217 Reporter's Statement of the Case dissolved on July 26, 1927. Its entire outstanding capital stock was at all times during its existence owned by the plaintiff. 3. The Osage Oil Corporation was organized under the laws of the State of Oklahoma in 1925. Its entire outstanding capital stock was at all times during the calendar year 1927 owned by the plaintiff. 4. The Osage Trading Company was organized under the laws of the state of Delaware during the year 1927, and all of its outstanding capital stock was at all times during the remainder of said year owned by the plaintiff. 5. Prior to October 22, 1926, plaintiff acquired an interest in an oil and gas lease on the following described land situated in Osage County, Oklahoma, to wit: The NW4 and NE1⁄4 of Section 31, all in Township 25N, Range 8-E. On October 22, 1926, plaintiff and the Western Osage Oil Corporation, which also owned an interest in said lease, as party of the first part, entered into an agreement with Prairie Oil and Gas Company, as party of the second part, which provided, among other things, as follows: I First party hereby assigns, transfers, sells and conveys unto the second party, the oil leasehold estate covering the following described land, situate in Osage County, Oklahoma, to-wit: The Northwest Quarter (NW14) of Section 31, and the Northeast Quarter (NE1⁄44) of Section 31, all in Township 25 North, Range 8 East, together with all equipment, machinery and appliances situate thereon, as of October 16, 1926 at 7 o'clock a. m., except drilling contractors' tools, and first party, concurrently herewith, has executed assignments of the aforesaid leasehold estate, on the forms required by the Rules and Regulations of the Secretary of the Interior. II As consideration for the foregoing conveyance, the second party shall pay to the first party, the sum of Four Hundred Thousand Dollars ($400,000.00) in cash on approval of said conveyance by the Secretary of the 92 C. Cls. Interior, and shall pay as additional consideration therefor, the sum of Four Hundred Thousand Dollars ($400,000.00) in oil, as, if and when produced from said property, said sum to be payable out of fifty percent (50%) of the proceeds of the oil produced to the credit of the working interest in said leases so conveyed by party of the first part to party of the second part, settlement therefor to be made on the 10th and 25th days of each month after the oil is produced and sold from said properties, at the current posted market price paid by the party of the second part for oil of like kind and quality, and under the terms of its regular formal Division Order; if the party of the second part does not itself purchase said oil, then at the posted market price paid for said oil by the purchaser thereof. The party of the second part shall have and retain as its own, the other fifty percent (50%) of the proceeds of the oil produced from said working interest, free and clear from all liabilities for said sum of Four Hundred Thousand Dollars ($400,000.00), nor shall the party of the second part ever be personally liable therefor if insufficient oil be produced from said fifty percent (50%) of said interest to pay said sum of Four Hundred Thousand Dollars ($400,000.00). Reporter's Statement of the Case III It being further agreed, however, that of said oil payment so agreed to be made, the Wrightsman Petroleum Company, to the exclusion of the Western Osage Oil Corporation, shall be entitled to receive from said oil runs, the total sum of Two Hundred Thousand Dollars ($200,000.00) before the Western Osage Oil Corporation shall participate therein; that after there shall be paid to the said Wrightsman Petroleum Company the said sum of Two Hundred Thousand Dollars ($200,000.00) from out of said oil runs as aforesaid, then and thereafter, the Western Osage Oil Corporation shall be entitled to receive the proceeds of said oil runs to the exclusion of said Wrightsman Petroleum Company, until the said Western Osage Oil Corporation shall have received the said sum of Two Hundred Thousand Dollars ($200,000.00) from and out of said proceeds from the said oil runs, and not otherwise, it being the intention that the Wrightsman Petroleum Company shall be preferred as to the proceeds of said oil runs until it has received the total of Two Hundred Thousand Dollars ($200,000.00) and that the residue of said 217 Reporter's Statement of the Case oil runs shall belong to and be the property of the Western Osage Oil Company until it shall have received the said sum of Two Hundred Thousand Dollars ($200,000.00). Said agreement was performed by all parties in accordance with its terms, and during the calendar year 1927 plaintiff received under said agreement, in addition to its share of the $400,000.00 cash payment mentioned therein, the sum of $159,455.64. Said amount represented the portion of plaintiff's $200,000.00 preference under said agreement which accrued during said year. If plaintiff is entitled to take depletion on said $159,455.64 and is otherwise entitled to recover, then the amount of such depletion is 272 percent of said amount, without limitation. No deduction for depletion