*108 Decision will be entered under Rule 50.
1. Held, petitioner is entitled to a deduction for depletion on its share of net profits from a lessee's drilling operations on oil and gas leases. Kirby Petroleum Co. v. Commissioner, 326 U.S. 599">326 U.S. 599.
2. In 1939 petitioner instituted suit in a Federal District Court to quiet title to land on which in 1928 petitioner had given an oil and gas lease to the Texas Co. In January 1940 Texas Co. obtained an oil and gas lease on this land from the title claimants, paying therefor $ 25,000. In June 1940 petitioner reimbursed Texas for the $ 25,000 payment and Texas agreed to assign to petitioner the claimants' lease if their title should be recognized by District Court. In 1941 the litigation was settled by compromise agreement providing, inter alia, that petitioner owned the disputed title. Held, the $ 25,000 is part of the cost to petitioner of perfecting title to the land and must be so capitalized.
3. In 1931 petitioner acquired mineral leases covering two tracts of land comprising approximately 18,000 acres. In 1941 petitioner expended $ 11,361.56 for a geophysical survey of these properties*109 to determine whether subsurface structures thereon were sufficiently high to justify drilling for oil or gas. Held, such amount is a capital expenditure and is not deductible as an ordinary and necessary business expense.
4. Petitioner purchased for $ 30,000 a 575-acre tract of land, primarily for the purpose of acquiring the mineral rights thereto, and on its books assigned $ 18,000 to the mineral rights therein and $ 12,000 to the surface. In 1942 petitioner's oil and gas lessee drilled a dry hole on this land and forfeited the lease as worthless. During the taxable year petitioner retained ownership of the land in fee. Held, assuming, arguendo, that in 1942 the land was demonstrated to be worthless for oil or gas production, no part of the purchase price is deductible by petitioner as a loss sustained in 1942. Coalinga-Mohawk Oil Co., 25 B. T. A. 261; affd., 64 Fed. (2d) 262; certiorari denied, 290 U.S. 637">290 U.S. 637.
*507 The Commissioner determined deficiencies in petitioner's income tax liability for the calendar years 1941 and 1942 in the respective amounts of $ 25,927.19 and $ 47,524.85. These deficiencies were based *508 upon numerous adjustments to petitioner's net income, many of which are not contested. The issues presented are, (1) whether petitioner is entitled to a deduction for percentage depletion on its share of net profits from its lessee's drilling operations on oil and gas leases, (2) whether petitioner sustained a deductible loss of $ 25,000 in 1941 in connection with a certain oil and gas lease, (3) whether petitioner may deduct an amount expended for geophysical surveys on property which it held under a mineral lease, and (4) whether petitioner sustained a deductible loss in 1942 as a result of unsuccessful drilling operations by its lessee on land to which it held fee title. The correctness *111 of respondent's disallowance of a deduction for legal expenses in connection with litigation to quiet title to land was challenged by petitioner in the pleadings but is conceded on brief. The case was submitted upon a stipulation of facts, with joint exhibits, and upon a deposition introduced in evidence at the hearing. The facts stipulated are so found. Other facts are found from the testimony given by the deponent on direct and cross examination.
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of the State of Maryland on January 19, 1926, with its principal office and place of business located in Houma, Louisiana. Petitioner filed corporation income and declared value excess profits tax returns, Form 1120, and corporation excess profits tax returns, Form 1121, for the calendar years 1941 and 1942 with the collector of internal revenue for the district of Louisiana.
