Fleming v. Comm'r of Internal Revenue
| Decision Date | 29 July 1955 |
| Docket Number | 46782.,46781,Docket Nos. 46713 |
| Citation | 24 T.C. 818 |
| Parties | WM. FLEMING AND BESSIE M. FLEMING, HUSBAND AND WIFE, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1 and 2. EXCHANGES SOLELY IN KIND— CAPITAL GAIN— SEC. 117(j), I.R.C. 1939.— Petitioners exchanged oil payments for land. Held, that the property was of unlike kind within the meaning of section 112(b)(1), and the gain was taxable as capital gain.
3. INTEREST— PAID AND ACCRUED.— Under two settlement agreements the proceeds of two endowment policies for petitioner Mary D. Walsh were retained by the insurance company at maturity. In one agreement interest on the retained proceeds was paid to petitioner. Held, that the interest payments were taxable income. Under the other agreement the interest payments were added to the principal sum retained by the insurance company for future distribution. Held, the accrued interest was taxable income to the petitioner in the years before the Court. Harry C. Weeks, Esq., for the petitioners.
Daniel A. Taylor, Esq., for the respondent.
Respondent determined deficiencies in income tax as follows:
+-----------------------------------------------------------------------------+
¦Docket ¦Petitioner ¦Year ¦Deficiency¦
¦No. ¦ ¦ ¦ ¦
+---------+-------------------------------+------------------------+----------¦
¦46713 ¦Wm. Fleming and Bessie M. ¦1948 ¦$94,113.30¦
¦ ¦Fleming ¦ ¦ ¦
+---------+-------------------------------+------------------------+----------¦
¦46781 ¦F. Howard Walsh and Mary D. ¦1948 ¦2,301.31 ¦
¦ ¦Walsh ¦ ¦ ¦
+---------+-------------------------------+------------------------+----------¦
¦ ¦ ¦1949 ¦38,550.52 ¦
+---------+-------------------------------+------------------------+----------¦
¦ ¦ ¦(Fiscal year ended 8/31/¦51,976.17 ¦
¦ ¦ ¦48 ¦ ¦
+---------+-------------------------------+------------------------+----------¦
¦46782 ¦Mary D. Fleming Walsh ¦(Fiscal year ended 8/31/¦31,218.55 ¦
¦ ¦ ¦49 ¦ ¦
+-----------------------------------------------------------------------------+
The issues presented are:
(1) Whether an exchange of limited overriding royalties or oil payment interests for the fee simple title to a ranch was an exchange solely in kind under section 112(b)(1), Internal Revenue Code of 1939. In the alternative, if a gain is recognized, is it a capital gain, or ordinary income with depletion allowable?
(2) Would the tax consequences resulting from the exchange above be different where urban real property is substituted for the ranch?
(3) Did petitioners F. Howard Walsh and Mary D. Walsh receive taxable income in 1948 and 1949 because of certain transactions involving endowment life insurance policies?
Petitioner Mary D. Fleming Walsh has stipulated that she is liable as a transferee for whatever deficiencies in income tax are finally determined against Wm. Fleming, Trustee, for the fiscal years ended August 31, 1948, and August 31, 1949.
All of the facts have been stipulated and are so found and we summarize therefrom as follows:
Wm. Fleming and Bessie M. Fleming were husband and wife, as were F. Howard Walsh and Mary D. Walsh. Mary D. Fleming Walsh (Mary D. Walsh) was also the daughter of Wm. Fleming. All petitioners were residents of Fort Worth, Texas, and their income tax returns were filed on a cash basis with the collector of internal revenue for the second district of Texas.
For all the years before us Wm. Fleming was the sole trustee and Mary D. Walsh was the sole beneficiary of the private trust known as Wm. Fleming, Trustee. This trust was created in 1931 and continued in existence until 1950. The trust kept its books on a cash basis for a fiscal period ending August 31 of each year, and its income tax returns were filed with the collector of internal revenue for the second district of Texas.
For the years before us the Fleming Oil Company was a partnership composed of Wm. Fleming and Wm. Fleming, Trustee. The partnership produced oil and gas, and made investments. Wm. Fleming held a 61.026 per cent interest in the business, and Wm. Fleming, Trustee, a 38.974 per cent interest. Partnership books were kept on a cash basis, and tax returns for the partnership were filed with the collector of internal revenue for the second district of Texas.
