*1 course, positively, his sustains Of advised the evidence better and wiser falsity of an unawareness course would have been detail the an- avouchment guilt. objective swers with the and an unconsciousnessof addition response based, facts on which each was bias, Despite his unavoidable his testi- give rather than to bald statements weighed sensitively mony be- must be petitioner’s attorney’s personal character in which the cir- cause of the Nevertheless, deductions. it cannot questions and an- cast cumstances said that these determinations were personal opin- swers. Both demanded a preponderantly far from actualities as right to ion. Wertz’ conditional Whether bankrupt’s evince fraud. The corporation share at a future time planation, interroga- nature property posed was in fact a debatable tories and answers in circumstances point. inquiry apprais- for an called attorney’s and his advice his sustained substantiality byal him of the immediate burden, compel say contrary us to right. of this individual His answer finding clearly erroneous. judgment. necessarily only best his entry Reversed and remanded for many kept Too factors discharge. being anything most, or, but a chance at bankrupt opportunity an testified, to succeed. The finances, impoverished did his present his resources exercise were nil. He was not bound repay acquire funds or stock. might change preference He his or alter any time, his at fault career without Understandably prize. never attain the distant, privilege dim and tenuous America, UNITED STATES of ignored property. could be Appellant, Likewise, activity or not whether v. preparatory operation Wertz to his Joseph Thomas, M. THOMAS and Jill G. Equipment equiva- Distributors Appellees. employment question lent of nice was a No. 18306. requiring equally an answer He refined. Appeals United may States Court of employed may have been he have Ninth Circuit. simply occupied perfection been of his March 1964. plans. employment gener- quite Personal ally conveys serving the idea of for com- Rehearing April 14, Denied pensation. job praesenti He had no although sight, he had one in a distinc- unemployed. tion not unknown to the petitioner’s But the his word was not only Counsel, compet- reliance. whose ency assailed, approved is not an- ordinarily, acceptable, affirmative swers— proof purpose. want a fraudulent Eck, Thompson (2 v. 149 F.2d 631 Cir. 1945). facts, repeated, Other not here passed said not have been on to so, counsel. Even in our estimation undisputed do not weaken circum- just giving

stances outlined in a fair bankrupt’s

foundation mind and lawyer’s judgment bankrupt’s his for the

answers.

percentage depletion on the basis of a the oil *3 gas operations. claims The were re- jected by Appellees the Commissioner. timely filed a suit the District Court overpayments. recover claimed Following trial, judgment was entered their favor. Oberdorfer, Atty. Gen., question presented F. Louis Asst. The broad on the Jackson, Graney, appeal appellees Lee A. Melva M. is the amount which the Mulroney, Attys., Dept. comput-