Issue 1. -- On January 19, 1926, petitioner acquired the fee simple title to certain lands situated in the southern part of Southern Louisiana. Subsequently, petitioner acquired oil and gas leases covering the water bottoms situated within the area or vicinity of its fee simple owned*112 lands. On November 12, 1928, petitioner entered into a contract with the Texas Co., hereinafter referred to as Texas, concerning these fee-owned lands and leases. Under the terms of the contract petitioner granted to Texas the exclusive right to develop and drill upon the lands and leases for the production of oil, gas, and sulphur. Petitioner reserved to itself an oil and gas royalty of one-fourth of the oil and gas produced from these properties by Texas, and in addition Texas agreed to pay petitioner 8 1/3 per cent of the net profits from the operations of such leases. This contract was in full force and effect during the calendar years 1941 and 1942, except as to certain properties previously released and not here involved. In addition to the payments made by Texas on the one-fourth royalty it paid to petitioner as its 8 1/3 per cent of net profit $ 190,276.38 in 1941 and $ 184,580.52 in 1942. These amounts were included by petitioner in its gross income reported *509 in the tax returns for the respective years. On these amounts petitioner claimed percentage depletion of $ 52,325 for 1941 and $ 50,759.63 for 1942. The depletion claimed did not exceed 50 per cent of*113 petitioner's net income from the respective properties for either 1941 or 1942. The respondent disallowed the depletion deductions. Of the sum of $ 184,580.50 received by petitioner during 1942, $ 103,867.44 is attributable to petitioner's fee-owned lands and the balance, or $ 80,713.06, is attributable to the water bottom leases.
Issue 2. -- Petitioner's contract of November 12, 1928, with Texas covered certain land known as Paradis Oil Field of Louisiana, purportedly owned by petitioner in fee at the making of the contract. After some development work had been done by Texas on this property certain persons, who will be referred to hereinafter as the McEnery heirs, claimed to own this land or a portion thereof and on May 23, 1939, petitioner instituted a suit against the McEnery heirs in the District Court of the United States for the Eastern District of Louisiana to quiet title to the land. The complaint in this suit was entitled "Complaint in Slander of Title" and contained allegations by the petitioner that it was the fee owner of such land.
On January 26, 1940, Texas obtained an oil, gas, and mineral lease from the McEnery heirs covering the land which was claimed by*114 them and which was the subject of the above mentioned suit by petitioner. As consideration for the lease Texas paid the McEnery heirs $ 25,000 in cash and gave them a $ 25,000 oil payment, and agreed to pay the lessors a one-eighth royalty on oil and gas produced on such land as might be adjudged by the Federal court to be owned by them.
On June 24, 1940, petitioner and Texas entered into a letter agreement wherein it was provided that, "In order that we [petitioner] may be protected against the possibility of the failure of our title to all or any portion of the above described lands leased by us to you, and in order to protect our obligation of warranty under our aforesaid contract," Texas would assign to petitioner its rights under the McEnery heirs' lease of January 26, 1940, in the event that the McEnery title should be recognized. Such assigned lease was then immediately to become subject to the original agreement between Texas and petitioner. It was also agreed that Texas was to place in escrow one-half of petitioner's one-fourth royalty interest from oil produced on the lands in dispute. As consideration for Texas' agreement to the assignment, petitioner reimbursed Texas*115 for the $ 25,000 cash payment to the McEnery heirs and assumed the $ 25,000 oil payment. In discharge of this oil payment, petitioner paid the McEnery heirs $ 7,743.94 in 1940 and $ 17,256.06 in 1941. The $ 25,000 cash payment was capitalized on petitioner's books as cost of the "McEnery Heirs" lease.
*510 Petitioner's controversy with the McEnery heirs was settled by compromise agreement on October 7, 1941, which agreement was, on October 28, 1941, approved by and made the judgment of the District Court in the suit pending between the parties. The compromise agreement recognized that petitioner owned fee title to the lands in dispute and recited that petitioner had paid to the McEnery heirs $ 3,302.32 and conveyed to them a one-eightieth royalty interest in all oil, gas, and minerals produced on the disputed lands. The McEnery heirs retained the $ 25,000 cash payment and the $ 25,000 received in discharge of the oil payment. In connection with the settlement of the title controversy, petitioner incurred and paid during the year 1941 attorney's fees of $ 6,000.
In its computation of net income for 1941 petitioner deducted the $ 25,000 cash payment as amortized cost of leases*116 and deducted the $ 6,000 attorneys' fees as a business expense, both of which deductions were disallowed by the respondent.
Issue 3. -- During August 1931 petitioner acquired from Louisiana Furs, Inc., a mineral lease covering two properties. One of these properties, hereinafter referred to as the north tract, is located about 6 1/2 miles north of the other and comprises 4,953.76 acres; the other, which we shall refer to as the south tract, comprises 12,888.93 acres. Petitioner held the lease on these properties for an indefinite period by production. During the year 1941 petitioner caused a geophysical survey to be made covering these properties and paid therefor, in 1941, $ 11,361.56. A geophysical survey consists of the following operations:
1. Determination of the elevation of the points to be surveyed.
2. Drilling of small bore holes by portable equipment to a depth which is usually the top of the sands containing fresh water. This may vary from 25" to 300" plus, depending upon the area surveyed.
