*1140 1. ASSOCIATION. - Where the owners of an oil lease create a trust for the purpose of engaging in business for profit by prospecting and drilling for oil and the marketing thereof, and the trust issues common participating oil agreements to the owners of the lease in payment for their transfer of the lease and subsequently sells to some 200 persons 1,200 shares of preferred participating oil agreements at $100 per share, and engages in business during the taxable years under quasi-corporate form, such trust is an association taxable as a corporation.
2. INCOME OF THE ASSOCIATION. - The receipts of the association from the sale of oil and gas are income to it even though the participating oil agreements did provide that the Monrovia Oil Co. does by these presents assign and transfer to an undivided - /20th percent of the proceeds that shall be derived and received by said Monrovia Oil Co. from the sale or other disposal of the net production from its oil wells.
3. COST OF DRILLING OIL WELL RECOVERABLE THROUGH DEPLETION AND DEPRECIATION. - Expenditures for drilling an oil well under a turnkey contract were capitalized on the taxpayer's books and are recoverable through depletion*1141 and depreciation in accordance with the Commissioner's regulations approved by the Supreme Court. Graham-Loftus Oil Co.,27 B.T.A. 1301">27 B.T.A. 1301, followed.
4. DEEPENING WELL EXPENSE. - Expenditures for deepening and improving an oil well paid in 1923 are to be treated as capital expenditures where facts show that petitioner elected to treat the original cost of drilling the well in 1922 as a capital expenditure, and are recoverable through depletion and are not deductible in full in the year when made as a business expense.
5. DEPLETION BASE DETERMINED UNDER REVENUE ACTS OF 1921 AND 1924. - Deductions for depreciation and depletion considered and determined for years 1923 and 1924, under applicable revenue acts.
*336 These two cases, which were consolidated for hearing, involve deficiencies in income and profits taxes for 1923 in the sum of $5,691.70 and for 1924 in the sum of $3,002.04. The assignments of error will be stated and discussed in the opinion.
*1142 FINDINGS OF FACT.
The petitioner was created and organized as a common law trust under the laws of California by a declaration of trust dated August 21, 1922. The trust instrument provided for three trustees. Under it the three trustees and their successors in office were authorized to carry on business of various kinds and with practically all powers possessed by individuals or business corporations. The general purposes of the trust were thus stated:
To undertake and carry on anywhere any business, transaction or operation which an individual could legally undertake and carry on conformably to the law of the land where the business transaction or operation is undertaken and carried on. Hereby intending to give to said trustees the power in their discretion to do anything legal and the object of this trusteeship is to give them such power as trustees.
Among the specific powers enumerated were the following:
To engage in the business of searching, prospecting and exploring for mineral oil by boring or drilling therefor by any means, to buy, sell, or lease in the United States, or in any other part of the world, real estate, concessions, rights and privileges in and*1143 to real estate for the purpose of prospecting for, obtaining, handling, storing, transporting, refining, selling and disposing of mineral oil of all kinds and varieties, including petroleum; to borrow money, and to pledge or mortgage the properties of the trust estate, real or personal, to secure the payment of the same, to buy, lease, rent or otherwise acquire and to sell such property, real, personal or mixed, as to them, may seem for the best interest of the trust, to declare and to pay such dividends as to them shall seem proper and for the best interest of the trust.
Certain other provisions of the trust document deemed pertinent to these proceedings are as follows:
ARTICLE 5. The capital, so called, of this trust shall be divided into five thousand (5,000) equal beneficial interests and shall have the par value of one hundred ( $100) dollars per beneficial interest.
*337 ARTICLE 6. Certificate. Form and Transfer. The holders of beneficial interests shall each receive a certificate or certificates from the trustees showing the number of beneficial interests to which such certificate holder is entitled. The certificate shall be in such form as the trustees may*1144 from time to time by vote determine. The interest of the holders of beneficial interests shall be transferable only by the holder in person or by the attorney on the books of the trustees under this Declaration of Trust upon surrender of certificate properly endorsed as prescribed by said trustee.
ARTICLE 9. Signature. The signature of the trustees shall be in the form from time to time determined by vote of the trustees, or in the form
MONROVIA OIL COMPANY
By President
By Secretary
The signature to all notes, checks, drafts and bonds shall be in the form
MONROVIA OIL COMPANY
By President
By Secretary
The trustees may, however, change the form of signature in any manner that they may deem fit.
