Ferguson v. Commissioner of Internal Revenue

• Decision Date: 13 December 1930
• Docket Number: No. 6029.,6029.
• Citation: 45 F.2d 573
• Parties: FERGUSON v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

45 F.2d 573 (1930)

FERGUSON v. COMMISSIONER OF INTERNAL REVENUE.

No. 6029.

Circuit Court of Appeals, Fifth Circuit.

December 13, 1930.

Robert Ash, of Washington, D. C., and Harry C. Weeks and A. H. Britain, both of Wichita Falls, Tex. (T. J. Reilly, of Washington, D. C., on the brief), for petitioner.

G. A. Youngquist, Asst. Atty. Gen., Sewall Key and A. H. Conner, Sp. Assts. to Atty. Gen., C. M. Charest, Gen. Counsel, Bureau of Internal Revenue, and R. N. Shaw, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., and J. Louis Monarch, Sp. Asst. to Atty. Gen. (J. Louis Monarch and A. H. Conner, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before BRYAN and FOSTER, Circuit Judges, and DAWKINS, District Judge.

DAWKINS, District Judge.

Petitioner, a married man, inherited certain real property, which under the law of Texas became his separate property. During the year 1919 he negotiated a number of oil and gas leases thereon from which cash bonuses were received as follows: In 1922, $96,388.84, in 1923, $74,111.16, and in 1924, $1,869.45, as well as large sums in each of these years and the year 1925 as royalties. When the leases were executed he agreed with his wife that she should share equally the proceeds of any oil produced. All of the funds so derived were placed in petitioner's bank account, the wife having no separate account, but they each drew checks thereon, the wife signing those drawn by her, "W. P. Ferguson by Mrs. Ferguson."

Petitioner and his wife filed separate returns, in which the royalties and cash bonuses were reported as community income, to be taxed as capital gain, under section 206 of the Revenue Act of 1921 (42 Stat. 232). He also claimed an earned income of $10,000 and $20,000 for the years 1924 and 1925, respectively. The Commissioner, upon an audit of the returns, held all of the funds so received to be the separate property of the petitioner and taxed the same as ordinary income after allowing a credit of only $5,000 for earned income. Petitioner seeks a reversal of that ruling.

The questions presented, therefore, are as follows:

(1) Did the cash received as bonuses and the royalties from the leases constitute capital gain, to be taxed as contended by petitioner, or were they ordinary income from the property?

(2) Were these funds, under the facts of the case, community income or the separate revenue of the husband?

(3) Was the petitioner entitled to any greater allowance for earned income than was found by the Commissioner?

The answer to the first question depends, at least in so far as the cash consideration is concerned, upon whether or not the transfers amounted to sales and the vesting in the transferees of title to real property. If so, then the sums so realized were taxable under section 206 of the Revenue Act of 1921. That section defines "capital gain" as "gain from the sale or exchange of capital assets consummated after December 31, 1921." The lands in question undoubtedly represented a capital asset, the sale of any part of which at a profit produced a capital gain. The statute makes no attempt to define a sale, but it is defined by the lexicographers as follows:

Webster's International Dictionary:

"Act of selling; a contract whereby the absolute, or general, ownership of property is transferred from one person to another for a price, or sum of money, or loosely for any consideration; also a contract for such transfer of ownership in the future or upon the future fulfillment of some condition (this being by some differentiated as an agreement to sell)."

Black's Law Dictionary:

"A contract between two parties, called, respectively, the `seller' (or vendor) and the `buyer' (or purchaser), by which the former, in consideration of the payment or promise of payment of a certain price in money, transfers to the latter the title and possession of an object of property."

Bouvier's Law Dictionary:

"An agreement by which one of two contracting parties, called the seller, gives a thing and passes the title to it, in exchange for a certain price in current money, to the one party, who is called the buyer or purchaser, who on his part, agrees to pay such price. 2 Kent 363; Pothier, Vente n. 1.

