Court Opinion

ID: 4495854
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:14:33.055319+00
Date Added: 2024-06-11T14:54:13.318368
License: Public Domain

TueneR,
dissenting: The unusual and complicated facts in this case have, in my opinion, induced the Board to make an erroneous interpretation of section 114 (b) (3) of the Revenue Act of 1928. The application of this provision to the facts seems to me to be clearly contrary to the plain language of the statute.
In stating my views, it seems advisable to summarize the pertinent facts which are set out in detail in the findings of fact preceding the prevailing opinion. The Sinclair Oil & Gas Co. had, through various transfers, acquired an oil and gas lease to property inherited by this taxpayer and his brothers and sisters. Difficulties arose which *53brought on court proceedings to set aside the lease. In 1922 this taxpayer, through his guardian, with the coheirs, undertook the operation of the property to prevent its drainage through wells on adjoining properties. By reason of the claim of the Sinclair Oil & Gas Co., it was necessary for the heirs to agree to the deposit in escrow of the proceeds from the' sale of the oil so produced until final disposition of the litigation then pending. An agreement was accordingly entered into with the Garber Befining Co., purchaser of the production, for such deposit with the Farmers State Bank as escrow agent. The fund so held in escrow was finally to- be distributed in accordance with the disposition of the litigation pending between the heirs and the Sinclair Oil & Gas Co. This arrangement continued until 1930, when a settlement of the litigation was concluded by compromise. Up to that time the production from the property had amounted to $1,462,504.02, all of which sum had been deposited with the escrow agent. There had been expended as cost of operation a total of $849,544.31, which amount had been released by the escrow agent for that purpose only. On settlement of the litigation it was discovered that the escrow agent had dissipated the funds. 'Of this amount, $514,000 had been put in bonds, but the bonds had been misappropriated. To cover the losses in the escrow fund, assets of the escrow agent, represented to have a value in excess of $900,000, were placed in the hands of the trustees under an indemnity contract. The work-out of these assets amounted to only an approximate amount of $1,000, while the expenses of the trust amounted to $39,000. The indemnity contract was worthless at the time of its execution. While the operation of the property under the escrow agreement covered the period from 1922 to 1930, it was agreed between the parties herein that full accounting for the income therefrom should be made in 1930, the year of the settlement of rights under the escrow agreement.
In the prevailing opinion the gross income of the heirs from the oil property in question is found to be $1,303,504.02. Of this amount $355,000 represents the recovery from the Sinclair Oil & Gas Co., while the remaining $948,504.02 represents the difference between $1,462,504.02, the amount of the gross sales under the escrow agreement, and $514,000, the sum invested by the escrow agent in the bonds which were later misappropriated. This sum of $514,000 is excluded from the gross income of the heirs under authority of North American Oil Consolidated v. Burnet, 286 U. S. 417. It is then held that the gross income of the heirs from the property is the same as “ the gross income from the property ”, within the meaning of section 114 (b)(3), supra, and that $1,303,504.02 is the amount from which the depletion deduction is to be computed.
*54In my opinion the conclusion reached is wrong in two respects. In the first place, the holding that the gross income of the heirs from the property is the same as K the gross income from the property ” within the meaning of section 114 (b) (3), supra, requires the reading into the statute of language which Congress did not see fit to place there, and, in the second place, if North American Oil Consolidated v. Burnet, supra, is applicable, no part of the amount deposited with the escrow agent constituted gross income to the heirs in any year and, under the interpretation placed on the statute in the prevailing opinion, the depletion deduction has been computed on the basis of gross income which did not exist.
Considering first the language of the statute, it will be noted that section 114 (b) (3) is divided into two parts. In the first sentence it is stated that the allowance for depletion in the case of oil and gas wells “ shall be 27*/2 per centum of the gross income from the property during the taxable year.” This sentence presents a full and complete thought which is not modified or changed in any respect by any subsequent language appearing in the statute. The language is simple and unambiguous. In that sentence Congress was expressing its judgment of the extent of the exhaustion of oil properties through operation. Nothing is said there about the owners of the property or any individual taxpayer. The individual interests in the property may be varied and numerous. We have found in our findings of fact that the gross production from the property herein involved was $1,462,504.02 and the prevailing opinion accepts this finding. Neither is there any question that the oil properties were exhausted or depleted by this production. In my opinion it would be mere quibbling to say that the amount found as gross production from the property is not the “ gross income from the property ” contemplated by the first sentence of section 114 (b) (3), supra.
In the second sentence of this provision of the statute Congress, for the first time, mentioned the individual taxpayer and there provided that the depletion allowance, computed under the first sentence, may not exceed “ 50 per centum of the net income of the taxpayer * * from the property.” By this sentence Congress made no change whatever in the depletion allowance prescribed by the first sentence, nor in the method of computing such allowance, but did prescribe a limitation on that allowance in respect of each individual taxpayer, the limitation so prescribed being computed on an entirely different basis and without reference to the computation made under the first sentence.
