*700 1. In computing depletion of 27 1/2 percent of "gross income from the property" during the taxable year in the case of oil and gas leases the words "gross income from the property" are held to mean, under section 204(c)(2) of the Revenue Act of 1926, the gross amount actually received by the taxpayer as income from the depletable property - not the market price of the oil or gas produced during the taxable year (unless such was received), nor the amount actually received by the taxpayer, increased by any amount expended by one other than the taxpayer, in producing the oil.
2. Where corporation A received income arising from a Wyoming state oil lease by virtue of a declaration of trust in its favor made by corporation B, the owner of such state lease, held, the income of corporation A from such source is not exempt, but is subject to income tax, such tax not being an imposition or burden upon the lease as an instrumentality of the state.
3. Where the Commissioner, in determining petitioner's income tax liability under the Revenue Act of 1926, computed oil depletion allowance of 27 1/2 percent of gross income, but did not compute and determine what the depletion allowance*701 would be on cost basis, and the petitioner insists that the latter basis would be greater, and facts necessary to determine which computation would result in the greater depletion are stipulated, held, that petitioner is entitled to have a recomputation made under Rule 50, and be allowed depletion on whichever basis is the greater.
*410 The petitioner, Mountain Producers Corporation, is the parent corporation of the Wyoming Associated Oil Corporation. A consolidated return was filed for the year 1925. Petitioner duly appealed from a deficiency in income tax of $90,642.87 determined against it for that year by the respondent, expressed in a deficiency notice of March 14, 1929.
An amended petition was filed in 1933, and in 1935 a hearing was had. Stipulations are filed and adopted as a part of our findings of fact, but are set forth herein, in connection with other findings of fact on the evidence, only to the extent found necessary for*702 the understanding and determination of the issues involved.
The errors assigned are, in substance, as follows:
1. The decrease in the amount of depletion deduction of the Wyoming Associated Oil Corporation from $2,215,862.23 to $1,674,677.92, asserted to have been based upon a wrong interpretation and application of section 204(c)(2) of the Revenue Act of 1926, in that the depletion computed in the deficiency notice was based upon 27 1/2 percent of an incorrectly computed gross income.
2. The increase of the net taxable income of the Wyoming Associated Oil Corporation by the restoration thereof of $185,438.83 so-called income from leased state lands.
3. In computing the net income of the Wyoming Associated Oil Corporation and the net income of it and the petitioner, the failure to allow as a deduction depletion based on cost to the Wyoming Associated Oil Corporation and/or its respective transferors and predecessor owners.
*411 FINDINGS OF FACT.
The Mountain Producers Corporation and the Wyoming Associated Oil Corporation are Delaware corporations, the former organized on May 12, 1920, and the latter on July 11, 1919, the principal offices of both being at*703 the same address in Denver, Colorado.
Throughout the year 1925 the petitioner owned all the capital stock of the Wyoming Associated Oil Corporation. It is stipulated that in computing the income tax liabilities of these corporations for 1925 the net income of the taxpayer should be computed, as in the deficiency notice of March 14, 1929, on a consolidated basis.
Immediately after its organization the Wyoming Associated Oil Corporation received from various parties deeds, assignments, and conveyances covering certain patented lands and interests in oil and gas leases in the Salt Creek Oil Field in Natrona County, State of Wyoming. With respect to these transactions it is stipulated that no Federal tax liability on the part of the Wyoming Associated Oil Corporation was incurred, or if incurred, it was paid.
On February 25, 1920, an act of Congress, known as the Oil and Gas Leasing Act, went into effect and under its so-called relief provisions, particularly those in sections 18, 18(a), and 19, the lands acquired by the Wyoming Associated Oil Corporation as heretofore described became eligible for exchange into Government leases. Pursuant to said act, in 1920 and 1921 the*704 Wyoming Associated Oil Corporation received from the United States, in lieu of its former placer mining locations, certain leases covering lands listed by governmental subdivisions, under the caption, "United States Government Leases", as stipulated herein.
