Nichols v. Commissioner , 17 B.T.A. 580 ( 1929 )

ROY NICHOLS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Nichols v. Commissioner

Docket No. 24016.

United States Board of Tax Appeals

17 B.T.A. 580; 1929 BTA LEXIS 2289;

September 26, 1929, Promulgated

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">*2289 1. Losses, claimed by reason of alleged worthlessness of royalty rights, disallowed for lack of evidence of such worthlessness, as well as lack of evidence of a closed transaction.

2. Deductions taken by petitioner, in his return for 1922, on account of bad debts, allowed.

J. M. McMillin, Esq., and W. W. Rankin, C.P.A.,, for the petitioner.

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

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LOVE

">*580 This proceeding was heretofore considered and opinion reported in .

Subsequent to the promulgation of that opinion, counsel for the respondent filed a motion in which he pointed out that the Board mistakenly held that it did not have jurisdiction for the year 1922, on the ground that no deficiency notice for that year had been mailed to the taxpayer, and pointing out that such deficiency notice had been mailed, and moved that the Board proceed to consider and decide the issues relative to the deficiency for 1922 upon the ">*581 record theretofore made. Respondent's motion was granted, and the case is now considered for a reviseed opinion and decision.

">*2290 This proceeding is for the redetermination of deficiencies in income taxes for the years 1921 and 1922, in the amount of $858.10 and $413.99, respectively.

Petitioner assigns errors:

(1) In the disallowance by the Commissioner of a deduction of $4,664 in 1921, and $858 in 1922, on account of worthless oil royalties;

(2) That the Commissioner increased the gross income of petitioner in 1921 to the extent of $2,175 alleged profits on the sale of oil royalties, which amount was not income to petitioner;

(3) In the refusal by the Commissioner to allow as a deduction from gross income, in 1922, bad debts in the amount of $3,300.

FINDINGS OF FACT.

The petitioner is now a resident of Texas, but formerly a resident of El Dorado, Ark.

In the early months of 1921 petitioner and C. R. Hoffer were members of a partnership each owning a one-half interest therein, which partnership was engaged in the buying and selling of oil leases, and oil royalty interests in Arkansas. This partnership is hereinafter referred to as the partnership.

In 1921 the partnership was dissolved by mutual consent and a corporation knowns as Nichols & Hoffer, Inc., hereinafter referred to as the corporation, ">*2291 was organized.

Certain royalty rights, the subjects of consideration herein, were transferred to the corporation for stock as hereinafter set out. After an existence of some five or six months, the corporation was dissolved and its assets distributed to the stockholders. The assets were distributed in 1921 and its charter surrendered in 1922.

At the end of 1921 petitioner was the owner of oil royalty interests in the J. C. Lewis farm located near the central part of Union County, Arkansas. A 1/64 interest had cost the petitioner $350. Another 1/64 interest was acquired by distribution from the partnership. The cost to the partnership had been $614. During 1921 an offsetting well was drilled on adjoining property within a distance of 500 feet. In addition there were several other holes drilled in the immediate vicinity. No well was drilled on the particular land in which the petitioner held the interests. The test wells proved to be dry and thereafter there was no demand or market for the interests owned by the petitioner. They were unsalable.

In 1921 petitioner and Hoffer acquired a 1/64 oil-royalty interest in 40 acres of the W. C. Sorrel farm, located about three">*2292 miles north of the Lewis farm in the central part of Union County, Arkansas, paying therefor a total of $2,500, of which the petitioner paid one-half, ">*582 or $1,250. The lease was turned over to the partnership by the petitioner and Hoffer. Subsequently in 1921 the partnership turned over the interest to the corporation for stock. In the latter part of 1921 the interest was turned over to the petioner by the corporation as a distribution in liquidation. Petitioner took over the interest at an agreed valuation of $2,500, which was the original cost to the individuals who purchased it. In the first part of the summer of 1921 the drilling of a well on the Sorrel farm was started. It had continued to a depth of 2,100 feet, where some gas was encountered at the time in August, 1921, when the interest was acquired by the petitioner. Later it was drilled to a depth of 3,000 feet and proved dry. Other dry wells were drilled, beginning in the late summer of 1921, which were completed prior to the end of that year. Thereupon there was no market for the sale of the interest.

Early in 1921 the partnership acquired at a cost of $1,200 a 1/32 oil-royalty interest in the Polk">*2293 and Ezzell farm, located about seven or eight miles north and east of the Lewis farm. This interest was turned over to the corporation by the partnership for stock, and upon dissolution of the corporation was turned over to petitioner at an agreed valuation equaling the original cost to the partnership. An offset well was drilled within 300 feet of the property line, on this tract, and proved to be dry. The territory was "wild-cat" territory and there was no market for the interest thereafter.

