Wegener v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 07 April 1941 |
| Docket Number | No. 9693.,9693. |
| Citation | 119 F.2d 49 |
| Parties | WEGENER v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Fifth Circuit |
C. F. Miller and Charles H. Garnett, both of Oklahoma City, Okl., for petitioner.
Lee A. Jackson, Sewall Key, and J. Louis Monarch, Sp. Assts. to Atty. Gen., Samuel O. Clark, Jr., Asst. Atty. Gen., and J. P. Wenchel, Chief Counsel, Bureau of Int. Rev., and Claude R. Marshall, Sp. Atty., Bureau of Int. Rev., both of Washington, D. C., for respondent.
Before SIBLEY, HUTCHESON, and McCORD, Circuit Judges.
At the outset we are confronted with a motion to dismiss filed by the Commissioner. The question presented by the motion arises in this way: The petitioner, H. H. Wegener, filed his income tax return for 1935 at the office of the Collector of Internal Revenue, Oklahoma City, Oklahoma, in the Tenth Judicial Circuit. The petitioner should have appealed to the Circuit Court of Appeals for the Tenth Circuit, but by mistake filed his petition for review in this court. In February, 1941, after it was too late to file an appeal to the Circuit Court of Appeals for the Tenth Circuit, the taxpayer discovered his mistake. He then sought to come within the agreement provision of Section 1141 of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 1141, under which the taxpayer and the Commissioner may stipulate for a review by any United States Court of Appeals. The Commissioner consented to a submission of the cause here. This consent, however, was given with the reservation that it was to be effective only if this court should hold that his authority to consent still persisted although the time for appeal had passed, and the Commissioner reserved the right to present that question to this court for decision.
We are clear that consent was given with authority, and that it was effective to confer jurisdiction upon this court as if it had been given before the petition for review was filed here. The statute, in providing that the Commissioner and the taxpayer may by agreement submit the cause to any United States Court of Appeals, fixes no time for making the agreement and we find no reason for writing such a limitation into the statute. The motion to dismiss the petition is overruled.
On the merits the pertinent facts are these: In February, 1932, Walter H. Gant and Knox L. Garvin acquired an interest in certain oil and gas leases on lands in Rusk County, Texas. Shortly after Gant and Garvin acquired their interests in the leases it was agreed that H. H. Wegener, a drilling contractor, would take a one-third interest in the leases and would drill wells on the property at an agreed price. During the negotiations Wegener expressed himself as being unwilling to enter into a partnership deal, and no partnership agreement was entered into by the parties. Wegener proceeded to drill wells and billed Gant and Garvin for their two-thirds proportionate share of the drilling costs. In October, 1932, a loan of $80,000 was obtained from a bank in Oklahoma City, and a deed of trust was executed by Gant, Garvin, and Wegener, "as individuals and as partners", to A. J. Peters, as trustee, to secure the loan. According to the terms of the trust instrument checks in payment of oil runs were to be sent direct to the bank until the loan had been repaid. A separate bank account was opened at the bank by and in the name of Gant, Garvin & Wegener, and checks were issued on this account. On October 31, 1932, Gant and Garvin, by written agreement, assigned to Wegener an undivided one-third interest in the Rusk County leases, and Wegener assumed an undivided one-third of all the duties, obligations, and liabilities imposed upon Gant and Garvin by their agreement with their assignors. Thereafter books in the name of Gant, Garvin & Wegener were set up for the joint enterprise, letterheads bearing the name of "Gant, Garvin & Wegener" were printed and used, and billings were made to and paid by the firm. The enterprise was conducted by Gant, Garvin, and Wegener, who consulted with each other concerning the business and shared equally in the profits and losses. It was understood that Wegener, who had theretofore billed Gant and Garvin for two-thirds of the drilling costs, would drill wells at a footage rate, and that he would receive the full amount of the agreed footage rate from Gant, Garvin & Wegener. From this time on Wegener charged to and was paid by Gant, Garvin & Wegener the full amount of the agreed drilling costs.
In 1935 Gant, Garvin, and Wegener, as copartners and as individuals, borrowed $300,000 from the National Bank of Tulsa, and assigned the Rusk County leases as security for the loan. Money in payment of oil runs went to the bank to liquidate this indebtedness. In financial statements filed by Wegener he stated that the Rusk County operations were a "joint venture".