On February 1, 1923, the Wyoming Associated Oil Corporation and the Midwest Oil Co., an Arizona corporation, executed a trust instrument effective throughout the taxable year 1925, wherein and whereby the Midwest Oil Co., the holder of a certain lease from the State of Wyoming, dated October 1, 1919, covering all of school section 36 in Natrona County, Wyoming, agreed to hold in trust for the benefit of the Wyoming Associated Oil Corporation an undivided 50 percent interest in the lease covering section 36, and in the benefits and net proceeds to be realized therefrom and from all renewals and extensions thereof. The trust agreement was to be effective as of February 1, 1923, and to completely supersede and replace all other declarations of interest in favor of the Wyoming Associated Oil Corporation.
On sundry dates between June 1, 1919, and December 31, 1924, the Wyoming Associated Oil Corporation disposed of, by sale or*705 exchange, certain of its properties and interests. As a result of *412 these transactions the Wyoming Associated Oil Corporation on January 1, 1925, owned and held - omitting any reference to section 36 - oil lands and interests subject to depletion and from which oil was produced. The number of barrels of oil produced during the year 1925 from the numerous tracts of land and interests covered by the various lease agreements, exclusive of the state school lease (section 36, separately considered) is set forth in detail in stipulation filed and adopted by reference as a part of our findings of fact. Likewise, so stipulated and adopted, are the gross income from each property, its field operating expense, income received at contract price, general and overhead expense, net income of taxpayer, 27 1/2 percent of gross income, 50 percent of net income, and allowable depletion.
During the same period between June 1, 1919, and December 31, 1924, the Wyoming Associated Oil Corporation expended sundry sums of money for the acquisition of adverse titles or outstanding interests in land so held by it, which sums constituted additional capital investment by it in said lands. The*706 amounts have been distributed by the Wyoming Associated Oil Corporation over the several tracts benefited thereby in the amounts and years tabulated and also stipulated.
About February 1, 1923, the Wyoming Associated Oil Corporation, the Midwest Oil Co., and the Wyoming Oil Fields Co. entered into an agreement with the Midwest Refining Co. in which the first three named parties are called "Producing Companies" and the Midwest Refining Co. is called "Refining Company." The producing companies owned certain leases covering lands in the Salt Creek Oil Field, Natrona County, Wyoming, as follows: The Midwest Oil Co. and the Wyoming Associated Oil Corporation each owned an undivided 50 percent interest in the so-called "Schoonmaker Lease." The Wyoming Associated Oil Corporation and the Wyoming Oil Fields Co. each owned an undivided 50 percent interest in the s0-called "Iba Lease." The Midwest Oil Co. and the Wyoming Associated Oil Corporation each owned an undivided 50 percent interest in the so-called "Stock Lease." The Midwest Oil Co., for the benefit of itself and the Wyoming Associated Oil Corporation, owned an undivided 50 percent interest for each in the so-called "State School*707 Lease" covering the aforesaid school section 36.
It was agreed that from February 1, 1923, until January 1, 1934, the producing companies would, subject to certain conditions (not necessary to be here set out), sell, exclusively, unto the refining company all the oil produced from said lands (except oil used for drilling, etc.) upon a sliding scale of prices fully stipulated, but not here necessary to be set out.
*413 From the date of the agreement until January 1, 1934, the producing companies were to give the refining company free use of all storage facilities, pipe lines, buildings, and equipment owned by the producing companies or either of them, upon said lands and also give, free of charge, oil and gas reasonably necessary for drilling, for domestic service, and for production thereon.
