Fell v. Commissioner

7 B.T.A. 263, 1927 BTA LEXIS 3224

• Court: United States Board of Tax Appeals
• Decided: June 9, 1927
• Docket: Docket No. 2089.
• Status: Published

Opinion

OPINION.

Love : The primary question is whether or not there was an abandonment in 1919 by the petitioner and his associates of their interest in the oil lease. If there was an abandonment, was the loss which they sustained in their enterprise realized in 1919, in view of the fact that the amount of salvage was not determined until 1920 and payment therefor not received until 1920 and 1921 ?

. The estate that a lessee acquires under the laws of Texas to secure the production of oil is determinable by abandonment. Abandonment is defined as the surrender or relinquishment of rights of property by a person, and includes both intention to abandon and the act of abandonment. There must be a concurrence of the intention to abandon and an actual relinquishment of the property. The intention to abandon may be shown by circumstantial evidence.

In the case of Wisconsin-Texas Oil Co. v. Clutter, decided by the Court of Civil Appeals, Fifth District of Texas (258 S. W. 265), the question in the case was whether or not the Wisconsin-Texas Oil Co. had abandoned an oil lease, and if so, did such abandonment effect a forfeiture of the lease contract to the extent that the owner of the fee might make a valid subsequent lease contract with another. The trial court instructed the jury “ that abandonment is a question of intention, and the duty rests with you in answering this question to ascertain what the intention of the defendants was in this case * * *. The intention to abandon may be shown by all the facts and circumstances in the case. The intention not to abandon may likewise be determined by all the facts and circumstances in the case.”

The Court of Civil Appeals approved the charge given by the trial court under which the jury found as a fact that the company had abandoned the lease. In discussing the law, the Court of Civil Appeals states the following propositions:

Abandonment is dependent upon the acts of the party; it is a question of intention to be ascertained and determined by the jury as to what that intention was * * *.

That intention to abandon the lease, or what is equivalent thereto, may be established just as any other fact may be, by positive testimony or by circumstantial evidence, such as removal of the machinery, quitting the premises, ceasing to work, and any other circumstance of value tending to show an intention to ultimately relinquish all rights and interest in the leased premises. * * *

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The estate that a lessee acquires to secure production of minerals is not in fee nor absolute, because it may be lost, and is determinable by abandonment on the part of the lessee, of mineral development.

While this case was reversed by the Supreme Court of Texas (268 S. W. 921), it was on grounds which do not affect the principle of law stated above.

On general principles and to the same effect are the following Texas cases: Grubb v. McAfee, 109 Tex. 527; 212 S. W. 464; Robinson v. Jacobs, 113 Tex. 231; 254 S. W. 309; Guffey Petroleum Co. v. Jeff Chaison Townsite Co., 48 Tex. Civ. App. 555; 107 S. W. 609. To the same effect are the following cases: In New York, Conkling v. Krandusky, 112 N. Y. S. 13; in West Virginia, Sult v. Hochstetter Oil Co., 63 W. Va. 317; 61 S. E. 307. In the last cited case the court said that whether or not a lease has been terminated by abandonment on the part of the lessee is a question of intention. That the abandonment of a lease, and its termination by such abandonment closes the transaction is so nearly axiomatic, that argument in support of such a proposition would be superfluous.

In the Appeal of A. L. Huey, 4 B. T. A. 370, while the word abandonment was not used, the petitioner was allowed a loss deduction because of the fact that he had abandoned his lease, such abandonment being evidenced by the fact that he delivered the lease contract to another person without compensation.

To our minds the evidence shows beyond doubt an intention on the part of the petitioner and his associates to abandon their rights under the lease. This is the only reasonable interpretation of their conduct in withdrawing from the premises, removing all of their property therefrom and not again entering upon or making any claim thereto. We think these acts also amount to an actual relinquishment of the lease rights.

It is suggested, however, that in view of the fact that the Supreme Court of Texas has held that oil in place, is realty, that an oil lease is a lease of realty, and that mere abandonment may not be treated as a termination, or closing of the deal, in the absence of a sale or other formal disposition of the leasehold. However, the Supreme Court of Texas has held that an oil lease may be abandoned and that such abandonment may effect a forfeiture even as against a subsequent assertion of rights on the part of the lessee. Wisconsin Texas Oil Co. v. Clutter, Grubb v. McAfee, supra. The idea, or doctrine seems to be that notwithstanding the holding that oil in place is realty, that an oil lease is but a permit or license to remove that oil by the payment to the fee owner of certain royalties, no nonforfeitable interest in the fee is granted by such a lease.

The petitioner claims that when the enterprise was abandoned he sustained in 1919 a loss, which is deductible in that year, of $15,145, or of this amount less the salvage subsequently collected. The Revenue Act of 1918, section 214 (a) (4), (5), allows the deduction of “ losses sustained during the taxable year.” The Board has held that a loss is not sustained or realized until the transaction out of which it arises is completed or closed. Appeal of A. J. Schwarzler Co., 3 B. T. A. 535; Appeal of Old ’76 Distilling Co., 3 B. T. A. 1346. The question therefore is whether or not the loss was sustained in 1919. The amount to be paid by the purchaser of the salvaged equipment was not determined in dollars and cents until the following year and payment was not received until subsequently. However, the equipment was delivered in 1919 and the property therein was then transferred to the purchaser. It then became an executed sale and the obligation of the purchaser to pay arose. If no price is agreed upon, the buyer must pay a reasonable price. Williston on Sales, 2d ed., sec. 171. The amount was not subject to fluctuations in market price; the time as of which it was to be determined was fixed by the delivery of the goods. These considerations lead to the conclusion that the enterprise was wound up and closed within the taxable year, as all of the factors were then in existence which would enable the amount of loss to be ascertained. The loss sustained by petitioner was $15,145, less his share of the salvage, or $14,306.39.

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

SteRNHageN dissents as to the loss claimed upon the sale of the equipment.