*1576 1. Deductions allowable for depreciation on oil wells include not only the depreciated cost of the physical equipment, but also amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the wells. A. T. Jergins Trust,22 B.T.A. 551">22 B.T.A. 551.
2. Deductions allowable for losses sustained on account of abandonment of oil wells likewise include not only the depreciated cost of the physical equipment, but also amounts expended in connection with the development and drilling of the wells.
*102 These proceedings, duly consolidated for hearing, are for the redetermination of deficiencies in income tax as follows:
| Taxpayer | Docket | Year | Deficiency |
| No. | |||
| United Oil Co | 38082 | 1923 | $5,354.04 |
| Do | 42922 | 1924 | 3,693.43 |
| Do | 51622 | 1925 | 6,475.90 |
| Richfield Oil Co | 42921 | 1924 | 21,007.23 |
The petitioning corporations became affiliated during 1923, and for the year 1924 filed a consolidated return. Upon audit of that return the respondent determined a deficiency in the*1577 amount of $24,700.66 against the affiliated corporations, of which he allocated $3,693.43 to the United Oil Company and $21,007.23 to the Richfield Oil Company, and sent a deficiency notice to each corporation accordingly. The parties have stipulated that the net income of the Richfield Oil Company for 1924, as computed by the respondent, in the amount of $611,575.08, is correct, and the only issues affecting the tax liability of the affiliated group for 1924 relate to adjustments made in the income and deductions of the United Oil Company. The parties have further stipulated that the deficiency, if any, as finally redetermined by the Board for the calendar year 1924, shall be allocated between the petitioners on the basis of their respective taxable net incomes.
All issues raised in the pleadings have been specifically abandoned and withdrawn by agreement of the parties except three, which relate only to the computation of the correct net income of the United Oil Company, as follows:
(a) Whether the United Oil Company is entitled, in computing deductions for depreciation on oil wells, to include in the amount subject to depreciation not only the cost of physical equipment, *1578 but also amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of said wells. This issue is involved for each of the years 1923, 1924 and 1925.
(b) Whether, in determining losses sustained by the United Oil Company on the abandonment of wells which had previously produced oil but became dry in 1924 and 1925, said petitioner is entitled to include not only the cost of physical equipment, but also amounts expended for wages, fuel, repairs, hauling, etc., after deduction of depreciation sustained thereon prior to abandonment.
(c) Whether the United Oil Company is entitled to any deduction from gross income for the year 1925 on account of the abandonment *103 of oil wells, whether dry holes or wells which had previously produced oil and had become dry in said year, and, if it is entitled to such deduction, whether it is entitled to include not only the cost of physical equipment, but also amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of said wells, after allowance for depreciation sustained thereon prior to abandonment.
No evidence was offered at the hearing, *1579 other than a stipulation of the parties, and from such stipulation and the pleadings, we set forth below the material facts.
FINDINGS OF FACT.
Each of the petitioners is a California corporation, with its principal place of business at Los Angeles.
On or about August 1, 1923, the Richfield Oil Company became an affiliated subsidiary of the United Oil Company, and a consolidated return was filed for the calendar year 1923, including the income of the United Oil Company for the entire year and of the Richfield Oil Company for the period August 1 to December 31, 1923. The deficiency determined by the respondent for 1923 results entirely from adjustments made to the taxable income of the United Oil Company for said year.
A consolidated return was also filed by the petitioners for the year 1924, and the deficiency determined by the respondent for said year results wholly from adjustments made to the taxable income of the United Oil Company. The correct taxable income of the Richfield Oil Company for 1924 is $611,575.08, and the deficiency for 1924, as finally redetermined by the Board, if any, is allocable between the petitioners on the basis of the net taxable income of each.
*1580 A consolidated return was filed by the petitioners for the year 1925, and the issues affecting the deficiency determined by the respondent for said year relate only to the computation of the correct taxable income of the United Oil Company. The deficiency, as finally redetermined by the Board, if any, is allocable wholly to the petitioner last named.
The amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of oil wells, mentioned in the preceding statement of the issues, and also referred to hereinafter, were not charged off and deducted as current expenses in the respective years of expenditure, but were charged to capital accounts. Aside from adjustments with respect to depreciation of lease costs and other income adjustments, correct deductions for depletion have been allowed by the respondent in computing the deficiencies.
*104 The petitioner, the United Oil Company, is entitled to an additional deduction from gross income for 1925 on account of depreciation of assets, exclusive of oil wells, in the amount of $69,434.71.
Issue (a). During the taxable years involved here the United Oil Company charged*1581 to capital assets the amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of oil wells, and in the consolidated returns filed for said years such expenditures were included as a part of the cost of the wells. In these returns deductions were taken for depreciation computed on the basis of total cost of the wells, including both the cost of the physical equipment and development and drilling costs. The respondent treated the latter amounts as additional cost of the leases, subject to depletion, and has refused to allow any deduction for depreciation thereon.
On the basis of including as a part of the total cost, subject to depreciation, the amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of oil wells, the United Oil Company is entitled to deductions from gross income for the taxable years on account of depreciation of such wells and depletion of lease costs, as follows:
| Item | 1923 | 1924 | 1925 |
| Depreciation of wells | $194,117.03 | $268,679.23 | $229,867.54 |
| Depletion of lease costs | 9,575.35 | 24,932.24 | 63,478.72 |
| Total | 203,692.38 | 293,611.47 | 293,346.26 |
*1582 On the basis of excluding as a part of the total cost of the wells, subject to depreciation, amounts expended for development and drilling costs, the United Oil Company is entitled to deductions from gross income for the taxable years on account of depreciation of its oil wells and depletion of lease costs as follows:
| Item | 1923 | 1924 | 1925 |
| Depreciation of wells | $120,551.20 | $187,436.62 | $212,123.86 |
| Depletion of lease costs | 95,996.00 | 111,543.65 | 205,572.54 |
| Total | 216,547.20 | 298,980.27 | 417,696.40 |
Issue (b). (1) During the year 1923, Well No. 1 on Denni No. 1 Lease, which had previously produced oil, became dry and nonproductive. The respondent has allowed as a loss sustained by the United Oil Company in 1923 the cost of the physical equipment used on said well in the amount of $67,885.70, less depreciation of $18,617.47, or a loss in the net amount of $49,268.23, but has not allowed any deduction with respect to the development and drilling *105 costs, such as wages, fuel, repairs, hauling, etc., on said well in the amount of $72,331.36, less depreciation of $6,380.69, or a net amount of $65,950.67.
On the basis of including the depreciated*1583 balance of the development and drilling costs as a part of the depreciated cost of the well, the petitioner is entitled to an additional deduction for loss on abandonment of Well No. 1 on Denni No. 1 Lease in the amount of $65,950.67 for the taxable year 1923.
(2) During the year 1924 Well No. 1 on Clarke-Carpenter Lease, which had previously produced oil, became dry and nonproductive. The respondent has allowed as a loss sustained by the United Oil Company in 1924 the cost of the physical equipment used on this well in the amount of $34,627.96, less depreciation of $13,641.86, or a loss in the net amount of $20,985.90, but has not allowed any deduction with respect to the development and drilling costs, such as wages, fuel, repairs, hauling, etc., on this well in the amount of $29,976.53, less depreciation of $4,759.03, or a net amount of $25,217.50.
On the basis of including the depreciated balance of the development and drilling costs as a part of the depreciated cost of the well, petitioner is entitled to an additional deduction for loss on abandonment of Well No. 1 on Clarke-Carpenter Lease in the amount of $25,217.50 for the taxable year 1924.