with respect to the aforesaid agreement was taken in either the original or amended consolidated returns for the calendar year 1927, or allowed by the Commissioner of Internal Revenue in his final determination of the tax liability for said year. 6. Prior to December 30, 1922, plaintiff acquired an interest in an oil and gas lease on the following described land situated in Kay County, Oklahoma, to wit: The SW4 of Section 36, Township 25N, Range 1W, situated in Kay County, Oklahoma, and containing 160 acres. On December 30, 1922, plaintiff entered into an agreement with the Comar Oil Company which provided, among other things, as follows: Subject to examination of title by our attorneys, for which examination we are to have three days after receipt of abstract and necessary papers showing a good and marketable title, which are to be furnished by you within ten days from date of this letter, we agree to buy, and you agree to sell and deliver to us, an assignment of a valid, regular school oil and gas mining lease, including the present oil and gas equipment thereon now belonging to you save and excepting stock pipe, prescribing the usual royalty of one-eighth and in the usual form of the same, the term of which is until May 21, 1923, and as much longer as oil or gas is produced, covering the Southwest Quarter (SW) of Reporter's Statement of the Case 92 C. Cls. Section thirty-six (36), Township Twenty-five (25) North, Range one (1) West, situated in Kay County, Oklahoma, and containing one hundred sixty (160) acres, for which, subject to the above conditions, we agree to pay you One Million Dollars ($1,000,000.00) in the following manner, to-wit: Three Hundred Thousand Dollars ($300,000.00) in cash upon delivery to Exchange National Bank of Tulsa, Oklahoma, of an assignment of such lease duly approved by the Commissioners of the Land Office of the State of Oklahoma, and Seven Hundred Thousand Dollars ($700,000.00) out of the proceeds of one-half (2) of the first oil and gas produced from said premises, as and when produced, exclusive of royalty, at a price for oil equal to the price posted by the Prairie Oil & Gas Company and/or Sinclair Crude Oil Purchasing Company for oil of the same gravity and nature in the Tonkawa field. Provided, however, that if at any time fifty percent (50%) or more of the sales of oil from oil produced upon the following described properties in the Tonkawa field, to-wit: Properties of the Blackwell Oil & Gas Company, McCaskey & Wentz, Pennock Oil Company, Amerada Petroleum Company, Humphries Petroleum Company, Healdton Oil & Gas Company, Southwestern Petroleum Company, shall be made to bona fide purchasers at a premium, Said agreement was performed by both parties in accordance with its terms, and during the calendar year 1927 plaintiff received thereunder an aggregate of $1,453.01 representing payments on account of the $700,000.00 payable as set forth in said agreement. 217 Reporter's Statement of the Case If plaintiff is entitled to take depletion on said $1,453.01 and is otherwise entitled to recover, then the amount of such depletion is 272 percent of the said amount, without limitation. No deduction for depletion with respect to said lease was taken in either the original or amended consolidated returns for the calendar year 1927, or allowed by the Commissioner of Internal Revenue in his final determination of the tax liability for said year. 7. Prior to July 1, 1922, plaintiff acquired certain oil and gas leases on land situated in Garvin County, Oklahoma, more particularly described as follows: North Half (N2) of the Northwest Quarter (NW) of the Northeast Quarter (NE1⁄44) and Southwest Quarter (SW14) of the Northwest Quarter of the Northeast Quarter (NW1⁄4) of (NE1⁄4), and the Southwest Quarter (SW14) of (NE1⁄44), and the Southwest Quarter (SW14) of Northeast Quarter (NE), and the West Half (W2) of the Southeast Quarter (SE14) of the Northeast Quarter (NE) and the East Half (E2) of the Northeast Quarter (NE1⁄44) of the Southeast Quarter (SE), and the South Half (S2) of the Northeast Quarter (NE) of the Northeast Quarter (NE), and the East Half (E2) of the Southeast Quarter (SE) of the Northeast Quarter (NE1⁄44), and the Northwest Quarter (NW4) of the Northwest Quarter (NW14) of the Southeast Quarter (SE1⁄44) of Section Twenty-one (21), and the Southwest Quarter (SW14) of the Northwest Quarter (NW14) of the Northeast Quarter (NE1⁄44), and the East Half (E1⁄2) of the Northeast Quarter (NE) of the Northwest Quarter (NW14), and the Southwest Quarter (SW14) of the Northeast Quarter (NE) of the Northwest Quarter (NW14); and the North Half (N2) of the Southeast Quarter (SE) of the Northwest Quarter (NW), and the Southwest Quarter (SW14) of the Southwest Quarter (SW14), and the West Half (W12) of the Northwest Quarter (NW14) of the Southwest Quarter (SW14), Section Twenty-two (22), all in Township One (1) North, Range Three (3) West, Garvin County, Oklahoma, containing two hundred fifty (250) acres, more or less, according to the Government Survey thereof. On July 1, 1922, plaintiff as party of the first part entered into an agreement with Texas Pacific Coal & Oil Company |