The refining company agreed to purchase from the producing companies currently as produced all of the oil of the several producing companies (except oil for drilling, etc.) at the prices indicated in the contract. The contract provided in part:
From the date of this Agreement until the First day of January, 1934, as part of the price for oil purchased hereunder, the Refining*708 Company will drill, case and maintain all wells, find and supply water, install and operate pumps when necessary, clean, shoot and otherwise stimulate production of wells as necessary, and conduct all development and production operations upon said lands necessary or proper for the protection and conservation of the oil and gas contained therein and for the production of oil therefrom in such amounts and from such wells as will prevent the drainage of the oil content of said lands through wells belonging to other operators, and will, at all times, during said term, maintain the development of and production from said lands at such rate that the production of oil therefrom shall be proportionate to the production of oil in other parts of the Salt Creek Field. * * *
It was further provided in the contract that the "Refining Company will take delivery of the oil purchased hereunder at the outlet gates of the measuring tanks located at or near the wells on said lands."
The contract also provided that:
Section Thirty-six (36) is subject to royalties in favor of the State of Wyoming, and that the other tracts of land are severally subject to various royalties in favor of others, and*709 it is agreed that whenever the State of Wyoming, or any other royalty owner having the ritht to take his royalty in kind shall elect to exercise such right, then the royalty oil, with respect to which such right is exercised, shall not be subject to this purchase agreement but shall be delivered by the Refining Company to such royalty owner in accordance with such directions as the royalty owner may rightfully give therefor, but the Refining Company shall have the right, if it and royalty owner can reach an agreement, to purchase any such royalty oil from the owner thereof on any terms mutually agreeable to them.
Royalty paid the State of Wyoming was in barrels of oil in kind and such practice prevailed from 1924 to 1934. Royalties taken in kind were divided at the pipe line and payment was made to the three producing companies for their share of the oil after the oils in kind were taken.
When the oil came from the wells it went into the battery tanks, was steamed, impurities taken out, and the clean oil run from the battery tanks to the pipe line; and that part that was delivered to the state was delivered at the battery tanks.
*414 The proceeds of the sale of oil*710 not delivered to the state were divided 50-50 between the Wyoming Associated Oil Corporation and the Midwest Oil Co. in the year 1925.
Before the oil left the battery tanks and went into the gathering lines, a representative of the Wyoming Associated Oil Corporation checked the gauging, supervised the run, and signed the run checks that were forwarded to its Denver office.
The properties - section 36 as well as the others - were operated by the Wyoming Associated Oil Corporation through the agency of the Midwest Befining Co., the latter conducting the actual operations.
The contract also provided: "The Producing Companies may, at all times, maintain gaugers and inspectors upon their said lands, and shall be furnished by the Refining Company with monthly statements", giving full information as to oil produced from said lands, as to certain sales, gross price, etc.
Also, on February 1, 1923, the Wyoming Associated Oil Corporation and the Midwest Refining Co. entered into a contract, the former being referred to therein as "Producing Company" and the latter as "Refining Company." This contract in its terms was identical or in substance the same as the contract last described, *711 with reference to its effective date, duration, sale of oil exclusively to the refining company, upon a sliding scale, etc., stipulated, as are the lands therein involved.
On or about April 19, 1923, the State of Wyoming, through its State Board of Land Commissioners, leased to the Midwest Oil Co. all of the aforesaid section 36, in Natrona County, Wyoming, for the purpose of drilling, boring, operating for, and producing mineral oil and gas for a term of five years beginning on October 1, 1924. The lease agreement is lengthy and its many provisions and conditions need not be here set out. As a consideration for the lease a certain royalty was to be paid by making "delivery of the royalties in kind * * * to the Mutual Oil Company as the representative" of the state. No assignment of the lease was permitted without the consent of the state. The lease was executed by the president of the State Board of Land Commissioners and the Midwest Oil Co. The lease was to be construed under the provisions of the laws of the State of Wyoming. It supplanted a somewhat similar lease which bore date of October 1, 1919. It was agreed in the latter lease that its execution constituted a surrender*712 of a lease of the same section, dated December 31, 1914, though December 26, 1914, was evidently intended. The lease of December 26, 1914, was of the same section, between the same parties and for the period of five years from January 1, 1915. This lease provided that as a consideration for the granting of the lease the Midwest Oil Co. agreed to surrender to the State of Wyoming its lease to the same land dated *415 January 4, 1910, issued to William M. Fitzhugh and assigned by him to the Midwest Oil Co., and it was expressly "stipulated and agreed by the parties hereto that said lease and all the rights of the party of the second part thereunder shall cease and terminate at midnight of the night of December 31, 1914."
