*590 1. Petitioner's contention that it was a member of a partnership in the taxable year 1924 and therefore entitled to deduct in its return a portion of the loss thereof is denied for lack of evidence.
2. Undepleted cost, less salvage, of individual oil wells upon tracts containing other producing wells disallowed as a deduction upon abandonment because of cessation of production.
*1130 This proceeding is for the redetermination of deficiencies in income tax of $16,130.48, $12,861.85, and $4,604.16 for 1924, 1925, and 1926, respectively. The matters in controversy are the correctness of the respondent's action (1) in failing to allow as a deduction, in 1924, the amount of $15,169.42, representing a loss alleged to have been sustained as a member of a partnership, Medina Refining Co.; (2) in failing to allow as a deduction, in 1924, the amount of $19,747.18 representing a loss on the abandonment in that year of two oil wells known as Burke Nos. 8 and 10; (3) in failing to allow as a deduction, in 1926, the amount of $34,562.54*591 representing a loss sustained on the abandonment in that year of three oil wells known as Burke Nos. 4, 6, and 9; and (4) in not allowing a deduction in 1926 of $1,936.98, as a loss sustained on the abandonment in that year of Brewer No. 1 well.
FINDINGS OF FACT.
The petitioner, a Texas corporation, with its principal place of business at San Antonio, was engaged in the production of oil in Navarro County, Texas, during the years under consideration. Claude L. Witherspoon, its president, owned more than 90 percent of its capital stock.
Medina Refining Co., a copartnership, organized at some time early in 1921 by said Witherspoon and C. Kurz - their respective interests being two-thirds and one-third - was engaged solely in the operation of an oil pipe line extending east and west approximately ten miles distant from a small refinery operated by Southern Refinery Co., its sole customer, at Somerset Field, Bexar and Atascosa Counties, Texas.
In or about March 1922 Witherspoon sold one-thirtieth of his interest in Medina Refining Co. to Lindsey J. Frye. Thereafter, in or about the same month, he "sold" the remainder of his said interest to his daughters, in equal proportions, *592 taking the promissory note *1131 of each aggregating an amount equal to the cost of such interest to him. Kurz assented to these transactions. Witherspoon continued in the active management of the business, however. His daughters took no active part therein.
In or about March 1924 Witherspoon's daughters "sold" and assigned their said partnership interests in Median Refining Co. to the petitioner. Such interests were recorded in the books of account on September 30, 1924, as having been acquired by Witherspoon, personally. Another entry was made in the books of account, after dissolution of the partnership took place, but "as of" September 30, 1924, recording the acquisition by the petitioner instead. In October of that same year the assets - principally pipe line - were divided, Kurz taking the east end of the pipe line and Witherspoon Oil Co. the west end, whereupon, it went into dissolution.
The respondent disallowed a deduction of $15,169.42 in 1924, claimed as the petitioner's portion of an alleged partnership loss sustained by Medina Refining Co., on the ground that the petitioner was not a member of the partnership.
In 1923 the petitioner was the owner*593 of a lease known as the Burke lease, covering 69 1/2 acres of land situated in Navarro County. About one-half of this acreage was found to be productive of oil and ten wells were drilled on this part of the lease. The first well drilled was completed on June 30, 1923, and the second on August 23, 1923. Wells drilled on the lease, known as Burke Nos. 8 and 10, were completed on October 23, 1923, and during the month of January 1924, respectively. Burke No. 8 produced oil in commercial quantities for seven or eight months while Burke No. 10 produced for only about three months. After these wells began producing the petitioner incurred some unusual expenditures in order to render them better producers since they were producing so much water and so little oil. In the latter part of 1923 the petitioner completed, on said lease, wells known as Burke Nos. 4, 6, and 9. These wells produced oil in commercial quantities for a period of about two and one-half years. In 1924 the petitioner abandoned Nos. 8 and 10 and in 1926 it abandoned Nos. 4, 6, and 9.
In the form O submitted by the petitioner in connection with its income tax return for 1923 the petitioner set up an estimated reserve*594 for the productive portion of the lease of some undisclosed amount and a discovery value of the lease of $1,003,496.25. The amounts of such reserve and discovery value thus set up (by the petitioner) were accepted by the respondent, who allowed depletion and depreciation based on such figures.
The cost, tangible and intangible, of each well drilled was capitalized and carried separately on the petitioner's books. Except for *1132 the first well drilled, and then only until the second well was brought in, the petitioner kept no production records of individual wells as the production from all the wells was run into field tanks where a production gauge was made of the oil.