Michael Jus are entitled to use as a for base tice, Washington, C., percentage depletion. D. Francis C. Whelan, Atty., Weiss, U. S. Walter S. Through assignments series of in- Atty., Section, Tax Asst. U. Chief S. in oil and terests leases and sub- McPeters, H. Thomas Asst. U. S. operating agreements held Atty., Angeles, Cal., appel Los for the by Quality Company, Oil hereinafter lant. “Quality”, appellees on October acquired percent (10%) an undivided ten Bayley Kohlmeier, & Kohl- Koster in the subleases held meier, Francisco, Cal., ap- for San Corporation, Richfield Oil hereinafter pellees. “Richfield”, and an undivided one-sixth Lambert, Francisco, Cal., C. Scott San Qual- (Vé) in subleases held for amicus Co. curiae Standard Oil ity Company and Hancock Oil Cali- Cal., Buckley, Angeles, Edmund Los D. fornia, hereinafter “Hancock”. for amicus curiae Tidewater Oil Co. appellees acquired interests Gibbons, Angeles, Cal., L. A. Los following arose manner: amicus Union curiae Oil Co. 1948, Quality In was sublessee under DeMartini, Angeles, William J. Los certain oil and leases and owned the Cal., for amicus Co. curiae Richfield Oil exclusive and other Miller, Cal., Angeles, William R. Los property substances Signal for amicus & Co. curiae Oil Gas gas leases, described the oil and sub- Cal., Friedman, Angeles, ject only royalties payment Robert E. Los having for amicus curiae Mobile Oil Co. the landowners royalty interests On March therein. Bennion, Cal., Angeles, Adam Y. Los 1948, Quality entered into two contem- for all amicus curiae. agreements poraneous with Richfield re- CHAMBERS, BARNES, Before lating specified portion to a land HAMLEY, MERRILL, JERTBERG, sublease. Under one KOELSCH, and DUNI- BROWNING agreements, “PARTIAL entitled AS- WAY, Judges. Circuit OIL SIGNMENT OF AND GAS LEAS- Quality assigned ES”, to Richfield * Judge. * * JERTBERG, Circuit “of all undivided [its] * * * in and On Tax title and interest their Federal Income to” two and “in and to 1953 and subleases Returns the calendar 1954, appellees, report said leases” as who the estates created their income partial part specified. receipts land on the cash disbursements assignment method, computed retained stated their deductions percentage “in sub- and to” the an undivided the basis royalties ; and other sums net amounts received them money respect operators gas proper- to the interest “with certain assignor assignee leases” re- timely in said Appellees claims for ties. filed lating part land overpayments covered and claimed refunds paid in aecord- compute were therein that entitled to were agreement” joint lands, “operating with an coverable anee concurrently prod- into manufacture made entered extract and/or during assignment. the term ucts therefrom agreement, Paragraphs assignment 6 of 4 and hereof, and or extension renewal Richfield, read follows: Operator, exploratory, geological, “4. All manage operation of conduct and drilling, producing operating and exploration, operations, discovery, produc- development, and *4 respect to de- with the hereinabove tion and thereon therefrom notwithstanding shall, lands, scribed gas, sub- and other by Assignor separate ownership and condi- stances under the terms Assignee of undivided and interests agree- of said leases tions and conducted as an en- in said be ment.” tirety operation and as of one drill- to commence Richfield lessee, all with in accordance terms ing operations or in months within six operating and conditions agreement said lieu Richfield could terminate the thereof mentioned.” hereinabove agreement reassign operating and Assignor As- “6. nor Neither quitclaim of its all and interest sell, assign, signee shall hereafter joint and to lands. Richfield transfer, convey, quitclaim or other- quired “joint maintain a account” dispose in said wise leases, accounting main- meant “the them, or in either by operator as tained Richfield hereun- thereby or in lands leased the estates recording joint der, purpose of all for the thereby, without the written created expenses, transfers, revenues, and hereto, party consent the other pertaining to the transactions except in terms accordance thereof, operations and for lands and the operating and conditions maintaining purpose and records agreement hereinabove mentioned.” rendering parties here- statements to the settling them.” and accounts between operating agreement “OP- entitled (carried in- ERATING AGREEMENT terest)” “joint In was to account” Richfield partial assign- to the referred gross opera- record revenues undivided 70% tions, royalties payable Richfield and re- leasehold interest parties; to re- Richfield was also “is an com- that Richfield cited pany, “joint “joint cord in account” and as experienced and every expense” the costs gas properties, operation including exploration, all costs of nature parties for the hereto it is desirable drilling, equip- discovery, developing, into this be- enter maintaining ping, operating and ownership party of the each cause property, producing and of and market- in and to of an undivided interest hereto therefrom, as obtained far as said leases in so affect charges liabilities, well as all other paragraph lands.” 1 of the Under including $40,000 the sum agreement, designated as Richfield assignment Richfield to for the “operator” and was by Quality to Richfield of interest in agree- given, purposes of this joint lands, “and the shall share ment, pay propor- therefor in therein tion of sole to ex- Richfield and exclusive “the Quality.” operating agreement pro- for, plore for, operate for, de- drill accounting proce- save, process velop, produce, vided more detailed hydro- oil, gas, “A” dures in Exhibit attached market and other agreement. in, under or re- carbon substances hereunder, expense operations 12, 13, 7, 9, Paragraphs 6, 22 and op- proceeds’ from be agreement provide: shall the 'net 24 of the hereunder, excess, erations Richfield, Operator “6. as here joint expense, any, if of all such instance, under, shall, in first gross shall revenues over above joint expense pay shall oper- deficit’ from such be the ‘net charge account the same to if, ations, as, pro- and when net accrue, ceeds shall then Richfield, joint expense. Opera seventy shall be receive entitled gross hereunder, shall tor credit per (70) cent thereof hereunder revenues thirty be shall entitled receive joint account. per thereof, except (30) cent personally liable for ex Operator hereunder, pense other than extent thirty shall deduct revenues, Rich- per (30) cent of net and re- field, Operator, shall reimburse *5 tain for its own use hereunder the joint solely expense from itself for charges accumulated interest refer- gross joint "the account and the rev paragraph hereof, to in and red therein, may all and recover enues establish, shall also be entitled to joint joint expense to extent that tain, maintain, n expense deduct from gross from can be recovered Quality’s thirty (30) per of said cent crediting joint by revenues to the proceeds net a reserve gross all No .account revenues. $25,000. Richfield, Oper- fund of as any proceeds during shall net accrue Quality, hereunder, pay ator shall n calendar joint month ac until cash, day on or last before the has for all count been reimbursed succeeding month, each calendar pre for current net deficits Quality’s remaining Qual- portion of gross ceding from calendar months ity’s thirty per (30) cent share joint to the ac revenues credited proceeds joint net accrued Opera count, and until Richfield as hereunder, operations account hereunder, fully reim tor has been preceding the end calendar joint