This post was originally published on Forbes Oct 27, 2015
Maureen O'Hara, who died Saturday, was a classic actress in some classic movies. So I guess it shouldn't be a surprise that she took a whirl at the classic tax shelter - oil wells. Julian Block sometime ago got me into checking whether celebrities who pass away played a role in tax history. That led me to Fitzsimons v Commissioner (37 TC 179), which was decided by Judge William Fay in 1961 in the first year of his service on the court. Judge Fay helpfully mention that "The petitioner is a motion picture actress known professionally as Maureen O'Hara.
The top marginal rate in those days was 91%. A big attraction of oil as an investment was the percentage depletion deduction. What is great about percentage depletion is that you can keep deducting even after you have recovered your cost, which is why owning a gold mine is like owning a gold mine , while owning an oil well can be even better. Percentage depletion for oil wells was 27.5% of revenue limited to 50% of net income from the property. And this was before they started with all those silly alternative minimum tax things and passive activity loss rules were not even on the horizon.
On December 20, 1954, the petitioner acquired a lease from the Cuban Corporations under which she would have the right to select 250,000 hectaries of the land covered by the grants from the Cuban Government. The lease was to run for 2 years and for so long as exploration or drilling operations were being conducted and thereafter for so long as oil, gas, or other hydrocarbon substance was being produced in commercial quantities from the selected land.
In any event, these bonus payments are not deductible. A payment may not be deducted solely on the grounds that it is not a capital payment. It must be shown further that the payment is an ordinary and necessary expense.York Water Co. , 36 T.C. 1111 (1961). In the present case the payment of the bonus resulted in a longstanding direct benefit to the petitioner. This benefit was to extend into the indefinite future. Therefore, it cannot reasonably be said that the payment was an ordinary and necessary expense to be deducted in a single year.