*1786 1. Cost of leases on oil property allowed as a deduction upon evidence that leases were worthless and that they expired within tax year.
2. Deduction as a loss of cost of other leases which did not expire until after tax year disallowed.
*942 This is a proceeding for the redetermination of a deficiency in income taxes for the years 1919 and 1920 in the amounts of $165,832.55 for 1919 and $58,876.93 for 1920, not all of which is in controversy.
For the year 1919 the petitioner alleges that the Commissioner erred (1) in including in income the amount of $299,338.29 as profit realized by the petitioner through an exchange of his interest in certain leases for stock of the Orlando Petroleum Company, and (2) by including in income $3,471.50 representing an overstatement in the petitioner's distributive share of the net income of the partnership of Forrester & Cook.
For the year 1920 the petitioner alleges that the Commissioner erred (1) in disallowing as a deduction from gross income the cost of certain oil and gas leases which the petitioner*1787 alleges became worthless in that year; (2) in including in income $6,943 representing an overstatement in petitioner's share of the net income from the firm of Forrester & Cook; (3) in including in income $23,452.67 as rents; and (4) by disallowing a deduction of $9,000 representing depreciation on a fence.
With regard to the first assignment of error for the year 1919, the same transaction is involved as was involved in the case of , in which case the Circuit Court of Appeals held that no profit was realized upon the exchange of leases for stock of the Orlando Petroleum Company, and the respondent, upon the authority of that case, has admitted that he erred in including the amount of $299,338.29 in petitioner's gross income for 1919.
*943 FINDINGS OF FACT.
The petitioner is an individual, a resident of Wichita, Kans.
During the years 1919 and 1920 the petitioner was engaged both individually and as a member of the partnership of Forrester & Cook in the oil business. As an individual he purchased or entered into a number of leases upon oil properties in Marion County, Kansas. On September 5, 1919, he*1788 entered into a lease with Isaac Good and wife, hereinafter referred to as the Good lease. This lease, after providing that the lessor for and in consideration of $1 has let the property to the lessee, provides in part as follows:
It is agreed that this lease shall remain in force for a term of three years from this date, and as long thereafter as oil or gas, or either of them, is produced from said land by the lessee.
In consideration of the premises the said lessee covenants and agrees:
* * *
3rd. To pay lessor for gas produced from any oil well and used off the premises at the rate of One Hundred and no/100 Dollars per year, for the time during which such gas shall be used, said payments to be made each three months in advance during the time the same is being refined.
If no well be commenced on said land on or before the 5th day of September, 1920, this lease shall terminate as to both parties, unless the lessee on or before that date shall pay or tender to the lessor, or to the lessor's credit in the State Bank of Commerce at Marion, Kansas, or its successors which shall continue as the depository regardless of changes in the ownership of said land, the sum of One*1789 Hundred Sixty and no/100 Dollars, which sum shall operate as a rental and cover the privilege of deferring the commencement of a well for 12 months from said date. In like manner and upon like payments or tenders the commencement of a well may be further deferred for like periods of the same number of months successively. And it is understood and agreed that the consideration first recited herein, the down payment covers not only the privileges granted to the date when said first rental is payable as aforesaid, but also the lessee's option of extending that period as aforesaid, and any and all other rights conferred.
Should the first well drilled on the above described land be a dry hole, then, and in that event, if a second well is not commenced on said land within twelve months from the expiration of the last rental period which rental has bee paid, this lease shall terminate as to both parties, unless the lessee on or before the expiration of said twelve months shall resume the payment of rentals in the same amount and in the same manner as hereinbefore provided. And it is agreed that upon the resumption of the payment of rentals, as above provided, that the last preceding*1790 paragraph hereof, governing the payment of rentals and the effect thereof, shall continue in force just as though there had been no interruption in the rental payments.
The petitioner also acquired by assignment a number of leases referred to as the McFadden leases, covering approximately 2,000 acres and adjoining the property covered by the Good lease. These leases were purchased to protect the property covered by the Good lease. The petitioner began the drilling of a well on the Good lease *944 in the early part of 1920 which was finished in June or July. The well when finished was dry.
The petitioner also entered into a number of leases known as the Anderson leases. A well was drilled on the property covered by these leases which came in dry some time in the summer of 1920. These leases covered from 2,000 to 3,000 acres. All of the leases hereinabove referred to contained provisions similar to those quoted from the Good lease.
