*1768 Development costs of oil wells on leased lands are capital expenditures returnable through depreciation rather than through depletion deductions. A. T. Jergins Trust,22 B.T.A. 551">22 B.T.A. 551.
*1091 These proceedings, consolidated for hearing, are for the redetermination of deficiencies for 1925 and 1926 as follows:
| Deficiency | |||
| Petitioner | Docket No. | Year 1925 | Year 1925 |
| Albert W. Ziegler | 46291 | $63.70 | $654.99 |
| Clifford E. Ziegler | 46292 | 43.06 | 213.34 |
*1092 The only question at issue is whether certain expenditures made by the partnership, of which the petitioners were the only members, in drilling and developing oil wells on lands leased by the partnership, are returnable through depreciation or through depletion deductions. If the former, a pro rata part of the total amount of the expenditures is deductible in each of the taxable years, while the deductions for depletion allowances would be subject to the statutory limitations provided for in section 204(c) of the 1924*1769 Act. A further allegation of error with respect to the respondent's allowance for depreciation on casing and tubing was abandoned.
FINDINGS OF FACT.
During the years 1925 and 1926 and prior years the petitioners conducted a partnership under the firm name of Ziegler Brothers, which was engaged in the business of drilling oil wells and producing and marketing oil in Barren County, Kentucky. In 1924 the partnership engaged various contractors to drill oil wells on land leased by it, for which services it paid an aggregate amount of $4,093.71. Also in 1924, the partnership expended an aggregate amount of $2,554.75 for labor and other costs in drilling operations which it conducted on its own behalf.
In 1925 the partnership expended an aggregate amount of $7,216.95 for labor and other costs in drilling oil wells.
In 1926 the partnership drilled nine wells with contract labor, on the basis of 40 cents per foot, at an aggregate cost of $2,702.20.
All of the above expenditures were charged to capital account in the partnership's accounts.
The wells in question in connection with the development of which the above expenditures were made had an economic life of four years.
*1770 OPINION.
SMITH: The sole issue in this case is controlled by the Board's decision in . In that case we said:
The final contention of petitioner is that respondent erred in adding its drilling and development expenses to the amounts recoverable through depletion. Petitioner has waived its contention that these costs are proper subjects for annual deductions and apparently concedes that they should be capitalized. We believe that this is the proper solution of the problem. Cf. , . Both parties agree that these capital expenditures are returnable to petitioner during the life of its lease and they differ only as to the character of the deduction. Respondent has allowed it as depletion, while petitioner claims it as depreciation. * * *
* * *
*1093 * * * Amounts expended in development and drilling operations convey to us the impression of expenditures for improvement of the property upon which the statute permits the taxpayer to deduct depreciation. * * *
In computing the partnership profits*1771 taxable to the petitioners in 1925 and 1926, depreciation deductions should be allowed of a pro rata part of the above amounts expended in connection with the development of the oil wells.
Judgments will be entered under Rule 50.