Montana oil and mining journal. [volume] (Great Falls, Mont.) 1931-1953, 1942-01-10
Paying Income Taxes On a Million
Dollars Yielded by State Royalties

recognized producing horizons in the
area, he will be permitted loss de-
duction measured by the cost of the
property, although he may still retain
title The allowance of such loss will
probably be conditioned upon an agree
ment between the taxpayer and the bu-
reau of internal revenue that should the
royalty interest which is allowed as a
loss later become productive of income,
that the taxpayer shall report as taxable
income, without any deduction, the en-
tire amounts received therefrom, which
would otherwise be allowable, shall
have equalled the amount of the loss
allowed as a deduction. The taxpayer
must clearly show that his royalty in
terest has become worthless DURING
THE TAXABLE YEAR and the bur
den of such proof will be upon him.
In the past, some royalty owners
have made the mistake of carrying their
royalties along-perhaps in the honest
expectation that another we'll would be
drilled Then they tried to charge them
off, perhaps in lump sum that saved
them from some taxes. This practice
was ended by the ruling that the royalty
must be charged off during the taxable
year
Montana state records are now so
kept that it is possible to secure the
abandonment date on any given we'll
We will be glad to furnish this data
for any of our members. Wherever a
we'll is standing at the end of the year,
not officially abandoned but certain of
abandonment, it is we'll to attempt to
charge it off We have known of in
stances where wells were not properly
plugged and therefore were not off
cially called abandoned" until a year
or two later.
Charging off disproven royalties is
unlike charging off bad debts in which
the taxpayer is allowed to determine in
his own mind the year the debt is "as-
certained" to be worthless. None should
ever delay; the date of official aban-
donment is the important one, even if
the taxpayer knows in his own mind
that one more we'll will be drilled and
that it will doubtless develop produc-
ton
The adverse ruling in 1910 was i'll
a case appealed by Paramount Royal
ties, Inc For those who wish to look
it up, the case number is Docket No.
1850 of the Board of Tax Appeals
In that case the taxpayer had claimed
deductions from its gross income for
losses arising from the sales during the
taxable year of certain royalty interests
r Il IL.
deductions we're disallowed by the COM
missioner because of his determination
that the losses were not sustained dur
ing the taxable year, it being his con-
tention that the royalty interests be-
came worthless in prior years because
of the drilling of certain test wells The
taxpayer contended that the wells in
question had not sufficiently tested the
property in order to condemn it. After
the claims were disallowed in the Para
mount case the bureau decided to dis
allow all losses claimed on condemned
ROYALTIES, to which title was retained by
the taxpayer, unless the test well which
was relied upon to show the worthless
ness had penetrated all geological hori
IONS to the granite or to the deepest
practical depth to which a well could
be drilled. That made it virtually i'm
possible for a taxpayer to charge off
a loss and still retain title to his prop
erty.