*2388 1. Where the decedents did not own, receive or control any part of certain oil royalties, ownership being vested in others because of an agreement by which a law suit regarding title to the land was compromised, it is held that the amount of such royalties was improperly included in gross income by the respondent. United States v. Looney, 29 Fed.(2d) 884.
2. Where the respondent increased gross income of the decedent Wilkinson for the years 1920, 1921, 1922, and 1923 in the amounts by which his total bank deposits exceeded the gross income reported on his income-tax returns, it is held that, in so far as the evidence shows certain of the deposits to have represented the repayment of loans or advances and bookkeeping errors, such gross income as determined should be reduced.
3. The evidence does not establish that the respondent erred in disallowing in part deductions for extra compensation to stenographers claimed by decedent Wilkinson, for the year 1921.
4. Bad debts proved to have been worthless in 1921, when they were charged off by the decedent, Wilkinson, are allowable deductions from gross income for that year.
*1391 The respondent has asserted deficiencies in income and profits taxes as follows:
| Year | Estate of W. A. Wilkinson | J. M. Foster |
| 1920 | $3,019.38 | $675.57 |
| 1921 | 11,839.69 | 6,661.38 |
| 1922 | 1,007.41 | |
| 1923 | 633.33 |
Error is alleged on the part of respondent in the following respects:
(1) In increasing the taxable net income of each decedent for the year 1921 in the amount of $66,420.61, which represents one-third of certain oil royalties, amounting to $199,261.83, which, pursuant to an agreement of compromise involving title to the land, were paid to adverse claimants;
(2) In determining that the difference between total bank deposits and gross income reported on the return constituted miscellaneous income to Wilkinson for the years 1920, 1921, 1922, and 1923;
(3) In disallowing deductions claimed by Wilkinson for extra pay to stenographers during the year 1921.
(4) In disallowing deductions for bad debts alleged to have been worthless and charged off by Wilkinson during the years 1920, *2390 1921, 1922, and 1923; and
(5) In failing to allow Wilkinson a sufficient deduction on account of depletion for the year 1921.
By agreement of the parties these proceedings were consolidated for hearing and decision, the principle issue being common to both taxpayers.
FINDINGS OF FACT.
The petitioner in Docket Nos. 16379 and 16743 is the only heir to the estate of W. A. Wilkinson, having been substituted as petitioner for J. D. Wilkinson, executor, upon discharge of the latter by the District Court, Parish of Caddo, Louisiana, in a decree which recognized Katherine Wilkinson Barnette as the sole and only heir.
The petitioner in Docket No. 21928 is the executrix of the estate of J. M. Foster, deceased, who died on August 4, 1928, a resident of Shreveport, La.
During the taxable year 1921 Wilkinson and Foster were members of a law partnership, Foster, Looney & Wilkinson, which maintained offices at Shreveport, La. Wilkinson was the husband of Anna Carter Wilkinson, with whom he lived in community under the laws of *1392 Louisiana. They filed separate income-tax returns for the years 1920, 1921, 1922, and 1923. Foster was unmarried during the taxable years.
*2391 On June 23, 1920, there was pending in the United States District Court for the Western District of Louisiana a suit by Lillie G. Taylor against George West, involving the title to certain real estate situated in the Homer oil field in Claiborne Parish, La. Foster, Looney & Wilkinson, as a partnership, had prior to that date acquired from Lillie G. Taylor a one-half interest in such title as she owned in the real estate which had been previously leased by her to the Caddo Central Oil & Refining Corporation with a reservation of a one-eighth royalty. One George West also claimed the ownership of the land and had, prior to the agreement hereinafter referred to, given to H. C. Walker, Jr., for the firm of Goldstein & Walker, a lease upon the same land, retaining a one-eighth royalty for himself. Walker in turn assigned the lease to the Gulf Refining Co. of Louisiana, reserving a royalty interest of one twenty-fourth.
On June 23, 1920, West, Goldstein, and Walker on the one part, and Foster, Looney, and Wilkinson on the other part, entered into an agreement, the material provisions of which are as follows:
STATE OF LOUISIANA.
PARISH OF CADDO.