expense thereto bursed all paid, month and not theretofore charged joint account.” fore remaining seventy per (70) cent Richfield, Operator “7. as here- proceeds of such net shall be the joint under, shall credit ac- belonging paid to and shall be joint income, gross count, as rev- by to or retained Richfield hereun- hereunder, operations enues der.” consisting gross proceeds from of Richfield, Operator, “12. as shall of all oil and the sale sold charge thirty on interest hereunder, Richfield, Operator as per (30) cent the net deficit value, market as hereinafter joint account, as shown defined, of all oil and not sold monthly statements herein elsewhere but its own taken to, (4) four the rate of referred at use, except provided paragraph as annum, per per cent such interest hereof, royalties tak- by Richfield, Oper- as be recovered by parties parties than the en other thirty ator, only (30) in kind to hereto per cent of the net due parties hereto, than if, as, and when hereunder gross any sundry proceeds from shall accrue.” by Richfield, sale or service rendered hereunder, Operator ben- as Richfield, Operator “13. here joint operations.” efit under, sole and ex shall have the privilege any, excess, clusive exer “9. if necessary rights cising any revenues, and all all over above agreement. exploration, event, In such or discovery, development, convenient assign seventy production (70) to Richfield shall right, title, per of all of operation on cent Operator joint lands, in and to said shall have leases management far affect the lands leased full control exploration, O’Day discovery, development, said Norris lease and said marketing, processing, production, lease to be so included transportation and lands. shall have the Richfield, lands, with the to consult with and in and on the advise whatever, Operator, power op do in its connection with may judgment, hereunder, be reason erations final but the de exclusive ably necessary expedient therefor. termination matters rest hereunder, Operator solely Operator.” Richfield, any " to drill w shall not be 1 Operator will, on or be l el any opera f or to conduct wells o r e day the last of the calendar m on s ti lands, o n t h on Operator hereunder, but s following a the month in which a w subject e l l al y , placed pr on said w lands is s a however, o d u c tion, render statement of a o t qu u c c termmate u m joint expenses, t cl lative thereafter, and w i reassign Quality aim i l l on or before the last i t s y any m said at a d ti e each calendar month render m j part of as to all or t *6 o Quality i t a statement of accumulated o n thereby relieving lands, ... itself . , , gross revenues, joint expenses, .t. , , obligations under said leases proceeds or an net net deficit d ,. , agreement operating . . under to preceding month, a calendar sho s joint lands, portion w ing or said quitclaimed thereof so reas and/or “(a) joint expense All signed, shall drill such wells and during preceding calendar joint operations conduct such on said month. may by required lands as be said “(b) O’Day products All oil and said or Norris lease lease and/or shipped derived to maintain said therefrom order leases joint by respect joint Operator the ing lands dur- effect with said Quality agrees preceding lands. to drill such calendar month drilling quantities, quality, gravity. wells and conduct such development operations por on the «(c) gas, products, All oil and or tions of lands Nor leased said derived sold and the. therefrom> Day lease, ns and saidO lease ac_ joint amount reeeived joint lands, m are not included said count may required by , , as leases (d) any i The market value of gas, oil n _ _ , , . to maintain said m order leases f . products derived l u ,, , , , , effect, upon . l force fail , therefrom, taken, retained or used » e u r Quality do, twenty so to after (in. RicMeld for its own use (20) days written notice from Rich- eluding a statement the cost of do, shall, field lands at the trucking transportation of the option Richfield, be included un price paid if same to be Rich- operating agreement der this field is to be reduced joint lands, cost), Opera amount hereunder, may tor drill such wells “(e) any sun- drilling and conduct and de dry by Op- sale or service rendered velopment operations thereon as it joint oper- erator the benefit of may operating elect to do under this ations hereunder. “(f) rentals, royalties, All the do, to, sole and exclusive and shall payments joint lease the costs and of which are charged joint expense. account. “(g) By paragraph 18, def- net Richfield had the joint account, agreement any icit of as the terminate the at may any part time case be.” as to all or of the lands, provided, upon any such termina- buildings, “22. Title to all struc- tion, quitclaim tures, improvements, facilities, reassign all of its equipment, supplies materials and right, title and interest in and to said constructed, placed installed part so far as affect the connection oper- lands as which joint operations hereunder, shall be ating agreement is so terminated. Operator remain therein, l shall have no Apri 1948, Quality On executed cept shall have the “partial assignment another have account credited gas leases” which inis the same form with the value thereof prior as the an one and transferred joint account, moved from the undivided interest to additional provided in the Exhibit “A” hereof. specified portion of land held Upon agree- the termination of this un subleases. retained an any part to all of said portion divided interest in the joint lands, buildings, all such struc- assign land second covered tures, improvements, facilities, assignment incorporated ment. The equipment, supplies materials executed connec necessary not deemed or convenient prior assignment tion with to Rich- by Operator on the day field. On the same part of said lands still sub- agreement was amended include ject operating agreement to this additional land. *7 disposed pro- shall be of and the July 1948, Quality On into entered divided, provided ceeds as for in the agreements contemporaneous two with upon hereof, Exhibit “A” the basis relating portion Hancock to a different seventy (70) per of cent to thereof of it held the lands under subleases. thirty (30) per and Richfield cent agreements “PAR- were entitled Quality, provided thereof to no OF AND TIAL OIL ASSIGNMENT such division shall be until made GAS LEASES” “OPERATING Richfield, Operator, as has been interest)”. (carried AGREEMENT joint expense imbursed in- They substantially as were the same by hereunder, including curred it Quality and those into entered between any cost of abandonment except they (1) applied wells drilled on said lands as portion ato of the land different covered operating agreement to which this assign- by Quality’s subleases; (2) the is so terminated.” 70%) (instead of a ment was of a 50% “24. It is not intention of a interest with retained undivided parties create, to hereto nor shall interest; (3) a retained 23%% agreement this ating, be construed as cre- overriding royalty interest; (4) parties partnership a expense, to in addition to items similar hereto, toor them liable as render operating those included the Richfield partners, parties neither agreement $100,000 was stated to include agent, shall or hereto be act royalty “in cash as advance hereunder” employee servant the other designated value steel market any purpose whatsoever.” Quality by goods Han- to to be delivered cock, many Paragraph both of which to be debited were 14 lists different things Quality’s Operator and credited to Han- account has

