Court Opinion

ID: 8596305
Source: CourtListenerOpinion
Date Created: 2022-11-23 16:03:32.791883+00
Date Added: 2024-06-11T16:54:57.594499
License: Public Domain

Cowen, Senior Judge,
concurring in part and dissenting in part:
I concur fully in Part II and Part IV of the court’s opinion but I respectfully dissent from the holding in Part III, which involves the 1967 and 1968 litigation expenses incurred by Southland in the suit filed by the Gulf Oil Company. I would adopt the opinion of the trial judge, for in my opinion, he correctly held that:
Southland’s ownership of a fraction of the royalty interest in the Waddell Ranch — and, therefore, of a fractional reversionary interest entitling Southland to participate in the further development of the minerals, or in the issuance of a new mineral lease on the property, following the expiration of the mineral lease on the ranch — had been acquired long before the controversy with Gulf arose over the longevity of the mineral lease. In the litigation, Gulf did not attack Southland’s entitlement to a fractional royalty interest and related fractional reversionary interest. For that reason, there was no occasion in the litigation for Southland’s title to an interest in the property either to be defended or perfected.
*456The question for decision cannot be answered by a general discussion of the elements of a capital expenditure. The defendant has promulgated regulations which were expressly intended to cover the situation involved in this case, and our task is to decide whether plaintiffs right to the deductions is precluded by Treas. Reg. 1.263(a)-2(a), which provides that the cost of acquisition of property having a useful life substantially beyond the taxable year is a capital expenditure, and Treas. Regs. 1.212-l(k) and 1.263(a)-2(c), which state that expenses incurred in defending or perfecting title to property are capital expenditures.
Admittedly, "the line of demarcation between 'an ordinary and necessary expense’ as a deductible item and an expenditure incurred in defense of title to property and therefore not deductible is extremely narrow.”1 I agree with the majority that there is no precedent precisely in point, but I differ with the court in its conclusion that the decisions cited by it strongly suggest the capitalization result. On the contrary, as I read them, all of the cases cited by the majority in support of its view directly and specifically involve costs incurred in acquiring property or in defending or perfecting title thereto. Farmer v. Commissioner, 126 F.2d 542, 544 (10th Cir. 1942), is a classic example of a situation in which the claimed expenses were incurred to defend and establish title to land. This is made plain by the following statement from the court’s decision:
* * * The plaintiffs in each suit attacked the lessor’s title to the land and claimed an interest in the oil and gas that petitioners were receiving under their assignment of the lessor’s interest. The suits were defended and the claims of the plaintiff were held to be groundless, and petitioners’ title was established. Petitioners’ total cost of resisting this litigation was $10,804. They sought to deduct this amount as an ordinary business expense and have appealed from a decision disallowing the claim. [Emphasis supplied.]
The following quotation from Reed v. Commissioner, 55 T.C. 32, 40 (1970) demonstrates that this was a clear case of expenses incurred in the acquisition of title to property:
In our view the Supreme Court’s holding in Woodward [v. Commissioner, 397 U.S. 572, 575 (1970)], requires us to *457apply the origin-of-the-claim test to the expenses arising out of the first cause of action in Reed v. Robilio [248 F.Supp. 602 (W.D. Tenn. 1965)]. This, in turn, requires a decision for the respondent. In that first cause of action the petitioners were attempting to obtain title to the 30.66-percent interest in R & C. The complaint filed on behalf of Martha [Reed] with the District Court sought an order of reconveyance. It is manifest that this would require a conveyance of title to the interest. Not only was "the origin of the claim litigated * * * in the process of acquisition itself,” but the litigation was a direct attempt to acquire. Woodward v. Commissioner, supra, at 577. [Emphasis supplied.]
Thalhimer Brothers, Inc. v. Commissioner, 27 T.C. 733, 739 (1957), is a case involving the purchase price of a capital asset. It is another title acquisition case and was specifically so labeled by the Tax Court in its statement:
