Reporter's Statement of the Case

92 C. Cls.

as party of the second part, the agreement providing, among other things, as follows:

WITNESSETH, That for and in consideration of the execution and delivery by party of the first part to party of the second part of a certain instrument of transfer and assignment covering the several oil and gas leasehold estates, and other personal property connected with, or used in the operation of said leases and belonging to said first party, as is more particularly set forth and described in a copy of the instrument of said transfer and assignment hereto attached and marked EXHIBIT "A" and made a part hereof, and of the execution and delivery of a certain other assignment by party of the first part to party of the second part's nominee, THE ELRO OIL AND GAS COMPANY, of a certain Departmental oil and gas mining lease, made on the 13th day of July, 1916, by and between Levisey Gibson, nee Peters, covering the following described lands, to wit:

(Here follows description as above set forth.)

The agreement then continues as follows:

The second party hereby pays and agrees to pay to the party of the first part as follows, to wit:

The sum of FIVE HUNDRED THOUSAND ($500, 000.00) Dollars in cash and certain promissory notes, the receipt of which is hereby acknowledged by party of the first part, and the further consideration from party of the second part to party of the first part of sixteen thousand six hundred sixty-six and two-thirds (16,6662%) shares of the capital stock of the Texas Pacific Coal and Oil Company, a corporation of the State of Texas, being stock of the par value of Ten ($10.00) Dollars per share.

And as additional consideration for such assignments, the party of the second part agrees that when, and if the gross sales of the working interest oil and gas produced from all of said leases, including the Departmental lease assigned to the ELRO OIL AND GAS COMPANY, amount in the aggregate to the sum of ONE MILLION ($1,000,000.00) DOLLARS, then and in such event the first party shall thereafter receive onehalf of the gross proceeds resulting from sales of the working interest oil and gas purchased from said leases, until the party of the first part shall have received in such manner the sum of FIVE HUNDRED THOU

217

Reporter's Statement of the Case

SAND ($500,000.00) DOLLARS. Said one-half of such gross proceeds shall be paid to first party each month and settlement therefor shall be made on or before the 20th day of each calendar month immediately following the calendar month in which such oil and gas is produced and sold; and the party of the second part shall render with each of the said payments above referred to a statement to the party of the first part, showing the gross sales of oil and gas produced and sold from such leases for the preceding calendar month.

Said agreement was performed by all parties in accordance with its terms, and during the calendar year 1927 plaintiff received under said agreement the sum of $73,923.02 representing payments made under said agreement on account of the $500,000.00 to be paid out of "one-half of the gross proceeds resulting from the sales of the working interest oil and gas produced from said leases," after recovery of oil from said leases, resulting in gross sales aggregating $1,000,000.00. If plaintiff is entitled to take depletion on said $73,923.02 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.

8. Prior to June 12, 1926, the Osage Oil Corporation, one of plaintiff's affiliated subsidiaries, acquired a one-half interest in an oil and gas lease on certain land in Osage County, Oklahoma, more particularly described as follows:

SE4 of Section 6, Township 24N, Range 8E in Osage County, Oklahoma, being 160 acres, more or less. Prior to said date, plaintiff had also acquired a onefourth interest in oil and gas leases in the following described land in the same County:

NW4 of Section 6, Township 24N, Range 8E, in Osage County, Oklahoma.

NW4 of Section 7, Township 24N, Range 8E, in Osage County, Oklahoma.

SW4 of Section 6, Township 24N, Range 8E, in Osage County, Oklahoma.

Reporter's Statement of the Case

92 C. Cls.

On June 12, 1926, the Osage Oil Corporation as party of the first part, and plaintiff as party of the second part, entered into an agreement with the Carter Oil Company as party of the third part, which provided, among other things, as follows:

I

The Osage Oil Corporation agrees to cause to be executed and delivered to the Third Party by the Riverland Company and by the Interocean Petroleum Company, on the form prescribed by the Secretary of the Interior, an Assignment of an undivided one-half interest in the oil Lease above described, covering said South East Quarter of Section 6, Township 24 North, Range 8 East, Osage County, Oklahoma, and upon the execution and delivery of said Assignment, and upon the further condition that said Lease is in good standing upon the records of said Indian Office, as aforesaid, Third Party agrees to pay said Osage Oil Corporation, in cash, the sum of Three Hundred Fifty Thousand ($350,000.00) Dollars as part of the consideration for said Assignment, and this agreement on the part of said Osage Oil Corporation.

