Court Opinion

ID: 4497385
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:23.983019+00
Date Added: 2024-06-11T08:00:18.282659
License: Public Domain

*371OPINION.
Smith:
The Kevenue Act of 1918 permits a taxpayer to deduct from gross income in an individual tax return “losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business.” Section 214(a)(4). The taxpayer claims the right to deduct from gross income certain investments in oil leases in wildcat territory, upon the ground that the leases became worthless during the year 1920, such worthlessness being proven by the fact of wells being drilled during the year coming in “ dry.”
The Commissioner has disallowed the deduction upon the ground that the evidence shows that the leases ran beyond the year 1920; that for some years the leases ran from three to five years and that *372there is no evidence that the leases upon which the taxpayer claims the deduction of losses for the year 1920 had terminated or been canceled during the year 1920. The Commissioner furthermore contends that the wells which were drilled were at least a half-mile away from the Tillman County lease and that in some instances a dry well a half-mile from a leased tract does not prove that a well driven upon the tract might not be productive; that the fact that the wells came in dry was no indication that there was no oil in the tract covered by the lease; furthermore, that the leases had not been canceled by December 31, 1920, and that the Tillman County lease was given away by the taxpayer -in 1920 and that no loss can be claimed in respect of a gift.
Taking up first the Tillman County lease, it is to be noted that Cotton had information at the time Huey purchased the lease that the Sheegog well, which was being driven at the time, had reached water sand and not oil-bearing sand. As soon as he learned of the investment made by Huey, in the lease, he advised him that the lease was worthless, and within 48 hours after the purchase both parties came to the conclusion that it was worthless. On the ground that it was worthless, Huey delivered it to an individual who wished to drive a well in another locality not far distant from the leased tract. The Commissioner takes the position that no loss can be predicated upon this lease for the reason that it was given away. We are of the opinion, however, that the taxpayer did not intend to and did not give away a thing of value. In our opinion the lease was proven to be worthless at the time that the taxpayer delivered it to the driller of the wel] to the east. We can not doubt that the lease had been proven to be worthless at that time. The investment by the taxpayer in the lease was undoubtedly a loss sustained during the year 1920.
With respect to the taxpayer’s investment in the two leases in Clay County, Tex., it is to be noted that they continued as valid and subsisting leases at December 31, 1920. These leases were upon a tract of land containing approximately 900 acres. One well had been driven-upon the property within from 1 to 5 miles of the property. Scott, however, appears to have had some hope during the year 1920 that oil and gas would be found upon the leased premises and that the leases might become valuable. At any rate, he saAV fit to pay minimum royalties upon the land and to charge the taxpayer with his pro rata share of those royalties. In view of this fact we are not satisfied that the taxpayer sustained a loss deductible from gross income in respect of the leases during the year 1920.
Order of redetermination will be entered on 15 days’ notice, under Rule. 50.