McCallum v. Commissioner , 14 B.T.A. 805 ( 1928 )

J. H. MCCALLUM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McCallum v. Commissioner

Docket No. 14311.

United States Board of Tax Appeals

14 B.T.A. 805; 1928 BTA LEXIS 2901;

December 19, 1928, Promulgated

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Those losses sustained and expenses incurred in the conduct of a general speculation and investment business which are satisfactorily proven are deductible in the computation of net income for 1920.

Robert C. Foulston, Esq., for the petitioner.

J. Arthur Adams, Esq., for the respondent.

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MORRIS

This proceeding is for the redetermination of a deficiency in income tax for the year 1920 amounting to $2,646.62 which grows out of the respondent's disallowance of deductions of $4,000 and $8,018.40 claimed by McCallum in his return for that year.

FINDINGS OF FACT.

J. H. McCallum, against whom the deficiency here in controversy is asserted was, prior to his death on May 14, 1924, a resident of Wichita, Kans., where he was engaged in a general speculation and investment business, purchasing and selling oil leases, and promoting and drilling oil wells, with one Cressler, under the firm name of Cressler & McCallum Co.

The firm of Cressler & McCallum Co. acquired a lease for which it paid $10,000, and after having drilled five dry holes thereunder, sold it in September, 1920, for $2,000. McCallum's interest in this, as in other transactions hereinafter discussed, being one-half, a deduction of $4,000 was claimed by him in the computation of his net income for 1920, which amount was disallowed by the respondent because of the insufficiency of information furnished to show when and how the amount of the loss was determined.

A deduction of $8,013.40 was claimed by McCallum in the computation of his net income for the year in controversy which was disallowed by the respondent for the reason hereinbefore stated. McCallum's books of account having been lost, they were not available as evidence in this proceeding but a statement prepared from the books of account by the bookkeeper contemporaneously with the preparation of his 1920 return shows the $8,013.40 to be composed of the following:

Otto Creek Oil Co	$26.20
Office Expense	339.67
Martle Lease	1,868.75
Taylor Lease	193.33
Randle Lease	500.00
Wenger Lease	20.00
Mineral Lease - Senaca, Mo	166.78
Huffman & Weber Lease	$160.00
Princess Oil Co	357.00
World Oil Co	1,192.54
McHarg Brokerage Co	50.00
Butler Co. 400 acre farm sale	3,139.13
	8,013.40

The $26.20 item shown in the foregoing tabulation represents an amount paid by McCallum in connection with a lease. The Otto Creek Oil Co. began drilling a well in 1920 under that lease and because of disputes arising among the other parties in interest, McCallum and Cressler withdrew from the project. The item of $339.67 represents the amount of stenographic salaries and office expenses incurred and paid during the taxable year. The item of $1,868.75 listed in the foregoing tabulation as the "Martle Lease" was a lease that Cressler and McCallum purchased in Butler County. They purchased a derrick and a contractor commenced drilling under that lease in the early part of 1920 and drilled to a depth of 20 or 25 feet, when they decided that the cost was too great to carry on the project and one McClintick took over the lease in 1920, for which they received no compensation. The Taylor, Randle, Wenger, and Huffman & Weber leases are leases acquired by McCullum and Cressler, and the amounts shown opposite those names in the tabulation hereinabove are the rentals paid thereunder according to the books of account. There having been no developments under said leases, they were allowed to lapse. The "Mineral Lease - Senaca, Mo." represents a coal lease acquired which was surrendered in 1920. The Princess Oil Co. transaction was a small company that was started for the operation of a lease which was sold, and the amount shown opposite that company's name in the tabulation hereinabove is the aggregate amount of payments made thereunder according to McCallum's books of account. The $1,192.54 amount shown opposite the World Oil Co.'s name is McCallum's pro rata share of the cost of drilling an oil well under a lease in Oklahoma, which was acquired without cost. Finding the well dry, the lease was discarded in 1920, at which time the foregoing amount was charged off on the books of account as a loss. The McHarg Brokerage Co. transaction represents capital stock of that company owned by McCallum and Cressler which went into the hands of receivers and was dissolved in 1920.

