18 T.C. 1229">*1229 Respondent determined a deficiency of $ 6,107.71 in petitioner's income tax liability for 1947. Respondent now concedes certain deductions. Petitioner does not contest other disallowances. The remaining issue is whether the petitioner's expenditure of $ 14,000 for fractional interests in oil and gas leases constitutes optionally expensable intangible drilling cost under section 23(m) of the Internal Revenue Code and Treasury Regulations 111, section 29.23(m)-16.

Some of the facts have been stipulated.

FINDINGS OF FACT.

The stipulated facts are hereby found.

Petitioner is an individual, residing in Chicago, Illinois. He filed his Federal income tax return for the year in controversy with the collector of internal revenue for the1952 U.S. Tax Ct. LEXIS 81">*82 first district of Illinois.

Prior to July 1, 1947, one George Vasen acquired directly or indirectly certain mineral leases in lands situated in Stone County, Mississippi. On July 1, 1947, an oil and gas well was being drilled by Vasen on the S. W. quarter of the N. E. quarter of Section 9, Township 2 South, Range 11 West, Stone County, and had reached a depth of 11,200 feet without production.

Petitioner bought from George Vasen interests in the leases owned by him as follows:

On October 14, 1947, the well reached a depth of 12,700 feet. Petitioner and Vasen subsequently made an additional agreement, reduced to writing on November 21, 1947, under which Vasen promised to drill 18 T.C. 1229">*1230 the well to a depth of 13,500 feet in return for an additional payment by petitioner of $ 200 per undivided 300th share in the leases owned by him, a total of $ 2,800. The well reached a depth of 13,500 feet on November 24, 1947.

All of the assignments of interest to1952 U.S. Tax Ct. LEXIS 81">*83 petitioner were identical in form and terms. The pertinent parts of the following assignment are typical:

KNOW ALL MEN BY THESE PRESENTS, That the Undersigned GEORGE VASEN, of the County of Stone, and State of Mississippi, for and in consideration of Five Thousand Dollars ($ 5,000.00) cash in hand paid by SIDNEY PLATT, the receipt of which is hereby acknowledged, do hereby Transfer, Set Over and Assign to the said SIDNEY PLATT, five three-hundredths (5/300) interest in and to the oil and gas leases in and on the following lands in Stone County, Mississippi, totaling one thousand (1,000) acres, more or less, * * *

* * * *

together with the same interest in the oil and gas well which has been drilled by the undersigned * * * to a depth of 11,200 feet; and the said GEORGE VASEN agrees to continue to drill said well with due diligence, until a total depth of 12,700 feet has been reached, unless oil and/or gas is encountered or discovered in paying quantities at a lesser depth, or unless igneous or undrillable material is encountered at a lesser depth as will indicate to the geologist employed by the said GEORGE VASEN that further drilling will be unsuccessful; each party shall share1952 U.S. Tax Ct. LEXIS 81">*84 his proportionate part of the profits, as his interest shall bear to the whole.

The said GEORGE VASEN shall have exclusive management of and supervision over, the drilling of said well and, to the extent that may be necessary, the purchaser herein empowers the said GEORGE VASEN to act for him in all matters expedient or necessary in drilling said well.

In the event production of oil, gas or other minerals is obtained by reason of drilling operations contemplated hereunder, the Purchaser hereby obligates and binds himself to execute a unit operating agreement with accounting procedures, on Mid-Continent Oil and Gas Association form, designating the said GEORGE VASEN as operator, and further obligates and binds himself to sign any division order required by any purchaser of oil, gas or other mineral from the lands covered by the said leases.

Nothing herein contained shall be construed to constitute the parties hereto partners or joint venturers in the drilling of said well.

Other individuals owned lease interests and (together with petitioner and Vasen) were involved in the transactions herein. The terms of the assignments with respect to such persons were identical to those between1952 U.S. Tax Ct. LEXIS 81">*85 petitioner and Vasen.

The drilling was done by Martin Harris Drilling Company pursuant to an agreement between George Vasen and the driller. The Harris Drilling Company would not drill on a footage contract, because of the depth of the hole. Therefore, Vasen agreed to pay $ 500 per day for the rig and all labor. The equipment was owned by Martin Harris. In addition to the $ 500 per day, Vasen was to pay for all fuel oil, greases and all other expenses except labor and 18 T.C. 1229">*1231 incidental costs of maintaining the equipment. In 1947, Harris drilled the well from June 7 to December 24, seven days a week and 24 hours a day. There were not more than 7 days -- December 24 to December 31 -- when Harris was paid only $ 100 a day, under their contractual agreement for days when the rig would not be operated. All other days were $ 500 per day. Harris was paid a total of $ 132,000 for rig rental, wages, fuel oil, drilling mud, hauling, and other expenses, in 1947.

Vasen had sole management and control of drilling operations and made decisions respecting such operations. He did not keep any books or records respecting drilling operations.

The well was located in a purely speculative1952 U.S. Tax Ct. LEXIS 81">*86 or wildcat area. There were no other wells drilled on this drill block.

When the several contract depths were reached the hole was dry. Its surface casing, which extended to a depth of 1,700 feet and was cemented in, had no salvage value. The well is still dry, to date. At 13,500 feet it was abandoned.

In his income tax return for 1947, petitioner charged off as intangible drilling cost the amount of $ 16,800. His 1947 return was the first one in which he attempted to exercise an option to either charge off intangible drilling cost or to capitalize such cost.