.126 agreement operating and there- which Hancock account cock’s referred out of in and hereinafter ‘joint to reimbursement was entitled gas oil, overriding Quality’s 23y2% lands’ and in 36.17% hydrocarbon pro- income; substances other of net its share joint lands duced and saved from the right of oil was to its share (5) Hancock’s gas oil, leases; except right subject under said to Richfield’s stated be hydrocarbon substances other purchase oil in accordance with and/or royalty agreement under said Quality’s operating reserved with gas or other oil or under Richfield. agreements sub- to which 20, 1949, Han- On June gas oil, ject, and and/or agree- supplemental cock into entered Op- hydrocarbon substances as other agreement amending operating ac- not be erator respects July 30,1948, bear- certain provisions count under stating, oil and sale of operating paragraph 10 of said paragraph as follows: subject terms, agreement but parties is the hereto “Each covenants, of said and conditions one-half of an undivided owner agreement, operating and each gas produced and saved all oil and parties the full has hereto and, subject lands from the only dispose of its re- sell otherwise of Richfield Oil to said oil, spective share and/or purchase Corporation all of the pro- other substances gas produced duced saved mentioned, as hereinabove and said lands under said leases has hereto each operating agreement, except such dis- or otherwise sell hydrocarbon sub- pose of all such of its said one-half Op- or as as are so reserved stances saved, produced and required to ac- erator shall representative no and Hancock has provisions of count authority capacity or mar- to sell paragraph 10 of said one-half ket part rep- agreement, no and Richfield has hydro- oil, gas, authority capacity un- resentative produced from the substances carbon agreement sell, der said joint lands.” dispose mortgage or otherwise 30, 1949 Richfield enterd December On percent Quality’s thirty (30) Quality, into written *8 oil, hydrocarbon gas or other the Thomas, Joseph appellee M. and other produced and saved from substances having prop- persons in the an interest joint lands said the under leases (re- Richfield, being operated erties agreement, operating said “Quality”), collectively to

