Decision Date19 July 1932
Docket NumberDocket No. 33757.
Citation26 BTA 659
CourtU.S. Board of Tax Appeals

John B. Milliken, Esq., Claude I. Parker, Esq., and George H. Koster, Esq., for the petitioner.

J. L. Backstrom, Esq., for the respondent.

This proceeding arises upon the determination by respondent of a deficiency in petitioner's income and profits taxes for 1921 in the amount of $48,151.72.

The issues involved are (1) whether the Commissioner erred in including in petitioner's gross income for the calendar year 1921 the total amount of funds impounded by a receiver during the years prior to 1921, representing the earnings from certain oil lands the title to which was in dispute, and paid to the petitioner by the receiver in 1921; (2) whether the Commissioner erred in disallowing as a deduction from gross income the cost of 140 acres of oil land; and (3) whether the Commissioner erred in failing to compute petitioner's excess profits tax for the year 1921 under the special assessment provisions of sections 327 and 328 of the Revenue Act of 1921.


Petitioner was incorporated under the laws of California on May 19, 1914, with an authorized capital stock of 5,000,000 shares of a par value of 10 cents a share, or $500,000. On June 6, 1914, petitioner acquired all the interest of an Arizona corporation, the Pan-American Oil Company, which it was organized to succeed, in certain oil lands and all other property of the Pan-American Oil Company in exchange for 4,650,758 shares of petitioner's stock. Petitioner further assumed all the debts of the Arizona corporation.

The oil lands so transferred consisted of several tracts amounting to 140 acres in all, 80 acres in the northeast quarter and 60 acres in the southeast quarter of section 32, township 12 north, range 23 West, San Bernardino Base and Meridian, lying in Kern County, California. On the 60-acre tract lying wholly in the southeast quarter oil had been struck at this time.

On September 27, 1909, the President of the United States ordered the withdrawal and reservation of all of certain lands, among which were the lands later acquired by the petitioner from mineral exploration and from all forms of location, settlement, selection, filing, entry or disposal under the mineral or non-mineral public land laws of the United States (known as the Taft Withdrawal Order). On July 2, 1910, the President, under the Act of Congress approved July 25, 1910, entitled "An Act to authorize the President of the United States to make withdrawal of public lands in certain cases" (36 Stat. 847), duly and regularly ratified, affirmed and continued in full force and effect the order of withdrawal and reservation of September 27, 1909.

On February 27, 1913, a suit in equity was brought by the United States of America in the District Court of the United States for the Southern District of California, Northern Division, Ninth Circuit, entitled, "United States of America, Plaintiff, vs. American Oilfields Company, Ltd., et al. including the Pan-American Oil Company and Maricopa Consolidated Oil Company, predecessors of the Trojan Oil Company, Defendants," and numbered on the files of the court as "In Equity, No. A-3."

This suit was brought to have it adjudged that the defendants had no title or interest to the land lying in the southeast quarter of section 32 mentioned above, which was covered by the Taft Withdrawal Act, and to secure an injunction restraining the defendants from trespassing on said property or extracting oil therefrom, and for an accounting for oil and gas previously extracted therefrom. The land of petitioner involved in this cause was the 60-acre tract lying wholly in the southeast quarter and constituted only a part of the property which petitioner acquired in exchange for its stock.

In this suit one A. E. Campbell was, on April 23, 1915, appointed receiver of the properties claimed by plaintiff, and was thereafter succeeded by Howard M. Payne, who was appointed receiver on May 15, 1915, and who in turn was succeeded by Louis F. Byington, who was appointed receiver on October 25, 1918. Under the court's order of April 23, 1915, appointing a receiver, the receiver was given power and directed to operate any oil or gas well or wells on the property, or to permit them to be operated by the respective defendants then in possession of or operating them, or, at his discretion, to close the wells. He was directed to ascertain the quantity of oil and gas theretofore extracted by the defendants and to keep an accurate account of all oil and gas thereafter produced by the lands and to sell the oil and gas for the best price obtainable. For the purpose of protecting and operating the property, the receiver was authorized to incur such expense as was necessary. All moneys coming into the hands of the receiver were, unless otherwise directed by the court, to be deposited in a bank or banks to be selected jointly by the receiver and the defendants, who claimed the money, or their respective solicitors of record and the solicitor for the complainant, and such moneys were to be paid out only upon checks signed by the receiver and by the solicitors of record, unless otherwise ordered by the court.

