*1912 The respondent's estimate of the amount of the deposit or reserve applicable to each petitioner's interest in certain oil properties at the time of acquisition approved.
*135 These proceedings which were consolidated for hearing and opinion are for the redetermination of deficiencies in income tax as follows:
| Year | Docket | Deficiency |
| No. | ||
| 1920 | 20145 | $6,630.32 |
| 1920 | 20146 | 6.924.12 |
*136 In determining the deficiencies the respondent has disallowed $14,875.96 of a deduction of $24,417.54 taken by each petitioner for depletion of his interest in certain oil properties. The only matter in controversy is the amount of each petitioner's one-eighth interest in the estimated oil deposit or reserve of the oil properties. From the pleadings, a stipulation of facts, and documentary evidence, we make the following findings of fact.
FINDINGS OF FACT.
The petitioners are residents of Parkersburg, W. Va. In June, 1920, they, together with a number of associates, acquired from the Cosden Oil Co., of Tulsa, Okla., five developed*1913 oil properties located in Butler County, Kans., for a cash consideration including the commission and attorney fees of $660,000. Each petitioner's interest in the properties was one-eighth.
The legal description of the properties so acquired is as follows:
F. L. Anderson lease - 80 acres, S. 1//4 sec. 9, T. 27 S., R. 4 E.
J. H. Suits lease - 80 acres, S. 1//4 sec. 10, T. 27 S., R. 4 E.
H. C. Bates lease - 80 acres, S. 1//4 sec. 10, T. 27 S., R. 4 E.
J. L. Beck lease (owned in fee) - 160 acres, SE. 1/4 sec. 3, T. 28 S., R. 4 E.
J. B. Smock lease - 80 acres, S. 1//4 sec. 2, T. 27, R. 5 E.
All of the leases were obtained on the usual terms, were effective as long as oil or gas was produced, and were originally dated as follows:
| Date | |
| F. L. Anderson lease | Apr. 22, 1916. |
| J. H. Suits lease | Dec. 21, 1916. |
| H. C. Bates lease | Oct. 15, 1915. |
| J. L. Beck lease | June 21, 1916. |
| J. B. Smock lease | June 28, 1916. |
At the date of the acquisition of the properties by the petitioners and their associates no wells were being drilled nor had any new locations been made. The number*1914 of wells on the respective leases that were producing at the time and the number that had been abandoned were as follows:
| Beck | Suits | Anderson | Smock | Bates | |
| Number of wells producing | 9 | 6 | 7 | 3 | 9 |
| Number of wells abandoned | 1 | 2 | 3 | 2 | None |
*137 Three additional wells drilled during 1920 and 1921.
Data as to the wells upon the several leases are as follows:
| Well | Began | Completed | Abandoned | Depth | Penetr- | |
| No. | to | tion | ||||
| H. C. Bates | ||||||
| lease | 1 | Oct. 12, 1916 | Nov. 11, 1916 | 1,996 | 27 | |
| 2 | Aug. 3, 1916 | Sept. 30, 1916 | 2,440 | 79 | ||
| 4 | Nov. 20, 1916 | Feb. 24, 1917 | 2,460 | 99 | ||
| 5 | Apr. 11, 1917 | May 27, 1917 | 2,450 | 62 | ||
| 6 | Oct. 22, 1917 | Jan. 18, 1918 | 2,456 | 3 | ||
| 7 | May 19, 1917 | July 3, 1917 | 1,973 | 52 | ||
| 8 | June 1, 1917 | July 25, 1917 | 2,477 | 20 | ||
| 9 | Apr. 9, 1918 | May 31, 1918 | 2,450 | 12 | ||
| 10 | June 30, 1918 | Aug. 31, 1918 | 2,470 | 42 | ||
| J. H. Suits | ||||||
