Ninth, the difference between the depletion unit established above for the discovery well and that set up by the taxpayer for the discovery well is 34.1 cents per barrel. On the taxpayer's reserves for well No. 3, for only 38,150 barrels, this amounts to $13,009.

Tenth, the application of the $1.08 depletion unit to the actual production of wells 1 and 2 from an upper sand for the years 1918 and 1919 amounts to 16,216 barrels, at $1.084 per barrel, or $17,878. Mr. MANSON. Let me ask you a question right there. If those first two wells had produced more than their estimated reserves, or had nearly produced their estimated reserves, that would have returned the purchase price of the lease which was being depleted, would it not?

Mr. FAY. It would.

Mr. MANSON. And if they produced more than that, the taxpayer, under the regulations, would not be entitled to any depletion? Mr. FAY. None whatever.

Mr. MANSON. By this method, if there is a surplus of oil over the estimated reserves, the taxpayer gets depletion upon that surplus at the new discovery rate?

Mr. FAY. He does, the way the set-up reads.

Mr. MANSON. Yes.

The CHAIRMAN. Is that applicable to all oil companies, do you know?

Mr. MANSON. That I can not say. In the case of this particular lease, the way this was handled is in violation of the regulations and the practice of the department, as well as the law.

The CHAIRMAN. I understand; but do you know whether this rule is applied to all cases under the rule which you have just criticized? Mr. MANSON. I am not criticizing the rule in that respect.

The CHAIRMAN. I understand; but do you know whether the application of the rule that was applied to the settlement of this particular case was extended beyond the Gulf Oil case?

Mr. MANSON. I do not know about that.

Mr. FAY. I do not know myself, but that method is possibly applicable to many others.

The CHAIRMAN. Does Mr. Greenidge or anybody else know whether that particular oversight or practice has been continued in all the oil cases?

Mr. GREENIDGE. No, sir; it has not been continued. I am not quite sure that it is an oversight. I would have to have the particular lease in the record, so that I would be able to examine it.

The CHAIRMAN. Well, if Mr. Fay's contentions are correct, that the depletion was allowed after the estimated production had been exhausted, would that be a correct principle?

Mr. GREENIDGE. No, sir.

The CHAIRMAN. All right.

Mr. FAY. That is all I have on this particular case.
(The exhibits introduced by Mr. Fay are as follows:)

EXHIBIT 3

SCHEDULE 4. FOR PROOF OF DISCOVERY

1. Description of the property:

(a) Give a legal description of the property, including its location in section (or farm), township, range, county, and State: Staley-Ramming, 18.41

acres of land in block 35, Red River Valley, Wichita County, Tex. (Burkburnett district).

(b) Are you the sole owner? Yes. If not, give your ownership, interest therein, and the names and addresses and ownership interest of each of the other joint owners

(c) Is the property a leasehold? Yes. If so, give the name and address of the lessor and the lessee: J. I. Staley, Delia Staley, and R. W. Ramming, Wichita Falls, Tex.; Gulf Production Co., Fort Worth, Tex.

(d) Give date lease was effective: February 26, 1912.

(e) Give date of expiration: Lease remains in force so long as o'l or gas is produced in paying quantities.

(f) Give royalty rate: Oil, one-eighth; gas, $100 per year for each well where used or marketed.

(g) State whether bonus was in cash or property: Cash, $400. (h) Give any unusual terms of lease: None.

2. Date of acquisition: February 29, 1912.

(a) What was the fair market value of the property as of date of valuation? (See schedule below.)

(b) How was this value ascertained?

(1) By comparison with values established by actual sales of similar properties? No.

(2) By appraisal? Yes.

(3) By assessed value? No.

(4) By other method?

No.

If by comparison with values of other properties established by actual sales of these properties, give the details regarding each transaction so used and your basis of comparison.

Revaluation No. 1.

Sand horizon 1,800 feet.

Lease discovery well No. 3. Date, July 12, 1918.
Depth, 1,873 feet. Initial production, 35 barrels.

Estimated recoverable oil from discovery and wells to be drilled

LESS

Cost of 1 well at $21,470 per well

Cost of producing 38,150 barrels oil at 25 cents per barrel_

Less 11.3401 per cent for discount to present worth_.

Net value_

Gulf 100 per cent working interest_

$21, 470.00
9, 537.50

31, 007. 50

54, 830.00

6, 217. 78

48, 612. 22

48, 612. 22

Record of individual well production, by years, Staley Ramming lease, Burk

EXHIBIT 4

Mr. HARTSON. Mr. Fay, may I ask you again the name of that lease?

Mr. FAY. Did I not give it in the record?

Mr. HARTSON. I think you did, but I did not get it in my notes. Mr. FAY. The Staley-Ramming, 18.41 acres of land, in block 35, Red River Valley, Wichita County, Tex., Burkburnett district.

Mr. HARTSON. Do I understand that lease was purchased in 1912 for cash by a subsidiary of the Gulf Oil Co.?

Mr. FAY. The Gulf Production Co.

Mr. HARTSON. Yes.

Mr. FAY. Which is a subsidiary.

Mr. MANSON. I wish to say that the 5 per cent discount rate, the effect of which has been stated by me in connection with a limited number of leases, applied to all of the discovery valuations in connection with the Gulf Oil Co.

The CHAIRMAN. Was that percentage applied to other wells, where the other base of vaduation was fixed, such as the March 1, 1913, value, and the value of oil that was drilled on proven land? Mr. PARKER. Five per cent is the one in use; yes, sir. The CHAIRMAN. Is all of these leases?

Mr. PARKER. Of course, when you have cost, that is the value. You do not have to discount it.

The CHAIRMAN. Yes; I understand that; but I mean where you have to arrive at a discount value, is 5 per cent applied all through these cases?

Mr. MANSON. All through the Gulf Oil.

The CHAIRMAN. That is what I mean.

Mr. GREGG. Mr. Chairman, may I ask a question of Mr. Fay? In his discussion of the 5 per cent rate he immediately changed to 11 and a fraction per cent, and I do not understand exactly what he meant.

Mr. FAY. I can explain that.

The CHAIRMAN. As I understand that, he meant that a money value was added to it.

Mr. MANSON. No; what that means is this: It is discounted at the rate of 5 per cent a year. Instead of using Hoskold's tables, which assume a uniform depletion throughout the estimated life, the depletion is assumed to take place at so many barrels per year, and the investment is discounted at the rate of 5 per cent, compounded over that period.

Mr. GREGG. May I interrupt? Five per cent a year?

Mr. MANSON. Five per cent a year. By applying 5 per cent a year, by reason of the differences in the amount recovered each year, it results in a total composite percentage for the entire period of 11 and a fraction per cent.

Mr. GREGG. In other words, let me state it this way, to see if it is correct, Mr. Chairman. Your computations assume that the taxpayer would purchase on the basis of a 5 per cent return on his investment, and that is not correct, because he would get over 11 per cent return on his investment, when you consider that his investment each year was being decreased.

Mr. MANSON. Oh, no.

The CHAIRMAN. We have all of that before the committee.