West v. Comm'r of Internal Revenue
| Citation | 3 T.C. 431 |
| Decision Date | 10 March 1944 |
| Docket Number | 109855.,109853,Docket Nos. 109850,109851 |
| Parties | WESLEY W. WEST, PETITIONER, ET AL.,1 v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
In 1938 petitioners and the West Foundation entered into an arrangement with Humble Oil & Refining Co., evidenced by a deed, a supplemental agreement, and an assignment, with reference to certain lands, leases, and mineral rights, excepting and reserving to themselves a specified royalty interest in the minerals in all properties involved. Humble paid $8,032,145.26 in cash and obligated itself to drill, develop, and operate the properties for oil, gas, and other minerals. Held, the transaction effected a sale of the surface of the land and the improvements thereon, and a leasing arrangement with respect to the mineral contents; held, further, the profit from the sale is a capital gain, and that part of the cash consideration attributable to the mineral rights represented bonus or advanced royalties. J. Arthur Platt, Esq., James H. Yeatman, Esq., H. I. Wilhelm, C. P.A., and J. A. Phillips, C.P.A., for the petitioners.
James L. Backstrom, Esq., Frank B. Schlosser, Esq., and L. R. Van Burgh, Esq., for the respondent.
These consolidated proceedings involve deficiencies in income tax for the years and in the amounts following:
In Docket Nos. 109850 and 109851 the parties have stipulated that there are deficiencies in Federal income tax due from these petitioners for the taxable year 1939 in the respective amounts of $5,523.44 and $5,192.31. Effect will be given to these stipulations in the recomputations of the deficiencies under Rule 50.
The only issue presented is whether the transaction on December 28, 1938, between petitioners and Humble Oil & Refinery Co. constituted a lease or a sale for Federal income tax purposes. All other issues respecting the taxable year 1938 have been disposed of by a written stipulation of facts filed at the hearing. Effect will likewise be given to these stipulations in the recomputations under Rule 50.
The petitioners are all individuals, except petitioners in Docket No. 109853, who are the duly qualified and acting executors of the estate of J. M. West, deceased. The return of each of the petitioners for 1938 was filed with the collector of internal revenue for the first district of Texas at Austin, Texas. The returns were filed on the community property basis.
On December 28, 1938, J. M. West and wife, Jessie Gertrude West, J. Marion West, and Wesley W. West, all acting individually, and J. M. West, J. Marion West, Wesley W. West, J. A. Platt, and T. H. Monroe, trustees for the West Foundation, as grantors, executed an instrument of conveyance, hereinafter referred to as the deed, subject to the terms and provisions of a supplemental contract, therein referred to and made a part thereof and hereinafter referred to as the agreement, in favor of the Humble Oil & Refining Co. of Houston, Texas, hereinafter referred to as Humble.
Simultaneously with the execution of the deed and the agreement the above named grantors executed an assignment, hereinafter referred to as the assignment, in favor of Humble covering the Hutcheson and Sowden leases.
Each and every parcel or tract of property described and referred to in the deed and the agreement, together with all the improvements thereon except the Hutcheson and Sowden leases, had been held and owned by petitioners, as their respective interests will hereinafter appear, for more than two years immediately prior to December 28, 1938. It is agreed and stipulated by the parties that the properties covered by the deed did not represent stock in trade of the petitioners or other property of a kind which would properly be included in the inventory if on hand at the close of the taxable year, or property held primarily for sale to customers in the ordinary course of trade or business, or property used in trade or business of a character which is subject to the allowance for depreciation, except for the improvements which were on the land at the time the transaction occurred.
