*759 In the absence of evidence that the value of wet gas at the mouth of the well purchased under casinghead gasoline contracts was in excess of the royalties paid therefor it is held that the petitioner is not entitled to any deduction from gross income representing an allowance for depletion.
*385 These proceedings, consolidated for hearing, are for the redetermination of income tax deficiendies as follows:
| Docket No. | Year | Deficiency |
| 44093 | 1924 | $7,684.74 |
| Do | 1925 | 2,096.52 |
| Do | 1926 | 4,850.54 |
| 54950 | 1928 | 35,510.01 |
| 61165 | 1929 | 47,038.31 |
The deficiency determined for 1924 is conceded by the petitioner. Several allegations of error stated in the petitions have been waived by the petitioner. The only issue for the determination of the Board is whether the petitioner is entitled to deductions representing allowances for depletion for the calendar years involved on the basis of the casinghead gasoline (wet gasoline) obtained from the oil and gas produced under*760 purchase contracts commonly called casinghead gas contracts.
FINDINGS OF FACT.
The petitioner is the owner and operator of a casinghead gasoline plant of the absorption type located at Long Beach, California. The "wet gas" or gas having a gasoline content which it treats *386 in its plant is obtained from oil wells located in the Signal Hill field and is taken under so-called "casinghead gas contracts." Most of the contracts under which it obtained the gas in the years herein involved were in writing, but some were oral. The terms of the oral contracts were practically the same as those of the written contracts and the procedure under them was the same.
In addition to its gasoline extracting plant petitioner operates a central pumping plant furnishing such pressure as may be required in the process of taking the gas at or from the well. Some of the residue gas is returned for operating purposes on the leases and in some instances is injected into the well to stimulate further production. Some wells do not require the application of pressure, since they have sufficient propulsive force of their own for producing purposes without using artificial means. During 1928*761 or 1929 petitioner exerted vacuum on about one half of the wells from which it was taking gas. The petitioner is required under the contracts to meter the gas it receives. The meters are outside of the casinghead on the well. Oil and gas separators are adjacent to the rig or derrick, which are not required by the contracts to be built by the petitioner. The petitioner is given the right to apply vacuum to wells where needed. In many of the contracts the petitioner, at the order of the producer, is required to cease using pressure or vacuum on the wells. Petitioner also farmed out certain gas for processing in the plant of another manufacturer.
In some instances the residue of the gas, after the gasoline has been extracted at the plant, is forced back into the well where it is again enriched through contact with the crude petroleum coming out and again saturated with the gasoline vapors. It is metered at the well and again put through the plant. There were no posted prices of wet gas at the mouth of the well at any time.
The casinghead contracts under which the petitioner obtained gas during the taxable years were not identical in their terms, but were essentially the*762 same in general form and created similar obligations and benefits. The contracts generally provide for the purchase by the petitioner of the casinghead gas from the operators of oil and gas wells, the treatment and extraction of gasoline from the wet gas in the gasoline plant of the petitioner, and the marketing by the petitioner of the gasoline and dry gas produced. In a number of the contracts the operator of a property is designated as the "seller" and the petitioner as the "buyer" of the wet gas. The rights granted to the petitioner include the sole and exclusive right to treat the gas produced by the operator of the property and the right to go upon the land to install necessary equipment, lay pipe lines from the casinghead or gas trap of the operators of the wells, and the full *387 right of ingress and egress on the premises for the purpose of maintenance and operation of these facilities.
The contracts further provide that the "seller" and operator of the property shall "save and collect" the gas and "deliver" the same to the "buyer", the petitioner herein, at the casinghead of the well or, if gas is produced with the oil from the well, then the gas shall be delivered*763 to the "buyer" at the gas trap; that the operator of the property shall provide and maintain all necessary equipment for separating the oil and gas on the premises, in order to save the gas and render it available for "delivery" to the petitioner as "buyer."
The owner-operator or lessee-operator of the property from whom the petitioner purchases gas shall determine and regulate the pressure at which gas or oil shall be produced from the wells and shall have the right to disconnect any well from the gas pipe line system of the petitioner during the time such connection would materially interfere with the production of oil from the well.
The contracts further provide that the petitioner as buyer shall pay to the operator of the property a fixed proportion of the total gross proceeds received by it from the sales of gasoline, ranging from 35 percent to 50 percent, and shall sell the dry gas not returned to the operator for fuel purposes (or the proportionate share of lessee-operators' gas used by the petitioner for fuel purposes in its plant) and pay the operators a fixed proportion of such gas sales, ranging from 45 percent to 100 percent of the dry gas available for sale.
In*764 the event of default on the part of either party to the agreement and upon failure to remedy such default after notice, the other parth has the right at its option to terminate the agreement.
The following table shows in thousands of feet the total volume of wet gas produced and treated under the contracts and the total royalties paid under the contracts for the years indicated:
| Year | M feet produced | Royalties paid |
| 1925 | 2,090,579 | $212,277.43 |
| 1926 | 2,699,981 | 409,742.63 |
| 1928 | 9,835,670 | 870,110.71 |
| 1929 | 11,411,123 | 1,055,945.59 |
In its returns for 1925 and 1926 the petitioner did not claim the deduction from gross income of any amount representing an allowance for depletion. It made such claims, however, in its returns for 1928 and 1929. In the determination of the deficiencies the respondent has not permitted the deduction from gross income of any amount representing allowances for depletion.
