McKinney v. Commissioner ( 1929 )

MAGDALINE MCKINNEY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JULIA M. SOWELL (NEE JULIA M. BERTHELSEN), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

BERTHEL S. BERTHELSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

THOMAS BERTHELSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ANNA L. BERTHELSEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

CHRISTINE B. EDLING, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McKinney v. Commissioner

Docket Nos. 22322-22326, 22700.

United States Board of Tax Appeals

16 B.T.A. 804; 1929 BTA LEXIS 2519;

May 29, 1929, Promulgated

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">*2519 1. Income from an oil and gas lease may not all be treated as income until the capital value is returned. New Creek Co. v. Lederer,295 F. 433, followed.

2. A donee of property may be taxed upon the increment in value which occurred while the property was owned by the donor. Taft v. Bowers,278 U.S. 470">278 U.S. 470, followed.

3. The donee of an oil and gas lease is not entitled to claim depletion based upon a discovery value established by the donor. Melville G. Thompson,10 B.T.A. 25">10 B.T.A. 25, followed.

4. Under the Revenue Act of 1921, the donee of an oil and gas lease is entitled to depletion upon the basis of the fair market value of the lease when acquired.

5. Under the Revenue Act of 1924, the donee of an oil and gas lease is entitled to depletion upon the basis of the cost of such lease, if any, to the donor.

6 Where the donee in 1922 sold property acquired in the same year, held that the profits are not to be taxed under section 206 of the Revenue Act of 1921.

A. M. Blackmon, Esq., for the petitioner.

Bruce A. Low, Esq., for the respondent.

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PHILLIPS

">*804 The Commissioner">*2520 determined deficiencies in income tax as follows:

	1922	1923	1924
Magdaline McKinney	$619.28	$2,111.33
Julia M. Sowell	1,246.78	2,178.54	$1,018.97
Berthel A. Berthelsen	1,246.78	2,178.54	973.55
Thomas Berthelsen	1,349.14	1,961.71	952.02
Anna L. Berthelsen	1,246.78	2,178.54	1,018.97
Christine B. Edling	3,994.00	782.50

">*805 Each of these petitioners instituted a proceeding before the Board to secure a redetermination of such deficiencies. The facts in each case are similar and they were consolidated for hearing and decision. They were submitted upon stipulations of fact.

FINDINGS OF FACT.

A. E. Berthelsen, who was the father of each of the petitioners, acquired a certain tract of land in Limestone County, Texas, aggregating about 436 acres, for farming purposes in 1908 and 1911, when no oil was being produced within a radius of 40 miles of same. In the year 1912 the said A. E. Berthelsen granted a lease for the development of oil on said property and retained a one-eighth royalty interest therein under said lease. On April 1, 1922, A. E. Berthelsen made to each of the petitioners a bona fide gift of an undivided one sixty-fourth">*2521 royalty interest in and to the minerals on and under said tract of land.

Prior to the date of the gifts hereinbefore referred to, all the tract of land in question was proven oil-bearing property. By the deed above referred to an undivided six-eights of his retained royalty interest became divested out of the said A. E. Berthelsen, and one-eighth of said retained royalty interest became vested in each of the petitioners, and each petitioner became and was thereafter the owner of an undivided one sixty-fourth of all the minerals in and under the 436 acres of land hereinbefore referred to.

Prior to April 1, 1922, the date of the gift by A. E. Berthelsen to these petitioners, as above referred to, the said A. E. Berthelsen had established, in manner provided by law, a discovery value upon said tract of 436 acres, and had established a depletion unit to be thereafter used and which was thereafter used by A. E. Berthelsen in making his tax returns. Such discovery value so established, as well as the depletion unit so fixed and established, we accepted and ratified and thereafter used by respondent in the computation of income taxes of the said A. E. Berthelsen for the years following.

">*2522 Said A. E. Berthelsen, had he retained the one sixty-fourth royalty interest given each of these petitioners, on the basis of the discovery value theretofore established thereon, would have been entitled to depletion allowances on the respective interests as follows:

	1922	1923	1924
Magdaline McKinney	$12,815.41	$19,690.35
Julia M. Sowell	12,815.41	19,690.35	$10,834.98
Berthel A. Berthelsen	12,815.41	19,690.35	10,834.98
Tom Berthelsen	12,815.41	19,690.35	10,834.98
Anna L. Berthelsen	12,815.41	19,690.35	10,834.98
Christine Edling	19,289.63	23,919.21

">*806 The petitioners received in cash as proceeds of oil runs from their respective one sixty-fourth royalty interests the following amounts:

	1922	1923	1924
magdaline McKinney	$17,647.75	$27,196.22
Julia M. Sowell	17,647.75	27,196.22	$21,669.99
Berthel A. Berthelsen	17,647.75	27,196.22	21,669.99
Tom Berthelsen	17,647.75	27,196.22	21,669.99
Anna L. Berthelsen	17,647.75	27,196.22	21,669.99

The petitioner, Christine B. Edling, received from the sale of her one sixty-fourth royalty interest during the year 1922 the sum of $44,386.53 in cash">*2523 and the further sum of $15,180.04 in cash out of oil, and for the year 1923, under her contract of sale, received $16,411.84 in cash out of oil.

On April 1, 1922, the date of the acquisition of the one sixty-fourth royalty interest deeded to each of these petitioners, each said one sixty-fourth interest had a fair market value of and was worth a sum equal to $110,000, and has never since said date had a greater value. The value of each of said one sixty-fourth royalty interests on April 1, 1922, as above stated, is and was greatly in excess of any sum or sums that the respective petitioners have ever received or realized therefrom.

