erty, rather than a step in the plan. For we note, first, that Pittsburgh had in mind also that, if it had to buy the plant at receiver's sale, it would "either operate the same or dispose of it, as circumstances seem to indicate"; second, that in its offer to sell on June 3, 1926, Pittsburgh set a dead line of 30 days, after which its offer would be "null and void"-not at all the act of a company obligated to be a mere transitory step in a merger, but indicative of its free and independent status as a vendor negotiating, on its own terms, a sale; and, third, the record indicates that the petitioner settled with Pittsburgh for less than the amount of its claim and expenses-again showing Pittsburgh not in the position of one contracting, as a part of the original plan, to take its debt and pass the property along. Petitioner on brief agrees with respondent's statement that, "On June 29, 1926, settlement was effected between Pittsburgh Plate Glass Company and Adamston Flat Glass Company * * *." Had Pittsburgh been shown under agreement to take the amount of its debt and step out, and that plan had been carried out, more semblance to a reorganization might appear, but neither fact was proven. Pittsburgh, though having given its note for $66,500 in part payment for the property, is not shown to be freed therefrom by assumption, and received $153,969.85 an amount not sufficient to carry out the alleged plan to make Pittsburgh "whole" on the matter." If there was such a plan, it is not shown to have been consummated, and Pittsburgh appears in the role of vendor, setting a time limit on its offer to sell, and actually selling for less than the alleged plan of reorganization contemplated.

All this, in our view, destroys continuity between the old corporation and the new, for freedom of action on Pittsburgh's part and that of petitioner in acquiring the property is inconsistent with the requisite continuity from one corporation to the other. No case cited, or of which we know, goes so far with the reorganization idea as to apply it to acquisition of property by settlement with an owner, after acquisition at a sale which ended ownership in the old corporation. The fact that any of the creditors, such as two, satisfies the provision of section 113 (a) (7) (A) as to 50 per cent interest does not, of course, satisfy as to definition of reorganization, under section 203 (h), Revenue Act of 1926.

* If on the other hand (as does not appear from the record to be the case) petitioner, in addition to the other payments made, assumed the $66,500 (apparently paid to the extent of $9,580.09) due from Pittsburgh to the special commissioners for sale, Pittsburgh is then seen to be receiving for the property, much more than the amount necessary to make it whole on its debt; in other words, Pittsburgh then appears to be making a profit, inconsistent with the alleged plan of reorganization. Apparently, though the record does not explain, Pittsburgh as creditor, may have been able to receive back the $33.500 cash and $66,500 note given to the sale commissioners. Pittsburgh thus appears either making a profit or taking a loss. If it received back the $33,500, charged in purchase price to petitioner, then much profit was involved.

We conclude and hold that there was no reorganization, from which it follows that the petitioner is not, in calculating depreciation, entitled to use the basis of Clarksburg Glass Co. Therefore,

Decision will be entered for the respondent.

THE LOUISIANA LAND AND EXPLORATION COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 8849. Promulgated August 8, 1946.

1. Held, petitioner is entitled to a deduction for depletion on its share of net profits from a lessee's drilling operations on oil and gas leases. Kirby Petroleum Co. v. Commissioner, 326 U. S. 599.

2. In 1939 petitioner instituted suit in a Federal District Court to quiet title to land on which in 1928 petitioner had given an oil and gas lease to the Texas Co. In January 1940 Texas Co. obtained an oil and gas lease on this land from the title claimants, paying therefor $25,000. In June 1940 petitioner reimbursed Texas for the $25,000 payment and Texas agreed to assign to petitioner the claimants' lease if their title should be recognized by District Court. In 1941 the litigation was settled by compromise agreement providing, inter alia, that petitioner owned the disputed title. Held, the $25,000 is part of the cost to petitioner of perfecting title to the land and must be so capitalized.

3. In 1931 petitioner acquired mineral leases covering two tracts of land comprising approximately 18,000 acres. In 1941 petitioner expended $11,361.56 for a geophysical survey of these properties to determine whether subsurface structures thereon were sufficiently high to justify drilling for oil or gas. Held, such amount is a capital expenditure and is not deductible as an ordinary and necessary business expense.