BEFORE Me, the undersigned authority, *2392 a Notary Public in and for Caddo Parish, Louisiana, duly commissioned and qualified, came and appeared George West, husband of Missouri Kimbell, a resident of Claiborne Parish, Louisiana, Henry C. Walker, Jr., husband of Lurline Graham, Elias Goldstein, husband of Fannie Levy, both residents of Caddo Parish, Louisiana, hereinafter referred to as vendors, and James M. Foster, a single man, Frank L. Looney, husband of Adeline Leonard, and W. A. Wilkinson, husband of Annie Carter, all residents of Caddo Parish, Louisiana, hereinafter referred to as vendees, who declared; that,
Whereas, there is pending in the United States District Court, for the Western District of Louisiana, a suit entitled Lillie G. Taylor, vs George West, which suit is numbered 1235 on the docket of the aforesaid Court, and involves the title to:
* * *
and,
Whereas, the aforesaid vendees have acquired from the aforesaid Lillie G. Taylor an interest equal to an undivided one-half (1/2) interest in the minerals in and under the aforesaid tract of land subject to the leases granted by the sail Lillie G. Taylor, which interest, being one-half (1/2) of the entire royalty reserved by the said Lillie G. Taylor under*2393 the lease granted by her, amounts to an undivided one-sixteenth (1/16) of the oil, gas and other minerals produced and to be produced from the aforesaid premises; and,
Whereas, the aforesaid George West having granted an oil, gas and mineral lease affecting the above described tract of land and other lands, to the said Henry C. Walker, Jr., and the said H. C. Walker Jr., having assigned the *1393 said lease to the Gulf Refining Company of Louisiana, reserving to himself and in his favor an undivided one-twenty-fourth (1/24) of all the oil, gas and other minerals produced from the aforesaid land; and,
Whereas the parties hereto desire and have agreed to compromise the aforesaid law suit in so far as it relates to the interest above described, together with one-sixth (1/6) of the royalty reserved by the said George West under the aforesaid lease to H. C. Walker, Jr., which one-sixth (1/6) is equivalent to one-forty-eighth (1/48) of the oil, gas and other minerals produced from the aforesaid lease; and,
Whereas, all of the parties hereto have agreed that such compromise shall be effected by the sale by the said H. C. Walker, Jr., and the said Elias Goldstein, to the said*2394 Vendees of the said one-twenty-fourth (1/24) interest, and by a sale to the same parties by the said George West of an undivided one-forty-eighth (1/48) interest in the oil, gas and other minerals produced from the aforesaid land (including one-sixth (1/6) of the total royalty reserved by the said George West under the aforesaid lease);
The Consideration of this sale is the sum of Two Hundred Thousand ($200,000.00) Dollars, to be paid entirely out of the oil produced from the above described tract of land, either by the lessees of the said George West and their assigns, or by the lessees of the said Lillie G. Taylor and their assigns and accruing to the credit of the undivided one-sixteenth (1/16) interest that is vested in the said vendees by reason of the purchase above referred to by them from the said Lillie G. Taylor on the one hand, and by reason of their purchase from the said vendors under this contract on the other hand.
Immediately upon the execution of this contract the said vendees shall be entitled to withdraw and receive from the Gulf Refining Company of Louisiana, all sums accruing to the credit of the interest hereby transferred to them by the said vendors, up*2395 to June 1st, 1920, which sums shall be retained by them free of any claim on the part of these vendors; but all sums hereinafter accruing to the credit of the aforesaid one-sixteenth (1/16) interest shall be paid by the lessees under the leases granted by the said George West and by Lillie G. Taylor, their heirs and assigns to the City Savings Bank & Trust Company of Shreveport, Louisiana, hereinafter referred to as the bank, which bank is hereby made the agent of all the parties hereto for the purpose of receiving such royalty, acknowledging receipt thereof and holding and distributing the sums in accordance with the provisions of this contract.
The sums received by the said bank under this contract shall be deposited to the credit of an account to be known as "Escrow Account, George West, H. C. Walker, Jr., and Elias Goldstein", and shall be paid out by the said Bank as follows:
On the 2nd day of January, 1921, 1922, 1923, and 1924, the aforesaid bank shall withdraw from the said account the sum of Fifty Thousand ($50,000.00) Dollars, and shall credit same to the said vendors in the proportion of one-third (1/3) to each. In the event that there should not be sufficient funds*2396 to the credit of the aforesaid account to make such payment at the due date thereof, the said bank shall pay to the said vendors the entire amount to the credit of the said account, and shall continue to make payments from month to month as sums are received by it to the credit of the said account until the deficiency in the payment shall have been made up.
