20 T.C. 565

Bentex Oil Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.

Docket No. 27450.

Promulgated May 29, 1953.

*566Marvin K. Collie, Esq., and C. E. Bryson, Esq., for the petitioner.

J. Marvin Kelley, Esq., and Paul M. Newton, Esq., for the respondent.

*570OPINION.

Van Fossan, Judge:

The ultimate question for decision is whether the petitioner, in computing its excess profits credit for the years 1944 and 1945, was entitled to capitalize its proportionate share, one-fourth, of the intangible drilling and development costs of the Puig Lease Operations for the years 1938 and 1939. The petitioner elected to capitalize intangible drilling and development expenses on its 1936 income tax return pursuant to the option granted in Regulations 94, article 23 (m}-lG.1 In 1938 and 1939, however, the petitioner in con*571junction with other coowners of the Puig Lease Operations, undertook to expense and deduct such costs in arriving at the proportionate share of profits or losses of the respective coowners. The 1938 and 1939 income tax returns were examined by respondent’s agent and these deductions were disallowed. The petitioner contested this determination and argued that the Puig Lease Operations constituted a partnership and possessed the right to elect to deduct such intangible drilling and development costs. The controversy was settled in an informal compromise by which the intangible drilling and development costs of the Puig Lease Operations were allowed as deductions. The petitioner now contends that it acted erroneously in 1938 and that the intangible costs should be capitalized. The, respondent urges that this contention constitutes an inconsistent position from that taken in the earlier controversy. The petitioner admits the inconsistency and the propriety of the adjustments claimed by respondent as to 1938 and 3939 if the petitioner’s present position be sustained.

Petitioner makes two contentions, the first, and principal one, being that Puig Lease Operations was not a partnership or joint venture and therefore had no right to exercise an option in 1937, 1938, and 1939, and second, assuming it be held to be a partnership or joint venture under the statute, as such it was not a “taxpayer” and consequently had no right to an option under the regulations.

On the facts set out in our Findings of Fact we entertain no doubt as to the answer to the petitioner’s first contention and accordingly hold that in the years in question the Puig Lease Operations was a joint venture or partnership within the broad definition of that term in section 3797, Internal Revenue Code.

Directing our attention to the second question, i. e., the right to an election, we find that Regulations 94, article 23 (m)-16 provided that “All expenditures for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas, may, at the option of the taxpayer, be deducted from gross income as an expense or charged to capital account.” A further provision is that “Any election so made is binding for all subsequent years.” It will be noted that this regulation grants the election to the taxpayer. Petitioner calls attention to the provision of section 181, Internal Revenue Code, that “Individuals carrying on business in partnership shall be liable for income tax only in their individual capacity”; that consequently a partnership is not a taxpayer. From this it is argued that its action in 1937, 1938, and 1939 in deducting the intangible drilling costs as expense was without legislative sanction and that it was bound by the election exercised by it in 1936 to capitalize such expenses.

When the practical application of the statute is considered and the possible impact of petitioner’s argument on the income-computing *572responsibility of the partnership is appreciated, it appears clear that the regulations, construed as petitioner asks, would lead to results not contemplated by the Congress. Such is the case where two members of a partnership having equal investments and being entitled to equal shares in the profits have previously made opposing elections, one to charge such costs to expense, the other to capitalize them. How could such a partnership determine its capital account, the amount of its expenses, its income, and distributions, and what justification could be advanced for distributing to the partners the differing amounts that would result therefrom ? The term “taxpayer” in the pertinent regulations had its genesis in the office of the Commissioner, not in the authorizing statute. If it be held to exclude a partnership from the election granted to other income-computing agencies, the regulation works an unnecessary hardship and is plainly unreasonable and unworkable. We are inclined to the view that the word “taxpayer” was used in the broad sense of any “person,” as defined in section 3797, Internal Revenue Code, which term “shall be construed to mean and include an individual, a trust, estate, partnership, company or corporation.” Any narrower interpretation would effectively so hamper the partnership in its computation of income as to make impossible a true and fair accounting to the partners and the Government. See article by Valentine Brookes, Esq., 5 Tax L. Rev. 35, 39.

The only direct reference we have found to the question in issue is in H. H. Wegener, 41 B. T. A. 857, affirmed 119 F. 2d 49, where this Court said: “It is true that the joint venture had a right to elect to treat ‘intangible’ development costs as ordinary and necessary expenditures in its income tax return, Regulations 86, art. 23 (m)-16, but it did not do this. Obviously it elected to capitalize the entire development cost, and we see no reason for treating it otherwise.”

The organization of the joint venture known as the Puig Lease Operations brought into being a new entity, which, while not a taxpayer, had a very important role as an income-producing and computing agency. See John G. Scherf, Jr., 20 T. C. 346, where we said “* * * in computing its net income under the revenue laws, it is generally the partnership, not the individual partner, that exercises the various options open to taxpayers in computing net income under the Code.” The rationale on which this statement is based is applicable in solving our present difficulty.

We hold that the petitioner’s contention is untenable with the consequence that respondent’s action is affirmed.

Reviewed by the Court.

Decision will he entered under Rule 50.

Bentex Oil Corp. v. Commissioner
20 T.C. 565

Case Details

Name
Bentex Oil Corp. v. Commissioner
Decision Date
May 29, 1953
Citations

20 T.C. 565

Jurisdiction
United States

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