The second issue is whether petitioner is entitled to deduct, as a business expense, the amount of $25,000 which it paid to the sellers of real estate, in order to obtain title and possession at an earlier date than had been provided in the purchase contract. [Emphasis supplied.]
In Third National Bank in Nashville v. United States, 454 F.2d 689 (6th Cir. 1972), the taxpayer, after unsuccessful negotiations for an outright purchase of property in Nashville, entered into a 25-year lease agreement granting it an option to purchase the property, plus the right to demolish existing buildings and to construct new buildings on the site. When the lease agreement was executed, there were three existing leases on the property. The taxpayer expended funds to procure the early termination of the three leases and then erected a new building on the site. The only issue before the court in that case was whether the taxpayer’s expenditures were allocable to the new building or to the land as a part of the basis. The court held that the costs paid for terminating the leases were allocable to the new building. Obviously, this is just another case where the taxpayer claimed deductions for amounts expended to acquire or perfect title to property.
American Spring Wire Specialty Co. v. Commissioner, 20 T.C.M. 116 (1961), primarily involved the acquisition of title to the property which the taxpayer had not previously *458owned. There the taxpayer attempted to purchase certain improved property adjoining its plant. The owner refused to sell but did agree to exchange it for other property. The taxpayer purchased the other property for $60,000 and exchanged it with the owner of the improved property it wished to acquire.
In contrast to the foregoing cases, in all of which the primary issue was the acquisition or defense of title to property, there are a number of decisions in which the facts are more similar to those in the case at bar. I view them as controlling the issue in favor of the taxpayer.
In Bliss v. Commissioner, 57 F.2d 984 (5th Cir. 1932), the taxpayer prevailed in a case in which the facts were not nearly as favorable to it as the facts supporting Southland’s claim. There the taxpayer had acquired land in Louisiana on which adverse claims were asserted to oil and gas rights by one who had entered on some of the lands and proceeded to drill oil wells thereon. The taxpayer entered into agreements with two oil companies, which agreed to pay the taxpayer cash, plus other consideration, for oil and gas leases "when the lessor’s title to the entire tract of land and to the oil, gas and other minerals thereunder had been perfected and the adverse claims of all parties thereto cancelled and removed.” Lawyers were employed by the taxpayer to bring ejectment actions against the adverse claimant of the oil and gas mineral rights. The Supreme Court of Louisiana determined that the adverse claims were invalid. In holding that the attorney’s fees expended by the taxpayer in the ejectment suits were deductible as ordinary and necessary expenses, the Fifth Circuit declared:
* * * The defendants in those suits set up claims, not to title to lands admitted to be owned by the firm, but to rights to minerals therein or extracted therefrom. What was adversely claimed was part of what was or might be produced from the lands when used in business by the firm or its lessees. To treat as an addition to the cost of land the amount of an expenditure made, after ownership was acquired, to enable the owner, his agent or lesse, to possess and use the land for business purposes, undisturbed by intruders or trespassers, would involve a disregard of the difference between the cost of acquiring ownership of property and expenses paid or incurred to *459protect the owner’s right to undisturbed possession and enjoyment of his property, and what it yields or produces, by himself, his agents or lessees. It seems reasonable to treat amounts expended for services rendered in ejecting or excluding trespassers after ownership has been acquired as expenses incident to the ownership of property and the acquisition and enjoyment of income from it, rather than as additions to the capital investment in the property. * * *2 [57 F.2d at 985.]
In Tucker v. Commissioner, 9 T.C.M. 956 (1950), a closely analogous case, the Tax Court reached the same result as in Bliss. The taxpayer successfully prosecuted an ejectment suit against a lessee and obtained possession of a leased farm. The court held that the attorney’s fee paid for the prosecution of the suit was deductible from taxpayer’s income.
