Goforth v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 52316.
| Citation | 32 BTA 1206 |
| Decision Date | 13 August 1935 |
| Docket Number | Docket No. 52316. |
| Parties | R. S. GOFORTH AND MARY B. GOFORTH, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Charles H. Garnett, Esq., for the petitioners.
Willis R. Lansford, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the amount of $5,066.02. The issues are, first, what amount of gain on the sale of an interest in certain land to one R. W. Morrison, Jr., did the petitioners realize as income in 1928; second, was the money received by the petitioners in 1928 from oil produced prior thereto and impounded until after the settlement of certain litigation on January 30, 1928, taxable income to them in 1928; and, third, was the gain derived from the sale of an interest in the land to Morrison a capital net gain from the sale of capital assets and so subject to the limitation of a 12½ percent rate in the computation of the tax.
At the hearing on May 8, 1934, the parties filed a stipulation entitled "Statement of Facts", together with documents attached thereto as exhibits, and on May 29, 1935, the parties filed herein a "Supplemental Stipulation of Facts", modifying their original "Statement of Facts." From these stipulations, omitting matter deemed immaterial, we make the following findings of fact.
FINDINGS OF FACT.
The petitioners are husband and wife and filed a joint return for the year 1928, being the taxable year involved in this proceeding. They are retired farmers and their address is Shawnee, Oklahoma, R. F. D. They are, and were at all times mentioned herein, citizens and residents of the State of Oklahoma. They were married and living together during the taxable year involved, and had in their family one child and a niece under eighteen years of age, both wholly dependent. They kept no books of account, and their return was made on a cash receipts and disbursements basis.
Their income for 1928 was derived wholly from oil produced from, and gain upon the sale of an interest in, a certain tract of land situated in Seminole County, in the State of Oklahoma, containing 120 acres, a technical description of the land being unnecessary here.
An apparent fee simple title to this entire tract of land was acquired in 1912 in the name of Mary B. Goforth by warranty deed from certain grantors who were assumed to be the sole heirs of the original Indian allottee. Neither at the time acquired nor at March 1, 1913, did this land have any mineral value. But in 1923 it became valuable as prospective oil-producing property.
The cost to petitioners of the deed to the land involved, and of such title as they acquired thereby in 1912 was $3,000. The agricultural value of the land was not at any time relevant herein in excess of $3,000. Whatever value it had in excess of that sum was determined by the discovery of oil and gas.
The entire 120 acres of land involved was allotted to Ida, a member of the Seminole Nation or Tribe of Indians, duly enrolled opposite Roll No. 1860. While said allottee was enrolled as a female, he was in fact a male and his correct name was Eddie.
The allottee died intestate in 1905, at the age of 14 years, unmarried and without issue. His parents were both Seminole Indians, and died prior to his death. He was survived by the following relatives in the maternal line of ascent:
His surviving relatives in the paternal line of ascent were the descendants of seven paternal uncles and aunts.
Bessie Sena, the maternal grandmother of the allottee, executed a warranty deed to petitioners' grantor, covering the 120 acres of land involved, in 1906, and this was the only source of record title to this land which petitioners acquired by the deed from their grantor in 1912, and they had no other source of title at the time of the filing of the lawsuit of Lena v. Goforth et al., hereinafter referred to, or at the time of the trial thereof, except possession by them and their grantor since 1906.
On March 17, 1925, a suit was filed in the District Court of Seminole County by an alleged heir of the original Indian allottee against the petitioners and 72 other persons who were considered to have or claim some interest in the land as heirs of the original allottee or otherwise. The object of the suit was to recover the land or certain interests therein from the petitioners, and to quiet title thereto in the claimants, the style of the case being Martha Lena, Plaintiff, vs. Mary B. Goforth, et al., Defendants, No. 7908.
