*2537 1. A "royalty interest" under an oil and gas lease is an interest issuing out of the land and a part of the lessor's estate, the assignment of which must be evidenced by a writing to satisfy the statute of frauds.
2. The transfer of a part of such royalty interest to petitioners occurred on December 20, 1922, and the respondent's computation of depletion deductions based on a discovery value fixed by the first discovery thereafter on January 30, 1923, is approved.
*1062 The respondent has asserted deficiencies in income taxes as follows:
| Year | F. O. Burket | F. O. Burket, trustee |
| 1923 | $1,030.54 | $1,056.79 |
| 1924 | 260.98 | 371.62 |
The deficiencies arise from the respondent's determination that depletion deductions should be computed upon a discovery value fixed on January 30, 1923, rather than on a value fixed in September, 1922, on the ground that the petitioners acquired no depletory interest in the property until December 20, 1922, when assignments*2538 in writing were executed.
FINDINGS OF FACT.
The petitioners are individuals residing in Topeka, Kans. Flavius O. Burket is the son of F. O. Burket.
On August 7, 1922, Emily C. Burket, the mother of F. O. Burket and the grandmother of Flavius O. Burket, entered into an oil and gas lease with the Barrington Oil Co. whereby she leased 560 acres of land which she owned in Greenwood County, Kansas, for the purpose of drilling and operating for oil and gas for a term of five years and as long thereafter as oil and gas should be produced. As consideration for the lease she was to receive the equal one-eighth part of all oil and gas produced from the land.
*1063 Emily C. Burket acquired the above land upon the death of her husband in 1909. From that time until the taxable year the petitioner, F. O. Burket, managed his mother's business affairs, including the above real estate which he leased and rented. From time to time he advanced money for the support of his mother, to pay interest on a mortgage against the land, and to pay debts existing at the time of his father's death. Petitioner was never repaid for these advances, which amounted to approximately $7,000.
*2539 Early in 1917, oil was discovered in the neighborhood of the Burket farm and negotiations were conducted with several companies for a lease. Some time in August, 1917, when the negotiations were being conducted with one Frugenberger, Emily C. Burket stated to the petitioner, F. O. Burket, "If you will lease the land and they get any oil, I will give you a one-third interest in it." On August 11, 1917, an oil and gas lease was granted by Emily C. Burket to Frugenberger, which lease was subsequently canceled. Again in July, 1919, petitioner negotiated a lease with the Willow Creek Oil & Gas Co., which was subsequently canceled. In each of these lease F. O. Burket signed as grantor. When the lease of August 7, 1922, was executed Emily C. Burket stated that she wanted her son and grandson to have one-third each of any oil or gas produced from the land.
Oil was discovered on the Burket farm about September 15, 1922. Beginning thereafter royalty checks were mailed to Emily C. Burket until December 1, 1922. These checks were cashed by F. O. Burket and the money was divided equally among Emily C. Burket and the two petitioners. On December 15 the following statement of oil runs, *2540 together with checks in the amounts stated, was sent to each of the parties:
Crude Oil purchased from Bitler & Associates, produced on the Burket Farm, being the N 1/2 of NW 1/4 of Section 24, Township 23; Range 10, East; Greenwood County, Kansas from December 1st to 15th, inclusive, 1922.
* * *
| 2,252.88 barrels, at $1.90 | $4,280.47 |
| Emily C. Burket, 1/24 royalty | 178.35 |
| F. O. Burket, 1/24 royalty | 178.35 |
| Flavious Burket, 1/24 royalty | 178.35 |
| Bitler & Associates, 7/8 W.I | 3,745.42 |
| $4,280.47 |
On December 20, 1922, the following instrument was executed:
WHEREAS, On the 7th day of August, 1922, a certain oil and gas mining lease was made and entered into by and between Emily C. Burket, Lessor and The *1064 Barrington Oil Co., Lessee covering the following described land in the County of Greenwood and State of Kansas, to wit:
All Section Twenty-four (24), Township Twenty-three (23), Range Ten (10), except the North One-Half (N 1/2) of the North East Quarter (N.E. 1/4).
Said lease being recorded in the office of the Register of Deeds in and for said County in Book 10, Page 152; and
WHEREAS, The said lease and all rights thereunder or incident*2541 thereto are now owned by Emily C. Burket.
Now, THEREFORE, For and in consideration of One Dollar (and other good and valuable considerations), the receipt of which is hereby acknowledged, the undersigned, the present owner of the said lease and all rights thereunder or incident thereto, do hereby bargain, sell, transfer, assign and convey unto F. O. Burket all of her right, title and interest of the original lessee and present owner in and to the said lease and rights thereunder in so far as it covers the One-Third (1/3) of the One-Eighth (1/3 of 1/8) of Section Twenty-four (24) Township (23) Range Ten (10) of Greenwood Co. Kansas, together with all personal property used or obtained in connection therewith to F. O. Burket and his heirs, successors and assigns.
