Court Opinion

ID: 4595927
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:16:02.472209+00
Date Added: 2024-06-11T07:51:31.791120
License: Public Domain

ANGIE E. REID, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Reid v. CommissionerDocket Nos. 32688, 36679.United States Board of Tax Appeals22 B.T.A. 1150; 1931 BTA LEXIS 2008; April 9, 1931, Promulgated *2008  DEPLETION - OIL WELL - GIFT. - Where in 1922 the taxpayer's husband made her a gift of a one-half interest in the fee of oil-bearing property, depletion is based upon the fair market value of the property at the time she received it, and not upon discovery basis or cost to donor, under the Revenue Act of 1921.  George S. Atkinson, Esq., H. V. Robertson, C.P.A., and Luke B. Garvin, C.P.A., for the petitioner.  W. Frank Gibbs, Esq., for the respondent.  BLACK *1150  These two cases were ordered consolidated for hearing and decision.  Respondent determined deficiencies for 1922 in the sum of $14,994.31 and for 1923 the sum of $2,292.82, which petitioner alleges are erroneous because of respondent's failure to allow her depletion on oil wells, either on a basis of the fair market value of the property at the time she received it, or at the time of discovery.  At the hearing it was agreed that the petition in Docket No. 32688, involving the year 1922, should be amended so as to include as an additional assignment of error the failure of respondent to allow a deduction of $97.58 for taxes paid during that year, and for the year 1923 it was agreed*2009  that the petition in Docket No. 36679 be amended to include an error of respondent in including in petitioner's net income $30.83 alleged interest which was not received during said year.  It was further agreed upon that respondent's answer be amended to include as taxable income $200.21, an excess of a deduction for taxes paid, and that there should be added to petitioner's taxable income the sum of $40,638.81, representing income from oil royalties omitted by respondent in determining the deficiency for 1923, and respondent asked that the deficiency be increased proportionately.  Another alleged error, relative to failure to allow deductions for State, county and city taxes in the amount of $10,422.87 for 1923, seems to have been abandoned, as no evidence was introduced concerning it, nor was it included in the stipulation of facts.  The facts were stipulated and from the written stipulation we make the following findings of fact.  FINDINGS OF FACT.  The petitioner herein and her husband, J. W. Reid, are citizens of the United States, with residence in Canyon, Tex.  On July 2, 1903, Reid, then a single man, purchased 117.54 acres of land situated in Limestone County, Texas, for*2010  a consideration of $1,527.50.  This *1151  tract of land had no known value as oil property at the time of purchase in 1903 or at March 1, 1913.  The petitioner married Reid on November 1, 1905.  On December 28, 1920, Reid granted an oil and gas lease on 60 acres of the above mentioned tract to one E. J. Anderson, retaining a one-eighth royalty interest.  The peitioner joined in the execution of this lease.  Oil was discovered on the aforesaid property on December 30, 1921, while title to the property was still in Reid.  On March 17, 1922, the said J. W. Reid made a gift of an undivided one-half interest in the fee of this property to his wife, the petitioner herein.  The petitioner and her husband filed separate income tax returns for each of the years 1922 and 1923 upon a community property basis and also upon a cash receipts and disbursements basis.  Reid received $37,745.38 as his one-eighth of the oil sold from this tract from January 1, 1922, to March 17, 1922, and received $72,014.74 as his one-sixteenth of the oil sold between March 17, 1922, and December 31, 1922.  The petitioner herein received payments aggregating $72,014.74 from her one-sixteenth royalty interest*2011  between March 17, 1922, and the close of the year 1922.  For the year 1923, the petitioner received and reported as income from her one-sixteenth interest of the oil sold in that year, $81,265.63.  The petitioner, against the income which she reported as having been received from her interest in the oil sold in 1922, claimed a deduction on account of depletion in the amount of $58,839.29, and for the year 1923 claimed a deduction on account of depletion in the sum of $57,314.95.  The respondent, in his audit of petitioner's returns for the years 1922 and 1923, disallowed the depletion deductions claimed, on the ground that the petitioner is limited in her claim for depletion deduction to the cost to the donor, her husband, and that, since this property had no known value for oil on the date her husband purchased the property, and no known value on March 1, 1913, for oil, she was entitled to no deduction whatsoever.  