Commissioner of Internal Rev. v. JS Abercrombie Co., 11895.
| Decision Date | 25 June 1947 |
| Docket Number | No. 11895.,11895. |
| Citation | 162 F.2d 338 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. J. S. ABERCROMBIE CO. |
| Court | U.S. Court of Appeals — Fifth Circuit |
Sewall Key, Acting Asst. Atty. Gen., Melva M. Grancy, Helen R. Carloss, and Hilbert P. Zarky, Sp. Assts. to Atty. Gen., and J. P. Wenchel, Chief Counsel, Bur. Int. Rev., and Bernard D. Daniels, Sp. Atty., Bur. Int. Rev., both of Washington, D. C., for petitioner.
Harry C. Weeks, of Fort Worth, Tex., for respondent.
Before SIBLEY, HOLMES, and WALLER, Circuit Judges.
This appeal involves income taxes for the calendar year 1941. The question is whether the assignees of an oil and gas lease — the assignors having retained a one-sixteenth working interest — are taxable for that portion of the gross income (less proper deductions) which is attributable to said interest notwithstanding, under the terms of the assignment, there were no net profits paid or payable to said assignors and the latter were not personally liable for any expenses.
The consideration for the assignment was $600,000 in cash, $2,500,000 payable only out of one-fourth of subsequent production free of all costs and expenses (neither of which items is in controversy here), and in addition a one-sixteenth "carried working interest." The assignees were put in control of the development and operation of the property, were to advance all funds necessary therefor, were authorized to sell the production accruing to said working interest or to purchase same themselves, and were to recoup their advances only from this source or from the sale of personal property; a one-sixteenth interest in the latter also having been reserved by the assignors.
The assignees were required to account to the assignors from time to time for one-sixteenth of the operating profits as defined by the agreement if, as, and when realized. Until July, 1942, there were no such profits. The Tax Court held that, under the contract, one-sixteenth of the gross proceeds from oil production belonged to the assignors, who were chargeable with the expenditures attributable to said interest.
Petitioner's contention, with reference to the amount in controversy, is that the assignors retained nothing more than a right to share in one-sixteenth of the net profits. He agrees with the Tax Court that the assignors possessed an economic interest in the property to the extent that they were entitled to share in the net operating profits. This is in concurrence with Kirby Petroleum Co. v. Commissioner, 326 U.S. 599, 66 S.Ct. 409, 90 L.Ed. 343, and Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25, 66 S.Ct. 861, 90 L.Ed. 1062, 162 A.L.R. 827; but he disagrees with the Tax Court as to the tax consequences of such interest. His position, in substance, is that when there were no net profits and when nothing was paid or payable to the assignors, as was true in the taxable year here involved, they received no gross income from the property, there was nothing to be depleted by them, and nothing that might be excluded or deducted from the income of the assignees.
It is true that language used by the parties in describing what was retained by them is not always conclusive as to the tax consequences of the transaction; but the Tax Court did not find any inconsistency in this case between what the parties did and the language used by them. It did not ignore, but gave full effect to, the statement in the agreement that the assignors did not agree to sell, but reserved and retained in themselves, "as a carried ownership and interest, an undivided one-sixteenth interest in all minerals." Moreover, it does not appear that the assignors, under their agreement with the assignees, were entitled to share operating net income as defined by federal law and regulations. On the contrary, they were entitled to share only in accumulated net operating profits as defined in the contract between the assignors and assignees.
Since net taxable income may differ from operating profits as defined by the parties (due to the fact that capital items not deductible for federal income tax purposes do not enter...
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