WILLIAMS, Judge.
The plaintiff corporation during the years 1923, 1924, 1925, and 1926, was engaged in the business of developing and operating oil properties and the production of crude oil, including the owning, development, and operating oil properties, procuring leases on oil lands, drilling, owning, and operating oil wells, and building, erecting, 'constructing, and owning the necessary camps and equipment for the construction and operation of such oil wells.
During the calendar years before stated the plaintiff expended upon the properties involved in' suit, for 'labor, fuel, hauling, freight, supplies, materials, and equipment used in drilling oil wells, casing the same, erecting derricks, and camps, and equipment for the operation of such oil wells, and for all items of cost in the drilling and completion of producing oil wells, a large sum of money.
All these expenditures were capitalized by the plaintiff and included in its invested capital.
In its income-tax return for the calendar year 1926, made upon the accrual basis, in accordance with its bookkeeping methods, the plaintiff claimed a deduction for depletion of its oil reserves in the sum of $159,200.71, and claimed a deduction for depreciation of $13,-210.58 upon certain camp buildings and lease equipment, and paid the tax computed upon this basis. Subsequently the plaintiff filed its amended tax return for the year 1926, in whieh return it claimed a deduction of $26,-529.95 upon the camp buildings and lease equipment, upon which it had only claimed a deduction of $13,210.58 in its original return, and in addition thereto claimed a further deduction of $6,302.58 upon the costs of the preliminary development of its wells, and a deduction of $130,469.28 for depreciation upon its well equipment and on its intangible drilling costs. The amended return claimed a deduction for depletion in the sum of $158,-169.24.
The plaintiff filed with the amended return a claim for a refund of the sum of $20,-123.07, whieh claim was rejected with the exception of $1,658.86, an overpayment resulting from the commissioner’s allowance of the increased depreciation claimed by the plaintiff in its amended return, upon the camp buildings and lease equipment. A check for the amount of this determined over-assessment, with interest, was tendered to the plaintiff, whieh sum the plaintiff refused to accept, returning the check.
It is conceded by the government that the cost of labor, fuel, hauling, freight, supplies, material, and equipment used in casing the oil wells, erecting camps, and equipment for the operation of such wells, are costs upon which depreciation may be had; but it contends that the aetual costs of drilling the well, that is, the costs of putting the drill hole in the ground, are covered by the allowance for depletion, and are not allowable deductions for depreciation.
It is urged that the eosts of drilling the well were not expended for or related in any way, to the installation or erection of any tangible property; that the drill hole is not a part of the physical property constituting [857]*857a completed and operating oil well, in tie sense that the easing's, derricks, camp buildings, and other equipment constitute sueh physical property; that tho cost of ,drilling the hole is a part of the cost of the oil just as the bonus paid for a lease is a part of the oil cost, the value of tho drill hole disappearing entirely when the oil reserves are exhausted. Upon these premises it is contended the costs of drilling the wells should be considered as a part of the cost of the oil itself, recoverable only through depletion.
The applicable provisions of the Revenue Act of 1926, chapter 27, 44 Stat. 9, 16, 41, §§ 204(c) (2), 234(a) (8), 26 USCA §§ ©35(e) (2), 986(a) (8), read:
“See. 204(e) (2) In the ease of oil and gas wells the allowance for depletion shall be 27% per eentum of the gross income from the property during the taxable year. * * * ”
“See. 234(a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *
“(8) In the ease of mines, oil and gas wells, other natural deposits, a,nd timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each ease; sueh reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. * * * ”
The statute expressly provides that in the ease of oil wells a deduction shall be allowed both for depletion and for depreciation, the allowance to be made under rules and regulations prescribed by the commissioner and approved by the Secretary.. Article 221, of Regulations 69,1 following the provisions of section 204 (e) (2) of the 1926 Act, provides for the depletion deduction a taxpayer is entitled to make for the taxable year. Article 223 of the same Regulations provides that sueh incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with th.o exploration of the property, drilling of wells, building of pipe lines and development of the property, may at the option of the taxpayer be deducted as a development expense or charged to capital account returnable through depletion. It is provided, however, that if in the exercise of this option a taxpayer charges these incidental expenses to capital account, as the plaintiff did in this case, “in so far as such expense is represented by physical property it may be taken into account in detemiining a reasonable allowance for depreciation.”
