*1118 1. Profits realized from the sale of oil and gas leases should not be included in the basis for computing depletion under section 204(c)(2) of the Revenue Act of 1926. Macon Oil & Gas Co.,23 B.T.A. 54">23 B.T.A. 54, followed.
2. Where, after selling the bulk of its property for cash, a partnership composed of four individuals, with 1/24 interest held by trustees for undisclosed beneficiaries, transferred the remainder of its property, having a depreciated cost basis of $180,006.37, to a new partnership composed of the same four individuals with readjusted interests, but not including the trustees, for a recited consideration of $70,000, which was entered as an account receivable on the books of the old partnership and as an account payable on the new partnership books, no deductible loss is sustained.
*409 The respondent has determined deficiencies in income tax for the year 1926 as follows: Lester W. Fritz, $2,099.94; Adeline C. Fritz, $2,128.25; J. E. Hall, $1,203.07; Mrs. J. C. Wynne, $2,890.21; J. C. Wynne, $2,890.76; J. I. Staley, *1119 $21,006.80; Delia H. Staley, $21,173.78. The petitioners allege (1) that in determining the basis for depletion deductions the respondent has erroneously excluded profit from sale of certain oil and gas leases as gross income from the property; and (2) that losses resulting from the sale of partnership assets have not been properly computed and allocated. The several proceedings were consolidated for hearing and report. The parties have filed a stipulation of facts, which we adopt as our findings of fact.
FINDINGS OF FACT.
I.The petitioners, Lester W. Fritz and Adeline C. Fritz, J. C. Wynne and Mrs. J. C. Wynne, J. I. Staley and Delia Staley, are husband and wife, respectively, residing together in Wichita Falls, Texas. The petitioner J. E. Hall is a single man. All of the property and income involved in these proceedings were community property to the above named husbands and wives, and income under the laws of Texas.
II.In the year 1926 the petitioners owned an interest in the partnership of Staley & Wynne as hereinafter set forth. This partnership had its principal office in Wichita Falls, Texas, and was engaged in the business of producing oil.
III.
*1120 During the early part of the year 1926 the partnership, Staley & Wynne, sold to the Humble Oil and Refining Co. certain oil and gas leases which it had developed and which had been producing oil during the year prior to said sale. The cost of each property sold after deducting depreciation and depletion sustained to date of sale, together with the sale price and the net profit realized, is as follows:
| NAME OF LEASE | NET COST | SALE PRICE | PROFIT |
| Bond "A" | $28,484.96 | $60,675.74 | $32,190.78 |
| Bond "B" | 140,458.06 | 192,461.35 | 52,003.29 |
| Burnett "A" | 14,940.37 | 17,672.29 | 2,731.92 |
| Parish "A" and "B" | 87,638.76 | 293,370.15 | 205,731.39 |
| Stephens | 117,218.43 | 241,514.63 | 124,296.20 |
| Willis | 6,607.52 | 12,830.57 | 6,223.05 |
| Hines | 3,823.99 | 14,042.07 | 10,218.08 |
| Totals | $399,172.09 | $832,566.80 | $433,394.71 |
*410 On the 1926 return filed by the partnership, profit from the sale was further reduced by the sum of $193,260.96, representing depletion based upon 27 1/2 per centum of the gross income from the sale of each property, but not to exceed 50 per centum of the net profit therefrom. The amount of depletion so claimed was disallowed by the revenue agent, *1121 and his disallowance was sustained by the income tax unit. The petitioners contend that the profits received from the sale of the producing leases should be considered as "gross income from the property", and that 27 1/2 per centum depletion limited to 50 per centum of the net income should be allowed.
At the conclusion of the sale of its producing properties to the Humble Oil and Refining Company and a few other minor sales, the remaining property of the partnership, Staley & Wynne, consisted of a great many inactive and undeveloped leases, 10 automobile trucks and tractors, an oil storage tank, cable and rotary drilling tools, and other miscellaneous assets. These assets were reflected on the books of the partnership at a cost of $202,261.60, with a depreciation reserve of $22,255.23, or a net cost of $180,006.37.
