Court Opinion

ID: 4607023
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:39:45.800108+00
Date Added: 2024-06-11T07:53:28.432956
License: Public Domain

MAX BEREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  HARRY BEREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Beren v. CommissionerDocket Nos. 20145, 20146.United States Board of Tax Appeals21 B.T.A. 135; 1930 BTA LEXIS 1912; October 30, 1930, Promulgated *1912  The respondent's estimate of the amount of the deposit or reserve applicable to each petitioner's interest in certain oil properties at the time of acquisition approved.  H. W. Russell, Esq., for the petitioners.  Brooks Fullerton Esq., for the respondent.  TRAMMELL *135  These proceedings which were consolidated for hearing and opinion are for the redetermination of deficiencies in income tax as follows: YearDocket DeficiencyNo.192020145$6,630.321920201466.924.12*136  In determining the deficiencies the respondent has disallowed $14,875.96 of a deduction of $24,417.54 taken by each petitioner for depletion of his interest in certain oil properties.  The only matter in controversy is the amount of each petitioner's one-eighth interest in the estimated oil deposit or reserve of the oil properties.  From the pleadings, a stipulation of facts, and documentary evidence, we make the following findings of fact.  FINDINGS OF FACT.  The petitioners are residents of Parkersburg, W. Va.  In June, 1920, they, together with a number of associates, acquired from the Cosden Oil Co., of Tulsa, Okla., five developed*1913  oil properties located in Butler County, Kans., for a cash consideration including the commission and attorney fees of $660,000.  Each petitioner's interest in the properties was one-eighth.  The legal description of the properties so acquired is as follows: F. L. Anderson lease - 80 acres, S. 1//4 sec. 9, T. 27 S., R. 4 E.  J. H. Suits lease - 80 acres, S. 1//4 sec. 10, T. 27 S., R. 4 E.  H. C. Bates lease - 80 acres, S. 1//4 sec. 10, T. 27 S., R. 4 E.  J. L. Beck lease (owned in fee) - 160 acres, SE. 1/4 sec. 3, T. 28 S., R. 4 E.  J. B. Smock lease - 80 acres, S. 1//4 sec. 2, T. 27, R. 5 E.  All of the leases were obtained on the usual terms, were effective as long as oil or gas was produced, and were originally dated as follows: DateF. L. Anderson leaseApr. 22, 1916.J. H. Suits leaseDec. 21, 1916.H. C. Bates leaseOct. 15, 1915.J. L. Beck leaseJune 21, 1916.J. B. Smock leaseJune 28, 1916.At the date of the acquisition of the properties by the petitioners and their associates no wells were being drilled nor had any new locations been made.  The number*1914  of wells on the respective leases that were producing at the time and the number that had been abandoned were as follows: BeckSuitsAndersonSmockBatesNumber of wells producing96739Number of wells abandoned1232None*137  Three additional wells drilled during 1920 and 1921.  Data as to the wells upon the several leases are as follows: Well BeganCompletedAbandonedDepth Penetr-No.totionH. C. Bates lease1Oct. 12, 1916Nov. 11, 19161,996272Aug. 3, 1916Sept. 30, 19162,440794Nov. 20, 1916Feb. 24, 19172,460995Apr. 11, 1917May 27, 19172,450626Oct. 22, 1917Jan. 18, 19182,45637May 19, 1917July 3, 19171,973528June 1, 1917July 25, 19172,477209Apr. 9, 1918May 31, 19182,4501210June 30, 1918Aug. 31, 19182,47042J. H. Suits lease1(1)1,3702June 6, 1916Sept. 16, 19161,992133Aug. 14, 1916Sept. 21, 19162,57224Jan. 29, 1917Apr. 16, 1917Sept. 10, 2,550619185May 9, 1917June 17, 19172,526146May 24, 1917Aug. 1, 19172,5407doAug. 10, 19172,475648June 12, 1917Aug. 16, 19172,48198J. B. Smock lease1Mar. 22, 1917June 13, 19172,7042May 22, 1917Aug. 6, 19172,6883June 20, 1917Aug. 30, 191719222,7194Jan. 7, 1918June 17, 1918(3)2,7025Mar. 22, 1918do2,68461922F. L. Anderson lease1June 15, 1916Mar. 12, 19172,033242July 20, 1916Sept. 6, 19162,51632 Feb. 1, 19173Nov. 11, 1916Dec. 26, 19162,39824Jan. 10, 1917Feb, 27, 19172,480555Feb. 11, 1917May 5, 19172,5326Mar. 8, 1917do2,5537doApr. 