3. Placing of portable seismographs in proper relation to the bore hole.
4. Connecting said seismographs to the recording wagon or boat.
5. Running in and exploding a dynamite*117 charge in the bore hole.
6. Recording the reflected seismic waves as picked up by the small seismographs. This is recorded in the recording wagon.
7. Correlation of the charts thus recorded.
8. Compilation of such data in order to determine the underground structure.
9. A series of observations taken in the manner above indicated and the complete compilation of the results thereof constitutes a geophysical survey of an area.
On May 7, 1942, after the survey had been completed, petitioner acquired from the State of Louisiana two water bottom leases covering an area of 150 acres in the south tract and acquired from Jan Jean LaFitte Corporation a lease on 2,080 acres immediately south of and contiguous to the south tract.
*511 From November 27, 1942, to August 7, 1944, petitioner completed two gas wells and a dry hole on the south tract. Both gas wells have been capped for lack of a market.
In its 1941 income tax return petitioner deducted the amount expended for the geophysical survey. This deduction was disallowed by the respondent.
Issue 4. -- In 1936 petitioner had acquired a number of oil and gas leases on land situated in Iberia Parish, State of Louisiana, and had *118 attempted to acquire such a lease on a 575-acre tract situated in the same area and known and hereinafter referred to as Rosedale Plantation. The owners of Rosedale Plantation having refused to grant petitioner an oil and gas lease thereon, petitioner purchased the land in fee in 1936, primarily for the purpose of acquiring the mineral rights thereto. The land is located approximately 2 1/2 miles south of the New Iberia Oil Field.
Petitioner paid $ 30,000 for Rosedale Plantation, $ 18,000 of which was assigned on petitioner's books to the mineral rights in the land and $ 12,000 to the surface thereof. At the time petitioner purchased the land the surface had a value of $ 15,000 and the mineral rights had a value of $ 15,000.
From the time petitioner acquired the property to the end of 1942 it received the following amounts as rent for the use of the land for agricultural purposes and paid the following taxes thereon:
| Rents | ||
| Year | received | Taxes paid |
| 1936 | $ 139.00 | |
| 1937 | 524.75 | |
| 1938 | $ 494.19 | 545.56 |
| 1939 | 530.51 | |
| 1940 | 520.50 | 555.43 |
| 1941 | 1,063.25 | 509.44 |
| 1942 | * 420.68 | 533.66 |
*119 Prior to or during 1942 petitioner leased the mineral rights to Rosedale Plantation to one Paul G. Benedum, an oil producer who also owned about 39 oil and gas leases covering approximately 4,000 acres of land adjacent to Rosedale. In 1942 Benedum drilled a hole on Rosedale Plantation to a depth of 9,017 feet. Four geologists examined the mud and cuttings from the hole and no shows of oil or gas were found. The Schlumberger test, commonly used in the oil and gas industry as an aid in determining whether a well contains oil or gas shows, was also negative. No cores were taken from the well for examination, since nothing was found which in the opinion of one Buford Miller, an experienced geologist employed by Benedum, justified taking them. The sand from the well was not correlated with *512 the sand producing in the New Iberia Field, for the reason that Miller had concluded that the difference in underlying structures rendered correlation impossible. On February 22, 1942, the well was abandoned by Benedum and all his leases in that area were forfeited by nonpayment of rental. This abandonment and forfeiture were on the recommendation and advice of Miller. This advice was*120 to the effect that the hole had tested the Miocene sands in that area, which were producing in the New Iberia Oil Field to the north at 7,700 feet on one flank and 5,800 feet on the other, and to the effect that the low structure of the Miocene in the hole indicated that the structure of the Oligocene sands, found at about 14,000 feet and productive in the New Iberia Oil Field, were also low and would also be unlikely to produce shows of oil or gas.