On January 23, 1923, the petitioners executed an oil and gas lease on the entire tract to Terry G. Smith, who, on January 25, 1923, assigned it to the Indian Territory Illuminating Oil Co. By the terms of this lease the lessee agreed to deliver or pay to the lessors as royalty one eighth of all the oil produced and saved from the leased premises or its value at the market price. No attack was made on this lease in the lawsuit, but all parties thereto consented to a judgment and decree of the court validating it and establishing a good title to it in the lessee as against all parties to the suit, and all subsequent controversies and proceedings in the case were had concerning and were confined only to the fee title to the land subject to the lease.
On December 11, 1926, the petitioners entered into a written contract and agreement with one R. W. Morrison, Jr., to sell to him an undivided one-fourth, or 30 acres, interest in the oil, gas, and minerals in the land in question, being commonly known as a royalty interest therein, in consideration of the sum of $60,000, of which $3,000 was paid and received in cash at the time of execution of the contract. This contract provided that it was made subject to the above mentioned lawsuit then pending and was to be performed as soon as the litigation was disposed of by final decree or settlement. It also provided that if, as the result of the litigation, the petitioners were not awarded, and did not receive good title to as much as an undivided one-fourth, or 30 acres, interest in the land, then they were released from liability under it, and in such event, the $3,000 cash payment was not to be returned to the purchaser, but was to remain their property. It also provided that one fourth of all royalties accruing from oil produced from this land subsequent to the date of its execution, in the event the sale to the purchaser of the undivided one-fourth interest was finally consummated, should be received by him. On December 16, 1926, the contract was filed and recorded in the land title records of Seminole County.
The mineral deed conveying the undivided one-fourth interest to Morrison was executed by the petitioners on December 11, 1926, and was not delivered until about January 7, 1928, on which date it was filed and recorded in the land title records of Seminole County.
On July 10, 1927, said cause No. 7908 in the District Court of Seminole County was tried and judgment rendered. The court found that Mary B. Goforth owned an undivided one-half, or 60 acres, fee simple interest in the land and that she and her grantors had been in the quiet, peaceable, and undisputed possession of the same, claiming the entire fee simple estate, openly, notoriously and adversely against the world since the year 1906.
Pursuant to this finding, judgment was rendered awarding her an undivided one-half interest in fee simple in the land. Following the rendition of this judgment, certain parties to the suit adverse in interest to the petitioners filed a general appeal therefrom to the Supreme Court of Oklahoma, in which they disputed and contested the title and interest awarded Mary B. Goforth by said judgment. On its face there was no basis for disputing her title to an undivided one-eighth, or 15 acres, interest in the whole 120 acres, and it was conceded that in any event she would be entitled to a final judgment for at least that much. The appeal was docketed as Jarvis et al vs. Goforth et al., No. 19,114, in the Supreme Court of Oklahoma.
Soon thereafter a decision in a case involving a similar question was rendered in the United States Circuit Court of Appeals for the Eighth Circuit, being the circuit in which the State of Oklahoma was at that time included, adverse to the contention of Mary B. Goforth in the appeal pending in the Supreme Court of Oklahoma. This decision led the attorneys for the petitioners to advise that a settlement be made with the claimants as to her disputed title and interest in the land on the best terms possible.
Accordingly, it was agreed between the petitioners and the claimants, consisting of a large number of Indian heirs, that petitioners would pay them the sum of $45,000 and would also pay all costs of the litigation, and that the claimants would dismiss their appeal in the Supreme Court of Oklahoma and thus, in effect, cause the judgment of the District Court of Seminole County to become final. This agreement was promptly carried into execution and on January 30, 1928, the plaintiffs in error in the appeal case filed their motion to dismiss their appeal. Immediately on the filing of the motion and on the same day an order was entered in the case by the Supreme Court of Oklahoma, dismissing the appeal and directing that the mandate of the court be issued forthwith to the trial court.
The cash cost to the petitioners of the settlement above set forth and of the litigation, including attorney fees and other expenses, was the sum of $58,681.50, this being the amount set out in the revenue agent's final report upon which the respondent's notice of deficiency in this proceeding is based.
One of the attorneys for the petitioners in the litigation and the one first employed by...
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