27, 19172,6098May 14, 1917July 17, 19172,45339June 13, 1917Aug. 22, 19172,473510Oct. 23, 1917Nov. 28, 19172,00020J. L. Beck lease1Oct. 2, 1916Dec. 19, 19162,60982Oct. 7, 1916Jan. 17, 19172,60393Oct. 9, 1916Mar. 2, 19172,613134Jan. 5, 1917Feb. 16, 19172,581135Jan. 20, 1917Jan. 26, 19172,588106Nov. 20, 1916Apr. 19, 19172,561307Feb. 2, 1917Apr. 10, 19172,600138Feb. 5, 1917Apr. 16, 19172,610139June 2, 1917Sept. 15, 19172,58812 1/210Apr. 9, 1917May 24, 19172,6005*1915 No record was made of the date the lease were abandoned on the H. C. Bates lease.  However, of the nine producing wells on this lease when it was acquired by the petitioners and their associates in 1920, one was abandoned in 1920 and another in 1922, leaving seven producing wells on the property when it was sold at some time in 1923.  A record was not kept of the exact date on which wells were abandoned on the property included in the J. H. Suits lease.  However, two wells were abandoned in 1920 after the petitioners and their associates acquired the lease.  There were four producing wells on the property at the date of sale in 1923.  During 1920 and 1921 three wells were drilled on the property included in the J. B. Smock lease.  There is no record available as to the date in 1922 that well No. 3 on this property was abandoned.  *138  However, well No. 6 was completed in that year.  Since the exact date of the completion of well No. 6 is not available, the parties consider that it offsets the well abandoned.  No record was made of the date when wells were abandoned on the F. L. Anderson lease.  However, no wells were*1916  abandoned on this lease, after its acquisition by the petitioners and their associates until 1922, when one well was abandoned.  There were six producing wells on this property when it was sold in 1923.  No record was made of the date when wells were abandoned on the property included in the J. L. Beck lease.  However, one well was abandoned in 1920, and three in 1922.  There were six producing wells on the property when it was sold in 1923.  The gross production for 1920 on the properties after acquisition by the petitioners and their associates, the average number of wells producing, the average production per well, the amount received for the production and the average price received per barrel as to each lease were as follows: F. L. Anderson J. H. Suits H. C. Bates leaseleaseleaseProduction in barrels (7 months)12,207.164,403.2018,225.54Average number of wells producing4.002.504.00Average production per well3,051.791,761.284,556.38Amount received for production$44,448.20$16,171.68$66,375.10Average price received per barrel$3.65$3.65$3.65J. L. BeckJ. B. SmockleaseleaseProduction in barrels (7 months)11,719.3612,323.20Average number of wells producing5.501.75Average production per well2,130.797,042.00Amount received for production$41,134.80$49,768.70Average price received per barrel$3.50$4.03*1917  Each petitioner as joint owner received one-eighth of seven-eighths of the amount produced on all the leases except the F. L. Anderson lease, of which each received one-eighth of five-sixths, and the J. L. Beck lease, of which each received one-eighth of the entire amount.  The net production prior to June 15, 1920, from each of the leases, together with the total from all five of them, is as follows, except that in case of the Smock lease for 1917, which was the first year of its operation, the production records are not available and the parties have estimated the amount produced in that year: YearAndersonBatesBeckSuitsSmockTotalBarrelsBarrelsBarrelsBarrelsBarrelsBarrels19162,910.435,705.473,045.6915,820.6927,482.281917218,149.56145,065.38142,730.7438,837.1715,000.00559,782.85191845,768.4459,561.2055,770.9817,169.3432,313.19210,583.15191927,603.0939,857.0433,671.1010,797.7735,858.12147,787.121920 to June 1510,412.3412,658.489,708.822,842.2411,898.9247,520.80Total304,843.86262,847.57244,927.3385,467.2195,070.23993,156.20*1918 *139  The production of the properties by leases and the total for the last half of June and the first half of July, 1920, were as follows: SuitsAndersonBatesBeckSmockTotal1920BarrelsBarrelsBarrelsBarrelsBarrelsBarrelsJune 16189.48189.48June 17198.00209.04400.39807.43June 18208.49208.49June 19187.00187.00June 21208.37406.20203.84818.41June 23206.32187.00393.32June 24208.92201.86187.00597.78June 25202.34202.34June 