DocketNumber: Docket No. 10594.
Citation Numbers: 9 B.T.A. 813, 1927 BTA LEXIS 2497
Judges: Lansdon, Sternhagen, Artjndell, Green
Filed Date: 12/23/1927
Status: Precedential
Modified Date: 1/12/2023
*2497 Certain payments made in accordance with the provisions of certain oil and gas leases
*813 In this proceeding the petitioner seeks a redetermination of his income-tax liability for the year 1921, for which the respondent in his deficiency letter dated November 7, 1925, has determined a deficiency in the sum of $884.11. The petition alleges that the respondent in the determination of the deficiency committed the following errors:
In holding that monies paid annually in renewal of Indian oil and gas leases are not deductible from an oil and gas Indian lessee's income but must be charged to capital account and deducted only upon sale or development of the leases or final loss of the right of renewal of the leases.
In holding that a bad debt from a promissory note given by a client for prior services is not deductible.
The second assignment of error with respect to the "bad debt" was abandoned at the hearing.
FINDINGS OF FACT.
The petitioner is a resident of the District of Columbia, *2498 with offices in the Maryland Building, Washington, D.C. He is engaged in the practice of law, and since about 1912 he also has been engaged in the business of leasing Indian oil lands in the State of Oklahoma.
Beginning with the year 1912, the petitioner as lessee secured several oil and gas leases from the Otoe and Missouria Tribes of Indians. The following provision was contained in all of the leases except one:
That if lessee shall drill one well on some one tract covered by his leases of Otoe and Missouri allotted lands under restrictions within one year from date of approval of this lease, he shall be excused from drilling upon other tracts for a period not longer than ten years,
During 1921, in order to keep certain leases on which he had satisfied the drilling requirements, the petitioner paid $913.45 in accordance with the above provision. The leases also provided that in case *814 of production the petitioner was to pay "a royalty of 12 1/2 per cent of the gross proceeds of the oil produced, payable at the time of sale or removal of oil from the premises where produced."
The lease excepted above, which was known as the Harvey R. Atkins lease, was substantially the same as all of the others, except that in this lease the annual payments were termed "advanced royalty" and "rental." The provisions of the Atkins lease relative to such annual payments were as follows:
3. Until a producing well is completed on said premises the lessee shall pay, or cause to be paid, to the officer in charge, for the use and benefit of the lessor,
4. The lessee shall exercise diligence in sinking wells for oil and natural gas on the land covered by this lease, and shall drill at least one well thereon within one year from the date of approval of this lease by the Secretary of the Interior, or shall pay to the officer in charge, for the use and benefit of the lessor, for each whole year the completion of such well is delayed, after the date of such approval by the Secretary of the Interior, for not to exceed ten years from the date of such approval, in addition to*2501 the other considerations named herein,
During 1921 the petitioner paid for himself the amount of $145 as "advanced royalty" in accordance with section 3 of the Atkins lease and a like amount as "rental" in accordance with section 4 thereof. In case oil was produced on the Atkins lease the petitioner was to pay "as royalty, the sum of 12 1/2 per cent of the gross proceeds of all crude oil extracted from the said land, such payment to be made at the time of sale or removal of the oil."
During 1921 the petitioner produced no oil on any of the leases and did not surrender or abandon any of the leases during that year.
The respondent disallowed all of the above payments, totaling $1,203.45, on the ground that they were capital expenditures.
OPINION.
GREEN: We are of the opinion that the total payments of $1,203,45 itemized in the findings of fact constitute rentals and as such are deductible under section 214(a)(1) of the Revenue Act of 1921, *815 which provides that in computing net income there shall be allowed as deductions:
* * * Rentals or other payments required to be made as a condition*2502 to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.
Some of the payments were termed in the leases as "advanced royalty" and by the express provisions of the leases they could not be credited against any production other than that of the current year. Under such circumstances, we believe the amounts paid as such are deductible in the current taxable year.
The petitioner gave some testimony as to payments in 1921 of $50 for a bond, $5 for making a record, and $10 for certain desired information, but as the petition did not assign any error with respect to such items we have not considered them in this opinion.
Considered by STERNHAGEN, LANSDON, and ARUNDELL.