On May 19, 1948, Marie Hildreth Cline (joined by her husband) conveyed an undivided fee simple title to 2,994.5 acres of ranch land to the Fleming Oil Company (50 per cent), Wm. Fleming, Trustee (25 per cent), and Wm. Fleming (25 per cent). As consideration for this conveyance the grantees of the land conveyed and assigned to Marie Hildreth Cline certain limited overriding royalties or oil payment interests came from oil and gas leases, or oil and gas mineral leases, which the transferors had owned for more than 6 months prior to May 19, 1948, for productive use in their respective trades and businesses and not for sale. The ranch was acquired for investment and not for sale.
Pertinent parts of the various oil payments to Marie Hildreth Cline are presented below:
In the first, the Fleming Oil Company, as owner of one-half of seven-eighths of certain oil and gas leasehold estates
does hereby sell, assign, and convey unto the said MRS. MARIE HILDRETH CLINE, as a part of her separate property and estate, her heirs and assigns, the following described real property, to-wit: An overriding royalty and mineral interest carved hereby out of the interest owned by Fleming Oil Company in each and all of the oil and gas leases described above, amounting to an undivided 49/128ths interest in and to all the oil in, under, and that may be produced, saved and marketed from the above described tracts of land under the terms of the oil and gas leases covering same, until the grantee named above shall have received therefrom oil of the net value of One Hundred Forty-seven Thousand Dollars ($147,000.00), plus an amount equal to five per cent (5%) interest per annum from May 19, 1948, on the portions of said $147,000.00 which may be unsatisfied from time to time.
This grant was made subject to certain conditions, limitations, and agreements, such as:
(1) No interest in the gas or casinghead gas in, under, or produced and saved from said tracts, and no interest in the personal property now or hereafter placed thereon is assigned or conveyed to grantee, this conveyance affecting the oil only.
(5) When and if the grantee herein, her heirs and assigns, have received from the fractional interest hereby assigned, oil of the net value of $147,000.00, plus an amount equal to five per cent (5%) interest as above provided, then the interest hereby conveyed to said grantee shall cease and terminate, and said interest hereby conveyed to said grantee shall cease and terminate, and said interest shall revert to, and shall thereafter be owned by grantor, its successors, heirs or assigns; and grantee, her heirs and assigns, shall have no further interest in said oil and gas leasehold estates covering said land, or in the oil thereunder; and grantee, her heirs and assigns, shall have no further interest in said oil and gas leasehold estates covering said land, or in the oil thereunder; and grantee, her heirs or assigns, shall, upon request, execute such instruments as may be necessary or proper to evidence this of record.
(6) The execution of this conveyance shall not impose upon grantor any obligation with respect to developing or operating the property covered hereby, nor shall it be implied herefrom that grantor is in anywise obligated to see that grantee receives oil aggregating the net value of $147,000.00, plus an amount equal to five per cent (5%) interest as above provided, or any lesser sum; but grantor does covenant and agree that grantee shall have the same but no greater right to require grantor to develop and operate said property in accordance with the terms of the original leases upon said property as the original lessors therein, their heirs or assigns, might have or exercise.
Marie Hildreth Cline's share of oil produced from the property described in the Fleming Oil Company assignment, from the effective date of the assignment to the close of 1952, amounted to:
+------------------+
¦Year ¦Amount ¦
+------+-----------¦
¦1948 ¦$15,801.16 ¦
+------+-----------¦
¦1949 ¦22,835.94 ¦
+------+-----------¦
¦1950 ¦31,172.41 ¦
+------+-----------¦
¦1951 ¦31,350.19 ¦
+------+-----------¦
¦1952 ¦30,559.54 ¦
+------------------+
In the next oil payment, Wm. Fleming, as owner of an undivided interest in certain oil and gas leases does hereby sell, assign, and convey unto the said MRS. MARIE HILDRETH CLINE, as a part of her separate property and estate, and to her heirs and assigns, the following described real property, to-wit:
An overriding royalty and mineral interest carved hereby out of the interest owned by Wm. Fleming in each and all of the oil and gas leases described above, amounting to a .166668 interest in and to all the oil in, under, and that may be produced, saved and marketed from the above described tracts of land under the terms of the oil and gas leases covering same, until the grantee named above shall have received therefrom oil of the net value of Seventy-three Thousand Five Hundred Dollars ($73,500.00), plus an amount equal to five per cent (5%) interest per annum from May 19, 1948, on the portions of said $73,500.00 which...
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