Previous to the commencement of the Benedum well a dry hole known as Hamil Smith Baez had been drilled three or four miles northwest of the Benedum well to a depth of 7,948 feet, and about the same distance southeast of the Benedum well a dry hole known as Hamil Smith Burleigh had been drilled to a depth of 3,031 feet. Both of these holes had been abandoned. As a consequence of the unsuccessful drilling by Benedum in 1942 on petitioner's land, it determined the land had no value for oil production purposes and made no further exploration for oil thereon. In 1943 or 1944 one Phillips drilled a 12,000-foot dry hole in the vicinity of the Baez well.
Petitioner took no deduction for loss in its return for 1942 in respect of its determination*121 that the land was valueless for oil production, but it claims in the petition that such a deduction is allowable in the amount of $ 18,000. On brief, petitioner states that $ 15,000 rather than $ 18,000 is the correct amount of the deduction.
The land in question had a substantial market value during the taxable years, regardless of whether or not it was valueless for oil production.
OPINION.
Issue 1. -- As is conceded by respondent on brief, the depletion issue involves the same type of payment to this petitioner under the same contract as was considered with respect to the years 1939 and 1940 in Louisiana Land & Exploration Co., 6 T.C. 172">6 T. C. 172. In that proceeding, the opinion in which was promulgated after this case was submitted, we sustained this petitioner's deduction of percentage depletion on such payment on the authority of Kirby Petroleum Co. v. Commissioner, 326 U.S. 599">326 U.S. 599. We accordingly hold here that petitioner properly deducted as depletion in 1941 and 1942 27 1/2 per cent of the amounts received from Texas in those years as 8 1/3 per cent of the net profits from the lease operations.
*513 Issue*122 2. -- While petitioner concedes on brief that the $ 6,000 paid in 1941 for attorneys' fees in connection with the McEnery litigation must be capitalized as an additional investment in the land which was the subject of the litigation, it contends that the $ 25,000 cash payment to Texas was properly capitalized as the cost of acquisition from Texas of the McEnery heirs' lease. It is then argued that the recognition by the McEnery heirs in 1941 of petitioner's title to the land in dispute rendered the lease valueless, with the result that petitioner then sustained a deductible loss in the amount of the undepleted cost thereof. Respondent's position is that the $ 25,000 was expended in defense of petitioner's title to the disputed lands and is therefore properly capitalized to that interest and brings petitioner no tax benefit except through depletion deductions or as a loss deduction when the land is disposed of.
We think a realistic view of the various transactions resulting from the claim of title by the McEnery heirs compels the conclusion that the $ 25,000 represents an additional investment by petitioner in the land. Prior to and during the assertion of title by the McEnery*123 heirs petitioner insisted that it was the title owner. Petitioner paid, among other amounts, the $ 25,000 here in question to rid itself of the difficulties created by the disputants. The McEnery heirs received, among other amounts, a $ 25,000 cash payment. It is stipulated here that "the basis for the [compromise] settlement was that the 'McEnery heirs' were to retain the $ 25,000 cash payment * * *." Although the agreement of compromise contains no provision with respect to this cash payment, the history of the controversy between the parties establishes it as part of the value received by the heirs as a result of their assertion of title. In our view the $ 25,000 must be regarded as part of the consideration paid by petitioner to quiet the claim of the heirs by securing from them a recognition of its ownership of the land, and it must therefore be capitalized to the land. Murphy Oil Co. v. Burnet, 55 Fed. (2d) 17, 25.
Petitioner urges on brief that the $ 25,000 payment is in an entirely different category from the amounts paid directly in the conduct and settlement of the litigation. We have not overlooked the fact that petitioner actually*124 made the payment in question to Texas as reimbursement to it of the amount paid the McEnery heirs and that Texas conditionally agreed to assign the McEnery lease to petitioner. It is also true that the payment and the agreement predated the final settlement of the controversy and that the McEnery heirs were not parties to the former. As indicated above, however, we are of the opinion that the acts and motives of petitioner, Texas, and the McEnery heirs with respect to this land must be viewed in their relation to the title dispute and their effect upon its outcome. Cf. Hoboken Land & *514 ., 46 B. T. A. 495, 511; affirmed on other issues, 138 Fed. (2d) 104; Ravlin Corporation, 19 B. T. A. 1112, 1115; Ed Foster, 19 B. T. A. 958, 961. The success of petitioner's overall effort to protect its investment in the land was undoubtedly due in part to the $ 25,000 cash payment. We are not called upon to consider the tax consequence of the payment under circumstances other than those which actually occurred and, even aside from the fact that petitioner*125 never acquired the McEnery lease, we are not persuaded that the immediate circumstances surrounding the outlay of the $ 25,000 afford a sound basis for treating it differently from the expenditures which petitioner concedes must be capitalized to the land as the cost of perfecting title thereto. Cf. Burton-Sutton Oil Co. v. Commissioner, 150 Fed. (2d) 621; certiorari denied on this issue, 326 U.S. 755">326 U.S. 755, and cases there cited.
