165 F.2d 933 (6th Cir. 1948), 10443, Porter Royalty Pool v. C.I.R.

Docket Nº:10443
Citation:165 F.2d 933
Case Date:February 03, 1948
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

Page 933

165 F.2d 933 (6th Cir. 1948)




No. 10443

United States Court of Appeals, Sixth Circuit.

February 3, 1948

Page 934

Frank W. Coolidge, of Detroit, Mich. (John C. Evans and Frank W. Collidge, both of Detroit, Mich., on the brief), for petitioner.

L. W. Post, of Washington, D.C. (Theron L. Caudle, Helen R. Carloss, and Hilbert P. Zarky, all of Washington, D.C., on the brief), for respondent.

Before HICKS, SIMONS, and ALLEN, Circuit Judges.

HICKS, Circuit Judge.

Petitioner, Porter Royalty Pool, Inc., seeks a review of the decision of the Tax Court that there are deficiencies in its income taxes for the years 1940 and 1941 in the respective amounts of $70.81 and $49, 943.20. The facts were stipulated, and as found by the Tax Court, are briefly as follows:

The petitioner is a Michigan corporation and filed its returns for the years involved with the Collector at Detroit. Prior to December 31, 1933, certain owners in fee of lands executed oil and gas leases to certain lessees in which they conveyed, for a term of years and so long thereafter as operated for oil and gas, all the oil and gas in and under the lands, and certain surface rights incident to the operations necessary to drill for and sell the oil and gas. The consideration for the leases was, that the lessees were to drill wells within a stipulated period of time and deliver to the lessors in pipe lines connected with the wells the one-eighth part of the oil produced and saved from the premises.

It is clear enough, and petitioner concedes that, under the facts stated, the landowner-lessors were taxable on the profits from their one-eights part of the oil produced. Burton-Sutton Oil Co. v. Commr., 328 U.S. 25, 66 S.Ct. 861, 162 A.L.R. 827, 90 L.Ed. 1062; Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199. This is true because the landowner-lessors retained what is now commonly called an 'economic interest' in the oil in place, and this interest is measured by the one-eighth part of the oil to be delivered to them. This was the only medium through which the landowner-lessors could derive a profit. See Anderson v. Helvering, 310 U.S. 404, 409, 60 S.Ct. 952, 84 L.Ed. 1277. A pooling agreement was arrived at whereby

Page 935

one-half of the royalty interests of each landowner-lessor was to be assigned and transferred through promoters and trustees to a corporation to be formed, and the consideration for such assignments and transfers was the common stock of the corporation to be issued proportionately to the landowner-lessors. The royalties paid on the interests thus pooled were to be collected by the corporation and ratably distributed to the stockholders as dividends. The promoters were to receive twenty-five percent of the stock of the corporation. The corporation, petitioner here, was organized in accordance with the pooling agreement, and on June 16, 1933, the trustees assigned to petitioner all of the royalty interests they had acquired and petitioner issued its stock certificates to the persons entitled thereto.

It is pertinent to inquire more particularly as to just what was assigned or transferred to petitioner through the trustees. The answer is found in paragraph 2 of the assignments, to wit:

'The first parties do hereby transfer, assign and set over to the said second parties, as trustees, all the right, title, interest, claim or demand of the first parties in and to all royalty interest in oil and/or gas now or hereafter discovered and/or produced from the real estate hereinbefore described, to the extent, however, of a one-half of the royalty interest of the first parties only, that is to say, to the extent of an undivided one-sixteenth interest in and to all the oil and/or gas produced from the aforesaid lands. * * * '

We have heretofore set forth the consideration for the assignments. From the viewpoint of the Federal income tax laws the validity of the assignments cannot be challenged. Blair v. Commr., 300 U.S. 5, 12, 57 S.Ct. 330, 81 L.Ed. 465; Edgar G. Swartz, Inc., v. Commr., 5 Cir., 69 F.1d 633. As in any ordinary contract, petitioner is entitled to the benefits of the assignments and transfers and is burdened...

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