Court Opinion

ID: 4478924
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:13:22.124956+00
Date Added: 2024-06-11T15:03:33.448085
License: Public Domain

Withey, J., concurring: I concur that there are deficiencies in the income tax of petitioner based on the amount of the oil royalties and rentals received by it in the years at issue. It should not be held, however, that the actual costs incurred in taking the water from the river, storing it, delivering it to petitioner’s stockholder customers, and maintaining the facilities to do so are not ordinary and necessary business expenses. There is no dispute here as to the amount of such costs or its reasonableness. Such being the case, to hold they do not constitute ordinary and necessary expense merely because they were in part defrayed by application of oil royalties and rentals acquired from a separate enterprise to such water costs does violence to the basic concept of taxation upon net business income. Petitioner is taxable on the oil royalties and rentals because, in substance, they or the water into which they were converted are clearly surplus after the conversion which was distributed to petitioner’s stockholder customers at an amount less than the water’s value exactly corresponding to such royalties and rentals. In substance then the royalties and rentals were so distributed as dividends. As stated, such dividends were paid from a water surplus. For illustration, it is considered that a gallon of water reaches petitioner’s headgate in the river. At that point it has no intrinsic value to petitioner for it then must be taken, stored, and delivered and the facilities to do so maintained. By the application of its oil royalties and rentals to that processing, the gallon of water immediately upon being taken from the river begins to acquire value to the extent such royalties, rentals, and the rate paid by the customer are applied to its processing. At the point where the gallon of water is about to be turned over to the customer it is worth at least the cost of bringing it to that point— for the sake of discussion let us say 10 cents. One cent of the cost is paid by the stockholder customer and 9 cents defrayed from royalties and rentals. The 9 cents thus distributed is then in substance clear surplus in petitioner’s hands and a distribution by way of a dividend to such customers. The surplus is taxable business net income.