The lease of January 4, 1910, by the State of Wyoming to William M. Fitzhugh above referred to was for a period of five years from that date, money royalties to be paid in advance, annually, on January 4th of each year.
It is stipulated that if the Board should find that the amount of $185,438.83 added to taxable income in the deficiency notice is exempt from taxation, then the deductions allowed in the deficiency notice should be reduced in the amount*713 of $45,927.12 representing the depletion applicable to this income, and in the amounts of $5,602.81 and $18,431.11 representing taxes and royalties which were allowed as deductions in the deficiency notice.
The average field price of oil or market price of oil in the Salt Creek Field, Wyoming, during the year 1925 was $1.808605 per barrel.
The consolidated return filed by the Mountain Producers Corporation and the Wyoming Associated Oil Corporation for the year 1925 was on an accrual basis and did not include as income any amount expended by the Midwest Refining Co. under contracts made by it with the Wyoming Associated Oil Corporation, the Midwest Oil Co., and the Wyoming Oil Fields Co., and none of said amounts were entered as income on the books of the Wyoming Associated Oil Corporation or the Mountain Producers Corporation. Said return included in gross income the net prices actually received pursuant to said contracts. The return computed depletion, in so far as depletion consisted of 27 1/2 percent of the gross income from the property, by taking 27 1/2 percent of an amount consisting of the barrels of oil produced from the properties of the company at the market price*714 of oil in the field at the date of production.
The fair market value at February 2, 1914, April 3, 1914, and April 10, 1916 (so recited in stipulation, though July 10, 1916, probably intended), of the interests transferred in trust on those dates to predecessor owners of the Wyoming Associated Oil Corporation as set forth in the stipulation is agreed to be, for the purposes of this proceeding, the fair market value at March 1, 1913, of the same interests in said properties, and the total value of the interests transferred as stated on above dates, it is agreed, aggregates 38 percent of the fair market value of March 1, 1913. It is further agreed that a true copy of the deficiency notice is attached to the amended petition herein.
*416 For the year 1925 the petitioner paid a total income tax of $271,342.32 at the dates and in the amounts set forth in the following schedule:
| Mar. 15, 1926 | $73,050.35 |
| July 1, 1926 | 57,402.69 |
| Aug. 19, 1926 | 5,218.12 |
| Sept. 11, 1926 | 67,835.58 |
| Dec. 14, 1926 | 67,835.58 |
| 271,342.32 |
The income tax return of petitioner herein was filed in the office of the collector of internal revenue for the district of Colorado*715 at Denver, Colorado.
The unrecovered capital sum of the Wyoming Associated Oil Corporation as of January 1, 1925, returnable through depletion upon the basis of cost, but without any reference to percentage depletion as provided for in section 204(c)(2) of the Revenue Act of 1926, of the rights, properties, and interests of the Wyoming Associated Oil Corporation owned and held as of January 1, 1925, omitting any reference to the aforesaid school section 36, is stipulated and in the aggregate amounts to $11,607,199.93.
The unrecovered capital sum of the Wyoming Associated Oil Corporation as of January 1, 1925, returnable through depletion upon the basis of cost, but without any reference to percentage depletion as provided for in section 204(c)(2), supra, with respect to the aforesaid school section 36 is $233,817.
OPINION.
SEAWELL: 1. There is no controversy as to the right of the Wyoming Associated Oil Corporation to an allowance for depletion on its interest in the properties in question; nor is there any dispute as to what the allowable depletion is, on the basis of cost, which is stipulated. The main problem for consideration and determination is what is meant*716 by "gross income" for the purpose of computing depletion on the percentage basis. There is no disagreement on the proposition that the taxpayer may avail itself of whichever basis results in the greater depletion.
