Muldavin v. Commissioner

T.C. Memo. 1997-531

UNITED STATES TAX COURT

ROGER MULDAVIN, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 152-92, 153-92, Filed December 1, 1997.
23624-92, 23660-92.

Roger Muldavin, pro se.

Lynn M. Brimer, for respondent.

MEMORANDUM OPINION

TANNENWALD, Judge: Respondent determined deficiencies in

and additions to Federal income taxes as follows:

1
The following cases are consolidated herewith for
purposes of briefing and opinion: Jean Muldavin, docket No. 153-
92; Jean and Roger Muldavin, docket No. 23624-92; and Jean and
Roger Muldavin, docket No. 23660-92.
 - 2 -

Roger Muldavin
Additions to Tax

Year Deficiency Sec. 6651 Sec. 6653(a) Sec. 6654 Sec. 6661

1985 $142,578.85 $30,936.52 $7,128.94* $6,798.00 $30,937.00
1986 113,423.25 21,292.62 5,671.16* 4,177.00 21,293.00
1987 56,026.00 13,957.00 2,801.00* 3,016.00 ---

*Plus 50 percent of the interest on $123,746.07, $85,170.25, and
$56,026.00, for 1985, 1986, and 1987, respectively.

Jean Muldavin

Additions to Tax

Year Deficiency Sec. 6651 Sec. 6653(a) Sec. 6654 Sec. 6661

1985 $143,618.85 $31,196.52 $7,180.94* $6,858.00 $31,197.00
1986 114,503.25 21,562.62 5,725.16* 4,231.00 21,563.00
1987 56,026.00 13,957.00 2,801.00* 3,016.00 ---

*Plus 50 percent of the interest on $124,786.07, $86,250.47, and
$56,026.00, for 1985, 1986, and 1987, respectively.

Roger and Jean Muldavin

Additions to Tax

Year Deficiency Sec. 6653(a) Sec. 6661 Sec. 6662

1988 $19,935 $997 $4,984 ---
1989 26,302 --- --- $5,260

This case was submitted by the parties fully stipulated

under Rule 122.2 The stipulation of facts and attached exhibits

are incorporated herein by this reference. The submission was

accompanied by a stipulation of settled issues and by an

explanation by the parties that the sole issue for decision, with

2
Unless otherwise indicated, all statutory references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
 - 3 -

the possible exception, according to petitioners, of

jurisdictional matters, is whether petitioners are entitled to an

oil depletion allowance in excess of 15 percent of their reported

royalty income.

Background

Petitioners are husband and wife. They resided in Arcadia,

Michigan, at the time the petitions herein were filed. They

filed their Federal income tax returns at the Covington,

Kentucky, Service Center.

Prior to petitioners' marriage, Jean Muldavin (Mrs.

Muldavin) owned in fee simple a piece of property in Manistee

County, Michigan (the property). On June 19, 1968, she entered

into an oil and gas lease with J. L. Orr, whereby Orr as lessee

had the exclusive right to produce oil on the property in

exchange for which:

The lessee shall deliver to the credit of the
lessor as royalty, free of cost, in the pipe line to
which lessee may connect its wells the equal one-eighth
part of all oil produced and saved from the leased
premises, or at the lessee's option, may pay to the
lessor for such one-eighth royalty the market price for
oil of like grade and gravity prevailing on the day
such oil is run into the pipe line, or into storage
tanks.

Subsequent to petitioners' marriage, Mrs. Muldavin transferred

her interest in the property to Roger and Jean Muldavin as

husband and wife. At some point, Shell Oil Company (Shell)

became the successor in interest of J. L. Orr. On June 26, 1975,
 - 4 -

petitioners' fractional interest in the oil produced and saved

from the property was 79.39/80.00 of one-eighth royalty interest

(or 0.1240468 in decimal).

During the years at issue, petitioners received and reported

on their tax returns gross royalty income from the well

identified as Muldavin 2-13 in the following amounts:

Year Amount

1985 $598,561
1986 419,957
1987 287,085
1988 169,347
1989 157,944

In respondent's determinations, the foregoing amounts were

reduced to take into account windfall profit taxes, depletion

allowance at 15 percent, legal fees, and State severance taxes.

Discussion

In order to enable us better to focus on the question of the

proper depletion allowance, we first address the following other

issues raised by petitioners:

(1) They contend that our jurisdiction is defective because

respondent lacked authority to issue the deficiency notices

involved herein. Those assertions are similar to those raised by

tax protesters which have been uniformly rejected by cases too

numerous to cite. They are totally without merit.
 - 5 -

(2) They assert that three of the deficiency notices are

untimely. This contention is directly contrary to the

stipulation of settled issues and, accordingly, is rejected.

(3) They seek to have us reopen years prior to 1985 in

order to give petitioners the benefit for those years of what

they claim is more favorable treatment in the stipulation of

settled issues for the years before us. We reject this attempt

for the simple reason that, in the apparent absence of any

pending deficiency notices and petitions for the earlier years,

we are without jurisdiction to deal with petitioners' assertions.