II

In addition to the cash consideration above provided for, Third Party shall pay said Osage Oil Corporation one-half of its one-half part of the proceeds of all oil produced and marketed from said Lease until by this means said Osage Oil Corporation shall have received the sum of Two Hundred Fifty Thousand ($250,000.00) Dollars in addition to said $350,000.00 to be paid in cash as aforesaid: PROVIDED, no liability is imposed upon the Carter Oil Company to pay said Osage Oil Corporation said sum of $250,000.00, excepting from said proceeds of oil produced and marketed from said land and the intent and meaning of this paragraph is that said Osage Oil Corporation shall receive the proceeds of one-fourth of all the working interest oil produced and marketed from the land above described under said Lease until by that means said sum of Two Hundred Fifty Thousand ($250,000.00) Dollars shall have been fully paid. PROVIDED, FURTHER, That said oil payments shall be made semi-monthly and in accordance with the customary method of settling for oil run from producing leases in the State of Oklahoma.

217

Reporter's Statement of the Case

Said agreement was performed by all parties in accordance with its terms, and during the calendar year 1927 the said Osage Oil Corporation received under said agreement the sum of $11,825.41 representing payments made under said agreement on account of the $250,000.00 to be paid out of "oil produced and marketed from said lease." If plaintiff is entitled to take depletion on said $11,825.41, 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.

9. At the time of its dissolution on July 26, 1927, the assets and liabilities of the Wrightsman Oil Corporation were as follows:

The indebtedness to plaintiff, as shown in the above balance sheet in the amount of $171,694.62, represented an aggregate of cash advances theretofore made by plaintiff to the said Wrightsman Oil Corporation. No part of the said advances had been recovered or charged off as worthless or uncollectible by plaintiff prior to the dissolution of the Wrightsman Oil Corporation.

The assets listed above were taken over by the plaintiff at the time of the dissolution as the sole stockholder and creditor of the said Wrightsman Oil Corporation, and the balance of the indebtedness, $162,473.34, was at the time of the dissolution charged off on plaintiff's books as a bad debt.

291825-41-CC-vol. 92-17

Reporter's Statement of the Case

92 C. Cls.

The Wrightsman Oil Corporation sustained a loss for each of the years 1923 to July 26, 1927. The aggregate of the benefits which plaintiff and its other affiliates received from such losses by way of offsets through the filing of consolidated returns with the said Wrightsman Oil Corporation was $122,077.17.

At all times during its corporate existence the Wrightsman Oil Corporation was actively engaged in the business of developing its own oil properties.

10. The books of plaintiff and each affiliated company were at all times kept on the cash receipts and disbursements basis.

11. On March 15, 1928, plaintiff, as the parent corporation, filed with the Collector of Internal Revenue at Oklahoma City, Oklahoma, a consolidated return of income for itself, the Wrightsman Oil Corporation, the Osage Oil Corporation, and the Osage Trading Company, and on the same date each of said subsidiary corporations filed information returns on forms provided therefor by the Commissioner of Internal Revenue. In said returns all of said corporations agreed and directed that the entire tax liability for the taxable year 1927 should be assessed against and paid by plaintiff, and that none of the tax on the consolidated return for the calendar year 1927 was to be assessed against any of said subsidiaries. Subsequently, pursuant to written request dated April 15, 1930, from the Internal Revenue Agent in Charge, at Oklahoma City, Oklahoma, and on or about April 21, 1930, all of said corporations filed a formal agreement with respect to their respective tax liabilities for the year 1927. The consolidated return showed a consolidated taxable net income of $203,633.29, and a tax thereon of $27,490.49, which was duly paid by the plaintiff corporation as follows: