*36 Decision will be entered under Rule 50.
1. Petitioner and his wife, residents of the State of Oklahoma, filed a declaration of intention to come under the community property law of that state effective November 1, 1939. The Oklahoma Community Property Law by its express terms applies only to husbands and wives who file such a declaration. Held, that the Oklahoma Community Property Law is to be given effect in determining Federal income tax questions and that the income of petitioner and his wife for the period November 1 to December 31, 1939, which constituted community income under the provisions of the Oklahoma statutes, may be reported in equal shares by petitioner and his wife in their separate returns, following
2. Prior to November 1, 1939, petitioner acquired with his separate property certain oil and gas royalties located in Oklahoma and Illinois. Test wells were drilled on the properties, or in some instances on nearby premises, which proved dry or commercially nonproductive during 1939. The data obtained from these drillings and other available information as to the geological structure in the areas*37 of petitioner's properties indicated that at the close of 1939 there was little probability that oil or gas would ever be produced from petitioner's properties in commercial quantities and that petitioner's royalties were worthless. In 1940 petitioner disposed of all of such royalties by quitclaim deeds. There have been no test drillings to the sedimentary beds or series below the proven oil producing level in the areas of petitioner's properties. Held, that petitioner's royalties became worthless in 1939 and that the cost of such royalties is deductible by petitioner in his income tax return for 1939 as a loss of that year.
*41 This proceeding involves a deficiency of $ 11,029.95 in petitioner's income tax for 1939. The questions in issue are (1) whether petitioner and his wife, who were domiciled in the State of Oklahoma and who made an election, as provided by state statute, to come under the terms of the community property law of that state, may report their respective*38 shares of community income in separate returns; and (2) whether certain oil and gas royalty interests which petitioner owned became worthless during the taxable year, giving rise to a deductible loss.
These questions have been submitted on a written stipulation of facts with exhibits attached, and the oral testimony of witnesses.
FINDINGS OF FACT.
Petitioner is a resident of Nowata, Oklahoma. He filed his income tax return for 1939 with the collector of internal revenue for the district of Oklahoma. Petitioner's books were kept and his income tax return made on the cash basis. His return showed a tax due of $ 22,986.10, which has all been paid. The deficiency of $ 11,029.95 has likewise been paid and claim for refund in the amount of $ 9,300 has been filed.
The State of Oklahoma, by legislative enactment effective July 29, 1939, adopted a community property law similar to that of the State of Texas and other community property law states except that it is operative only when an election to come under the law is made by the husband and wife.
On October 26, 1939, petitioner and his wife executed and filed with the county clerk of Nowata County, Oklahoma, a "Community Property Election," *39 stating that they desired to avail themselves of the provisions of the Oklahoma Community Property Law and to have the law apply to them and their property. A certified copy of the election was filed in the office of the Secretary of State of Oklahoma on October 27, 1939. By reason of this election the Oklahoma Community *42 Property Law applied to them and their property on and after November 1, 1939.
For the period November 1 to December 31, 1939, inclusive, petitioner and his wife received the following income and claimed the following deductions:
| Income | |
| Salary of petitioner | $ 3,333.34 |
| Dividends from petitioner's stocks | 10,250.50 |
| Dividends from stocks of petitioner's | |
| wife | 9,856.00 |
| Interest from obligations due petitioner | 242.50 |
| Distributive share, petitioner's | |
| interests in partnerships | 1,214.66 |
| Oil royalty net income of petitioner | 2,774.36 |
| Oil royalty net income of petitioner's | |
| wife | 1,909.65 |
| Oil lease net income of petitioner | 9,722.58 |
| Oil lease net income of petitioner's wife | 122.70 |
| Total income | 39,426.29 |
| Deductions | |
| State and local taxes of petitioner | $ 106.28 |
| State and local taxes of petitioner's wife | 197.18 |
| Charitable contributions of petitioner | 30.00 |
| Field car expense of petitioner | 175.36 |
| Office expense o petitioner | 576.74 |
| Depreciation upon petitioner's office | |
| furniture and fixtures | 9.32 |
| Travel expense of petitioner | 180.76 |
| Depreciation upon petitioner's | |
| business automobiles | 177.66 |
| Worthless royalties deducted by | |
| petitioner | 2,625.00 |
| Total deductions | 4,078.30 |
| Net income | 35,347.99 |
*40 Petitioner and his wife filed separate Federal income tax returns for 1939 in which they each reported one-half of the foregoing amounts of income and deductions for the period November 1 to December 31, 1939. In his determination of the deficiency herein the respondent has denied the petitioner and his wife the right so to report this income and the deductions claimed.
