Belridge Oil Co. v. Commissioner , 11 B.T.A. 127 ( 1928 )

BELRIDGE OIL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Belridge Oil Co. v. Commissioner

Docket No. 6296.

United States Board of Tax Appeals

11 B.T.A. 127; 1928 BTA LEXIS 3858;

March 22, 1928, Promulgated

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1. Value of option paid into a corporation for stock determined.

2. Year in which certain oil wells were abandoned determined.

Ralph W. Smith, Esq., and Claude I. Parker, Esq., for the petitioner.

J. D. Foley, Esq., for the respondent.

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VAN FOSSAN

The Commissioner determined deficiencies of $52.18 and $79,759.90 in income and excess profits taxes for the years 1917 and 1920, respectively, and overassessments of $6,127.99 and $1,190.81 for the years 1918 and 1919, respectively. The petitioner alleges that the Commissioner erred in his determination of deficiencies and overassessments by (1) eliminating from invested capital for each of the years the sum of $974,995, being the excess of the actual cash value of a certain option and the par value of stock specifically issued therefor, over the amount of $25,000 paid for said option by petitioner's assignor; (2) in allocating the sum of $91,601.14 of the cost of drilling unproductive wells to years other than 1920; and (3) refusing to compute the excess-profits tax for the years 1919 and 1920 in accordance with sections 327 and 328 of the Revenue Act of 1918.

FINDINGS OF FACT.

The petitioner is a California corporation with its principal place of business in Los Angeles, Calif. If was organized January 25, 1911, with capital stock of $1,000,000 divided into 1,000,000 shares of $1 par value each.

For many years prior to 1911 Willis J. Hole was engaged, as principal and agent, in buying and selling ranch and farm lands in the southern counties of California. He was the resident agent for the Sterns Rancho Co., which owned approximately 300,000 acres of land in Kern County. Emily B. Hopkins owned about 50 per cent of the Stearns Rancho Co. and individually owned certain property in Kern County, hereinafter described. This property, which was located in close proximity to producing oil fields, was also good farm land, the soil being decomposed granite, but farming was limited to winter crops. It contained a number of cienagas, or low wet places, indicating the presence of water, but at that time there was no developed water supply. The nearest railroad was at McKittrick, a town of 800 or 1,000 people about 9 miles distant, and the nearest town of any size was Bakersfield, about 45 miles distant. On January 5, 1911, Hole acquired from Emily Hopkins, in consideration of $25,000, an option to purchase said property within one year from January 1, 1911, at $33.33 1/3 per acre, or a total of $1,028,198.67. This option was transferred to the petitioner in exchange for capital stock by assignment dated January 25, 1911. The agreement was as follows:

AGREEMENT made this 5th day of January in the year one thousand nine hundred and eleven, by and between EMILY B. HOPKINS, of the City and State of New York, party of the first part, and W. J. HOLE, of the City of Los Angeles, State of California, party of the second part.

WITNESSETH:

That the parties hereto each in consideration of the covenants of the other, and of One Dollar ($1.00) to each in hand paid by the other, and other good and valuable considerations, receipt whereof is hereby acknowledged, do covenant and agree to and with each other as follows:

FIRST: The party of the second part agrees to pay to the party of the first part, or her counsel, F. K. Pendleton, on her behalf, on the execution and delivery hereof, the sum of Twenty-five Thousand Dollars ($25,000.) for the right or option to purchase from the said party of the first part at any time before the expiration of one year from the first day of January, 1911, on the terms and at the price hereinafter set forth, all those certain lands in the County of Kern in the State of California, more particularly described as follows:

Sections 25, 26, 27, 28, 29, 30 and 35, and the SW 1/4 of Section 19, and the S 1/2 of the SE 1/4 of Section 19, in Twp. 27 South, Rg. 20 east; Sections 28, 29, 30, 31, 32 and 33, and the West 1/2 of Section 27, and the NW 1/4 of Section 34 in Twp. 27 South, Rg. 21 East; the North 1/2 and the North 1/2 of the South 1/2 of Section 1; - all of Section 2, except the South 1/2 of SE 1/4 thereof; the South half of the SE 1/4 of Section 12 and Section 13, in Twp. 28 South, Rg. 20 East; Sections 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 17, 18, 20, 21, 22, 23, 24, 25, 26, 27, 28, 29, 32, 33, 34, and 35 in Twp. 28 South, Rg. 21 East, M.D.M., containing in all substantially an area of 30,845.96 acres of land.

subject to pipe line, telegraph, and telephone rights to Producers Transportation Co., and Associated Pipe Line Co., and a lease to Miller and Lux for one year from January 1st, 1911, for grazing purposes and all such rights of way for pipe lines, telephone and telegraph lines, or other rights, as may have been heretofore granted or conveyed by said party of the first part, and now of record in the office of the Recorder of Kern County, California.