The total cost of the properties and developments, tangible and intangible, on the Burke lease was $207,787.32. The cost, together with developments, all of which were capitalized by the petitioner, and the salvage value at the time of abandonment, were as follows with respect to the wells in controversy:
| Wells | Cost | Salvage value |
| Burke No. 8 | $16,637.41 | $3,808.77 |
| Burke No. 10 | 15,404.84 | 2,779.02 |
| Burke No. 4 | 16,342.74 | 500.00 |
| Burke No. 6 | 19,821.30 | 500.00 |
| Burke No. 9 | 20,549.78 | 500.00 |
*595 Depletion and depreciation allowed by the respondent with respect to the burke lease, and the physical properties thereon, were as follows:
| Year | Depletion | Depreciation |
| 1923 | $206,825.73 | $16,115.18 |
| 1924 | 18,898.91 | 7,117.82 |
| 1925 | 35,821.94 | 2,227.05 |
| 1926 | 16,939.38 | 1,587.47 |
In 1926 the petitioner was the owner of a lease, known as the Brewer lease, on a tract of land containing 30 acres, on which were ten wells. A well known as Brewer No. 1 was the discovery well and it produced oil in commercial quantities for about a year. This well was abandoned by the petitioner in 1926. The cost of the drilling and developments on the lease was $154,942.65. The cost of Brewer No. 1 well, together with tangible and intangible properties, was $6,251.92 and the salvage value was $749.56. Depletion and depreciation allowed by the respondent with respect to the Brewer lease and the physical properties thereon were as follows:
| Year | Depletion | Depreciation |
| 1925 | $75,815.44 | $22,209.84 |
| 1926 | 1,059.39 | 2,815.16 |
In its return for 1924 the petitioner took a deduction of $19,747.18, as a loss sustained on the abandonment of the Burke Nos. 8 and 10*596 wells. In its return for 1926 it took a deduction of $34,562.54, as a *1133 loss sustained on the abandonment of Burke Nos. 4, 6, and 9 wells, and a deduction of $1,936.98, as a loss sustained on the abandonment of Brewer No. 1 well. The amounts of the foregoing deductions were computed by the petitioner in the following manner:
| Burke No. 8 | Burke No. 10 | Total loss | |||
| Cost | $16,637.41 | $15,404.84 | |||
| Less: | |||||
| Depletion and depreciation | $2,995.57 | $2,639.71 | |||
| Salvage | 3,880.77 | 2,779.02 | |||
| 6,876.34 | 5,418.73 | ||||
| Loss | $9,761.07 | $9,986.11 | $19,747.18 |
| Burke Nos. 4, 6 and 9 | Brewer No. 1 | ||
| Cost | $56,713.82 | $6,251.92 | |
| Less: | |||
| Depletion and depreciation | 22,151.28 | $3,528.38 | |
| Salvage | 794.56 | ||
| 4,322.94 | |||
| Loss | $34,562.54 | $1,928.98 |
Petitioner did not keep separate depletion and depreciation accounts for each well. Such charges, when made, were in a lump sum for the entire Burke tract. As entries for depreciation and depletion were made as to each well a computation became necessary. The amounts used by the petitioner as depletion and depreciation in determining the loss on the abandonment of these*597 wells was computed in the following manner:
The amount of depletion to be deducted for any given taxable year with respect to the lease as a whole was determined by dividing the amount of oil produced for that year into the amount of the reserve of estimated recoverable contents, thus obtaining the unit of depletion. The cost or other basis of the property was divided by the unit of depletion thus obtained to arrive at the amount of deductible depletion. The amount of depletion was then apportioned among each of the wells on the basis of the number of months that each well was producing. The amount of depletion allocable to a well down to the time of abandonment was used in computing the loss sustained on abandonment. The same method of apportionment was followed with respect to the computation of the depreciation allocable to the physical assets involved.
The respondent determined the total amount expended on all wells upon the tract for intangible and other drilling costs, which sum he divided by the total number of barrels of oil estimated to be produced from the property, each barrel of oil so produced receiving its pro rata of the cost of all wells upon the tract. By*598 his method each *1134 barrel of oil, as and when produced, was credited with its proportion of depletion for the entire tract.
In determining the deficiencies for the years in controversy the respondent denied the deductions taken by petitioner as losses sustained on the abandonment of wells in those years.
OPINION.
MORRIS: The first question for our determination pertains to the deductibility of a proportionate part of the partnership loss sustained in the taxable year 1924 by Medina Refining Co., of which the petitioner contends it was a member. The respondent concedes the loss to be properly deductible if we find, as a matter of law, that the petitioner was a member of such partnership. While there are many factual obstacles which might, without more, defeat the petitioner's cause - such, for instance, as the failure of the petitioner to supply us with the details surrounding the sale of Witherspoon's Medina Refining Co. interest to his daughters and the resale of that interest back to the petitioner (instead of the legal conclusions of witnesses that such interest was "sold"); failure to supply us with the various agreements of copartnership, or the terms thereof, *599 or with the books of account of Medina Refining Co. to show who the partners of that company were at the various times alleged; the fact that it is not at all clear that the partnership interest purchased by Witherspoon's daughters was ever actually paid for - indeed, just the opposite appears, or that any legal consideration passed from the petitioner to them; and the fact that it does not appear that, although Medina Refining Co. earned large profits, distributions thereof were ever made to them, as partners - we believe it sufficient to rest our decision upon the failure to establish the exception to the general rule of law prohibiting corporations from becoming members of partnerships. .