We note in passing that it would appear that the period of

limitations has long since expired in respect of any overpayments

of taxes for those earlier years.

(4) They seek to have us deal with levies and liens in

respect of matters not involved in this proceeding and apparently

relating to the windfall profit excise taxes for other years, in

particular 1980. Here again, we are without jurisdiction in

respect of any such levies or liens. Beyond this, we have no

jurisdiction in respect of a year not before us3 or in respect of

3
Sec. 6214(b) provides that we:

shall consider such facts with relation to the taxes
for other years or calendar quarters as may be
necessary correctly to redetermine the amount of such
deficiency, but in so doing shall have no jurisdiction
to determine whether or not the tax for any other year
or calendar quarter has been overpaid or underpaid.
(continued...)
 - 6 -

windfall profit taxes which are apparently not subject to an

existing separate notice of deficiency. See Logan v.

Commissioner, 86 T.C. 1222, 1225-1230 (1986). In this

connection, we note that petitioners have offered no explanation

which would indicate how any windfall profit taxes for earlier

years would affect our determination of the taxes owed in respect

of the years before us.

(5) They appear to be asking us to decide that they should

not be considered in the category of producer for purposes of the

windfall profit tax; that issue has previously been decided

against them for the years 1980 through 1984 based upon the same

documents relating to their arrangement with Shell as are

involved herein. Muldavin v. Commissioner, T.C. Memo. 1991-481,

affd. without published opinion 977 F.2d 582 (6th Cir. 1992). As

far as we can determine, there were no changes between facts or

law applicable to that case and those applicable herein with the

result that petitioners would be collaterally estopped from

relitigating the "producer" issue even if it were assumed to be

within our jurisdiction. Commissioner v. Sunnen, 333 U.S. 591

(1948).

(6) They devote a considerable portion of their brief to

asserting that there are facts relating to the windfall profit

3
(...continued)
[Emphasis added.]
 - 7 -

taxes paid by Shell which need to be established in order to

determine the correct amounts attributable to petitioners. To

the extent that petitioners may be questioning only the amounts

allowed by respondent for such taxes in the years before us,

separately from the depletion allowance, we note that no

reference to this point was made in the submission of this case

fully stipulated. Such submission precludes the use of further

evidence by a party absent the consent of the other party and/or

an appropriate order of the Court. Rule 143(b). The fact that

the case was submitted fully stipulated does not relieve

petitioners of their burden of proof as to facts necessary to

sustain their position. See Meunier v. Commissioner, T.C. Memo.

1991-446. While the full impact of petitioners' assertions is

not easily determined, we are satisfied that there are no

extraordinary circumstances which would justify our reopening

this fully stipulated case and ordering a trial.

To the extent that the facts and arguments which petitioners

set forth are directed toward obtaining a decision from us that

Shell withheld too large a portion of windfall profit taxes in

respect of their share of the oil production, we simply have no

jurisdiction to resolve this apparent dispute with Shell.

(7) They seek damages for alleged errors by respondent in

the handling of their tax matters. The simple answer to this
 - 8 -

contention is that we are without jurisdiction to consider their

requests.

We now turn to an analysis of the issue as to whether

petitioners are entitled to a depletion allowance in excess of 15

percent of their gross royalty income.

As we see it, there are two prongs to petitioners' position.

First, they contend that, as owners of the land, they are

entitled to the entire percentage depletion allowance given that

Shell as an integrated oil producer is not entitled to such an

allowance. Second, they contend that their percentage depletion

allowance should be calculated on the basis of the "market

price"4 as provided in section 1.613-3(a), Income Tax Regs. For

reasons hereinafter set forth, we reject both contentions.

Section 611(a) provides for a reasonable allowance for

depletion in the case of oil wells. Section 611(b) provides that

"In the case of a lease, the deduction under this section shall

be equitably apportioned between the lessor and lessee." With

exceptions not applicable to petitioners, the depletion allowance

for oil wells is, with respect to a limited quantity of the

taxpayer's average daily production of oil, 15 percent "of the

gross income from the property excluding from such gross income

4
Petitioners set forth in their briefs extensive data
related to this calculation. Such data, however, is not evidence
and, therefore, in any event would not be considered. Rule
143(b); see also supra pp.6-7.
 - 9 -

an amount equal to any rents or royalties paid or incurred by the

taxpayer in respect of the property". Secs. 613(a), 613A(c)(1).

It has long been decided that the "gross income from the

property" is the gross income from the property received by the

taxpayer claiming the deduction for depletion. Helvering v.

Mountain Producers Corp., 303 U.S. 376, 382 (1938); Helvering v.

Twin Bell Oil Syndicate, 293 U.S. 312 (1934); McLean v.