If the full sum of Two Hundred Thousand ($200,000.00) Dollars shall not have been received by the aforesaid bank on or before the 2nd day of January, 1924, then and in that event the royalties accruing to the credit of the aforesaid *1394 one-sixteenth (1/16) mineral interest shall continue to be paid to the said bank until it shall have received the full sum of Two Hundred Thousand ($200,000.00) Dollars; it being the intent of the parties to this contract that the said vendors shall receive Two Hundred Thousand ($200,000.00) Dollars out of the royalties accruing to the credit of the aforesaid undivided one-sixteenth (1/16) interest before the said vendees shall receive any further income from the aforesaid royalties or become entitled to any portion thereof.
Now therefore, the said H. C. Walker, Jr., and Elias Goldstein*2397 do sell, transfer and convey unto the aforesaid vendees the excess royalty of one-twenty fourth (1/24) of all the oil, gas and other minerals reserved by them under the aforesaid lease granted by George West and assigned to the Gulf Refining Company of Louisiana in so far as same affects and applies to the above described tract of land; and the said George West sells, transfers and conveys to the said vendees an undivided one-forty eighty (1/48) interest in the oil, gas and other minerals in and under the aforesaid land, including an undivided one-sixth (1/6) of the royalty reserved by him under the aforesaid lease in so far as same affects and applies to the above described tract of land under the following terms and conditions, and for the consideration as hereinafter set forth.
This sale is made without warranty of any kind even as to the return of the purchase price; and the execution of this instrument by the parties hereto shall not be regarded as a recognition by any of the vendees hereunder of the title of the said vendors to the interest herein conveyed or any part thereof, and shall not be construed as a recognition by the said vendors of any title or interest in the said*2398 Lillie G. Taylor and said vendees in and to the aforesaid land, and shall be entirely without effect upon the aforesaid suit now pending in the United States District Court, except with regard to the interest conveyed.
During the term of this contract, and as long as money shall be deposited with it hereunder, the said City Savings Bank & Trust Company shall pay interest on the daily balances to the credit of the aforesaid escrow account at the rate of four per cent (4%) per annum, such interest payments to be added to and to form a portion of the funds to the credit of the aforesaid account, and to be credited by the said bank quarterly until the said sum of Two Hundred Thousand ($200,000.00) Dollars shall have been credited to said account, when and thereafter such interest payments on the sums remaining on deposit in said bank under the terms hereof shall be paid to the vendees.
And hereunto appears the City Savings Bank & Trust Company, through its Cashier, L. H. Baker, and accepts the mandate imposed on it by this contract and agrees to pay interest on the sums deposited with it as hereinafter set forth.
When the said vendors shall have received the full sum of Two Hundred*2399 Thousand ($200,000.00) Dollars, as herein provided, the said bank shall pay over to the said vendees any and all sums yet remaining to the credit of the aforesaid escrow account; and from and after such date all monies accruing to the credit of the aforesaid one-sixteenth (1/16) interest shall be paid direct to these vendees and these vendors shall have no interest whatsoever therein.
*1395 Thus done and signed before me, Notary, in triplicate, and in the presence of the undersigned competent witness on this 23d day of June, 1920.
(Signed) George (his x mark) West
Henry C. Walker, Jr.
Elias Goldstein
W. A. Wilkinson J. M. Foster,Frank J. Looney,
CITY SAVINGS BANK & TRUST COMPANY
By L. H. Baker, Cashier
WITNESSES:
(Signed) E. J. Mitchell
T. Webb(Signed) Otis W. Bullock,
Notary Public in and for Caddo Parish, Louisiana.
ENDORSEMENTS: No. 13236
George West, Elias Goldstein, H. C. Walker, Jr., (Parties of first Part, and James M. Foster, Frank J. Looney, W. A. Wilkinson, (Parties of the second) Part., to Each other, COMPROMISE Filed for Record at 3.51 p.m. June 29th, 1920 (Signed) S. R. Newsom, Deputy Clerk D.C.