ARTICLE 10. Seal. The seal of the trustees shall be an impression seal containing the words: Monrovia Oil Company, Liability limited by Declaration of Trust, August, 1922, recorded with County Recorder, Los Angeles County.
Other provisions in the declaration of trust provided that the trustees should fill any vacancy in their number caused by death, resignation or otherwise; that the term of the trust should be twenty years; that the trust might be terminated and*1145 thereupon incorporated under the laws of the State of California by the holders of a majority of the beneficial interests notifying the trustees to take such action; that the trustees should have power to fix their own compensation, under certain limitations and restrictions; that the trustees at the time in office shall be owners in their own right of the entire legal, equitable and beneficial title and interest in the trust assets, subject to the prescribed rights of the holders of beneficial interests, and shall hold the same in fee simple as joint tenants and not as tenants in common; that the place of business of the trustees shall be at the city of Monrovia, California, or such other place or places as the trustees may from time to time determine; that the trustees may appoint a president or chairman from their own number, one or more vice presidents, a secretary, a treasurer, and such other officers, committees and agents, either standing or temporary, as they deem necessary for the management of the property and affairs of the trust and that in order to raise capital to carry out the purpose of the trust, the trustees may accept transfer to them of real or personal property*1146 and may deal in and sell or transfer any of the beneficial interests in such a way as they may deem necessary to acquire capital for the conduct of the business.
*338 The parties have filed the following stipulation dealing with the activities of the trust:
That Petitioner immediately after its creation, in exchange for 800 participating oil agreements acquired by assignment an oil and gas lease providing among other things for the payment to the lessors as a royalty 33 1/3 precent of all oil and gas recovered from said lease covering the following described property:
Lots One (1) and Two (2) of Barker Heights Sub-division, sometimes called Barker Harbor Heights Sub-division, in the county of Los Angeles, State of California.
That the total participating oil agreements entered into by Petitioner were 2,000, each having a par or face value of $100, 800 of which were designated as "Common Participating Oil Agreements" and 1,200 were designated as "Preferred Participating Oil Agreements". All of these agreements were outstanding and effective during the years involved in this appeal. * * * The 800 Common Participating Oil Agreements were given to the assignors of said*1147 lease; 200 of the Preferred Participating Oil Agreements were given to John McKeon as hereinafter stated and the balance thereof, to-wit, 1,000 of the Preferred Participating Oil Agreements were acquired for cash by the public.
Petitioner's well was drilled to a depth of approximately 3,900 feet by John McKeon under and pursuant to a contract dated October 27, 1922, whereby Petitioner was obligated to and did pay to said John McKeon the sum of $70,000 in cash and 200 of Petitioner's Preferred Participating Oil Agreements. The foregoing sum of money was paid and the contracts delivered to John McKeon by Petitioner during the year 1922.
During the year 1923 Petitioner paid the further sum of $45,000 to said John McKeon for the purpose of deepening its well beyond the 3,900 feet to which it had then been drilled.
The said sum of $70,000 and the total face value of the participating oil agreements, to-wit, $20,000 were capitalized on Petitioner's books of account.
On March 13, 1923, Petitioner entered into an agreement with John McKeon, * * *; on August 8, 1923, Petitioner entered into another contract with John McKeon * * *.
The $45,000 consideration agreed to be paid*1148 by Petitioner was paid during the year 1923 in accordance with the terms of the agreements and the total amount thereof was treated as an expense by Petitioner on its books of account.
In the event that the Board of Tax Appeals holds that any portion of the $90,000 constitutes a part of Petitioner's capital sum returnable through depletion, then the Board may allocate 50% of the said sum to Petitioner's depletable base and the balance thereof may be allocated to Petitioner's capital sum returnable through depreciation.
Petitioner's gross income for the year 1923 amounted to the sum of $101,144.57, of which the total sum of $36,000 was distributed by Petitioner during the year 1923 to the holders of participating oil agreements.
Petitioner's gross income for the year 1924 amounted to the sum of $222,308.07, of which the total sum of $185,000 was distributed by Petitioner during the year 1924 to the holders of participating oil agreements.
That Petitioner's oil reserves at the date of completion of Petitioner's well, to-wit, August 28, 1923, amounted to 485,531 barrels; that during the year 1923 there was produced from said well 139,663.70 barrels and for the year 1924, 200,857.42*1149 barrels.
