*45 Decisions will be entered for the respondent.
Amounts actually paid by purchaser for oil sold at petitioner's well, held to be "gross income from property" for computation of percentage depletion under Internal Revenue Code, section 114 (b), without adding back to such amounts payments deducted by purchaser pursuant to sales agreement in order to cover charges attributable to transportation of oil by purchaser from well to refinery. Consumers Natural Gas Co., 30 B. T. A. 1263; affd. (C. C. A., 2d Cir.), 78 Fed. (2d) 161; certiorari denied, 296 U.S. 634">296 U.S. 634, followed.
*726 By these proceedings petitioners seek redeterminations of deficiencies in income tax for the taxable year ended June 30, 1944, 2 as follows:
| Petitioner | Docket No. | Deficiency |
| James P. Evans, Sr | 16527 | $ 2,316.97 |
| Edith S. Evans | 16528 | 2,316.97 |
| William S. Evans | 16529 | 4,273.20 |
| Catherine M. Evans | 16530 | 4,378.01 |
| James P. Evans, Jr | 16531 | 7,561.56 |
The question presented is whether petitioners are entitled to add back to sums received for oil sold to a pipe line company the amounts stated to be charged by the pipe line company as a "freight equalization charge" and "gathering charge," in order to arrive at the "gross income from the property," for the purpose of computing percentage depletion thereon under Internal Revenue Code, section 114 (b) (3).
FINDINGS OF FACT.
During the fiscal years ended June 30, 1943, and June 30, 1944, J. P. Evans & Sons was a partnership engaged in the production of oil, *727 with headquarters at Shreveport, Louisiana. The partnership interests were held as follows:
| James P. Evans, Sr | 60 per cent |
| William S. Evans | 20 per cent |
| James P. Evans, Jr | 20 per cent |
During the years in question petitioner James P. Evans, Sr., was married to petitioner Edith S. Evans, and lived with her in the State of Louisiana; petitioner William S. *47 Evans was married to petitioner Catherine M. Evans, and lived with her in the State of Louisiana; and petitioner James P. Evans, Jr., was a married man living in the State of Mississippi. James P. Evans, Jr., for the years in question filed his returns with the collector of internal revenue at Jackson, Mississippi. The other petitioners filed their returns with the collector of internal revenue at New Orleans, Louisiana.
The individual partners and their wives kept their books and filed their income tax returns on the basis of a fiscal year ending June 30.
During all of each of the fiscal years ended June 30, 1943, and June 30, 1944, petitioners owned and reported income from an oil and gas lease in Yazoo County, Mississippi, located in the Tinsley Field and known as the Dalzell-Johnson Leases. All of the oil produced from this lease during the fiscal year ended June 30, 1943, was sold by petitioners to the Allied Pipe Line Corporation, hereinafter sometimes called Allied, pursuant to a contract dated March 8, 1941.
Under this contract Allied agreed to purchase the crude oil produced by the partnership from the Dalzell-Johnson lease for a period of three years from the date of *48 the first deliveries of crude oil. The contract, inter alia, provided as follows:
Price: Buyer agrees to accept such crude oil when delivered as herein provided, and to pay for the same at a price to be determined on the basis of schedule attached hereto marked "Exhibit A," less a freight equalization charge of .05349 per barrel and a gathering charge of .06 per barrel.
The posted prices indicated in Schedule A attached hereto are in effect on the date hereof and shall advance or decline with the posted price of Forty (40) and over Gravity, East Texas Crude Oil, as posted by the Humble Oil and Refining Company, the price of Forty (40) and over Gravity East Texas Crude Oil being $ 1.12 per barrel on the date hereof.
Exhibit A attached to the contract, "Crude Oil Price Schedule, Tinsley, Miss. District. Effective Feb. 1, 1941," showed prices ranging from $ .73 for crude oil of "24-24.9" gravity to $ .99 for crude oil of "40 and above" gravity.
Allied purchased all the crude oil from the Dalzell-Johnson lease for the full three-year period provided in the contract. In or about July 1943, Allied began paying the partnership 11 1/2 cents more per barrel for the crude oil than it *49 had paid during the previous period *728 in which the contract was in force. The 11 1/2 cents had been used as a working figure. This additional payment was due to the elimination of the "freight equalization" and "gathering charge" deduction.
At the time the contract was executed there were no facilities for handling the transportation of petitioners' product. Petitioners could have obtained a fleet of tank trucks for this purpose. Allied undertook the construction of a pipe line from petitioners' lease to the nearest railroad, a distance of approximately six miles. The cost of the pipe line was borne by Allied, which owned and operated it. It was understood that, when the cost of the pipe line was recovered by Allied, the "freight equalization" and "gathering charge" would not be reflected in the payments for petitioners' oil.
Allied bought petitioners' crude oil from petitioners' stock tanks at the lease. Allied's pipe line was connected to petitioners' stock tanks. Any loss occurring in transporting the oil over the six-mile pipe line to the railroad loading racks was Allied's loss and not petitioners'. On one occasion the line did break and the loss was regarded *50 as Allied's loss because it had given a purchase slip for the oil at the well.
While the freight equalization and gathering charges were being considered a factor under the March 8, 1941, agreement, and during the fiscal year ended June 30, 1943, petitioners sold Allied 637,794.77 barrels of oil. The freight equalization and gathering charges on this were as follows:
| Freight equalization | $ 35,078.71 |
| Gathering charge | 38,267.69 |
| Total | 73,346.40 |
Prior to the execution of the contract petitioners discussed with Allied the problem of whether or not the partnership should mail checks to Allied for the amount of the freight equalization and gathering charges. It was decided that there was no necessity for exchanging checks, but that it would be more convenient for Allied to deduct the amount of these charges from checks sent to petitioners for the crude oil purchased by Allied.
