DocketNumber： Docket No. 65886.
Judges： Aeundell
Filed Date： 8/28/1934
Status： Precedential
Modified Date： 11/2/2024
*1161 Payments made by petitioner under an assignment, whereby it acquired an interest in claims located on what proved to be oil lands, are capital expenditures and not deductible as royalties.
*107 The respondent has determined deficiencies in petitioner's income taxes for the years 1929 and 1930 in the respective amounts of $1,340.99 and $205.73. So much of the deficiencies as are in controversy arise from the respondent's disallowance of deductions of $4,500 and $1,500 paid out in 1929 and 1930, respectively, and claimed as royalty payments.
FINDINGS OF FACT.
In 1887 Iver Johnson located oil claims on public lands in the district that subsequently became known as the Salt Creek Oil Field in the State of Wyoming. In 1895 he sold a half interest in his claims to two Richardson brothers. Assessment work was performed on these claims for a number of years. As the field was *108 developed many conflicting claims arose within it. This field was included in the public lands withdrawn*1162 from entry by Executive order issued in 1910. Under the Mineral Lands Leasing Act of February 25, 1920 (41 Stat. 437), the lands were restored to entry, and thereupon further conflicting claims arose. About 1919, when the bill which became the Mineral Lands Leasing Act was under consideration by Congress, Iver Johnson retained two attorneys, Rigdon and Howell, to represent him in clearing up the conflicting claims. The attorneys were employed on a contingent basis, their fee to be a 15 percent undivided interest in property to which Johnson's title was perfected. In 1919 Johnson sold a 4 1/4 percent interest in his claims to each of two other individuals, Brooks and Matson. At the same time he conveyed the remainder of his interest in the claims to two corporations, the petitioner in this proceeding and the Western Exploration Co. Thus, at the close of 1919 an 85 percent interest in the Johnson claims was owned by the group consisting of the two Richardsons, Brooks, Matson, the Western Exploration Co., and the petitioner. The other 15 percent interest was that of Rigdon and Howell.
In 1920 a difference of opinion arose between the group to whom Johnson had assigned an 85*1163 percent interest in his claims and Rigdon and Howell as to the methods of settling various claims conflicting with those of Johnson. A settlement was necessary before leases could be obtained from the Federal Government. The group holding the 85 percent interest favored settlement out of court, while Rigdon and Howell favored litigation. In order to be able to proceed to a settlement of the claims, the Western Exploration Co. and the petitioner secured an assignment from Rigdon and Howell of their 15 percent interest under date of December 22, 1920. In the instrument of assignment Rigdon and Howell are designated as the assignors, and the Western Exploration Co. and petitioner as the assignees. It is provided therein that "said assignors do hereby sell, assign, transfer and quit-claim to the assignees, all their right, title and interest in and to the following described lands * * *," followed by a list of section numbers. The consideration for the assignment is set forth in three paragraphs, which as far as material here are as follows:
First: The assignees are to pay the assignors the sum of Five thousand dollars ($5,000.00) and to deliver to them five thousand (5,000) shares*1164 of stock of the assignee, THE CONSOLIDATED ROYALTY OIL COMPANY, upon the execution of this agreement, the receipt whereof is hereby acknowledged and confessed, and the sum of Thirty-seven thousand seven hundred dollars ($37,700.00) on the second day of January, A.D. 1921.
Second: The sum of Forty thousand dollars ($40,000.00) to be paid upon the issuance of leases applied for in the said General Land Office at Washington, D.C., * * *
*109 Third: The sum of Sixty thousand dollars ($60,000.00) to be paid out the royalty oil received by the assignees thereof from the certain fifteen per cent. interest herein assigned from whatever leases may be granted upon the lands herein involved. The said Sixty thousand dollars ($6,000.00) to be paid in ten (10) annual instalments of Six thousand dollars ($6,000.00) each, payable January first in each year and every year beginning with January 1st, 1922, providing, the sum of Six thousand dollars ($6,000.00) is realized each year from the royalty oil herein assigned, and should a lesser sum be realized, the balance of the Six thousand dollars ($6,000.00) due shall be collected in succeeding years when the royalty so produced shall amount*1165 to said sum, and the Six thousand dollars ($6,000.00) to be paid for that year; the full sum of Sixty thousand dollars ($60,000.00) to be paid, if ever produced out of said interest.