The tract of land referred to in the agreement as the homestead of J. M. West and Wife, Jessie Gertrude West, contained 200 acres. On December 28, 1938, this tract of land, together with the improvements thereon, was owned by J. M. West and his wife as community property, and the other petitioners herein named had no interest therein. The remaining tracts of land enumerated and described in the deed and agreement contained 22,955.60 acres, and this land, together with the minerals only under 70.67 acres of other lands, referred to in the deed as tracts numbered 108, 109, and 110, were on December 28, 1938, owned as follows:
+----------------------------------------------------+
¦ ¦Percent ¦
+-----------------------------------------+----------¦
¦J. M. West and wife, Jessie Gertrude West¦38.731384 ¦
+-----------------------------------------+----------¦
¦J. Marion West ¦27.300975 ¦
+-----------------------------------------+----------¦
¦Wesley W. West ¦27.300975 ¦
+-----------------------------------------+----------¦
¦The West Foundation ¦6.666666 ¦
+-----------------------------------------+----------¦
¦ ¦ ¦
+-----------------------------------------+----------¦
¦Total ¦100.000000¦
+----------------------------------------------------+
Prior to December 28, 1938, J. M. West got in touch with the president of Humble and told the latter that he wanted to sell the above mentioned properties. Humble was interested in acquiring the right to develop and operate the lands for oil, and its negotiations with West were handled by one Barrow, vice president of Humble. These negotiations continued over a period of several months. At various Barrow tried to discuss with West the possibility of acquiring a lease instead of purchasing the surface in fee, but without success. The negotiations between West and Barrow culminated in the execution of the deed, the agreement, and the assignment, hereinbefore mentioned. Thereafter Humble leased back the surface of the lands and the residence to J. M. West for grazing and agricultural purposes for a period of five years at an annual rental of $16,000. This lease was renewed at a like rental with the residence excepted.
By the deed the grantors, for and in consideration of $1,000 and other good and valuable considerations, ‘GRANTED, BARGAINED, SOLD, and CONVEYED‘ to Humble ‘subject, however, to certain outstanding royalty interests, and to certain exceptions, terms, and provisions hereinafter referred to more specifically, the following: * * * .‘ The deed then lists and described in paragraphs A, B, C, D, E, F, and G the premises and property covered by the deed. Paragraph G and other pertinent portions of the deed are as follows:
G. Also all oil, gas and other minerals produced from the land affected by this deed and produced subsequent to seven o'clock, A.M., December 28, 1938; subject, however, to the royalties hereinabove and hereinafter more specifically referred to, in so far as same apply to such oil, gas and/or other minerals.
TO HAVE AND TO HOLD the above described premises and property, together with all and singular the rights and appurtenances thereunto in any wise belonging, unto * * * Humble * * * , its successors and assigns, forever; subject, however, to certain exceptions, terms and provisions hereinabove and hereinafter more specifically referred to.
The Grantors jointly except from this conveyance and retain unto themselves, their heirs, successors and assigns, those certain royalties on oil, gas and other minerals which may be produced and saved from the lands hereby conveyed, which royalties are more particularly described in a certain supplemental contract executed simultaneously herewith between the parties hereto, and such royalties so excepted and retained are not herein conveyed and shall not be construed as passing to Humble Oil & Refining Company by any language whatsoever in this deed contained, and reference is here made to said supplemental contract for more specific description of the royalties excepted herefrom and retained by the Grantors herein and of the rights, obligations, duties and agreements of the parties hereto with respect to such royalties, and said contract is made a part hereof for all purposes, and by the acceptance of this deed Humble Oil & Refining Company acknowledges the royalties excepted herefrom and retained by Grantors and the rights, obligations, duties and agreements of the parties hereto with respect thereto.
The terms and provisions referred to above and to which this deed is made subject are fully set out in the contract of even date herewith referred to above, to which contract reference is here made for all the terms and provisions thereof to which this conveyance is made subject.
By the assignment the assignors, being the same parties that were grantors in the deed, conveyed the Hutcheson and Sowden leases and all rights thereunder, together with certain personal property, fixtures, machinery, and physical equipment, to Humble, its successors and assigns forever, in accordance with the terms and provisions of said leases, subject, however, to the royalties and overriding royalties retained in the assignment and to the agreement which was incorporated in the assignment by reference. The assignors also excepted from the assignment to Humble that certain one-half interest in and to all royalties payable to the lessors...
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