The case of Herman A. Moore Trust v. Commissioner, 49 T.C. 430 (1968), involved facts which are more similar to those before us than the facts in any of the decisions relied on by the majority. The Moore case is particularly pertinent because of the Government’s contention that Southland’s title to its reversionary interest in the leasehold was the subject of the dispute in the Gulf litigation and therefore, that plaintiff incurred the attorney’s fees in defense of its title. Twelve years after the establishment of the trust involved in the Moore case, testator’s widow renounced her interest in a portion of the trust assets. The action which gave rise to the tax deductions was a suit brought by the testator’s two children in which they unsuccessfully contended that the release and renunciation by the widow acted to accelerate their beneficial remainder interest in the renounced property and that the trustee should hold the property and administer the trust as if the widow had died. Here Gulf unsuccessfully contended in the Texas courts that the action of the Texas Railroad Commission prolonged its interest in the leased property and that Gulf should retain its interest and continue as lessee beyond the expiration of the lease. The Moore court held that although title was incidentally involved, the *460trustee’s primary purpose in defending his title to the assets was to obtain a decision on the timing of the remainderman’s rights. The answer to this question was vital to the trustee’s administration of the trust and the Tax Court allowed the deduction. Here, even though title was incidentally involved in the litigation, the real question between Gulf and Southland was one of timing— whether plaintiffs interest would take effect in 1975, as it contended or at a later time, as Gulf contended. The answer to this question was vital to Southland’s operation of the properties in order to aid it in the management thereof for the production of income. The trial judge correctly held that the legal issue in the Gulf litigation was "the longevity of the oil and gas lease on the land and whether delays in the production of oil and gas from the land attributable to proration orders issued by the Texas Railroad Commission should or should not be counted in determining the date on which the 50-year term of the lease would expire.” The Government does not challenge this determination of the trial judge. Thus, even though title was incidentally involved, I think that the cases I have cited strongly support a holding that it was not the primary purpose of plaintiffs defense to Gulfs suit to defend or perfect plaintiffs title. Therefore, I think that plaintiffs claim for refund falls within the rule stated by the court in Industrial Aggregate Company v. United States, 284 F.2d 639, 645, 647 (8th Cir. 1960).
* * * On the other hand, even though title may be involved, if its defense or perfection is not the primary purpose of the litigation, the expenditures do not encounter the barrier of the regulation’s standard and they may qualify instead as ordinary and necessary expenses. * * *
*****
Thus * * * the primary purpose of Oakland’s [lessor’s] institution of the state court litigation, of the taxpayer’s [lessee’s] defense of it, and of both parties in effecting the settlement, was one and the same, namely, the resolution of the issue of the taxpayer-lessee’s alleged violations of the operating covenants of the four leases. That the determination of this issue involved the taxpayer’s consequent right, or lack of right, to the extension, and thus involved continuing title to the leaseholds as extended, does not make this purpose any less primary.
*461From the facts found by the trial judge and accepted by both parties, it seems clear to me that plaintiffs primary purpose in defending the suit brought by Gulf was, as stated by plaintiff, "to permit it to make definitive plans for the operation of the Waddell property upon a confirmation of the July 14, 1975, expiration date and to collect the ordinary income to accrue to its reversionary interest.”3
In the Texas litigation, there was no dispute over title and therefore it was not necessary for plaintiff either to defend or perfect its title to the land. Obviously, there was no capital acquisition resulting from the litigation. Consequently, I would hold as did the trial judge that plaintiffs 1967 and 1968 legal expenses were deductible for income tax purposes under section 162(a) of the 1954 Code, as ordinary and necessary business expenses.
FINDINGS OF FACT
The court, having considered the evidence, the decision and findings of Senior Trial Judge Mastin G. White, and the briefs and arguments of counsel, makes findings of fact as follows:

General

1. (a) This is an action to recover federal income taxes and assessed interest allegedly overpaid by plaintiff for the calendar years 1966, 1967, and 1968 in the amounts of $44,067.38, $12,747.43, and $84,308.40, respectively, or a total of $141,123.21, plus statutory interest from dates of payment.
(b) The case involves the deductibility for income tax purposes of:
(1) Legal expenses in the amount of $75,276.18 which plaintiff accrued during 1966 in connection with certain litigation in the state courts of Texas and related settlement proceedings (see findings 9-14);
(2) Legal expenses in the amounts of $22,898.68 and $113,892.55 which plaintiff accrued during 1967 and 1968, respectively, in connection with other litigation in the state courts of Texas (see findings 15-17); and
(3) Expenses in the amount of $31,297.27 which plaintiff accrued during 1968 in connection with the *462conduct of a study regarding the petroleum reserves in a certain property known as the Waddell Ranch (see findings 18 and 19).
2. Plaintiff keeps its books and reports its income and expenses for federal income tax purposes on the accrual method and on the calendar year.
3. The court has jurisdiction of this case under 28 U.S.C. § 1491.
4. Plaintiff, Southland Royalty Company (usually referred to hereafter in the findings as "Southland”), was, and is, a Delaware corporation, incorporated in 1924. Its principal office was, and is, at Fort Worth, Tarrant County, Texas.
5. (a) Southland is engaged in the oil and gas business. At the times pertinent to this litigation, Southland owned, among other assets used in its business, various interests in many mineral properties in Texas, in other States of the United States, and in Canada. Its interests included fee interests, leasehold interests, royalty interests, and overriding royalty interests. It owned some of these interests alone and others as co-owner with other persons, including individuals and corporations.
(b) Southland explored for, produced, and developed oil and gas, and participated in gasoline plant operations and in secondary recovery projects.
(c) Southland earned income from the production and sale of oil, gas, and other minerals from the properties in which it owned interests.
6. In order to earn its income from the production and sale of oil, gas, and other minerals, and properly to report the correct amount of its income and expenses for income tax purposes and for management, financial, regulatory, and other purposes, Southland maintains — and maintained in 1966, 1967, and 1968 — extensive records of its interests in the properties mentioned in previous findings, of the amount of income attributable to Southland’s interest in each property, of the expenses (both operating and other) incurred and paid on each property, and the amount of expense attributable to Southland’s interest in each property.
7. (a) Legal, petroleum engineering, accounting, and other questions arise in the regular course of Southland’s business, and are resolved. Such questions arose in 1966, 1967, and 1968, and were resolved.
(b) Southland employs and contracts with — and employed and contracted with in 1966, 1967, and 1968— qualified and skilled persons to obtain the legal, engineer*463ing, accounting, and other services necessary for the conduct of the activities mentioned in paragraph (a) of this finding.
(c) Activities of the sort described in paragraphs (a) and (b) of this finding are — and they were in 1966, 1967, and 1968 — common in the petroleum industry, of which Southland is, and was, a member.
8. (a) In the conduct of its business, Southland has regularly engaged attorneys to perform legal services for it and to give it legal advice, including, but not limited to, representation in litigation. The legal services and advice received by Southland have been necessary and helpful to Southland in the day-to-day operation and management of its business.
(b) The types of legal services and advice received by Southland during 1966, 1967, and 1968 were common in the oil and gas business, and were similar to legal services and advice received by others who were also in the oil and gas business.

