1942 BTA LEXIS 655 | B.T.A. | 1942
Lead Opinion
Issue 1. — The question in this issue is whether the net proceeds in 1937 and 1938’ from the;sale of oil produced on the Fox lease is income of petitioner or of Caldwell. Under the assignments of November 2,1936, and the agreement made by petitioner in 1937, Caldwell was to receive all of the net proceeds from oil and gas sold from the lease. The parties argue the question under the terms of the assignment of November 2, 1936, and it will be considered with respect to the terms thereof.
The facts are that Caldwell acquired an oil payment right, that is, the right to receive a specified sum out of the oil production, if, as, and when oil was produced, saved, and sold as the consideration for his payment for the costs of drilling and equipping the wells. The instrument in clear terms gave Caldwell an interest in the proceeds of a full seven-eighths working interest in all the wells, after deducting the necessary and actual expenses of operation, until the “proceeds of the interest” paid $44,024.03 plus 6 percent interest to Caldwell. While it is true that petitioner was to pay Caldwell proceeds up to a specified amount, such payments were to be made only
The determination of the issue turns on whether or not Caldwell acquired an economic interest in the oil under the instrument relied on. It appears that respondent could not seriously contend that Caldwell did not obtain an economic interest, in the face of such authorities as Palmer v. Bender, 287 U. S. 551, and Thomas v. Perkins, 301 U. S. 655, and see also Commissioner v. O'Shaughnessy, Inc., 124 Fed. (2d) 33, but for the provision that actual operating expenses were to be deducted from proceeds from the sale of oil. The weight of authority leaves little doubt, if any, that such provision is immaterial. First, the rule is now clear, as stated in the O'Shaughnessy case, supra, that:
* * * One who acquires by contract, in whatever form, a right to the production from an oil and gas well, or the proceeds thereof until a stipulated amount has been paid, without any other or further security except the contingency of the production, thereby becomes the owner of an economic interest in oil in place * * * . [Italics supplied.]
See also, Hugh Hodges Drilling Co., 43 B. T. A. 1045, 1069:
* * * the owner of oil payment rights, who is required by the terms of the contract to look solely to the oil and gas or the proceeds from production for the agreed payments, has an economic interest in the oil and gas in place, is taxable upon the gross income derived from his interest, and is entitled to an allowance for depletion thereon.
In Ortiz Oil Co., 37 B. T. A. 656, affd., 102 Fed. (2d) 508; certiorari denied, 308 U. S. 566, among the facts, most of which have a close similarity to the facts here, Ortiz, which executed an oil payment contract with persons who advanced money for the acquisition of property, and the drilling of wells, was to manage, develop, and operate the properties and pay all expenses. The Board found as a fact, p. 660, that “They [Westbrook and Thompson] had an ‘overriding’ interest, all expenses of development and operation being paid by
While we believe it is immaterial that petitioner was to retain out of proceeds from the sale of oil enough to pay actual operating expenses, it is pointed out that under the assignment to Caldwell his right was not limited to a share in the proceeds of oil produced and sold, but was a right in the entire seven-eighths working interest in all of the wells. Petitioner was no more than an operator. In order to realize anything from the oil payment right, expenses had to be entailed to lift the oil and deliver it to pipe lines. In reality, petitioner retained no interest in the oil in place, but had only a rever-sionary interest to come back to it when and after Caldwell’s right was exhausted. If petitioner had assigned to Caldwell a right to participate in only a share of the production, it is conceivable that the parties might have executed an operating contract under which operating and supervisory costs would be borne in proportion to their interests. Cf. Taylor Hardwick Trust, 44 B. T. A. 370 (reversed on a point not involved here). Under the facts it appears that petitioner was no more than an agent of Caldwell, its chief stockholder, to operate the lease. Whatever other questions this suggests we do not consider, because no other questions are in issue.
It is held that Caldwell’s right to the oil payments constituted an economic interest in the oil in place and that the amounts which he received therefrom during the taxable years constituted gross income to him, not to petitioner. Ortiz Oil Co., supra; Hugh Hodges Drilling Co., supra; Taylor Hardwick Trust, supra; Thomas v. Perkins, supra.
Respondent raises the estoppel issue because he can not make any assessment against Caldwell for the years 1937 and 1938, more than three years having elapsed since the returns for those years were filed. Sec. 275 (a), Internal Revenue Code. The facts are that Caldwell’s returns were filed when due, on March 15, 1938, and March 15, 1939. • Petitioner filed the amendment to the petition on February 28, 1941, which was prior to the expiration of the period within which respondent could have made assessment of an income tax deficiency against Caldwell for both years. Also, the date of the hearing in this proceeding, October 8, 1941, was prior to the expiration of the assessment period for the year 1938. There is nothing in the facts to show that Caldwell, as president of petitioner and as an individual taxpayer, concealed any of the facts regarding the oil payments in question, from the respondent’s agents, or misrepresented them. He put at the disposal of the agents the records of petitioner and himself. In petitioner’s returns it is stated that its books are in the care of D. K. Caldwell. Also, Caldwell signed petitioner’s returns as its president. Caldwell’s returns bear the stamps of respondent’s auditor, the return for 1937 having been audited April 28, 1939, and the return for 1938 having been audited January 26, 1940. The 1938 return of petitioner bears the stamp “Received — • Audit Division — ” under date of April 17, 1939. The record shows (Tr. 145) that the agent asked Caldwell for figures pertaining to his income and the corporation’s income. Caldwell testified that, when respondent’s agent came to his office to audit his return for 1937, he asked the agent to check petitioner’s books, “since they both were related and had [sic] books all there in the office together.”
The question is whether petitioner’s mistaken course of conduct in including the oil payments in gross income in its returns, under a mistake of law, has estopped it from raising the question here. The respondent contends that he lost his right to assert a deficiency against
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