
    ALEXANDER, Collector of Internal Revenue, v. CONTINENTAL PETROLEUM CO.
    No. 615.
    Circuit Court of Appeals, Tenth Circuit.
    March 8, 1933.
    T. H. Lewis, of Washington, D. C. (Herbert K. Hyde, U. S. Atty., and William Earl Wiles, Asst. U. S. Atty., both of Oklahoma City, Okl., and C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and Eldon O. Hanson, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for appellant.
    Thomas D. Lyons, of Oklahoma City, Okl. (David H. Blair, of Washington, D. C., and T. P. Gore, of Tulsa, Okl., on the brief), for appellee.
    Before LEWIS, COTTERAL, and PHILLIPS, Circuit Judges.
   COTTERAL, Circuit Judge.

This suit was brought by the Continental Petroleum Company to recover an. excess payment of income tax for the year 1925-, which was due to a refusal by the Commissioner of Internal Revenue to allow a deduction claimed for depletion.

On December 21, 1921, the Continental Petroleum Company agreed, in writing, with the Transcontinental Oil Company (both Delaware corporations) the former would on January 25, 1922, sell and assign to the latter certain oil leases it had acquired in Creek county, Okl., for $5,000,000, of which $1,000,-000 was to he paid in cash, three installments of $500,000 each were evidenced by notes, and the remaining $2^500,000 was to he paid out of one-half of the oil produced and credited to tho leasehold interests, provided the cash payment should he credited with qne-half the oil run, and tho $2,500,000 should he credited with the other half, between December 24, 1921, and tho date of delivery of the transfers. There were provisions for securing the payments by liens, for the sale of the equipment used or held for use upon the leases, and for the delivery of abstracts of title.

An “assignment” was executed on February 8, 1922, whereby a three-fourths interest in tho leases was sold and transferred to the Transcontinental Oil Company, and a one-fourth to M. L. Benedum (an assignee of that interest). Tho equipment was also transferred. Conditions were annexed. One was a reservation to the vendor of one-half the lessee’s share of the oil when produced, until it should he credited with $2,471,241. The others were that liens should be secured on the equipment, and the transfers were subject to the terms of tho leases, as approved by the Secretary of the Interior. Tho considerations were a cash payment of $600,361.38; four notes, one for $384,000 and three others for $500,000 each, maturing at different datos and secured by vendor’s liens, except that one note for $500,000 was to be placed in escrow, and the vendee was to pay vendor $2,471,241 out of one-half the oil credited to vendor’s working interest, acquired by vendee. When the notes were paid, the liens were to he released, and on the payment in oil, tho reservation thereof was to bo satisfied.

A collateral agreement between the parties of the same dato provided safeguards against defects in the title to the leases.

The controversy in the suit was whether the plaintiff reserved an interest in the oil production that was subject to depletion. The cause was tried before the District Court, upon waiver of a jury. That court found the plaintiff was entitled to the deduction claimed.

The appeal presents the controversy to this court. It is urged by the plaintiff that the finding of the District Court forecloses inquiry into the facts and bars a review of the questions of law. The contention would he sound in respect of the facts, if there was a finding upon any disputed issues. Stinson v. Business Men’s Acc. Ass’n (C. C. A.) 43 F.(2d) 312. But only questions of law were involved upon the undisputed evidence, and they were saved by defendant’s requests for special findings and for a judgment in his favor. White v. United States (C. C. A.) 48 F.(2d) 178; Maryland Casualty Co. v. Jones, 279 U. S. 792, 49 S. Ct. 484, 73 L. Ed. 960.

The depletion statute here involved is section 234 (a) (8), Revenue Act of 1926 (44 Stat. c. 27, pp. 41, 42, 26 USCA § 986 (a) (8), which is.set out in the lower margin.

The defendant contends, in substance, that the transfer of the leases was absolute, and as a result left no reserved interest in the vendor subject to depletion. We may agree that the transaction was a sale of the leases. But it was not an end of plaintiff’s interest in the production of the oil. We consider further that as the leases were located in Oklahoma the lessees had no title to the oil in place and acquired only a right to produce the oil and reduce it to possession, when ownership attached. Rich v. Doneghey, 71 Okl. 204, 177 P. 86, 88, 3 A. L. R. 352; Alexander v. King (10 C. C. A.) 46 F.(2d) 235, 74 A. L. R. 174, certiorari denied 283 U. S. 845, 51 S. Ct. 492, 75 L. Ed. 1455. But they had a property right that was undoubtedly subject to an allowable depletion. Commissioner v. Molter (C. C. A.) 60 F.(2d) 498. The question is whether the plaintiff was entitled to it, in view of the reservation in the sale.

It is to he noted that the Revenue Act does not limit the taxpayer’s interest. It broadly authorizes a reasonable allowance for depletion “according to the peculiar conditions in each case,” and specifies that “in the ease of leases the deductions * * * shall be equitably apportioned between the lessor and lessee.”

There is no occasion to review the citations and arguments on which defendant relies, as we are pez'suaded the eontrovez’sy is ruled by the decision of the Supreme Court, in Palmer v. Bender, 53 S. Ct. 225, 77 L. Ed. - (January 9, 1933), where a like statute was involved. Thei’e the depletion was claimed by Palmer, a member of two partnerships, which had sold certain leases. One of the sales was in consideration of a cash bonus and a payment “out of one-half of the first oil produced and saved,” and the other was of like character. The interest, as defined hy state law, to which the Revenue Act was applied, was held to be irrelevant; and the depletion was sustained.

We do not doubt that the decision applies to the present controversy and controls its disposition.

The judgment in this ease is therefore a£« firmed. 
      
       “Sec. 234 (a) In computing the net income of a corporation subject to the tax imposed hy section 981 [230] of this title there shall be allowed as deductions : * * *
      “(8) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the commissioner with the approval of the Secretary. In the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee.”
     