Issue (c). (1) Drilling*1584 on Bixby Well No. 2 was started on September 8, 1924. On March 16, 1925, the well was finally abandoned, and on that date notice of intention to abandon was filed with the State Mining Bureau. The total cost of the well to date of abandonment was $100,298.34. Depreciation on the equipment and development cost of Bixby Well No. 2 in the amount of $15,188.17 was deducted prior to the date of abandonment, leaving a depreciated cost of $85,110.17. This well never produced any oil and was a dry hole. The respondent has allowed no deduction for loss on abandonment of Bixby Well No. 2.
If the United Oil Company sustained a deductible loss on the abandonment of Bixby Well No. 2 with respect to the entire cost of equipment and amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then the petitioner is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $85,110.17, but if petitioner sustained a deductible loss only with respect to the cost of equipment, excluding amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development*1585 and drilling of the well, then it is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $56,866.36.
*106 (2) Drilling on Bixby Well No. 2A was started on April 10, 1925. This well was finally abandoned and notice of intention to abandon was filed with the State Mining Bureau on December 25, 1925. The total cost to date of abandonment was $64,907.75. No depreciation was ever claimed or deducted on account of Bixby Well No. 2A. The well never produced any oil and was a dry hole. The respondent has allowed no deduction for loss on abandonment of Bixby Well No. 2A.
If the United Oil Company sustained a deductible loss on the abandonment of Bixby Well No. 2A with respect to the entire cost of equipment and amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then petitioner is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $64,907.75; but if petitioner sustained a deductible loss only with respect to the cost of equipment, excluding amounts expended for wages, fuel, repairs, *1586 hauling, etc., in connection with the development and drilling of the well, then it is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $12,610.40.
(3) Drilling was started on Hass Well No. 4 on January 9, 1923, and the well was first completed with initial production on May 9, 1923, producing 62,509 barrels to July, 1923, when it was killed. Thereafter the well was worked on until June 27, 1924, when it started producing again, and produced 1,971 barrels from June 27 to August 9, 1924. Work was again started on the well on August 9, 1924, and continued until September 7, 1925, when it was finally abandoned and notice of intention to abandon was filed with the State Mining Bureau. The cost of Hass Well No. 4 to date of abandonment was $107,664.35, and depreciation on cost was deducted in the amount of $32,948.80, leaving a depreciated cost of $74,715.55. No deduction has been allowed by the respondent for abandonment of Hass Well No. 4.
If the United Oil Company sustained a deductible loss on account of abandonment of Hass Well No. 4 with respect to the entire depreciated cost of equipment and amounts expended*1587 for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then petitioner is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $74,715.55; but if petitioner sustained a deductible loss only with respect to the depreciated cost of equipment, excluding amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then it is entitled to an additional deduction from its gross income for 1925, on account of such loss in the amount of $52,729.34.
*107 (4) Drilling on Dominguez Well No. 4 was started on November 22, 1924, and was completed in February, 1925, producing 18,509 barrels of clean oil. On September 7, 1925, the well was finally abandoned and notice of intention to abandon was filed with the State Mining Bureau on that date. The total cost of Dominguez Well No. 4 to date of abandonment was $23,037.09 and the depreciation deducted thereon was $4,396.24, leaving a depreciated cost of $18,640.85. The respondent has allowed no deduction for loss on abandonment of this well.
If the United Oil Company sustained*1588 a deductible loss on account of abandonment of Dominguez Well No. 4 with respect to the entire depreciated cost of equipment and amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then petitioner is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $18,640.85; but if petitioner sustained a deductible loss only with respect to the depreciated cost of equipment, excluding amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of the well, then it is entitled to an additional deduction from its gross income for the year 1925 on account of such loss in the amount of $8,147.15.
OPINION.
