*822 1. Where in 1918 the petitioner sold shares of stock in an oil company and the purchaser agreed to acquire all of the company's assets and dissolve it, and to develop and operate the oil properties and pay petitioner one third of the net profits resulting therefrom, and in March 1926 petitioner orally agreed to assign his right to receive these profits to his wife and on August 4, 1926, notified the operating company of such assignment and directed the company in writing to make all future payments to his wife, held that petitioner's right to receive such profits was thereby completely assigned to his wife and the income thereafter paid by the operating company to the wife belonged to her and was not taxable to the petitioner.
2. Payments made to petitioner in 1925 and in 1926 up to August 4 of that year are taxable income to him and he is entitled to reduce such payments by the 27 1/2 percent depletion provided under section 204(c)(2), Revenue Act of 1926. Petitioner, by reason of his right to receive one third of the profits from oil production of the operating company, received as consideration for his stock in the company owning the oil properties, possessed such an*823 economic interest in the property as entitles him to depletion.
*1278 These consolidated cases involve deficiencies in income tax as follows: 1924, $335.57; 1925, $505.59; 1926, $3,966.54; 1927, $7,003.28; 1928, $5,392.81; and 1929, $979.41. No evidence relative to the year 1924 was introduced and respondent's determination as to the deficiency of $335.57 for that year is approved.
As to the remaining years, petitioner alleges that the income in question came from the development and operation of oil and gas wells in which he had an economic interest and that respondent erroneously refused to allow him depletion under section 204(c)(2), Revenue Act of 1926, for the year 1925, and for the period from January 1, 1926, to August 4, 1926.
Petitioner claims that on August 4, 1926, he assigned his property interest in the right to receive the income in question to his wife, and from that date through the remaining taxable years the income belonged to and was paid to his wife, who returned it for taxation, but it is alleged*824 that notwithstanding this assignment the respondent erroneously included the income arising from the oil properties in petitioner's income and determined deficiencies thereon without allowing depletion.
Petitioner further alleges as an alternative that in the event it is decided that respondent properly included the income paid to his wife under the contract in his taxable income, he is entitled to depletion thereon under section 204(c)(2), Revenue Act of 1926, and section 114(b)(3), Revenue Act of 1928.
The facts were established by evidence given by deposition and by written stipulation, from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioner, Thomas A. O'Donnell, and Winifred W. O'Donnell were married in December 1925, and lived together as husband and wife in California during the taxable years. Petitioner was in the oil and gas production business and at the times in controversy was considered a person of substantial wealth. Among his holdings had been one third of the issued and outstanding capital stock of the San Gabriel Petroleum Co., which he sold to the Petroleum *1279 Midway Co., Ltd., by written contract of January 9, 1918. *825 The contract was filed with the stipulation of facts as an exhibit. By the terms of the contract it was provided that the purchaser, as owner of all of the stock of the San Gabriel Petroleum Co., would acquire all of its assets and then dissolve it. The contract further provided:
Second party agrees to purchase, and does hereby purchase, all of said first party's stockholdings in said San Gabriel Petroleum Company, and agrees to pay therefor, at the times and in the manner hereinafter specified, one-third (1/3) of the net profits received by it, its successors or assigns, from the development and operation of the properties described and enumerated in the leases, contracts and agreements now owned by said San Gabriel Petroleum Company, for and during the full, unexpired term or terms of said leases, contracts and agreements, and each of them.
In accordance with the contract the Petroleum Midway Co., Ltd. (name since changed to California Petroleum Corporation of California), acquired all of the assets of San Gabriel Petroleum Co. and dissolved it, and developed and operated the oil properties thus acquired and paid petitioner one third of the net profits from the date of the*826 contract to August 4, 1926. Payments to petitioner in 1925 were $50,270.02 and in 1926 were $12,842.48. Desiring to provide a separate private income for his wife and make suitable provision for her maintenance and support, petitioner in March 1926 told her that he would give her his interest, income, or rights under the San Gabriel Petroleum Co. contract. He does not remember the exact words he used, but his purpose was to make her a gift of his entire interest in the San Gabriel contract and it was to be irrevocable. The question of diminishing his income tax was not considered and was not the moving cause of the gift and assignment. About the same time he made his will, making other provisions for his wife, but the San Gabriel contract was not mentioned therein.
