*1440 1. Held that the petitioner has not overcome the presumption in favor of the respondent's determination that petitioner elected to charge costs of wages, fuel, repairs, hauling, etc., in connection with the exploration of property, drilling of wells, building of pipe lines, and development of property, as enumerated in article 223 of Regulations 45, to capital in computing its tax liability for the year 1918, and that the respondent correctly treated such items in each of the years 1918, 1919, 1920 and 1921 as capital expenditures.
2. Held that under the circumstances of this case petitioner is entitled to have its profits taxes for the years 1920 and 1921 computed in the manner provided in section 328 of the Revenue Acts of 1918 and 1921.
*902 This is a proceeding for the redetermination of asserted deficiencies in income and profits taxes for the calendar years 1920 and 1921 in the respective amounts of $33,011.20 and $10,221.65.
The following errors are alleged in the petition:
(a) In the determination of taxable net income of taxpayer*1441 for the calendar year 1920 the Commissioner overstated said income to the extent of $55,557.78, in that he disallowed as operating expense an amount of $47,101.96 which represented incidental cost of drilling wells for said year, overstated the depletion allowable by $1,743.55 and also failed to deduct from the net income properly determinable for the year 1920 a net loss contended for by taxpayer for the year 1919 in the amount of $15,537.10, arising by reason of taxpayer claiming as an expense the incidental cost of drilling wells for the year 1919 in the amount of $24,309.70, which the Commissioner treated as a capital charge for said year, and an adjustment in the depletion allowance for said year of $2,773.39.
(b) In the determination of the net income of taxpayer for the calendar year 1921 the Commissioner overstated said income to the extent of $1,723.31, in that he did not allow as an operating expense an amount of $9,608.61, which represented the incidental cost of drilling wells for said year and overstated the depletion allowable by $7,885.30.
(c) In determining the invested capital of taxpayer for the calendar year 1920 the Commissioner overstated the amount properly*1442 allowable for said year to the extent of $46,989.09, in that he included as part of the earned surplus of the corporation at the beginning of said taxable period the cost of incidental drilling expense for the year 1918 of $25,452.78 and for the year 1919 of $24,309.70, and excluded an excessive depletion allowance for 1919 of $2,773.39.
(d) In determining the invested capital of taxpayer for the year 1921 the Commissioner overstated the amount properly allowable to the extent of $79,045.86, in that he excluded from invested capital:
| Income tax eliminated for 1919 | $399.99 | |
| Excessive deduction on account of 1920 tax liability | 12,901.65 | |
| 1919 depletion overstated | 2,773.39 | |
| 1920 depletion overstated | 1,743.55 | |
| $17,818.58 |
and included as part of the invested capital:
| Drilling expense - 1918 | $25,452.78 | |
| Drilling expense - 1919 | 24,309.70 | |
| Drilling expense - 1920 | 47,101.96 | |
| $96,864.44 |
*903 (e) In determining the excess profits tax liability of taxpayer for each of the taxable years covered by this petition, the said tax was computed under the provisions of Section 201 of the Revenue Acts of 1918 and 1921 instead of under the*1443 provisions of Sections 327 and 328 of said Acts.
Upon motion made previous to the hearing, the hearing in this proceeding was limited, in the first instance, to the trial of issues defined in subdivisions (a) and (b) of Rule 62 of the Board's rules of practice.
FINDINGS OF FACT.
The petitioner is a California corporation, with its principal place of business in the Union Oil Building, Los Angeles, California. Its business is the production and sale of crude oil. Petitioner was organized in September, 1903, with an authorized capital stock of $200,000, of which $104,666.66 was subscribed at that time. No other amounts have been paid in. During the period from 1904 to 1906 the Union Transportation Company and the Associated Oil Company acquired all of petitioner's capital stock. In the early part of 1913, the Union Oil Company acquired the stock held by the Union Transportation Company, and thereafter and in the years in question the petitioner's stock was held equally by the Union Oil Company and the Associated Oil Company.
In 1905 petitioner obtained a lease on 600 acres of land near Orcutt, California, in the so-called Santa Maria Field, from the Escolle Estate Company, *1444 for which it paid a bonus of $1,100, and agreed to pay to the lessor a one-eighth royalty. The income derived by the petitioner in the years 1920 and 1921 was derived from 12 oil wells which were drilled on the land covered by the lease. Ten of these wells were drilled prior to March 1, 1913, and two in the year 1920. No discovery of oil was made by petitioner after March 1, 1913. The petitioner had no important property until it acquired the Escolle lease in 1905, and has acquired no other prospective oil property since that time.