Article 225 of the Regulations 2 deals with depreciation of improvements in the case of oil and gas wells, and provides that owners and lessees operating oil properties will, in addition to and apart from the deduction allowable for depletion, be permitted to deduct a reasonable allowance for depreciation of physical properly, sueh as machinery, tools, equipment, pipes, etc., so far as not in conflict with the option exercised by the taxpayer under article 223.
The precise question presented was considered by the Board of Tax Appeals in the ease of Jergins Trust v. Commissioner, 22 B. T. A. 551. The board said: “Section 234 (a) (9) of the Revenue Act of 1921 and section 234(a) (8) of the Revenue Act of 1924 [26 USCA § 986(a) (8)] permit the deduction in cases such as this of ‘a reasonable allowance for depletion and for depreciation of improvements * * *.’ As we understand the stipulation, the amounts in controversy were expended in drilling wells and in operations preparatory and relating to sueh drilling, all of which would constitute a part of the cost of the structure recoverable through depreciation. On the other hand, the concept of the term ‘depletion’ is the exhaustion of the mineral content of a mine or an oil well. United States v. Ludey, 274 U. S. 295 [47 S. Ct. 608, 71 L. Ed. 1054]. The precise [858]*858wording of the statute indicates clearly that Congress had in mind the distinction between the exhaustion of the natural resources and the recovery of the capital invested in the improvements necessary to work the property. It can not be seriously contended that the exhaustion of petitioner’s investment in preparing for and in drilling its wells constitutes any part of the exhaustion of its oil reserves.
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WILLIAMS, Judge.
The plaintiff corporation during the years 1923, 1924, 1925, and 1926, was engaged in the business of developing and operating oil properties and the production of crude oil, including the owning, development, and operating oil properties, procuring leases on oil lands, drilling, owning, and operating oil wells, and building, erecting, 'constructing, and owning the necessary camps and equipment for the construction and operation of such oil wells.
During the calendar years before stated the plaintiff expended upon the properties involved in' suit, for 'labor, fuel, hauling, freight, supplies, materials, and equipment used in drilling oil wells, casing the same, erecting derricks, and camps, and equipment for the operation of such oil wells, and for all items of cost in the drilling and completion of producing oil wells, a large sum of money.
All these expenditures were capitalized by the plaintiff and included in its invested capital.
In its income-tax return for the calendar year 1926, made upon the accrual basis, in accordance with its bookkeeping methods, the plaintiff claimed a deduction for depletion of its oil reserves in the sum of $159,200.71, and claimed a deduction for depreciation of $13,-210.58 upon certain camp buildings and lease equipment, and paid the tax computed upon this basis. Subsequently the plaintiff filed its amended tax return for the year 1926, in whieh return it claimed a deduction of $26,-529.95 upon the camp buildings and lease equipment, upon which it had only claimed a deduction of $13,210.58 in its original return, and in addition thereto claimed a further deduction of $6,302.58 upon the costs of the preliminary development of its wells, and a deduction of $130,469.28 for depreciation upon its well equipment and on its intangible drilling costs. The amended return claimed a deduction for depletion in the sum of $158,-169.24.
The plaintiff filed with the amended return a claim for a refund of the sum of $20,-123.07, whieh claim was rejected with the exception of $1,658.86, an overpayment resulting from the commissioner’s allowance of the increased depreciation claimed by the plaintiff in its amended return, upon the camp buildings and lease equipment. A check for the amount of this determined over-assessment, with interest, was tendered to the plaintiff, whieh sum the plaintiff refused to accept, returning the check.
It is conceded by the government that the cost of labor, fuel, hauling, freight, supplies, material, and equipment used in casing the oil wells, erecting camps, and equipment for the operation of such wells, are costs upon which depreciation may be had; but it contends that the aetual costs of drilling the well, that is, the costs of putting the drill hole in the ground, are covered by the allowance for depletion, and are not allowable deductions for depreciation.
