(Download) "Dearing v. Commissioner of Internal Revenue." by United States Court of Appeals for the Fifth Circuit * eBook PDF Kindle ePub Free
eBook details
- Title: Dearing v. Commissioner of Internal Revenue.
- Author : United States Court of Appeals for the Fifth Circuit
- Release Date : January 03, 1939
- Genre: Law,Books,Professional & Technical,
- Pages : * pages
- Size : 62 KB
Description
The taxpayer, Willis R. Dearing, during the tax year 1932 was a partner in the firm of R. H. Dearing & Company, which was doing a large business in drilling oil wells and receiving pay for its services partly in cash and partly in a right to payment of a fixed sum out of the oil and gas produced, saved and marketed from the several wells successfully brought in. The present contest relates to the proper treatment for income tax purposes of the receipts in or from these socalled "oil payments." The partnership returned only the money received, having always made its returns on a cash receipts basis, and claimed that as to each successful well it should apply the receipts in money from the oil payments first to extinguish the cost of drilling the particular well and treat the excess only as a taxable gain.The Commissioner as to each partner held that the right to receive in the future the agreed oil payment,s was, when the well turned out a producer, a property having present market value, and therefore was a taxable gain in the year the well was completed, and fixed that gain at 75% of the total to be paid out of the well; and he held also that when the payments from the oil contract in after years exceeded the 75% thus taxed the excess was an additional taxable gain. He allowed no deduction for depletion. The Board of Tax Appeals held that although such an oil payment contract might be salable, there was too much uncertainty and contingency about it to make it a property having a readily ascertainable market value, following Edwards Drilling Co. v. Commissioner, 35 B.T.A. 341, affirmed 5 Cir., 95 F.2d 719, and that in consequence it should not be taxed as a gain until sold or until money should be received under it from the oil sales. This ruling is acquiesced in by the Commissioner. The Board further held that the expenditures in drilling, if not deducted in the returns as expenses of doing business as was held might be done in the case of Vinton Petroleum Co. v. Commissioner, 5 Cir., 71 F.2d 420, stood as the investment of the partnership in the oil payments contracts obtained by the drilling; that these contracts conveyed to the partnership an economic interest in the oil in place which was depleted by the production of the oil, so that the money receipts derived from the production of the oil carried a depletion allowance of 27 1/2% as provided by Section 114(b)(3), Revenue Act of 1932, 26 U.S.C.A. § 114(b)(3); but that there is no right to recover the drilling expenses otherwise. These rulings the taxpayer contests.