Berg v. Commissioner of Internal Revenue, Docket No. 7029.
| Decision Date | 11 May 1927 |
| Docket Number | Docket No. 7029. |
| Citation | 6 BTA 1287 |
| Parties | HENRY L. BERG AND ROSE BERG, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
P. J. O'Connor, Esq., for the petitioners.
J. E. Marshall, Esq., for the respondent.
This proceeding involves the determination of a deficiency in income tax for the year 1922, in the amount of $10,655.82. The only point at issue is whether the consideration received by Henry L. Berg for leasing certain oil and gas rights in certain lands falls within the classification of gain from the sale of capital assets as provided by section 206 of the Revenue Act of 1921. The facts are found as stipulated.
FINDINGS OF FACT.
Petitioners are husband and wife and are residents of Camden, Ark.
Henry L. Berg and his brother, Leo Berg, for nearly forty years prior to 1922, were in the mercantile business together at Camden. Throughout such period they acquired the fee simple title to approximately 40,000 acres of land in Calhoun and Ouchita Counties, Arkansas. By deed dated May 16, 1922, and duly executed by Henry L. Berg and his brother, Leo Berg they conveyed to Rose Berg, wife of Henry L. Berg, a fee simple title to fractional interests in the said 40,000 acres of land. At sundry times in the year 1922 on or before November 18, 1922, Henry L. Berg and Rose Berg, his wife, together with Leo Berg and his wife and children, executed certain oil and gas leases to divers parties. All of the leases were in all respects similar and so far as is material here provided:
That the said lessor for and in consideration of ____ Dollars cash in hand paid, the receipt of which is hereby acknowledged, and of the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed, have granted, conveyed, demised, leased and let, and by these presents do grant, convey, demise, lease and let unto said lessee, for the sole and only purpose of mining and operating for oil and gas, and laying of pipe lines, and of building tanks, towers, stations and structures thereon to produce, save and take care of said products, and all that certain tract of land situated in the County of ____ State of _____.
It is agreed that this lease shall remain in force for a term of ____ from this date, and as long thereafter as oil or gas, or either of them is produced from said land by the lessee.
In consideration of the premises the said lessee covenants and agrees:
1st. To deliver to the credit of the lessor, free of costs in tanks or pipe line to which it may connect its wells, the equal one-eighth part of all oil produced and saved from the lease premises.
2nd. To pay the lessor _____ Dollars each year in advance, for the gas from each well where gas only is found, while the same is being used off the premises, and lessor to have gas free of cost from any such well for all stoves and all inside lights in the principal dwelling houses on said land during the same time by making his own connection with the well at his own risk and expense.
3rd. To pay lessor for gas produced from any oil well used off the premises at the rate of ____ Dollars per year, for the time during which such gas shall be used, such payments to be made each three months in advance.
If no well be commenced on said land on or before the _____ day of _____, 19__, this lease shall terminate as to both parties, unless the lessee, on or before that date, shall pay or tender to the lessor, or to the lessor's credit in the ____ Bank of _____, Arkansas, or its successors, which shall continue as the depository regardless of changes in the ownership of said land, the sum of ____ which shall operate as a rental and cover the privileges of deferring the commencement of a well for ____ from said date. In like manner and upon like payments or tenders the commencement of a well may be further deferred for like periods in the same number of months successively. And it is understood and agreed that the consideration first recited herein, the down payment, covers not only the privileges granted to the date when said first rental is payable as aforesaid, but also the lessee's option of extending that period as aforesaid, and any and all other rights conferred.
Should the first well drilled on the above described land be a dry hole, then, in that event, if a second well is not commenced on said land within twelve months from the expiration of the last rental period from which rental has been paid, this lease shall terminate as to both parties, unless the lessee on or before the expiration of said twelve months shall resume the payment of rentals in the same amount and in the same manner as hereinafter provided. And it is agreed that upon the resumption of the payment of rentals, as above provided, that the last preceding paragraph hereof governing the payment of rentals and the effect thereof, shall continue in force just as though there had been no interruption in the rental payments. * * *
For the calendar year 1922, the petitioners filed a joint return on March 14, 1923, showing the income of the wife separate and apart from the income of the husband. The only income reported for the wife represented profits of $35,134.14 from the leasing of the oil and gas rights in the land mentioned and described on the return as "capital net gain." The return also included like profits of $40,230.37 of the husband, described likewise on the return as "capital net gain;" and for the purpose of arriving at the tax liability of both individuals jointly, the income of the wife was added to the husband's income, making an aggregate reported joint net income of $78,458.83 — on which amount a tax of $9,807.35 was computed by petitioners at 12½ per cent, on the theory that such computation was authorized by section 206 of the Revenue Act of 1921.
Upon an audit of the return, the Commissioner found the aggregate joint net income of petitioners to be $81,941.57, which net income is admitted by petitioners to be correct. The Commissioner in computing the tax did not consider the profits arising out of the leasing of the oil and gas rights aforesaid as falling within the provisions of section 206 of the Revenue Act of 1921, but computed the tax under sections 210 and 211 of that Act; and he arrived at a deficiency in tax of $10,655.82 due by Henry L. Berg and Rose Berg. Of the admitted net income of $81,941.57, there was received by the petitioners from the leasing of the oil and gas rights on the property mentioned the sum of $78,844.24, divided between them as follows:
Henry L. Berg __________________________________ $42,872.12
Rose Berg ______________________________________ 35,972.12
The income of $42,872.12 of Henry L. Berg arose out of the leasing of the aforementioned oil and gas rights on land in which he owned an undivided fee simple interest for more than two years prior to the execution of the said leases. The income of $35,972.12 of Rose Berg arose out of the leasing of the said oil and gas rights on land in which she owned an undivided fee simple interest for less than two years prior to the execution of the said leases.
The tax in controversy is for the year 1922 and if the consideration received by the petitioners for leasing the said oil and gas rights falls within the classification of gain from the sale of capital assets as provided by section 206 of the Revenue Act of 1921, the Commissioner's determination is erroneous, but if section 206 does not apply to the income received by petitioners from the oil and gas leases involved herein, the Commissioner's determination is correct.
The pertinent parts of section 206 of the Revenue Act of 1921, which petitioners insist apply and the Commissioner contends are not applicable to this case, are as follows:
SEC. 206. (a) That for the purpose of this title:
(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921;
* * * * * * *
(6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
(b) In the case of any taxpayer (other than a corporation) who for any taxable year derives a capital net gain, there shall (at the election of the taxpayer) be levied, collected and paid, in lieu of the taxes imposed by sections 210 and 211 of this title, a tax determined as follows:
A partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner provided in sections 210 and 211, and the total tax shall be this amount plus 12½ per centum of the capital net gain; but if the taxpayer elects to be taxed under this section the total tax shall in no such case be less than 12½ per centum of the total net income. The total tax thus determined shall be computed, collected and paid in the same manner, at the same time and subject to the same provisions of law, including penalties, as other taxes under this title.
The Committee on Ways and Means said at page 10 of its report:
The sale of farms, mineral properties, and other capital assets is now seriously retarded by the fact that gains and profits earned over a series of years are under the present law taxed as a lump sum (and the amount of surtax greatly enhanced thereby) in the year in which the profit is realized. Many such sales, with their possible profit taking and consequent increase of the tax revenue, have been blocked by this feature of the present law. In order to permit such transactions to go forward without fear of a...
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