Molter v. Commissioner , 19 B.T.A. 911 ( 1930 )

CARRIE E. MOLTER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Molter v. Commissioner

Docket No. 25730.

United States Board of Tax Appeals

19 B.T.A. 911; 1930 BTA LEXIS 2299;

May 12, 1930, Promulgated

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The petitioner was the equitable owner of an undivided one-half interest in certain real estate at the time oil was discovered thereon in November, 1921, and she is entitled to depletion deductions based upon the fair market value at the date of the discovery or within thirty days thereafter.

Wilbur H. Jones, Esq., Mark H. Adams, Esq., and Stanley Spurrier, C.P.A., for the petitioner.

L. A. Luce, Esq., for the respondent.

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LANSDON

The respondent has asserted deficiencies in income taxes for 1922 and 1923 in the respective amounts of $13,961.30 and $1,624.53. The deficiencies arise from the respondent's disallowance of deductions for depletion, alleged to have been sustained upon certain oil and gas property owned by the petitioner, on the ground that she acquired an interest in a proven tract without cost and, therefore, is not entitled to the deduction provided for in section 214(a)(10) of the Revenue Act of 1921.

FINDINGS OF FACT.

The petitioner is an individual residing at Wichita, Kans. She was married to Roy B. Molter in December, 1897, in Clark County, Illinois, where they rented a farm and engaged in farming. Prior to her marriage petitioner had been a school teacher and had accumulated some money and property which, together with her husband's property, consisting of less than $100 in cash and one horse and a wagon, was used to start housekeeping and stock the farm. A bank account was opened in the name of Roy B. Molter at the First National Bank in Charleston, Ill., in which was placed the money of both and all income from the farm. Both parties checked on the account. During the next succeeding eight years petitioner and her husband lived on the rented farm in Clark County, where she performed the usual duties of a housewife on the farm, including gardening, milking cows, making and selling butter, cooking for helpers and harvest hands, and assisting in every way possible in the operation of the farm.

In the fall of 1904 a contract was entered into by petitioner and her husband for the purchase of an 80-acre farm in Coles County, Illinois, for a price of $9,000. Under the terms of the contract an initial payment of $500 was made, which represented profits accumulated from farming. A further payment of $3,000 was made upon delivery of the deed in the spring of 1905. The balance of the purchase price was represented by notes secured by a mortgage on the property. Part of the $3,000 payment was borrowed by petitioner and her husband from the bank.

In May, 1907, petitioner sold a 40-acre farm which had been given to her by her father in a division of property among his children, receiving therefor $2,000, which was subsequently applied to reduce the indebtedness arising from the purchase of the Coles County farm. The remaining purchase money notes were paid as they came due from farm profits.

In the spring of 1909, petitioner and her husband made a trip to Kansas to investigate the farming situation in that State with a view to moving there. In the summer of 1910 petitioner's husband again went to Kansas and tentatively selected two farms which might be acquired. After returning to Illinois and talking the matter over with petitioner, they decided to trade for a 320-acre farm in Butler County, Kansas. The deal was closed on November 21, 1910, and a deed to the Butler County land was delivered. The Illinois farm was conveyed by petitioner and her husband in exchange for the Kansas farm. At the time of the exchange, $5,000 remained unpaid on the Illinois farm and there was a mortgage against the property in that amount. In consideration of the assumption of that mortgage by the grantee, petitioner and her husband assumed a $6,000 mortgage on the Kansas farm, which instrument was signed by petitioner as well as her husband.

In 1921 the petitioner and her husband executed and delivered certain oil and gas leases covering the entire Kansas farm. Such leases were in the regular form, which retained to the lessors a royalty interest in and to all oil and gas produced from the premises. Oil was discovered in commercial quantities on November 17, 1921. Thereafter, while seeking to have a division of the proceeds from the sales of oil, Roy B. Molter discovered that title to the land stood solely in his name. There had always been an understanding between petitioner and her husband that the Illinois farm and the Kansas farm were owned by them jointly. Until this time, their attention had not been drawn to the fact that the legal title stood in the name of petitioner's husband. A lawyer was consulted, who advised petitioner's husband that to make a legal division an assignment of one-half of the royalty interest should be executed to petitioner. Accordingly, on December 28, 1921, the following instrument was executed:

THIS AGREEMENT, Made this 28th day of December, 1921, between R. B. Molter, party of the first part and Carrie E. Molter, party of the second part,

WITNESSETH: That in consideration of the sum of One and no/100 Dollars and other valuable considerations, the receipt of which is hereby acknowledged, first party hereby sell and assign to said second party an undivided one-half (1/2) of his one-eighth oil royalty, and one-half (1/2) of all gas royalties and gas well rentals reserved to him in the existing oil and gas leases, as shown by the records in the office of the Register of Deeds of Butler County, Kansas on the following described real estate situated in Butler County, State of Kansas, to-wit: (Description of real estate.)

Providing oil or gas is produced in paying quantities on said land within five (5) years from the date hereof.

AND for the same consideration first party hereby sell and assign to second party the right to one-sixteenth (1/16th), delivered free of cost as royalty, of all oil produced from said land under any subsequent leases executed by first party on said land, or any part thereof, within said five (5) year period, and one-half (1/2) of all gas royalties and gas well rentals reserved to said first party under any such leases, providing oil or gas is produced in paying quantities on said land within said five (5) year period.

IT is the express understanding and agreement that after the termination of the existing oil and gas leases on said premises, or any of them, that first party shall have the full and exclusive right to execute subsequent leases on said premises.

