Court Opinion

ID: 6886739
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:30:24.885424+00
Date Added: 2024-06-11T16:05:44.038573
License: Public Domain

SIBLEY, Circuit Judge
(concurring specially).
*700The Regulation, of many years standing, which purports to give the “taxpayer” an “option” to treat as expense or as capital investment “all expenditures for wages, fuel, repairs, hauling, supplies, etc. incident to and necessary for the drilling of wells and the preparation of wells for the production of oil and gas”, does not mention lessor and lessee, or assignor and assignee, or owner and “turnkey contractor”. Any “taxpayer”, according to its broad language, has the option. But I do not see where the statutes have authorized an option to be given to anyone. Internal Revenue Code, Sect. 23(a) (1), 26 U.S.C.A. Int.Rev.Code, § 23(a) (1), repeating what has long been the statutory language, allows a deduction of expenses in carrying on any trade or business; but what is in fact a capital investment is not an expense, and is expressly denied deduction by Sect. 24(a) (2). No option is provided.
This Regulation has not been attacked by the taxpayers because favorable to them. The Treasury Department instead of modifying or withdrawing the Regulation, has, with the aid of the Courts, whittled it down by many distinctions, reaching, I think, not logically satisfactory results. A taxpayer who drills wells for others for money and who has and is acquiring no interest in the completed well, is plainly making no capital investment, and what he expends for labor and the like in doing his job is business expense, and the decisions permitting him to deduct it are right and according to the Statute and the Regulation. So those are correct which hold that one who drills a well, as the consideration for which he is to get an interest in the oil reserve and in the well, is plainly making a capital investment, just as though he were building a house or a bridge to an inaccessible mine. Everything necessarily expended to make the well or the house or the bridge is investment, not expense. It does not matter whether the driller gets an assignment or a lease in return for making the well, or whether he gets his formal title before or after he drills; in every such case he is making a capital investment.1 The Hardesty case, 5 Cir., 127 F.2d 843, in both its branches, seems to me rightly decided. But it is in the teeth of the Regulation. As matters stand, if a lessee drills a well because he must drill in order to prevent loss of his lease by condition subsequent, or by breach of warranty to develop, he is allowed the expense option under the Regulation. If he drills because he agreed to in acquiring his lease, as in the Hardesty case, he has no option. There is really no ground for this distinction. In both instances he has to drill to have .his lease. In both, having drilled, he owns the well. He has made the same capital investment. In the case before us, we deny Hunt deduction of- drilling expense in all cases but two, because he was under contractual obligation to drill and acquired an interest in the land and owned an interest in the wells after drilling them. He was plainly making capital investments. As to the two exceptions, he already owned a half of the land drilled and was acquiring an interest in the other half by the drilling. There is really no sense in saying that what he was spending on the well was half a capital investment and half expense. No one would think so, except for the option which the Regulation is supposed to give to owners. The option ought to be given broadly to all who risk their money in drilling oil wells if, as is argued, the Regulation is intended to encourage drilling, and is valid. Otherwise, an expense deduction ought to be allowed only where the facts show that the expenditures were .really expenses and not a capital investment; with no right of arbitary option given to any taxpayer. I concur in that part of the judgment which permits an expense deduction, only because the Regulation gives it and has not been attacked, and because the decided cases require it.

 In case the well is a failure, there is, of course, a loss of its cost less salvage. The deduction of the net loss as an expense, as the Regulation provides, is right in effect though not accurate. It is as though a house was destroyed in its building.