It is urged that the eosts of drilling the well were not expended for or related in any way, to the installation or erection of any tangible property; that the drill hole is not a part of the physical property constituting [857]*857a completed and operating oil well, in tie sense that the easing's, derricks, camp buildings, and other equipment constitute sueh physical property; that tho cost of ,drilling the hole is a part of the cost of the oil just as the bonus paid for a lease is a part of the oil cost, the value of tho drill hole disappearing entirely when the oil reserves are exhausted. Upon these premises it is contended the costs of drilling the wells should be considered as a part of the cost of the oil itself, recoverable only through depletion.
The applicable provisions of the Revenue Act of 1926, chapter 27, 44 Stat. 9, 16, 41, §§ 204(c) (2), 234(a) (8), 26 USCA §§ ©35(e) (2), 986(a) (8), read:
“See. 204(e) (2) In the ease of oil and gas wells the allowance for depletion shall be 27% per eentum of the gross income from the property during the taxable year. * * * ”
“See. 234(a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *
“(8) In the ease of mines, oil and gas wells, other natural deposits, a,nd timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each ease; sueh reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. * * * ”
The statute expressly provides that in the ease of oil wells a deduction shall be allowed both for depletion and for depreciation, the allowance to be made under rules and regulations prescribed by the commissioner and approved by the Secretary.. Article 221, of Regulations 69,1 following the provisions of section 204 (e) (2) of the 1926 Act, provides for the depletion deduction a taxpayer is entitled to make for the taxable year. Article 223 of the same Regulations provides that sueh incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with th.o exploration of the property, drilling of wells, building of pipe lines and development of the property, may at the option of the taxpayer be deducted as a development expense or charged to capital account returnable through depletion. It is provided, however, that if in the exercise of this option a taxpayer charges these incidental expenses to capital account, as the plaintiff did in this case, “in so far as such expense is represented by physical property it may be taken into account in detemiining a reasonable allowance for depreciation.”
Article 225 of the Regulations 2 deals with depreciation of improvements in the case of oil and gas wells, and provides that owners and lessees operating oil properties will, in addition to and apart from the deduction allowable for depletion, be permitted to deduct a reasonable allowance for depreciation of physical properly, sueh as machinery, tools, equipment, pipes, etc., so far as not in conflict with the option exercised by the taxpayer under article 223.
The precise question presented was considered by the Board of Tax Appeals in the ease of Jergins Trust v. Commissioner, 22 B. T. A. 551. The board said: “Section 234 (a) (9) of the Revenue Act of 1921 and section 234(a) (8) of the Revenue Act of 1924 [26 USCA § 986(a) (8)] permit the deduction in cases such as this of ‘a reasonable allowance for depletion and for depreciation of improvements * * *.’ As we understand the stipulation, the amounts in controversy were expended in drilling wells and in operations preparatory and relating to sueh drilling, all of which would constitute a part of the cost of the structure recoverable through depreciation. On the other hand, the concept of the term ‘depletion’ is the exhaustion of the mineral content of a mine or an oil well. United States v. Ludey, 274 U. S. 295 [47 S. Ct. 608, 71 L. Ed. 1054]. The precise [858]*858wording of the statute indicates clearly that Congress had in mind the distinction between the exhaustion of the natural resources and the recovery of the capital invested in the improvements necessary to work the property. It can not be seriously contended that the exhaustion of petitioner’s investment in preparing for and in drilling its wells constitutes any part of the exhaustion of its oil reserves. * * * The stipulation shows that the commissioner has allowed as the cost of improvements (the word used in the statute) only the amounts expended for physical equipment, and has refused to treat as cost of improvements amounts expended for wages, fuel, repairs, and hauling ‘in connection with development and drilling.’ This terminology excludes the idea that any part of such amount was expended in discovery or exploration work or in operating the leased property. Amounts expended in development and drilling operations convey to us the impression of expenditures -for improvement of the property upon which the statute permits the taxpayer to deduct depreciation. The adjustment of taxable ineome will be accomplished by allowing as depreciation the amounts previously treated as depletion allowances upon these expenditures.”
The board followed the same ruling in Ziegler et al. v. Commissioner, 23 B. T. A. 1091; Petroleum Exploration v. Commissioner, 23 B. T. A. 890 and P-M-K. Petroleum Company v. Commissioner, 24 B. T. A. 360.