IT is further understood and agreed that second party acquire no interest hereunder to delay rentals provided for in existing leases or to any cash considerations or bonuses received by first party for subsequent leases or delay rentals therein provided for.

IT is further expressly understood and agreed that if no oil or gas is produced in paying quantities on said premises within five (5) years from the date hereof, all rights of the second party and their assigns, shall terminate at the end of said five (5) years.

THIS agreement shall extend to and be binding upon the respective heirs, successors and assigns of the party hereto.

IN WITNESS WHEREOF, first party has hereunto set his hand the day and year first above written.

(Signed) R. B. MOLTER.

Counsel for the parties entered into the following stipulation of facts.

STIPULATION OF FACTS.

That the following wells were drilled on the several tracts involved herein during 1921 and 1922 and the information relative thereto was submitted in "Form O" as filed by taxpayer and petitioner for the years 1922 and 1923, and as covering each separate tract. That the wells, as hereinafter described, were drilled with the dates of beginning and completion, to the sand depth, with the sand thickness, and initial production as is hereinafter and in this paragraph set forth:

LEWIS OIL CO. TRACT.
Number	Began	Completed	Sand	Sand	Initial
			depth	thickness	production
1	Oct. 6, 1921	Nov. 17, 1921	2,770	24	185
2	Oct. 13, 1921	Dec. 6, 1921	2,785	38	400
3	Nov. 10, 1921	Dec. 12, 1922	2,728	36	365
4	Nov. 30, 1921	Jan. 17, 1922	2,756	32	580
5	Dec. 11, 1921	Feb. 2, 1922	2,750	35	600
6	Nov. 29, 1921	Jan. 8, 1922	2,769	41	260
7	Dec. 13, 1921	Jan. 20, 1922	2,780	24	250
8	Jan. 9, 1922	Feb. 23, 1922	2,770	32	500

WHITE EAGLE OIL & REFINING CO. TRACT.
Number	Began	Completed	Sand	Sand	Initial
			depth	thickness	production
1	Oct. 24, 1921	Dec. 25, 1921	2,782	25	190
2	Dec. 6, 1921	Jan. 25, 1922	2,793	22	125
3	Dec. 26, 1921	Feb. 17, 1922	2,783	24	250
4	Mar. 25, 1922	May 14, 1922	2,799	18	50
5	Jan. 26, 1922	Mar. 27, 1922	2,778	17	140
6	Feb. 16, 1922	Apr. 24, 1922	2,794	17	240
7	Mar. 16, 1922	May 14, 1922	2,778	17	150
8	Mar. 17, 1922	June 10, 1922	2,781	20	50

That petitioner filed her income tax returns for the years 1922 and 1923 wherein she claimed deductions by way of depletion on the oil production received from the premises described in the instrument attached to taxpayer's petition, and identified as "Exhibit B" thereof; that at the time of filing of the income tax returns for the years aforesaid, the petitioner caused to be prepared and filed "Form O" containing information relative to the depletion as claimed on the tracts from which such production was received.

That the deduction by reason of depletion as claimed by the petitioner herein in her income tax returns for the years 1922 and 1923 was computed on the same basis as depletion claimed by her husband, R. B. Molter, on the oil production received by him from the same years and from the same tracts and in the same oil fields as that received by the petitioner.

In 1921 portions of the royalty interest under the existing leases were sold and profits therefrom were reported in a joint income-tax return. The proceeds of such sales were used to discharge the mortgage remaining against the land.

OPINION.

LANSDON: The single question to be determined in this proceeding is whether the petitioner is entitled to deductions for depletion with respect to certain oil and gas property. The respondent contends that her interest in the property was acquired from her husband without cost after discovery of oil had been made and that no basis exists for the deductions claimed. The petitioner contends that she has always been the equitable owner of an undivided one-half interest in the land and that she is entitled to depletion deductions based on discovery value.

The facts disclose that $2,000 of petitioner's separate estate was applied on the purchase price of an Illinois farm on which a total amount of $4,000 had been paid at the time it was exchanged for a farm in Kansas. The remaining $2,000 paid on the farm represented savings from farm profits. In consideration of being released from further payments on the Illinois property, the petitioner and her husband assumed an indebtedness of $6,000 on the Kansas farm which was secured by a mortgage. The $6,000 was later paid out of the proceeds from the sale of oil and gas royalty interests under an existing lease on the Kansas farm, oil having been discovered in November, 1921. There has always been an understanding between petitioner and her husband that the farms were owned by them jointly and until after oil was discovered on the property it was not known that title stood in petitioner's husband alone.

In both Kansas and Illinois, a wife may enter into contracts with her husband and with other persons. She may own property and engage in business in her own name and as a partner. Revised Statutes of Kansas (1923), sec. 23-201, 23-204; ; ; Cahill's Illinois Revised Statutes (1929), ch. 68, P6 to 9. The decisions of both States clearly support the general proposition of law that if a husband purchase real estate with the separate estate of his wife or with the proceeds or accumulation from it and take the title in his name, a trust results to his wife. Perry on Trusts, 7th ed., vol. 1, p. 194; : ; ; ; ; . Cf. ; .

We think the petitioner was the equitable owner of a one-half interest in the Kansas farm when oil was discovered thereon. It follows that she is entitled to report her share of the income and deduct her share of the depletion based upon the fair market value at the date of discovery. ; ; ; ; .

Decision will be entered under Rule 50.