*388 OPINION.
SMITH: The only question presented by these proceedings is whether the petitioner is entitled to deduct from gross income of each or any of the years in question an allowance for depletion of properties, and, if so, the amount thereof. *765 The respondent has made no allowances for depletion and in those returns where the petitioner claimed a deduction representing an allowance for depletion the respondent has disallowed such deduction. The basis of the respondent's action was that the petitioner had no depletable interest in the properties. On brief he contends that if the petitioner should be held to be entitled to the deduction of an allowance for depletion it has not proven the amount to which it is entitled.
The applicable provisions of the Revenue Act of 1926 are as follows:
SEC. 234. (a) In computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
* * *
(8) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.
SEC. *766 204. (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that -
* * *
(2) In the case of oil and gas wells the allowance for depletion shall be 27 1/2 per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.
Section 234(a)(8) of the Revenue Act of 1926, under deductions allowed corporations, is the same as section 214(a)(9).
The applicable provisions of the Revenue Act of 1928 are substantially the same as those of the Revenue Act of 1926 quoted above.
The petitioner, in support of its contention that it is entitled to a deduction from gross income representing an allowance for depletion, relies upon *767 . The facts in that case showed that the Signal Gasoline Corporation had made a cash investment in *389 certain casinghead gasoline contracts and had also issued shares of its stock in the acquisition of other contracts. The court held therefore that the corporation was entitled to a deduction from gross income of a reasonable amount representing an allowance for depletion. The case was remanded to this Board and on reconsideration this Board held () that there was no evidence before it to prove that the royalties paid by the Signal Gasoline Corporation were less than the fair market value of the wet gas at the mouth of the well. For lack of evidence the determination of the respondent that the Signal Gasoline Corporation was not entitled to the deduction of an allowance for depletion was affirmed. On appeal to the Circuit Court of Appeals for the Ninth Circuit the decision of the Board in that case was affirmed, . In the course of its opinion the court stated:
In view of the fact that under the existing law the depletion allowance is fixed*768 at an arbitrary figure of 27.5% the importance of selecting the right base on which this allowance is to made is of the utmost significance. The theory upon which a fixed percentage is allowed for depletion is that the mineral product to be mined or produced when still in the ground has a value of 27.5% of its value when mined or produced. Consequently the 27.5% represents a return of capital while the balance represents income to the taxpayer subject to the usual deductions in determining the net income. The difficulty in the case at bar arises from the fact that the wet gas produced and processed by the petitioner and by Holly Oil Company under a contract with petitioner was subject to the payment by petitioner of royalties to the owner of the wells for the product at the time it was produced and manufactured into dry gas and gasoline. It is apparent that if the petitioner's contract was such that it was required to pay the full market value of the wet gas as it was produced by the wells it had no capital investment in the well or in the oil content of the land and had no advantage over a manufacturer who bought his wet gas on the market other than the exclusive right to*769 the product of the particular wells from which it derived the gas. In such a case where the manufacturer pays to the owner or lessee of the oil land the full market value of the wet gas at the time it is turned over to the manufacturer at the mouth of the well, the entire capital investment in the wet gas belongs to the owner of the land, or lessee, and by reason of the production of the wet gas from the land his capital was depleted by an amount which Congress had arbitrarily fixed at 27.5% of the value of the wet gas at the surface. The person who paid the market price to the lessee or owner would suffer no diminution of capital investment in the oil or gas in place under such circumstances. If we assume, however, that the petitioner by reason of his favorable contract with the producer secures the wet gas when produced at a fraction of its market price at the time it is produced, say one-half for the purpose of illustration, it is clear that petitioner to that extent (50%) would have his interest in the wet gas in place in the land reduced by one-half of the amount produced. In such a case it is clear that the allowance for depletion should be equally divided between the owner*770 or lessee and the petitioner. If the relationship between the owner or lessee and the petitioner involves a payment of less than 100% of the market value of the wet gas at the surface, then by as much as the petitioner owns a fractional portion of the market value of the wet gas when produced, its capital investment is*390 depleted by 27.5% of that amount. For illustration, if the amount agreed to be paid is two per cent less than the market price of wet gas, the petitioner would be entitled to a depletion allowance of 27.5% of two per cent, that is, .55% of the market value of the wet gas at the surface before the manufacturing process or separation has taken place. [Italics supplied.]
The court further stated:
Since the taxpayer is seeking a deduction for depletion from its otherwise taxable income, the burden of proof is upon it not only to prove that it is entitled to the deduction but also to prove the correct amount therof. * * *
The petitioner has gone to great pains to show its profits from the manufacture and sale of casinghead gasoline as distinguished from its profits from the sales of dry gas. It contends that the excess of the amount realized*771 from the sale of casinghead gasoline over the royalties paid represents depletion sustained in the taxable years. It contends that the production of casinghead gasoline is not a manufacturing process. There is no merit in this contention. See
Since the petitioner has not met the burden of proof of showing a reasonable allowance for depletion, if it might be entitled to any such allowance, the determinations of the respondent are approved. Cf. ; certiorari denied, ; Hurley v.United States, decided by the District Court for the Northern District of Oklahoma and reported at .
Judgment will be entered for the respondent.