And for the same consideration, the undersigned for herself and her heirs, successors and representatives, does covenant with the said assignee, his heirs, successors or assigns, that she is the lawful owner of the said lease and rights and interests thereunder and of the personal property thereon or used in connection therewith; that the undersigned has good right and authority to sell and convey the same, and that said*2542 rights, interests and property are free and clear from all liens and encumbrances, and that all rentals and royalties due and payable thereunder have been duly paid.
IN WITNESS WHEREOF, The undersigned owner and assignor has signed and sealed this instrument this 20th day of December, 1922.
(Signed) EMILY C. BURKET. (SEAL.)
A like assignment was executed to Flavius O. Burket, who was then 19 years of age.
On their income-tax returns for 1923 and 1924, the petitioners claimed depletion deductions based on a value fixed by the discovery of oil in September, 1922. Upon audit of the returns, the respondent disallowed the deductions claimed and allowed deductions based upon a value fixed on January 30, 1923, on the ground that no depletory interest was acquired until December 20, 1922, when the written assignments above were executed.
OPINION.
LANSDON: The single question raised by the pleadings is whether certain royalty interests in an oil and gas lease were acquired by verbal grant on or before August 7, 1922, or on December 20, 1922, when a written assignment was executed. The respondent has determined that the interests were acquired on December 20 and has allowed*2543 depletion deductions based on a value fixed by the first discovery thereafter on January 30, 1923. The petitioners contend that they acquired the royalty interests on or before August 7, *1065 and that depletion should be computed on a value fixed by the discovery in September, 1922.
Section 214(a)(10) of the Revenue Act of 1921 provides:
That in computing net income there shall be allowed as deductions:
* * *
In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, *2544 the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter: And provided further, That such depletion allowance based on discovery value shall not exceed the net income, computed without allowance for depletion, from the property upon which the discovery is made, except where such net income so computed is less than the depletion allowance based on cost or fair market value as of March 1, 1913; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.
The royalty interests herein involved were acquired without cost after March 1, 1913, and the basis for depletion must be the fair market value at the date of discovery as provided in the above section. We have heretofore held that in order to use the discovery value as a basis for depletion deductions the discovery must have been made "by the taxpayer" after he acquired the property. *2545 Boucher-Cortright Coal Co.,7 B.T.A. 1">7 B.T.A. 1; Evangeline Gravel Co.,13 B.T.A. 101">13 B.T.A. 101.
The date of transfer of the royalty interests involved in this proceeding depends upon the nature of such interests and whether they may be transferred orally. The decisions of this Board and of the courts hold uniformly that oil and gas leases and the assignments of royalty interests convey no title to the oil and gas in place. J. T. Browning et al.,16 B.T.A. 485">16 B.T.A. 485; John T. Burkett,7 B.T.A. 560">7 B.T.A. 560; affd. 31 Fed.(2d) 667; certiorari denied, 280 U.S. 43">280 U.S. 43A; Henry L. Berg et al.,6 B.T.A. 1287">6 B.T.A. 1287; Lynch v. Alworth-Stephens Co.,267 U.S. 364">267 U.S. 364; United States v. Biwabik Mining Co.,247 U.S. 116">247 U.S. 116; Von Baumbach v. Sargent Land Co.,242 U.S. 503">242 U.S. 503. The Supreme Court, however, in discussing the nature of the interest created by an oil and gas lease, points out in Lynch v. Alworth-Stephens Co., supra, that it is a very real and substantial property interest. The court states:
*2546 *1066 It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits, United States v. Biwabik Mining Co.,247 U.S. 116">247 U.S. 116, 123; but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank,113 U.S. 408">113 U.S. 408, 416; Ewert v. Robinson,289 Fed. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone,175 U.S. 414">175 U.S. 414, 421; Bryant v. Kennett,113 U.S. 179">113 U.S. 179, 192.
See also Ohio Oil Co. v. Indiana,177 U.S. 190">177 U.S. 190, and Rich v. Donaghey (Okla.), 177 Pac. 86.
Bonuses, rentals, and royalties provided for in oil and gas leases are payments for the use of the mineral resources of the land. Work v. United States,261 U.S. 352">261 U.S. 352; *2547 Wright v. Carter Oil Co. (Okla.), 223 Pac. 835. Rentals are payments for the privilege of going upon the land to prospect for oil and gas and for delay in beginning operations. Royalty refers to a certain percentage of the oil and gas produced or to so much per gas well developed. Thornton's Law of Oil & Gas; 4th ed., sec. 253. Royalty which has accrued is personal property and may be assigned without creating any interest in the lease or land. Kendall v. Ewert,259 U.S. 139">259 U.S. 139; Warren v. Boggs (w. Va.), 97 S.E. 589">97 S.E. 589; Central Kentucky Natural Gas. Co. v. Stevens (Ky.), 120 S.W. 282">120 S.W. 282. There is, however, a difference between an assignment of "royalty" and an assignment of a "royalty interest" under an existing lease or in the land. A "royalty interest," which is the right to receive royalties to accrue in the future, is an interest issuing out of the land, and a part of the lessor's estate. United States v. Noble,237 U.S. 74">237 U.S. 74; Amalgamated Royalty Oil Corporation v. Hemme (C.C.A., 8th Cir.), 282 Fed. 750, 765;*2548 Ferguson v. Steen (Texas), 293 S.W. 318">293 S.W. 318; McKernon v. Josey Oil Co. (Okla.), 233 Pac. 451; Wright v. Carter Oil Co. (Okla.), supra;Hagan Co. v. Norton Coal Co. (Va.), 119 S.E. 153">119 S.E. 153; Miller v. Sooy (Kans.), 242 Pac. 140.