Under the contracts between the Wyoming Associated Oil Corporation and the Midwest Refining Co., the latter company took delivery of the oil purchased "at the outlet gates of the measuring tanks located at or near the wells."
The average field price of oil or market price of oil in the Salt Creek Field, Wyoming, during the year 1925 was $1.808605 per barrel. In behalf of the Wyoming Associated Oil Corporation (and *417 in behalf of petitioner) it is contended that the "gross income" upon which depletion allowance of 27 1/2 percent applies should be based on the market value of the oil produced or at least on the amount actually received, plus the operating expenses of the Midwest Refining Co., which in the consolidated return was claimed as $2,215,862.23, now stipulated to be $2,816,520.04.
Section 204(c)(2) of the Revenue Act of 1926 provides:
In the case of oil and gas wells the allowance for depletion shall be 27 1/2 per centum of the gross income from*717 the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.
It is specifically stated in the statute that the allowance for depletion shall not exceed 50 percent of the "net income of the taxpayer (computed without allowance for depletion) from the property." We are of the opinion and hold that, in arriving at the amount of depletion allowable under said section, development expense should not be deducted from the gross income from the property in arriving at the net income therefrom for the purpose of applying the depletion limitation of 50 percent of the net income. See . In the instant case, in our opinion, it is logical to conclude that the words "gross income" to which the rate of 27 1/2 percent applies means the gross income of the Wyoming Associated Oil Corporation for the year 1925 from its property subject to depletion. *718 See .
It is argued in behalf of the petitioner that in the particular circumstances of the instant case, if the allowance for depletion on a percentage basis is limited to 27 1/2 percent of the amount actually received by the Wyoming Associated Oil Corporation for the oil produced from the properties subject to depletion, it does not receive as great an allowance as if it were operating the properties itself, since in that event the amount it received from the oil would be greater. Such might be the situation of any owner of oil properties which does not choose to operate its properties itself. It is the insistence of the respondent that the amount received by any holder of an interest in oil properties other than the one actually operating the property is the gross income which is subject to the 27 1/2 percent depletion deduction, and, regardless of the fact that such amount is net in so far as the cost of producing the oil is concerned, the taxpayer is not permitted in such cases to base the percentage allowance on the amount received plus the cost of operations or on the market price of the oil produced. *719 If the base determined by the *418 respondent for computing percentage depletion is not considered satisfactory, the taxpayer, as we have heretofore indicated, may compute its allowance for depletion on the basis of cost, if that method results in a greater depletion allowance. See section 204 (a) and (b) of the Revenue Act of 1926. .
There are numerous cases involving the application of percentage depletion, but we are aware of none in which the peculiar circumstances shown in the instant case were present.
In , the question for decision was as to the total allowance for depletion permitted and its apportionment between lessor and lessee where the income is derived from operation under an oil and gas lease. The Supreme Court decided the depletion allowance permitted an assignee or lessee named in an oil and gas lease should be limited to 27 1/2 percent of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer. The lessor, *720 likewise, was entitled to a depletion allowance of 27 1/2 percent of the gross income received by it from the oil and gas production. The royalties paid out by the Twin Bell Oil Syndicate were obviously a part of the gross income from the property, but nevertheless as held by the Supreme Court the royalties so paid could not be considered a part of the gross income to be used for computing the depletion allowable to the taxpayer.
It is insisted in behalf of the petitioner that under the provisions of the agreements with the Midwest Refining Co. whereby the properties were operated, the cost of the operations and development expenses were a part of the purchase price paid the Wyoming Associated Oil Corporation for the oil and should, therefore, be considered as a part of the "gross income from the property." It is not shown that the Wyoming Associated Oil Corporation included in its return for 1925 any such expense as part of its gross income. Such expense as the Midwest Refining Co. incurred in rendering alleged services to the Wyoming Associated Oil Corporation, under circumstances shown, was not, in our opinion and we so hold, income to the latter.
