1940 BTA LEXIS 987 | B.T.A. | 1940
Lead Opinion
The respondent allowed depletion upon amounts received from International by petitioner as royalty payments upon the two-thirds royalty interest owned by petitioner, but denied depletion upon $305,000 received as consideration for conveyances to International. The question presented here arises upon the disallowance of percentage depletion upon the $305,000. The gist of the principal problem is whether depletion is allowable on ⅛⅝ theory that the petitioner, having owned both a leasehold and about two-thirds of the lessor’s interest, was in effect in conveying to International, the lessor of a lease, retaining an economic interest, under such cases as Herring v. Commissioner, 293 U. S. 322, or should be denied on the theory that it occupies the position of an assignor of a lease, within the principle enunciated in Helvering v. Elbe Oil Land Development Co., 303 U. S. 372, and cases to the same effect.
The petitioner executed and delivered (a) an assignment in the usual form of an oil and gas lease as to about 1,327 acres of land, (b) an assignment of an oil payment, (c) an original oil and gas
The oil payment, of a value of $650, was payable from the net proceeds of one-fourth of the oil or gas as, if, and when produced and sold by the Mcllroy Oil Co., to whom petitioner assigned the lease. Mcllroy was not liable personally for the payments. After any default in payment, petitioner’s signature was necessary upon division orders on the sales of oil or gas. In assigning to Mollroy, the petitioner retained an economic interest in the oil and gas, but sold such interest for cash, and was not entitled to depletion upon $650, that part of the $305,000 consideration attributable to the oil payment. Commissioner v. Fleming, 82 Fed. (2d) 324; R. R. Ratliff, 36 B. T. A. 762; Rawco, Inc., Ltd., 37 B. T. A. 128 (139).
Included in the lease assigned to International was a tract of 130 acres in Carson County. This was not included in the warranty deed by which the petitioner acquired the remainder of the estate of the lessors, Lewis and wife. Therefore the petitioner owned no interest in the 130 acres, except as lessee. Depletion was properly denied, to the extent of $2,000, the value of the lease. Helvering v. Elbe Oil Land Development Co., supra; Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56. Hammonds v. Commissioner, 106 Fed. (2d) 420.
This brings us to consideration of the principal issue: As to those lands in which petitioner had acquired not only a lease, but the lessor’s interest, except approximately one-third of the rights to royalties under oil and gas leases, is petitioner entitled to depletion upon amounts received, in large part for an assignment of the lease held by it, and as to a smaller amount of land, for delivery of a lease executed by petitioner itself, and for the “Royalty Owner’s Agreement” as to offsetting wells, etc.? In effect, the petitioner argues that it occupies the same economic position as the original lessor, having acquired his interests (except one-third of royalty rights conveyed to others) and has an economic interest in the production to be realized from the lease conveyed and is entitled to depletion. Petitioner bases its contention in part upon the idea of merger of lease in the larger estate acquired from the lessor, but urges that, irrespective of merger and ignoring the technical forms of conveyancing, such an interest in future production remained in the petitioner as to require allowance of depletion upon amounts received for the conveyance.
We think it plain that petitioner’s position must depend upon whether its leasehold interest was merged into and extinguished by the acquisition of the remaining interests of the lessor; for it is not to be doubted, in the light of the decisions above enumerated, that an assignor of a lease, merely assigning the rights thereunder to his assignee, does not, in receiving a cash consideration for the assign
Moreover, as a matter of law there was, in our opinion, no merger. That doctrine involves the extinguishment or “drowning” of a lesser in a larger estate. The petitioner never acquired all of the estate remaining after execution of the oil and gas lease. One-third of the right to receive royalties under the lease and under any future lease was in other hands. A lease can not, we think, be merged in any estate less than that of the full estate of the lessor. In Wisconsin National Bank, 4 B. T. A. 109, 113, we held that there was no merger of a leasehold into a two-thirds interest in the fee estate, acquired by the lessee after execution of the lease. We said:
* * * Although the lessee purchased portions of the fee at different times, the leasehold, nevertheless, continued to have a legal existence in its entirety and so could have been sold or otherwise transferred as a whole at any time prior to legal merger of the lesser and greater estate through acquisition of the entire fee by such lessee.
In the present matter also approximately one-third of the royalty interest was extant in others and the lease was in fact sold or otherwise transferred as a whole — “prior to legal merger of the lesser and greater estate through acquisition of the entire fee by such lessee.” Quoting Bouvier, we also observed:
“To have the union operate a merger, the estates must unite in one and thie same person, having a commensurate and coextensive interest in each, with no intervening interest in another. A legal estate in fee in one who has only a partial equitable interest, or vice versa, would not merge. In re Washburn’s Estate, 11 Cal. App. 735; 106 Pac. 415.”
We consider it clear that the outstanding one-third interest in the royalties was an intervening estate, and that the whole lease can not merge in less than the whole interest of the lessor. The outstanding royalty interests had a right to continuance of the lease and to payment of royalties thereunder. A conception of the lease merged as to two-thirds of the royalty interests, but still existent as to one-third, is an anomaly. Less than the entire lessor’s interest can not encompass and “drown” a lease under which every part of the lessor’s interest has rights.
In the state of the record the same must be said as to the original lease executed by the petitioner to International. This comprises a comparatively small portion of the total acreage involved, i. e., 160 acres as compared with about 1,327 acres in the lease assigned. The
Decision will be entered, for the respondent.