Southwest Exploration Co. v. Comm'r of Internal Revenue
| Decision Date | 10 September 1952 |
| Docket Number | Docket No. 24872. |
| Citation | 18 T.C. 961 |
| Parties | SOUTHWEST EXPLORATION COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner was granted the drilling and development rights in certain submerged oil property by the State of California. Under the terms of such grant petitioner was required to drill certain offset wells. Upon completion thereof, petitioner was to continue uninterrupted drilling operations until a total of 83 wells were thus drilled. Held: The drilling of wells during 1939 to 1943, inclusive, subsequent to the required number of offset wells was a part of the consideration for acquisition of the drilling rights from the State of California and as such the intangible drilling costs incident thereto are not deductible in accordance with the option contained in Regulations 111, section 29.23(m)-16.
2. Pursuant to the State Lands Act of 1938 all oil wells bottomed in the submerged oil deposits were required to be drilled from filled lands or slant-drilled from littoral drill sites. The necessary drill sites and easements appertaining thereto were acquired from certain upland owners by petitioner for which it agreed to pay an amount equal to 24 1/2 per cent of its net profits. Held: Petitioner was the sole recipient of an economic interest in the submerged oil deposits; no third parties thereafter acquired any such interest; the amounts paid by petitioner equal to 24 1/2 per cent of its net profits were not so paid as rent or royalty on an economic interest in the oil and gas in place; and, therefore, petitioner is entitled to include such amounts in its gross income subject to the statutory allowance for depletion. Melvin D. Wilson, Esq., for the petitioner.
B. H. Neblett, Esq., for the respondent.
This proceeding involves corporate income tax, declared value excess-profits tax, and excess profits tax, as follows:
+--------------------------------------------------------------+
¦ ¦Year ¦Deficiency¦Overpayment¦
+---------------------------------+-----+----------+-----------¦
¦ ¦ ¦determined¦claimed ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1939¦$32,114.88¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1940¦31,271.85 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1941¦5,470.28 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦Income tax ¦(1942¦34,075.82 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1943¦46,767.42 ¦$2,883.04 ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1944¦31,822.17 ¦17,828.29 ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1945¦47,892.34 ¦1,758.12 ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1939¦$20,455.80¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1940¦5,973.03 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦Declared value excess-profits tax¦(1942¦6,996.71 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1944¦2,982.50 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1945¦8,764.91 ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦ ¦ ¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1940¦$24,545.60¦ ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1941¦54,525.59 ¦$23,942.25 ¦
+---------------------------------+-----+----------+-----------¦
¦Excess profits tax ¦(1942¦81,158.14 ¦31,379.00 ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1944¦34,102.12 ¦27,385.23 ¦
+---------------------------------+-----+----------+-----------¦
¦ ¦(1945¦22,219.31 ¦51,088.51 ¦
+--------------------------------------------------------------+
There are two questions presented in this case. One, involving the taxable years 1939 to 1942, inclusive, is concerned with the propriety of petitioner's deducting so called intangible drilling costs incurred during those years in producing oil from submerged coastal lands on a portion of an operating grant from the State of California.
The second issue raises the question of whether petitioner may properly take a depletion deduction in the taxable years 1939 to 1945, inclusive, on an amount equal to 24 1/2 per cent of its net income, which amount it paid to certain upland owners on and through whose properties petitioner had located ‘whipstock‘ wells for purposes of producing oil from the adjacent submerged lands.
The State of California has proposed additional franchise taxes against petitioner for the years 1939 to 1946, inclusive, based on adjustments of income similar to those set out in the deficiency letter herein. The State has requested, and obtained, from petitioner agreements waiving the statute of limitations for assessing such additional franchise taxes for the years 1939 to 1946, inclusive. Petitioner has filed protests against these additional franchise taxes.
