*891 Petitioner, a Texas corporation, in 1931 sold and assigned to an individual, as trustee, an oil lease in consideration of $250,000, for which promissory notes were given, payable unconditionally at various dates and secured by valid liens on the property sold. In 1932 petitioner sued on its notes, asking for foreclosure of its liens. A compromise settlement was effected by which petitioner was to receive a judgment for $150,000 and have foreclosure of its lien on one-half of seven-eighths of the gross production of oil from said land to August 7, 1934, and thereafter on seven-eighths of the gross production of oil. The District Court of Smith County, Texas, approved the settlement and gave petitioner judgment for $150,000, with foreclosure of its liens in the manner agreed upon in the compromise settlement. Held, petitioner is not entitled to percentage depletion upon payments received in the taxable years under its judgment of foreclosure.
*147 The Commissioner has determined deficiencies in income tax against petitioner of $366.35 for 1932 and $1,176.09*892 for 1933, and a deficiency in excess profits tax for 1933 of $89.69. The deficiency for 1932 results from several adjustments made by the Commissioner in petitioner's income tax return for that year, none of which seem to be now contested by petitioner. The deficiency for 1933 results *148 from several adjustments made by the Commissioner in petitioner's income tax return for that year, one of which was "depletion not allowable, $14,104.14." With respect to this latter adjustment, the Commissioner stated in his deficiency notice:
No depletion is allowable on the payments received on account of $150,000.00 judgment in connection with sale of lease on 133.3 acres of the Eaton land since the full cost of the property sold was deducted in 1931. See Comar Oil Company Decision, United States Board of Tax Appeals, Volume 24, page 688, affirmed , certiorari denied, October 9, 1933.
The petitioner assigns the following errors:
(A) That for the calendar year 1932, the Commissioner erred as follows:
(1) In not allowing as a deduction from income the sum of $2,664.38, which constituted the excess of percentage depletion allowable under section 114(b)(3) *893 Revenue Act of 1932, on the proceeds received from the Vitek judgment payable out of oil, over cost depletion allowed by the Commissioner of Internal Revenue on such proceeds.
(B) That for the calendar year 1933, the Commissioner erred as follows:
(1) In not allowing as a deduction from the income the sum of $14,094.57 which constituted the excess of percentage depletion allowable under section 114(b)(3) Revenue Act of 1932 on the proceeds received from the Vitek judgment payable out of oil, over cost depletion allowed thereon.
FINDINGS OF FACT.
The facts have all been stipulated and we find the facts as stipulated. We shall state herein only such of the facts as we deem necessary to an understanding of our decision upon the issues involved.
The petitioner is a corporation, incorporated during January 1930, under the laws of the State of Texas, with its principal office at 5226 Goodwin Street, Dallas, Texas.
On January 7, 1931, the Pearl Oil Co. acquired an oil and gas lease from G. W. Eaton and wife on 203.3 acres of land in the F. Cordova League, Rusk County, Texas, for a consideration of $9,000 which was paid in cash.
Under a contract dated January 7, 1931, by*894 and between the Pearl Oil Co. and Paul Vitek, trustee, the petitioner assigned and sold to said trustee the lease on 133.3 acres of the Eaton land. The consideration for this sale was $250,000, payable in a series of promissory notes, the first of which fell due August 7, 1931. These notes were secured by a vendor's lien and deed of trust lien and chattel mortgage lien on the property which was sold and assigned. The notes were unconditionally payable on the dates mentioned therein.
Vitek brought in the first well on the property above mentioned some time in April 1931. Vitek had been instrumental in organizing *149 the following companies: Williamson County Oil Purchasing Co., LaRue Holding Co., Williamson County Oil & Royalty Co., Williamson County Petroleum Co., and Combined Oil Interests. Vitek or the aforementioned companies drilled four wells on the 133.3 acres of the Eaton land mentioned above prior to the death of Vitek, which occurred on July 13, 1931, as the result of burns received when a fifth well, Eaton No. 5, caught fire.
On July 6, 1931, Mack Watson filed a receivership suit against Paul Vitek in the 48th District Court of Tarrant County, Texas. This*895 cause was later transferred to the 17th District Court of Tarrant County.
The T. T. Word Supply Company filed a receivership suit on July 15, 1931, in the District Court of Smith County, Texas, against the above named corporations and Vitek's administrators.
Receivers were appointed by the Smith County court July 15, 1931, and a different receiver was appointed by the Tarrant County court on July 16, 1931. These receiverships were some time later consolidated and Ward B. Powell of Tarrant County was appointed receiver for all of the properties. In the meantime, the Pearl Oil Co. had brought suit against Vitek's estate and the above named corporations on the notes executed as the purchase price of the Eaton lease, referred to above. This suit was compromised by the parties and on March 2, 1932, the District Court of Smith County, Texas, entered as its judgment the compromise agreement of the parties. Parts of this judgment which are pertinent to the issue which we have here to decide are as follows, omitting formal parts:
Thereupon it was shown to the Court that said parties had entered into the following compromise agreement:
1.