The prevailing opinion justifies its conclusion with reference to the first sentence pf section 114 (b) (3), supra, by saying that since Congress, in the second sentence, dealt with “ the net income of the *55taxpayer * * * from the property ”, it obviously intended that the words “ of the taxpayer ” should be read into the first sentence. The answer to this contention is that Congress did not place any such phrase in the first sentence. By this omission Congress, itself, drew the distinction between the two sentences. According to the views previously expressed, the first sentence is complete in itself and we are not at liberty to read into the statute something that is not there, merely because we are confronted with an unusual case in which the “ gross income from the property ” is not the same as the gross income of the taxpayer or taxpayers from the property.
If the net income of the heirs from the property has been correctly determined and the 21% per centum depletion allowance is computed in accordance with the views which I have expressed above, the result would not be at variance with the result in the prevailing opinion, since, under such circumstances, the depletion deduction would be finally determined by application of the limitation contained in the second sentence of section 114 (b) (3), supra. But even if the result should be the same in this case, an erroneous interpretation of the statute, such as we have here, should be avoided, for it is altogether unlikely that a similar application of the statute to other cases would produce correct results.
It has previously been suggested, however, that another error is apparent in the prevailing opinion which, if corrected, will not only change the depletion deduction but also the net income of the taxpayer computed without regard to the depletion allowance. The decision of the Supreme Court in North American Oil Consolidated v. Burnet, supra, has been cited as controlling in this case. There the Government and North American Oil Consolidated were both claiming title to certain property. During 1916 and 1917 it was operated by a receiver appointed at the instance of the Government. In 1917 the Government’s bill was dismissed and the proceeds accumulated by the receiver from the operation of the property were paid to North American Oil Consolidated. The suit was not finally disposed of, however, until the dismissal, in 1922, by the United States Supreme Court of the Government’s appeal. Later, in the case above cited, the Supreme Court held that North American Oil Consolidated realized income in 1917, the year in which it actually received the proceeds from the operation of the property. It was stated that “ If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return even though it may still be claimed that he is not entitled to retain the money and even though he may still be adjudged liable to restore its equivalent.” Reasoning from the language of the Court in that case, the prevailing opinion hay *56excluded, from the gross income of the heirs the sum of $514,000 which represented that part of the escrow fund which had been invested" in bonds and misappropriated by the escrow agent. It does not apply this rule, however, to the remainder of the escrow fund, but includes the remainder in the gross income of the heirs. In my opinion there is no justification under the rule laid down in North American Oil Consolidated v. Burnet, supra, for excluding the $514,000 representing the misappropriated bonds and including the remainder. The facts which are accepted by the prevailing opinion show that no part of the escrow fund was, at any time, received by the heirs in the manner and under the conditions set forth in the language quoted above from the Supreme Court’s decision. According to the facts, $514,000 had been placed in bonds and the bonds misappropriated. This leaves $948,504.02 of the escrow fund, all of which has been included in the gross income of the heirs. Of this remainder, $849,544.37 was expended in the production of the oil which gave rise to the escrow fund. While it is true that this sum was expended by the heirs, or some of them, it should be remembered that it was expended in strict accordance with the terms of the escrow agreement and the heirs never, at any time, received any portion of that amount as their own “ without restriction as to its disposition.” If any part of the escrow fund is to be excluded from gross income of the heirs under the decision of the Supreme Court above cited, there is no basis for any claim that the amount expended under the escrow agreement as operating expenses, or any part of that amount at any time constituted gross income to this taxpayer, or any of the heirs. But even though it be said that the receipt of the $849,544.37 as expenses of operation was comparable to the receipt by North American Oil Consolidated in 1917 of the amount accumulated by the receiver, and from that it is held that the $849,544.37 was income to the heirs, there is still no basis whatever for the inclusion in the income of the heirs of the remaining $98,959.65 of the escrow fund. No part of this amount has ever been received by the heirs or any of them, from the escrow agent or any other person, and the facts show nothing from which it can be paid, or could have been paid at any time after the litigation was settled. It is to be remembered that all of the escrow fund, except $849,-544.37 which represented the expenses of operation under the escrow agreement, was dissipated by the escrow agent, and the heirs, in their own right, received nothing therefrom. The facts show that when the defalcations were discovered the escrow agent transferred to the trustees certain assets having a claimed value of $900,000 in satisfaction of its liability under the escrow agreement, and we have specifically found as a fact that this contract, whereby the said *57assets were transferred in trust, was worthless from the date it was-cxecuted.
Under such circumstances it is impossible, in my opinion, to reconcile the conclusion reached in the prevailing opinion, whereby a part x.f the escrow fund is declared to be income to the heirs while another portion is excluded, with the conclusion stated in North American Oil Consolidated v. Burnet, supra.
Smith, Sternhagen, and MoeRis agree with this dissent.