Commissioner, 41 B.T.A. 565, 575 (1940), affd. 120 F.2d 942 (5th

Cir. 1941). Accordingly, for purposes of computing the amount of

average daily production to which the depletion allowance will

apply, section 613A(c)(2) provides that the average daily

production for a taxpayer with a partial interest is equal to the

total production of the property times the taxpayer's percentage

participation in the revenue from such property.

Applying the foregoing statutory provisions, it is clear

that, where more than one taxpayer is involved, the depletion

allowance for any one taxpayer cannot be calculated on the gross

income from the property as a whole, since the allowance must be

apportioned equitably in keeping with the respective interests of

lessor and lessee. Helvering v. Twin Bell Oil Syndicate, supra;

Callahan Mining Corp. v. Commissioner, 51 T.C. 1005, 1020 (1969),

affd. 428 F.2d 721 (2d Cir. 1970); cf. sec. 613A(c)(2). Thus,

petitioners' argument based on their title to the land is without

merit.
 - 10 -

It is equally clear the gross income used is the amount

actually or constructively received by the taxpayer. Helvering

v. Mountain Producers Corp., supra. Thus, petitioners cannot

claim depletion on another interest holder's gross income from

the property, whether or not such taxpayer is entitled to a

depletion allowance. The fact that Shell may be a major

integrated oil producer precluded from using percentage

depletion, see Exxon Corp. v. Commissioner, 102 T.C. 721 (1994),

is beside the point, particularly since Shell is still entitled

to a depletion allowance based on the cost method. Secs. 611 and

612.

In a similar vein, petitioners' arguments based upon the use

of "market price" and its relationship to "controlled price" are

also irrelevant, particularly in light of petitioners' efforts to

reconstruct the price movements going back to 1980. Insofar as a

"controlled price" is concerned, that phrase has no bearing in

the years before us since Federal oil price controls were lifted

in 1981. See CanadianOxy Offshore Prod. Co. v. Commissioner, 100

T.C. 382, 384, 387 (1993). With respect to "market price", we

see no basis for applying such a standard herein. That standard,

referred to as "representative market or field price",

section 1.613-3(a), Income Tax Regs., applies to taxpayers,

generally integrated producers, who do not sell their oil or gas

in the immediate vicinity of the well and who thus must calculate
 - 11 -

a gross income from the property which excludes amounts received

for transportation or refining, etc. Petitioners do not fall

within the category of an integrated producer. See Exxon Corp.

and Subsidiaries v. United States, 88 F.3d 968, 970 (Fed. Cir.

1996); Exxon Corp. v. Commissioner, supra, and cases discussed

therein.

Another of petitioners' arguments is that their lease

agreement with Shell provides that petitioners should receive

their royalty income "free of cost", which petitioners construe

to mean that Shell should bear the liability for all taxes

related to the lease, including those imposed on them. This

argument fails because, whatever the scope of the phrase "free of

cost", the agreement of one party to pay the other's taxes is not

binding on respondent and does not alter liability for such taxes

under the Code. Pesch v. Commissioner, 78 T.C. 100, 129 (1982);

Neeman v. Commissioner, 13 T.C. 397, 399 (1949), affd. 200 F.2d

560 (2d Cir. 1952); Humbert v. Commissioner, 24 B.T.A. 828, 829

(1931).

Petitioners seek to share Shell's status as an integrated

oil producer in order to be able to utilize a "market price"

measurement for percentage depletion allowance but without regard

to the fact that an integrated producer was not entitled to

percentage depletion during the taxable years before us under

section 613A (effective for taxable years commencing after
 - 12 -

December 31, 1974) and without any corresponding adjustment to

the amount includable in their gross income. We are not prepared

to accept petitioners' pick-and-choose approach. Exxon Corp. and

Subsidiaries v. United States, 88 F.3d supra, upon which

petitioners rely in respect of the "market price" issue, dealt

with the taxable year 19745 and with natural gas subject to a

fixed contract, which continued to be entitled to percentage

depletion under section 613A. Such being the case and taking

into account the circumstances of the case before us, we find it

unnecessary to direct our attention to the seeming conflict in

rationale between Exxon Corp. and Subsidiaries v. United States,

88 F.3d supra, and Exxon Corp. v. Commissioner, 102 T.C. supra,

in respect of an allowance for depletion in excess of actual

receipts under section 1.613-3(a), Income Tax Regs.

Additionally, we note that the failure to adjust the amount

includable in gross income has been considered a significant

element to be taken into account in respect of the attempt by

taxpayers to increase the amount to which the depletion

percentage should be applied. See Exxon Corp. v. Commissioner,

102 T.C. at 735-737.

Petitioners' gross income from the property for purposes of

the depletion allowance is their royalty income in the amount

5
The taxable year 1974 is a year prior to the statutory
amendments which eliminated the allowance of percentage depletion
to integrated oil producers.
that they received and reported on their returns. We hold that

the depletion allowance is 15 percent of those amounts.

To give effect to the parties' stipulation of settled issues

and the above holding,

Decisions will be entered

under Rule 155.