*339 In addition to the foregoing stipulation petitioner introduced in evidence certain documents and the oral testimony of two witnesses from which we make the following additional findings:
On September 6, 1922, R. L. Casner, as a result of negotiations made by him and Grover Lawler, acquired a sublease on land located in the Signal Hill Oil Field in Southern California, being the same land described in the foregoing stipulation. This sublease was taken in behalf of Casner, his wife, Mrs. R. L. Casner, and Grover Lawler. This land was in the midst of a proven oil field, and the sublease was obtained from the Oceanic Oil Co. through its principal owner, John McKeon. McKeon was indebted to Lawler in the sum of $13,600 and in consideration of its cancellation and $2,500 cash additional, the sublease was transferred to Casner. The lease provided for a royalty of 33 1/3 percent to the original lessor. The sublease was assigned to the petitioner and at the time of said assignment had a fair market value of $80,000.
The participating oil agreements referred to in the foregoing as having been issued to the extent of 2,000, 800 common and 1,200 preferred, provided*1150 in substance that petitioner proposed to drill and operate a well on its property to produce petroleum and sell that portion remaining after the payment of the royalty and that it assigned a certain percentage of the proceeds after the payment of expenses and taxes to the agreement holder and that it would pay to such holder his proportion of the proceeds not later than the 10th of the month following their receipt. It was provided that the holders of the preferred participating oil agreements should be repaid the total purchase price which they paid before the holders of the common agreements should receive anything; after such repayment had been made to the holders of the preferred, all agreement holders of both preferred and common were to share in the profits pro rata without preference. In addition to the 200 preferred assignments of interest paid to McKeon, as a part of the cost of drilling the well, the other 1,000 shares of preferred mentioned in the stipulation were sold to an aggregate of about 200 persons. Issuance of such agreement certificates, together with three beneficial certificates at $10 each was authorized by a permit from the State Corporation Department of*1151 the State of California, pursuant to application made by petitioner. The three beneficial certificates just mentioned were issued one each to Lawler and Mr. and Mrs. Casner. Nothing was ever paid to them as holders of these three beneficial certificates. No certificates at all were issued immediately after the leasehold interest was assigned to the trust. The dates on which the various certificates were issued are not disclosed.
*340 The trust was organized to drill one well on the land acquired in a proven field, sell the product and deliver the proceeds to the beneficial owners - all of which functions were carried out. The well was drilled by a contractor who assumed all risks and was bonded to deliver a completed well. Agreements were entered into with oil and gas companies for the entire output of the well. It was necessary to employ men to handle the oil produced in the years in question. These men were employed and paid by petitioner. The trustees also collected the proceeds, paid expenses and distributed the remainder to shareholders. Neither the trustees nor the holders of participating oil agreements ever held any meetings. No officers were elected, but*1152 the offices were assumed and duties performed by the trustees. R. L. Casner acted as president; B. D. Daniels, vice president; and Grover Lawler, secretary-treasurer. After the completion of the well, its business was looked after by Grover Lawler, as managing trustee, who saw to it that its product was properly cared for, sold, and the proceeds properly divided and distributed to those entitled thereto.
Petitioner filed its 1923 return on Form 1040 (individual income tax return form) and later filed an amended return on Form 1120 (corporation income tax return form). The original and amended returns for the year 1924 were on Form 1120. In the original return for 1923 petitioner capitalized the $45,000 cost of deepening its well in 1923, as depletable capital. In its amended return for that year it set up the $45,000 as a deductible expense.
OPINION.
BLACK: The issues raised by petitioner may be summarized as follows:
1. Is the Monrovia Oil Co. taxable as a trust or as a corporation?
2. Do the amounts which were required, under the participating oil agreements, to be distributed to the agreement holders constitute taxable income to petitioner, or deductions in*1153 the determination of its net taxable income?
3. What was the value, for depletion purposes, of the sublease at the time acquired by petitioner?
4. Do drilling costs of an oil well paid under a turnkey drilling contract constitute a capital item to be added to the depreciable base returnable as depreciation, or should a portion thereof be allocated to the capital sum returnable through depletion?
5. Is the cost of deepening petitioner's well under a contract a capital item, or does it constitute an operating expense during the year expended?
6. If the deepening costs are proper deductions, then in that event a loss will be shown for the year 1923 for the Monrovia Oil Co. Is *341 such a loss a proper one to be carried forward as a deduction in determining the 1924 income?
We will discuss these issues in their order.
1.
