*1800 DEDUCTION - DEPRECIATION. - Amounts expended by petitioner during 1925, 1926 and 1927, representing cost of drilling productive oil wells, of freight and haulage and of labor employed in installing equipment in the wells, all of which cost was capitalized, held, to be recoverable through depreciation rather than depletion.
*890 In these proceedings, consolidated for hearing, the respondent has determined income-tax deficiencies in the amounts of $10,262.26, $7,040.24 and $4,404.21 for the calendar years 1925, 1926 and 1927, respectively, and the sole issue presented for our determination is raised by petitioner's contention that the capitalized cost of drilling oil wells, of haulage and of installing equipment in the wells, is recoverable through depreciation instead of through depletion as determined by respondent. The petitioner abandoned the issue relative to a claimed bad debt deduction for 1926.
FINDINGS OF FACT.
The petitioner*1801 is a corporation organized on September 25, 1916, under the laws of the State of Maine, and its principal office is at Sisterville, W. Va. The petitioner is the parent company of the following subsidiaries:
Petroleum Purchasing Company, organized on April 1, 1924, under the laws of Delaware, with principal office at Sistersville.
Western Petroleum Exploration, organized on June 7, 1921, under the laws of Maine, with principal office at Sistersville.
*891 The parties hereto have submitted the following stipulation of facts:
1. On December 31, 1924, the undepreciated investment of Petroleum Exploration in equipment in oil wells amounted to $475,975.02.
2. During the years 1925, 1926 and 1927 Petroleum Exploration capitalized on its books of account the total cost of new productive oil wells drilled, such charges representing amounts paid for equipment put into the wells, amounts paid to drilling contractors for drilling the wells, amounts paid for freight and haulage of the equipment, and amounts paid for labor in installing the equipment in the wells, as follows:
| Year | Cost of equipment | Cost of drilling wells, hauling and placing equipment | Total cost of completed producing wells |
| 1925 | $121,303.02 | $49,640.17 | $170,943.20 |
| 1926 | 15,882.88 | 25,994.14 | 68,887.02 |
| 1927 | 56,626.31 | 2,659.26 | 59,285.57 |
*1802 3. The productive life of all producing wells, the total cost of which was capitalized as shown in paragraph No. 2, is more than one year.
4. Depreciation has been claimed by the petitioner and allowed by the Commissioner at a unit production rate, based on the length of life of the oil deposits.
5. The Commissioner, in making his computation of depreciation, has added to his depreciation schedules the cost of the equipment added each year, as shown in paragraph No. 2, but has not added the cost of drilling wells, hauling and placing the equipment.
6. Instead, the cost of drilling wells, hauling and placing the equipment, as shown in paragraph No. 2, has been added to the cost depletion schedules by the Commissioner; but depletion has been allowed on a statutory percentage basis (27 1/2 per cent. of gross income not to exceed 50 per cent. of net income) and is not based on cost.
7. The petitioner, in making its computation of depreciation as shown in its "Form O", has added the total cost of completed wells, including equipment, drilling, hauling and placing the equipment, to its depreciation schedules, no part of the cost of the wells being added to the cost depletion*1803 schedules.
8. If petitioner's method of computing depreciation be sustained by the Board, namely, by adding to the undepreciated investment shown in paragraph No. 1 the total cost of completed wells as shown in paragraph No. 2 (no part of such cost being added to the depletion schedules) an increase in the depreciation allowance will result as follows:
| DEPRECIATION ALLOWANCE | |||
| Year | Computed by Commissioner's method | Computed by petitioner's method | Increase in depreciation allowance if petitioner's method be sustained |
| 1925 | $82,826.35 | $89,369.57 | $6,543.22 |
| 1926 | 68,105.24 | 78,192.46 | 10,087.22 |
| 1927 | 66,015,91 | 75,161.03 | 9,145.12 |
*892 9. If petitioner's method of computing depreciation be sustained, as shown in paragraph No. 8, a decrease in the depletion allowance will result as follows:
| DEPLETION ALLOWANCE | |||
| Year | Computed by Commissioner's method | Computed by petitioner's method | Decrease in depletion allowance if petitioner's method be sustained |
| 1925 | $302,012.87 | $300,860.43 | $1,152.44 |
| 1926 | 277,900.70 | 275,191.94 | 2,708.76 |
| 1927 | 168,874.41 | 167,486.55 | 1,387.86 |
OPINION.
*1804 TRUSSELL: In the case of , we held, under the applicable provisions of the Revenue Acts of 1921 and 1924, that capitalized expenditures of the type involved in the instant case, are recoverable through depreciation rather than depletion. The instant case involves the years 1925, 1926 and 1927 and the applicable provisions of the 1926 Act are to the same effect as those of the 1924 Act. Accordingly, our decision in , is controlling, and upon authority of that decision the petitioner's contention is sustained and the respondent's determination reversed.
Judgment will be entered pursuant to Rule 50.