Under the contract between*721 the parties, the petitioner contends that the market value of the oil produced should be taken as the gross income for the purpose of computing percentage depletion, on the theory that the value of the services rendered by the Midwest Refining Co. in operating the leases was a part of the purchase price of the oil and that the value of such services should be assumed or considered to be the difference between the market value of the oil and the contract price.
*419 There is, in our opinion, no sound basis for the assumption that the value of the services rendered by the Midwest Refining Co. in producing the oil should be considered as a part of gross income of the Wyoming Associated Oil Corporation. It is natural and reasonable, however, to assume that the Midwest Refining Co., by purchasing all of the oil which was produced under the leases in question for a number of years and assuming the burden and risks incident to the operation and development thereof during that period, paid less for the oil than if it were buying the oil on the open market after it was produced and without assuming any burden in connection therewith. The value fixed or placed by the parties upon*722 the services rendered would seem to be none other than the actual cost of such services, which is the amount actually expended by the Midwest Refining Co. in producing the oil and not necessarily the difference between the market value and the contract price of the oil. There is no evidence nor reason apparent to us to justify the assumption that such costs as stipulated do not represent the full cost of operation of the properties.
Cases in which taxpayers are permitted to use the field market price for the purpose of computing depletion are those in which the product was not sold until it had been converted into a refined product or transported a considerable distance to the consumer. A portion of the selling price in that event naturally represented an amount received for the conversion or for the transportation which can not be used as the basis for computing depletion. See ; affd., ; certiorari denied, ; ; affd., *723 ; certiorari denied, ; ; affd., ; certiorari denied, .
In the class of cases cited, supra, it was necessary to allocate the amount received, and the market price of the oil was assumed to be the portion of the selling price which was received for the raw product, the balance representing the amount attributable solely to manufacturing and transporting the product.
The market price of the oil in those cases was merely used as a basis of allocation of the total amount received in the absence of a more definite basis for determining the amount of gross income subject to depletion or in cases where the gross income could not be otherwise ascertained.
In the instant case, the Wyoming Associated Oil Corporation did not conduct any manufacturing operations or transport the product to individual consumers; in fact, it did not itself operate the property *420 and produce the raw material. There is, therefore, nothing to allocate or segregate in this case.
*724 The respondent allowed percentage depletion on the gross income which the Wyoming Associated Oil Co. is shown to have actually received in 1925 pursuant to the contracts entered into in 1923, and to allow such sum to be arbitrarily increased by the amount of operating expenses of the Midwest Refining Co. or to the market price of the oil in effect during 1925, we hold, would be allowing the Wyoming Associated Oil Corporation depletion on a basis in excess of that authorized by the statute. Any allowance for depletion is a matter of grace and unless Congress has provided for depletion there can be no deduction therefor. ; certiorari denied, . Congress no doubt intended that the allowance for depletion be as uniform as possible, though at times it might appear that there were "unjust and unequal results."
The fact that the Wyoming Associated Oil Corporation, by reason of its failure to operate its oil properties itself, may receive, as heretofore indicated, less depletion than it would have received had it operated them or less*725 than other taxpayers who operated their own similar properties is immaterial. There are many reasons why the depletion allowance to the taxpayer may not be the same where it operates the properties and where it does not. Many different facts and circumstances must be taken into consideration in determining the depletion in different cases and naturally, in consequence, depletion results may vary. While this was well known to Congress, it provided, as one of the methods that a taxpayer might adopt, that depletion may be computed at the rate of 27 1/2 percent of the gross income, though such income would vary in different cases and under different circumstances, as all taxpayers would not receive the same prices for their product and some might operate their properties themselves while others might do so through others, as was done in the instant case. In other words, Congress saw proper to base percentage depletion allowance on gross income actually received by the taxpayer from its property or interests therein.