In the event of the exercise of said option by said party of the second part, the said sum of Twenty-five Thousand Dollars ($25,000.) paid on the execution hereof as aforesaid shall be applied and allowed on account of the purchase price of said lands, otherwise to belong to said party of the first part absolutely.

SECOND: The party of the first part hereby agrees on compliance by the party of the second part with all the terms and provisions hereof in the manner and within the times herein specified, and payment of the purchase price as herein provided on thirty days previous notice in writing from said party of the second part to the said counsel of said party of the first part, delivered at his office in the City of New York, of the intention to exercise said option, to sell, transfer, assign and convey to said party of the second part the said lands aforesaid free from any and all liens and encumbrances, except as aforesaid. The deed of conveyance to be in proper form to convey said lands above mentioned and to be prepared by counsel for said party of the first part and delivered to said party of the second part, at the office of F. K. Pendleton, 25 Broad Street, Borough of Manhattan, City of New York, at twelve o'clock noon on the day to be specified in said notice aforesaid, or at such other time and place as may be mutually agreed upon by said counsel and said party of the second part.

THIRD: The purchase price of said property and the terms and conditions of the said option are as follows:

"A" The purchase price is Thirty-three and one-third Dollars ($33 1/3) per acre, viz, the sum of One Million, Twenty-eight Thousand, One Hundred and Ninety-eight and Sixty seven one-hundredths Dollars ($1,028,198.67) payable as follows: One-tenth at the time of delivery of deed as aforesaid; of said one-tenth the sum of Seventy-seven Thousand Eight Hundred Nineteen and eighty-six one-hundredths Dollars ($77,819.86) is to be paid in cash, and a credit is to be given to said one-tenth payment in the sum of $25,000 which has heretofore been paid for the option. The balance of said purchase price is to be paid in yearly installments, with interest on the unpaid balance from time to time remaining unpaid at the rate of 5% per annum, from date of delivery of deed, viz: one-tenth of said purchase price, i.e., One Hundred and Two thousand, Eight Hundred and Nineteen and eighty-six one-hundredths Dollars ($102,819.86), with interest as aforesaid on the first day of January in the year 1913, and on the first days of January each of years 1914 to 1917, inclusive, and one-fifth thereof, viz., Two Hundred and Five Thousand, Six Hundred and Thirty-nine and Seventy-two one-hundredths ($205,639.72) with interest as aforesaid on the first day of January of years 1918 and 1919, respectively. All of said deferred payments to be represented by mortgage notes secured by a purchase money first lien mortgage on the lands herein described, such mortgage to be delivered at the time of delivery of the deed aforesaid, and to be prepared by the counsel aforesaid of said party of the first part, and to contain the usual clauses, including provisions for maturity in case of default in the payment of principal, interest, taxes or other provisions, and also a clause that all oil or gas from said property in excess of the amount used for fuel in the development or operation of said property by second party, and the proceeds or revenue derived from the sale thereof in excess of the amount of money expended by said second party for the improvements or developments placed on said land, shall be applied to the payment of the sums secured to be paid by said mortgage until paid in full, first party agreeing that the amounts so derived shall be applied to the earliest maturing notes of said second party. And also a clause allowing pre-payment at any time on thirty days notice of the whole or any part of the principal secured to be paid; and also a clause providing that in the event the owners of the property desire to sell any portion of the property covered by said mortgage, the holder of said mortgage will release the premises so sold from the lien thereof, providing the price and terms of sale are satisfactory to said holder, and the purchase money is applied as payment on account of amount secured to be paid by said mortgage.

First party further agrees that should any sums of money derived from the sale of the land as aforesaid be paid to it by second party, first party will apply such payments on the earliest maturing notes of said second party.