In his separate return for 1939 petitioner claimed deductions aggregating $ 5,724 on account of the worthlessness of certain oil and gas royalty interests, in addition to one-half of the above shown deduction of $ 2,625 claimed against community income. The Commissioner has disallowed the deduction of all the amounts claimed as royalty losses on the ground that petitioner's royalty interests did not in fact become worthless during the taxable year 1939. Following is a brief description of each of such interests, showing the date of acquisition, location and cost thereof, and some of the facts bearing upon the probability of future production:
On June 24, 1939, petitioner acquired, with his separate property, a one-eighth royalty interest in the northeast quarter of section 17, township 5 north, range 10 east, Hughes*41 County, Oklahoma, at a cost of $ 750. A dry hole was drilled on the premises to and through the Cromwell sand (4,613 feet) on July 23, 1939. There were only two producing wells, one oil and one gas, in that area. They were about three-fourths of a mile northwest of petitioner's royalty. These wells were both drilled to the Wilcox sand originally, but proved unproductive in that formation and were plugged back to the Cromwell sand, where they produced commercially at about 4,500 feet. The dry hole on petitioner's royalty was not drilled to the Wilcox sand, *43 which was found to lie about 150 feet deeper there than on the producing properties. Generally a formation which has proven nonproductive at one depth will not produce at a lower depth in that area. Petitioner's royalty became worthless in July 1939, when the dry hole was drilled to a depth below the producing level in that area. No other development has ever been undertaken on petitioner's royalty.
In January 1938 petitioner acquired, with his separate property, a one thirty-second interest in three royalties located in Payne County, Oklahoma, in the vicinity of a producing area known as the Ramsey Pool, which lies*42 principally in sections 13 and 18, township 18 north, ranges 1 and 2 east, Payne County, Oklahoma. This pool was discovered in 1937 and was fully developed by the end of 1939. One of petitioner's royalties was in the southeast quarter and one in the northeast quarter of section 18 and the other was in the southeast quarter of section 12. In the order mentioned they were situated directly to the southeast, northeast, and northwest of the Ramsey Pool. In May 1939 dry holes were drilled to the Wilcox sand on both of the royalties in section 18 at points nearest the pool, one to a depth of 5,139 feet and the other to a depth of 4,932 feet. The production in the Ramsey Pool was all from the Wilcox sand at depths of from about 4,700 to 4,800 feet. Both of petitioner's royalties in section 18 became worthless in 1939 when the dry holes thereon were completed.
There has never been any development on the royalty located in section 12. During 1938 a dry hole was drilled about one-fourth of a mile directly north and another about one-half mile to the southeast of petitioner's royalty. Both of these dry holes were more than a half mile outside of the producing area. In July 1939 a well*43 was drilled by the Mid-Continent Petroleum Corporation, the principal operator in that area, directly offsetting the southeast corner of petitioner's royalty to the south, which had an estimated initial 24-hour production or "potential" of 7,344 barrels. Thereafter, and on August 31, 1939, another well was completed by the Mid-Continent Petroleum Corporation directly offsetting the southeast corner of petitioner's royalty to the east, which had a small initial production of only 50 barrels of oil for the first 24 hours from the Wilcox sand. In August 1940 this well was plugged back to the Hunton lime, where it had an initial production of about 90 barrels for the first 24 hours. It was never considered commercially profitable. Petitioner's royalty in section 12 became completely worthless in August 1939, when the commercially nonproductive well was drilled directly offsetting the southeast corner to the east, showing that in all probability petitioner's property lay outside of the area of profitable production.
On August 30, 1938, the petitioner acquired with his separate property three separate oil and gas royalty interests covering premises *44 situated in sections 17, *44 19, and 20, township 8 north, range 3 east, Fayette County, Illinois, at a cost of $ 2,625. A dry hole was drilled (1,637 feet) on one of these properties, section 17, that nearest the producing area, on September 1, 1938. On August 2, 1938, a dry hole was drilled (1,757 feet) in section 19 southwest of petitioner's property located in that section. On May 16 and June 20, 1939, respectively, two dry holes were drilled in section 16 northeast of petitioner's properties located in section 17. No further development has occurred on any of these properties. All three of petitioner's royalties became worthless in 1939 when the dry holes were completed.
During the year 1940 petitioner executed quitclaim deeds divesting himself of all interest in all of the oil and gas royalty interests described above.
