1928 BTA LEXIS 4280">*4280 Depreciation on equipment of oil wells allowed on a unit-of-production basis rather than a straight-line basis, since the useful life and value of such equipment depends on the rate of extraction of oil content.
9 B.T.A. 1206">*1206 This proceeding involves the redetermination of a deficiency in income tax for the year 1920, in the amount of $4,669.36. The only issue involved is whether petitioner is entitled to have an allowance for depreciation computed upon the unit-of-production basis rather than upon the straight-line basis.
FINDINGS OF FACT.
In the years 1919 and 1920, petitioner was the owner of a one-fourth working interest in an oil lease, known as the Prentice-Johnston 9 B.T.A. 1206">*1207 lease, on a tract of land in Creek County, Oklahoma. Development began on this lease in the latter part of 1919 and equipment for the extraction and preservation of the oil was erected on the leased premises. Petitioner's share of the cost of this equipment, during the year 1919, was $14,820.26 and during 1920, $54,941.69. His total investment in the equipment for both1928 BTA LEXIS 4280">*4281 years, was $69,761.95. The equipment consisted in part of derricks, tubing, casing, pumps, boilers and engines. In the year 1919, the oil reserve attributable to petitioner's interest in the lease was 142,000 barrels. The production attributable to petitioner's interest in the lease was in 1919, 2,363 barrels, and in 1920, 105,285 barrels. Respondent allowed petitioner a deduction for depreciation on a straight-line basis of 10 per cent. Upon the cessation of the flow of oil in profitable quantities, the equipment will have a value only for salvage purposes, which is $3,000.
OPINION.
MILLIKEN: The only question involved is whether petitioner is entitled to have depreciation computed on the unit-of-production basis rather than on the straight-line basis. Respondent has found that the equipment had a useful life of 10 years. Since 71 per cent of the oil in the reserve was extracted in the year 1920, the year here involved, it at once appears that the estimate of a 10-year life for the equipment bears no relation to the purpose for which the equipment was intended. Under respondent's allowance, only 10 per cent of the depreciation is allocable to 71 per cent of the total1928 BTA LEXIS 4280">*4282 contents of the reserve, while 90 per cent of such depreciation is allocable to 29 per cent of such contents. To put it another way, under respondent's computation, petitioner's allowance for depreciation will be effective in years in which the equipment is wholly out of use and at a time when he will be in receipt of no returns from his capital investment. In this proceeding, we have the total cost to petitioner of his share of the equipment and the amount of the salvage value thereof, the amount of oil in the reserve attributable to petitioner's interest and the amount of extraction for the taxable year. This case falls within the rule laid down in . Petitioner is entitled to have the depreciation computed upon the unit-of-production basis.
Judgment will be entered on 15 days' notice, under Rule 50.