26191.28207.86200.45187.00786.59June 27187.00187.00June 29215.68407.02191.34189.481,003.52July 2201.94207.70406.24202.521,018.40July 3191.96191.96July 5207.58207.79196.49187.00798.86July 7203.16201.90405.06July 8206.52189.48396.00July 9195.84187.00382.84July 10209.04202.56411.60July 12209.04204.94192.00191.96797.94July 13187.00187.00July 14397.79397.79Total794.382,089.753,239.031,797.292,448.3610,368.81*1919  The production by months of the properties by leases and the totals from June 15 to December 31, 1920, were as follows: SuitsAndersonBatesBeckSmockTotalBarrelsBarrelsBarrelsBarrelsBarrelsBarrelsJune, 15 days389.281,049.871,617.811,010.441,313.965,381.36July811.382,493.883,239.961,978.662,450.8410,974.72August808.742,312.903,053.131,813.641,884.889,873.29September781.801,688.423,052.071,800.701,500.968,833.95October812.761,267.522,649.701,584.603,174.049,488.62November405.082,064.982,626.911,608.011,486.088,191.06December384.001,665.722,381.972,003.16912.767,347.61Each petitioner's share of the production from the five leases from June 15 to December 31, 1920, was 6,691 barrels, and from January 1 to March 15, 1921, was 1,639 barrels.  The posted market price for oil at Augusta, Kans., on June 15, 1920, was $3.50 per barrel.  The oil from the leases here involved during the period from June 15, 1920, to January 1, 1921, was sold at a premium and an average price per barrel of $3.73 was received therefor. *1920  The cost to each petitioner of his share of the oil deposits was $53,446.84 and the cost to him of his share of the physical equipment was $29,053.16.  Of the latter amount $15,435.47 was for surface equipment and $13,617.69 was for well (underground) equipment.  The respondent has determined the depreciation on the surface equipment at a flat rate of 16 2/3 per cent and on the well (underground) equipment on the unit-of-production method.  *140  In their income-tax returns for 1920 each of the petitioners took a deduction of $24,417.54 for depletion of the cost of his interest in the oil deposit or reserve.  For the purpose of determining the amount of depletion to which each was entitled, such determination requiring primarily an approximation of the probable oil reserve in the property covered by the leases at the time the petitioners and their associates acquired them, recourse was had by the petitioners to the Manual for the Oil and Gas Industry under the Revenue Act of 1918 (1919 Edition).  This manual was a publication issued by the Treasury Department "to assist the taxpayer of the oil and gas industry in correctly and expeditiously preparing his Federal tax return. *1921  " The amount of depletion taken by each party in his return was based upon a table contained on page 94 of the manual and referred to as "Augusta District." The petitioners computed the amount of the deduction taken in their returns for depletion as follows: Calculation of Depletion, 1/8 InterestCost - Whole property$660,000.00Phys. equip. as per inv232,425.30Deposit427,574.70Value of 1/8 interest53,446.83Production 2nd half June, 1st half July, 5/16 int. (barrel)2878.205Average per well per year, 8/8 interest3295.82Estimated future production per well per year (p. 94, Manual Oil & Gas, 1918)3515.55Estimated total deposit - 3515.55 X 34 (barrels)119,528.7Original cost per barrel$3.58Production of 1/8 for the period ended December 31st (barrel)6792.61Depletion of above at above rate of $3.58 per barrel$24,417.54In determining the deficiencies here involved the respondent allowed each petitioner $9,451.58 of the deduction of $24,417.54 taken for depletion in his return, thereby disallowing $14,875.96 of the deduction taken by each.  In disallowing a portion of the deductions taken by the petitioners the respondent*1922  determined that the estimated oil reserve at June 15, 1920, in the properties covered by the leases applicable to each petitioner's interest was 47,744 barrels as against the petitioners' estimate of 14,942 barrels.  From January 1, 1921, to December 31, 1924, net oil production applicable to each petitioner's interest was as follows: Barrels192110,35319228,20519237,74719246,959Total33,264*141  The amount of the oil deposit or reserve in the properties covered by the leases applicable to each petitioner's one-eighth interest at the time of the acquisition of the leases by the petitioners and their associates was 47,744 barrels.  