The sedimentary series or beds under the properties on which petitioner's royalty interests were located and under the areas surrounding these properties and below the horizons or strata penetrated by the development in those areas have never been tested by drillings.
OPINION.
Our first question is whether the petitioner and his wife, having made a statutory election to come under the*45 Community Property Law of the State of Oklahoma, effective November 1, 1939, are entitled to report separately their respective shares of community income and deductions pertaining thereto for the period November 1 to December 31, 1939.
In the State of Oklahoma, unlike the other community property states, the community property law applies only to husbands and wives who have filed their written election to come under its terms. The pertinent provisions of the community property statutes are found in Title
This Act shall be available only to and apply only to husbands and wives and to their property for a period of time from the first day of the month in any year subsequent to their filing their written election to come under the terms of this Act until either an absolute decree of divorce is rendered dissolving their marriage, or until the death of one of them. Laws 1939, page 356, Sec. 1.
The written election to come under the terms of this Act, *46 referred to in Section 1 of this Act, shall be a written instrument signed and acknowledged in duplicate by both husband and wife, stating in substance that they desire to avail themselves of the Act and have same apply to them and to their property on the first day of the next month in any year subsequent to the filing thereof in both the office of the county clerk and the Secretary of State as hereinafter provided. * * * Laws 1939, page 356, Sec. 2.
*45
All property acquired by the husband or the wife after the effective date of the election to come under the terms of the Act as provided in *47 Section 1 of this Act, except that which is separate property of either one or the other, shall be deemed the community or common property of the husband and the wife and each, subject to the provisions of this Act, shall be vested with an undivided one-half interest therein. The wife shall have the management and control and may dispose of that portion of the community property consisting of her earnings, all rents, interest, dividends, incomes and other profits for her separate estate and all other community property the title to which stands in her name. The husband shall have the management and control and may dispose of all other community property, * * * Laws 1939, page 357, Sec. 6.
Upon the death of the husband or the wife, the surviving spouse shall administer all community property in the same manner and with the same duties, privileges and authority as are vested in a surviving partner to administer and settle the affairs of a partnership upon the death of the other partner, as provided by Section
The Oklahoma community property law is said to be patterned after the Texas community property statutes (see Vernon's Civil Statutes of the State of Texas Annotated, Revision of 1925, Title 75, ch. 3) and in some of its provisions bears a close resemblance to the community property law of that state and those of the other community property states. The election provisions contained in
The Commissioner terms the statutory election which petitioner and his wife made to come under the Oklahoma community property law an "anticipatory arrangement" such as the Supreme Court held in
This contention, we think, is unsound. In other community property states, such as California and Texas, the community property statutes apply by operation of law and without any voluntary action on the part of the marital community, but they may be modified or avoided by an express agreement or declaration to that effect by the spouses. For purposes of the Federal income tax we can see but little practical difference between a community property law which is operative only when expressly invoked and one which operates unless expressly revoked. Contracts between husbands and wives changing or modifying the operation of the statutory community property laws of the states have been given effect in determining *47 Federal income tax questions in a number of cases, including
It seems to us that the argument for bringing this case under the rule of
In the Earl Case a husband and wife contracted that any property they had or might thereafter acquire in any way, either by earnings (including salaries, fees, etc.), or any rights by contract or otherwise, "shall be treated and considered, and hereby is declared to be received, held, taken, and owned by us as joint tenants. * * *" We held that assuming the validity of the contract under local law it still remained true that the husband's professional fees, earned in years subsequent to the date of the contract, were his individual income, "derived from salaries, wages, or compensation for personal*53 service," under sections 210, 211, 212 (a) and 213 of the Revenue Act of 1918 (40 Stat. 1062-1065). The very assignment in that case was bottomed on the fact that the earnings would be the husband's property, else there would have been nothing on which it could operate That case presents quite a different question from this, because here, by law, the earnings are never the property of the husband but that of the community.
In his brief the Commissioner submits that although the holding in
From its earliest history the law of the community, in some if not all of the sources of its origin, has embodied the concept of a voluntary agreement between the members of the community. For instance, prior to the adoption of the Code Napoleon, by which the law of the community was made a part of the general law of France, the community of property was excluded in some jurisdictions, *56 in which the Roman law prevailed, but might be adopted by contract. In McKay's Community Property, 2d Ed., it is said that:
§ 147. Contract is the basis of the conventional community. -- * * * A purely conventional community may be formed and may operate in a state or country where marital rights are not regulated by the law of community. It is enough that the law does not in express terms or by implication forbid it. Where the law of the state recognizes community and provides for it, the contract of the spouses need not provide for every legal detail of the association but may leave much to the law and the law will be deemed to be embodied in their contract where it is not in terms excluded. The contract and the law supplement each other and are construed together as though the law were, in terms, written into the contract. But in spite of this co-operation of contract and law, the basis of the association is contractual. In brief, contract forms the basis of that form of the marital property association called the conventional community.
