Commissioner of Internal Revenue v. Belridge Oil Company

Belridge is a large oil producer in the North Belridge field in Kern County, California. Most of its holdings of more than 38,000 acres are in fee simple and are within what is known as its “Main property.” This interest was acquired in 1911. Its whole cost basis has long ago been recovered in depletion allowances, but, as it may, it continued on its income tax returns to take a percentage depletion on oil captured from its wells on the Main property. More recently, about 1945, in this North Belridge field, it acquired at high cost all of the rights to oil in an adjoining 80 acre tract known as the Result property. On this, Belridge has taken and desires to take its depletion on a cost basis. Here in this field, as in many fields, oil and gas are found at various depths in strata, layers or zones, the zones each being self-contained, distinct and separate from each other, or at least substantially so.

Our income tax problem here for the year 1950 concerns only the 64 zone. It lies intermediate between other zones in Belridge’s Main property and extends under the surface of Result and other adjoining North Belridge field properties formerly operated and still owned by or leased to…