Duly recorded on pages 239-24-241, Book*2400 #23 Conveyance Records, Claiborne Parish, La., on 20th day of July, 1920 (Signed) L. E. Kilpatrick, Dy. Clerk D.C.
In conformity with the above agreement the Gulf Refining Co. of Louisiana paid the royalties accruing to the land in controversy to the City Savings Bank & Trust Co., which in turn delivered the amounts, as set forth in the agreement, to West, Goldstein, and Walker until the full sum of $200,000 had been received. During the year 1921 the sum of $199,261.83 was delivered to the bank and paid by it to West, Goldstein, and Walker. Foster, Looney & Wilkinson as a partnership or as individuals received no part of these royalties.
The lawsuit referred to in the above agreement, entitled "Lillie Taylor v. George West," was subsequently decided in favor of Lillie Taylor, through whom Foster, Looney, and Wilkinson claimed. The decision of the District Court was affirmed on appeal.
Both Wilkinson and Foster made their income-tax returns for 1921, without including any part of the sum of $199,261.83. Upon audit the Commissioner held that the total amount constituted income to the firm of Foster, Looney & Wilkinson, and that one-third of such amount was taxable to the*2401 individuals, Foster, Looney, and Wilkinson, on the ground that the payment to West, Goldstein, and Walker constituted a capital investment by Foster, Looney, and Wilkinson, whereby they purchased an outstanding interest in their property for the purpose of perfecting their title.
Upon audit of W. A. Wilkinson's income-tax returns for the years 1920, 1921, 1922, and 1923, respondent increased the reported income in the respective amounts of $19,064.43, $11,261.79, $9,442.97, and *1396 $3,358.96, which results from the respondent's determination that the taxpayer's total bank deposits reflected his income.
The deposits which the Commissioner has used as gross income include the following:
| Jan. 23, 1920 | $ 71.75 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| Feb. 3, 1920 | 77.75 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| Feb. 16, 1920 | 23.75 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| Mar. 26, 1920 | 252.80 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for his life | |
| insurance premium | |
| May 24, 1920 | 230.00 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| June 9, 1920 | 25.00 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| June 19, 1920 | 1,833.32 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| in handling the Lillie G. Taylor suit | |
| June 24, 1920 | 100.00 |
| Repayment of a loan made by Wilkinson to Lavinia Egan | |
| June 26, 1920 | 600.00 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| in handling the Lillie G. Taylor suit | |
| July 28, 1920 | 4,714.07 |
| Wilkinson's daily deposit balance of $ 4,714.07 was | |
| carried forward by the bank's bookkeeper as $47,014.07. | |
| The correction was made by showing a charge for $47,014.07 | |
| and a credit for $4,714.07, which latter amount appears as | |
| a deposit in the total figure taken by the Commissioner as | |
| gross income | |
| Sept. 1, 1920 | 505.05 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| while the latter was out of town, to care for the pay roll | |
| of Foster's plantation | |
| Dec. 7, 1920 | 8,983.25 |
| Wilkinson's daily deposit balance of $8,983.25 was carried | |
| forward by the bank's bookkeeper as $8,973.25. The | |
| correction was made by showing a charge for $8,973.25 and | |
| a credit for $8,983.25, which latter amount appears as a | |
| deposit in the total figure taken by the Commissioner as | |
| gross income | |
| Dec. 28, 1920 | $1,000.00 |
| Repayment of a loan made by Wilkinson to W. B. Means | |
| Total | 18,416.74 |
| Sept. 14, 1921 | 1,033.33 |
| Repayment of advance made by Wilkinson on behalf of Foster | |
| in handling the Lillie G. Taylor suit | |
| Sept. 22, 1921 | 4,966.65 |
| Repayment of advance made by Wilkinson on behalf of Frank | |
| Looney in handling the Lillie G. Taylor suit | |
| Total | 5,999.98 |
| Jan. 18, 1922 | 602.40 |
| Repayment of a loan made by Wilkinson to Jackson Stanford | |
| Total | 602.40 |
*2402 *1397 On his income-tax return for 1921 Wilkinson deducted $1,500 on account of additional compensation paid to stenographers. The respondent allowed $750 and disallowed the remaining $750. In 1920 Wilkinson paid Miss Effie Moncure $750 additional compensation for extra employment after hours and on Sundays.