We accordingly hold that respondent correctly disallowed the deduction of $ 25,000 as a loss sustained in 1941. As is conceded by petitioner, the disallowance of the deduction of $ 6,000 attorneys' fees was also proper and we so hold.
Issue 3. -- This issue involves the deductibility of an amount spent by petitioner in 1941 for a geophysical survey of property under lease to it at the time the survey was made. Petitioner contends that the total amount is deductible under section 23 (a) (1) (A) of the Internal Revenue Code as an ordinary and necessary business expense. In the alternative, petitioner argues that all of such amount is so deductible except that attributable to the 2,080-acre lease*126 acquired after the survey was made. Respondent's position is that the entire expenditure is "in the nature of an addition to lease cost" and, under section 24 (a) (2) of the Internal Revenue Code and section 19.24-2 of Regulations 103, must be capitalized.
Section 24 (a) (2) prohibits the deduction of amounts paid "for permanent improvements or betterments made to increase the value of any property or estate." Section 19.24-2 of Regulations 103 provides that "amounts paid for increasing the capital value * * * of property are not deductible from gross income." Petitioner contends that section 24 (a) (2) does not prohibit the deduction claimed. It is argued that the geophysical survey was not an improvement or betterment of its property, because it added nothing tangible thereto, and that it did not and could not increase the value of the property for oil-producing purposes because there was just as much oil and gas on the land prior to the survey as there was afterwards.
We deem it unnecessary to discuss either the arguments of petitioner with respect to the scope of section 24 (a) (2) or those as to the "ordinary and necessary" character of the expenditure in question, for in our*127 view the geophysical expense here involved is capital in *515 nature and is for that reason not deductible under section 23 (a) (1) (A). The distinction between capital expenditures and business expenses is generally made by looking to the extent and permanency of the benefit derived from the outlay. The benefit from business expenses is generally realized and exhausted within a year and the expense is therefore said to be of a recurring nature. See W. B. Harbeson Lumber Co., 24 B. T. A. 542, 550. On the other hand, an item of expense is of a capital nature where it results in the taxpayer's acquisition or retention of a capital asset, or in the improvement or development of a capital asset in such a way that the benefit of the expenditure is enjoyed over a comparatively lengthy period of business operation. See Commissioner v. Boylston Market Assn., 131 Fed. (2d) 966; Clark Thread Co. v. Commissioner, 100 Fed. (2d) 257; Parkersburg Iron & Steel Co. v. Burnet, 48 Fed. (2d) 163; James M. Osborn, 3 T. C. 603. *128 A capital expenditure is thus nonrecurring, even though many similar expenditures are made by the taxpayer. The one-year period referred to above is not, of course, a touchstone to be arbitrarily applied, but is resorted to in definition as an aid in expressing the distinction. It should also be observed that in exceptional cases certain expenses which might never recur have been held to be deductible business expenses. See, e. g., Kornhauser v. United States, 276 U.S. 145">276 U.S. 145. The theory of those decisions, however, suggests no conflict with the basic nature of a capital expense as stated above, and the item here involved is not similar to the items considered in those cases.
As to the function and frequency of geophysical surveys in the oil-producing business, we can only rely here upon such inferences as may be drawn from the portion of the stipulation which sets forth the technical procedure by which such a survey is made. On this issue, the record contains no evidence other than the stipulation. We think, however, that the agreed facts do justify a conclusion in accord with petitioner's statement on brief that the purpose of this geophysical*129 survey was to determine whether the land contained subsurface structures sufficiently high so as to make drilling for oil economically feasible.