The cost to the petitioner of the acquisition of these leases including the cost of digging the wells was as follows:
| McFadden leases | $18,345.80 |
| Good leases | 12,000.00 |
| Anderson leases | 17,375.00 |
The petitioner did*1791 not pay any rent on these leases after the wells came in dry.
The petitioner charged the cost of these leases off his books in 1920 and claimed the amount as a loss deduction on his return, which was disallowed by the respondent. There were about seventy-two wells drilled in that vicinity in 1919 and 1920, all of which were dry. Of these about fifteen were drilled by the petitioner.
The partnership of Forrester & Cook, in which the petitioner owned a one-half interest, leased about 200,000 acres of oil property in the same vicinity. The partnership dug wells on this property in 1919 and 1920, all of which were dry.
The petitioner in 1920 owned a ranch in southern Texas of about 226,000 acres which he had purchased in 1919. At the time of the purchase there was a fence on the property, part of which was old and part new. The fence was about 462 miles long. The petitioner leased the ranch in 1920 for $68,000 and allowed the tenant an amount of $12,000 per year for the upkeep of the fence.
The petitioner also owned an apartment house in Chicago which he rented. The rents were tied up on account of a suit against the former owner. Some of the rents at least were paid*1792 to petitioner's secretary, Jessy, but the petitioner himself never received any of the rents paid by the tenants in 1920.
OPINION.
MATTHEWS: The petitioner is claiming the cost of the Good, McFadden and Anderson leases as a deductible loss in 1920, upon the theory that they were abandoned in that year. He testified that when the wells came in dry he "abandoned" the leases, paid no more rent thereon and that he did not have any expectation of realizing anything out of this acreage after the wells came in dry. However, he did not surrender the leases to the lessor but retained *945 them. it is clear from a study of the terms of the lease set forth in our findings of fact, which is typical of all the leases, that the earliest period at which the lease would terminate by its own terms was one year from the date it was entered into. In , leases in "wildcat" territory were involved. The taxpayer became convinced that one lease was worthless and gave it away and we allowed the deduction of the cost of that lease as a loss. With regard to another lease, however, the taxpayer, although he considered it worthless, continued to pay rentals, *1793 and we disallowed the deduction. See also ; ; .
We do not consider that the petitioner's testimony is sufficient to establish that he had abandoned those leases which did not expire until after the taxable year and we are therefore of the opinion that he is not entitled to deduct the cost as a loss in 1920. On the other hand, we believe the petitioner is entitled to deduct the cost of any leases which expired in 1920 and upon which he did not pay any rent after the wells came in dry. The Good lease was entered into on September 5 1919, and the well came in dry in the summer of 1920. The petitioner did not pay the rent required to continue the lease. The petitioner is entitled to deduct the cost of this lease from his gross income for 1920. As to the McFadden leases, only three of them were introduced in evidence. These three covered 64 acres and were dated May 12, 1919, August 25, 1919, and September 24, 1919, respectively. They were all assigned to the petitioner on October 9, 1919. There is no evidence as to when the remaining leases covering*1794 this tract of approximately 2,000 acres were entered into or were assigned to petitioner. Since we have no way of determining what part of the cost of all these leases is attributable to the three introduced in evidence, we must sustain the action of the respondent in disallowing a deduction of the cost thereof. Only two of the Anderson leases were introduced in evidence and they were entered into on January 26, 1920, and May 5, 1920. Since the earliest date they could have expired was in 1921, and there is no evidence as to the dates of execution of the remaining ones, the petitioner is not entitled to deduct the cost thereof in 1920.
With regard to the leases entered into by the partnership of Forrester & Cook, the evidence is insufficient to entitle the petitioner to the deduction claimed. The leases themselves were not introduced in evidence and there is no evidence of the terms of these leases or of the dates on which they were executed. The claim of the petitioner that the respondent erred in increasing his distributive share *946 of the income of Forrester & Cook for the years 1919 and 1920 is denied.
The petitioner is also claiming a deduction for depreciation*1795 upon a fence on a ranch. There is no definite evidence as to the cost of the fence or its useful life. The action of the respondent in disallowing any amount for depreciation on the fence is sustained.
In determining the deficiency involved the respondent included in petitioner's gross income an amount of $23,452.67 as rents. The only testimony upon this point was that of the petitioner, who testified that he never received any of the rents, but that he thought they were collected by his secretary. Since receipt by the secretary as agent amounts to receipt by the petitioner, we must also sustain the action of the respondent in this regard.
Judgment will be entered under Rule 50.