In re LEVY

In re LEVY
1939 OK 355
94 P.2d 537
185 Okla. 477
Case Number: 28997
Decided: 10/03/1939
Supreme Court of Oklahoma

 In re LEVY

Syllabus

¶0 1. TAXATION--Deductions Allowable in Computing Not Income Tax Dependent on Statutory Provision.
Deductions to be allowed in computing net income, under the net income tax law, depend entirely upon the legislative will, and must be clearly expressed.
2. SAME--Landowner in Making Income Tax Return Held not Entitled Under Statute to Deduction for "Depletion" From Amount of Cash Bonus Received for Making Oil and Gas Lease.
The owner of an undivided interest in land in Oklahoma who makes an oil and gas mining lease thereon for a cash bonus, reserving a royalty in the oil and gas produced thereunder, is not entitled, when returning his income for taxation, to deduct from such bonus the allowance "to cover the depletion caused by removal from the natural state" in case of oil, gas and other minerals, granted by subdivision (g) of section 9, art. 6, ch. 66, S. L. 1935.

In the matter of the protest of Leon Levy to deficiency assessment on his 1936 Oklahoma state income tax return. Protestant appeals from order of the Tax Commission denying depletion deduction on cash bonus for execution of oil and gas lease. Affirmed.

Keaton, Wells & Johnston, of Oklahoma City, for plaintiff in error and protestant.
Dick Jones, A. L. Herr, Wendell Barnes, and C. D. Stinchecum, all of Oklahoma City, for defendant in error.

HURST, J.

¶1 Protestant, Leon Levy, in making his income tax return for the year 1936, deducted 20 per cent. from a $45,000 cash bonus received by him from the sale of an oil and gas mining lease upon an undivided interest in lands in Oklahoma. The deduction was made on the assumption that protestant was entitled to a depletion allowance on said sum, under subdivision (g) of section 9, art. 6, ch. 66, S. L. 1935, for the reason that such bonus was equivalent to advanced royalties, or that to the extent of such 20 per cent. it represented a conversion of a capital asset. In support of this position protestant cites numerous eases construing the Federal Income Tax Acts, typified by Burnett v. Harmel, 287 U.S. 103, 53 S. Ct. 74, 77 L. Ed. 199, and Herring v. Commissioner, 293 U.S. 322, 55 S. Ct. 179, 79 L. Ed. 389. These decisions are not controlling, as the federal statute does not contain any provision similar to the restrictive clause found in our law, and. in the determination of the question before us, cannot subvert the plain intent of the Legislature as expressed in the act above referred to.

¶2 The production of oil is a major industry in this state, and the peculiar characteristics of the business, and the terms used therein, have been before this court in many eases, and were unquestionably known to and recognized by the Legislature at the time this statute was enacted. An oil and gas lease has been defined as "a grant of the exclusive right to take all the oil and gas that could he found by drilling wells upon a particular tract" (Rich v. Donaghey [1918] 71 Okla. 204, 177 P. 86). While it purports to he a present conveyance, yet, by reason of the fugitive nature of such substances, no title n them actually vests In the lessee until reduced to Possession. Rich v. Donaghey, supra; Kolachny v. Galbreath. 26 Okla. 772, 110 P. 902. A bonus is defined as the cash consideration moving from the lessee to the landowner for the execution of the lease. Carroll Pt al. v. Bowen et al. (1937) ISO Okla. 21.5. 68 P.2d 773. Depletion of the store of oil or gas under the land, if there he any, commences at the time the oil or gas is reduced to possession by the lessee (Breeding v. Ritterhoff, 126 Okla. 225, 259 P. 227), at which time delivery of the royalty, or share reserved to the landowner for permitting lessee to expIore and reduce to possession, also commences. Carroll v. Bowen, supra. If lessee fails within the term of the lease to develop or explore, and reduce to possession, his rights terminate, and the landowner retains the bonus and the land. The exercise of the rights acquired by the lessee under the lease is optional, and until exercised in no way restricts the landowner's use of the land, and deprives him of no right except the right to make another oil and gas lease or to himself develop and produce during the term of the existing, lease.

¶3 With knowledge of these facts the Legislature, by the statute above referred to, provided for a reasonable allowance or deduction "to cover the depletion caused by the removal from the natural state" in case of oil, gas, and other minerals. This language clearly contemplates the allowance for depletion only in event of actual production of oil or gas from the land. In view of what we have said above, it is apparent that the lease bonus does not represent payment for any portion of the mineral produced, but is the consideration for the option to explore and remove minerals, granted by the lease. The landowner's royalty, upon which he is entitled to the depletion allowance if oil or gas is produced from his land, is his compensation, under the lease, for the exercise by lessee of the right therein granted to remove the oil and gas under his land. Aldridge v. Houston Oil Co. et al. (1926) 116 Okla. 281, 244 P. 782; Carter, State, Auditor, v. Rector et al. (1922) 88 Okla. 12, 210 P. 1035; Carroll et al. v. Bowen et al., supra.

¶4 Deductions allowable in computing the net income tax must be clearly authorized by the provisions of the act. Home-Stake Royalty Corporation v. Weems. State Treas., et al. (1935). 175 Okla. 340. 52 P.2d 806; New Colonial lee Co. v. Helvering, 292 U.S. 435, 54 S. Ct. 788, 17 L. Ed. 1348. The protest was properly denied.

¶5 Affirmed.