*2561 1. Depletion on the basis of discovery value may not be taken as a deduction by those who acquired by gift in 1922 an interest in an oil lease on a proven tract. Melville G. Thompson,10 B.T.A. 25">10 B.T.A. 25, followed.
2. The basis for the computation of the allowance for depletion of an oil lease acquired by gift subsequent to December 31, 1920, is, under the provisions of the Revenue Act of 1921, the fair market value of the property at the date of the gift. Magdaline McKinney et al.,16 B.T.A. 804">16 B.T.A. 804, followed.
*952 These consolidated proceedings are for the redetermination of alleged deficiencies in income tax for the years 1922 and 1923, as follows:
| 1922 | 1923 | Total | |
| Lemuel Scarbrough | $2,108.33 | $3,555.48 | $5,663.81 |
| J. W. Scarbrough | 800.86 | 1,299.40 | 2,100.26 |
| Mrs. J. W. Scarbrough | 800.86 | 1,299.39 | 2,100.25 |
The deficiencies in taxes herein are due to the disallowance of depletion by the Commissioner and the inclusion of the said amounts by the Commissioner as*2562 income subject to tax.
The question at issue is the determination of the proper basis, if any, for the computation of deductions for depletion. Petitioners contend that they are entitled to such deductions computed on the basis of discovery value, or in any event, of deductions not less than those determined on the basis of the fair market value of the property at the date they acquired it. Respondent contends that no deductions for depletion are allowable. The facts are stipulated.
FINDINGS OF FACT.
In 1922 E. M. Scarbrough of Austin, tex., was the owner of the fee of certain oil lands located in Liberty County, Texas, which he had leased, and under which he received oil royalties for certain production companies. The said oil wells are hereinafter referred to as the "Gulf-Scarbrough" wells. In 1922 E. M. Scarbrough also owned a royalty interest in oil wells located in the State of Texas, operated by certain production companies, which wells are hereinafter referred to as the "Barngrover" wells.
On or about August 1, 1922, E. M. Scarbrough transferred as a gift to his son, J. W. Scarbrough, 40 per cent, and to his son, Lemuel Scarbrough, 30 per cent of his royalty*2563 interest in each of the Gulf-Scarbrough and Barngrover wells. By reason of the community property laws of the State of Texas, upon the transfer of the said 40 per cent interest in each of the said wells to J. W. Scarbrough, his wife, Mrs. J. W. Scarbrough became vested with one-half of the said 40 per cent interest.
By virtue of the said ownership of interests in these wells, in their 1922 and 1923 income-tax returns, the petitioners claimed, as deductions from the gross amount received from the said oil wells, depletion determined upon the same basis as depletion claimed by the donor, E. M. Scarbrough, which was on the basis of the discovery value of the oil contained in the said oil wells at the time of the discovery while they were owned by him.
*953 The date of discovery in the case of the Gulf-Scarbrough wells was June 7, 1922. On that date there were recoverable therefrom 600,000 barrels of oil of a grade which was then being sold at an established market price of $1.25 per barrel. At that time the interest under the lease of E. M. Scarbrough was 14.45 per cent or 86,700 barrels which, upon production and sale, could be expected ultimately to yield $108,375.
*2564 On August 1, 1922, the fair market values of the respective interests in the amounts of oil reserves in the Gulf-Scarbrough wells were as follows:
| Name | Per cent | Barrels | Fair market value as of Aug. 1, 1922 |
| E. M. Scarbrough | 30 | 24,371.44 | $21,325.00 |
| J. W. Scarbrough | 20 | 16,247.62 | 14,216.67 |
| Mrs. J. W. Scarbrough | 20 | 16,247.62 | 14,216.67 |
| Lemuel Scarbrough | 30 | 24,371.43 | 21,325.00 |
The date of discovery of the Barngrover wells was September 4, 1920, and at the time of the discovery there were $3,500,000 barrels of oil recoverable from those wells. The interest therein of E. M. Scarbrough was .8721 per cent, or 30,523.50 barrels. The market price at which oil of the same grade was being sold on the date of discovery was $3 per barrel.
On August 1, 1922, the fair market values of the respective interests in the amounts of oil reserves in the Barngrover wells were as follows:
| Name | Per cent | Barrels | Fair market value as of Aug. 1, 1922 |
| E. M. Scarbrough | 30 | 4,723.28 | $4,132.87 |
| J. W. Scarbrough | 20 | 3,148.85 | 2,755.24 |
| Mrs. J. W. Scarbrough | 20 | 3,148.85 | 2,755.24 |
| Lemuel Scarbrough | 30 | 4,723.28 | 4,132.87 |
During the years*2565 1922 and 1923 the petitioners received the following amounts for the following number of barrels of oil from the said oil wells, to wit:
| Name | Barrels | Amounts |
| 1922 | ||
| Gulf-Scarbrough wells: | ||
| J. W. Scarbrough and Mrs. J. W. Scarbrough (one-half each) | 6,627.55 | $8,259.37 |
| Lemuel Scarborough | 4,970.66 | 6,194.52 |
| Barngrover wells: | ||
| J. W. Scarbrough and Mrs. J. W. Scarbrough (one-half each) | 721.88 | 902.36 |
| Lemuel Scarborough | 541.42 | 676.77 |
| 1923 | ||
| Gulf-Scarbrough wells: | ||
| J. W. Scarbrough and Mrs. J. W. Scarbrough (one-half each) | 11,337.22 | 15,269.94 |
| Lemuel Scarbrough | 8,502.91 | 11,452.45 |
| Barngrover wells: | ||
| J. W. Scarbrough and Mrs. J. W. Scarbrough (one-half each) | 1,351.13 | 1,882.54 |
| Lemuel Scarbrough | 1,013.34 | 1,411.89 |
*954 OPINION.
LOVE: The issues herein presented are purely those of law. Each of the contentions of the petitioners has been heretofore fully considered and decided by this Board.
In , we held that depletion on the basis of discovery value may not be taken as a deduction by those who acquired by gift in 1921 an interest in an oil lease on a proven tract. The gift in the case at*2566 bar was made and received on or about August 1, 1922, but the provisions of the Revenue Act of 1921 were still in full force and effect. We hold for the respondent on this issue.
In , we held that the basis for the computation of the allowance for depletion of an oil lease acquired by gift subsequent to December 31, 1920, is, under the provisions of the Revenue Act of 1921, the fair market value of the property at the date of the gift. Following , we hold for the petitioner upon this issue.
In accordance with our findings of fact, we hold that at the date of the gift, on or about August 1, 1922, the fair market values of the respective interest of these petitioners in the amounts of oil reserves in the Gulf-Scarbrough and the Barngrover wells were as follows:
| Lemuel Scarbrough | $25,457.87 |
| J. W. Scarbrough | 16,971.91 |
| Mrs. J. W. Scarbrough | 16,971.91 |
The taxes of these petitioners will be recomputed in accordance with this opinion.
Judgment will be entered under Rule 50.