4. Petitioner purchased for $30,000 a 575-acre tract of land, primarily for the purpose of acquiring the mineral rights thereto, and on its books assigned $18,000 to the mineral rights therein and $12,000 to the surface. In 1942 petitioner's oil and gas lessee drilled a dry hole on this land and forfeited the lease as worthless. During the taxable year petitioner retained ownership of the land in fee. Held, assuming, arguendo, that in 1942 the land was demonstrated to be worthless for oil or gas production, no part of the purchase price is deductible by petitioner as a loss sustained in 1942. CoalingaMohawk Oil Co., 25 B. T. A. 261; affd., 64 Fed. (2d) 262; certiorari denied, 290 U. S. 637.

James H. Yeatman, Esq., for the petitioner.

D. Louis Bergeron, Esq., for the respondent.

The Commissioner determined deficiencies in petitioner's income tax liability for the calendar years 1941 and 1942 in the respective amounts of $25,927.19 and $47,524.85. These deficiencies were based

upon numerous adjustments to petitioner's net income, many of which are not contested. The issues presented are, (1) whether petitioner is entitled to a deduction for percentage depletion on its share of net profits from its lessee's drilling operations on oil and gas leases, (2), whether petitioner sustained a deductible loss of $25,000 in 1941 in connection with a certain oil and gas lease, (3) whether petitioner may deduct an amount expended for geophysical surveys on property which it held under a mineral lease, and (4) whether petitioner sustained a deductible loss in 1942 as a result of unsuccessful drilling operations by its lessee on land to which it held fee title. The correctness of respondent's disallowance of a deduction for legal expenses in connection with litigation to quiet title to land was challenged by petitioner in the pleadings but is conceded on brief. The case was submitted upon a stipulation of facts, with joint exhibits, and upon a deposition introduced in evidence at the hearing. The facts stipulated are so found. Other facts are found from the testimony given by the deponent on direct and cross examination.

FINDINGS OF FACT.

The petitioner is a corporation, organized under the laws of the State of Maryland on January 19, 1926, with its principal office and place of business located in Houma, Louisiana. Petitioner. filed corporation income and declared value excess profits tax returns, Form 1120, and corporation excess profits tax returns, Form 1121, for the calendar years 1941 and 1942 with the collector of internal revenue for the district of Louisiana.

Issue 1.-On January 19, 1926, petitioner acquired the fee simple title to certain lands situated in the southern part of Southern Louisiana. Subsequently, petitioner acquired oil and gas leases covering the water bottoms situated within the area or vicinity of its fee simple owned lands. On November 12, 1928, petitioner entered into a contract with the Texas Co., hereinafter referred to as Texas, concerning these fee-owned lands and leases. Under the terms of the contract petitioner granted to Texas the exclusive right to develop and drill upon the lands and leases for the production of oil, gas, and sulphur. Petitioner reserved to itself an oil and gas royalty of one-fourth of the oil and gas produced from these properties by Texas, and in addition Texas agreed to pay petitioner 813 per cent of the net profits from the operations of such leases. This contract was in full force and effect during the calendar years 1941 and 1942, except as to certain properties previously released and not here involved. In addition to the payments made by Texas on the one-fourth royalty it paid to petitioner as its 813 per cent of net profit $190,276.38 in 1941 and $184,580.52 in 1942. These amounts were included by petitioner in its gross income reported

in the tax returns for the respective years. On these amounts petitioner claimed percentage depletion of $52,325 for 1941 and $50,759.63 for 1942. The depletion claimed did not exceed 50 per cent of petitioner's net income from the respective properties for either 1941 or 1942. The respondent disallowed the depletion deductions. Of the sum of $184,580.50 received by petitioner during 1942, $103,867.44 is attributable to petitioner's fee-owned lands and the balance, or $80,713.06, is attributable to the water bottom leases.

