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Gaudreau v. United States

United States District Court, D. Kansas

December 29, 2014


December 29, 2014, Decided

For Brian T. Gaudreau, Elizabeth A. Gaudreau, Plaintiffs: Jeffrey L. Kennedy, Marcia A. Wood, LEAD ATTORNEY, Martin, Pringle, Oliver, Wallace & Bauer, LLP -- Wichita, Wichita, KS.

For United States of America, acts through the Department of the Treasury and the Internal Revenue Service, Defendant: Martin M. Shoemaker, LEAD ATTORNEY, U.S. Department of Justice - Tax Division PO 7238, Washington, DC.

Page 1265


John W. Lungstrum, United States District Judge.

Plaintiffs filed this case seeking refunds of federal income taxes. This matter presently comes before the Court on cross-motions for summary judgment filed by plaintiffs (Doc. # 23) and defendant United States (Doc. # 21). As more fully set forth below, the Court concludes as a matter of law that plaintiff Brian Gaudreau did not have an " economic interest" in certain oil and gas deposits, and that plaintiffs therefore are not entitled to the depletion deduction and capital gains treatment that they seek. Accordingly, the Court denies plaintiffs' motion for summary judgment, and it grants summary judgment in favor of defendant on plaintiffs' refund claims.

I. Background

The following facts are undisputed. Plaintiffs Brian and Elizabeth Gaudreau are a husband and wife residing in Wichita, Kansas. On November 1, 1988, Brian Gaudreau began his employment with Stelbar Oil Corporation (" Stelbar" ). At the same time, Stelbar and Mr. Gaudreau executed an " Employee's Incentive Agreement" (the " Agreement" ). In the Agreement, Stelbar promised to pay Mr. Gaudreau " bonuses" equal to a percentage of the net income produced by oil and gas properties purchased by Stelbar through the efforts of Mr. Gaudreau. Mr. Gaudreau eventually received payments under the Agreement for properties acquired in 1990, 1994, and 1997.

The present case concerns income received by Mr. Gaudreau under the Agreement in 2006, 2007, and 2008. In their joint tax returns for those years, plaintiffs treated that income as regular income. Plaintiff subsequently filed amended returns in which they claimed depletion deductions (for income from proceeds on producing properties) and capital gains treatment (for income from the sale of properties by Stelbar) for income received under the Agreement. Defendant denied or failed to act on plaintiffs' refund claims.

Page 1266

Plaintiffs have thus brought this action for refunds pursuant to 26 U.S.C. § 7422. Specifically, plaintiffs seek refunds in the amounts of $485,632 for 2006, $19,167 for 2007, and $5,202 for 2008.

II. Analysis

Each side seeks summary judgment on plaintiffs' claims. Summary judgment is appropriate if the moving party demonstrates that there is " no genuine dispute as to any material fact" and that it is " entitled to a judgment as a matter of law." See Fed.R.Civ.P. 56(a).

The Internal Revenue Code allows for a depletion deduction for " mines, oil and gas wells, other natural deposits, and timber." See 26 U.S.C. § 611. The applicable regulation, Treasury Regulation § 1.611-1, provides that such a deduction may only be taken by an owner of an " economic interest" in the mineral deposits, as follows in relevant part:

Annual depletion deductions are allowed only to the owner of an economic interest in mineral deposits or standing timber. An economic interest is possessed in every case in which the taxpayer has acquired by investment any interest in mineral in place or standing timber and secures, by any form of legal relationship, income derived from the extraction of the mineral or severance of the timber, to which he must look for a return of his capital. . . . A person who has no capital investment in the mineral deposit or standing timber does not possess an economic interest merely because through a contractual relation he possesses a mere economic or pecuniary advantage derived from production. For example, an agreement between the owner of an economic interest and another entitling the latter to purchase or process the product upon production or entitling the latter to compensation for extraction or cutting does not convey a depletable economic interest.

See 26 C.F.R. § 1.611-1(b)(1); see also, e.g., United States v. Swank, 451 U.S. 571, 579-80, 101 S.Ct. 1931, 68 L.Ed.2d 454 (1981) (applying this regulation). This regulation, which has remained essentially the same since it was first promulgated in 1939, was based on language from the Supreme Court's opinions in Palmer v. Bender, 287 U.S. 551, 53 S.Ct. 225, 77 L.Ed. 489, 1933-1 C.B. 235 (1933), and Helvering v. Bankline Oil Co., 303 U.S. 362, 58 S.Ct. 616, 82 L.Ed. 897, 1938-1 C.B. 306 (1938). See Parsons v. Smith, 359 ...

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