New agreements were made by petitioner in subsequent years for additional depths, the cost of which he attempted to charge off as intagible drilling expense in those years. There was expended over a million dollars in further drilling of the well subsequent to 1947. Petitioner paid no lease rentals after 1947 on any leases in the drill block.

In a letter dated June 24, 1952, the Bureau of Internal Revenue, through its Chief Counsel, stated that --

* * * On the accepted ground that the assessment of $ 2,800.00 paid by petitioner represented an expenditure for intangible drilling costs, for his account, the respondent concedes1952 U.S. Tax Ct. LEXIS 81">*87 his right to expense such costs under the option granted in section 29.23 (m)-16 (b) of Regulations 111.

As to the $ 14,000.00, it is still the opinion of the respondent herein that said amount was paid by petitioner as consideration for the acquisition of a 14/300 interest in certain oil and gas leases and non-productive well located thereon, and as such, may not be expensed under section 23 (m) of the Internal Revenue Code and the Regulations thereunder.

* * * *

The amount of $ 14,000 expended by petitioner in 1947 constituted the cost of acquiring a fractional interest in oil and gas leases and in a nonproductive well thereon. As such, it represents his capital investment and is not deductible as intangible drilling costs under section 23 (m) of the Internal Revenue Code and Regulations 111, section 29.23 (m)-16.

18 T.C. 1229">*1232 OPINION.

The amended regulations (for years beginning after 1942) dealing with deduction of the costs of drilling oil and gas wells contain a new provision affecting the option to "expense" intangible drilling costs: "Included in this option are all costs of drilling and development undertaken (directly or through a contract) by an operator of an oil and gas1952 U.S. Tax Ct. LEXIS 81">*88 property whether incurred by him prior or subsequent to the formal grant or assignment to him of operating rights * * * except that in any case where any drilling or development project is undertaken for the grant or assignment of a fraction of the operating rights, only that part of the costs thereof which is attributable to such fractional interest is within this option * * *."

"Operating rights," are defined as "a leasehold interest or other form of operating rights or working interest" and "an operator" as "one who holds a working or operating interest in any tract or parcel of land either as a fee owner or under a lease or any other form of contract granting working or operating rights." These regulations were expressly given Congressional approval. H. Con. Res. 50, 79th Cong., 1st Sess. (July 21, 1945).

It may well be that under the regulation petitioner acquired "operating rights" and became "an operator" by the first assignment to him, that of July 31, 1947. By regulations enjoying more than ordinarily the force of law he was then expressly given the expensing option as to drilling costs "incurred * * * prior or subsequent to the formal grant." But this would be so only 1952 U.S. Tax Ct. LEXIS 81">*89 if two prerequisites exist: first, that the drilling costs as such were undertaken "by him" "directly or through a contract"; and second, if he acquired his fractional rights in consideration of the development agreement, that no more than his fractional share of the costs is included in the option.

As to the first condition, the contract with Vasen, coupled with the facts here shown to exist, leave no doubt that Vasen was to do the drilling, not as petitioner's agent, cf. W. D. Ambrose, 42 B. T. A. 1405, affd. (C. A. 5) 127 F.2d 47, but in discharge of his own obligations to "continue to drill said well with due diligence" (emphasis added) Even assuming that there was an implied obligation to use the purchase money as far as necessary for entering into a drilling contract, see Rogan v. Blue Ridge Oil Co. (C. A. 9), 83 F.2d 420, certiorari denied 299 U.S. 574">299 U.S. 574, and though this is by no means clear, that the facts here show that all of it was so used, the legal relationship of the parties was such that it was Vasen and not petitioner who made the expenditures, 1952 U.S. Tax Ct. LEXIS 81">*90 and that if the drilling had been less expensive Vasen could have pocketed the difference, unlike the drilling agent in W. D. Ambrose, supra. See Rogan, supra.

18 T.C. 1229">*1233 This is not a case analogous to a turnkey contract, which presumably would now be within the regulation. See Retsal Drilling Co. v. Commissioner, (C. A. 5) 127 F.2d 355. What petitioner must show is that the drilling costs were "undertaken" by him. The contract shows that they were to be undertaken by Vasen, and that the full amount of petitioner's cash was paid for the fractional interests he acquired. Since Vasen was an "operator" in his own right, the expenses were not also "undertaken" by petitioner. There is no legal or practical connection between the sums paid by petitioner under the contract for his fractional interest and the drilling costs defrayed by Vasen because he was required to continue to drill. We cannot regard the drilling expenses as those of petitioner, and accordingly no option is granted him even by the amended regulations.

It hence becomes unnecessary to consider whether an adequate showing1952 U.S. Tax Ct. LEXIS 81">*91 has been made under the second requirement, although in fact this is more like a case where money has been received in exchange for a fractional interest accompanied by the commitment (by Vasen, the seller) to drill; rather than that envisaged by the the regulations of a "drilling or development project * * * undertaken [by the purchaser] for the * * * assignment of a fraction of the operating rights * * *." Petitioner did not agree to do the drilling nor to pay for it. Vasen did.

It may well be that petitioner would be within the regulation if he had acquired his interest for his agreement to finance the drilling. Cf. Manahan Oil Co., 8 T.C. 1159; Berkshire Oil Co., 9 T.C. 903; or even if the amount to be paid and actually paid for drilling expenses were ascertainable and severable from the purchase price. Cf. Manahan Oil Co., Berkshire Oil Co., both supra. But these are questions we need not decide. Except for the amounts now conceded by respondent they are not this case.

Decision will be entered under Rule 50.