The 1966 Legal Expenses

9. (a) On March 27, 1925, H. G. Hendrick and wife leased to J. W. Grant 10,240 acres of land in Winkler County, Texas, for the purpose of mining and operating for oil, gas, potash, and other minerals. The lease provided that it would remain in force for a term of 20 years, and as long thereafter as oil, gas, potash, or any other mineral was produced from the leased land by the lessee.
(b) The lease referred to in paragraph (a) of this finding contained three numbered provisions relating to royalty payments, as follows:
(1) The first royalty provision required the lessee to deliver to the credit of the lessor, free of cost, "the equal one-eighth part of all oil produced and saved from the leased premises and % of the net proceeds of potash and other minerals at the mine.
(2) The second royalty provision required the lessee to pay the lessor $100 per year "for the gas from each well where gas only is found, while the same is being used off the premises * * *.”
(3) The third royalty provision required the lessee to pay the lessor $50 per year "for gas produced from any oil well and used off the premises * * *.”
(c) The lease granted to the lessee "the right to use, free of cost, gas, oil and water produced on said land for all operations thereon * *
*46410. Prior to the time that is involved in the present litigation, Southland, Avoca Corporation ("Avoca”), and Socony Mobil Oil Company ("Mobil”), as successors to H. G. Hendrick and wife, each became the owner of a fraction of the royalty interest in a certain 480-acre parcel of the land referred to in finding 9(a); and Pan American Petroleum Corporation ("Pan Am”) and Westbrook-Thompson Holding Corporation ("Westbrook”) succeeded J. W. Grant as the mineral lessee under the lease of March 27, 1925.
11. (a) In 1927, production of oil was obtained from the 480 acres mentioned in finding 10; and thereafter a number of comparatively shallow oil wells were completed on this acreage. Some gas was produced from these oil wells; and, later on, some of the wells quit producing oil and produced only gas. Up until 1949, the gas was used only by Pan Am and Westbrook, who removed some of the gas from the leased land by means of pipelines and used it elsewhere as fuel for boilers, machine shops, and garages, and in the operation of camps.
(b) In 1949, Pan Am and Westbrook made a contract to sell to C. V. Lyman some of the gas produced from the shallow wells mentioned in paragraph (a) of this finding. Mr. Lyman removed such gas from the leased land and used it in his gasoline plant located elsewhere.
(c) In 1956, Pan Am and Westbrook drilled a deep well on the 480-acre parcel, and this well produced only gas. They began selling the gas from this well in 1958. Two other deep gas wells were completed on the 480-acre parcel, one in 1958 and one in early 1959; and Pan Am and Westbrook began selling gas from these wells. Sales of gas from the three deep gas wells mentioned in this paragraph (c) were running at the rate of more than a million dollars per year in 1959, after the completion of the third well.
(d) Throughout the period mentioned in this finding 11, up to and into the year 1959, Pan Am and Westbrook paid Southland and the other royalty owners, for the gas used by Pan Am and Westbrook off the leased land or sold by them, at the rate of $50 per well per year for the gas from wells producing oil and $100 per well per year from wells producing only gas, including the deep wells referred to in paragraph (c) of this finding.
12. (a) In 1959, Southland, Avoca, and Mobil filed suit against Pan Am and Westbrook in a district court of the State of Texas, seeking additional royalty payments on the gas produced from the three wells referred to in finding 11(c) and sold by Pan Am and Westbrook. Southland et al. contended in the litigation that they had the right to have their payments calculated on the basis of one-eighth of the *465net proceeds from the sale of the gas, under the phrase in the first royalty provision requiring the payment of of the net proceeds of potash and other minerals at the mine”, and that the second and third royalty provisions relative to lump-sum payments per well per year were applicable only to gas used by Pan Am and Westbrook off the premises, and not to gas sold by them. On the other hand, Pan Am and Westbrook contended that they had properly paid Southland et al. their proportionate parts of the fixed amount per well per year, as provided in the second royalty provision, for the gas produced from the three deep gas wells and sold by Pan Am and Westbrook.