OPINION.  TRAMMELL: The question we are called upon to decide is the amount of the oil deposit or reserve applicable to each petitioner's one-eighth interest at the time the oil properties were acquired by them and their associates in June, 1920.  The petitioners contend that the amount was 14,942 barrels, the amount used by them in computing the deduction taken for depletion in their returns.  The respondent contends that it was 47,744 barrels, the amount used by him in determining the deficiencies.  *1923  In support of their contention the petitioners rely on the fact that in computing the estimated oil reserve used by them in determining the deduction taken for depletion they used figures in an estimated future production table for the Augusta District, Butler County, Kans., as set forth in the Manual for the Oil and Gas Industry.  In a foreword to the manual it is expressly stated that the tables appearing in the manual were intended as a suggestion for the guidance of the taxpayer in the computation of his depletion allowance, but that they are not to be applied indiscriminately to specific properties and that the Treasury Department is in no way committed to accept estimates based upon them.  With respect to the methods of estimating recoverable reserves it is stated on page 27 of the manual that the Treasury Department does not prescribe any particular method of estimating recoverable reserves, but that the methods described.  therein are applicable to a wide variety of conditions and are inserted as a suggestion.  From the foregoing we think it is clear that in issuing the Manual for the Oil and Gas Industry the Treasury Department intended for the matter set forth therein*1924  to be suggestive only and not determinative as the petitioners now urge.  The contention of the petitioners, therefore, is not well founded.  In making their selection of figures from the manual, it appears that the petitioners took into consideration the production of the oil properties only for the period in 1920 subsequent to the acquisition of the leases by them and their associates, notwithstanding the fact that the properties had been producing steadily for about four years.  On the other hand the respondent's estimate of the reserve or deposit is based on all the production data available from the time the wells were brought in down to the time the petitioners' returns were due, March 15, 1921, which date was two days before they were filed.  The *142  respondent's estimate clearly was determined on a more comprehensive basis than that of the petitioners, and consequently more likely to approach the actual amount of the deposit or reserve than that determined by them.  While facts occurring subsequent to the time the petitioners filed their returns may not be used in estimating the amount of the deposit or reserve of oil in the properties at the time of acquisition*1925  of the leases, , and , such facts may be used in checking or corroborating the estimate made.  . The respondent has estimated each petitioner's share of the deposit or reserve to be 47,744 barrels as at the date of the acquisition of the leases in June, 1920.  Each petitioner's share of the actual production from June 15, 1920, to the end of 1924, the last year for which the amount of production was put in evidence, was 39,955 barrels.  In view of this we do not think it could be said that the respondent's estimate was unreasonable.  It certainly comes more nearly to approaching the actual amount of the reserve now known to have been in the properties than the petitioner's estimate of 14,942 barrels.  The petitioners are contesting the estimate made by the respondent and the burden is upon them to show that such estimate is erroneous.  From a consideration of all the evidence we do not think that they have sustained this burden.  Accordingly, the respondent's estimate is sustained.  Judgment will be entered under*1926  Rule 50.Footnotes1. No record.  ↩3. Dry hole. ↩2. Deepended.  ↩