127 F.2d 355 | 5th Cir. | 1942
This is another of that growing body of cases in which the taxpayer makes claim that moneys expended for drilling and equipping oil wells, are deductible under the intangible drilling and development costs option.
Developing its view the Board declared: “If any part of the amounts expended for drilling, equipping, and completing an oil well is to be deducted, it must meet the test of the statute and regulation, and it is not enough to say that such expenditures are deductible because the contract under which they were made is not, strictly speaking, a turnkey contract. The contracts here were not contracts for the employment of labor and the purchase of various items of material and equipment but were contracts for the drilling and completing of oil wells. In other words, the petitioner was contracting for a finished job and the mere fact that it agreed to furnish some of the items needed by the contractors for use in the operations does not convert the contracts here into contracts for the employment of labor and the purchase of equipment. * * * ” The petitioner did not hire labor or buy material and supplies but agreed to pay an independent contractor, a stated sum for a finished job, leaving it to the contractor to make his own deal for labor and equipment and the fact that the petitioner may have furnished some of the supplies and some items of equipment does not change the contracts so as to bring any portion of the amounts paid the contractors within the provisions of Art. 23-M 16.
Petitioner meets the Bdard’s position with the contention here, that the so-called turn key cases on the analogy of which the Board relies, were not cases laying down broad principles of construction and therefore furnishing bases for deciding other cases by analogy to them, they were merely fact cases in each decided on its particular facts. Each held that the taxpayer had not shown within the meaning of the regulation, that he had expended monies for intangible drilling and development costs but had shown that he had in effect, contracted for the purchase outright of a capital asset, a completed well. Nothing in any of those cases, argues the petitioner, lends support to the view the Board took here, that amounts expended by the taxpayer, not in the purchase of a completed well but in connection with drilling and development conducted by him on his property were any the less under the option because some of the costs of the drilling were paid out tp an independent contractor. Indeed, urges petitioner, the regulation itself, by its express provision, “drilling and development costs shall not be excepted from the regulation merely because they are incurred under a contract providing for the drilling of a well to an agreed depth or depths at an agreed price per foot or other unit of measurement”, completely negatives this view.
We agree with petitioner. Though in the beginning the Commissioner claimed that the contracts in question were turn key contracts, this view was not accepted by the Board and it is not, indeed, it could not, reasonably be claimed that they were. What is affirmed by the Commissioner and held by the Board, is that they so resemble, are so much like turn key contracts, that they must be dealt with as though they were.
Both in tax decisions and in those arising under general law,
We have no disposition to question the decisions in the turn key cases. We think those cases were correctly decided. But we think it plain that in denying the option there, because a turn key contract for a completed well should be regarded as the purchase rather than the drilling of a well, those cases, on their facts, pressed the analogy of the purchase of capital assets there made use of, to the verge, and that if any further pressing of the analogy is to be done, it must be by amendment, and not by construction, of the regulation. That those cases were essentially fact cases and were not decided with the idea or for the purpose of laying down general controlling principles, the Hughes case,
We conceded the force of the- taxpayer’s argument,
But pointing out that to obtain the deduction it was not sufficient for the taxpayer to show that reasoning by analogy, it ought to be, it must show that it was within the regulation, we rejected its claim that the deduction should be allowed it. There, the taxpayer was using analogy to extend the regulation to claims not covered by it. Here, the shoe is on the other foot, and the Commissioner, because of some resemblances in these facts to the facts in the turn key cases, is seeking by the same
The order of the Board is reversed and the cause is remanded for further and not inconsistent proceedings.
(a) (1) “Option with respect to intangible drilling and development costs in general: 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 or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account. Such expenditures have for convenieuce been termed intangible drilling and development costs. * * * Drilling and development costs shall not be excepted from the option, merely because they are incurred under a contract providing for the drilling of a well to an agreed depth, or depths, at an agreed price per foot or other unit of measurement.” Art. 23-M, Regulations 86 and 94.
White v. Cascade Oil Co., 14 Cal.App. 2d 695, 58 P.2d 994, 998.
Cf. Com’r v. Ambrose, 5 Cir., 127 F.2d 47, just decided.
Com’r v. Ambrose, note supra.
“These contracts obligated the contractor ‘to furnish all derricks, all necessary drilling equipment, machinery, easing, cement and labor, in fact, everything necessary to complete said well in a first-class workmanlike manner, including fuel and water, the owner not being obligated to furnish anything whatever in the way of labor, fuel, drilling supplies, or anything necessary for the completion of' the well.’ ” J. K. Hughes Oil Co. v. Bass, 5 Cir., 62 F.2d 176, 177.
Of that argument we said:
“It is alleged that there is no reason in or basis for the distinction, for the purposes of capitalization, between moneys which an owner pays out when he drills a well himself, on his own property, with bis own labor and, equipment, or when a contractor drills*it for him on a footage basis and the same amount of moneys representing the same amount of drilling and development costs paid out to a contractor as a part of the whole cost price of a turnkey job.
“If appellant claims no more than that the distinction is supported by no evident principle, that subjected to analysis moneys laid out in a completed improvement, such as an oil well, are no less and no more capital expenditures when it is furnished by a contractor on a footage basis than when it is done under a turnkey contract, I think we could agree with him.
If, however, he means to claim that, because this is so, he is entitled to have his deduction allowed, we cannot”