The petitioners claimed in their returns depletion allowance as follows:

	1922	1923	1924
Magdaline McKinney	$12,986.07	$19,942.79
Julia M. Sowell	12,815.41	19,690.35	$10,834.98
Berthel A. Berthelsen	12,986.07	19,942.79	10,834.98
Tom Berthelsen	12,991.56	19,942.79	10,834.98
Anna L. Berthelsen	12,991.56	19,942.79	10,834.98
Christine Edling	47,870.21	13,463.08

The respondent has disallowed same on the ground that the land to which said royalty interest attached was proven at the time of the gift, and that">*2524 petitioners are consequently not entitled to a revaluation on discovery basis for the determination of the depletion allowance.

The total recoverable oil, as of April 1, 1922, on each of the one sixty-fourth royalty interests of the petitioners, was 98,000 barrels; and each of the petitioners received during the respective calendar years the following number of barrels of oil from said one-sixty-fourth interest:

1922	11,764.80 barrels.
1923	18,130.80 barrels.
1924	14,666.66 barrels.

">*807 OPINION.

PHILLIPS: The petitioners claim that, having each received the one sixty-fourth royalty interest in question as a gift, the same became capital and no part can constitute taxable income in their hands until the value of the gift is returned. They further contend that no part of the increment in value accruing prior to their acquisition can be taxed to them. These contentions are effectively disposed of in ; certiorari denied, ; and ">*2525 .

It is urged by petitioners that if royalties are to be included as income, depletion is to be based upon the discovery value which the donor might have used. That such value is not available to the donee has been decided by this Board in .

It is next urged that depletion is to be allowed upon the basis of the capital value of the gift when acquired by petitioners. There is no doubt that such a value constituted the basis on which depreciation was computed prior to the Revenue Act of 1921. ; . "In essence, the deduction for depletion does not differ from the deduction for depreciation," . We are,, therefore, of the opinion that unless, as the respondent contends, section 202(a)(2) of the Revenue Act of 1921 changes the situation, depletion is to be based upon the value of the property when received by these petitioners. The section in question provides:

That the basis for ascertaining the gain derived or loss sustained from a sale">*2526 or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -

* * *

(2) In the case of such property, acquired by gift after December 31, 1920, the basis shall be the same as that which it would have in the hands of the donor or the last preceding owner by whom it was not acquired by gift. * * *

It is contended by counsel for respondent that the basis for computing depletion is the same as that for computing gain or loss; ; , and that the petitioners must use for depletion the basis which the donor would use in computing gain or loss. The cases cited lend support to the respondent's position. There are, however, other considerations which lead us to believe that the paragraph quoted does not control in the case of depletion claimed under the 1921 Act. The reports of the Congressional Committees (67th Cong., 1st sess., H.R. 350; S. 275) disclose that the paragraph in question ">*808 was added for the purpose of subjecting gains to income tax and preventing evasion by means of gifts. ">*2527 The provision was designed to deal with a sale by the donee, and there is nothing to indicate that Congress intended that it should affect the basis for depletion deductions. The provisions of the Revenue Act of 1921 with respect to depletion are, so far as is here material, the same as are contained in the Revenue Act of 1918. Sec. 214(a)(10). It provided that the allowance for depletion should be based upon cost, with the exceptions therein noted. Since the section fixes the basis on which depletion is to be allowed, there is no necessity of referring to other sections to fix the basis. That basis is cost, and cost of property to a donee or legatee has been construed to be its value when received. ; ;; ; . While the question is by no means free from doubt, we are of the opinion that the Revenue Act of 1921 did not change the basis on which depletion was to be computed and that these petitioners are entitled to deductions for depletion">*2528 in 1922 and 1923 based upon the fair market value of the property when received.

The revenue Act of 1924 expressly provides in section 204(c) that the basis upon which depletion is allowed in respect of any property shall be the same as is provided in subdivisions (a) and (b) of that section for the purpose of determining gain or loss upon the sale or other disposition of such property. Subdivision (a)(2) of that section is the same as the similarly numbered subdivision of the 1921 Act, quoted above. The basis for computing gain or loss on a sale by the donor would be the cost of the property to him. The basis to be used by a donee in the computation of a depletion allowance under the 1924 Act must be the same. It is not shown that there was any cost to the donor and the action of the respondent with respect to depletion allowance for that year must be affirmed.

What we have said above with respect to depletion does not apply in the case of Christine B. Edling. This petitioner sold her property in 1922. The gain is measurable in accordance with the provisions of section 202(a)(2), being the difference between the sales price and the cost of the property to the donor. ">*2529

The petitioner Edling presents an additional issue, alleging that she is entitled to the computation of the tax upon profits realized from the sale of her interest at the rate of 12 1/2 per cent under the provisions of section 206 of the Revenue Act of 1921. In denying this contention it need only be stated that the petition and the stipulation of facts show that the property was acquired and sold within ">*809 the year 1922, and, therefore, was not "held by the taxpayer * * * for more than two years" as is required for the computation of the tax under section 206.

Reviewed by the Board.

Decision will be entered under Rule 50.

LOVE dissents.

SMITH

SMITH, dissenting: I dissent from so much of the opinion of the Board as holds that the basis for computing the allowance for depletion is the value at the date of the gift rather than the cost to the donor. If the petitioners had sold the property acquired by gift the basis for the computation of the gain or loss would have been the cost to the donor. In the operation of petitioners' properties they were sold piecemeal. United States v. Ludey,274 U.S. 295">274 U.S. 295.">*2530 I can not see the logic of computing the gain on the sale of a part of the property on a different basis from that used in computing the profit or loss on the sale of the entire property.

GREEN concurs in this dissent.