
    C. E. COOPER and EDNA V. COOPER, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
    Docket No. 2206.
    Decided September 30, 1926.
    Income from share of distributive profits of a partnership determined.
    
      H. H. Tooley, O. P. A., for the petitioners.
    
      George G. Witter, Esq., for the respondent.
    
      In separate notices the Commissioner has asserted a deficiency in income tax for the calendar year 1920 against each of the petitioners in the amount of $12,287.51, all of which is in controversy. The deficiencies arise from the Commissioner’s method of computing the share of the marital community in the distributive profits earned by a certain partnership during the taxable year.
    PINDINGS OP PACT.
    The petitioners were residents of the State of Texas during the taxable year and constituted a marital community under the laws of that State.
    Prior to January 1, 1920, C. E. Cooper and R. H. Plenderson formed a business partnership, known as the C. E. Cooper Co., for the purpose of dealing in oil and gas leases. The partnership agreement was oral, and there is no controversy as to its terms and conditions. Each partner had a half interest in the business.
    Prior to July 1, 1920, the C. E. Cooper Co. acquired an oil and gas lease, known as the Goodwin lease, on a certain 20 acres of land in-the State of Texas. The terms of the lease are not material to the issues to be determined, except a provision for the payment to the lessor of a royalty of one-eighth of the oil produced.
    On July 1,1920, for the purpose of securing funds for the development of the Goodwin lease, the C. E. Cooper Co. entered into a written contract with one Leaverton, a trustee for various investors acting together under the terms of a trust agreement, hereinafter referred to as the Leaverton Trust. By the terms of this contract the C. E. Cooper Co. conveyed an undivided one-half interest in the Goodwin lease to the Leaverton Trust and contributed the amount of $30,000 for use in development work; the Leaverton Trust contributed $90,000 to the common fund for use in development work; the C. E. Cooper Co. and the Leaverton Trust were each to receive seven-sixteenths of any oil that might be recovered from the lease; and an operating entity, hereinafter referred to as the Cooper-Henderson-Goodwin Lease, composed of the C. E. Cooper Co. and the Leaverton Trust, was created.
    The development work done by the Cooper-Henderson-Goodwin Lease resulted in the discovery of oil in paying quantities on September 27, 1920. Subsequently, Cooper, Henderson, and one C. J. Dexter, organized the Cooper-Henderson Oil Co. of Texas and incorporated the same under the laws of the State of Arizona. On October 16, 1920, this corporation acquired the interest of the C. E. Cooper Co. in the Cooper-Henderson-Goodwin Lease and issued shares of its capital stock therefor.
    Seven-eighths of the total net income realized from the Goodwin lease during the year 1920 was $369,815.81. On October 16, 1920, the C. E. Cooper Co. transferred all of its interest owned up to that time in the Cooper-Henderson-Goodwin Lease to the Cooper-Henderson Oil Co., a corporation.
   OPINION.

Lansdon:

From the meager data adduced in evidence, we must determine the taxable income accruing to the petitioners from their interest in the Goodwin lease during the year 1920. Whatever income they received was by reason of their interest in the operating entity designated as the Cooper-Henderson-Goodwin Lease, which came into existence as the result of a contract between the C. E. Cooper Co. and the Leaverton Trust which was executed on July 1, 1920. The C. E. Cooper Co. had a seven-sixteenths interest in any distributive profits earned by the Cooper-Henderson-Goodwin Lease from July 1, 1920, to October 16, 1920. As Cooper and Henderson were equal partners, it follows that the marital community was entitled to seven thirty-seconds of such profits and that, if permitted to make separate income-tax returns for the taxable year, each member of such community should include seven sixty-fourths of such profits in the gross income reported.

It is stipulated that the total net income from the Goodwin lease during the year 1920 was $369,815.81. The petitioners’ right to share in such profits rests on and is defined by the contract that created the Cooper-Henderson-Goodwin Lease, and is limited to the elapsed time from July 1, 1920, to October 16, 1920, when such right was exchanged for shares of stock of the Cooper-Henderson Oil Co. of Texas. So far as we are able to. determine from the record, the accounting term in question of the Cooper-Henderson-Goodwin Lease was from July 1, 1920, to December 31, 1920, inclusive, a period of 184 days. The petitioners’ right to share in the profits earned during such accounting period began at July 1, 1920, and terminated at October 16, 1920, a period of 108 days. We are of the opinion, therefore, that they were entitled to' share in one hundred and eight one hundred and eighty-fourths of the stipulated net income of $369,815.81, which is $215,094.88, and that each petitioner’s share of such income was $23,525.95.

Order of redetermination will be entered on W days’ notice, under Rule 50.  