§ 148. Contract is the basis of the modified legal community. -- The modified legal community like the conventional is based on*57 contract. In a modified legal community the spouses simply agree to some change in the code or statute, and leave the remainder untouched by their contract. In such a case they not merely make their contract with reference to the law but are deemed to incorporate the unchanged provisions of the legal community into their contract, and clearly contract is the legal basis of this form of community.
§ 149. The sense in which tacit contract is the basis of the legal community. -- * * * And when two marry and one of the known consequences of their marriage in the absence of a contract to the contrary, is the formation of a marital property arrangement called the legal community, they are deemed to agree to that arrangement, just as much as when a modified community is created by a change of some provision of the law, or when a larger measure of change is made by the formation of the conventional community.
* * * *
§ 158. The doctrine in the common-law states. -- Common law and common sense recognize the distinction between casting a system of legal rights and obligations upon persons, and offering them that system to be accepted or *49 rejected. The law of community in*58 these seven common-law states is not cast upon the spouses; it is offered to them and their acceptance of it is proven by the absence of a contract excluding or modifying it.
The present Civil Code of Louisiana, article 2807, provides that "The community of property, created by marriage * * * is the effect of a contract."
In states where the community property law is self-operating a marriage, in itself, is a voluntary contract or "anticipatory arrangement" by which the contracting parties agree that their separate earnings shall become community income. This might be said also of an agreement between the spouses to move their domicile from a noncommunity property state to a community property state, with the intention of coming under the community property law of the new domicile. We are told that the avowed purpose of the enactment of the Oklahoma community property law was to prevent the exodus of wealthy citizens of that state to Texas and other community property states where they might obtain a tax benefit from the community property laws. Nevertheless the right of husband and wife to file separate returns dividing the community income and deductions in the state of the new*59 domicile is not denied to them.
We think that in his present contention the respondent fails to make a necessary distinction between agreements or assignments of a strictly private character, like that involved in
The respondent further states in his brief that "The identity of the person properly taxable for the income involved in this proceeding is to be determined without regard to the law of the State of Oklahoma." This contention, we think, is contrary to the position taken by the Supreme Court in its consideration of prior community property questions. For instance, in
In
The Commissioner concedes that the answer to the question involved in the cause must be found in the provisions of the law of the State, as to a wife's ownership of or interest in community property. What, then, is the law of Washington as to the ownership of community property and of community income including the earnings of the husband's and wife's*61 labor?
The answer is found in the statutes of the State, and the decisions interpreting them. [Italics supplied.]
The Court further said, in distinguishing
The respondent further states in his brief that:
Respondent also contends, as hereinafter more fully developed, that since no special reference is made by Congress in the Internal Revenue Code to income which is deemed community property under State law, the well-established rule that "state law may control only when the federal taxing act*62 by express language or necessary implication, makes its own operation dependent upon state law," is applicable as to the taxability of Oklahoma community income.
This contention, like much of the other argument contained in the respondent's brief, obviously is directed to the general question of whether the community property laws of the states are to be given effect in determining Federal income tax questions. We deem that question foreclosed by the decisions of the Supreme Court in
A further contention of the respondent is that the husband and wife, after electing to come under the community property law, each continues to enjoy most of the rights of ownership*63 in the income from his separate earnings and from his separate properties and is therefore taxable on such income, notwithstanding that it is labeled community income.
Just what are the essential rights of the individual spouses in the community property? First, all of the property of both husband and *51 wife is divided into two classes -- separate property and community property. All of the separate earnings of the spouses and the income from their separate properties, except the increase of lands separately owned, are community property. The wife has the management and control, and the right to dispose of, that portion of the community property consisting of "her earnings, all rents, interest, dividends, income and other profits for her separate estate and all other community property the title to which stands in her name." (
The management and control over community property are not property rights and do not determine the ownership of the property.
In its opinion in
§ 161a. Interests in community property. The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in sections 172 and 172a of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property.