One of the years involved in this proceeding is 1923, and section 704 of the Revenue Act of 1928 would be applicable if the facts were such as to bring petitioner within the terms of it, but they are not. Petitioner did not file a return as a trust, but for the year 1923 first filed a return as an individual on Form 1040 and later filed*1154 as an amended return an ordinary corporation income tax return on Form 1120. This makes section 704, Revenue Act of 1928, inapplicable. ; . So, for both the years 1923 and 1924 we have before us for decision the question whether petitioner should be adjudged an association, taxable as a corporation, or should be taxed as a trust.
This Board and the courts have held in a number of cases that if the purpose of the trust is to carry on a continuing business operation for profit, under quasi-corporate form, that it is an association taxable as a corporation. ; ; certiorari denied, ; ; ; ; ; *1155 ; ; ; affd., ; ; certiorari denied, ; ; affd., . But, on the other hand, if the trust is formed merely for convenience for the purpose of preserving or distributing property among beneficiaries or to liquidate and wind up a business and not for the purpose of engaging in business for a profit, it is not an association taxable as a corporation. ; ; ; ; . The effect of the foregoing decisions is to draw substantially the same distinction as the Commissioner has drawn in his regulations. Recently, these regulations*1156 were fully discussed and approved by the court in Trust No. 5833, The regulations applicable in that case were articles 1312 and 1314 of Regulations 74 (Revenue Act of 1928), but the court in discussing these articles mentioned the fact *342 that they were substantially the same as articles 1502 and 1504 of Regulations 65 (Revenue Act of 1924) and corresponding articles of Regulations 69 (Revenue Act of 1926). Articles 1502 and 1504 of Regulations 65 (Revenue Act of 1924), read as follows:
ART. 1502. Association. - Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each has or has invested in the business or property of the organization. A corporation which*1157 has ceased to exist in contemplation of law but continues its business in corporate form is an association or corporation within the meaning of section 2, but if it continues its business in the form of a trust, it becomes subject to the provisions of section 219.
ART. 1504. Association distinguished from trust. - Holding trusts, in which the trustees are merely holding property for the collection of the income and its distribution among the beneficiaries, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, are not associations within the meaning of the law. The trust and the beneficiaries thereof will be subject to tax as provided in articles 341-347. Operating trusts, whether or not of the Massachusetts type, in which the trustees are not restricted to the mere collection of funds and their payments to the beneficiaries, but are associated together in much the same manner as directors in a corporation for the purpose of carrying on some business enterprise, are to be deemed associations within the meaning of the Act, regardless of the control exercised by the beneficiaries.
*1158 In construing these regulations the court, in Trust No. 5833, , said:
If we accept, as we think we should, the interpretation placed upon the word "association" by the Commissioner of Internal Revenue, inferentially approved and adopted by Congress in subsequent legislation, based upon the decision of the Supreme Court in * * *.
Then the court went on to hold that, measured by these regulations, Trust No. 5833, Security First National Bank, was an association taxable as a corporation. The trust involved in that case was organized to subdivide and put on the market and sell for profit a tract of land located in the city of Los Angeles, California. In the instant case the trust was organized to develop an oil well in Signal Hill Oil Field, one of the largest oil fields in the world, near the city of Los Angeles, California, and to operate the oil well after it should be brought into production and to market the oil and gas obtained therefrom at a profit and distribute the profits to the holders of participating oil agreements. The form of organization was very similar to*1159 that involved in Trust No. 5833, , and while in the one case the trust dealt in *343 oil and gas and in the other the trust dealt in real estate, we do not think that fact furnishes any basis for a distinction. If the court was right, as we think it was, in holding Trust No. 5833, Security First National Bank, an association taxable as a corporaton, then we must hold petitioner in the instant case an association taxable as a corporation.
In ; certiorari denied, , the Court drew substantially the same distinction between a trust and an association as is drawn by the Commissioner's regulations, quoted above, and discussed in Trust No. 5833, etc. v., except the court said that the theory that the distinction between trusts of the Massachusetts type, and their consequent liability for taxes, is based on the powers exercised by the shareholders, great or little, is no longer seriously regarded. Said the court in discussing that point:
The real test is whether the shareholders or*1160 trustees, or both combined, carry on business for profit, and if they do, they constitute a business trust, in legal effect an association or a joint stock company, with liability for taxes * * *. We hold on these facts that the collectors were right in regarding this organization, however named, as an unincorporated association conducting a business for profit in quasi corporate form, liable for taxes at the corporation rate by force of the provisions of the applicable Revenue Act.
