*1137 1. Where the fee owner of real estate in Texas disposes of interests in oil and gas underlying her lands, retaining to herself an undivided fractional interest therein, held, such retained interest is property and subject to conveyance or transfer. Held, further, after conveyance or transfer of such property the income arising therefrom belongs to the new owner, the transferee, and is not taxable to transferor.
2. Fees paid attorneys for services rendered in defending against adverse claims respecting boundaries of lands, where no enlargement, or change of owner's existing rights is effected, held to be personal expenses for the deduction of which no provision is made by statute.
*33 This proceeding is for the redetermination of a deficiency in income tax of $42,997.82 for the year 1926, and $8,683.56 for the year 1927. The taxpayer having died, her executors have been substituted as petitioners herein. It is alleged that the respondent erred in (1) adding to gross income $189,755.11 for*1138 the year 1926, and $40,634.02 for the year 1927, as oil-royalty payments received by the petitioner; (2) disallowing the deduction from gross income in 1926 of $3,949.79, and in 1927 of $10,883.26, paid by petitioner as attorneys' fees and expenses of litigation.
FINDINGS OF FACT.
The original petitioner, Mrs. W. I. (M. M.) Cook, an individual residing at Albany, Texas, died February 22, 1932. On April 5, 1932, R. E. Nail and George Thompson, Jr., qualified as independent executors of her estate and were substituted as petitioners herein on motion granted May 16, 1932.
Petitioners' decedent was the owner of a tract of land in Shackleford County, Texas. On May 11, 1925, she entered into several oil and gas leases, reserving to herself one-eighth of the oil and gas produced, or the proceeds of sale thereof. Prior to the execution of the leases, she had conveyed an undivided one-sixteenth interest in the oil and gas "in and under" portions of said land, and the leases provided "that the lessee, its assigns and successors shall be entitled to receive 7/8ths of all the oil and gas in and under said land *34 and that 1/16th of said oil and gas heretofore conveyed shall*1139 be delivered or paid from the 1/8th royalty reserved in this lease."
Thereafter, on July 30, 1926, decedent created the W. I. Cook Memorial Trust, for the purpose of establishing a charitable hospital, and on that date by a written instrument recorded in Shackleford County, Texas, August 2, 1926, and included herein by reference, "granted, sold, conveyed, transferred and assigned" to the trustees, and their respective successors in trust, subject to the outstanding leases "all my present right, title and interest, both legal and equitable, now owned and possessed by me in and to all oil, gas and minerals of every nature and description, including casing head gas and casing head gasoline, in and under the following described tracts of land in Shackleford County, Texas, * * * subject to the following conditional limitations, which shall attach to this grant and conveyance, and constitute, in addition thereto, a covenant running with the title to said oil, gas and minerals," to wit:
* * *
2. This grant, transfer, assignment and conveyance of said oil, gas and minerals, is and shall be for a term of twenty (20) years from seven A.M. August 1, 1926, unless, and in the event, and*1140 should, the Trustees herein named, and their respective successor trustees, receive prior to the expiration of said twenty year term, gross income, without deduction for depletion, in the sum of Three Hundred Thousand ($300,000.00) Dollars, from the sale or other disposition of the Trustees' interest in said oil, gas and minerals, in and under the land hereinbefore mentioned; in either of which said events named, the term of this grant, assignment, transfer and conveyance having automatically expired, the title of said Trustees, and their respective successor trustees, in and to all of the then remaining oil, gas and minerals, in and under the land, hereinbefore referred to, shall thereupon immediately cease and terminate, and the full and complete title to all of such oil, gas and minerals, as then remain in and under the land hereinbefore mentioned, shall revert to and become reinvested in grantor, M. M. Cook, her heirs, devisees, assigns and legal representatives, free and clear of any further right, title, claim or interest, on the part of the Trustees named, and their successor trustees, * * * to vest in said Trustees herein named, and their respective successors, for the term*1141 of years herein stated, subject to termination prior thereto upon the happening of the contingency hereinbefore mentioned, that same and identical character of title denominated by the Supreme Court of Texas as "a determinable fee," as that term is particularly defined and approved by the Supreme Court of Texas in the case of Waggoner Estate vs. Sigler Oil Company, decided by the Commission of Appeals on the ninth day of June, 1926, and the authorities therein cited.
3. The present title of grantor, M. M. Cook, herein conveyed to the Trustees named, and to their successors in trust, in and to the oil, gas and minerals hereinbefore mentioned, shall be construed as evidencing an intention and purpose on the part of the grantor, M. M. Cook, to fully and completely now vest in said Trustees named, and their successors in trust, the present title of grantor, M. M. Cook, in and to said oil, gas and minerals hereinbefore referred to, for the term of years and upon the conditions and limitations herein set forth; and all gross income derived or received from the sale or other disposition *35 of said oil, gas and minerals, hereinbefore referred to, from and after seven A. M. August 1, 1926, shall*1142 constitute gross income belonging to the Trustees herein named and their respective successors in trust, * * *
5. Grantees herein named and their respective successor trustees shall never mortgage, encumber, or cause to be mortgaged or encumbered, or permit any lien or liens to be fixed or established, or any debts or obligation of any character to be created, which would operate to affect, cloud or diminish the reversionary interest of grantor, M. M. Cook, in and to the oil, gas and minerals in and under the land hereinbefore described; and this stipulation shall constitute a covenant running with the title to the oil, gas and minerals herein conveyed to grantees and their respective successor trustees; and should this agreement and covenant be violated by the Trustees herein named, or their successor trustees, their right, title, and interest in and to said oil, gas and minerals shall immediately, ipso facto, cease and determine, and neither they nor their respective successor trustees shall have, own or possess any further right, title or interest in and to said oil, gas and minerals, notwithstanding the term for which said grant and conveyance of said oil, gas and minerals, *1143 as provided for in paragraph 2, has not then expired.
On or about August 1, 1926, decedent executed transfer orders to the pipe line companies authorized to receive the oil, directing that credit for her entire interest in all oil produced from the property under the above leases be given to the I. W. Cook Memorial Trust. Exhibit 8, which is representative of these transfer orders, is included herein by reference.
At or about the same time division orders were executed by the trustees of the W. I. Cook Memorial Trust, and all other persons having an interest in the oil produced from the Cook lands under the leases. These orders were in the form of Exhibit 9, which is included herein by reference.
On December 21, 1926, sufficient oil had been produced and sold to entitle the W. I. Cook Memorial Trust to receive $300,000 gross income therefrom, and on January 26, 1927, the trustees executed a quitclaim deed in favor of Mrs. Cook, effective as of December 22, 1926, acknowledging that under the terms of the trust all of their right, title and interest in the remainder of the oil, gas and minerals in and under the leased lands ceased and terminated on December 22, 1926, and formally*1144 reconveyed all such interest to her as of that date.
The total payments received by the W. I. Cook Memorial Trust from oil and gas produced from the Cook lands from August 1, 1926, to December 21, 1926, inclusive, amounted to $302,365.61. Of this amount $261,731.18 was received by the trust in 1926 and $40,634.43 was received in 1927. These payments were made by the purchasers of the oil and gas by check direct to the W. I. Cook Memorial Trust, and were all used by the trust for the purposes set out in the trust agreement.
In computing the taxable income of the decedent for the years in question, the Commissioner included the amounts received by the *36 W. I. Cook Memorial Trust from the sale of oil and gas from the Cook lands in the respective years, less the allowance for depletion. The net amount so included for 1926 was $189,755.11, and for 1927 was $29,459.66.
After the discovery of oil on the Cook ranch the owners of adjoining lands on the east and south claimed title to a strip of land, along their boundary, which had been enclosed within the fence of the Cook ranch for more than thirty years. In November, 1926, certain actions were brought against Mrs. Cook*1145 and her lessees as joint defendants, wherein it was sought to recover title and possession of these strips of land, and damages on account of oil and gas removed therefrom. One of these suits, R. J. Moberly et al. vs. Mrs. M. M. Cook et al., was tried and decided in favor of Mrs. Cook. Thereupon the other suits were dismissed. Pending the outcome of this litigation the Humble Oil and Refining Company withheld payment for oil produced and sold to it from the strip of land involved. The amount thus impounded amounted to approximately $209,000; included in the amount was the Cook royalty interest. The costs of defending this suit were divided between the parties defendant upon the basis of their interest in the property involved, taking into account the money impounded by the Humble Oil and Refining Company, the oil remaining in and under the ground, and the surface value of the ground. Mrs. Cook's interest so computed was $66,000, made up as follows: Cash impounded, $26,000; oil in and under the ground, $36,000; surface value of ground, $4,000. Mrs. Cook expended, as her proportionate share of the costs in defending this suit, $3,949.79 in 1926 and $10,883.26 in 1927. *1146 The Commissioner refused to allow these expenditures as deductions in computing the net income of petitioner for the respective years.