| lease | 1 | (1) | 1,370 | |||
| 2 | June 6, 1916 | Sept. 16, 1916 | 1,992 | 13 | ||
| 3 | Aug. 14, 1916 | Sept. 21, 1916 | 2,572 | 2 | ||
| 4 | Jan. 29, 1917 | Apr. 16, 1917 | Sept. 10, | 2,550 | 6 | |
| 1918 | ||||||
| 5 | May 9, 1917 | June 17, 1917 | 2,526 | 14 | ||
| 6 | May 24, 1917 | Aug. 1, 1917 | 2,540 | |||
| 7 | do | Aug. 10, 1917 | 2,475 | 64 | ||
| 8 | June 12, 1917 | Aug. 16, 1917 | 2,481 | 98 | ||
| J. B. Smock | ||||||
| lease | 1 | Mar. 22, 1917 | June 13, 1917 | 2,704 | ||
| 2 | May 22, 1917 | Aug. 6, 1917 | 2,688 | |||
| 3 | June 20, 1917 | Aug. 30, 1917 | 1922 | 2,719 | ||
| 4 | Jan. 7, 1918 | June 17, 1918 | (3) | 2,702 | ||
| 5 | Mar. 22, 1918 | do | 2,684 | |||
| 6 | 1922 | |||||
| F. L. | ||||||
| Anderson | ||||||
| lease | 1 | June 15, 1916 | Mar. 12, 1917 | 2,033 | 24 | |
| 2 | July 20, 1916 | Sept. 6, 1916 | 2,516 | 3 | ||
| 2 Feb. 1, | ||||||
| 1917 | ||||||
| 3 | Nov. 11, 1916 | Dec. 26, 1916 | 2,398 | 2 | ||
| 4 | Jan. 10, 1917 | Feb, 27, 1917 | 2,480 | 55 | ||
| 5 | Feb. 11, 1917 | May 5, 1917 | 2,532 | |||
| 6 | Mar. 8, 1917 | do | 2,553 | |||
| 7 | do | Apr. 27, 1917 | 2,609 | |||
| 8 | May 14, 1917 | July 17, 1917 | 2,453 | 3 | ||
| 9 | June 13, 1917 | Aug. 22, 1917 | 2,473 | 5 | ||
| 10 | Oct. 23, 1917 | Nov. 28, 1917 | 2,000 | 20 | ||
| J. L. Beck | ||||||
| lease | 1 | Oct. 2, 1916 | Dec. 19, 1916 | 2,609 | 8 | |
| 2 | Oct. 7, 1916 | Jan. 17, 1917 | 2,603 | 9 | ||
| 3 | Oct. 9, 1916 | Mar. 2, 1917 | 2,613 | 13 | ||
| 4 | Jan. 5, 1917 | Feb. 16, 1917 | 2,581 | 13 | ||
| 5 | Jan. 20, 1917 | Jan. 26, 1917 | 2,588 | 10 | ||
| 6 | Nov. 20, 1916 | Apr. 19, 1917 | 2,561 | 30 | ||
| 7 | Feb. 2, 1917 | Apr. 10, 1917 | 2,600 | 13 | ||
| 8 | Feb. 5, 1917 | Apr. 16, 1917 | 2,610 | 13 | ||
| 9 | June 2, 1917 | Sept. 15, 1917 | 2,588 | 12 1/2 | ||
| 10 | Apr. 9, 1917 | May 24, 1917 | 2,600 | 5 |
No record was made of the date the lease were abandoned on the H. C. Bates lease. However, of the nine producing wells on this lease when it was acquired by the petitioners and their associates in 1920, one was abandoned in 1920 and another in 1922, leaving seven producing wells on the property when it was sold at some time in 1923.
A record was not kept of the exact date on which wells were abandoned on the property included in the J. H. Suits lease. However, two wells were abandoned in 1920 after the petitioners and their associates acquired the lease. There were four producing wells on the property at the date of sale in 1923.
During 1920 and 1921 three wells were drilled on the property included in the J. B. Smock lease. There is no record available as to the date in 1922 that well No. 3 on this property was abandoned. *138 However, well No. 6 was completed in that year. Since the exact date of the completion of well No. 6 is not available, the parties consider that it offsets the well abandoned.
No record was made of the date when wells were abandoned on the F. L. Anderson lease. However, no wells were*1916 abandoned on this lease, after its acquisition by the petitioners and their associates until 1922, when one well was abandoned. There were six producing wells on this property when it was sold in 1923.
