and assessment.

Petitioner refused to execute and submit an unqualified consent. The revenue agent in charge transmitted the case to the Bureau at Washington. Respondent's notice of deficiency contains the following statement: "Consent is on file for the year 1925 extending the statutory period of limitations to December 31, 1929." Exhibit 13, submitted in evidence as a copy of the limited consent of January 5, 1929, bears the signature of petitioner but not that of respondent. Petitioner's return for the year 1925 was filed on May 14, 1926.

OPINION.

GOODRICH:

It is admitted that under the Texas statutes¹ the lands purchased by petitioner prior to his marriage, his interest in the partnership lands which he owned prior to marriage, and the lands representing his interest in his father's estate were his separate...