On or about August 4, 1926, the petitioner delivered to the operating company a document which was in words and figures as follows:
Thos. A. O'Donnell
906 Security Building,
Los Angeles
August 4, 1926.
California Petroleum Corporation of Calif.
Security Building,
Los Angeles, California.
Gentlemen:
Please be advised that the income accruing to me in connection with the San Gabriel Petroleum Company*827 agreement has been transferred as of March 31, 1926, to Mrs. Thos. A. O'Donnell, to whom you will make all future payments.
Yours very truly,
[Signed] THOS. A. O'DONNELL
Genor:
Pls. send statements and checks to my office same as in the past.
[Signed] C H N
*1280 The C H N above referred to was C. H. Norton, authorized agent of Mrs. O'Donnell.
Between August 4, 1926, and March 11, 1929, petitioner's wife received payments made by the company pursuant to the terms of said agreement in the following amounts:
| 1926 | $15,535.85 |
| 1927 | 27,069.99 |
| 1928 | 21,451.24 |
| 1929 | 4,080.95 |
The respondent has included in petitioner's income, as shown in the deficiency notices, all of the above amounts received by petitioner's wife during the years 1926, 1927, 1928, and 1929, and no deductions for depletion have been allowed.
All of the payments to Mrs. O'Donnell were sent first to C. H. Norton, her authorized agent. Norton deposited the checks in bank to the credit of Mrs. O'Donnell, who had the exclusive use and ownership thereof and used it for her own purposes, and reported it for taxation on her own separate income tax returns. Petitioner did not*828 receive any of the income after August 4, 1926, and did not have any right to or use of the bank account, nor did he subsequently exercise control over the contract or its proceeds in any way.
The assets taken over by the Petroleum Midway Co., Ltd., included oil and gas leases, and all the payments to petitioner and to his wife were made from profits derived from the production and sale of oil, gas and other hydrocarbon substances produced from the properties covered by the leases.
OPINION.
BLACK: The respondent does not question the good faith of the parties, contending that it is merely a question of law as to which party is taxable upon the sums received. It is the contention of the respondent that the mere transfer or assignment of income to be acquired in the future without the transfer or assignment of the contract from which the right to the income arises is not sufficient to relieve the assignor (petitioner) from liability for income tax thereon.
On the other hand, the petitioner contends that the only beneficial interest arising under the contract after the sale of his interest in the San Gabriel Petroleum Co. properties was the right to receive one third of the*829 net profits from the development and operation of those properties; that this right was a property right, which was assignable either with or without the contract itself; and that subsequent income therefrom was not taxable to the petitioner.
*1281 In the case of , we said:
It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. [Citing cases.]
This is the general rule established by the decisions of this Board and the courts, but the difficulty arises in its application. . In the Seatree case, supra, the petitioner was entitled under articles of partnership to receive amounts equal to four shares of the firm's profits for a period of three years after his retirement from the firm. He executed a written instrument under seal by which "in consideration*830 of the sum of one dollar, the receipt whereof is duly acknowledged and other good and valuable considerations" he transferred and assigned to the Equitable Trust Co. of New York, in trust for his two minor daughters, "all my rights, title and interest in and to four undivided shares of the profits or income now due or which may hereafter become due and payable to me for three years ending June 30, 1924, under and by virtue of the partnership agreements." On these facts we held that Seatree's interest was in the nature of a capital asset; that the above quoted assignment transferred not merely future income, but a present property right; and that income subsequently arising therefrom was not taxable to the petitioner, William Ernest Seatree. Our decision was affirmed by the .
