*1338 1. A taxpayer advanced funds for the development of oil leases under a contract which gave him a 30 percent interest in the leases and business and the right to 75 percent of the proceeds of oil sales until he had received the amount of his advances with interest. Held, amounts received from oil sales were income and not repayment of loan.
2. Commissions paid by a trading partnership on sales of securities, held, deductible as a business expense. Neuberger v. Commissioner, 104 Fed.(2d) 649, followed.
3. The amount of commissions paid by a trading partnership on commodity transactions, for which the broker's bills showed no break-down between purchases and sales, held, allocable equally to purchases and sales, and the one-half thereof properly attributable to sales held deductible. George W. Covington,42 B.T.A. 601">42 B.T.A. 601, followed.
*370 The Commissioner determined a deficiency in income tax for 1937 of $274.58 plus a 25 percent penalty of $68.64, as to each of the seven petitioner trusts. *1339 He determined, (1) that $62,350.17 received by the trustee from an oil producer was "income and not a return of capital"; (2) that $22,270 paid by petitioners' trading partnership was not deductible; and (3) that petitioners were liable to the 25 percent penalty for failure to file returns.
*371 FINDINGS OF FACT.
Petitioners are seven trusts, Roland L. Taylor of Philadelphia, Pennsylvania, trustee.
1. On October 13, 1936, petitioners entered into a contract with the Gilmort Oil Co., owner of described oil leases, "to advance money for the purpose of developing said leases for an interest in the property and profits of such business." They agreed to place in escrow $150,000 in three deposits of $50,000 each within ten, forty and seventy days, respectively. The first deposit of $50,000 was to be released to Gilmort upon delivery to petitioners of a 30 percent undivided interest in the leases; one-sixth of the second deposit was to be released upon the completed reconditioning of each of six wells on the leases; and one-sixth of the third deposit upon completion of each of six new wells. In case any of the latter should produce less than a specified quantity of oil, *1340 the petitioners were to receive $5,000 of the escrow deposit and Gilmort $3,333.33. Gilmort agreed to direct the purchaser of gas or oil from a producing well to pay petitioners three-fourths "of the working interest of the oil and gas so produced and sold." Money advanced by petitioners under the agreement was "to be repaid" from oil produced and marketed from the leases, and was "to draw interest at the rate of six (6%) percent per annum from date of advancement." After such repayment further operating expenses were to be borne by petitioners and Gilmort in proportion to their interests in the leases, wells and materials. After completion of the initial development, petitioners had an option to increase their interest to 50 percent upon specified terms, among which was release of the "right to reimbursement of the $150,000 advanced under this contract." If the option should not be exercised, they were to retain a 30 percent interest in the venture's profits and assets. From the beginning, petitioners had the right to inspect operations, and after completion of the development program an operating contract was to be made, leaving direction and supervision to Gilmort; operating*1341 and supervisory costs to be borne in proportion to their interests. Further development was not to be made without petitioner's consent, and in case of a disagreement one party might undertake further development at his own expense, thereby becoming "entitled to receive, in reimbursement, all of the net oil production from this particular development until he has been reimbursed in full for the moneys advanced," after which event the revenue from the development was to be divided in accordance with the parties' interest in the leases.
Pursuant to this contract, petitioners, in equal portions, advanced $150,000 to Gilmort, and Gilmort assigned to them an undivided *372 30 percent interest in the requisite leases, and also assigned to them, until the advance should be repaid in full with interest, 75 percent of the "working interest" in all oil and gas produced from the leases covered by the contract. Under this assignment, petitioners in 1937 received $62,350.17 directly from oil companies which purchased oil and gas produced from the leases.
The Commissioner treated the amount as gross income, deducted therefrom $24,719.97 for expenses and depletion, and included in*1342 the income of each petitioner $5,375.74 representing one-seventh of $37,630.20, the aggregate net income.
2. In 1937 each petitioner held a 10 percent interest in the trading partnership of Harley & Co. In that year the partnership paid $21,750 as commissions on the purchase and sale of commodities and $520 as commissions on the sale of securities held by it. It deducted the $22,270 on its 1937 income tax return. The commission rate on commodities is the same for purchases and sales, but amounts of the bills were not broken down to show what commissions are paid on sales and what on purchases.
The Commissioner disallowed the deduction of $22,270; recomputed the partnership's income, and included in each petitioner's 1937 income $56.40 as its distributive share thereof.
3. No income tax returns were filed by petitioners for 1937.
OPINION.
STERNHAGEN: 1. The petitioners assail the inclusion in their income of any part of the $62,350.17 received by the trustee under the contract because it was all a "return of capital", the theory being that the $150,000 which petitioners "advanced" was a simple loan and that the $62,350.17 was but a partial collection of the debt. *1343 To accept this theory would be contrary to the facts and give an artificial meaning to the contract and to the word "advance" as used in it.
The contract recites that the Gilmort Co. desires to develop its properties and petitioner is willing to advance money for that purpose "for an interest in the property and profits of such business." The contract gave petitioners a substantial interest in the properties and also in the possible profits. To the prescribed extent, petitioners were to finance operations and the acquisition of new properties, and were assured of a larger part of proceeds from early operations than that to which their 30 percent interest entitled them. There was no fixed debt, but only an expansible interest out of production. Petitioners, to the stated extent, shared the hazard. Such a contract can not be placed in the same class with a mortgage, which, irrespective of personal liability for the loan, is a lien on the specified property and presupposes a promise to repay the full amount. *373 Petitioners had no simple promise to repay, but only the expectation of a business venturer that he would get back more than he put in. Compare *1344 ; certiorari denied, , which considers the position relative to that of the Gilmort Co. and holds that the amount received from Westbrook and Thompson, who were in a position relatively similar to petitioners here, was not a loan but the price of a sale of oil.
The Commissioner has held that the $62,350.17 was properly to be reduced by deduction for expenses and depletion, and this is as much as petitioners can legally claim. The determination is sustained.
2. The petitioners claim that the commissions paid by their partnership upon the sales and purchases of commodities and the sale of securities are deductible in determining the taxable net income of the partnership. The commissions on sales of securities have been held deductible in , reversed on another point, , and the Commissioner's determination is reversed as to this item. The separate commissions on purchases and sales of commodities can not be ascertained because the broker's bills did not show such a break-down. *1345 The evidence shows the rate to be the same, and under similar circumstances it was held that one-half of the total amount was properly attributable to each and a deduction allowed as to the one-half attributable to sales, (on review C.C.A., 5th Cir.). Following that decision, $10,875 is deductible as commissions on commodity sales, and the determination is to that extent reversed.
3. Since no returns were filed by any of the petitioners, the 25 percent penalty is sustained, ; (on review App. D.C.); .
Decisions will be entered under Rule 50.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Roland L. Taylor, Trustee for Anita Marjory Hardwick; Roland L. Taylor, Trustee for Roland Taylor Ely; Roland L. Taylor, Trustee for Gordon A. Hardwick, Jr.; Roland L. Taylor, Trustee for Donald Ely; Roland L. Taylor, Trustee for William Newbold Ely, III; and Roland L. Taylor, Trustee for Charles A. Hardwick. ↩