"Ordinarily, a transfer of property for a fixed price in money, or its equivalent. Five Per Cent. Cases, 110 U. S. 471 4 S. Ct. 210, 28 L. Ed. 198; Northern Pac. R. Co. v. Sanders (C. C.) 47 F. 604."

The Supreme Court of the United States has also defined "a sale" in very much the same way, in Williamson et al. v. Berry, 8 How. 495, 544, 12 L. Ed. 1170, wherein it is said: "Sale is a word of precise legal import, both at law and in equity. It means at all times, a contract between parties, to give and to pass rights of property for money, — which the buyer pays or promises to pay to the seller for the thing bought and sold."

Of course Congress could, if it saw fit, declare what was meant, and the federal courts are not bound by the decisions of the states on questions of general law. But the word "sale" seems to have the same meaning wherever used, and, as to the interest or the title which was conveyed by the transfers under inquiry, we think reliance must be had upon the law of Texas. It is settled by the jurisprudence of that state that such a conveyance vests a fee title in the minerals themselves, and this has become a rule of property in Texas, which could not be changed as to vested interests. Texas Company v. Daugherty, 107 Tex. 226, 176 S. W. 717, L. R. A. 1917F, 989; Stephens County v. Mid-Kansas Oil & Gas Company, 113 Tex. 165, 254 S. W. 290, 29 A. L. R. 566; Humphreys-Mexia Oil Company v. Gammon, 113 Tex. 255, 254 S. W. 296, 29 A. L. R. 607; Estate of W. T. Waggoner v. Sigler Oil Co., 118 Tex. 509, 19 S.W.(2d) 27. The Treasury Department has likewise recognized this effect by collecting upon such transfers in that state the federal stamp tax imposed upon sales of real property, amounting to many thousands of dollars. In this situation we can see no escape from the conclusion that in each of the transactions in question here there was a conveyance in fee of seven-eighths of the minerals in place for which the cash consideration was paid as the price of a capital asset. The Board of Tax Appeals has likewise recognized that result where the lessee or vendee of a mineral lease has subsequently conveyed either the whole or part of the title so acquired. Murphy v. Commissioner, 9 B. T. A. 610; In re Reynolds, 10 B. T. A. 651. In the present case the Board cited, in support of its decision, the cases of Stratton's Independence v. Howbert, 231 U. S. 399, 34 S. Ct. 136, 58 L. Ed. 285; Stanton v. Baltic Mining Co., 240 U. S. 103, 36 S. Ct. 278, 281, 60 L. Ed. 546; Von Baumbach v. Sargent Land Co., 242 U. S. 503, 37 S. Ct. 201, 208, 61 L. Ed. 460; and United States v. Biwabik Mining Co., 247 U. S. 116, 38 S. Ct. 462, 62 L. Ed. 1017. However, each of those decisions involved the excise tax laid upon corporations by the act of 1909. The court was called upon to determine what was meant by the word "income" as used therein. It was simply held that, for the purposes of that particular statute, mining was manufacturing, and the result from such an operation was income, although it involved the gradual consumption or exhaustion of the minerals, and to that extent a conversion of the property; and further that the word "depreciation" should be given its ordinary meaning, which was not the same as "depletion" or exhaustion of the minerals. In fact, it was clearly pointed out that the tax was not upon property but upon the results of a business, as indicated in Stanton v. Baltic Mining Company, supra, from which we quote as follows: "It appellant's contention above outlined moreover rests upon the wholly fallacious assumption that, looked at from the point of view of substance, a tax on the product of a mine is necessarily in its essence and nature in every case a direct tax on property because of its ownership, unless adequate allowance be made for the exhaustion of the ore body to result from working the mine. We say wholly fallacious assumption because, independently of the effect of the operation of the 16th Amendment, it was settled in Stratton's Independence v. Howbert, 231 U. S. 399, 34 S. Ct. 136, 58 L. Ed. 285, that such tax is not a tax upon property as such because of its ownership,...