Mohawk Petroleum Co. v. Commissioner

The petitioners herein are the Mohawk Petroleum Company and the transferees of the property of that company who are liable as such to the extent of the property respectively transferred to them, for the income tax of the Mohawk Petroleum Company for the years 1936 and 1937.

The facts are stipulated and the controversy arises over the claim by the Mohawk Petroleum Company for the allowance of deduction from gross income for losses alleged to have been suffered by it by reason of the abandonment of four oil wells during the taxable years because oil in paying quantities was no longer produced therefrom. The question of deduction allowance depends largely upon the manner in which the company set up items of depreciation upon its books and has heretofore claimed allowance therefor in its income tax returns. It was the practice of the company to charge to capital the cost of materials incorporated into wells drilled on its leaseholds. So-called “intangible” drilling expenditures were deducted as current expenses and did not enter into the capital cost of the wells set up in the company’s books.

In claiming depreciation, the company treated each leasehold as a unit and used the unit…

(concurring in result).

I concur in the result. The discussion of the method of computing depreciation of the machinery is upon a moot question and entirely unnecessary.

The petition to the Tax Court was for a redetermination of a claimed deficiency determined by the Commissioner, arising from the Commissioner’s disallowance of a claimed deduction for the value of abandoned machinery. In such a proceeding, before the question of the validity of tax *960 payer’s method of depreciation can arise, the burden of proof is upon the taxpayer to show (1)' that the equipment was in fact abandoned and (2) its value after abandonment. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 , 54 S.Ct. 788 , 78 L.Ed. 1348 .

The taxpayer showed the abandonment of the oil well at which the machinery was installed but not the abandonment of the equipment or its value when the well was abandoned. The Tax Court so found, as follows:

The Commissioner’s brief and argument relied upon this failure to establish any claim at all, the necessary foundation of any discussion of whether taxpayer chose a proper method of depreciation. The majority opinion states this finding of the Tax Court in its footnote…