So, without taking time to review the many decisions of the Board and the courts which deal with the issue here involved, we think it is safe to say that the weight of authority is to the effect that, where the trust organization is carrying on a business for profit under quasicorporate form, it is taxable at corporation rates. Petitioner urges, as its principal authorities in support of its contention that we should hold it taxable as a fiduciary under section 219 of the applicable revenue acts instead of taxable as a corporation, , and *1161 ; affirming . We do not consider that the views expressed in either of these cases are in conflict with the views expressed herein.
In the Blum case ten persons purchased an oil lease and for convenience executed only a limited deed of trust to Blum, who had authority merely to collect the rent from the lease and after payment of expenses distribute the proceeds among the ten beneficiaries. There was no authority to engage in business, own or dispose of property, and no stock or sale of beneficial interests provided for. In the Extension Oil Co. case, the trust was created to sell the oil well, which was done in a few months' time. The money raised by the medium of the trust was merely for exploration purposes.
In , we pointed out the distinction in the situation which existed in the Extension Oil Co.*344 case from the situation which exists in a case such as we are now discussing, in the following language:
Petitioner relies strongly upon *1162 , (affd., ), in which under facts somewhat similar to those of the instant case we held a body to be a trust and not an association. But that case can be easily distinguished. There, the organizers combined for the sole and restricted purpose of drilling a single oil well for test purposes, and as soon as the value of the leased land was thus learned, of selling the lease. This purpose was promptly carried through in eleven months time. Here, the original trust agreement ran for twenty years and as amended for fifty, and the trustees were given full powers to develop the lease as they saw fit. They did, it is true, distribute the profits when made, but this fact of distribution does not, in our opinion, negative the petitioner's obvious business purpose. * * *
On the strength of the authorities already cited, as applied to the facts stated in detail in our findings of fact, we hold that petitioner during both of the years involved in this proceeding was an association, taxable as a corporation.
2.
It is petitioner's contention that the amounts which were required under the*1163 terms of the participating oil agreements to be distributed to the holders of said agreements constitute either deductions to petitioner or are nontaxable income to it. Petitioner contends that the amounts were deductible under section 219(b)(2) of the applicable revenue acts, which reads as follows:
There shall be allowed as an additional deduction in computing net income of the estate or trust, the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries.
It is enough to say as to this particular phase of petitioner's contention that since we have held petitioner taxable as an association and not as a fiduciary, the provisions of section 219 are not applicable.
Petitioner contends in the alternative that the amounts distributed to the holders of participating oil agreements were never the income of petitioner, but belonged to the distributees at all times. This contention must be denied. Petitioner was the owner of the oil lease and the oil well drilled thereon, and of the oil and gas produced and of the proceeds resulting from the sale thereof. Whatever profits resulted from the oil and*1164 gas production and sale were its profits and taxable to it, just the same as a corporation's profits are taxable to the corporation. Even if the proof in the instant case showed that the purchasers of the oil and gas from petitioner did *345 not pay the money direct to petitioner but on the contrary disbursed it direct to the holders of the oil participating agreements, that would make no difference. The profits, being those of petitioner, would be taxable to it, even although paid direct to the certificate holders. Cf. ; . However, the facts do not show that the proceeds from the sale of the oil and gas production were paid direct to the holders of the participating oil agreements. Petitioner kept books during the taxable years in question and presumably these books showed all receipts and disbursements, and we have nothing on which to base a conclusion that the distributions in question were not made by the petitioner itself. These distributions were comparable to the distribution by a corporation of dividends and certainly a corporation does not secure*1165 a deduction from income by reason of dividends paid to its stockholders. We hold against petitioner on this issue.
3.
Under assignment of error 3, petitioner contends that the value of the oil lease at the time assigned to petitioner in exchange for 800 common participating oil agreements was at least $80,000, which should be added to petitioner's depletable base returnable through depletion as to both taxable years in question. Respondent contends that the basis for depletion is cost to the transferors, in this case not more than $15,100, by reason of section 204, subdivisions (a)(8) and (c), Revenue Act of 1924, and section 202(c)(3), Revenue Act of 1921.