In United States v. Noble, supra, an Indian allottee of lands under a patent which provided that the allotment should be inalienable for a period of 25 years had assigned his "right, title, and interest in and to the royalty" under certain mining leases. Suit was instituted to cancel the assignments upon the ground that they were in violation of the restriction imposed by Congress against alienation. In holding that the assignments were invalid, the Supreme Court stated:
We may first consider the assignments of rents and royalties. Under his patent, the allottee took an estate in fee, subject to the limitation that the land should be "inalienable for the period of twenty-five years" from date. * * * The comprehensiveness of the restriction was modified only by the power to lease; and while the allottee could make leases, as provided*2549 in these acts, they gave him no power to dispose of his interest in the land subject to the lease, *1067 or of any part of it. The rents and royalties were profit issuing out of the land. When they accrued, they became personal property; but rents and royalties to accrue were a part of the estate remaining in the lessor. As such, they would pass to his heirs, and not to his personal representatives. 1 Washburn on Real Property, *337; Wright v. Williams,5 Cow. 499">5 Cow. 499. It is true that the owner of the reversion, when unrestricted in his right to convey, may sever the rent and grant it separately, but this is by virtue of his freedom to deal with the estate in the land. 2 Bl. Com. *176.
It necessarily follows that the allottee in the present case having no power to convey his estate in the land could not pass title to that part of it which consisted of the rents and royalties. It is said that the leases contemplated the payment of sums of money, equal to the agreed percentage of the market value of the minerals and thus that the assignment was of these moneys; but the fact that rent is to be paid in money does not make it any the less a profit issuing*2550 out of the land. * * *
The lessor's interest under an oil and gas lease is analogous to the lessor's interest under a general farming lease. In each instance there is a letting of the premises for a particular use with a reservation of rent. It has long been established that an assignee of rent, without the reversion, under a lease for years may have any remedy for collecting the rent which the lessor had. Thompson on Real Property, sec. 1354; Gilbert on Rents, sec. 165; F. Gross & Co. v. Chittim (Tex.), 100 S.W. 1006">100 S.W. 1006; Haywood v. O'Brien (Iowa), 3 N.W. 545">3 N.W. 545; and Lufkin v. Preston (Iowa), 3 N.W. 58">3 N.W. 58. The right of a landlord to transfer a part or all of his estate in the land is an incident to his right of property and necessary to the full enjoyment thereof. Thompson on Real Property, sec. 1345. And so it is with a lessor under an oil and gas lease. He may assign a part or all of his interest under the lease without parting with his reversion. Hagan Co. v. Norton Coal Co., supra;*2551 McKernon v. Josey Oil Co., supra; and Thornton's Law on Oil and Gas, sec. 262. Such an assignment creates an interest issuing out of lands and to be valid must be in writing under section 33-105 of the Revised Statutes of Kansas (1923), which provides:
Leases or estates exceeding one year in duration. No leases, estates or interests of, in or out of lands, exceeding one year in duration, shall at any time hereafter be assigned or granted, unless it be by deed or note, in writing, signed by the party so assigning or granting the same, or their agents thereunto lawfully authorized by writing, or by act and operation of law.
The parol assignments on August 7, 1922, could operate to create no interest in the land and at most were assignments of the "royalty" after it was severed from the land and became personal property. Robinson v. Smalley (Kans.), 171 Pac. 1155; White v. Green (Kans.), 173 Pac. 974; and Miller v. Sooy (Kans.), 242 Pac. 140. An assignment of accrued royalties would not entitle petitioners to depletion deductions in any amount. Such deductions *1068 are allowed by the*2552 statute to compensate for the diminution of the mineral reserve caused by the extraction and removal of minerals therefrom and until an interest in such mineral reserve is acquired by a taxpayer no right to depletion deductions exists.
On December 20, 1922, each of the petitioners acquired one-third of the royalty interest under the existing oil and gas lease and the respondent has correctly allowed deductions from their respective incomes on account of depletion. I.T. 1920, C.B. III-1, 188. Cf. J. V. Leydig,15 B.T.A. 124">15 B.T.A. 124, and William I. Paulson et al.,10 B.T.A. 732">10 B.T.A. 732.
Reviewed by the Board.
Decision will be entered for the respondent.
MARQUETTE, SMITH, STERNHAGEN, TRAMMELL, PHILLIPS, VAN FOSSAN, and MURDOCK concur in the result only.