Petitioner, however, contends that she is entitled to a deduction of $55,478.86 in the year 1922 and $55,848.60 in the year 1923, for depletion, based on the fair market value of her interest in the property as of March 17, 1922, the date of the gift of the property*2012  to her.  If, as a matter of law, the Board should decide that the petitioner is entitled to depletion based upon the fair market value of her interest as of March 17, 1922, the date of the gift of the property to her, it is agreed that the depletion sustained in the year 1922 amounts to $55,478.86 and that the depletion sustained in the year 1923 amounts to $55,848.60.  Petitioner contends in the alternative that if, as a matter of law, she is not entitled to depletion based on the fair market value of her *1152  interest in the said property on March 17, 1922, the date of the gift of the property to her, then she is entitled to depletion deduction for each of the years 1922 and 1923 based on the fair market value of the oil reserves on December 30, 1921, the date of discovery; or, in other words, that she is entitled to depletion on the same basis as the donor.  If, as a matter of law, the Board should decide that the petitioner is entitled to depletion based upon the discovery value, aforesaid, it is agreed that the depletion sustained on said discovery value in the year 1922 amounts to $46,232.38, and the depletion sustained on said discovery value in the year 1923 amounts*2013  to $46,540.50.  It is agreed that the net income of the petitioner for the year 1922 as shown in the notice of deficiency dated October 19, 1927, from which the appeal in Docket No. 32688 was taken, should be decreased by an amount of $97.58, representing taxes paid during the year 1922, which amount the respondent failed to allow in computing the deficiency proposed in the aforesaid notice.  It is agreed that the net income of the petitioner for the year 1923 as shown in the notice of deficiency of January 27, 1928, from which the appeal in Docket No. 36679 was filed, should be decreased by $30.83, representing interest not received by the petitioner in that year, which amount the Commissioner had included as taxable income in computing the net income upon which the deficiency was proposed.  It is further agreed that the net income shown in the aforesaid letter should be increased by $200.21, representing an excess of a deduction allowed on account of taxes paid during the year 1923, and also there should be added to the income of the petitioner for the year 1923 an amount of $40,638.81, representing income from oil which respondent did not include in petitioner's income for the*2014  year 1923 for the purpose of determining the deficiency proposed in his letter of January 27, 1928.  OPINION.  BLACK: The contentions of the parties are fully stated in the stipulation made the basis of our findings of fact, and leave for our determination only the question of depletion.  Briefly stated, the petitioner claims that she is entitled to depletion on the basis of the fair market value of her interest in the property as of March 17, 1922, the date of the gift to her by her husband, or, in the alternative, if she is not entitled to that basis, then on a basis of the discovery value on December 30, 1921.  The respondent contends that petitioner is not entitled to any depletion because she is only entitled to depletion on the original cost to the donor, or the market value on March 1, 1913, neither of which is shown in the stipulation of facts.  *1153  The deficiencies involved here are for 1922 and 1923 and are governed by the Revenue Act of 1921.  We have had this question before us several times and have decided that the donee taxpayer, in circumstances similar to those in these proceedings, is entitled to a depletion allowance based on the fair market value*2015  of the property on the date the gift was made.  ; ; ; ; . The case of , was appealed to the Circuit Court of Appeals for the Fifth Circuit by the Commissioner, and the decision of this Board was affirmed in . Upon authority of these decisions, we hold that petitioner is entitled to depletion based on the fair market value of her interest in the property as of March 17, 1922, the date of the gift, and that under clause 12 of the stipulation and findings of fact, she is entitled to depletion allowances of $55,478.86 for 1922 and $55,848.60 for 1923.  Upon recomputation, petitioner's income for the year 1922 should be decreased $97.58 as provided in clause 14 of the stipulation.  For the year 1923 her income as shown in the deficiency letter of January 27, 1928, should be decreased by $30.83, and increased by $200.21 and the additional sum of $40,638.81 as*2016  provided in clause 15 of the stipulation and in the findings of fact.  Judgment will be entered under Rule 50.