In , a question was whether a corporation could legally become a member of a partnership, and in holding that it could not, the court said:
* * * Again, the appellant and the appellees Mexia Oil & Gas Company and Texas Gas Company are separate private corporations and there is no allegation or proof that either of them was authorized by its charter*600 to enter into private partnerships, and without such authority being so conferred they would not be authorized so to do. [Citations.] In the last-cited case it is said:
"Unless specially authorized to do so, corporations have no power to enter into partnership with other corporations or persons, and as the petition in this case failed to allege any such charter powers, it was insufficient to fix the liability of the Irrigation & Improvement Company as a partner." *1135 Also, in , it was said:
It is a well-established general rule that a corporation cannot form a partnership with another corporation, nor with an individual. The reason for the rule is that in entering into a partnership the identity of the corporation is lost or merged with that of another, and the direction and management of its affairs is placed in other hands than those provided by the law of its creation. Both the law and public policy forbids enforcement by the courts of such partnership agreements. [Citations.]
In *601 , the court said:
* * * The appellant was a corporation, and as a general rule cannot enter into partnership relations with other parties. But sometimes after the execution of such a contract courts will sustain the relation to prevent injustice. For a discussion on this point we refer to , rendered by Mr. Justice Boyce of this court. There will be no presumption that the parties intended to enter into an ultra vires contract, but the presumption is that they knew the powers of the corporation and the law with reference thereto, and that they intended to obey the law. The trial court was therefore justified in finding there was no partnership. * * *
See also , and .
The basic issue is clearly defined, i.e., whether the petitioner was a member of the partnership of Medina Refining Co. It neither alleges nor has it offered*602 proof that its charter authorized it to do so. Under the laws of Texas the general rule must apply except where there is some special charter authorization. The petitioner's charter has not been placed in evidence and we know nothing of its provisions. A matter so susceptible of proof does not warrant the substitution of conjecture. If such proof were favorable to the petitioner's cause is it not as reasonable to presume that it would have been supplied - that all doubt might be removed - as to presume that it acted lawfully under the circumstances, as it would have us do? The only reasonable inference to be drawn from the failure to make this simple proof, if infer we must, is that it would defeat the petitioner's cause. Upon this issue the respondent's determination must be approved.
Since the petitioner has assigned no error in the respondent's determination for 1925 it is approved.
The remaining three allegations of error pertain to the same question; i.e., may the petitioner deduct the undepleted and undepreciated cost, less salvage, in the taxable years 1924 and 1926, of oil wells known as Burke Nos. 8, 10, 4, 6, and 9, and Brewer No. 1, such *1136 wells having*603 ceased to produce and having been abandoned in these two taxable periods, in the computation of net taxable income.
Section 234 of the Revenue Acts of 1924 and 1926 provides in part as follows:
(8) 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; such reasonable allowance in all 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; * * *
Regulations 65, promulgated under the Revenue Act of 1924:
ART. 215. Computation of depletion allowance for combined holdings of oil and gas wells. - The recoverable oil belonging to the taxpayer shall be estimated for each property separately. The capital account for each property shall include the cost or value, as the case may be, of the oil or gas lease or rights plus all incidental costs of development not charged as expense nor returnable through depreciation. The unit value of the recoverable*604 oil and/or gas for each property is the quotient obtained by dividing the amount returnable through depletion for each property by the estimated number of units of recoverable oil and/or gas on that property. This unit for each separate property multiplied by the number of units of oil and/or gas produced within the year by the taxpayer upon such property will determine the amount which may be deducted for depletion from the gross income of that year for that property, subject, however, to the limitation contained in article 201(h). The total allowance for depletion of all the oil and/or gas properties of the taxpayer will be the sum of the amounts computed for each property separately. However, in the case of gas properties the depletion sustained for each pool may be computed by using the total amount returnable through depletion of all the tracts of gas land owned by the taxpayer in the pool and the average decline in rock pressures of all the taxpayer's wells in such pool in the formula given in article 212. The total allowance for depletion in the gas properties of the taxpayer will be the sum of the amounts computed for each pool.
ART. 201. (c) A "mineral property" *605 or "property" is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface only as is reasonably expected to be underlaid with the mineral. The value of a mineral property is the combined value of its component parts.