At the expiration of the three-year term of the March 8, 1941, agreement, petitioners did not renew it, but sold their crude oil to the Sohio Pipe Line Co.
The partnership return for the fiscal year ended June 30, 1943, schedule B, indicating the "Net income -- Dalzell-Johnson Producing Leases," *51 discloses the following: *729
| Dalzell-Johnson Producing Lease | ||
| Oil Runs | $ 737,254.85 | |
| Less: J. A. Selby 10% Interest | 73,725.48 | |
| 663,529.37 | ||
| Add: Charges Deducted by Allied Pipe Line | ||
| Corporation | ||
| Gathering Charge | $ 46,477.59 | |
| Freight | 41,434.77 | |
| 87,912.36 | ||
| 751,441.73 |
The partnership computed its 27 1/2 per cent depletion on $ 751,441.73.
OPINION.
In computing their deduction for percentage depletion of their oil lease petitioners seek to have included in the "gross income from the property" 3 for the fiscal year ending June 30, 1943, the amount which the purchaser of its oil, which was owner and operator of the pipe line servicing petitioners' lease, deducted from an agreed price, as a "gathering" and "freight equalization charge," pursuant to their written contract.
*52 The issue seems to us to be settled by respondent's regulation, which petitioners do not question and which has been in effect without material alteration during successive reenactments of the revenue acts. United States v. Dakota-Montana Oil Co., 288 U.S. 459">288 U.S. 459. That regulation employs as a definition of "gross income from the property" 4 the principle that the crude product itself at the source is determinative, *730 see Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312">293 U.S. 312, and that if other items are included in the ultimate sale, such as refining, processing, or transportation, they are to be eliminated as nearly as may be in arriving at the figure sought. Consumers Natural Gas Co., 30 B. T. A. 1263; affd. (C. C. A., 2d Cir.), 78 Fed. (2d) 161; certiorari denied, 296 U.S. 634">296 U.S. 634.
*53 Here the facts do not require us to separate such nonrelated items, since the arm's length agreement of the parties makes it clear that they considered 5 the net amount paid to petitioners was the price for which the crude product was purchased "in the immediate vicinity of the well," and that the balance, whether handled by deduction from the gross amount or by repayment to the purchasers, would be chargeable to transportation and not to the oil itself. The amount of depletion allowable to producers may vary with their individual situations, depending as it does on what they can command at the well for their product in its crude state. Helvering v. Mountain Producers Corporation, 303 U.S. 376">303 U.S. 376.
It follows*54 not only that the amount employed by the respondent to compute petitioners' percentage depletion is correct, but that no inequity or lack of realism results, since it is that unexpanded figure, not related to transportation or other subsequent costs, which the statute, as construed by the regulation, would seek in the case of any oil producer. What petitioners paid for indirectly through the deductions from the gross price was, as we have said, the cost of transportation of the oil after it had been produced. The deductions did not cover costs of producing the crude product itself, for which an allowance might have to be added back -- if paid directly, or through an agent as in Oliver Iron Mining Co., 10 T. C. 908 -- before the "gross income" from the oil itself could be found. But cf. Helvering v. Mountain Producers Corporation, supra.Even if the title to the oil had passed at the end of the transportation process instead of the beginning, and even if the agreement and the practice of the parties had been to pay the larger amount to petitioners and require a counterpayment by them, the consequence would thus be*55 the same, and a deficiency similarly determined would have to be sustained there, as it must be here. Consumers Natural Gas Co. v. Commissioner, supra.
Decisions will be entered for the respondent.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Edith S. Evans; William S. Evans; Catherine M. Evans; and James P. Evans, Jr.↩
2. The fiscal year ended June 30, 1943, is pertinent by reason of the Current Tax Payment Act.↩
3. SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
* * * *
(b) Basis for Depletion. --
* * * *
(3) Percentage depletion for oil and gas wells. -- In the case of oil and gas wells the allowance for depletion under section 23 (m) shall be 27 1/2 per centum of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. * * *↩
4. In the form effective prior to October, 1944, the text was as follows:
"(f) 'Gross income from the property,' as used in section 114 (b) (3) and (4) and sections 29.23 (m)-1 to 29.23 (m)-28, inclusive, means the amount for which the taxpayer sells the crude mineral product of the property in the immediate vicinity of the mine or well, but, if the product is transported or processed (other than by the processes excepted below) before sale, it means the representative market or field price (as of the date of sale) or crude mineral product of like kind and grade before such transportation or processing. If there is no such representative market or field price (as of the date of sale), then there shall be used in lieu thereof the representative market or field price of the first marketable product resulting from any process or processes (or, if the product in its crude state is merely transported, the price for which sold) minus the costs and proportionate profits attributable to the transportation and the processes not listed below. * * *
"In the case of oil and gas, if the crude mineral product is not sold on the property but is manufactured or converted into a refined product or is transported from the property prior to the sale, then the 'gross income from the property' shall be assumed to be equivalent to the market or field price of the oil or gas before conversion or transportation." (Regulations 111, sec. 29.23 (m)-1 (f↩).)
5. "* * * My deal with him [the purchaser] was to sell oil at my tanks on my lease.
* * * *
"* * * I think the six cents was what he [the purchaser] considered the cost of taking the oil from the lease to the loading rack and the balance of it from the loading rack to the refinery."↩