Court Opinion

ID: 9651368
Source: CourtListenerOpinion
Date Created: 2023-08-23 16:16:34.299443+00
Date Added: 2024-06-11T13:28:03.425895
License: Public Domain

HUTCHESON, Circuit Judge
(dissenting).
I agree with the majority that the motion to dismiss should be overruled. T disagree with their view that the Board’s order should be affirmed. The question is an interesting and important one. I think the position of the Board, affirmed by the majority, is both unsound in law and unjust to the petitioner. I therefore am giving fully my reasons for dissenting.
The question for decision on the merits is whether only two-thirds as petitioner contends, or all, as the Commissioner contends, of the sums, in excess of their cost to petitioner, paid him in the tax year in question out of a joint account set up for that purpose, for drilling wells on oil leases owned jointly by himself and two associates, Gant and Garvin, were taxable gains. *52The petitioner’s contention was that the one-third in controversy was a return to him of his own capital and therefore could not be gains. The Commissioner denied this. He insisted that for tax purposes, payment out of the joint account of Gant, Garvin and Wegener from which the sums were paid was an entirely different thing from payment from the individual account of Gant, of Garvin and of Wegener, and that petitioner must be regarded as having dealt jointly with the joint account and not individually with Gant, Garvin and Wege-ner. He made his determination accordingly.
The Board concluded 1 that Gant, Garvin and Wegener were not a partnership but a joint venture for operating for oil and gas the leases the three jointly owned “and that petitioner as an individual drilled the oil wells for Gant, Garvin & Wegener, and not for himself as to his interest, and for Gant and Garvin as to their interest.” So concluding, it rejected petitioner’s contention; that the only real profits he received were those derived from the two-thirds of the $70,776.23, paid him in excess of the cost, $59,818.27, attributable to the contributions of his associates to the joint account; and that as to the other one-third, contributed by himself, the supposed profits were not actual but suppositious profits derived from dealing with himself. It therefore affirmed the determination of the Commissioner.
Petitioner is here insisting that the Board by treating him, in his capacity as an oil well drilling contractor, as a separate and distinct person from himself, as owner of leasehold interests, has unreally and unjustly created income out of the payment to himself as driller, for himself as owner, of sums, advanced by himself as owner, and expended by himself as driller, in the development of his interest in the lease.
These are the controlling facts. Petitioner is an oil well contractor. In 1932, he acquired a one-third interest with Gant and Garvin in certain oil and gas leases, in Rusk County, Texas, and thereafter under an arrangement with his associates, he, from time to time, drilled oil wells on the properties at an agreed price per foot. In the beginning the drilling was handled in this way. Petitioner assumed one-third of the agreed drilling cost and billed Gant and Garvin each for one-third thereof. Afterwards, while no partnership agree-, ment was entered into and it is obvious from the record that the parties did not intend to and did not form a general partnership, they did arrange for a joint account and for a method of operating on capital secured for their joint account. The moneys were borrowed on their joint and several notes, with assignments of their interests in the oil leases as security, and provision for the payment of the loans from oil and gas runs, which were run to each owner individually, on the basis of one-third to each. In financial statements, the petitioner stated that the Rusk County, Texas, operations were a joint venture and not a partnership. A joint bank account was opened in the name of Gant, Garvin and Wegener. Letterheads bearing this name were printed and used and late in 1932 books of account were set up in that name and thereafter bills were made to, and accounts paid, in the joint name.
In the tax year in question, 1935, the joint account paid on an agreed price per foot, $130,594.50 for the footage drilled. The cost to the petitioner as drilling contractor was $59,818.27. On his books petitioner charged the whole sum received to an account called Gant, Garvin and Wegener and to offset this charge, he credited gross income with the paper profit of $70,776.23. Of this amount, attributing one-third to his own contributions and two-thirds to that of his associates, he charged himself with $47,184.16, or two-thirds thereof, as profits and set up the other one-third in a “lease investment contra account”, so as to clearly show that his investment cost was increased by the drilling, not $43,531.50 but $19,939.42, that sum less the $23,000 received by him as return from his capital. Gant, Garvin and We-gener filed partnership returns on Form 1065 for the taxable years, 1932, 33, 34 and 35. These returns showed a net income for 1935 of $55,680.67 and gross profits of $174,609.15. No deduction was taken on these returns for the cost of drilling oil wells or for any amount paid out for such drilling. Petitioner in 1935 reported his pro rata of the share net income shown on the partnership return. He also reported net income from drilling and rental of tools, “Gant, Garvin and Wegener”, $47,-184.15. This represented two-thirds of the *53excess of the agreed price over his cost. This was computed by him as follows:
Amount received from drilling, rental tools................ $130,594.50
Drilling expense............. 59,818.27
Net profit................... $ 70,776.23
1/3 Net profit allocated to petitioner’s interest............ 23,592.27
2/3 Net profit allocated to Gant & Garvin ................. $ 47,184.15
On these facts the Board found that petitioner was not a partner with Gant & Garvin but that each owned individually a share in the property and that though they made partnership returns and reported and paid on their distributable shares as partners, they are not to be treated as constituting a partnership. Nevertheless by the simple device of finding that the association of the three constituted a joint venture, in short, a special or limited partnership, and in complete disregard of the fact that except for its limited scope, such a venture has all the incidents of a partnership; it endowed this venture with an existence completely separate from the existence of its members, and with gaze foreshortened by the intensity of this view, it completely overlooked the fact, that repayment by the venture to Wegener, of moneys he had contributed to the capital of the enterprise, could not constitute a gain to him.
Petitioner is here insisting that in determining as they did, the Commissioner and the Board in violation of the rule that strained and unreal construction may not be resorted to to create tax gains and particularly of the rule that a partnership is not for income tax purposes, an entity, separate and apart from the partners2 have unjustly subjected him to taxation with respect, not of actual but of purely suppositious gains.
In support he urges upon us; that he and his associates were, as to the ownership of the leaseholds in question, not partners, but tenants in common,3 each owning an undivided one-third interest; that as to the operations on the leases the three were a mining partnership,4 that of the money paid him for drilling out of the moneys borrowed on that partnership and placed in their joint account as paid in capital, the one-third thereof attributable to his share was really a distribution to him of part of his capital investment and not gain, profit or income to him; that as to that one-third he could add to his capital investment the actual cost;5 that a joint venture is only a special partnership.6 Finally, he insists that whether the arrangements between petitioner and Gant and Garvin for the operation of the properties be regarded as a general partnership, a mining partnership or a joint venture is wholly unimportant here, for it is not the partnership that is, but the partners separately that are, taxed, and the moneys paid petitioner out of his own contributions to capital must be regarded not as income or gains to him but as a return pro tanto of his capital.
I agree with petitioner that he and his associates constituted a mining partnership, and that the sum in question here was a return to him of a part of his capital. I agree with him too that for the purpose of the decision of the question here, it is not important whether the associates be re*54garded as constituting a mining partnership, a general partnership or a joint venture, in the nature of a special partnership as the Board found, for without regard to the name to be given to their association, the sum in question here represents not income to petitioner, but a return of his capital.
The Board’s statement that what occurred here was a shifting by Wegener of his cash capital assets to oil well capital assets in which petitioner retained the same undivided interest he had in the leases is apparently based upon the erroneous 7 view of the Board, that Wegener must be regarded as having .contributed to the drilling the same amount as his associates did. This will not do. There was such a shifting as to the $19,939.42 representing Wegener’s one-third of the cost, there was not, there could not be such a shifting as to the $23,592.08 in question here. For this was not an outlay by Wegener but a repayment to him by the venture of that part of the agreed price which was in excess of his cost.
Looked at realistically, that is, as the facts are, Gant, Garvin and Wegener represent merely a name and device through which petitioner and his associates conduct ed the business of drilling on and operating their properties. The substance of the matter at all times was that the properties were owned by the three as co-owners, the development was paid for by the three as co-owners, and the returns from the oil runs were paid individually to each of the three as co-owners. Under these facts, Wegener as to the $23,592.08 in question, was merely being repaid advances he had made to the joint venture and it would be a denial of everything that has been written and said in Taxing Statutes and Decisions, relating to and affecting partners and partnerships and their return and payment of income taxes to treat this sum as income. Jennings v. Com’r; Nuberger v. Commissioner; Craik v. United States; Ortiz Oil Co. v. Commissioner; United States v. Coulby, supra; Carroll v. Commissioner, 5 Cir., 70 F.2d 806.
The Board’s order should be reversed and the cause remanded for 're-determination in accordance with petitioner’s contention. I respectfully dissent from its affirmance.