The question of the right of a wife in California to report separately her share of the community income was again presented to the United States Supreme Court in
(1) Under the applicable provisions*67 of the Revenue Act of 1928, must the entire community income of a husband and wife domiciled in California be returned and the income tax thereon be paid by the husband?
(2) Has the wife, under section 161a of the Civil Code of California, such an interest in the community income that she should separately report and pay tax on one-half of such income?
In a per curiam opinion, and upon authority of
While there are certain differences which might be pointed out between the rights of the spouses in the community*68 property under the California law and under the Oklahoma law, we do not think that they require a different treatment of the community income for the purpose of the Federal income tax. What is of more weight here is that the Oklahoma statutes (
*53 We think that the Oklahoma community property law, once properly invoked by a husband and wife resident in that state, creates in each of the spouses a vested estate in one-half of the community property which must be given recognition for Federal income tax purposes.
The respondent does not make any contention that any of the income here in controversy, as identified in our findings of fact above, was not community income under the Oklahoma statutes. We think that it all was community income. None of it was "separate property" as defined in
It is settled law in the State of Oklahoma that oil and gas in place do not constitute a part of the realty; that no title therein vests until the oil or gas is reduced to possession; and that all income realized from the sale of oil and gas after election to come under the community property law is community income, even though produced from separately owned property.
The deductions allowable in computing the net income of the community are those incidental to the production of the community gross income, such as expenses, depreciation, interest, and taxes. Each *54 spouse is chargeable with one-half of the community gross income and is *71 allowed one-half of the available deductions.
The respondent has allowed the deduction, either to the petitioner or his wife, of all of the items set forth above in our findings of fact as deductions claimed, except the worthless oil and gas royalties. That question is discussed separately below. It is to be noted, however, that among the community deductions claimed is an item of $ 30 designated "Charitable contributions of petitioner." This deduction is personal to the petitioner and is in no way related to the production of the community income. It is therefore not an allowable deduction against the community gross income.
The respondent has disallowed all of the deductions claimed, either by petitioner or his wife, on account of worthless oil and gas royalties on the ground that such royalties were not shown to have become worthless in 1939.
An oil and gas royalty interest, such as those here under consideration, is the right to a share of the production, or of the profit from production, *72 of oil and gas received by the owner of the land or the mineral rights therein. See Curlee v. Anderson & Patterson (Tex. Civ. App.);
The respondent's contentions are that a royalty interest can not be considered worthless until it has been proven that there is no possibility of obtaining oil or gas production from any of the underlying sedimentary beds which can be reached under standard present day practices of drilling; that there must have been test drillings on the property or in the immediate vicinity down to the bottom of the sedimentary beds, that is, to the granite or other underlying base formation generally recognized as containing no oil or gas. In his brief the respondent states his position as follows:
* * * In other words, respondent's position is bottomed on the fact that the search for oil or gas, by virtue of the*73 nature and occurrence of the subject matter, is uncertain; uncertain because the known-producing sands are not necessarily uniform in occurrence and thickness and may be absent completely in some places because of having pinched out or because of other geologic conditions; and uncertain because it is impossible in advance of drilling to determine the possibilities of finding oil or gas in the lower and deeper sedimentary series.
The respondent goes to considerable length in his brief tracing the history of this question through the various Bureau rulings and decisions of the Board of Tax Appeals and the courts. He urges that the uncertainty and confusion that have long attended the administration of the loss provisions of the act in respect of oil and gas properties be *55 put at rest by the establishment of a definite principle, such as that which he now offers, for future guidance.
However helpful it might prove, as an administrative aid, to lay down a rule of that sort, we can not go beyond the boundaries set by the statute itself. The deduction allowed by the statute,
Generally speaking, the income tax law is concerned only with realized losses, * * *. Exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized. * * * The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal, test. * * *
A deductible loss is realized upon the happening of some identifiable event by which the property is rendered worthless.
In
Common sense interpretation is the safest rule to follow in the administration of income tax laws. Gross income and deductions flow from trade, commerce and dealings in property carried on in the ordinary business way and in the determination of taxes men should measure both by ordinary, everyday business standards. Compare
In arriving at losses the taxpayer should determine in the first instance the tax year in which sustained and such deductions should be allowed by the Commissioner of Internal Revenue unless it appears from the facts that the taxpayer was*76 clearly unreasonable and unfair at the time he was compelled to make his decision. Subsequent events may show a taxpayer to have been wrong but these must have been ascertainable by the exercise of ordinary business care and judgment at the time he made his income tax return.
