*1200OPINION.
Littleton:Taxpayers claim (1) that they together, as lessors, are entitled to an allowance for depletion for 1919 of $728,303.01, computed at $1.50 a barrel on 485,535.34 barrels of oil, and (2) that the sale of certain oil and gas interests to Noble & Company was not consummated and completed until 1920 and there was therefore no taxable gain from that source in 1919.
During the taxable years taxpayers kept their books and rendered their returns upon the cash receipts and disbursements basis, and they had large income from various sources other than from royalties and from the alleged sale to Noble & Company.
The Commissioner contends (1) that the reasonable allowance for depletion to which these taxpayers were entitled for 1919 should be computed upon the basis of $1.50 on 280,523.71 barrels of oil, if their income is to be determined upon the cash receipts and disbursements basis; (2) that if they are to be allowed depletion upon the basis of the 485,535.34 barrels, or on any amount in excess of the 280,523.71 barrels, their income, in order to be clearly reflected, should be determined upon the accrual basis; and (3) that upon either the accrual or the cash receipts and disbursements basis his determination that the profit of $222,607.15 on the transaction was realized in 1919 should be approved.
Section 214 (a) (10) of the Revenue Act of 1918 provides:
(a) That in computing net income there shall be allowed as deductions:
* * * * * * *
(10) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the *1201case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer’s interest therein) on that date shall be taken in lieu of cost up to that date: Provided further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter; such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.
The purpose of the depletion provision of the statute is to return to the taxpayers having an interest in oil properties through the aggregate of annual depletion allowances, the basis of the depletion allowances, that is, the cost or the value on March 1, 1913, or the value of the oil in place at the date of discovery or within thirty days thereafter, before any income therefrom during the year shall be subjected to tax. These taxpayers employed the cash receipts and disbursements method of accounting, and in view of this and other facts disclosed by the record, we are of the opinion that the reasonable allowance to which these taxpayers were entitled for the year 1919 should be computed upon the basis of the royalty income received within the year. It is only in this manner that taxpayers employing the cash receipts and disbursements method of reporting income can get the full benefit of the provision of section 214 (a) (10) for, if a taxpayer employing such a method of accounting should for any reason receive no royalties from such source and had no other income from which to take the deduction of the allowance for depletion, he would receive no benefit from the statute; and if he should receive in a subsequent year his royalties, as the facts show was true in the case of these taxpayers, he would be required to pay a tax upon the entire amount thereof. The tax is an annual tax and the deductions are annual deductions and it is the intent and purpose of the statute that income and deductions shall be treated consistently. United States v. Anderson, 269 U. S. 422; United States v. Mitchell, 271 U. S. 9; Appeal of Consolidated Asphalt Co., 1 B. T. A. 79; Appeal of Henry Reubel, 1 B. T. A. 676. Royalties are income. Sargent Land Co. v. Von Baumbach, 207 Fed. 423; 219 Fed. 31; 242 U. S. 503; Alworth-Stephens Co. v. Lynch, 278 Fed. 959; 294 Fed. 190; 267 U. S. 364. In the last mentioned case depletion was allowed the lessor under the provisions of the Revenue Act of 1916 upon the basis of the value of its interest in the mineral rights and the royalties received within the year.