It thus appears that the results of this survey were to guide petitioner in determining generally whether and to what extent these large areas of land should be explored by drilling wells. Whether or not the scientific knowledge gained from the survey indicated that drilling would be successful or unsuccessful, it was undoubtedly the information upon which would be based further tests and potential drilling operations during the entire period of petitioner's exploitation of the land for oil and gas. Cf. Parkersburg Iron & Steel Co. v. Burnet, supra, at page 165. This survey was not connected with the drilling of any particular well or wells and was not confined to any restricted area *516 which had been tentatively singled out as the location of a well. Under these circumstances it seems abundantly clear that the survey was the first step in the over-all development for oil of these tracts of land and that the benefit derived from the expenditure was to be enjoyed by petitioner in its business during*130 the entire useful life of the asset being developed. Cf. Repplier Coal Co. v. Commissioner, 140 Fed. (2d) 554; certiorari denied, 323 U.S. 736">323 U.S. 736; Rialto Mining Corporation, 25 B. T. A. 980, 985. It is well settled that development expenses such as the platting, mapping, and subdividing of a tract of land held for sale must be capitalized and treated as an adjustment of the taxpayer's basis for such property. Mellie Esperson Stewart, 35 B. T. A. 406, 412; Frishkorn Real Estate Co., 15 B. T. A. 463, and we are unable to perceive any significant difference between such expenses and the one involved here. For these reasons we conclude that the geophysical expense in question is a capital expense.
Petitioner suggests on brief that geophysical expenses are deductible by analogy to the deduction of costs for geological work in preparation for the drilling of wells. Such a deduction is granted taxpayers at their option by section 29.23 (m)-16 (a) (1) of Regulations 103, which, of course, does not establish that such geological expense*131 is within the scope of section 23 (a) (1) (A). Indeed, it may be questioned whether the existence of the option does not indicate that all geophysical expenses incurred in preparation for the drilling of wells, which are capital assets, are capital in nature. So broad a question is not now before us, however, and we express no opinion with respect to it. See C. M. Nusbaum, 10 B. T. A. 664; Seletha O. Thompson, 9 B. T. A. 1342. Petitioner does not contend that the expenditure here involved is deductible under the option accorded by the regulations, and if such contention were made we should decline to adopt it. The option is directed to the costs of preparations for the drilling of particular wells after the drilling has been at least tentatively decided upon, which preparations are far removed from over-all geophysical exploration such as we are here considering.
We hold that the petitioner's expenditure for geophysical explorations in 1941 on the leases held from Louisiana Furs, Inc., is not deductible as business expense.
Issue 4. -- Petitioner contends that its lessee's completion of the dry hole on Rosedale*132 Plantation in 1942 determined that the mineral rights in that land were valueless, and that it thereby sustained a deductible loss in the amount of the portion of the purchase price of the fee which is allocable to those rights. Respondent argues, first, that the completion of the dry hole did not establish the worthlessness of the land for oil or gas production and, secondly, that even if it did, no deductible loss was sustained thereby, since petitioner retained *517 the fee title to the land. We find it unnecessary to consider the probative value of the Benedum dry hole as to the worthlessness of Rosedale Plantation for oil and gas production, for, even if such worthlessness were proved, we could not agree that petitioner sustained the deductible loss claimed.
Petitioner purchased Rosedale Plantation in 1936 for $ 30,000 and still owns it, surface and subsurface. Petitioner hoped, and no doubt believed, at the time of purchase that the land was oil or gas bearing, and the amount of the purchase price reflected this possibility. In 1942, we assume arguendo, it became clear that no oil or gas may ever be profitably recovered from Rosedale. On these facts, petitioner*133 asks us to conclude that it has sustained a deductible loss.
In our view, Coalinga-Mohawk Oil Co., 25 B. T. A. 261; affd., 64 Fed. (2d) 262; certiorari denied, 290 U.S. 637">290 U.S. 637, disposes of this issue in favor of respondent. The taxpayer there purchased a tract of land in 1918 for $ 80,000, solely as an oil prospect, and retained title to the land until 1923. The respondent admitted in that case that in 1921 it was determined that the land contained no oil and was worth only $ 2,000. We held that no part of the purchase price was deductible by the taxpayer in 1921 as a loss sustained in that year, since only a reduction in value, and not worthlessness, had been shown.