The transaction entitled "Butler Co. 400 acre farm sale" was not in fact a farm sale as the title would indicate. That was a lease acquired upon which drilling was commenced in the fall of 1919 and a depth of 2,000 feet was attained. The drilling contractor, who was financially embarrassed, could not proceed with the drilling. In order to complete the well McCallum paid $3,139.13 as his share of the additional cost. The well came in dry in 1920.

OPINION.

MORRIS: McCallum having died in 1924 and the books and records containing the transactions here in dispute having been lost, hence not available as evidence at the hearing of this proceeding, the petitioner's counsel was decidedly handicapped, and was necessarily compelled to resort to secondary evidence in the presentation of his case. McCallum's bookkeeper, who recorded these transactions and who was in intimate touch with the affairs of Cressler & McCallum Co. during the year in controversy, gave testimony based upon his personal knowledge of these transactions, and from his testimony we are satisfied that McCallum did, in fact, sustain a loss of $4,000 in September, 1920, because of the sale in that month of his interest in a royalty which proved unprofitable.

With respect to the other item of expense here in dispute, it appears from the testimony that the amount is $8,013.40 instead of $8,018.40, as set forth in the allegation of error herein. The record shows that McCallum and his associate had expended $26.20 in the Otto Creek Oil Co. project and that because of disputes arising among the interested parties they withdrew therefrom in 1920, sustaining a loss of the amount so expended; that the item of $339.67 was the amount incurred and paid during the taxable year for stenographic salaries and office expenses; that the sum of $1,868.75 represented the purchase of a lease in Butler County upon which work was suspended and the lease assigned to one McClintick in 1920 without compensation; and that the amounts denominated Taylor, Randle, Wenger, and Huffman & Weber leases were rentals paid under those leases which were, because of the failure of developments, allowed to lapse. The record further shows that the sum of $1,192.54 was expended in the development of an oil well under a lease in Oklahoma which was abandoned in 1920 for the reason that the well was found to be dry; and that a $50 loss was sustained in 1920 because of the failure of the McHarg Brokerage Co., which went into the hands of receivers and was dissolved in 1920.

While we have no direct evidence of the actual expenditure of some of the various amounts included in the deduction of $8,013.40, we do have the undisputed testimony of the bookkeeper who recorded these transactions and who was in intimate touch with the business of McCallum, and who prepared his return for 1920, that they were recorded in the books of account and that in his opinion these losses were actually sustained. In the absence of a showing to the contrary we must infer that the books of account correctly set forth the amounts of income and expenses and that the explanations made in good faith are correct. There has been no showing on the part of the respondent that these amounts are incorrectly recorded in the books of account, and since they purport to record the actual expenditures made, we assume that they were in fact made as represented. We are satisfied from the evidence that the petitioner is entitled to deduct the amounts which we have discussed in the preceding paragraph in the computation of McCallum's net income for 1920.

The evidence with respect to the "Mineral Lease - Seneca, Mo.," the Princess Oil Co., and the Butler County project, in our opinion, is insufficient to establish the validity of the deductions claimed. With respect to the mineral lease, all that the record shows is that the $166.78 represents a coal lease which was acquired and surrendered in 1920, and, with respect to the Princess Oil Co. transactions, we are told that the sum of $357 represents total payments made according to the books of account in the organization of a small company and operation of a lease. All that we know about the Butler County project is that the amount in question was advanced to the drilling contractor for the completion of an oil well in that county and that the well came in day. We do not know the nature of the contract under which the work proceeded. Without more we are unable to grasp the true significance of these transactions and we must, therefore, approve the findings of the respondent insofar as they are concerned.

Judgment will be entered under Rule 50.