Foran v. Commissioner of Internal Revenue

• Decision Date: 20 January 1948
• Docket Number: No. 11984.,11984.
• Parties: FORAN et al. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

165 F.2d 705 (1948)

FORAN et al. v. COMMISSIONER OF INTERNAL REVENUE.

No. 11984.

Circuit Court of Appeals, Fifth Circuit.

January 20, 1948.

Muckleroy McDonnold, of San Antonio, Tex., for petitioners.

I. Henry Kutz, Sewall Key, Robert N. Anderson and Louise Foster, 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 respondent.

Before SIBLEY, HOLMES, and WALLER, Circuit Judges.

SIBLEY, Circuit Judge.

Taxes for 1941 on community incomes are in dispute, and the particular question is whether gain realized during that year in selling certain oil producing properties in Texas which were bought in 1938 and 1939 is taxable as long term capital or ordinary gain. The Tax Court held the latter.

This property, owned by the taxpayers for more than eighteen months, is a capital asset unless under the exclusions stated in Internal Revenue Code, § 117, 26 U.S. C.A. Int.Rev.Code, § 117, it was "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business". The court found that the head of the community, Lester Foran, was "engaged in the oil and gas royalty and brokerage business for several years before and during 1941 wherein he bought and sold oil royalties for others on a commission basis. He also purchased and sold some gas properties in his own name". There is no finding that the latter amounted to a business. It is then found that the properties in controversy were acquired by Foran more than eighteen months prior to his sale of them in 1941, and that before the acquisition was complete they had all been proven to be oil producing and that later wells were drilled on them, and before the time of sale they were yielding Foran a monthly income of $400 per month; but this income had been assigned to a mortgagee to repay a loan of $15,000 made to acquire capital to further conduct his business; that the wells were estimated to have a flowing life of twenty-five years and a pumping life of fifteen to twenty years thereafter; that Foran had never sold a producing oil property before, and had never offered this property for sale; and that just before the sale the major oil companies attempted to have the method of allocation and production in this oil pool changed in such a way as to radically reduce the income from Foran's property.

Foran's testimony was the only evidence before the court, and the foregoing findings are based on his testimony alone. He also testified that he had in his family, besides his wife, four children, the oldest being fourteen years old; that he had no steady income from his brokerage business, and when the properties in controversy became proven as producing properties he decided to hold them as an investment. He never offered them for sale, and when on June 10, 1940, he borrowed the $15,000 it was to be repaid out of the income, and at that time he had no purpose of selling the property; the decision to sell in 1941 was made because of the effort of the major oil companies to change the allocation in such a way as would curtail his income from it. On cross-examination Foran...