Pursuant to paragraph third quoted above, petitioner paid to Rigdon and Howell the amount of $4,500 in 1929 and $1,500 in 1930. It claimed deductions for those amounts as royalty payments in its income tax returns, which deductions were disallowed by the respondent.
For the years 1922 to 1925, inclusive, petitioner made payments to Rigdon and Howell under paragraph third of the above agreement and claimed deductions therefor in its returns. Upon audit of the returns the respondent refused to allow the deductions and treated the amounts paid as capital expenditures representing cost of oil properties. He determined that the entire cost to petitioner of the Rigdon and Howell interest was $150,000, including stock of the petitioner at a value of $7,500. Against the cost determined by the respondent he allowed deductions for depletion. Deficiencies proposed for those years were settled by the parties, taking as one of the factors the cost so determined by the respondent, and stipulations were filed*1166 with the Board, whereupon decisions were entered (Docket Nos. 28481 and 36730).
OPINION.
ARUNDELL: Petitioner claims, first, that the sums of $4,500 in 1929 and $1,500 in 1930 should not have been included in gross income because they were not its property, but were merely collected for and paid over to Rigdon and Howell. In the alternative, petitioner contends that the payments were royalties and deductible as expenses.
Rigdon and Howell did not assign to petitioner a royalty interest, and so it cannot be said that petitioner collected any royalties to be paid over to them. Under paragraph third of the assignment they were to receive $6,000 per year until $60,000 was paid. While it was provided that the payment of $6,000 annually was subject to the condition that that amount was realized "from the royalty oil herein assigned," the fact is that Rigdon and Howell had no royalty interest to assign. All they had was an undivided interest in the Johnson claims which were then the subject of controversy *110 among various claimants. No lease or other muniment of title to the oil or the land had then been obtained. In this respect the case differs from *1167 ; affd., , cited by petitioner. In that case there was a dispute as to the ownership of a certain royalty interest in the production from a proven field. A compromise was reached whereby the parties claiming adversely to Looney withdrew their claims in consideration of their receiving the royalties on the interest in dispute until such royalties amounted to $200,000. The court held that Looney "parted with all right or interest in or to the royalty" until it amounted to the sum stated. Consequently such royalties were not income to Looney. Here, as above pointed out, there was no royalty interest, as such, in existence when the assignment of December 22, 1920, was executed. The effect of that assignment was to remove Rigdon and Howell as owners of an interest in the claims and any leases that might be obtained to the lands, and pro tanto enlarge the interests of the assignees. We are accordingly of the opinion that the assignment from Rigdon and Howell affords no ground for excluding from petitioner's gross income any sums realized from the operation of leases subsequently acquired.
*1168 What we have said above indicates our view of the alternative claim for deductions of the amounts paid to Rigdon and Howell. There was no royalty interest assigned by them and no royalties as such were payable to them. The substance of the contract was a conveyance to the assignees of an undivided interest in unpatented claims to land, and payments made thereunder were capital expenditures. The question here is similar to that decided in , affirming . In that case the taxpayer acquired oil and gas leases, agreeing to pay therefor certain sums in cash and further sums out of the oil and gas produced from the leased premises. The opinion of the court reads in part:
We think the statute makes plain distinction between rentals or other payments for the continued use or possession of property to which the taxpayer has not taken title or in which it has no equity on the one hand, and rentals or other payments for the continued use or possession of property to which the taxpayer has taken title or in which it has an equity on the other hand. The former rentals are deductible; the latter are not.
*1169 * * *
In the case at bar, it is clear that title to the property was taken by the petitioner.
In the present case the instrument of assignment operated to vest the assignees with title to whatever interest the assignors had, hence the payments made were for the acquisition of a capital asset and were not royalties or rents paid for the right to explore and develop.
*111 In view of our holdings above it is unnecessary to consider the contention of counsel for respondent that petitioner is estopped to claim deductions for 1929 and 1930 because of its acceptance of a settlement for prior years, 1922 to 1925, based on a capitalization of payments made to Rigdon and Howell.