Rowan v. Commissioner

Memorandum Findings of Fact and Opinion

FAY, Judge: Respondent determined deficiencies in the petitioners' income taxes as follows:

The issues for decision are:

Primary Issue

Are the intangible costs of drilling geothermal steam wells deductible under section 263(c)? ²

Alternative Issues

In the event the Court determines that the intangible costs of drilling geothermal steam wells are not deductible under section 263(c): 798

1. Are the costs of drilling geothermal steam wells deductible under section 615 as exploration expenditures?

2. Are the costs of drilling geothermal steam wells dedutible under section 212 as expenses for the production*138 of income?

3. Are the costs of drilling geothermal steam wells deductible under section 162 as trade or business expenses?

4. Are the costs of drilling geothermal steam wells deductible under section 174 as research and experimental expenditures?

5. Are the costs of drilling geothermal steam wells deductible under section 165 (c)(1) or (2) as losses not compensated for by insurance or otherwise, incurred in a trade or business or in a transaction entered into for profit?

Findings of Fact

Petitioners and respondent stipulated that the testimony and exhibits presented in the related case of Arthur E. Reich, 52 T.C. - (July 31, 1969), shall be considered as presented in this case insofar as they are relevant. Accordingly, that testimony and those exhibits, and the findings of fact based upon them, are incorporated herein by this reference.

George D. and Virginia H. Rowan were husband and wife in 1960. They filed a Federal joint income tax return for the taxable year 1960 with the district director of internal revenue, Los Angeles, California. Their legal residences were in or near Los Angeles, California, when they filed their petition in this case.

George D. Rowan was single*139 in 1961 and 1962. He filed Federal individual income tax returns for the taxable years 1961 and 1962 with the district director of internal revenue, Los Angeles, California. His legal residence was in South Pasadena, California, when he filed his petition in this case.

Robert A. and Carolyn P. Rowan are husband and wife. They filed Federal joint income tax returns for the taxable years 1960, 1961, and 1962 with the district director of internal revenue, Los Angeles, California. Their legal residence was in Pasadena, California, when they filed their petition in this case.

Petitioners were partners in two partnerships which engaged in the business of drilling for geothermal steam. The names of these partnerships were Vulcan Thermal Power Company and Geothermal Resources Company.

Vulcan Thermal Power Company was a limited partnership. It was in turn a partner in Magma-Vulcan Thermal Power Project with Magma Power Company (hereinafter referred to as Magma), a Nevada corporation engaged in the business of drilling for geothermal steam. Magma contributed to the partnership certain leaseholds. Vulcan Thermal Power Company contributed cash. Magma-Vulcan Thermal Power Project engaged*140 in drilling operations in Lander and Eureka Counties, Nevada. It expended the following amounts in drilling geothermal well at such locations in the years indicated:

Geothermal Resources Company was a limited partnership. It was in turn a partner in a partnership with Magma formed in 1962. Magma contributed to the partnership certain leaseholds. Geothermal Resources Company contributed cash. The Magma-Geothermal Resources partnership engaged in drilling operations in Nevada and California. It expended $74,369.24 in drilling geothermal wells at such locations in 1962.

On their Federal income tax returns for the taxable years relevant herein, petitioners deducted the intangible costs of drilling geothermal steam wells. In his statutory notices of deficiency relating to the petitioners and taxable years involved herein, respondent disallowed the claimed deductions for the intangible costs of drilling geothermal thermal steam wells.

Opinion

The primary and controlling issue in this case is identical to one of the primary issues in the case of Arthur E. Reich, supra. ³ The two cases were tried at the same time. The*141 facts in the two cases are identical in all material respects.

It follows from our disposition of the Reich case that petitioners are entitled to deduct under section 263(c) the intangible costs of drilling geothermal steam wells. Because of our disposition of the primary issue, the alternative issues are moot.

Decisions will be entered for the petitioners. 799