The tax records and accounts of the petitioner during the taxable years in question were kept by the Union Oil Company and had been *904 for many years prior to those years. The Union Oil Company supervised these records and determined the policies for the petitioner and other companies in which the Union Oil Company owned an interest, with respect to the cost accounts and records. During 1920 and 1921 the petitioner's officers and directors were made up of the officers and directors of the Union Oil Company and the Associated Oil Company. Such a situation is not unusual in California. The petitioner's president was W. L. Stewart, who was*1445 also president of the Union Oil Company. Stewart did not receive any salary in 1920 and 1921 from the petitioner, but he did receive a substantial salary from the Union Oil Company as president of that corporation, the salary being in keeping with that corporation's capitalization of $90,000,000. None of the petitioner's officers or directors received salary from petitioner. A reasonable compensation for the duties performed by petitioner's officers and directors was at least $25,000 to $50,000 for each of the years 1920 and 1921.
Petitioner expended and paid during the years 1918, 1919, 1920 and 1921, the following respective amounts for incidental expenses such as wages, fuel, repairs, hauling, etc., in connection with drilling the wells, building of pipe lines, and the development of property under lease by petitioner: $25,452.78, $24,309.70, $47,101.96, and $9,608.61. These items were of the character described in article 223 of Regulations 45 and 62 of the Treasury Department, United States Internal Revenue Bureau. They will be hereinafter referred to as "incidental development costs."
During the course of the years 1916, 1917 and 1918, petitioner's incidental development*1446 costs had been charged on its books to "oil wells and development" account, which was a capital account during those years.
The Union Oil Company, in its control of the petitioner and other companies in which it held an interest, at some time not disclosed by the record, determined that items of this character should be charged to expense for the year 1918. On June 18, 1919, the Union Oil Company sent the following letter to its district offices:
Effective with June, 1919, please arrange to divide the charges on Form #81, Drilling Well Sheet, to show the "Tangible" and "Intangible" items against drilling well accounts.
The following will be observed in this connection:
1. The cost of Tangible items used for the ordinary maintenance of physical property, which neither materially add to the value of the property nor appreciably prolong its life, but keep it in an ordinary efficient operating condition, should be charged to Intangible account C-2.
2. The cost of Tangible items used in the nature of replacements made necessary through the deterioration of equipment, which materially add to the value of the property or appreciably prolong its life, should be charged to Tangible*1447 B, 1 to 8, or B 14, the salvage value of the property replaced should *905 be credited to Tangible when it is removed and the balance of its original cost to the project should be transferred by Journal Entry to Intangible (Column B 9). The Head Office must be promptly and fully advised of such transfers to insure the proper adjustment of depreciation provided thereon.
3. Column B 9 will be used for Intangible charges outlined in paragraph 2, as well as for Lime, Cement, Paint, and other Intangible items.
Entries in columns B, 1 to 8 inclusive, and column B 14 on Form #81, Drilling Well Sheet, must be confined to charges for Tangible material plus freight only; thus the total of these nine columns combined will represent the Tangible, and the combined total of all other columns on the sheet will be the Intangible additions to the well.
Two separate columns will be carried on each Project Distribution Sheet for accumulating separately the Tangible and Intangible additions to Subsidiary Facilities.
We have arranged for a revision of Form #81 Drilling Well Sheet, and Form #4, Summary of Additions to Property, to include in the proper order captions for Tangible and*1448 Intangible items. In the meanwhile until such time as the new print is received, you will insert the proper heading on the present form.
Yours faithfully,
(Signed) R. D. MATTHEWS,
Comptroller.
WHG:WG
* * *
On August 12, 1919, the Union Oil Company sent a letter to its district offices, which stated as follows:
Please furnish this Office, at an early date with a statement showing the Tangible and Intangible Segregation of the Additions to Subsidiary Facility Property Accounts for the months of January, February, March, April and May, 1919.