"B." The party of the second part shall drill on said lands four proper and suitable wells for the discovery of oil or gas, same to be located on such portions of said property as the said party of the second part may select. The drilling of at least two of such wells shall be commenced as soon after the date hereof as two first-class drilling outfits can be installed on the property, and the necessary water for same provided, and thereafter the second party shall continuously and diligently prosecute the work of drilling on said two wells until oil or gas shall have been found, or until said second party shall decide to abandon the further drilling of such wells.

And second party agrees that within sixty days after completing such first two wells, or the abandonment of such two wells, and the withdrawal of the pipe therefrom, if not purchased by first party, to commence the drilling of a second two wells with the same drilling outfits as used on the first two wells and to prosecute the drilling of the second two wells diligently and continuously, in good faith, until oil or gas shall have been found in said second two wells, and the completion thereof, or until the second party shall decide to abandon further work on said second two wells.

Said second party may drill as many more wells as he may elect within the time specified for the drilling of the said four wells.

All wells drilled, or to be drilled, hereunder shall be drilled in a workmanlike manner for the production of oil or gas, and all care taken and proper methods adopted for the prevention of the entrance of water into any oil bearing formation in accordance with the requirements of the statutes of the State of California. In the event of the abandonment of any of the wells drilled hereunder, the party of the first part shall have the right and option for ten days after notice of such abandonment, to purchase the casing in any one, or all, of the wells so abandoned, at the actual cost of such casing at the well site. If first party does not exercise such option within ten days after notice shall have been given to it by second party, the second party shall have the right to remove such casing and all other material from the location of such abandoned well or wells. In the event of the removal of the casing from an abandoned well, the second party agrees to protect the oil bearing formation from the intrusion of water, in accordance with the statutes of the State of California. In case the party of the first part purchases any of the said casing, then the well where such casing is shall not be injured by said party of the second part in any particular whatsoever.

In the event of the discovery of gas or oil in paying quantities on the property aforesaid, prior to the delivery of deed as hereinbefore mentioned, the second party agrees that all proceeds derived from the sale thereof, in excess of the fuel consumed in the operation and development of this property, shall be the property of and belong to said party of the first part; and said second party further agrees to pay to first party such surplus proceeds; and first party agrees that if second party exercises this option to purchase, said first party will credit second party with the amount of such proceeds on the money first falling due on account of such purchases.

"C." In the event that the first two wells to be drilled, as hereinabove provided, shall prove to be what is known as "dry" wells, and the two additional wells, or either of them, hereinbefore provided for, shall not have been completed by the first day of January, 1912, hereinbefore referred to, the option hereby given to purchase said property on the terms aforesaid shall be extended until the expiration of thirty days after the finding of oil or gas in the said last two wells and completion of same, or the abandonment of work on the same; provided, that the said party of the second part continuously and diligently prosecutes the drilling of said wells aforesaid with all reasonable speed until oil or gas is found or said wells abandoned; and in the event the time to exercise the option is extended, as in this clause provided, the notes and mortgage securing the same shall be dated as of the date of the exercise of same option and the deferred payments represented thereby shall be extended accordingly.

"D." The party of the first part shall have the right at any time, through agents appointed by her or her counsel aforesaid, to investigate all the work and operations being carried on by said party of the second part on the property covered hereby, and for that purpose shall have free access at all reasonable times to all buildings or premises occupied or used by the said party of the second part, who shall himself or through his representatives afford to the representatives of the said party of the first part, all reasonable opportunity to make thorough examination and investigation of all such work or operations, including the logs of any and all wells drilled, sunk or opened, and any maps or charts of said party of the second part, and to acquire all additional information concerning the same.

And the said party of the second part shall furnish, when so requested to the counsel of the party of the first part, or his order, a log of any and all wells drilled by second party, and a map or chart on which shall be located the position of such well or wells.

"E." The party of the second part shall have the right, if he so elect, at the time of the exercise of the option by him to purchase the said property as aforesaid, to take title thereto in the name of a corporation to be organized by him for the purpose, which corporation shall execute the notes and mortgage hereinbefore referred to, and the execution thereof by such corporation shall be deemed a compliance with the terms of this agreement.

"F." In the event that the said party of the second part shall not exercise the option to purchase said properties as hereinbefore provided, he shall at the request of the said party of the first part at any time after the expiration of said option, execute in writing an instrument in proper form setting forth that he has not exercised the said option, and releasing each and every right hereunder, such instrument to the prepared by the counsel of the said party of the first part, and to be acknowledged by the said party of the second part in such manner as shall entitle the same to be recorded, and shall be delivered to the said party of the first part, or her counsel aforesaid, in order that the same may be recorded if desired by said party of the first part.

