*2493 1. DEPLETION. - Discovery basis in hands of donee of oil and gas property. Melville G. Thompson,10 B.T.A. 25">10 B.T.A. 25 followed.
2. DEPLETION. - Based upon fair market value of property at date of receipt, McKinney et al.,16 B.T.A. 804">16 B.T.A. 804 followed.
3. Fair market value of property at date gift determined for depletion purposes.
*926 These proceedings, consolidated for hearing and decision, result from the determination by the respondent of deficiencies in tax with respect to S. B. Daniel for the years 1922 and 1923 in the respective amounts of $2,578.91 and $1,103.99, and with respect to Charles R. Daniel for the years 1922 and 1923 in the respective amounts of $4,635.15 and $1,197.32. Error is assigned in that the respondent allowed an insufficient amount for depletion for all the years.
The facts were stipulated and from such stipulation we make the following findings of fact.
FINDINGS OF FACT.
1. The petitioners, S. B. and Charles R. Daniel, reside in Wichita Falls, Tex.
2. In 1902 and 1903 the petitioners' *2494 parents, S. M. and Hattie S. Daniel, acquired 640 acres of land in Wichita County, Texas. Some years prior to 1919 shallow oil production was discovered on this property, but the production was relatively small. In October, 1919, oil in large quantities was discovered at a depth of about 1,300 feet. If depletion, based on discovery values is allowable, the amounts are as follows:
| 1922 | |
| S. B. Daniel | $9,797.60 |
| Charles R. Daniel | 9,797.60 |
| 1923 | |
| S. B. Daniel | $6,922.35 |
| Charles R. Daniel | 6,922.35 |
3. The parents of the petitioners herein deeded to Charles R. Daniel and S. B. Daniel on November 19, 1919, an undivided two-thirds interests in the mineral rights on the property for the period to December 31, 1920. On December 8, 1920, the parents executed another deed conveying to the sons an undivided two-thirds interest in the mineral rights on the property until December 31, 1921. It was the parents' intention to give the petitioners a two-thirds interest in the fee of the land or in case a sale took place to give them two-thirds of the receipts upon sale.
In adjusting the tax returns of the petitioners for 1919, 1920, and 1921, the respondent permitted*2495 the petitioners to value the gift as of November 19, 1919, and to take advantage of all discovery valuations as the development of the property took place.
4. During the latter part of 1921 the Magnolia Petroleum Co. offered $150,000 in cash for the mineral rights on the property. The parents were willing to accept the offer and divide the money, $50,000 to themselves and $100,000 to the sons.
5. The sons deemed the sale inadvisable and agreed to pay to their parents $50,000 for the one-third interest which the parents had planned to retain. In accordance with this agreement, the parents on December 28, 1921, deeded to the petitioners, for a consideration stated to be $10 and love and affection, 600 acres of this property. *927 Forty acres of the total 640 acres were retained by S. M. and Hattie S. Daniel as a homestead.
6. As a matter of fact, a two-thirds interest in the property was deeded in fee as a gift to the petitioners and a one-third interest was purchased in fee for $50,000 by the petitioners.
7. In determining the petitioners' tax liability for the years in question the Commissioner has allowed depletion to the petitioners on a mineral value of*2496 $50,000.
OPINION.
MILLIKEN: Respondent has allowed depletion deductions to these petitioners on a mineral value of $50,000. He considered that such sum represented the cost for depletion purposes to the petitioners of the 600 acres of land in question. Petitioners claim the right to depletion deductions on a mineral value of $150,000.
In conformity with our decision in , we hold that the petitioners are not entitled to depletion based upon discovery value. Depletion based upn such a value is available only to the father and mother of petitioners.
In our recent decision in , we held that under the Revenue Act of 1921 the donee of an oil and gas lease was entitled to depletion upon the basis of the fair market value of the lease when acquired and should not be required to take depletion deductions based upon cost to the donors.
On December 28, 1921, the petitioners acquired by gift a two-thirds interest in the property in question and purchased for $50,000 the remaining one-third interest. Prior to the above named date but approximately at the same time, the father and*2497 mother of petitioners had been offered $150,000 in cash for the property. We think such cash offer, together with the outright purchase for $50,000 of a one-third interest, is sufficient to establish a fair market value for the property in question of $150,000, and under our decision in , petitioners are entitled to depletion on the mineral value of $150,000 instead of $50,000 as established by the respondent.
Judgment will be entered under Rule 50.