Issue 2.-Petitioner's contract of November 12, 1928, with Texas covered certain land known as Paradis Oil Field of Louisiana, purportedly owned by petitioner in fee at the making of the contract. After some development work had been done by Texas on this property certain persons, who will be referred to hereinafter as the McEnery heirs, claimed to own this land or a portion thereof and on May 23, 1939, petitioner instituted a suit against the McEnery heirs in the District Court of the United States for the Eastern District of Louisiana to quiet title to the land. The complaint in this suit was entitled "Complaint in Slander of Title" and contained allegations by the petitioner that it was the fee owner of such land.

On January 26, 1940, Texas obtained an oil, gas, and mineral lease from the McEnery heirs covering the land which was claimed by them and which was the subject of the above mentioned suit by petitioner. As consideration for the lease Texas paid the McEnery heirs $25,000 in cash and gave them a $25,000 oil payment, and agreed to pay the lessors a one-eighth royalty on oil and gas produced on such land as might be adjudged by the Federal court to be owned by them.

On June 24, 1940, petitioner and Texas entered into a letter agreement wherein it was provided that, "In order that we [petitioner] may be protected against the possibility of the failure of our title to all or any portion of the above described lands leased by us to you, and in order to protect our obligation of warranty under our aforesaid contract," Texas would assign to petitioner its rights under the McEnery heirs' lease of January 26, 1940, in the event that the McEnery title should be recognized. Such assigned lease was then immediately to become subject to the original agreement between Texas and petitioner. It was also agreed that Texas was to place in escrow one-half of petitioner's one-fourth royalty interest from oil produced on the lands in dispute. As consideration for Texas' agreement to the assignment, petitioner reimbursed Texas for the $25,000 cash payment to the McEnery heirs and assumed the $25,000 oil payment. In discharge of this oil payment, petitioner paid the McEnery heirs $7,743.94 in 1940 and $17,256.06 in 1941. The $25,000 cash payment was capitalized on petitioner's books as cost of the "McEnery Heirs" lease.

Petitioner's controversy with the McEnery heirs was settled by compromise agreement on October 7, 1941, which agreement was, on October 28, 1941, approved by and made the judgment of the District Court in the suit pending between the parties. The compromise agreement recognized that petitioner owned fee title to the lands in dispute and recited that petitioner had paid to the McEnery heirs $3,302.32 and conveyed to them a one-eightieth royalty interest in all oil, gas, and minerals produced on the disputed lands. The McEnery heirs retained the $25,000 cash payment and the $25,000 received in discharge of the oil payment. In connection with the settlement of the title controversy, petitioner incurred and paid during the year 1941 attorney's fees of $6,000.

In its computation of net income for 1941 petitioner deducted the $25,000 cash payment as amortized cost of leases and deducted the $6,000 attorneys' fees as a business expense, both of which deductions were disallowed by the respondent.

Issue 3.-During August 1931 petitioner acquired from Louisiana Furs, Inc., a mineral lease covering two properties. One of these properties, hereinafter referred to as the north tract, is located about 62 miles north of the other and comprises 4,953.76 acres; the other, which we shall refer to as the south tract, comprises 12,888.93 acres. Petitioner held the lease on these properties for an indefinite period by production. During the year 1941 petitioner caused a geophysical survey to be made covering these properties and paid therefor, in 194 $11,361.56. A geophysical survey consists of the following operatic

1. Determination of the elevation of the points to be surveyed.

2. Drilling of small bore holes by portable equipment to a depth which is the top of the sands containing fresh water. This may vary from 25' plus, depending upon the area surveyed.

3. Placing of portable seismographs in proper relation to the bore 4. Connecting said seismographs to the recording wagon or boat. 5. Running in and exploding a dynamite charge in the bore hole 6. Recording the reflected seismic waves as picked up by the sma This is recorded in the recording wagon.

7. Correlation of the charts thus recorded.

8. Compilation of such data in order to determine the und 9. A series of observations taken in the manner above in plete compilation of the results thereof constitutes a gec

area.

On May 7, 1942, after the survey had been co acquired from the State of Louisiana two water bo an area of 150 acres in the south tract and acqu LaFitte Corporation a lease on 2,080 acres imme contiguous to the south tract.