The leases under which these taxpayers were entitled to royalties are not before the Board, and the facts contained in the record show *1202that those taxpayers received royalties amounting to $631,178.85. The taxpayers claimed that because the lessees removed from the leased premises and sold during the year 3,884,272.70 barrels of oil and that under the terms of the leases and the “ division order ” they had a “ one-eighth royalty interest,” (whatever that may mean), they -were entitled to an allowance for depletion computed upon one-eighth of this number of barrels, or 485,535.34 barrels, notwithstanding they only received royalties to the extent of $631,178.35, the equivalent of the sales price of 280,523.71 barrels of oil. The only basis for their contention is that the Commissioner’s regulation provides that depletion in the case of oil shall be computed by applying the depletion unit, in this case $1.50 a barrel, to all oil produced within the year, and that such regulation is binding upon the Commissioner and the Board. These taxpayers were not engaged in producing oil. They only received royalties. It is apparent from the argument of the Commissioner in this case that the allowance for depletion to lessors should be upon the basis of the royalty income received, that he does not construe his regulation as taxpayers contend. The Board does not construe the regulation in the manner contended for by the taxpayers and therefore fails to find merit in their contention. Article 210, Regulations 45, provides as follows:
(a) Depletion attaches to the annual production ‘‘according to the peculiar conditions of each case ” and when the depletion actually sustained, whether legally allowable or not, from the basic date, equals the cost or value on the basic date plus subsequent allowable capital additions, no further deductions for depletion will be allowed except in consequence of added value arising through discovery or purchase. * * *
(b) When the value of the property at the basic date has been determined, depletion for the taxable year shall be determined by dividing the value remaining for depletion by the number of units of mineral to which this value is applicable, and by multiplying the unit value for depletion, so determined, by the number of units sold within the taxable year. In the selection of a unit for depletion preference shall be given to the principal or customary unit or units paid for in the product sold.
These Regulations further provide, in article 215 (b), that—
* ⅜ * where the owner has leased a mineral property for a term of years with a requirement in the lease that the lessee shall extract and pay for, annually, a specified number of tons, or other agreed units of measurement, of such mineral, or shall pay, annually, a specified sum of money which shall be applied in payment of the purchase price or royalty per unit of such mineral whenever the same shall thereafter be extracted and removed from the leased premises, the vaiue in the ground to the lessor, for purposes of depletion, of the number of units so paid for in advance of extraction will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the extraction or *1203removal in sucli year of any mineral so paid for in advance and for which deduction has once been made.
Even if the Regulations could be construed as permitting the deduction of an allowance for depletion to a lessor receiving royalties and employing the cash receipts and disbursements basis of accounting on units of measurement in excess of that on which such lessors received income from royalties, it might be seriously doubted if such a method would be a proper interpretation of the statute. The Commissioner has held that a lessor of mining property who waived his rights to royalties for several years and received all of the royalties in 1917 was entitled, since he submitted his returns for those years on the cash receipts and disbursements basis, to deduct from income received in 1917 such depletion allowance as appertained to that income. See A. R. M. 17, C. B. No. 2, p. 144. We think this holding applied the correct principle and followed the intendment of the statute. All that the statute provides is that in computing net income there shall be allowed as a deduction a reasonable allowance for depletion “ according to the peculiar conditions in each case,” and this reasonable allowance must be determined in the light of the provisions of sections 212 and 213 of the Act defining gross and net income.
As stated hereinbefore, the leases are not before us and we do not know just what they provided regarding the payment of royalties. The evidence shows that the oil was extracted by the lessees and run into their tanks located upon the leased premises; that they had possession of the oil until it was run through the pipe lines and sold to others. At the time of the sale the purchaser was given some kind of a written document signed by the lessor and the lessee to the effect that the taxpayers, lessors, were to be paid one-eighth of the purchase price of the oil. The purchaser thereupon paid or credited taxpayers with that amount and they reported as royalties received that portion of the one-eighth of the selling price received by them during the year 1919. The number of barrels of oil upon which taxpayers claim an allowance for depletion, to wit, 485,535.84, represented one-eightli of the total number of barrels of oil sold to the pipe-line companies during the year.
We are not deciding the question whether if a lessor under the terms of a lease receives instead of cash a certain proportion of the oil produced by the lessees he thereupon receives taxable income. That question is not before us, and, if it were, the evidence in this case is insufficient to enable us to decide it. All that we decide in connection with the issues presented is that upon the facts in this case these taxpayers received royalties to the extent of $631,178.85 and that upon the unit of measurement for the purpose of computing *1204the depletion deduction they were entitled to depletion from 280,-523.71 barrels of oil.
In view of our conclusions in respect of the depletion allowance, it may not be said that the cash receipts and disbursements method of accounting employed by these taxpayers did not clearly reflect their income.