There shall be adjudged to the plaintiff*896 the sum of One Hundred Fifty Thousand Dollars ($150,000.00) and a lien securing said judgment upon the following described lands situated in Rusk County, Texas.
[Here follows the description of the lands, not necessary to be here copied.]
Except as against 1/2 of 7/8 of the gross production of oil from said land the lien so adjudged to plaintiff shall be inoperative and of no force and effect until August 7, 1934, and until said time the party or parties operating said leasehold estates shall have the right to produce and sell the production therefrom and make complete and absolute title to such property and title thereto shall pass unencumbered by any lien in favor of the plaintiff except as to 1/2 of 7/8 of said oil production. On August 7, 1934, however, the lien so adjudged to plaintiff shall become effective to secure the unpaid balance, if any, of this judgment.
2.
Of the 1/2 of 7/8 of the gross production against which plaintiff retains a present lien by virtue of his judgment, 1/4 of 7/8 of said gross production is released until he judgment in favor of T. T. Word Supply Company this day *150 rendered in Cause No. 3063-A upon the docket of this Court shall*897 be satisfied, but when said judgment shall have been satisfied, the plaintiff shall have his lien against said 1/4 of 7/8 of the oil production thus released in favor of said T. T. Word Supply Company, Inc.
The remaining 1/4 of 7/8 of such gross production shall first be applied to the payment and discharge of certain Receiver's Certificates issue out of the District Court of Smith County to cover allowances in favor of Earle B. Mayfield, John M. Stephens and J. S. Grisham, and plaintiff's lien shall be subordinate to the payment of said Receiver's Certificates, but when same have been paid, then plaintiff's lien against such 1/4 of 7/8 of the gross production of oil shall be effective.
3.
The properties hereinabove described shall be operated in such manner as reasonable prudence and care shall require and upon breach of this covenant, judicially ascertained, plaintiff's lien against the whole of said property shall become effective.
4.
The indebtedness so to be adjudged the plaintiff shall be paid out of 1/2 of 7/8 of the gross production of oil from the aforesaid properties after the prior payments hereinabove stipulated and not otherwise until August 7, 1934.
*898 The Court having heard and considered said agreement is of the opinion that same is fair and is a just settlement of this cause and the same is hereby approved.
It is, therefore, ordered, adjudged and decreed by the Court that pursuant to said agreement the plaintiff, Pearl Oil Corporation do have and recover of and from the Williamson County Oil Purchasing Company, LaRue Holding Company, Williamson County Oil and Royalty Company, Williamson County Petroleum Company and Combined Oil Interests, all Texas Corporations, and Earle B. Mayfield, and John M. Stephens, Receivers, as aforesaid, and C. A. Gilliam, as Receiver, as aforesaid, and Ward Powell as Trustee, for all of the profit sharing receipt holders as aforesaid, the sum of $150,000.000 together with 6 percent interest from this date until paid, and together with the Court Costs, and that plaintiff's vendor's lien and Deed of Trust Lien and Chattel Mortgage Lien be foreclosed upon the properties hereinabove described, said judgment and foreclosure being subject, however, to all the terms and conditions of the agreement hereinabove set forth.
No payments had been received by the Pearl Oil Co. from the assignment and sale*899 of the 133.3 acres to Paul Vitek, trustee, prior to the aforesaid judgment entered on March 2, 1932. After the entry of that judgment the Pearl Oil Co. received from the proceeds of oil sold from the lease in the years under controversy the amount of $10,860.42 for 1932 and $51,252.97 for 1933. Statutory percentage depletion on these sums, if any is to be allowed, amounts respectively to $2,986.62 and $14,094.57.
OPINION.
BLACK: The petitioner assails the action of the Commissioner in disallowing percentage depletion for each of the taxable years. The respondent denies that he erred in the matters complained of.
*151 Paragraph 12 of the stipulation which has been filed says that "The respondent has allowed cost depletion for the years 1932 and 1933. The petitioner is claiming in this proceeding deductions for only the excess of statutory percentage depletion over and above the amount of cost depletion heretofore allowed by the respondent."
We have carefully examined the statement which is attached to the deficiency notice and is a part thereof, and it does not show that the Commissioner has allowed any depletion based on cost as to the $10,860.42 collected on*900 the judgment in 1932 and the $51,252.97 collected on the judgment in 1933. On the contrary, this statement shows that the Commissioner in his determination expressly disallowed any depletion on these judgment payments. In his determination of the deficiency, the Commissioner has allowed depletion of $1,049.69 for 1932 and $289.98 for 1933. In each case it was stated by him that the depletion allowed was on an "overriding royalty." But be this as it may, the Commissioner does not here contend that any depletion he has allowed should be disallowed and that the deficiency should be increased. Therefore, the depletion which the Commissioner has already allowed to petitioner in his determination of the deficiency, whatever the basis of it was, will remain undisturbed.