So it is, we think, in the instant case. Looking to the testimony of petitioner, we find that it is replete with statements which show that it was his intention to give to Mrs. O'Donnell not only the income itself, but also the right to receive the income, which right petitioner considered to be a valuable property.
*831 Petitioner gave his wife the means of obtaining possession and control of the thing given in the only manner possible, by informing the California Petroleum Corporation that he had transferred the income accruing to him under said contract to his wife, and directing the company to make all future payments to her. The gift, having once been made, is irrevocable by the donor. Section 1148 of the Civil Code of California provides: "A gift, other than a gift in view of death, cannot be revoked by the giver."
It is the well established rule that delivery of a gift can be made by the donor to a third person for the benefit of the donee, , and cases therein cited. When the petitioner gave the company the letter informing it that all of petitioner's rights were assigned to his wife and directed it to make all future payments *1282 to his wife, he made a delivery of the corpus of the gift to her; he gave her the means of obtaining possession and control of the gift, and the gift was thereby completed. From the moment the company received that letter from the petitioner the petitioner could not direct the payment of such income to any person other than*832 his wife; neither could he, by any legal action, compel the company to pay the income to him. Once the gift was completed, by enabling his wife to obtain possession and control of the right to receive the income, his dominion over the disposition of his former share of the profits terminated.
On this issue we hold for petitioner. Cf. ; ; ; ; .
Whether petitioner is entitled to a depletion allowance against the amounts received by him in 1925 and 1926 under his contract with the Petroleum Midway Co. Ltd., depends upon whether he had an economic interest in the oil in place within the meaning of the decision of the Supreme Court in . Petitioner relies upon this case in support of his claim for depletion.
As has been pointed out in our findings of fact, when petitioner sold his stock in the San Gabriel Petroleum Co. to the Petroleum Midway Co. Ltd., the consideration*833 was that the San Gabriel Co. was to be dissolved and its oil properties were to be transferred to the Petroleum Midway Co. and operated by it, and petitioner was to receive one third of the profits from such operation. Also in our findings of fact we have found that all the payments here in question made to petitioner in 1925 and up to August 4, 1926, were made from profits derived from the production and sale of oil, gas, and other hydrocarbon substances produced from the properties formerly owned by the San Gabriel Co. In , the court discussed the meaning and application of the Supreme Court's decision in , and, among other things, said:
In that decision the court pointed out that the statute here involved permits a reasonable depletion allowance to be made "in the case of oil and gas wells * * * according to the peculiar conditions in each case"; that there is nothing in the statute or regulations to confine a depletion allowance to persons who are technical lessors; and that the concluding sentence of the section, to the effect that, in the case of leases, *834 deductions shall be equitably apportioned between lessor and lessee, indicates that depletion deductions may be allowed in other cases. The court expressed the opinion that the language of the statute is broad enough to permit a depletion allowance in every case where a taxpayer had acquired, by investment, any interest in the oil in place, and acquires, by any form of legal relationship, income derived from the extraction of the oil, to which the taxpayer must look for a return of his capital. The court also *1283 stated that the right to a depletion allowance does not depend upon the retention of ownership or special form of legal interest in the mineral content of the land, but upon his right to share in the oil produced. In short, the court made it clear that the lessor, lessee, or any other person having or acquiring an interest in the oil in place or a right to share in the oil produced, has such an economic interest in the oil that he is entitled to a depletion allowance.
Accordingly, the right to a depletion allowance does not depend upon the nature or character of the legal estate retained or acquired by the parties to an original oil and gas lease or their successors, *835 but depends entirely upon whether any such parties are entitled to share in the oil and gas produced from the properties. If any of such parties are entitled to a share of the oil and gas, he had the "economic interest" upon which the Supreme Court bases the right to a depletion allowance.
We think that petitioner, by virtue of his right to receive one third of the net profits from the oil produced from the San Gabriel properties, brings himself within the rules above announced and is entitled to the percentage depletion allowed by the applicable statute. On this issue we hold for petitioner. Cf. ; ; .
Decision will be entered under Rule 50.