These sections provide in effect that when property is acquired in exchange for stock (without money or other property as consideration) from persons who immediately after the transfer are in control of the corporation, the basis for gain or loss is the cost to the predecessor. Section 204(c), Revenue Act of 1924, provides that the basis for depletion and depreciation shall be the same as the basis for determining gain or loss. The Revenue Act of 1921 contains no such provision. This fact was fully discussed in *1166 , in which the taxpayer was allowed exhaustion on its leasehold for the years which came under the 1921 Act, based on cost to the corporation which was $640,000, but for the year 1926 was allowed no exhaustion of the leasehold because the 1926 Act provides, as does the 1924 Act, that the basis for depletion, exhaustion and depreciation shall be the same basis as that for determining gain or loss, and in the ,*346 the basis for gain or loss, by reason of sections 203 and 204 of the Revenue Act of 1926, was cost to the transferors (which in that particular case was nothing). Cf. ; .
As has been detailed in our findings of fact, the cost to petitioner of the oil lease in question was 800 common oil participating agreements of a par value of $100 each ($80,000) and the fair market value of the lease at the time of transfer was $80,000. The cost to petitioner of the lease was therefore $80,000 and it is entitled to have that amount added to its depletable base, returnable through*1167 depletion, so far as the year 1923 is concerned. This right is not restricted by the provisions of section 202(c)(3), Revenue Act of 1921, which has nothing to do with the determination of depletion and depreciation. The situation however as to the year 1924 is different. For that year the basis for depletion and depreciation is made the same as the basis for gain or loss and by reason of section 204(a)(8) of such act the basis of gain or loss in such circumstances as we have in the instant case is cost to the transferors. It seems clear to us in the instant case that immediately after the transfer of the lease by Casner, acting for himself, his wife and Lawler, these parties were in control of the association, coming within the terms of section 203(b)(4), Revenue Act of 1924. The cost to the transferors of the lease was $15,100, and this is the amount which should be added to the depletable base recoverable through depletion, so far as the year 1924 is concerned.
4.
The issue involved in assignment of error 4 was recently decided by the Supreme Court in *1168 ; and . In all of these decisions the Supreme Court approved the Commissioners' regulations, which in substance provide that such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of property, drilling of oil wells, building of pipe lines and development of the property may at the option of the taxpayer be deducted as a development expense or charged to the capital account returnable through depletion.
The Commissioner's regulations contained in article 227, Regulations 65, and article 225, Regulations 69, further provide that "Both owners and lessees operating oil and/or gas properties will, in addition to and apart from the deduction allowable for depletion as hereinbefore provided, be permitted to deduct a reasonable allowance for depreciation of physical property, such as machinery, tools, equipment, *347 pipes, etc., so far as not in conflict with the option exercised by the taxpayer under article 225 [article 223*1169 in Regulations 69]." Cf. . In accordance with the Commissioner's regulations approved in the above cases, and the stipulation herein filed, 50 percent of the $90,000 original cost of the well is allocated to petitioner's depletable base returnable through depletion and the balance thereof is allocated to tangibles, returnable through depreciation.
5.
With reference to this issue, the facts show that the well was first drilled to a depth of 3,900 feet, but it was unsatisfactory because of water. It was then deepened at an additional expense of $45,000, which petitioner claims as a deductible expense. This was disallowed by respondent. The deepening of the well was as much a part of the well as the upper 3,900 feet; it added to the value of the lease, and it logically follows that if one part of the well is capitalized, the other should be also. ; . The stipulation shows that petitioner capitalized the $90,000 representing the cost of drilling the well to 3,900 feet, as it had the right to do under article*1170 223, Regulations 62 (Revenue Act of 1921). This same regulation provides that an election once made under the option which it provides will control the taxpayer's returns for all subsequent years. Therefore the petitioner, having elected in 1922 to capitalize this $90,000 cost of drilling the well to a depth of 3,900 feet, cannot in 1923 abandon the election thus made and treat the $45,000 paid for deepening and completing the well in 1923 as a deductible expense. This $45,000 must be added to the depletable base, recoverable by depletion as provided in the Commissioner's regulations, approved in
6.
Issue six is stated by petitioner to depend upon whether or not the $45,000 paid for deepening the well is allowed as a deductible expense. If so, petitioner claims there is a net loss for 1923 which it is entitled to carry forward and use as a deduction in computing net income for 1924. We have held that the $45,000 in question under the circumstances of this case must be capitalized and added to the depletable base, returnable through depletion. Under these circumstances, there will be no net loss for 1923.
*1171 Decision will be entered under Rule 50.