Gant, Garvin & Wegener filed partnership returns on Form 1065 for the taxable years 1932, '33, '34, and '35. The return for 1935 showed a net income of $55,680.67, and gross profits of $174,609.15. No deduction was taken on these returns for the cost of drilling wells, or for any amount paid out for such drilling. In his 1935 return Wegener reported his one-third pro rata share of the net income shown on the partnership return, or $18,560.22.
In 1935 Wegener was paid the full amount of the agreed footage rate for drilling wells during that year. This amount, including the agreed rental for tools, was $130,594.50. For drilling these wells Wegener's expense as a drilling contractor was $59,818.27. This amount deducted from the total amount received from Gant, Garvin & Wegener left Wegener with a net profit of $70,776.23 on his drilling operations. In his individual income tax return for 1935 he reported as net income from drilling and rental of tools, "Gant, Garvin & Wegener, $47,184.15", which amount he calculated as follows:
Amount received from drilling
rental tools ................. $130,594.50
Drilling expense ............... 59,818.27
___________
Net Profit ................. $ 70,776.23
Less 1/3 net profit allocated to
taxpayer's interest .......... 23,592.08
___________
2/3 net profit allocated to Gant
and Garvin ................... $ 47,184.15
The Commissioner included in Wegener's income the sum of $23,592.08, designated by the taxpayer as income allocated to his one-third interest, and determined a deficiency in income taxes for 1935. The statement accompanying the Commissioner's letter, after quoting the definition of a "partnership" contained in Section 801(a) (3), Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 3797(a) (2), stated "that for Federal income tax purposes Gant, Garvin & Wegener is a partnership and since you realized in cash a profit from drilling wells from the partnership, the entire amount of the profit constitutes taxable income to you."
The taxpayer filed petition for redetermination of the deficiency, and the Board of Tax Appeals, after a hearing, entered decision affirming the determination of the Commissioner. Wegener v. Commissioner, 41 B.T.A. 857, 861. The Board found that Gant, Garvin & Wegener was a "joint venture conducted under the name of Gant, Garvin & Wegener"; that as such it was properly treated as a partnership for income tax purposes under Section 801(a) (3); and that, "From the facts in the record and the relation of the parties, we conclude that the development and operation of the property was carried on by the joint venture and that petitioner as an individual drilled the oil wells for Gant, Garvin & Wegener, and not for himself as to his interest, and for Gant and Garvin as to their interest."
The taxpayer contends that under Texas law he and his associates held the leases as tenants in common, each owning an undivided one-third interest; that concerning their operation of the properties they were a mining partnership; that one-third of the $130,594.50 paid to him for drilling was a distribution to him of a part of his capital investment, and not a taxable gain or profit; and that the Board erred in including the $23,592.08 in his income for 1935.
Although the relationship between Gant, Garvin, and Wegener might not be considered a general partnership under Texas law, when we view their relationship, as we must, in the light of the federal taxing statutes, it is clear that they were operating within the definition of a "partnership" contained in Section 801(a) (3). We agree with the Board that after 1932 they operated not as individuals but as a business unit, using their joint capital, their joint credit, and their joint efforts in developing and operating the oil properties.
Citing Jennings v. Commissioner, 5 Cir., 110 F.2d 945, and Neuberger v. Commissioner, 311 U.S. 83, 61 S.Ct. 97, 85 L.Ed. ___, the petitioner contends that as a partner he should not be taxed on one-third of the profits received by him from the partnership. These cases dealt with a partner's distributive share of partnership income, and not with individual profits such as those earned and collected by the taxpayer in this case. In Ortiz Oil Company v. Commissioner, 5 Cir., 102 F.2d 508, strongly relied upon by the petitioner, Ortiz, the owner of a one-half interest in a lease, drilled a well under a turnkey agreement and other owners simply paid Ortiz their pro rata share of the drilling costs out of their individual funds. The case at bar is unlike the Ortiz case. Wegener drilled the first wells and the other owners, Gant and Garvin, simply paid to him their two-thirds pro rata share of the agreed drilling costs, but late in 1932 this method of doing business was abandoned by the parties and Gant, Garvin, and Wegener elected to and did carry on their operations jointly under a new plan. For reasons best known to themselves they chose to carry on their operations as a...
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