Waggoner and Greene unconditionally sold their three-eighths interest in a certain oil and gas well on November 26, 1919. All that remained to be done before they became unconditionally entitled to receive the $500,000 placed in escrow was for them to furnish an abstract showing good and merchantable title to the property sold. Beyond this provision the transaction was in all other respects a completed sale on November 26, 1919. Waggoner and Greene were given fifteen days from November 26 within which to furnish abstract of title to the property. This period expired on December 11, 1919. Noble & Company were given one week thereafter, or until December 18, within which to examine the abstract and point out any defects therein. Waggoner and Greene were then given an additional two weeks, or until January 1, 1920, within which to cure any defects pointed out. At some date prior to December 20, 1919, an abstract was furnished in which, so far as the period which it covered is concerned, the attorney for Noble & Company found no defect. On December 20, 1919, he requested that a supplemental abstract covering the period from September 4, the last date covered by the first abstract furnished, to November 26, 1919, be furnished him. This supplemental abstract was furnished on or about December 27, 1919, and showed good and merchantable title. The conveyance specifically provided that Waggoner and Greene should furnish the abstract within fifteen days; that Noble <& Company should have one week thereafter in which to point out any defects in the title; that, if any defects were pointed out, Waggoner and Greene should then have two weeks from the end of the said one-week period to cure such defects in the title as might have been pointed out, and that upon such defects being cured the purchase and sale should at once be consummated. The effect of this provision was that since Waggoner and Greene had furnished an abstract showing good and merchantable title the sale should become absolute. The completed abstract of title was not furnished within the fifteen days, nor were any defects pointed out by Noble & Company within one week after the expiration of the fifteen days specified or at any time thereafter. The first abstract furnished by Waggoner and Greene was satisfactory to Noble & Company as far as it went. The only defect pointed out was that the abstract was not complete and a supplemental abstract was asked for, which was furnished *1205on or about December 27, 1919, showing a good and merchantable title to the interest in the property conveyed. This was after the expiration of the fifteen days allowed Waggoner and Greene for furnishing the abstract and also beyond the period of one week allowed Noble & Company within which to examine the abstract. The time for furnishing and for the examination of the abstract was never extended, and in our opinion the sale became completed and consummated on December 27, 1919, when the complete abstract showing good and merchantable title in Waggoner and Greene was furnished to Noble & Company. Under the provisions of the conveyance Noble & Company did not have a period of one week from December 27, 1919, within which to examine the contract before the sale should become consummated. On that date-Wag-goner and Greene, having furnished an abstract showing good and merchantable title as required by the conveyance, could have demanded and enforced the delivery of the $500,000 purchase price, and it would have been incumbent upon Noble & Company to show that their title to the property conveyed was imperfect. This, according to the evidence, it could not have done. After the time specified in the conveyance within which the abstract should be furnished and examined had expired, no modification of the provision having been made by the parties, the furnishing of the abstract showing good and merchantable title in the sellers consummated the sale, and the taking effect of the sale so as to postpone the realization by the sellers of the profit thereon could not be postponed by the delay of Noble <& Company in notifying the escrow agents that the escrow agreement had been complied with.
The purpose of Waggoner and Greene from the beginning was to postpone the realization of the profit on the sale of their three-eighths interest until the year 1920. We think that they have failed in their attempt to accomplish this. In the opinion of the Board the sale became a completed one on December 27, 1919.
The consideration received for the property consisted of $150,000 in cash and three interest-bearing promissory notes executed by the Charles F. Noble Oil & Gas Co., one for $150,000 due March 1, 1920, one for $100,000 due June 1,1920, and one for $100,000 due September 1, 1920.
The Commissioner held that the profit on the sale was realized in the year 1919, that the promissory notes were the equivalent of cash, and that Waggoner’s profit on the transaction was $222,607.15. The taxpayer stated “the agreed consideration was $500,000, of which one-half was to go to Waggoner. The profit of these taxpayers in this transaction is admittedly $222,607.15, The question at issue is *1206the year in which the profit is to be reported.” In the opinion of the Board the Commissioner’s determination that the profit was realized in 1019 was correct and is approved.
Judgment will ~be entered on SO days’ notice, under Rule 50.
Milliken not participating. Akundell, Phillips and Teammell dissent from the decision reached on the last issue discussed.