ferred operator under that agreement operating of March the amend agreement, operating said shall have agreement 17, 1948 as amended the right to for the account the deliver Paragraph April 29, 1 of (cid:127)of the Quality gas oil, Richfield as follows: amendment reads hydrocarbon substanc- other Quality is of an “1. the owner royalty in kind as es taken thirty (30) percent and undivided or under under said is of an undi- the owner Richfield agreements gas or other lease seventy (70) percent the vided subject.” to which said leases are under, and the lease- lessee’sinterest By paragraph by, 2 of the amendment oil and hold estates created agreed Quality buy, operat- to Richfield agreed leases said described oil, sell, ing agreement share of to its referred hereinafter 30% leases’, substances and other in so far as to as ‘said produced and saved from the cover the lands described

127 through in full and effect force as defined market value thereof at the agreement. original operating and 1954. in the Paragraph states amendment production prior proceeds from The offset had the to Richfield that both to from the Richfield and selling price against and deduct operations, Hancock exceeded the cost share, Quality’s share of such operation expenses in- 30% 30% joint expenses as defined prior to 1953. curred agreement, original operating disposition of the issue month prior of the calendar to the end automatically dispose of will other ad- sales were made. justments specifica- summarized amendment, By paragraph 6 of the upon by appellant tion errors relied original operating paragraph of6 from since all the lower court’s derive provide agreement to was amended holding as to the allowance. pay and that would Richfield of net limitation con- income 50% personally for its would be liable applica- tained in 26 U.S.C. is not § expenses only to extent of such share ble facts before us. under the proceeds from amount of arising issues Since the its share the sale lationship Quality and Richfield between gas. arising to are identical the issues amendment, By paragraph 9 of the relationship between original paragraph operating of9 Hancock, will we hereafter our confine agreement provide was amended existing relationship discussion to the pay Quality, would Richfield Quality and Richfield. day last before the each calendar relationship may This be summarized Quality’s month, partial assign- Under the follows: deducting offsetting the after first ments of oil and leases made expenses. latter’s share Richfield, Quality retained By paragraphs of the amendment undivided in and to the- original operating agreement was assign- partial leases covered substitute, amended crediting references thereby ments and the estates created. revenue 30, 1949 Under the December amendment account, reference was; agreement oil or Rich- sale declared to the owner of inter- field. estates, est leasehold under the day July, 1950, appellee 15th On the hydrocarbon- and to Joseph M. Thomas and entered produced and substances saved there- into AGREE- “MODIFICATION from. MENT” which the original operating agree- Under modified, so far as the given the sole appellee concerned, of such explore for, develop, pro- clusive *9 paragraphs relating to the as- delete to oil, gas hy- duce and market and other signment Quality’s of and sub- interest drocarbon substances recoverable from provision, stitute Richfield joint the lands. Under the amendment appellee, requiring any assign- and such 30, 1949, agreed of December it was that parties’ ment to of be the entire interest Qual- parties of [Richfield each ity] the and equal or of interests in both but has the to sell or other- permitting mortgage pledge or as se- dispose respective of wise its of share curity for debt. oil, all the other joint ownership produced The above described of substances and saved from the- rights subleases, lease, oil and in under said the and that described agreements representative authority with Rich- Richfield has no Hancock, amended, capacity dispose field and or remained to sell otherwise