Regulations 69, promulgated under the Revenue Act of 1926:
ART. 211. (b) When the value of the property at the basic date has been determined and the allowance is based upon such value, depletion sustained for the taxable year shall be computed by dividing the value remaining for depletion by the number of units of mineral to which this value is applicable, and by multiplying the unit value for depletion, so determined, by the number of units sold within the taxable year. Such depletion deduction is subject, however, to the limitation in article 201(h). In the selection of a unit for depletion preference shall be given to the principal or customary unit or units paid for in the product sold.
ART. 201. (c) A "mineral property" is the mineral deposit, the development and plant necessary for its extraction, and so much of the surface only as is *1137 reasonably expected to be underlaid with the mineral. *606 The value of a mineral property is the combined value of its component parts.
In so far as the amounts here claimed represent undepreciated costs of physical assets - other than those held includable in depletable cost in ; ; and - the petitioner is entitled to deductions upon abandonment of the wells to which they relate. , and .
This leaves for consideration whether the costs of preliminary development and drilling of the wells in question, exclusive of the costs of physical property which is subject to depreciation, may be deducted as a loss when the wells were no longer commercially profitable. The petitioner's claimed deduction is based on the theory that the entire cost of any particular well should be recovered ratably over the production of that particular well. The respondent treated the producing tract as a unit, applying against each barrel of oil produced the depletion unit*607 derived from the total cost of all wells and estimated recoverable oil. Under his method each barrel of oil produced is burdened with an equal proportion of the cost of all wells on the tract. That method obviously precludes such a deduction as the petitioner claims, as long as the entire tract is not abandoned.
Because of the recognized difficulties in the computation of depreciation and depletion the Congress expressly delegated the right to make rules and regulations therefor. ; ; certiorari denied, . Article 215 of Regulations 65 prescribes how the reasonable allowance for depletion authorized by the statute shall be computed. It is therein provided that the allowance shall be based upon the production of each separate property which is defined as the mineral deposit (art. 201(c) ), or separate tracts or leases of the taxpayer (art. 221, Regulations 69). That article further provides that the unit of depletion for each separate property, multiplied by the number of units produced within the year upon such property, will*608 determine the amount which may be deducted for depletion from the gross income of that year. This clearly indicates that all costs recoverable through depletion are to be returned over the producing life of the tract or property, which was the principle followed by the respondent in this proceeding. To hold otherwise would necessitate constant revision of the depletable base with corresponding change in the unit of depletion. Depleting on the basis of the entire property returns to the taxpayer all his costs providing his estimate of recoverable oil is fairly accurate. Such a method removes the uncertainties that are inherent in the petitioner's method. *1138 Subsequent regulations have carried the same interpretation of similar provisions of the statute. This interpretation, which is reasonable and practical, must be regarded as having the approval of Congress. ; , .
Under the 1926 Act the taxpayer was permitted to calculate depletion upon the basis of cost alone (sec. 204(c)), *609 or else to deduct 27 1/2 percent of gross income from the property without reference to cost or discovery value (sec. 204(c)(2)). In , the Court held that there was no ground for supposing that Congress, by providing a new method for computing the allowance for depletion, intended to narrow the function of that allowance but that depletion includes, under the 1926 Act, precisely what it included under the earlier acts. It then used the following language:
Article 225 [Regulations 69] limits the depreciation for which an allowance may be made to that of "physical property such as machinery, tools, equipment, pipes" etc. We do not doubt that the effect of this language is to require the taxpayer to look to the depletion allowance, in this case 27 1/2 per cent of gross income, for a return of the costs of developing and drilling the well, which are involved here.
It was likewise held in , that when a taxpayer elects to take the percentage depletion that allowance covers all elements of depletion.
The statute provides for a reasonable*610 allowance which connotes as accurate a determination as is possible to accomplish the purpose of its enactment. One defect is immediately noticeable in the application of the facts to the petitioner's theory, even assuming its soundness. The petitioner kept no production records of the individual wells after the second well was brought in. All the oil was run into field tanks where a gauge was made of the production of the entire tract. It was therefore impossible for it to determine, based on actual production of any well, the amount of depletion that particular well had sustained and consequently the remaining costs to be recovered. It substituted average for actual production; that is it divided the total production by the number of producing wells, thus arriving at an average production per well and used that average as the prior sustained depletion of the wells in question. That these wells were not average is evidenced by the fact that their productive life was considerably shorter than their estimated life, although extra measures were taken to keep them at profitable production. The computation of sustained depletion upon that basis in order to arrive at the unrecovered*611 costs distorted those costs by the difference between the actual and average production. The petitioner *1139 computed separate depletion upon the wells in question only for the purpose of the deductions in controversy. In so doing, reasonable accuracy, as contemplated by the statute, was sacrificed.
The respondent's determination on this point being in accordance with the regulations, which are a reasonable interpretation and application of statute, is sustained.
Reviewed by the Board.
Judgment will be entered under Rule 50.