OPINION.
GOODRICH: There is no question but that the amounts received from the sale of oil and gas constituted income within the meaning of the revenue acts and, ordinarily, are taxable. The issue here is, Whose income was it? Respondent contends the income belonged to petitioners' decedent, because decedent transferred only a right to receive income; petitioners contend that it belonged to the trust, because the trust was the owner of the property from which the income arose.
It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property, or property rights, are transferred the income subsequently arising therefrom is taxable, not to the transferor - for neither the property nor the income belongs *37 to him - but to the new owner. This principle is so familiar that citation or discussion of the many decisions of this Board and of the courts in which it is reiterated is unnecessary. It applies equally to real or personal property; consequently, it is here immaterial whether, *1147 under the taxing statutes, we regard the oil and gas interests owned by decedent as interests in real property or in personal property. It is only necessary to determine whether Mrs. Cook assigned income, or the property from which income arose. If the former, the income is taxable to her; if the latter, the income was not hers and she is liable to no tax thereon.
At the outset Mrs. Cook owned certain lands in fee. She first sold various undivided fractional interests in the oil and gas underlying certain parts of her property and thereafter, under the leases, disposed of a seven-eighths interest in the oil and gas underlying the entire property, retaining to herself the remaining undivided fractional interest, which varied in amount as to different parts of the property, according to her previous conveyances. It need not be argued that the several property interests embraced by a fee title may be severed and separately may be conveyed or dealt with otherwise. Under the Texas law this is so, particularly of mineral rights, including oil and gas. *1148 ; ; . The severance may be accomplished by a conveyance of oil and gas in place, , which vests title to the minerals themselves; . And, in Texas, oil and gas leases convey to the lessee an interest in the real estate, which is likewise the nature of the interest of the lessor respecting any undivided fractional share of the minerals retained by him under the lease. ; ; Group #, and other cases cited above.
Therefore, at the time she created this trust Mrs. Cook had, with respect to the oil and gas underlying her lands, an undivided fractional interest, recognized as an interest in real property, and she was to be paid ratably from the sale of oil and gas as produced. Now, what did she transfer to the trust? *1149 The terms of the instrument are perfectly clear - "all my present right, title and interest, both legal and equitable, now owned or possessed by me in and to all oil, gas, and other minerals of every nature and description." In other words, she transferred her entire present interest in all minerals in or under her property. Under the local laws, her interest was recognized as an interest in real property and the instrument *38 was in a form proper for the conveyance of real property interests. The conveyance created either a determinable fee, an estate well recognized in the substantive law of real property and in Texas (see Thompson on Real Property, vol. 3, secs. 2105 et seq.; Tiffany on Real Property, vol. 1, sec. 93; ; ), or an estate for years, an estate likewise well recognized. We need not decide which, because, as we have stated, it is immaterial whether the interest was in real or personal property, our inquiry is whether that interest was transferred. Here it is apparent that there was a complete transfer of decedent's present interest*1150 in the property. She kept a reversionary interest, but that gave rise to no income. The income here involved arose from the property conveyed and belonged, not to Mrs. Cook, but to the trust. On this issue we hold for petitioner.
As to the second issue, we affirm respondent. In our opinion, the expenditures for attorneys' fees are not deductible under section 214(a)(1) of the Revenue Act of 1926 as "ordinary and necessary expenses paid or incurred during the taxably year in carrying on any trade or business," nor are they expenditures for the acquisition of additional rights to property to be capitalized and subsequently recouped. Neither the suit, nor the fees paid attorneys for participation therein, served to enlarge, change or acquire for Mrs. Cook any interest in the property; she merely defended what she had. That situation is distinguishable from the decisions relied upon by petitioner - , where the suit was instituted by the landowner to make realizable income under leases effective only when title was cleared, and *1151 , where the taxpayers were engaged in business, in conection with which the expenditures were made for the purpose of enlarging their rights to income or in property. The expenditures in the case at bar fall within that class of personal expenses for the deduction of which the statute makes no provision. ; reversed, ; .
Judgment will be entered under Rule 50.