leases. and other field, of per liable amendment, enues and Richfield agrees was entitled chargeable in the field. The excess count was and above as “net instance, price of offset duct erating entitled expenses, erating agreement ity imburse itself ity or sale to Richfield. expenses. of such ducting ity’s changed the sale of oil Under Quality’s any 30% paid paid is to income the annum. 30% extent charge from share Richfield all against original operating full amount of the to proceeds,” “net operator, account joint expenses Under share fund of assigned gross agrees to buy including thereof, except gas hydrocarbon substances receive 70% References Quality’s personally references to the for interest 30% kind as Richfield of such offsetting Quality’s pay deficit,” its share to credit original operating at its interest was revenues any joint expenses is defined the retain, of both share, market value the has the all joint expenses $25,000. deduct account. of which Quality agrees to joint expenses pay amendment required, the sum gross royalty 30% to at the liable for its share only crediting has deficit) and thereof maintain to the account of oil and from share, on the agreement. required to re- account were revenues a reserve expenses Richfield to the extent rate of original op- Under gross personally as defined to after de- ac- joint Quality’s to Richfield said $40,000.- Richfield revenue than (includ- for the and de- amount deliver selling agree- taken solely Rich- Rich- Qual- Qual- Qual- their over first rev- was gas. 4% sell op- the Richfield Revenue Code exceeded references of the tax applicable operation expenses applicable identical. Although preciation of mines, “§ be ural —The n case; “§ ing allowance his tions amount age, specified ties ural ing al excluding er der section 611 shall be the (b), Internal pertinent Internal Revenue Code tioned between the lessor lessee. “(b) “(a) section lease, “(b) “(a) General rule.—In the case years. deposits, allowed as a deduction in 611. cases delegate. gross proceeds it “(1) deposits, and the allowance for taxable income respect prescribed by deposits ^[*] such reasonable allowance mines, wells, mines, wells, the cost Special General rule.—In the Percentage equal will be to the 1954 Code to to the tax the deduction under ^[*] Allowance Percentage Revenue Code peculiar from such income Leases.—In the case provisions depletion ^[*] be provisions improvements, from * * * applicable ” in subsection the listed rules.— tax the made under be of incurred timber, question, Hancock conditions production wells, equitably appor- property. year year depletion percentages, rents in subsection a reasonable are, deduction depletion un- of Secretary of 1954 are: and for de- amended, provisions there of 1953 other nat- the Internal of 1954 operations, property from both percent- comput- taxpay- 1954, our accord- (b), of regula- case of natur- royal- essence, each rates. in * *10 * shall each nat- of a since each of is