On brief petitioner has attempted to distinguish the facts in the Coalinga case from those here, but we find no significance in whatever difference there may be. It is also argued that that decision and an earlier one to the same effect in Fred C. Champlin, 1 B. T. A. 1255, are now outmoded because:
The rule to be deduced from the more recent cases is that where worthlessness of real property, including*134 a mineral interest, is established by some identifiable event occurring in the year the loss is claimed, it is allowable as a deduction without the taxpayer having divested himself of legal title to the property. * * *
That rule seems to be correct, but in our view it does not conflict with the principle of the Coalinga case or authorize the deduction claimed by petitioner. In C. C. Harmon, 1 T. C. 40, where we held that disposal of worthless oil and gas royalties was not a prerequisite to deduction of the unrecovered cost thereof, it was made clear that the rationale of the rule stated by petitioner is to be found in the opinion of the Supreme Court in Lucas v. American Code Co., 280 U.S. 445">280 U.S. 445, as follows:
Generally speaking, the income tax law is concerned only with realized losses * * *. Exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized. * * * The general requirement that losses be deducted in the year in which they are sustained calls for a practical, *135 not a legal, test. * * *
*518 Petitioner's position suffers, not from its failure to quitclaim its rights to any oil or gas in Rosedale, but from its failure to come within the exception to the restriction of deductible losses to those "absolutely realized." We find in Perkins v. Thomas, 15 Fed. Supp. 356; modified, 86 Fed. (2d) 954; affirmed on another issue sub nom Thomas v. Perkins, 301 U.S. 655">301 U.S. 655, cited by petitioner, no substitute for a compliance with the general requirement that losses be so guaranteed to be deductible.
In the Harmon case, and in each of the similar cases cited by petitioner, the taxpayer proved that the asset involved was worthless for all practical purposes and it was held that disposal thereof was unnecessary to establish the certainty or the amount of the loss. Such a situation is far different from that here. The record shows and we have found as a fact that Rosedale Plantation had substantial value in 1942. But, cf. Bickerstaff v. Commissioner, 128 Fed. (2d) 366, and Rhodes v. Commissioner, 100 Fed. (2d) 966.*136 It is by no means clear that even the subsurface was valueless, for it had apparently never been explored for valuable deposits other than oil or gas, and prior to the disposal of the land by petitioner some known but presently worthless deposits may yet come to have value as the result of newly discovered uses therefor. Petitioner has not even shown either that Rosedale Plantation was worth any less in 1942 than the $ 30,000 acquisition price, or that the "mineral rights" therein were worth less in 1942 than the $ 15,000 they were stipulated to be worth in 1936. The most that this record tends to show, and we do not decide that it shows that, is that Rosedale Plantation had no value for one particular purpose -- the production of oil or gas. We can not conclude from such a showing that a loss by petitioner with respect to Rosedale was reasonably certain in fact in 1942, or ascertainable in amount.
We think the Coalinga case is unimpaired in authority by subsequent decisions and, had petitioner not strenuously urged its reconsideration, we should have disposed of this issue by merely adopting the forceful reasoning of that opinion. We can, in addition, foresee innumerable *137 administrative difficulties as a consequence of allowing a taxpayer, upon showing that an asset owned by him is valueless for one of several purposes for which it was acquired, to deduct the part of the purchase price which might be apportioned to that purpose. Moreover, to permit such a deduction would be to allow the taxpayer to make one asset into as many as there were contemplated uses for it, and would have the effect in many cases of nullifying the established rule that mere shrinkage in the value of an asset prior to closing of the transaction with respect thereto does not give rise to a deductible loss. See Edith K. Findley, 46 B. T. A. 1219. The approval *519 of petitioner's contention would thus, in our view, constitute the adoption of a principle which is in conflict with the correct and long established interpretation of the loss provisions of the code and would lead to confusion in their administration.
We accordingly hold that no part of the purchase price of Rosedale Plantation is deductible by petitioner as a loss sustained in 1942.
Decision will be entered under Rule 50.
Footnotes
*. This amount represents a compromise settlement made for 1942 and reported as 1943 income.↩