FOURTH: This agreement shall be binding upon and enure to the benefit of the respective representatives and assigns of the parties hereto.

IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals the day and year first above written.

(Signed) EMILY B. HOPKINS

By F. K. PENDLETON

Atty.-in-fact.

IN PRESENCE OF:

(Signed) ROSWELL C. OTHEMAN.

(Signed) W. J. HOLE

Notarial acknowledge W. J. Hole taken before E. T. Stoddard, N.P., January 5, 1911.

ASSIGNMENT

IN CONSIDERATION of the payment of Ten Dollars ($10.00) and other valuable consideration, the receipt of which is hereby acknowledged, I, W. J. Hle, do hereby sell, transfer and assign to the BELRIDGE OIL COMPANY, a corporation organized and existing under and by virtue of the laws of the State of California, and having its principal place of business in the city of Los Angeles, County of Los Angeles, State of California, all of my right, title and interest in and to the foregoing agreement, dated January 5th, 1911, between Emily B. Hopkins and myself, covering all those certain lands in the County of Kern, State of California, as particularly described in said agreement.

(Acknowledgment of above.)

In the summer of 1910, William G. Van Slyke, an experienced operator and prospector in oil lands, then employed as superintendent and locating oil lands for T. M. Bardsdale, found a gully about six feet deep in the southwest portion of this property, which extended about 9 miles northwest and southeast through the property. He discovered along the banks of this gully outcrops of stratified shales and oil sands lying in a true anticline disclosing oil formations on a definite structure crossing the property. (An anticline is a fold or mound in the earth dipping or sloping in two directions. The apex is the anticline, the slopes are the dips of the anticline, and the trough at the bottom of the slope is the syncline. Oil is found generally in the anticline and the dips.) The stratified shales and outcrops of oil sand were exposed for the full 9-mile length of the gully; Beside this gully and extending the same distance across the property, there was a low ridge or chain of hills; Van Slyke dug a shaft 14 feet deep at the point where he first noticed an outcrop of oil structure in the gully, which was on section 34 about 1 mile from the southern boundary of this tract; At the bottom of the shaft he found live oil sand (sand containing free oil) which showed, upon a test, a 5 per cent saturation of oil of a very light asphalt base and was later proved to contain a light refining oil. Van Slyke then covered the shaft to conceal his discovery.

The general geological formation of this property, which is practically level land, lying on the west side of the San Joaquin valley and adjacent to the foothills, and the surrounding country consists of thick masses of organic shales, oil-originating shales, overlain with porous sandstone. Oil collects in the porous formations, with the shale as a base, wherever there is a structure to trap it. Oil sands, oil seepages, oil springs, and masses of asphalt outcrop in large quantities in the foothills and immediately opposite, and within 3 miles of petitioner's property, show the oil-bearing formations dipping under the valley in the direction of that property. These outcrops extend about 8 miles along the foothills, parallel to the ridge of hills and outcrops on petitioner's land;

Extensive oil fields were developed prior to 1911 on lands both north and south of this tract, having the same topographical and geological characteristics, and at January 25, 1911, most of these fields were large producers. The Gould Central field, about 2 miles southwest, was brought in long prior to 1911 and the wells had been abandoned by that date. Oil was discovered in the Lost Hills Field, about 9 miles from the northern boundary and 14 miles from the discovery shaft on petitioner's property, in the spring of 1910 and in January, 1911, there were 30 or 40 producing wells. The southern boundary of Lost Hills is 2 1/2 miles from the northern boundary of petitioner's tract. The McKittrick field, about 9 miles south of this property, was developed many years prior to 1911 and at that time had approximately 600 producing wells. A little farther south there is the large west side field of Kern County, known as the Midway and Sunset Oil fields, which were developed long prior to 1911, and were then, and are now, producing large quantities of oil. To the southeast there is the Elk Hills field, which was discovered many years ago and is now a large producer.