(b) All parties to the suit mentioned in paragraph (a) of this finding agreed (1) as to the total amount of the proceeds from the sale of gas, and (2) as to the amount actually paid to Southland et al. in connection with the sale of gas, prior to the institution of the suit.
(c) The state district court, on motions for summary judgment by all parties (there being no dispute as to any material fact), sustained the position of Pan Am and Westbrook.
(d) The Texas Court of Civil Appeals affirmed the judgment of the district court.
(e) The Texas Supreme Court granted the application of Southland et al. for writ of error.
(f) The Texas Supreme Court first decided the apeal in favor of Pan Am and Westbrook on June 26, 1963. On motion for rehearing, however, the Texas Supreme Court on January 29, 1964, withdrew its prior opinions of June 26, 1963, substituted new opinions which construed the royalty provisions of the lease in favor of Southland et al., reversed the judgments of the district court and of the Texas Court of Civil Appeals, and remanded the cause to the district court for further proceedings in accordance with the new opinions. The Texas Supreme Court held (378 S.W. 2d 50) that the first royalty provision was applicable to gas sold by Pan Am and Westbrook, and that the second and third royalty provisions were applicable only to gas used by Pan Am and Westbrook off the leased land. Further motions for rehearing were denied by the Texas Supreme Court.
(g) The district court, on remand, entered a final judgment on June 29, 1964, determining the amounts due Southland et al. in accordance with the Texas Supreme Court’s decision of January 29, 1964.
(h) Pan Am and Westbrook took an appeal from the district court’s decision of June 29, 1964.
*466(i) On October 27, 1965, the Texas Court of Civil Appeals affirmed the district court’s decision of June 29, 1964.
(j) After Pan Am and Westbrook filed with the Texas Supreme Court an application for writ of error to review the Texas Court of Civil Appeals’ decision of October 27,
1965, but before any action was taken by the Texas Supreme Court, the parties entered into a settlement agreement which concluded the litigation.
(k) Under the settlement agreement mentioned in paragraph (j) of this finding, Southland on or about March 30, 1966, collected $195,238.59, all of which was included in its taxable income in 1966. This amount included a lump sum of $168,990.78 representing royalties that had accrued to Southland’s account through December 31, 1965, plus interest thereon in the amount of $26,247.81. In addition, the settlement provided for Southland to receive, from and after January 1, 1966, its proportionate share of royalty payments calculated on the basis of one-eighth of the net proceeds received by Pan Am and Westbrook from the sale of gas, as provided for in the first royalty provision of the lease dated March 27, 1925.
13. (a) By check numbered 3607 and dated May 16, 1966, Southland paid to the law firm of Jackson, Walker, Winstead, Cantwell and Miller the sum of $75,276.18, being a fee of $75,000 and related expenses (including telephone, xerox, travel, etc.) of $276.18, for the law firms’s services in connection with the litigation and settlement mentioned in finding 12.
(b) The amount referred to in paragraph (a) of this finding was reasonable for the services rendered.
(c) Counsel who performed the legal services made an allocation of the $75,276.18 as between (1) services rendered in connection with the proceedings referred to in paragraph (a)-(f) of finding 12, allocating three-fourths of the total amount, or $56,457.13, to such services, and (2) services rendered in connection with the proceedings referred to in paragraphs (g)-(k) of finding 12, allocating one-fourth of the total amount, or $18,819.05, to such services. There is no other evidence in the record either supporting or challenging the accuracy of this allocation.
14. In computing its federal income tax for the calendar year 1966, Southland deducted the $75,276.18 referred to in finding 13. Upon examination of the income tax return, the Internal Revenue Service disallowed the total amount of the deduction. The IRS determined that these litigation expenses should be capitalized. Following exhaustion of the administrative appeal, the IRS assessed additional income *467tax and interest thereon against Southland. The income tax so assessed was in the amount of $36,132.57, and the interest thereon was in the amount of $7,934.81, or a total of $44,067.38. Southland paid the $44,067.38 to the Internal Revenue Service on three different dates, as follows: $41,286.16 on December 4, 1970; $1,878.03 on January 12, 1971; and $903.19 on March 5, 1971.