While the question is not free from doubt, and there is much force in the defendant’s contention that the well itself — the hole in the ground — does not wear out by use, as do tools, derricks, pumps, pipes, and other component parts of a completed producing oil well, we think the decisions of the Board of Tax Appeals in the eases cited are a correct interpretation of both the statute and the regulations. The drill hole of a producing oil well through which the oil is brought to the surface of the ground is a necessary and inseparable portion of the physical property of a completed oil well. It, at least, bears as direet a relation to the casing, pumps, pipes, derricks, and other necessary equipment of the completed, well as it does to the oil reserves under the ground. The hole in the ground it seems is as susceptible to depreciation by wear and tear through use as it is to “depletion” as that term is used in the revenue acts.
In United States v. Ludey, 274 U. S. 295, 47 S. Ct. 608, 610, 71 L. Ed. 1054, the court said: “The depletion charge permitted as a-deduction from.the gross income in determining the taxable ineome of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. The reserves are recognized as-wasting assets. The depletion effected by operation is likened to the using up of raw material in making the product of a manufacturing establishment. As the cost of the raw material must be deducted from the gross ineome before the net income can be determined, so the estimated .cost of the part of the reserve used up is allowed.”
Article 201 of Regulations 69 provides that:
“Depletion of Mines, Oil and Gas Wells; Depreciation of Improvements. — Sections 214 (a) (9) and 234 (a) (8) provide that taxpayers shall be allowed as a deduction in computing net income in the case of natural deposits a reasonable allowance for depletion of mineral and for depreciation of improvements. * * *
“The essence of these provisions of the-statute is that the owner of mineral deposits,, whether freehold or leasehold, shall, within the limitations prescribed, secure through an aggregate of annual depletion and depreciation deductions the return of either the cost of his property, or the value of his property-on the basic date plus, in either case, subsequent allowable capital additions * * * but not including land values for purposes other than- the extraction of minerals. * * *
“When used in these articles (201-237) covering depletion and depreciation — * * *
“(e) A ‘mineral property’ is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface only as is reasonably expected to be un-derlaid with the mineral. The value of a mineral property is the combined value of its component parts.
“(d) A ‘mineral deposit’ refers to minerals only, such as the ores only in the case-of a mine, to the oil only in the case of an oil well, and to the gas only in the case of a gas well, and to the oil and gas in the case of a well producing both oil and gas. The value of a mineral deposit is the value of the mineral property, less the value of the plant and equipment, and less the value of the surface of the land for purposes other than mineral production. The cost of a mineral deposit is that proportion of the total cost of the mineral property which the value of the deposit bears to the value of the property at the time of its purchase.”
[859]*859While in essence the deduction for depletion does not differ from the deduction for depreciation, United States v. Ludey, supra, they are separate and distinct allowances; the depletion deduction applying to natural resources (oil in the case of an oil well), the depreciation deduction applying to improvements.
We think that the drill hole of a producing oil well is an improvement within the meaning of the statute, and that it is also physical property within the meaning of articles 223 and 225 of the Regulations. A producing oil well is undoubtedly a physical property. Only by the most refined process of reasoning can it bo said that the derricks, casings, pumps, pipes, buildings, and other equipment constitute parts of such physical property and are improvements upon the costs of whieh depreciation deductions may bo had, and that the drill hole in whieh the casing1 is placed and Ihrcugh which, by the use of the pumps and other equipment, the oil is brought from beneath the ground to the surface is not a physical property or an improvement within the meaning of the statute and the regulations.
The physical property comprising a completed oil well includes every item of improvement or equipment necessary for the extraction of the oil from the ground. Without the drill hole the well is incomplete and would be a useless thing, in fact would not bo an oil well. Can it reasonably be said, then, that this essential item of the component parts of the physical property comprising a completed producing oil well is not itself a physical property, or that it is not an improvement? We think not.
The expenses incurred by the plaintiff in drilling its wells, including wages, Enel, repairs, £ might, hauling, and materials, have been capitalized. Under the statute and the regulations hereinbeEore discussed these expenditures are returnable tbroug'h deprecia,tion.
The plaintiff is entitled to depreciation deductions claimed, and under the findings is awarded a judgment for $19,096.12, with interest thereon, as provided by law. It is so ordered.
BOOTH, Chief Justice, and WHALEY, Judge, concur.