Hair v. CIR
Decision Date | 27 May 1968 |
Docket Number | No. 22047,22047 |
Citation | 396 F.2d 6 |
Parties | Melvin L. HAIR and Esther Hair, his wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. Richard E. HAIR and Naomi L. Hair, his wife, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
Court | U.S. Court of Appeals — Ninth Circuit |
Cameron Sherwood (argued), of Sherwood, Tugman & Green, Walla Walla, Wash., for appellant.
Grant W. Wiprud (argued), Meyer Rothwacks, Marian Halley, Attorneys, Department of Justice, Mitchell Rogovin, Asst. Atty. Gen., Tax Division, Lester Uretz, Chief Counsel, Internal Revenue Service, Washington, D. C., for appellee.
Before HAMLEY and ELY, Circuit Judges, and VON DER HEYDT*, District Judge.
von der HEYDT, District Judge:
These cases, which have been consolidated, are petitions for review of decisions of the Tax Court affirming the Commissioner's assessment of deficiencies for the years 1962 and 1963. The facts are as follows.
Melvin and Richard Hair are brothers.1 Both are engaged in farming. When their mother died each became the owner of an undivided one-half interest in certain lands. Some parts of these lands are suitable for farming; the rest is wasteland.
In 1962 taxpayers entered into an agreement with Curtis Construction Company. Curtis was a subcontractor on a dam project, and was to furnish all of the sand and gravel for a part of the dam. Test borings by Curtis had revealed large deposits of sand and gravel on taxpayers' property. The contract provided as follows:
From 1962 to 1964 Curtis removed quantities of sand and gravel. In 1964 it terminated the contract, pursuant to its terms, as its subcontract had been completed.
For 1962 and 1963 taxpayers reported the payments received from Curtis as income from the sale of a capital asset under Section 1221; i. e., as deferred payments from a sale in 1962 of the sand and gravel in place. The Commissioner determined that the payments constituted ordinary income, subject to a five per cent depletion allowance, and assessed deficiencies. The Tax Court upheld the Commissioner, and these petitions followed.
Taxpayers contend that the agreement with Curtis was an absolute sale, and that they retained no economic interest in the sand and gravel which was removed. They conclude that the transaction involved the sale2 of capital assets and the payments received should be treated as capital gains. Taxpayers rely on Gowans v. Commissioner of Internal Revenue.3 Respondent urges that Curtis was under no obligation to purchase any fixed quantity of sand and gravel for a specified total price, and that taxpayers retained an economic interest because they were dependent upon continued excavation for a return of capital.
The "economic interest" test was first enunciated in Palmer v. Bender.4 Briefly stated, Palmer holds that an economic interest is retained where (1) the owner has acquired, by investment, any interest in the mineral or natural deposit,5 and (2) secures, by any form of legal relationship, income derived from the extraction of the mineral to which he must look for a return of his capital.6 Gowans is one of many cases which has construed the second of these criteria. While Gowans held that an economic interest had not been retained, the Court expressly relied on three principal factors:
These factors are inapposite here. Taxpayers herein claim that under the contract Curtis was obligated to remove all the sand and gravel it needed to complete its subcontract. Assuming for purposes of discussion that this is true, it must be noted that no accurate determination of the amount of sand to be removed, or the total cost thereof, was made. There is no estimate of the amount of sand and gravel on taxpayers' land. It does not appear that either party ascertained what amount of these deposits Curtis would require. Nor can it be shown that Curtis would need all of the sand and gravel on taxpayers' land.
The Tax Court found that taxpayers retained a reversionary interest in any sand and gravel remaining after Curtis had fulfilled its subcontract. Taxpayers vigorously contend that there has been no proof that any commercially valuable sand and gravel remained. Taxpayers do not deny, however, either 1) that commercially valuable sand and gravel in fact remained, and 2) that the right to exploit any such remaining sand and gravel reverted to them. It cannot then be concluded that taxpayers sold Curtis either all or a predetermined amount of sand and gravel.
It is clear that the contract, as a whole, contemplated that Curtis might remove only such indeterminate amounts of materials as would be needed for its sub-contract. For...
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