The record shows that the respondent in his computation of the 27 1/2 percent depletion used as a base the amount of gross income which the Wyoming Associated Oil Corporation*726 actually received from the Midwest Refining Co. during 1925. We are of the opinion and hold that no error was committed in using such base for that computation. We think, for reasons briefly stated herein, that the base for computing percentage depletion should not, in the particular circumstances of this case, be either the market price of the oil produced from the said properties or the amount of money received *421 by the Wyoming Associated Oil Corporation from sale of oil to the Midwest Refining Co. increased by the amount of the cost of services rendered by the Midwest Refining Co. in the matter of the oil production.
2. The second assignment of error is based primarily on the decision of the Supreme Court of the United States in . In that case, which followed the court's earlier decision in , the Supreme Court held that the income derived by the Coronado Oil & Gas Co. under oil and gas leases executed to it by the state upon portions of the public school lands of the state was exempt from Federal income tax, for the reason that the leases to*727 the said company were instrumentalities of the state for the purpose of "carrying out her duty in respect of public schools. To tax the income of the lessee arising therefrom would amount to an imposition upon the lease itself." In so deciding, the Court stated that the doctrine of , should be applied "strictly and only in circumstances closely analogous to those which it disclosed."
The respondent contends that the circumstances of the instant case are not "closely analogous" to those in ; that the instant case is clearly distinguishable from it and therefore not controlled by the principle therein enunciated and applied.
On February 1, 1923, a trust agreement was entered into between the Midwest Oil Co. and the Wyoming Associated Oil Corporation, under which the Midwest Oil Co. was to hold in trust for the Wyoming Associated Oil Corporation one-half the benefits and net proceeds realized by the Midwest Oil Co. from a lease of October 1, 1919, which it held from the State of Wyoming, covering school section 36 embraced in the trust.
The lease agreement of October 1, 1919, was*728 superseded by another lease, dated April 19, 1923, between the same parties. It was this latter lease that was in force during the taxable year (1925) involved herein. It was executed between the State of Wyoming and the Midwest Oil Co. solely. It contained a provision against assignment to any one without the consent of the State of Wyoming. The record does not disclose any assignment thereof, either with or without such consent.
The income which the Wyoming Associated Oil Corporation received from the aforesaid school section 36, held by the Midwest Oil Co., was by virtue of the declaration of trust of February 1, 1923, made by the Midwest Oil Co. prior to the lease of April 19, 1923, which superseded that of October 1, 1919. There was no lease of said land to the Wyoming Associated Oil Corporation by the *422 State of Wyoming. The Wyoming Associated Oil Corporation had no contractual relationship with the State of Wyoming, which leased said school land section in question to the Midwest Oil Co., solely.
The burden of operating the lease, the payment of royalties, and the responsibility for compliance with the numerous provisions of the lease agreement rested directly*729 upon the Midwest Oil Co., which was solely responsible to the State of Wyoming. The declaration of trust under which the Wyoming Associated Oil Corporation realized its income from this school land, in our opinion, is not an instrumentality of the State of Wyoming through which the state exercised sovereign power of maintaining and operating its public schools. Therefore, the situation, in so far as the Wyoming Associated Oil Corporaiton is concerned, not only is not "closely analogous" to the situation in , but is different in the material point which entitled the Coronado Oil & Gas Co. to tax immunity in that case.
The facts and circumstances in the instant case are not in all respects the same as those in ; affd., ; certiorari denied, , but, in our opinion, are sufficiently similar in their essential aspects to make applicable and controlling, on the issue now being discussed, the principles therein enunciated and the authorities therein cited. In the Wanless Iron Co. case, supra, the petitioner claimed exemption*730 from tax on income realized by it on certain mineral lands owned by the State of Minnesota and leased to one Wanless, who assigned the leases to the petitioner therein, and, subject to subsequent subleases, the petitioner had since been the owner of the leases. Neither the original lessee and assignor nor the petitioner, the assignee and sublessor, ever extracted or sold ore from the lands. The sublessees were the only ones that produced and sold ore from the lands. The royalty paid the state was by the sublessees. The petitioner there paid no royalty to the state. Its claim of tax exemption in the circumstances of that case was denied by the Board, and the determination of the Board was affirmed by the United States Circuit Court of Appeals, as heretofore stated.