TRAMMELL: The material facts have been stipulated by the parties, the stipulation in full being incorporated herein by reference and accepted as the facts. The above findings of fact contain what we deem to be the material facts. Predicated thereon three separate issues have been formally presented for decision, as set out in the preliminary statement above. The petitioners were affiliated and filed consolidated*1589 returns for each of the taxable years, but the issues presented pertain only to deductions claimed by the petitioner, the United Oil Company, from its gross income for the respective taxable years, and in no wise involve the tax liability of the petitioner, Richfield Oil Company, except in so far as it may be affected by the allocation, on the basis stipulated, of the deficiency as finally redetermined by the Board, if any, for the calendar year 1924.
The United Oil Company claimed deductions in computing net income for the taxable years 1923, 1924 and 1925 on account of depreciation sustained on its oil wells on the basis of including in the total cost of the wells not only the cost of the physical equipment, but also amounts expended for wages, fuel, repairs, hauling, etc., in connection with the development and drilling of such wells. Apparently the respondent has allowed deductions for depreciation on the *108 basis of the cost of the physical equipment only, and now contends that the incidental expenditures made in connection with the development and drilling of the wells are not subject to depreciation, but should be added to the cost of the leases subject to depletion. *1590 This same question runs through all three issues submitted, and they may therefore be considered collectively rather than separately.
During the years 1923 and 1924 the petitioner abandoned certain wells which had theretofore produced oil but had become dry in those years. In the consolidated returns for 1923 and 1924 the petitioner claimed deductions for such losses on the basis of including the depreciated cost not only of the physical equipment, but also of the amounts expended in connection with the development and drilling of the wells. The respondent allowed deductions for the losses only to the extent of the depreciated cost of the physical equipment.
In 1925 petitioner abandoned (1) wells which had theretofore produced oil but became dry in that year, and (2) wells which had never produced oil but were dry holes when finally abandoned in that year. The respondent has allowed no deductions for losses on account of the abandonment of such wells in 1925, and the petitioner contends that in the redetermination of the deficiency for that year it is entitled to deductions for losses on the basis of including not only the depreciated cost of the physical equipment, but also*1591 amounts expended in connection with the development and drilling of the wells.
The precise question, which in essential aspects is raised in reference to the three classes of deductions here claimed by the petitioner, was considered by us at length in , where we held that expenditures for fuel, wages, repairs, hauling, etc., in connection with the drilling of oil and gas wells, are capital expenditures recoverable through depreciation rather than depletion. That case involved deductions claimed for the years 1922, 1923 and 1924, under the Revenue Acts of 1921 and 1924.
The decision in the Jergins case was followed by us in , under the Revenue Act of 1926, and in , under the same act.
It follows that at least the first issue presented here is governed squarely by the foregoing decisions, on authority of which the petitioner's contention must be sustained.
We think the same view must prevail also in respect to the second and third issues. No brief has been filed in this case by the respondent and we are not*1592 advised of his position other than as disclosed by the deficiency letters and the stipulation of facts. We do not know, therefore, what reasons moved the respondent to allow deductions *109 for losses sustained on abandonment of wells in 1923 and 1924 to the extent of the depreciated cost of the physical equipment, and to deny similar deductions for 1925. As indicated in our decisions above cited, the applicable provisions of the revenue acts governing the three years mentioned are in all material respects identical.
Losses sustained on account of the abandonment of oil wells constitute allowable deductions from income for the year or years in which abandoned, and this principle has been specifically recognized by the respondent. .
In connection with the second and third issues, there remains only the question whether the basis for computing losses sustained on abandonment of oil wells should be the depreciated cost of the physical equipment only, or whether such basis should include also the expenditures made in connection with the development and drilling of such wells. Since we have decided that development and*1593 drilling expenses properly constitute a part of the cost of the wells for the purpose of computing deductions for depreciation, we know of no reason why such expenditures should not be treated as a part of the cost of the wells in determining loss sustained on abandonment.
The amounts of the additional deductions to which the petitioner is entitled have been stipulated by the parties and set out in our findings of fact above. The deficiences will be redetermined accordingly.
Judgments will be entered under Rule 50.