The parties have stipulated that if petitioner prevails as to both of the foregoing issues, and if it is not entitled to deduct any franchise taxes not allowed in the deficiency letter, petitioner will be entitled to additional depletion deductions, as follows:
+----------------+
¦1941¦$19,443.62 ¦
+----+-----------¦
¦1942¦96,189.89 ¦
+----+-----------¦
¦1943¦91,452.47 ¦
+----+-----------¦
¦1944¦218,032.38 ¦
+----+-----------¦
¦1945¦244,764.71 ¦
+----------------+
If petitioner prevails as to the second issue above, but not as to the first, it has been stipulated that then petitioner will be entitled to additional depletion deductions, as follows:
+----------------+
¦1941¦$35,874.23 ¦
+----+-----------¦
¦1942¦96,189.89 ¦
+----+-----------¦
¦1943¦82,446.98 ¦
+----+-----------¦
¦1944¦218,032.38 ¦
+----+-----------¦
¦1945¦244,764.71 ¦
+----------------+
The parties have entered into agreements from time to time pursuant to section 276(b), Internal Revenue Code, extending the period for the assessment of additional taxes for each of the years 1941 to 1945, inclusive. These agreements were executed within 3 years, respectively, from the time the returns to which they apply were filed by the taxpayer.
Respondent has filed an amendment to his amended answer in which he makes claim for any increased deficiency in petitioner's income tax that may result from our holdings herein.
Most of the facts have been stipulated. Oral stipulations made and the written stipulation filed with exhibits attached are adopted and made a part hereof.
Petitioner is a corporation organized under the laws of California on June 20, 1933. It was completely inactive until 1938. Its principal office and place of business is 811 West Seventh Street, Los Angeles, California. The petitioner filed its corporate income tax, declared value excess-profits tax, and excess profits tax returns for the calendar years 1938 to 1945, inclusive, with the collector of internal revenue for the sixth district of California at Los Angeles, California. From its inception, petitioner has kept its books and filed its tax returns on the accrual basis.
Prior to 1938 the State of California permitted State lessees and oil operators to develop and operate submerged coastal oil deposits from piers, islands and barges. This practice resulted in waste petroleum products interfering with fishing and bathing along the beaches of southern California. In 1938 the State Legislature passed the State Lands Act of 1938 under which the State Lands Commission was appointed with power to lease the submerged lands in such manner as to prevent the oil operations from despoiling the beaches. From August 8 to 13, 1938, this Commission published a Notice of Intention to Receive Offers to enter into an agreement for extraction of oil and gas from an area of submerged lands situated off Huntington Beach, California. The area involved was approximately 835 acres and was the area which eventually was covered by State Easement No. 392.
Petitioner made a bid and submitted same on August 30, 1938. With its letter transmitting the bid it filed a form of Agreement for State Easement, later identified as No. 392, and attached to this agreement was so called ‘Exhibit A (for entire tract)‘ which constituted the drilling requirements. There was also attached thereto ‘Exhibit B‘ which set out the royalty which petitioner agreed to pay, as well as an endorsement by upland owners indicating that such owners had given petitioner authority to drill wells on their land and to run its wells through their property out under the ocean. Also attached to the transmittal letter were the following:
(a) Permit agreement executed with upland owners.
(b) Cashier's check for $15,000.000 payable to the Treasurer of...
To continue reading
Request your trial
-
Southwest Exploration Company v. Riddell
...share. Actions involving the disputed taxes for the calendar years 1939 through 1945 were commenced. In Southwest Exploration Co. v. Commissioner, 18 T.C. 961 (1952), affirmed 220 F.2d 58 (9th Cir. 1955) it was held that plaintiff was entitled to take depletion of the percentage of profits,......
-
Commissioner of Internal Revenue v. Southwest Exploration Co United States v. Huntington Beach Co
...depletion allowance of 27 1/2% on this share of the profits. The Tax Court decided that Southwest was entitled to the depletion allowance, 18 T.C. 961, and the Ninth Circuit affirmed, 220 F.2d 58. In the other case, the Court of Claims held that one of the upland owners, Huntington Beach Co......
-
Commissioner of Int. Rev. v. Southwest Exploration Co.
...220 F.2d 58 (1955) ... COMMISSIONER OF INTERNAL REVENUE, Petitioner, ... SOUTHWEST EXPLORATION COMPANY, a corporation, Respondent ... No. 13875 ... ...
-
Huntington Beach Company v. United States
...the deduction to both parties. Southwest contested the Commissioner's denial in the Tax Court, and that court held in Southwest Exploration Co. v. Commissioner, 18 T.C. 961, that the plaintiff did not possess a depletable interest and that Southwest was entitled to the deduction on all its ......