129 (1956); Smith, 100 L.Ed. 347 (a) Parsons v. ferred to in subsection are as follows: this section— wells. property. “(c) come from the «* “(1) “(1) property. Definition ^[*] Gross income —The ^[*] —For percent property’ term gross income —oil purposes of ‘gross means, gas in- in the statute is gross ing must be equal 359 747 property from such (1959). U.S. income from the equitably proportioned 215, depletion rents or * * limited gross 79 S.Ct. taxpayer income an amount royalties paid allowance under property 27%% 656, Such allowance in respect 3 L.Ed.2d “of exclud among (1954 Code): Treasury Regulations on “Sec. an oil or come from «» ease 1.613-3. ^[*] of a gas *» mining. property well, Gross other than Income gross Income in- Tax the oil missioner v. Southwest with their ing supra; S.Ct. v. Twin Bell parties having Parsons v. 174, respective gas 79 L.Ed. 383 Syndicate, Smith, supra. economic place interests. Helver Exploration Co., (1934); in accordance 293 U.S. interests Com 312, in permit pletion minerals tal when the minerals are exhausted the Exploration Co., supra; Burton-Sutton tion. equivalent manufactured transported property shall be market amount for cinity is refined case come from section investment (( “(a) not sold on sale, before conversion or ^[*] oil or is in The deduction allowance for From The recoupment ^[*] product prior Oil and 613(c) the well. If the place # recognition field ff allowance in the minerals so that property’, gas price gas Property. the immediate vi- (1), converted into a of the owner’s income from the wasting premises wells, assumed premises prior wells. representative taxpayer of the fact that of the oil or is means transporta- sale, as used in designed ‘gross assets In but or is sells in- capi is de to Commissioner, supra, pendent solely upon the extraction and profit sale of the oil.” property relationship must look for return of made form of the er, supra. S.Ct. Co., supra; oil or traction of interest.” See also: Commissioner v. Southwest Commissioner v. 551, quired, “Economic the oil in depletion 53 S.Ct. case p. 411, dependent upon gas from that economic interest de- A taxpayer investment, any Palmer allowance the oil or taxpayer Parsons v. place place, 90 L.Ed. 343. interest does not mean title allowance taxpayer’s 225, depleted. Kirby Southwest 77 L.Ed. but the is entitled to v. derived from the ex 326 U.S. has an Bender, where he Petroleum Co. v. secured Smith, supra. Palmer v. Bend his particular legal possibility to which Exploration capital. “economic p. 604, 287 U.S. by legal (1933) ; has is not ac he In capital unimpaired. owner’s is Helver Company Commissioner, Oil v. 328 U.S. Co., 362, v. Bankline Oil 303 U.S. 25, 861, (1946). 66 S.Ct. 90 L.Ed. 1062 616, ; (1938) 58 S.Ct. 82 L.Ed. 897 Kir Company Commissioner, Petroleum question v. presented The critical 599, 409, 326 U.S. appeal 66 S.Ct. 90 L.Ed. 343 appellees is whether the (1946); question, Commissioner v. Ex Southwest the tax have ploration Co., 350 U.S. working 76 S.Ct. economic interest inter- *11 130 Supreme to entitle them the Court in the cases of the est1 above computation legal of cited has it a base the made clear that