The above letters had the effect of establishing that incidental development costs were to be charged to expenses, both in the Union Oil Company and in all the companies in which the Union Oil Company had an interest. The Union Oil Company itself had, in the years 1916, 1917 and 1918, charged costs of this nature to capital account, but in 1919 it altered its books to show these items as charges to expense and the respondent has not objected to that. Despite the above order, the petitioner's incidental development costs for the year 1918 continued to be reflected as capital items on its books of account. On December 31, 1919, William*1449 J. Hanna, who kept petitioner's books, made a journal entry capitalizing these costs. In making this journal entry as to the year 1918, Hanna was acting under verbal instructions from the Union Oil Company to change the books, but he later found that he had made a mistake. The verbal instructions from the Union Oil Company were to change the books to charge the incidental development costs for the years 1916 and 1917 to land, and for the years 1918 and 1919 to cost of production. Through an error he did not follow his instructions in making this journal entry of *906 December 31, 1919. He handled the incidental development costs for 1916, 1917 and 1918 as charges to land.
In petitioner's original income and profits-tax return for the year 1918, which was executed by petitioner's president, W. L. Stewart, and its secretary, John McPeak, before a notary public, on June 16, 1919, and filed with the collector of internal revenue on the same date, incidental development costs were not deducted as an expense. Nor were they deducted as an expense on petitioner's amended return for the year 1918 which is dated June 2, 1921. The petitioner reported a net loss on its income and*1450 profits-tax return for 1918, and the revenue agent reported no tax due for that year.
The petitioner reported a net loss on its income and profits-tax return for 1919. The respondent disallowed a deduction in the amount of $24,309.70 taken by the petitioner for incidental development costs, determined a deficiency of $399.92 for 1919, and so advised the petitioner, pursuant to section 274(a) of the Revenue Act of 1926, from which the petitioner did not appeal to this Board. Petitioner paid that deficiency.
Only one revenue agent, B. F. Hersom, examined the books of the petitioner for the years 1918 and 1919. He reported to the respondent on September 13, 1923, that he firmly believed that it was the intention of the petitioner to charge incidental development cost during 1918 to expense.
On September 5, 1923, the petitioner, by its assistant comptroller, R. S. Mill, wrote the following letter to the respondent:
In the audit of California Coast Oil Company records, Revenue Agent Mr. B. F. Hersom points out that the Incidental Cost of Drilling for the years 1916, 1917 and 1918 has been capitalized under the heading of Oil Lands and that such expenditures for the year 1919*1451 were charged against Income Account.
Under the option given Taxpayers in Article 223, Regulations 45, it was the election of the Union Oil Company of California, and its owned and affiliated company, including the CaliforniaCoast Oil Company whose records are kept in this office, to charge Incidental Cost of Drilling to Expense, beginning with the year 1918. All concerned were so instructed but the bookkeeper handling CaliforniaCoast Oil Company records has confused 1919 as the year in which the change was to be made. This is plainly evident by the fact that the entries are all made in the same belated Voucher No. 746 dated December 31, 1919, which was intended to revamp the books to conform to Income Tax Regulations.
The Revenue Agent while admittedly satisfied of the Company's intention to charge Expense in 1918 as has been done in subsequent years, does not consider it within his jurisdiction to authorize the transfer of $25,452.78 to Expense in the year 1918. We are therefore making this statement of the facts to you and will appreciate your approving the correction of this error.
Incidental development costs were treated as deductible expenses on the petitioner's*1452 books in 1920 and 1921 and in its returns for those years, but were disallowed as expense deductions by the respondent. *907 The deficiency letter for the years 1920 and 1921 which is the basis for this proceeding expressly sustained "the conclusion set forth in Bureau letter dated October 21, 1926"; the letter of October 21, 1926, had, in turn, expressly sustained the deficiency "as set forth in Bureau letter dated April 17, 1926," and the letter of April 17, 1926, stated in part as follows:
In view of your election under the provisions of Article 223, Regulations 45, with reference to capitalization of drilling costs, the amount expended by you in 1920 for drilling has been restored to net income and a corresponding amount added to the cost on value of leasehold recoverable through depletion.
In determining the proposed deficiency for 1920 and 1921 and in determining a deficiency for 1919, the respondent allowed deductions for depletion in each of the years on the basis of a valuation of $1,289,959.53 for the Escolle lease as of March 1, 1913.
In computing petitioner's invested capital for the year 1921 the respondent eliminated from the invested capital reported*1453 by petitioner an amount of $399.99 representing "additional tax liability for 1919," and $31,477.59 representing "tax liability for 1920, $74,485.55 prorated."