 41 B.T.A. 857, 863.

 Jennings v. Com’r, 5 Cir., 110 F.2d 945; Craik v. United States, Ct.Cl., 31 F.Supp. 132, Approved; Nuberger v. Com’r, 311 U.S. 83, 61 S.Ct. 97, 99, 85 L.Ed.-.

 Lee v. Wysong, 5 Cir., 128 F. 833; Bolding v. Camp, Tex.Com.App., 6 S.W.2d 94; Peterson v. Fowler, 73 Tex. 524, 11 S.W. 534; 11 Tex.Jur. 422, Sec. 14; Com’r v. Horseshoe Lease Syndicate, 5 Cir., 110 F.2d 748; Com’r v. Rector & Davidson, 5 Cir., 111 F.2d 332; Ortiz Oil Co. v. Com’r, 5 Cir., 102 F.2d 508; Waddell v. Com’r, 5 Cir., 102 F.2d 503, 505.

 Munsey v. Mills & Garitty, 115 Tex. 469, 283 S.W. 754; Wagner Supply Co. v. Bateman, 118 Tex. 498, 18 S.W.2d 1052; Thornton, Law of Oil and Gas, Vol. 1, page 894; 29 Tex.Jur. 698; Adams v. Texhoma Co., Tex.Civ.App., 262 S.W. 139; Shell Pet. Corp. v. Caudle, 5 Cir., 63 F.2d 296.

 McDaniel v. State Fair, Tex.Civ.App., 286 S.W. 513; O K Boiler & Welding Co. v. Minetonka, 103 Okl. 226, 229 P. 1045; Dexter & Carpenter v. Houston, 4 Cir., 20 F.2d 647; First Mechanics Bank v. Com’r, 3 Cir., 91 F.2d 275.

 Leo Schwartz v. Com’r, 7 B.T.A. 223; Tilton’s Estate, 8 B.T.A. 914; Lloyd v. Com’r, 15 B.T.A. 82; United States v. Coulby, D.C., 251 F. 982; Id., 6 Cir., 258 F. 27.

 Ortiz Oil Co. v. Commissioner, supra.