The case has been submitted to us as if it involves the issue as to whether petitioner had such an "economic interest" in the oil production as to entitle it to percentage depletion on the payments received in pursuance of the judgment of the court. We shall so treat the issue.
When petitioner sold and assigned to Paul Vitek, trustee, the lease on 133.3 acres of the Eaton land, it was an outright sale for $250,000, *901 payable in promissory notes secured by valid liens upon the property. No interest in the oil to be produced was reserved by petitioner, such as in those cases where the seller is to be paid a certain sum out of oil, if and when produced, and if the oil is not produced, then the payment is never to be made. In this latter kind of cases, the Board and the courts have held that depletion is allowable on the contingent oil payments when received. ; ; ; .
But where the obligation for payment is unconditional and is a personal liability of the purchaser, no depletion is allowable even though the obligation is discharged out of proceeds from oil produced on the premises. Such is merely a payment on account of the agreed consideration for the sale of a capital asset. Cf. ; *902 ; Darby-Lynde*152 ; certiorari denied, ; .
Therefore, it is perfectly clear that if petitioner had been paid any of the notes executed by Paul Vitek, trustee, petitioner would have been entitled to no depletion on such payments, even though they had been made out of oil produced on the premises. Petitioner would have been merely collecting the unpaid purchase price due it from the sale of a capital asset.
But Paul Vitek, trustee, died without the payment of any of the notes in question and petitioner had to sue on its notes in court and ask for a foreclosure of its liens on the property in question. The suit was compromised between petitioner and the several corporations which were then the owners of the property, subject to petitioner's liens. By this compromise, petitioner secured a judgment against the several corporations named therein for $150,000 and a foreclosure of its liens, to be satisfied out of a part of the gross oil production from the premises. We do not think that*903 this compromise agreement and judgment of foreclosure means that petitioner became the owner of any depletable interest in the oil to be produced. It was merely protected in its rights as a lien holder by the judgment of the court.
The judgment of the court, as we view it, gave petitioner no greater interest in the property than it had before, but merely described the method and manner of the discharge of petitioner's liens on the property in question, including the oil to be produced from the premises. The facts show petitioner to be a lien holder against the oil properties in question rather than one who has withheld from the operation of the grant which it has made a percentage of the oil to be produced. Cf. .
Petitioner in its brief relies largely upon the broad and sweeping language of the Supreme Court in , in which the Court, in discussing the statute which allows depletion on oil and gas, among other things said:
The allowance to the taxpayer is not restricted by the words of the statute to cases of any particular class or to any special form of legal interest in*904 the oil well. * * * The language of the statute is broad enough to provide, at least, for every case in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil to which he must look for a return of his capital.
Certainly the above language of the Supreme Court is very broad and sweeping nd if it stood without limitation perhaps it might be plausibly argued in the instant cvase that petitioner had such an "economic interest" in the oil to be produced as to entitle it to depletion. *153 But the Supreme Court in subsequent decisions has, in our judgment, very considerably narrowed the broad and sweeping language quoted above from Palmer v. Bender, See ; ; .
The Supreme Court, in the Elbe Oil Land Development Co. case, among other things said:
The words "gross income from the property" as used in the statute governing the allowance for depletion*905 means gross income received from the operation of the oil and gas wells by one who has a capital investment therein - not income from the sale of the oil and gas properties themselves. See . We conclude that, as respondent disposed of the properties, retaining no investment therein, it was not entitled to make the deduction claimed for depletion. [Citing cases.] [Italics ours.]
As we have already pointed out, when petitioner sold the leases in question to Paul Vitek, trustee, it retained no investment interest therein. And, for reasons which we have endeavored to point out, we do not think that petitioner acquired any capital investment in the ol in place by reason of the compromise agreement which was entered into and was approved by the court and made the basis for its judgment. We therefore hold that petitioner is not entitled to the additional deductions for which it contends in its assignments of error.
Respondent states in his deficiency notice that the petitioner's full cost of the property sold was deducted in 1931. Nothing to the contrary has been shown in the instant case. Therefore since*906 we have held that petitioner is not entitled to percentage depletion, there is nothing further to deduct in the way of capital costs of the lease in question.
In addition to , the petitioner cites in support of its contentions, , and . We have examined both of these cases carefully and we think they are distinguishable on their facts. We find nothing in them contrary to the conclusions which we have here reached. The effect of our decision in disallowing the additional depletion deductions claimed by petitioner is to affirm the deficiencies as determined by the Commissioner.
Decision will be entered for the respondent.