* * * *
The fact that a taxpayer recovers a small part of a loss in a subsequent year does not invalidate it as such when its deduction in the year taken was based on the exercise of reasonable judgment from facts then known.
See also
To say that one class of property, such as shares of stock, *77 becomes worthless when it no longer has sale value and that another, such as oil and gas royalties, does not become worthless, although entirely lacking sale value, if the title to the property is still held by the taxpayer, or if drilling has been made to certain specified depths, or if some other condition has not been met, is to set up a standard not authorized by the law or established by long standing usage. Cf.
Under one of the Bureau's earliest rulings, O. D. 375, C. B. No. 2 (1920), p. 128, the deduction of losses on account of oil royalties becoming worthless was allowed where "such interests prove worthless, as evidenced by all wells proving dry or failing after producing very small quantities of oil." In
In 1928
* * * Whether an oil and gas lease and/or royalty right comprehend a present interest or estate in the realty itself or in the oil and gas in place * * * they bear a value in direct relation to the presence of oil and gas in the land in commercial quantities. Where there is no oil or gas in the land, the oil and gas lease and royalty right relate to a nonexistent subject matter and have absolutely no value. It would appear that the right to extract oil and gas, or to share in the same when produced, becomes worthless when the subject matter of the right is found to be nonexistent. It is believed that formal disposal of the valueless interest by sale or relinquishment should not be required as a*80 prerequisite to allowance of a loss. A careful prospect of the entire field which demonstrates that the same is barren of oil in commercial quantities may establish the absolute worthlessness of the investment in an oil and gas lease or royalty right. * * *
In
In the instant case the preponderance of evidence is that all of the royalty interests in question became worthless in 1939. Dry wells had been drilled, some in 1938 and some in 1939, either on petitioner's properties or nearby premises, to depths below those of the producing wells in the vicinity. Two well qualified geologists testified in this proceeding that in their opinion, based on the stipulated facts and on data made available by drillings on or in the vicinity of the petitioner's properties, and their knowledge of the established geological formations in those areas, there was little prospect by the close of 1939 that oil in commercial quantities would ever be produced from any of petitioner's properties and that each of the petitioner's royalty interests became worthless in 1939 or partly in 1938*82 and partly in 1939.
*58 On the other hand, two equally well qualified witnesses testified on behalf of the respondent that in their opinions petitioner's royalty interests did not become absolutely worthless in 1939; that they thought it possible that the sedimentary beds beneath the lowest known oil producing formations in those areas might be found to contain oil; and that since, as stipulated, these lower sedimentary beds had not been tested by drillings, the worthlessness of petitioner's royalties had not been proven. On being asked by Government counsel the reason for his opinion that petitioner's royalties were not worthless in 1939, one of the respondent's witnesses replied:
A. Because all of the sedimentary beds that may contain oil and gas adjacent to or underneath these royalties have not been penetrated by the drill.
In the light of the witnesses' interesting and instructive explanations of the geological conditions attending the presence of oil deposits and the ever increasing efficiency of mechanical devices for its extraction, the possibility of the recovery of oil at some time in the future from some of the lower unexplored regions of petitioner's properties may*83 be admitted. We do not think, however, that this mere "possibility" of future production is in itself sufficient to give value to oil royalties which have been condemned as worthless by those engaged in the trade and familiar with the development in those particular areas. In the absence of a clear expression of such an intent by Congress, we do not think that
Maps of each of petitioner's royalty interests were submitted in evidence showing the location of the properties in relation to the oil pool, if any, and the completed wells, both dry and producing. These maps show that petitioner's properties for the most part were beyond, or at least on the outer fringe, of the proven productive areas.
The respondent concedes in his brief that "if the Board approves petitioner's approach to the question. * * * several of the royalties are demonstrated to have become worthless in the taxable year." On the*84 evidence of record we have found as a fact that all of the royalties in question became worthless during 1939.
These royalty interests were acquired by the petitioner before November 1, 1939, and were his separate property. The losses were not operating losses but were the losses of petitioner's capital investment in the properties. The Supreme Court of the State of Oklahoma has ruled that the profit from the sale of an oil and gas lease owned by one of the spouses before the effective date of their declaration to come under the community property law of the state is the separate *59 income of such spouse and does not go into community income.
Decision will be entered under Rule 50.
Footnotes
1. "Whether the Earl Case is entirely consistent with the later case of
Poe v. Seaborn, supra , we need not inquire, for the later decision is controlling. * * *" [Helvering v. Hickman↩, 70 Fed. (2d) 985, 987 .]