to title use property proportionate concepts a depletion law allowance alone not their party of leased from the determinative the revenues who has of an share working economic in interest the lands. interest. In of the area taxation economic realities appellant and amici the consequences. determine tax recognize appellees companies that the oil legal property in interest have Under place gas in under the reserv oil and placed amended: Richfield was in sole rights Quality, and of retained ed property; and exclusive control of the appellees an have economic obligated concede that throughout gas place in suf in oil and interest relationship furnish, term of the pro support on the ficient to instance, capital exploration, first all re from sale oil ceeds development operation prop- of the They contend that ceived them. erty; Richfield retained title appellees’ limit to tangible is the property; Quality was under profits” compare to “net obligation personal no to contribute to place. A in oil and in interest2 portion expenditures; bear of such profits is deemed solely Richfield production look in oil and in economic interest recoupment Kirby place. Co. v. Petroleum Commis expenditures, and risk alone bore supra. sioner, Burton-Sutton Oil Co. See production if burden failed Commissioner, supra; Commissioner v. equal expenditures; and Richfield Exploration Co., supra; v. Southwest recoupment alone benefits from ex- Commissioner, 282 Mines Grandview v. penditures through production since 1960); (9th F.2d Cir. Commissioner 700 obligation personal no Co., (9th Oil 144 F.2d 276 Cir. v. Felix expenditures. respect 1944). In our the substance and effect view Appellees contend have a legal arrangement Rich- “carried interest” Quality assigned is that field and place.3 beginning legal of the at the support appellees In such contention Quality’s relationship, so much of rely following Reynolds on the during cases: v. gas place as would be needed 1932) McMurray, (10th F.2d 843 60 Cir. relationship to reim- of that the term C.D. 287 U.S. 53 S.Ct. 77 L.Ed. Quality’s portion of burse Richfield 573; Helvering Armstrong, v. 69 F.2d expenses, development and (9th 1934) ; 370 Cir. T. K. Harris Com inter- an economic thus retained pany Commissioner, v. (6th 112 F.2d 76 working the leases interests of est in the 1940) ; Cir. Commissioner v. J. S. Aber only reality profits” a “net inter- but in crombie, 162 (5th F.2d 1947); Cir. proceeds from The fact est. R., Prater 1959). C. v. I. (5th F.2d 124 Cir. years question production development opera- the cost ceeded during legal relationship those While the tion be Quality, Richfield bore tween Richfield and fact that not alter the viewed does standpoint property concepts share law risk and burden solely pro- is, form, expenditures and looked co-owners working recoupment. involved, the leases duction others, royalty of the on behalf Mineral interests minus interests. costs future advances recover such and to gross production 2. A measured accruing any, production, if profits operation prop- net erty. of the working interest. owners’ Weinert, al. v. et H. H. Estate of See (5th arrangement Commissioner, Cir. 3- An 294 F.2d co- between two or more working interest, whereby 1961). owners of a one agrees part advance or some *12 131 holdings Exploration Co., Cir., in that v. Southwest We concede 58, upon appellees support F.2d company in cases relied favor the oil drilling which did their contentions. to the exclusion of him with no oil but had an who ac- holdings Armstrong McMurray, drilling cess road and the onshore site primarily, if not and Harris are based to reach the offshore oil. But I was wholly, concepts, upon property law wrong. give opinions in con- cases no those me, (the Thomases), To con- to the “economic interest” sideration Oil many speculator gave cept developed Supreme interest as a of the it the same percentage of Court Likewise Aber- economic cases above cited. the oil rely upon property (or they) personally as if it crombie and Prater had been legal concepts fictions liable law resort severely Thus, costs. criticized a recent would not hold were I the Thom- Circuit,4 ases down to and their decision the same their net profits, largely precedential but would value was undermin- let them share the depletion on the difference ed. between the profit gross profit. position in no We are to overrule wrong upon by again, appellees If I am the cases relied is the cept Armstrong today, unhappy evidence I am case. We believe with vitality majority’s that case has result. been sapped by the above cited decisions of the Supreme expressly Court we over- Armstrong. rule the decision judgment of the District Court

is reversed. Judge (dissent-

CHAMBERS, Circuit ing) : Gross, David SMITH Erwin on behalf would affirm. I taxpayers of themselves and on be Exploration, Before Southwest U. taxpayers half of all other Vir of the 308, 395, gin Islands, Appellants, 347, S. 76 S.Ct. 100 L.Ed. I unhesitatingly would have concurred v. foregoing opinion. The GOVERNMENT OF the IS VIRGIN LANDS, Mario Lewis as Commissioner In this field we deal Property and Procurement only a deduction that has an occasional Hodge. Steadman accidental relation the cost or in- No. 14545. wasting justi- vestment asset. The special fication for this consideration is Appeals United States Court of encourage said to be that we must do it to Third Circuit. taking necessary the risk make Argued at Charlotte Amalie keep country big strong. our amI Jan. 1964. enough (and not wise it is of our none Decided Feb. business) to condemn the law. As a citi- zen, something think I would I favor present like the law. believing purpose But that the

depletion provisions of the Internal Rev- encourage (or enue Code was to the man company) put money his ground hole was what led me to opinion concur in our in Commissioner Weinert, Commissioner, supra.

4. Estate of H. H. et al. v.