*4105 Discovery value of oil properties denied for lack of evidence of value.
*450 In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1920 and 1921, for which the Commissioner has determined deficiencies of $494.68 and $218.11, respectively.
*451 The petitioner alleges error on the part of the Commissioner in disallowing depletion based on the discovery value of oil wells discovered by the partnership of Miller and Shannon in 1920.
FINDINGS OF FACT.
The petitioner is an individual whose residence is in Caney, Kans. During the years 1920 and 1921 he was a member of the partnership of Miller and Shannon. On January 20, 1920, the partnership acquired a lease in the Caney Field on the east half of lot 3; east half of lot 6; lot 2, lot 7, except 10 rods off the east side thereof; northwest quarter of southeast quarter, except 10 rods of the east side thereof, section 5, township 35, range 13 east, containing 145 acres, Chautauqua County, Kansas, providing for a one-eighth royalty payment. *4106 The lease was acquired by the payment of a bonus of $4,000.
The partnership proceeded to drill a well on this property, and completed it July 15, 1920. At the time this well came in the nearest well was one-half mile distant. Two other producing wells were drilled during the year and two dry holes.
The record of the production was as follows:
| Month | Wells Producing | Production |
| July | ||
| Half August | ||
| Half August | 1 | 137.6 |
| September | 1 | 334.64 |
| October | 2 | 416.65 |
| November | 2.8 | 419.99 |
| December | 3 | 540.38 |
The failure to produce before August 15th was due to the fact that no pipe line had been installed to transport the oil. The average cost of general pumping and operating expenses was $1.25 a barrel during 1920.
The average cost of sinking producing wells was $4.23 a foot, and of sinking dry holes was $2.14 a foot. This results in a cost of $9,149.80 for 3 producing wells and $4,215.50 for 2 dry holes.
The initial production of well No. 1 was 35 barrels, well No. 2, 75 barrels, and well No. 5, 15 barrels.
OPINION.
MILLIKEN: The only evidence introduced to establish a value for discovery was the testimony of an accountant who produced a computation*4107 which he had made based upon the records disclosed by the partnership books for the year 1920. He computed the oil reserves in the property from one of the oil decline curves published in a pamphlet of the Oil Men's Association of Tulsa, Okla., purported to be curves sanctioned by the Treasury Department for estimating the *452 lives of oil wells in the mid-continent oil territory. The curve used was not of the Caney filed but the one geographically nearest to Caney. For the average monthly production for the first year's production he used the average per month as shown by the operation of the property during the last four and one-half months of 1920, and for the market price of oil he used $3.50 a barrel, which was the average price received during the four and one-half months.
There are many objections to the computation which might be advanced, the first and most serious being that it does not represent the fair market value of the property on the date of discovery or within 30 days thereafter as called for in section 214(a)(10) of the Revenue Act of 1918. The figures used in this computation are based on operations and data subsequent to the 30-day period, and which*4108 were not shown to have been applicable to that period. There is no testimony that the amount so computed represented the fair market value of the lease on the date of discovery or within 30 days thereafter.
We are of the opinion that the petitioner has failed to show that the determination of the Commissioner was erroneous or that the partnership was entitled to additional depletion based on discovery value.
Judgment will be entered for the respondent.