No record was made of the date when wells were abandoned on the property included in the J. L. Beck lease. However, one well was abandoned in 1920, and three in 1922. There were six producing wells on the property when it was sold in 1923.
The gross production for 1920 on the properties after acquisition by the petitioners and their associates, the average number of wells producing, the average production per well, the amount received for the production and the average price received per barrel as to each lease were as follows:
| F. L. Anderson | J. H. Suits | H. C. Bates | |
| lease | lease | lease | |
| Production in barrels (7 months) | 12,207.16 | 4,403.20 | 18,225.54 |
| Average number of wells producing | 4.00 | 2.50 | 4.00 |
| Average production per well | 3,051.79 | 1,761.28 | 4,556.38 |
| Amount received for production | $44,448.20 | $16,171.68 | $66,375.10 |
| Average price received per barrel | $3.65 | $3.65 | $3.65 |
| J. L. Beck | J. B. Smock | |
| lease | lease | |
| Production in barrels (7 months) | 11,719.36 | 12,323.20 |
| Average number of wells producing | 5.50 | 1.75 |
| Average production per well | 2,130.79 | 7,042.00 |
| Amount received for production | $41,134.80 | $49,768.70 |
| Average price received per barrel | $3.50 | $4.03 |
*1917 Each petitioner as joint owner received one-eighth of seven-eighths of the amount produced on all the leases except the F. L. Anderson lease, of which each received one-eighth of five-sixths, and the J. L. Beck lease, of which each received one-eighth of the entire amount.
The net production prior to June 15, 1920, from each of the leases, together with the total from all five of them, is as follows, except that in case of the Smock lease for 1917, which was the first year of its operation, the production records are not available and the parties have estimated the amount produced in that year:
| Year | Anderson | Bates | Beck | Suits | Smock | Total |
| Barrels | Barrels | Barrels | Barrels | Barrels | Barrels | |
| 1916 | 2,910.43 | 5,705.47 | 3,045.69 | 15,820.69 | 27,482.28 | |
| 1917 | 218,149.56 | 145,065.38 | 142,730.74 | 38,837.17 | 15,000.00 | 559,782.85 |
| 1918 | 45,768.44 | 59,561.20 | 55,770.98 | 17,169.34 | 32,313.19 | 210,583.15 |
| 1919 | 27,603.09 | 39,857.04 | 33,671.10 | 10,797.77 | 35,858.12 | 147,787.12 |
| 1920 to | ||||||
| June 15 | 10,412.34 | 12,658.48 | 9,708.82 | 2,842.24 | 11,898.92 | 47,520.80 |
| Total | 304,843.86 | 262,847.57 | 244,927.33 | 85,467.21 | 95,070.23 | 993,156.20 |
*1918 *139 The production of the properties by leases and the total for the last half of June and the first half of July, 1920, were as follows:
| Suits | Anderson | Bates | Beck | Smock | Total | |
| 1920 | Barrels | Barrels | Barrels | Barrels | Barrels | Barrels |
| June 16 | 189.48 | 189.48 | ||||
| June 17 | 198.00 | 209.04 | 400.39 | 807.43 | ||
| June 18 | 208.49 | 208.49 | ||||
| June 19 | 187.00 | 187.00 | ||||
| June 21 | 208.37 | 406.20 | 203.84 | 818.41 | ||
| June 23 | 206.32 | 187.00 | 393.32 | |||
| June 24 | 208.92 | 201.86 | 187.00 | 597.78 | ||
| June 25 | 202.34 | 202.34 | ||||
| June 26 | 191.28 | 207.86 | 200.45 | 187.00 | 786.59 | |
| June 27 | 187.00 | 187.00 | ||||
| June 29 | 215.68 | 407.02 | 191.34 | 189.48 | 1,003.52 | |
| July 2 | 201.94 | 207.70 | 406.24 | 202.52 | 1,018.40 | |
| July 3 | 191.96 | 191.96 | ||||
| July 5 | 207.58 | 207.79 | 196.49 | 187.00 | 798.86 | |
| July 7 | 203.16 | 201.90 | 405.06 | |||
| July 8 | 206.52 | 189.48 | 396.00 | |||
| July 9 | 195.84 | 187.00 | 382.84 | |||
| July 10 | 209.04 | 202.56 | 411.60 | |||
| July 12 | 209.04 | 204.94 | 192.00 | 191.96 | 797.94 | |
| July 13 | 187.00 | 187.00 | ||||
| July 14 | 397.79 | 397.79 | ||||
| Total | 794.38 | 2,089.75 | 3,239.03 | 1,797.29 | 2,448.36 | 10,368.81 |