The petitioner's net production of oil from 1913 to 1921, after deduction of royalty, was as follows:
| Year | Barrels |
| 1913 | 158,865 |
| 1914 | 180,375 |
| 1915 | 166,538 |
| 1916 | 158,307.01 |
| 1917 | 150,353 |
| 1918 | 135,544 |
| 1919 | 157,875 |
| 1920 | 198,650 |
| 1921 | 198,938 |
The net income of the petitioner as shown by its books, and the dividends paid by it in cash for the years 1906 to 1921, inclusive, were as follows:
| Year | Net income, per books | Cash dividends paid |
| 1906 | $36,752.90 | $15,000.00 |
| 1907 | 149,680.87 | 80,000.00 |
| 1908 | 309,407.99 | 309,000.00 |
| 1909 | 243,617.14 | 243,700.00 |
| 1910 | 183,031.12 | 241.500.00 |
| 1911 | 136,348.81 | 161,000.00 |
| 1912 | 85,130.28 | 146,000.00 |
| 1913 | 60,097.62 | 71,100.00 |
| 1914 | $37,035.63 | $87,707.39 |
| 1915 | 21,357.44 | 60,800.00 |
| 1916 (loss) | -12,385.14 | 41,700.00 |
| 1917 (loss) | -22,483.00 | 5,500.00 |
| 1918 (loss) | -22,486.66 | None. |
| 1919 | 15,445.64 | 40,000.00 |
| 1920 | 143,349.47 | 85,000.00 |
| 1921 | 151,131.80 | 295,000.00 |
During the years 1920 and 1921, due to favorable contracts negotiated*1454 by its officers and directors, the entire oil output of petitioner was sold to the Associated Oil Company or Union Oil Company at the full prevailing market prices of oil. The net valume of sales derived by petitioner are attributable very largely to the services of *908 the petitioner's directors and officers. Due to their efforts, petitioner was assured of a large income.
There was a scarcity of oil in California in 1920 and 1921, which caused a higher price for oil. This accounted for the large income of the petitioner for 1920 and 1921 as compared to the years 1916, 1917, 1918 and 1919.
For the years 1920 and 1921, the sales, net income, invested capital, excess-profits tax, normal tax and total tax of petitioner as found by the respondent, together with the ratio of some of the items to each other, are as follows:
| Item | 1920 | 1921 |
| Sales | $319,548.19 | $296,837.13 |
| Invested capital | 103,950.19 | 230,951.75 |
| Net income | 174,923.15 | 148,990.66 |
| Excess-profits tax | 63,548.04 | 46,066.56 |
| Normal tax | 10,937.51 | 10,293.31 |
| Total tax | 74,485.55 | 56,359.87 |
| Percentage of net income to invested capital | 168.28% | 64.515% |
| Percentage of excess-profits tax to net income | 36.33% | 20.92% |
| Percentage of total tax to net income | 42.58% | 37.825% |
*1455 The petitioner owned no drilling equipment in 1920 or 1921. Its drilling in 1920 and 1921 was done by the Union Oil Company at cost and the petitioner only paid when the work was finished. Office space was furnished to the petitioner in 1920 and 1921 by the Union Oil Company, without charge. The books and records of the petitioner were kept and maintained by the Union Oil Company for a consideration less than the petitioner would have had to pay if it had had to employ a bookkeeper on the open market to do the same.
The income and profits-tax returns filed by the petitioner for 1920 and 1921 showed "office and general expense" to be $2,041.67 and $2,154.72 for the respective years. The inventories of petitioner at January 1, 1920, December 31, 1920, January 1, 1921, and December 31, 1921, as shown by the income and profits-tax returns of the petitioner for the years 1920 and 1921, respectively, were as follows: $689.09, $413.15, $413.15, and $335.47.
OPINION.