On or about April 1, 1926, the partnership of Staley, Wynne & Company was formed and the above-mentioned assets owned by Staley & Wynne were transferred to the new partnership for $70,000. On the 1926 return filed by Staley & Wynne, a deduction of $110,006.37 was claimed as the loss on the sale of the assets to Staley, Wynne & Company. The consideration of $70,000*1122 was not paid in cash but was entered on the books of Staley & Wynne as an account receivable, and on the books of Staley, Wynne & Company as an account payable. Both partnerships kept their books and made their tax returns upon an accrual basis.
The members of Staley & Wynne, and Staley, Wynne & Company, partnerships, and the ownership of interests in each, were as follows:
| Name of Partner | Staley & Wynne | Staley, Wynne & Co. |
| J. I. Staley | [sic] 13/24ths | 13/24ths |
| J. C. Wynne | 4/24ths | 6/24ths |
| L. W. Fritz | 3/24ths | 4/24ths |
| J. E. Hall | 1/24th | 1/24th |
| P. P. Langford and J. A. | 1/24th | None |
| Staley, Trustee [sic] |
The loss of $110,006.37 claimed by Staley & Wynne was disallowed.
OPINION.
LANSDON: In the taxable year the partnership, Staley & Wynne, sold certain oil and gas leases, as set out in our findings of fact, and realized net profit in the amount of $433,394.71. Petitioners contend that such profit was income from the property in the taxable year and should be included in the basis for computing depletion as provided in section 204(c)(2) of the Revenue Act of 1926.
The issue here raised was decided adversely to the contention of the*1123 petitioners in ; affirmed by the ; and certiorari denied by the Supreme Court, . In , the Board followed the *411 Darby-Lynde decision above cited and from its decision no appeal was taken. On these authorities this question must be decided adversely to the petitioner.
On brief counsel for petitioner suggests and argues at some length that the principle of the Darby-Lynde and Macon cases, cited above, is overruled in , which was decided after the decisions upon which the respondent relies. A careful study of the opinion in the Palmer case, supra, has convinced us that it has no bearing on the issue here. There the owners of a lease assigned or sold it to an operating company for a cash consideration, plus a further amount to be realized from the sale of oil produced from the property by the operating assignee. It is clear, therefore, that the seller or assignor retained an interest in the*1124 lease and that his realization therefrom depended on the continued production of oil by the operating company. Here the selling partnership completely divested itself of all ownership and interest in the property and received the entire consideration in cash in the taxable year. Thereafter it was not in receipt of any income from the leases that could in any way be applied to the recovery of capital investment, if any. The sale was in all respects a closed transaction at the date of the transfer of the leases and the profit therefrom must be determined under the provisions of section 204(a) of the Revenue Act of 1926.
The loss claimed by the petitioners upon transfer of partnership assets to a new partnership must be disallowed for lack of evidence. The stipulation of facts merely shows that after selling the bulk of its property for cash, the partnership of Staley & Wynne, composed of four individuals, with a 1/24 interest held by trustees for undisclosed beneficiaries and the ownership of 2/24 not being disclosed, transferred the remainder of its property, having a depreciated cost basis of $180,006.37, to the new partnership of Staley, Wynne & Co., composed of the same individuals*1125 with slightly readjusted interests, but not including the trustees, for a recited consideration of $70,000, represented by debits and credits on the books of the partnerships. The record does not show whether the partnership of Staley & Wynne continued in business or whether it closed its books without collecting or intending to collect the $70,000 entered as an account receivable from Staley, Wynne & Co. In such circumstances we cannot say that the petitioners have sustained any deductible losses, except to the extent that a portion of the partnership interest may have been sold, which losses have been allowed by the respondent. The stipulation establishes nothing more than a readjustment of partnership interests with the new partnership owning the property alleged to have been sold by Staley & Wynne, though no actual sale *412 has been shown. Cf. ; ; and ; ; affd., *1126 .
Reviewed by the Board.
Decision will be entered for the respondent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Adeline C. Fritz; J. E. Hall; J. C. Wynne; Mrs. J. C. Wynne; Delia H. Staley; J. I. Staley. ↩