After his discovery of live oil sand in the shaft dug by him on the property, Van Slyke endeavored to obtain a lease on a portion of the tract and was advised by the attorney for Mrs. Hopkins that she did not care to lease the property. Thereafter he took the matter up with M. H. Whittier and together they examined the shaft dug by Van Slyke and went over the property. Later they learned that Hole held an option on the land and Whittier then entered into negotiations with Hole for the organization of a corporation to operate the property as oil land. On January 25, 1911, Whittier and Hole, with their associates - Burton E. Green, Michael Connell and one Butler, incorporated the petitioner, and transferred to it the option held by Hole in exchange for capital stock. It is impossible from the record to determine how much stock was issued for the option, whether 999,995 shares of the par value of $1 each, being all of the stock less 5 shares, or one-fifth of 999,995, namely 199,999 shares. It was understood that Van Slyke would receive for his services $100,000 in stock of the new company, if oil was produced, but it was shown that he never received the same. Van Slyke became superintendent and manager of development for the petitioner immediately upon its organization.

Drilling was started on the first well on section 34, township 28 south, range 21 east, about 300 feet east of the discovery shaft, and oil came in at a depth of about 1,000 feet, neither the date of beginning or completion of the well appearing. The second well was drilled on the same section, about 300 feet west of the discovery shaft and oil came in at a depth of about 550 feet. Both wells showed oil in profitable quantities. No. 2 well came in at about 250 barrels per day, about 25 days after beginning drilling, the exact date not appearing, and No. 1 well came in at a later date at about 400 barrels of 24-gravity oil per day. No well was completed or oil discovered prior to the assignment of the option to petitioner.

The actual cash value of the option on the 30,845.96 acres of land, above described, at the date it was acquired by the petitioner was $25,000, the amount paid for the same on January 5, 1911.

Well No. 18 was started in 1918 and the drilling thereof was continued off and on until the year 1920. In 1920 the petitioner stopped drilling on this well at a depth of about 4,500 feet, and, having tested the well for oil, determined that it was not commercially profitable. Thereupon, the petitioner plugged and cemented the hole, tore down the rig, pulled the casing and abandoned the well during the year 1920. No work was done prior to 1920 in the matter of closing this well. Petitioner applied to the State Mining Bureau on December 26, 1919, for permission to abandon this well. Well No. 22 was started in September, 1919, and drilling was stopped in November, 1920, at a depth of about 4,445 feet. The well was tested and petitioner determined that it was not commercially profitable. This well was plugged and cemented, and the well abandoned in December, 1920. Petitioner applied to the State Mining Bureau on December 2, 1920, for permission to abandon this well.

The petitioner sustained a loss of $29,250.67 on well No. 18 and a loss of $45,825.41 on well No. 22, in the year 1920 and claimed a deduction on account thereof from its gross income for that year. The respondent determined that the loss on well No. 18 was sustained in 1919 and the loss on well No. 22 was sustained in 1921, and denied the deduction of said losses from gross income for 1920.

OPINION.

VAN FOSSAN: The petitioner having abandoned the assignment of error relative to special assessment of its profits taxes under sections 327 and 328 of the Revenue Act of 1918, the issues requiring our determination are (1) the actual cash value at the date of acquisition of an option upon certain land paid in to the petitioner for capital stock, and (2) the year in which losses were sustained upon certain oil wells. As to the second of these issues petitioner claimed losses aggregating $216,743.36 on account of dry wells, which it alleges were abandoned, and the entire loss sustained in 1920. The respondent concedes the total amount of the loss sustained, but determined that five of the wells were abandoned, and the losses thereon, aggregating $91,601.14, sustained in years other than 1920. The respondent disallowed the losses on these five wells as a deduction from gross income for 1920 and allocated the same to other years, which action the petitioner alleges was in error. At the hearing the petitioner waived its assignment of error as to three of the disallowed wells, leaving for determination only the year in which losses, in the amounts of $29,250.67 and $45,825.41, were sustained upon wells No. 18 and No. 22, respectively.

It is alleged in the petition and admitted by the answer that the "taxes in controversy are income and profits taxes for the years 1917 to 1920, inclusive." It appears, however, that the respondent determined overassessments for the years 1918 and 1919 in the respective amounts of $6,127.99 and $1,190.81, and determined deficiencies only as to the years 1917 and 1920. This Board has jurisdiction only as to those years for which the Commissioner has determined deficiencies or denied claims in abatement, and accordingly, the petitioner's tax liability for the years 1918 and 1919 is not before us on this appeal. ; ; and .