This suit came to trial before the District Court, which, on August 21, 1916, entered its decree, holding:

1. That the Plaintiff was, on and for a long time before and has ever since the 27th day of September, 1909, been and now is, the sole owner in fee simple absolute of all of the land involved in this cause and described as the Southeast Quarter of Section thirty-two (32), Township twelve (12) North, Range twenty-three (23) West, San Bernardino Base and Meridian, and of all petroleum oil, gas and other minerals therein, or heretofore extracted and produced therefrom;

2. That the said land was on the 27th day of September, 1909, and has been at all times since that date and now is, lawfully and fully withdrawn from all forms of location, settlement, selection, filing, entry or disposal under the mineral or non-mineral public land laws of the United States, and was not then and is not now subject to exploration, location or acquisition under any of said public land laws;

3. That the said Defendants, and each of them, have not had at any time, and have not now, any estate, right, title or interest whatever in or to said lands, or in or to any petroleum oil, gas or other minerals therein or heretofore extracted and produced therefrom, through or under any lawful and valid mining claims, mining locations or notices thereof, or otherwise; and the title of the Plaintiff thereto is good and valid; and any and all claims, rights, titles and interests heretofore and now asserted by the said defendant, or any of them, in and to said lands, or in and to any petroleum oil, gas or other minerals in said lands or heretofore extracted and produced therefrom, are invalid * * *. and directing that plaintiff's title be quieted as against the defendants and appointing a master who should report upon any and all improvements made by the defendants and any injuries to the land done by them, and give an accounting for the value of the oil and gas extracted therefrom by them.

The interlocutory decree was made final December 24, 1919, adjudging and decreeing that the plaintiff, the United States, was the owner of the southeast quarter of section 32, and quieting the title of the plaintiff as against said Trojan Oil Company and all other defendants to the action. Thereafter, on February 3, 1920, an appeal was allowed from this final decree to the United States Circuit Court of Appeals for the Ninth Circuit. The judge in the United States District Court made an order adjudging and decreeing that the property of the Trojan Oil Company and wells and other improvements thereon should remain in the possession of the receiver during the pendency of the appeal, and authorizing the receiver to continue the operation and management of the property until further order of the court.

While the appeal was pending in the Circuit Court of Appeals, Congress passed what is known as the Oil Land Leasing Act, which was approved February 26, 1920 (41 Stats. 437; U. S. Code, Ann., title 30, sec. 227). Under section 18 of this leasing act claimants of withdrawn lands were granted the right to apply for a lease to the properties claimed within six months after February 25, 1920, provided that they first relinquished to the United States all right, title and interest claimed in the property.

The petitioner relinquished all its right, title and interest in the 60-acre tract in the southeast quarter of section 32 to the United States Government on August 18, 1920, and on the same day it made and executed its application to the Secretary of the Interior of the United States for a lease upon this tract. After consideration of this application by the Secretary of the Interior, a lease was granted to the petitioner as of August 18, 1920, but actually executed by the parties on January 6, 1921. The lease covered only the 60 acres lying wholly in the southeast quarter which had been in litigation in the suit mentioned above.

The mandate of the Circuit Court of Appeals filed in this proceeding on January 17, 1921, after hearing, recited the fact that petitioner had quitclaimed the property in question, "East one-half (E ½) of the Southeast Quarter (SE ¼) of the Southeast Quarter (SE ¼) and the Northeast Quarter (NE ¼) of the Southeast Quarter (SE ¼) of Section Thirty-two (32), Township Twelve (12) North, Range 23 West, San Bernardino Base and Meridian, Kern County, State of California"; that it had been granted a lease thereof by the United States under the leasing act; and that the amount to be paid to the United States by the petitioner for past oil and gas production up to August 18, 1920, was the principal sum of $121,681.15; and...

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