MCMAHON: The first question to be determined is whether the respondent erred, in determining the tax liability of the petitioner for the years 1918, 1919, 1920 and 1921, in disallowing as operating expenses the*1456 amounts of $25,452.78, $24,309.70, $47,101.96 and $9,608.61, respectively, which petitioner paid out in those years for wages, fuel, repairs, hauling, etc., in connection with drilling wells, building of pipe lines, and the development of property under lease by petitioner, and which, for convenience, we term "incidental *909 development costs." The deficiency letter upon which this proceeding is based does not assert deficiencies against the petitioner for the years 1918 and 1919, and we therefore do not have jurisdiction to redetermine the tax liability of the petitioner for or decide questions relating to those years, except as it becomes necessary in computing the tax liability of petitioner for the years 1920 and 1921. It is the contention of the petitioner that the determination of this issue as to 1918 and 1919 will have a bearing upon the petitioner's tax liability for the years 1920 and 1921, by affecting invested capital for 1920 and 1921, and that the determination of the issue with regard to the year 1919 will result in the finding of a net loss in that year which may be carried forward and deducted from the net income of the petitioner for the year 1920.
It*1457 has been stipulated by the parties that the items constituting the amounts set forth above are of the character described in article 223 of Regulations 45 and 62 of the Treasury Department, Internal Revenue Bureau.
Article 223 of Regulations 45, which relates to taxes under the Revenue Act of 1918, provides in part as follows:
Charges to capital and to expense in the case of oil and gas wells. - Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as an operating expense or charged to the capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital account, in so far as such expense is represented by physical property it may be taken into account in determining a reasonable allowance for depreciation. The cost of drilling nonproductive wells may at the option of the operator be deducted from gross income as an operating expense or charged to capital account returnable through depletion and depreciation as*1458 in the case of productive wells. An election once made under this option will control the taxpayer's returns for all subsequent years.
Article 223 of Regulations 62, which relates to taxes under the Revenue Act of 1921, is identical with the above quoted portion of article 223 of Regulations 45, except that for the words "operating expense" it uses the words "development expense."
The only question presented in this regard by the parties is whether the petitioner exercised an option under the above article of the regulations and, if so, what type of an option.
The respondent contends that the petitioner exercised the option of charging such expenditures to capital in computing its tax liability for the year 1918 and that for that year and years following petitioner is bound by its election. Petitioner, on the other hand, contends that it elected to deduct such items as an operating expense for the year 1918 and that for that year and the following years, it should be allowed deductions of the amounts expended.
*910 An edition of Regulations 45, embracing article 223, was promulgated February 25, 1919, and another edition of such regulations was approved on April 17, 1919. *1459 Petitioner filed its original income and profits-tax return for the year 1918 on June 16, 1919. Therein the petitioner did not deduct its incidental development costs as an expense. Nor did it deduct such costs as expense in its amended return for the year 1918 which is dated June 2, 1921. As a matter of fact, these incidental development costs were charged to capital account on the petitioner's books in the years 1916, 1917 and 1918. There is evidence to show that in 1919 the Union Oil Company, which controlled the policies of the petitioner in respect to its cost accounts and records, issued instructions to charge incidental development costs for 1918 to expense, and that petitioner's bookkeeper, William J. Hanna, did not act in accordance with instructions when, in making a certain reforming journal entry on December 31, 1919, he failed to charge the amount of incidental development costs to expense for that year. However, in our opinion, these instructions issued by the Union Oil Company in 1919 are not decisive of the question, since petitioner may have made an election prior to that time.
George H. Forster, who is now comptroller of the Union Oil Company and who was chief*1460 accountant of that company in 1918 and 1919, testified that in 1918 the Union Oil Company, in its control of the petitioner and its other subsidiary companies, determined that those companies should charge expenditures of the nature here in question to expense, and indicated that since the books of the petitioner in the year 1918 showed these expenditures as charged to capital, Hanna, who kept petitioner's books in that year, had made a mistake. However, the testimony of Forster, taken in connection with the whole record, we believe, indicates that the error to which he refers was the error made by Hanna in making the journal entry on December 31, 1919. Hanna himself testified that he later learned that he had made an error in making the entry on December 31, 1919, but his testimony does not establish that the entries on the books made in the year 1918 were at variance with the policy or instructions in existence at that time. Furthermore, the evidence discloses that during 1918 the Union Oil Company itself charged items of this nature to capital and that it was not until some time in 1919 that it determined to treat its own expenditures of this nature to expense. For these reasons*1461 we do not feel justified in accepting the above referred to testimony of Forster as proof that during 1918 there had been established by the Union Oil Company a policy of having the petitioner charge items of this nature to expense.