The 1967 and 1968 Legal Expenses

15. (a) On July 14, 1925, W. N. Waddell and others, as the owners of 45,771 acres of land situated in Crane County, Texas, and commonly known as the "Waddell Ranch,” granted an oil and gas lease on such land to Gulf Production Company, corporate predecessor of Gulf Oil Corporation("Gulf’)• The lease was for a term of 12 years from its date and as long thereafter as oil or gas was produced from the land, but the term of the lease was limited by a provision expressly declaring "that this lease shall not remain in force longer than fifty (50) years from this date.”
(b) As successor to W. N. Waddell and others, South-land later became the owner of a fraction of the royalty interest in the Waddell Ranch and, therefore, of a fractional reversionary interest entitling Southland to participate in the further development of the minerals, or in the issuance of a new mineral lease, upon the expiration of the lease dated July 14, 1925.
(c) Gulf, as the lessee under the oil and gas lease mentioned in paragraph (a) of this finding, drilled, completed, and operated oil and gas wells under such lease. By 1967, Gulf was operating on the Waddell Ranch approximately 900 wells that were producing oil and gas. Southland was entitled to (and presumably received) its proportionate share of the royalty payments on the oil and gas produced by such wells.
(d) After 1925, the Texas Railroad Commission issued numerous orders which affected the amount of oil and gas, and the number of days, that Gulf could produce from the wells mentioned in paragraph (c) of this finding. The Texas Railroad Commission is the regulatory authority created by the legislature of the State of Texas, pursuant to the state constitution, to make and enforce rules and regulations for the conservation of oil and gas, and to prevent waste of oil and gas. The Texas Railroad Commission was granted this authority following the overproduction of petroleum in the State of Texas and elsewhere in the United States, and in view of the unfavorable economic conditions at that time.
*468(e) The Texas Railroad Commission ordered production of oil and gas from the Waddell Ranch to be stopped for 197 days between January 20, 1938, and March 23, 1940. Thereafter, the Commission’s monthly orders permitted production by most of the oil wells on the ranch of their daily allowable volume, assumed to be that amount produced at the most efficient rate for only a specified number of days of the month. The operator was given the choice of producing each well for the specified number of days in the month or of reducing the rate of production to corresponding percentages so as to achieve the same total production for the month.
(f) On or about October 11, 1967, Gulf and others filed suit against Southland and others in a district court of the State of Texas, seeking a declaratory judgment to determine the longevity of the oil and gas lease on the Waddell Ranch. Gulf et al. contended that delays in the production of oil and gas from the Waddell Ranch due to proration orders issued by the Texas Railroad Commission should not be counted in determining the date on which the 50-year term of the lease would expire, and that the termination of the lease should not occur until 1987. Southland et al., on the other hand, contended that Gulfs leasehold estate would expire on July 14, 1975, which would be exactly 50 years after the date of the execution of the lease.
(g) On or about November 27, 1970, the state district court entered its judgment, granting a motion for an instructed verdict in favor of Southland et al.
(h) The Texas Court of Civil Appeals, by a decision and opinion dated March 15,1972, affirmed the judgment of the district court.
(i) Gulf et al. next took the case to the Texas Supreme Court. That court, by means of a decision and opinion dated May 30, 1973 (and officially reported at 496 S.W. 2d 547), affirmed the judgments of the courts below, and declared that the oil and gas lease on the Waddell Ranch would terminate finally on July 14, 1975.
16. (a) During 1967, Southland accrued an obligation in the amount of $22,898.68, representing expenses payable to the law firm of Hudson, Keltner, Smith and Cunningham. This was the amount of the law firm’s fee and reimbursable expenses (including court and other related costs, travel, telephone, reproduction of documents, legal research, and postage) for the law firm’s services in the litigation referred to in finding 15. All of the $22,898.68 was paid during 1967 or in January 1968, and was a reasonable amount for the services rendered.
*469(b) Southland deducted the $22,898.68 in computing its federal income tax for the calendar year 1967. Upon examination of such income tax return, the Internal Revenue Service disallowed the total amount of the deduction, determining that the litigation expenses should be capitalized. Following exhaustion of the administrative appeal, the IRS assessed additional income tax and interest thereon against Southland. The income tax so assessed was in the amount of $10,991.37 and the interest thereon was in the amount of $1,756.06, or a total of $12,747.43. Southland paid the $12,747.43 to defendant on December 4, 1970.
17. (a) During 1968, Southland accrued obligations in the total amount of $113,892.55, representing expenses payable to the law firm of Hudson, Keltner, Smith and Cunningham and to the law firm of Stubbeman, McRae, Sealy and Laughlin. The $113,892.55 included the amounts of the law firms’ fees and reimbursable expense (including court and other related costs, travel, telephone, reproduction of documents, legal research, and postage) for the law firms’ services in connection with the litigation referred to in finding 15. All of the $113,892.55 was paid during 1968 or in January 1969, and was a reasonable amount for the services rendered.
(b) Southland deducted the $113,892.55 in computing its federal income tax for the calendar year 1968. Upon examination of the income tax return, the Internal Revenue Service disallowed the total amount of the deduction, determining that the litigation expenses should be capitalized. Following exhaustion of the administrative appeal, the IRS assessed additional income tax and interest thereon against Southland. The income tax so assessed (and attributable to the Gulf litigation issue) was in the amount of $60,135.27, and the interest thereon was in the amount of $5,999.52, or a total of $66,134.79. Southland paid the $66,134.79 to defendant on December 14, 1970.