In considering the question of the actual cash value of the option, we turn our attention first to the written agreement dated January 5, 1911, which is set out at length in the findings of fact. From the terms of this agreement certain facts are evident. The agreement was the result of negotiations between parties apparently dealing at arm's length; they were dealing with prospective oil lands and by the agreement provided for its exploration; they fixed a price of $25,000 as the value of the option and the privilege of exploration; they also fixed a price of $1,028,198.67 to be paid for the lands if oil or gas was found and the holder of the option elected to purchase; this figure of $1,028,198.67 represents the price at which the proven oil land was to be sold; the parties anticipated and provided for the assignment of the agreement to a corporation to be organized.

In our opinion, under the circumstances of this case, this agreement is entitled to great weight. It was executed in the light of such knowledge as the parties possessed about the character and value of the land. It does not appear that the parties were unadvised of any of the elements of its value, nor does it appear that any new proof of value was discovered between the giving of the option and its assignment to petitioner. The fact that one Van Slyke sometime in 1910 discovered an outcrop of oil sand on the property is not shown to be controlling. This discovery preceded the giving of the option to Hole and for aught that appears the existence of this outcrop may have been known to Hole when he acquired the option. The evidence does not indicate that at the time of the assignment petitioner had any greater knowledge of the oil-bearing properties of the land than had Hole when he took the option. When petitioner acquired the option the land was still unproven. No wells had been completed nor had the presence of oil in commercially profitable quantities been otherwise proven.

Oil and gas are of a fugitive nature. They hide in the deep recesses of the earth where the eye of man may not penetrate. The sorry experience of thousands of investors proves that their exact location may seldom, if ever, be divined with precision and certainty. Not every oil seepage or outcrop of oil sand indicates the presence of oil in profitable quantities. A few yards only may separate the gusher from the dry hole. Of a truth, the test of an oil property is the drilling thereof.

Petitioner undertook to prove by opinion evidence that the land had a value of from $2,000,000 to $5,000,000 at the basic date. Assuming this value of the lands, it is argued that the value of the option must be the difference between the above figure and the price fixed in the agreement, $1,028,198.67. Were we to accept this theorem as sound we would nevertheless be unable to find the value contended for by petitioner. The opinion testimony of these witnesses, with the several weaknesses apparent in the testimony itself, is not sufficient to overcome the weight that must be given to the price fixed between the parties to the agreement of option and sale. The owner of the land and one of petitioner's incorporators met in what appears to be an arm's length transaction and fixed a price of $25,000 as the value of the option and a price of $1,028,198.67 as the sale price of the land if, after exploration, the holder of the option elected to buy the property. The contract evidences deliberation on its face. The parties were awake to the possibility of discovering oil or gas and presumably acted reasonably in fixing the sale price. In no respect did petitioner show the agreement to have been unique or unrepresentative. It is not contended that Hole drove a sharp bargain or concealed any facts known to him from an unsuspecting seller. Although Hole appeared as a witness, no fact was elicited from him which in any way detracted from the weight properly to be given the price fixed in the agreement as the best evidence of the value of the land on January 5, 1911. Such evidence is more persuasive and is entitled to greater weight than the opinions of witnesses, not eminently qualified, which opinions were formulated years after the valuation date and after the property had proven to be a rich field. It not being demonstrated that there was a change in the value of the property between January 5, 1911, and January 25, 1911, it follows that the value on the former date, as fixed in the agreement, is also the value on the later date; Thus, accepting petitioner's theory of proof, the evidence in the case does not prove a value of the land as of January 25, 1911, in excess of that fixed by the agreement of option and sale of January 5, 1911.

We find no error in the determination of respondent that the option was worth on January 25, 1911, only what was paid for it on January 5 of the same year.

There remains only the question of the year in which wells Nos. 18 and 22 were abandoned, the respondent conceding the right of petitioner to deduct the cost of drilling the wells in the years in which they were abandoned.

The drilling of these wells was begun prior to 1920 but was not concluded until some time in 1920. Before the close of the year petitioner determined that the wells were worthless and thereupon plugged and cmented the wells, pulled the casing and removed the rig on No. 18 and pulled the casing on No. 22, all within the year 1920. Whether or not there has been an abandonment of an oil well depends upon the intention of the owner, coupled with the act of abandonment, both to be ascertained and determined from all the surrounding facts and circumstances. In this case the evidence establishes that petitioner intended to, and did, abandon wells Nos. 18 and 22 in the year 1920. The coincidence in that year of the intention to abandon and the acts showing actual abandonment is determinative. The abandonment occurred in the year 1920.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.