In the Wanless case the original lease provided that the lessee might sublet the same. In the instant case there was no such provision, but, on the contrary, one against assignment without approval of the state, the laws of Wyoming forbidding the assignment of state mineral leases except upon its written consent. See Wyoming Revised Statutes, 1931, Ann., ch. 91, art. 806.
Under the agreement of February 1, 1923, referred*731 to in our findings of fact, it is the Midwest Refining Co. that contracted to do the actual operations under certain leases (which included the school land heretofore mentioned) in the Salt Creek Oil Field.
*423 As stated by the Court of Claims in , "The immunity from taxation applies only where the tax would be a real and direct burden upon the state's exercise of its governmental functions." See same case, ; certiorari denied, . There is no proof here that the tax asserted would be a "real and direct burden" upon the State of Wyoming. Nothing in the record indicates that the imposition or payment of the tax asserted in this instance would in any way burden or interfere with the state in the exercise of its governmental functions. The execution of the declaration of trust of February 1, 1923, which entitled the Wyoming Associated Oil Corporation to share equally with the Midwest Oil Co. in the benefits and proceeds derived from the lease of section 36, was a distinct transaction and trust between private owners to which the state was not a party and the income*732 realized as a result thereof is, in our opinion, in the same status as income realized from the sale of a state lease, which was held not to be exempt in the Marland case above cited and in . See also , in which an exemption was denied to income realized from the sale of municipal bonds the interest on which is exempt from tax. (Ct. Cls.); ; and . Cf. .
The income which the Wyoming Associated Oil Corporation received from the said school land section 36 was by virtue of the declaration of trust in its favor by the Midwest Oil Co. Such did not create any privity of contract or constitute any contractual relationship whatever with the State of Wyoming.
It is insisted by petitioner's counsel that the exclusion from consideration herein of oral evidence tendered for the purpose of showing that the State of Wyoming recognized*733 the Wyoming Associated Oil Corporation as its direct lessee of said school section is error. The evidence offered was received in order that the record might show what it was, but it was with the understanding that it would be stricken as inadmissible upon respondent's objection then made, petitioner's counsel being granted an exception to such action so taken. We think and hold that in so ruling no error was committed. The lease of the school section of land by the State of Wyoming was made in writing to the Midwest Oil Co. and only to it. The oral testimony offered and excluded from consideration in the determination of the issue involved would (if admitted and considered) have violated a well recognized rule of evidence. "Parol testimony can not be received to contradict, vary, add to or subtract from the terms of a valid written instrument." Jones on Evidence (Civil Cases, *424 3d Ed.), sec. 434, p. 656. See also ; , in effect affirming *734 ; certiorari denied, .
After carefully considering the evidence, arguments, and authorities relative to this issue, though all have not been discussed herein, we are of the opinion and hold that the respondent did not err in his determination that the $185,438.83 added to taxable income in the deficiency notice is not exempt, but is subject to income tax.
3. The third assignment of error relates to depletion and the cost basis to be used in computing depletion in lieu of percentage depletion in the event that depletion based on cost should be greater than such percentage depletion. The stipulations enumerate the numerous tracts involved, including the aforesaid section 36, and state as to each the unrecovered capital sum returnable on January 1, 1925, through depletion upon the basis of cost.
The petitioner contends that it is entitled to a greater amount of depletion than was allowed under the percentage computations as computed and allowed by the respondent. We have herein determined the principles to be applied in determining the 27 1/2 percent depletion based upon gross income and also those applying to depletion based*735 on cost.
Under the facts as stipulated and established by evidence, we are of opinion and hold that the petitioner is entitled to a recomputation under Rule 50 and to have allowed as depletion whichever amount is the greater - depletion based upon cost, or percentage depletion based upon gross income computed as we have indicated.
Decision will be entered under Rule 50.