Court Opinion

ID: 4478024
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:12:51.044491+00
Date Added: 2024-06-11T12:47:53.067770
License: Public Domain

Black, /., dissenting: The majority opinion, after discussing the legal effect of oil leases which contain the “unless” clauses and the oil wells which have been drilled thereunder, concludes: “It is apparent from the foregoing discussion that they form a part of the consideration for and constitute capital expenditures in the acquisition of the * * * tracts. Accordingly, such costs may not be deducted but can be recovered only through depletion allowances.” (Citing cases.) I agree that such expenditures are capital expenditures but the very purpose of article 23(m)-16 of Treasury regulations printed in the margin is to give the taxpayer the option of either deducting as a business expense the intangible drilling costs incurred in drilling a producing oil well which he owns, or to capitalize such intangible drilling costs to be recovered through depletion. I think a producing oil well is a capital asset to a taxpayer who brings it in and owns it, whether he does it on land which he owns in fee simple, or on land which he has leased for development with an affirmative obligation to drill one or more wells in his program of development, or on land which he has leased with a mere option to drill within a given time and the lease to be forfeited unless he does drill, or on land where the lease contains no specific provisions at all as to when development shall begin. A producing oil well in all the cases which I have enumerated is a capital asset in the hands of the owner, I think, and just as much so in the one case as in the other. It seems to me that article 23(m)-16 is broad enough to include within its provisions all the cases I have mentioned above and I dissent from the view that it should be denied application to wells drilled under the circumstances which exist in the instant case. I further dissent from that part of the majority opinion which would deny the right to deduct intangible drilling costs to F. H. E. in respect of the well on the First National Bank tract and to Fleming-Kimbell in respect of the well on the Betz-JRobinson tract, on the further ground of failure to prove an interest,, respectively, in such tracts. I do not understand that the Commissioner either in his deficiency notice or at the hearing of these proceedings made any contention that petitioners were not the joint owners of the wells which they drilled on the two leases thus mentioned, in the drilling of which they incurred the intangible drilling costs which they here seek to deduct. The Commissioner makes no such contention in his brief. The issue as presented by the parties was whether under the drilling clauses of the leases — not only the First National Bank lease and the Betz-Ilobinson lease, but the other leases in evidence — petitioners were entitled to deduct their intangible drilling costs as business expenses, they having elected so to do in prior years, or whether they must capitalize them. That was the only issue between the parties on this phase of the case, as I understand it, and I think it is a mistake for the majority opinion to hold there was a failure of proof as to ownership of the oil wells in these two particular instances. Mellott and Hakron, JJ., agree with this dissent.