Even if the Union Oil Company had determined upon such a policy for petitioner, we do not believe that this necessarily would be *911 governing. The petitioner is a separate entity from the Union Oil Company and the regulations refer to an election by "the taxpayer." Nowhere in the record in this proceeding is there any evidence as to any action taken by "the taxpayer," either through its directors or officers, in regard to the exercise of this option.
The respondent has held that the petitioner elected to capitalize this type of expenditure, and the burden is upon the petitioner to introduce sufficient facts to overcome the presumption in favor of the correctness of the respondent's determination. From a consideration of the entire record we are constrained to hold that the petitioner has not shown that it did not elect to charge these items to capital in computing its tax liability for the year 1918. We approve the respondent's action*1462 in treating these items as capital expenditures in each of the years 1918, 1919, 1920 and 1921.
We do not consider this holding in conflict with Sterling Oil & Gas Co.v. Lucas, decided by the District Court for the Western District of Kentucky on July 21, 1931, which is relied upon by the petitioner. In that case it clearly appeared that the taxpayer had not finally disposed of the oil well development costs on its books until after the filing of its return for the year 1919, that the board of directors of the taxpayer did then deliberately elect to treat them as expenses, and that in an amended return the taxpayer treated them as expenses.
In view of the above holding as to the proper method of handling incidental development costs, the petitioner's contention that it sustained in 1919 a net loss which may be allowed as a deduction in computing its net income for 1920 fails. The respondent held that there was a deficiency in tax due for the year 1919 and there is no showing that he erred.
There is no evidence to show that the respondent erred in computing depletion deductions for 1920 and 1921 as alleged by petitioner. The respondent's determination in each of*1463 the above respects is approved.
Petitioner also contends that during 1920 and 1921 there were abnormal conditions affecting its capital and income within the meaning of section 327 of the Revenue Acts of 1918 and 1921, and that it is entitled to have its profits taxes for those years computed in the manner specified in section 328 of those revenue acts. The Revenue Act of 1918 provides in part as follows:
SEC. 327. That in the following cases the tax shall be determined as provided in section 328:
* * *
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the *912 corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate*1464 of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
SEC. 328. (a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. * * *
Sections 327 and 328 of the Revenue Act of 1921 contain the same provisions.
Petitioner did not pay out any salaries to its officers and directors during those years. These officers and directors were also officers and directors of the Union Oil Company of California and were capable men. They were largely responsible for the income of the petitioner in the years in question. There was testimony*1465 that the reasonable value of their services would be between $25,000 and $50,000 for each of the years in question, and we have found as a fact that their services were reasonably worth at least $25,000. There was also competent testimony adduced at the hearing which shows that it was abnormal in 1920 and 1921 in the oil industry for a corporation having the volume of business and the amount of income which petitioner had in those years not to be required to pay salaries to its officers.
During 1920 and 1921 petitioner did not pay office rent, office space being furnished it free of charge by the Union Oil Company, and the bookkeeping for petitioner was done by the Union Oil Company at cost. The petitioner's general office expenses for 1920 and 1921 were in the relatively small amounts of $2,040.67 and $2,154.72, respectively. The evidence shows that in 1920 and 1921 it was abnormal in the oil industry for a company having the volume of sales and income which petitioner had in those years to have such a small amount of office expense as petitioner had.
The petitioner did not incur any expense with respect to the marketing of its product. Its directors and officers negotiated*1466 contracts for the purchase of its commodity.
It is our opinion that the above described conditions constituted such abnormal conditions affecting petitioner's income of the years in question that the petitioner is entitled to have its profits taxes for *913 the years 1920 and 1921 computed in the manner specified in section 328, supra. See , where the fact that no officers' salaries were paid was held to create an abnormality entitling taxpayer to special assessment; , where inadequacy of officers' salaries was held to create an abnormality entitling taxpayer to special assessment; , where it was held that facts that officers received no salaries and that the taxpayer was required to pay a low rental created an abnormal condition entitling taxpayer to special assessment; and , wherein it was held that abnormal conditions obtained entitling taxpayer to special assessment where there was a disparity in the ratio of expenses to earnings, the taxpayer obtained its*1467 manufacturing building from the owners at less than normal cost, the taxpayer had the use of a large sales force without cost, and its officers' salaries were below normal.
Since we have held that petitioner is entitled to special assessment for the years 1920 and 1921, it becomes unnecessary to further consider the other contentions raised by petitioner with regard to invested capital for those years.
Further proceedings may be had under Rule 62(c).