On his income-tax returns for 1921, 1922, and 1923 Wilkinson deducted $5,606, $2,010, and $2,250, respectively, as debts ascertained to be worthless and charged off during the taxable years. The Commissioner disallowed these deductions on the ground that there had been no showing as to when the loss occurred. The following debts appearing in Wilkinson's books for the year 1920 were worthless in that year, when they were determined to be worthless, charged off his books and deducted on his income-tax return:
| F. D. Collins - loan | $150.00 |
| Was a chauffeur who had no property and whose whereabouts were | |
| unknown in 1921. | |
| Nettie Thompson - loan | 50.00 |
| Had no property in 1921. | |
| C. D. Keator - loan | 30.00 |
| Had no property in 1921. | |
| L. D. Smith - loan | 100.00 |
| Had no property in 1921. | |
| E. C. Carter - loan | 3,500.00 |
| Was a brother-in-law of decedent, and in 1921 was practicing | |
| medicine at Miami, Fla. After Wilkinson's death the executor | |
| realized $200 on the note, which was reported as income in 1926. | |
| This amount was realized by attaching Carter's interest in his | |
| mother's estate in Louisiana, which he was about to inherit. | |
| J. Stanford - loan | 300.00 |
| Was a laborer who had no property in 1921. | |
| Ernestine Manheim - loan | 200.00 |
| Had no property in 1921. | |
| 4,830.00 |
*2403 *1398 In connection with the royalty interest acquired by decedent Wilkinson in the Lillie Taylor property, the Commissioner computed depletion on a price of oil at the basic rate of $2.65. The depletion unit used was $2.03578.
OPINION.
LANSDON: The principal issue to be determined in these proceedings is whether certain oil royalties, amounting to $199,261.83, which were paid to adverse claimants under the compromise agreement set forth in our findings of fact, constituted income to the partnership, Foster, Looney & Wilkinson. This identical question was decided by the Circuit Court of Appeals in , where Frank J. Looney, one of the three members of the law partnership, Foster, Looney & Wilkinson, sued, together with his wife, to recover income taxes paid under protest, the taxes having arisen from the Commissioner's determination that the amount paid to adverse claimants under the agreement of compromise, above, constituted income to the partnership. In holding that the Commissioner erroneously determined such royalties to be partnership income, the court said:
*2404 * * * Though before the compromise agreement was made the firm mentioned owned the royalty which was the subject of that agreement, upon the execution of that agreement the other parties to it became the owners of the part of that royalty which, under the terms of the agreement, was to be paid to them. In other words, prior to 1921, the firm mentioned ceased to own all of that royalty which accrued during that year. It follows that neither of the appellees was entitled to a share of that royalty accruing in 1921. Rents or royalties are included in the income of their owner, though they are not actually received by him, but pursuant to his direction are paid to another. ; . But rents or royalties are not properly included in the income of one who did not own, receive, or control them; the ownership thereof being vested in another when they accrued. * * *
Upon the authority of the foregoing decision, which is controlling here, we hold that the respondent erred in including any portion of the $199,261.83 as income of*2405 these decedents, since they did not own, receive or control such royalties.
We have found that of the total bank deposits used by the Commissioner as Wilkinson's gross income for the years 1920, 1921, 1922, and 1923, the amounts of $18,416.74, $5,999.98, and $602.40 for 1920, 1921, and 1922, respectively, represent the repayment of advances or loans and bookkeeping errors. Such amounts do not constitute income and should be deducted therefrom.
The evidence does not establish that the decedent, Wilkinson, should have been allowed a deduction, on account of extra pay to *1399 stenographers for 1921, in an amount greater than that allowed by the respondent.
The evidence convinces us that in 1921 debts aggregating $4,830, which had been determined to be worthless and charged off by the decedent Wilkinson and deducted on his income-tax return, were worthless. Such amount should be allowed as a deduction for that year.
No evidence was introduced in support of the contention that insufficient depletion had been allowed Wilkinson for 1921. The respondent's determination is, therefore, sustained.
Decision will be entered under Rule 50.