*1919 The production by months of the properties by leases and the totals from June 15 to December 31, 1920, were as follows:
| Suits | Anderson | Bates | Beck | Smock | Total | |
| Barrels | Barrels | Barrels | Barrels | Barrels | Barrels | |
| June, 15 days | 389.28 | 1,049.87 | 1,617.81 | 1,010.44 | 1,313.96 | 5,381.36 |
| July | 811.38 | 2,493.88 | 3,239.96 | 1,978.66 | 2,450.84 | 10,974.72 |
| August | 808.74 | 2,312.90 | 3,053.13 | 1,813.64 | 1,884.88 | 9,873.29 |
| September | 781.80 | 1,688.42 | 3,052.07 | 1,800.70 | 1,500.96 | 8,833.95 |
| October | 812.76 | 1,267.52 | 2,649.70 | 1,584.60 | 3,174.04 | 9,488.62 |
| November | 405.08 | 2,064.98 | 2,626.91 | 1,608.01 | 1,486.08 | 8,191.06 |
| December | 384.00 | 1,665.72 | 2,381.97 | 2,003.16 | 912.76 | 7,347.61 |
Each petitioner's share of the production from the five leases from June 15 to December 31, 1920, was 6,691 barrels, and from January 1 to March 15, 1921, was 1,639 barrels.
The posted market price for oil at Augusta, Kans., on June 15, 1920, was $3.50 per barrel. The oil from the leases here involved during the period from June 15, 1920, to January 1, 1921, was sold at a premium and an average price per barrel of $3.73 was received therefor.
*1920 The cost to each petitioner of his share of the oil deposits was $53,446.84 and the cost to him of his share of the physical equipment was $29,053.16. Of the latter amount $15,435.47 was for surface equipment and $13,617.69 was for well (underground) equipment.
The respondent has determined the depreciation on the surface equipment at a flat rate of 16 2/3 per cent and on the well (underground) equipment on the unit-of-production method.
*140 In their income-tax returns for 1920 each of the petitioners took a deduction of $24,417.54 for depletion of the cost of his interest in the oil deposit or reserve. For the purpose of determining the amount of depletion to which each was entitled, such determination requiring primarily an approximation of the probable oil reserve in the property covered by the leases at the time the petitioners and their associates acquired them, recourse was had by the petitioners to the Manual for the Oil and Gas Industry under the Revenue Act of 1918 (1919 Edition). This manual was a publication issued by the Treasury Department "to assist the taxpayer of the oil and gas industry in correctly and expeditiously preparing his Federal tax return. *1921 " The amount of depletion taken by each party in his return was based upon a table contained on page 94 of the manual and referred to as "Augusta District."
The petitioners computed the amount of the deduction taken in their returns for depletion as follows:
| Calculation of Depletion, 1/8 Interest | |
| Cost - Whole property | $660,000.00 |
| Phys. equip. as per inv | 232,425.30 |
| Deposit | 427,574.70 |
| Value of 1/8 interest | 53,446.83 |
| Production 2nd half June, 1st half July, 5/16 int. (barrel) | 2878.205 |
| Average per well per year, 8/8 interest | 3295.82 |
| Estimated future production per well per year (p. 94, | |
| Manual Oil & Gas, 1918) | 3515.55 |
| Estimated total deposit - 3515.55 X 34 (barrels) | 119,528.7 |
| Original cost per barrel | $3.58 |
| Production of 1/8 for the period ended December 31st (barrel) | 6792.61 |
| Depletion of above at above rate of $3.58 per barrel | $24,417.54 |
In determining the deficiencies here involved the respondent allowed each petitioner $9,451.58 of the deduction of $24,417.54 taken for depletion in his return, thereby disallowing $14,875.96 of the deduction taken by each. In disallowing a portion of the deductions taken by the petitioners the respondent*1922 determined that the estimated oil reserve at June 15, 1920, in the properties covered by the leases applicable to each petitioner's interest was 47,744 barrels as against the petitioners' estimate of 14,942 barrels.