In 1921 petitioner sold a 1/64 oil-royalty interest in lands in section 6-12-35, to which he held title as trustee for his brother, who was the sole beneficial owner. The entire proceeds, amounting to $4,000, were forwarded by the petitioner to his brother. The petitioner received no commission or profit of any kind in the transaction.

Petitioner, in his return for 1922, took deductions as losses sustained on the following oil-royalty interests held by him:

1/32 interest in 160 acres, which cost $75.

1/48 interest in 40 acres, which cost $583.

1/128 interest in 40 acres, which cost $250.

The Commissioner disallowed those deductions. At the hearing, petitioner, as a witness, ">*2294 did not remember those transactions, and at that time knew nothing in regard to them except that by reference to his return he saw that he had treated them as losses and taken deductions therefor.

In 1921 petitioner loaned to Robert Berney $200 and later, in December of same year, took a note for that amount payable in six months. A few days after taking said note, he let Berney have $400 more. Berney had no property of any kind. He had worked for petitioner and petitioner was trying to help him get into business. He tried a number of times, by letter and by oral request, to collect the debt, but nothing was ever paid on it. Berney never got into ">*583 business that enabled him to pay the debt. No suit was ever filed on the claim. When the money was loaned, petitioner expected Berney to repay it if he ever made the money, but depended only on Berney's personal responsibility.

In the early part of 1922, there was organized or was then existing a company known as the El Dorado Chief Oil Co., in which petitioner was interested. That company desired to purchase a certain unproven oil lease from M. H. Simmons. Simmons would not accept the note of the company for the">*2295 purchase price, and it was agreed that notes should be executed by the company and by it assigned to the several stockholders without recourse and the stockholders would pay Simmons cash for the notes. This was done and petitioner took one note for which he paid in cash $2,250. The said company owned no assets except an oil lease to the 40 acres of land, which lease was forfeited in 1922 for nonpayment of rentals.

In 1921 petitioner loaned, or advanced, to C. C. Beasley (it may have been in the way of board and lodging) $400. Thereafter, he took a note from Beasley for $400, payable March 22, 1922.

Beasley worked for petitioner and his associates in the oil business and this loan was made at a time when Beasley had not funds to meet current expenses. Beasley had no property whatever. The note was never paid in whole or in part. Petitioner several times requested payment, but Beasley never had the money and a suit would have been fruitless.

OPINION.

LOVE: The issues involved in this case are:

1. Deductibility of alleged losses in worthless interests in oil and gas royalty rights;

2. Deductibility of alleged worthless debts ascertained to be worthless and charged">*2296 off in the taxable years.

With reference to the interests in oil and gas royalty rights, it may be pointed out that some of those claims, especially among the claims for 1922, are not clearly identified by the evidence. However, with reference to all of them, they were interests in royalty rights and not oil and gas leases.

Interests in royalty rights are interests running with the land, and unless specifically limited as to time or otherwise, are not forfeitable. They may become unsalable, dormant for a time as it were, but still remain an asset, an asset of questionable value it may be, but nevertheless an asset, that may become valuable any day, and hence may not be deemed such an ascertained loss as to be deductible in determining net profits for taxation purposes.

The action of the Commissioner with reference to his disallowance of those claims is approved.

">*584 With reference to the bad debt claims, it may be pointed out that in two of the cases the money loaned to the debtor was loaned in a generous effort on the part of the petitioner to help a person connected with him in business. The financial condition of such debtor was known by petitioner to be precarious">*2297 at the time the loan was made, and so remained at all times thereafter. Moreover, no suit was filed to collect those claims. However, the money was loaned under a promise to repay. It was not a gift. A suit would have been futile, with an added outlay for expense. One of the debts, that of the El Dorado Chief Oil Co., while it involved a circuitous route to purchase an interest - stock - in a corporation, technically and in fact, it was the purchase of a note which is clearly shown to have become worthless in 1922.

We believe that the evidence establishes the worthlessness of all those debts in the year in which deductions were taken, and we therefore hold that for the year 1922, petitioner is entitled to deduct from gross income the following amounts:

Note and account of Robert Berney	$600
Note of El Dorado Chief Oil Co	2,200
Note of C. C. Beasley	400

Also, there was included by the Commissioner in his computation of petitioner's gross income, $2,175 as profits realized on sales. The evidence clearly establishes that of that amount $2,000 was not petitioner's income, but income of his brother. The $175 amount was not explained by the evidence. In">*2298 the final computation the $2,000 will be adjusted.

Judgment will be entered under Rule 50.