Porter Royalty Pool v. Commissioner of Internal Rev.

Citation165 F.2d 933
Decision Date03 February 1948
Docket NumberNo. 10443.,10443.
PartiesPORTER ROYALTY POOL, Inc. v. COMMISSIONER OF INTERNAL REVENUE.
CourtUnited States Courts of Appeals. United States Court of Appeals (6th Circuit)

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-eighth 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 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.2d 633. As in any ordinary contract, petitioner is entitled to the benefits of the assignments and transfers and is burdened with its obligations. A little more will follow touching the validity of the assignments as between petitioner and the landowner-lessors.

Certain of the landowner-lessors became dissatisfied and filed a bill of complaint in an appropriate Michigan court for a rescission of the pooling agreement on account of fraud and misrepresentation in the organization of the pool and a violation of the Blue Sky laws of Michigan in the organization of petitioner and the sale of its stock. The litigation lasted for eight years and during this period the oil roylties were impounded. The Supreme Court of Michigan decreed that there had been no fraud, that the sale of stock by petitioner did not violate the Blue Sky law and that petitioner was the owner of the pooled royalty interests and entitled to the royalty payments. The impounded and subsequent royalties were then paid to petitioner. There was certain other litigation in Michigan courts between petitioner and some of the landowner-lessors involving the rights of petitioner under the transfers and assignments. This litigation was never brought to a conclusion and we need not further refer to it except in connection with another feature of the case to be considered.

The Tax Court held that these royalty payments to petitioner constituted taxable income to it. The opinion of the Michigan Supreme Court, written by Judge McAllister, now a member of ...

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21 cases
  • Ruoff v. Comm'r of Internal Revenue, Docket No. 59951.
    • United States
    • United States Tax Court
    • May 12, 1958
    ...Brawner v. Burnet, (C.A., D.C.) 63 F.2d 129; Moynier v. Welch, (C.A. 9) 97 F.2d 471; Porter Royalty Pool, Inc., 7 T.C. 685, affd. (C.A. 6) 165 F.2d 933, certiorari denied, 334 U.S. 833. Giving petitioner's claim its broadest scope, and assuming without deciding that the contest with the off......
  • Nickell v. C.I.R., 86-1010
    • United States
    • United States Courts of Appeals. United States Court of Appeals (6th Circuit)
    • October 27, 1987
    ...that the regulations making the cost of defending or perfecting title nondeductible have "the effect of law." Porter Royalty Pool, Inc. v. Comm'r., 165 F.2d 933, 936 (6th Cir.1948). See also Safety Tube Corp. v. Comm'r., 168 F.2d 787, 789 (6th In both Loyd and Cruttenden, the courts found t......
  • Karczewski v. Baltimore and Ohio Railroad Company
    • United States
    • United States District Courts. 7th Circuit. United States District Court (Northern District of Illinois)
    • June 27, 1967
    ......551, 53 S.Ct. 225, 77 L.Ed. 489 (1933); Porter Royalty Pool Co. v. Commissioner of Internal ...Rev. 645, 666 (1963); See Krause, Equal Protection ......
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    • November 29, 1960
    ...term. 7 This regulation is an old and repeated one and has been held to be valid and to have the force of law. Porter Royalty Pool v. Commissioner, 6 Cir., 165 F. 2d 933, 936, certiorari denied 334 U.S. 833, 68 S.Ct. 1347, 92 L.Ed. 1760; Jones' Estate v. Commissioner, 5 Cir., 127 F. 2d 231,......
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