From January 1, 1921, to December 31, 1924, net oil production applicable to each petitioner's interest was as follows:
| Barrels | |
| 1921 | 10,353 |
| 1922 | 8,205 |
| 1923 | 7,747 |
| 1924 | 6,959 |
| Total | 33,264 |
*141 The amount of the oil deposit or reserve in the properties covered by the leases applicable to each petitioner's one-eighth interest at the time of the acquisition of the leases by the petitioners and their associates was 47,744 barrels.
OPINION.
TRAMMELL: The question we are called upon to decide is the amount of the oil deposit or reserve applicable to each petitioner's one-eighth interest at the time the oil properties were acquired by them and their associates in June, 1920. The petitioners contend that the amount was 14,942 barrels, the amount used by them in computing the deduction taken for depletion in their returns. The respondent contends that it was 47,744 barrels, the amount used by him in determining the deficiencies.
*1923 In support of their contention the petitioners rely on the fact that in computing the estimated oil reserve used by them in determining the deduction taken for depletion they used figures in an estimated future production table for the Augusta District, Butler County, Kans., as set forth in the Manual for the Oil and Gas Industry. In a foreword to the manual it is expressly stated that the tables appearing in the manual were intended as a suggestion for the guidance of the taxpayer in the computation of his depletion allowance, but that they are not to be applied indiscriminately to specific properties and that the Treasury Department is in no way committed to accept estimates based upon them. With respect to the methods of estimating recoverable reserves it is stated on page 27 of the manual that the Treasury Department does not prescribe any particular method of estimating recoverable reserves, but that the methods described. therein are applicable to a wide variety of conditions and are inserted as a suggestion.
From the foregoing we think it is clear that in issuing the Manual for the Oil and Gas Industry the Treasury Department intended for the matter set forth therein*1924 to be suggestive only and not determinative as the petitioners now urge. The contention of the petitioners, therefore, is not well founded.
In making their selection of figures from the manual, it appears that the petitioners took into consideration the production of the oil properties only for the period in 1920 subsequent to the acquisition of the leases by them and their associates, notwithstanding the fact that the properties had been producing steadily for about four years. On the other hand the respondent's estimate of the reserve or deposit is based on all the production data available from the time the wells were brought in down to the time the petitioners' returns were due, March 15, 1921, which date was two days before they were filed. The *142 respondent's estimate clearly was determined on a more comprehensive basis than that of the petitioners, and consequently more likely to approach the actual amount of the deposit or reserve than that determined by them.
While facts occurring subsequent to the time the petitioners filed their returns may not be used in estimating the amount of the deposit or reserve of oil in the properties at the time of acquisition*1925 of the leases, , and , such facts may be used in checking or corroborating the estimate made. . The respondent has estimated each petitioner's share of the deposit or reserve to be 47,744 barrels as at the date of the acquisition of the leases in June, 1920. Each petitioner's share of the actual production from June 15, 1920, to the end of 1924, the last year for which the amount of production was put in evidence, was 39,955 barrels. In view of this we do not think it could be said that the respondent's estimate was unreasonable. It certainly comes more nearly to approaching the actual amount of the reserve now known to have been in the properties than the petitioner's estimate of 14,942 barrels.
The petitioners are contesting the estimate made by the respondent and the burden is upon them to show that such estimate is erroneous. From a consideration of all the evidence we do not think that they have sustained this burden. Accordingly, the respondent's estimate is sustained.
Judgment will be entered under*1926 Rule 50.