The 1968 Reserve Study Expenses

18. (a) Southland, as do other companies in the oil and gas industry, from time to time hires independent petroleum engineers to analyze and estimate the extent of its oil and gas reserves. A reserve study is similar to a balance sheet prepared for a corporation, in that it results in an estimate of the extent of the oil and gas reserves in one or more properties at a given point in time; and the estimate is subject to change at any time due to subsequent developments. Reserve studies are generally updated every *470few years to take account of properties acquired, and of discovery, development, production, and sales that have occurred, during the interim period. The management of a company uses the information obtained in the reserve studies to make income projections, develop short-term and long-term budgets, arrange financing, and make reports to shareholders and regulatory authorities, and for other activities in the petroleum business.
(b) Clarke B. Gillespie ("Mr. Gillespie”) is a petroleum engineer and consultant, with his office in Fort Worth, Texas. The services he renders to clients include all phases of reservoir engineering, from field studies for optimized recovery operations to lease evaluations involving reserve estimates, economic analyses, and fair market value appraisals.
(c) In addition to other reserve studies, Southland obtained a reserve study of its Waddell Ranch property in 1962. At that time, Mr. Gillespie performed some of the services necessary to prepare this study. In that connection, Mr. Gillespie became familiar with the Waddell Ranch property and Southland’s interest therein.
(d) In August of 1967, Southland decided to have another Waddell Ranch reserve study prepared. Southland contacted Mr. Gillespie in August 1967 about performing this study. Following some clarification of the information desired, the employment was confirmed in September of 1967. Mr. Gillespie performed these services and submitted his report to Southland.
(e) Southland decided to hire, and did hire, Mr. Gillespie in 1967 to perform the reserve study before Gulf filed the suit mentioned in finding 15 and before Southland was aware of any intention of Gulf to file such suit. Mr. Gillespie performed some of the services on the reserve study during the pendency of the Gulf litigation. Mr. Gillespie was also consulted during this time in connection with certain technical aspects of the Gulf litigation. Mr. Gillespie maintained accurate and detailed records of the time he spent on the reserve study and on the Gulf litigation; and he carefully segregated his fee to Southland and his related expenses between the reserve study and the Gulf litigation.
(f) Mr. Gillespie’s reserve study was not made in connection with, or to assist in the preparation for, the Gulf litigation, and it was not used in that litigation.
(g) Southland accrued expenses in 1968 for Mr. Gillespie’s fee for the reserve study and his related expenses for logs and data, telephone, reproduction of documents, reports, statistical services, computer usage and keypunch, and miscellaneous, in the amount of $31,297.27. This full *471amount was paid to Mr. Gillespie by Southland in 1968 and in January 1969, and was a reasonable amount for the services rendered.
19. The $31,297.27 referred to in finding 18(g) was deducted by Southland in computing its federal income tax for the calendar year 1968. Upon the examination of such income tax return, the Internal Revenue Service disallowed the total amount of the deduction, determining that the expenses in connection with the reserve study should be capitalized. Following exhaustion of the administrative appeal, the IRS assessed additional income tax and interest thereon against Southland. The income tax so assessed (and attributable to the reserve study issue) was in the amount of $16,524.96 and the interest thereon was in the amount of $1,648.65, or a total of $18,173.61. Southland paid the $18,173.61 to defendant on December 14, 1970, at the same time that Southland paid the $66,134.79 applicable to the Gulf litigation issue (see finding 17(b)).

The Claims

20. (a) On or about March 15, 1972, Southland duly and timely filed with defendant claims for refunds of all the taxes and interest for 1966, 1967, and 1968 referred to in these findings. Defendant rejected all the claims by letters dated January 26, 1973, notices of which were duly mailed by defendant to Southland by certified mail on January 26, 1973.
(b) No part of the income taxes and interest so paid and claimed has ever been refunded, credited, or otherwise allowed to Southland.
21. Southland is the only person interested in the claims on which this suit is based. No assignment or transfer of any such claim, or any part thereof, or interest thereon, has been made.
CONCLUSION OF LAW
Upon the foregoing opinion and findings, the court concludes as a matter of law that the plaintiff is entitled to recover as provided in the opinion, together with interest as provided by law, and judgment is entered to that effect. The case is remanded to the Trial Division for a determination of the amount of plaintiffs recovery, under Rule 131(c).

 Rassenfoss v. Commissioner, 158 F.2d 764, 766 (7th Cir. 1946).

 Although the majority asserts that the holding in the Bliss case has been sharply limited, a subsequent decision of the Fifth Circuit, Campbell v. Fields, 229 F.2d 197 (5th Cir. 1956), quotes at length from the Bliss case and states that it was not overruled by Jones Estate v. Commissioner, 127 F.2d 231 (5th Cir. 1942).

 Plaintiffs moving brief at p. 35.