Remer v. Comm'r of Internal Revenue, Docket Nos. 57593

• Decision Date: 19 April 1957
• Docket Number: 59035.,Docket Nos. 57593,57594
• Citation: 28 T.C. 85
• Parties: CHARLES H. REMER AND DOROTHY A. REMER, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

28 T.C. 85

CHARLES H. REMER AND DOROTHY A. REMER, ET AL.,1 PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 57593

57594

59035.

Tax Court of the United States.

Filed April 19, 1957.

Amasa E. Wheeler, Esq., and Hayner N. Larson, Esq., for the petitioners.

Frank C. Conley, Esq., for the respondent.

Petitioner held ‘Stockpiled Iron Ore Mining Leases' for more than 6 months. He assigned all rights to the leases in consideration of payments of $100,000 in 1947, $50,000 in 1948, and $50,000 in 1949, plus the sum of 10 cents per ton for concentrates shipped from the leased properties. The assignee was under no obligation to petitioner to ship any concentrates. Held, the transaction was a ‘sale’ of the leases and the profits realized were taxable as capital gains.

OPINION.

TIETJENS, Judge:

The Commissioner determined the following deficiencies in income tax and additions to tax:

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Docket No. Petitioner           Year   Deficiency Additions to tax sec
                                                                  294 (d) (1) (A)
                57593      Charles H. Remer and ( 1948 $14,625.36
                           Dorothy A. Remer     ( 1949 17,787.02
                57594      Charles H. Remer     1947   47,169.21
                59035      Charles H. Remer and ( 1950 5,794.27
                           Dorothy A. Remer     ( 1951 7,915.26   $3,303.34
                                                ( 1952 7,256.26
                

The questions for decision are (1) whether certain payments received by petitioners as the result of the transfer of rights in iron ore mining leases are taxable as ordinary income or as long-term capital gains and (2) whether petitioners are liable for additions to tax under section 294(d)(1)(A). Other adjustments which are uncontested may be made under Rule 50.

All of the facts have been stipulated, are so found, and the stipulation is included herein by reference.

The petitioners Charles H. and Dorothy A. Remer have been husband and wife since 1948 and are residents of Hibbing, Minnesota. Charles filed a separate return for 1947, and the two filed a joint return for each of the years 1948 to 1952, inclusive. Their books were kept and the returns filed according to the cash method of accounting.

Issued to Charles by the State of Minnesota on July 11, 1945, were two written documents, each entitled ‘Stockpiled Iron Ore Prospecting Permit’ and identical to the other except as to number and description of the property to which it related. One was permit No. SP-101 and the other permit No. SP-102. The latter, omitting such property description, was as follows:

STATE OF MINNESOTA

STOCKPILED IRON ORE PROSPECTING PERMIT

Permit No. SP-102

At the sale of stockpiled iron ore prospecting permits held by the State of Minnesota, acting by and through its Commissioner of Conservation and Executive Council, under the provisions of Minnesota Statutes 1941, Sections 93.16 and 93.17 and Laws of 1945, Chapter 342, at 11 o'clock in the morning of the 11th day of June 1945.

Chas. H. Remer, of Hibbing, Minnesota, having offered the highest rate of royalty for the right to remove stockpiled iron ore on that tract or parcel of land in St. Louis County, State of Minnesota, described as follows, to-wit:

(DESCRIPTION OMITTED)

and being a stockpiled iron ore mining unit as designated by the Commissioner of Conservation, and said Chas. H. Remer having paid the treasurer of the State of Minnesota the sum of Fifty Dollars;

NOW, THEREFORE, in consideration of the premises, the undersigned, as Commissioner of Conservation, pursuant to the provisions of Laws 1945, Chapter 342, hereby grants to the said Chas. H. Remer for the period of one year from July 11, 1945, the right to enter upon said land for the purpose of prospecting and exploring the stockpiled iron ore as authorized by Laws 1945, Chapter 342.

The rights, duties and obligations of the holder of this permit are as set forth in Laws 1945, Chapter 342, Sections 3, 4 and 5, and, in the event that a mining lease is issued in the form prescribed by Laws 1945, Chapter 342, Section 5, then the rates of royalty to be paid to the State of Minnesota shall conform to the bid offered by Chas. H. Remer to whom this permit is issued.

This permit will expire at 5 o'clock p.m. on the 10th day of July 1946.

The stockpiled iron ore referred to in the permit represented the residue of prior mining. The documents evidencing the permits were transmitted to Charles with a letter from the Director of the Division of Lands and Minerals of the State Department of Conservation wherein appeared the following paragraph:

We enclose two copies of Laws 1945, Chapter 342, and call your attention to Section 3 setting forth the duties and obligations of the permit holder and providing that the work of prospecting shall begin within 6 months unless a lease is asked for. Also enclosed are two copies of Minn. Stat. 1941, Sec. 93.19 outlining the manner in which you may receive from the Commissioner of Conservation a state mining lease under your permit.

The two permits were held by Charles continuously until their expiration.

On July 10, 1946, the date of expiration of the permits, the State issued to Charles 2 written leases. Each was entitled ‘Stockpiled Iron Ore Mining Lease Issued under Laws of 1945, Chapter 342.’ Each was identical to the other except that the one was designated lease No. TSP-301, referred to permit No. SP-101, and covered only the property to which this permit related, whereas the other was designated lease No. ISP-201, referred to permit No. SP-102, and covered only the property to which this latter permit related.

Each lease document recited that the State did thereby ‘lease and demise’ the property in question to Charles ‘for the term of fifty (50) years * * * for the purpose of exploring, mining, and removing the iron ore stockpiled on said land,‘ granting him also the right to construct such buildings, roads, and ‘other improvements' upon the premises ‘as may be necessary or suitable for such purposes.’ The State at the same time reserved power to sell timber on the property, to grant railroad rights-of-way, and to lease the surface, in all instances in such manner as not ‘unnecessarily or materially’ to ‘interfere with the mining operations.’

Charles on his part covenanted to pay the State a ‘rental’ of $312.50 for each quarter ‘during the first year of this lease * * * and a quarterly rental thereafter during the entire term this lease remains in force of $1,250; provided, that the total amount of royalty due on stockpiled iron ore removed and accounted for during said first year as provided for hereafter does not equal or exceed the sum of $1,250 during the first year as above provided, and the sum of $5,000 per annum thereafter, it being the purpose of this covenant to secure a regular annual income from the demised premises of not less than $1,250 during the first year and $5,000 thereafter in rentals or royalty on stockpiled iron ore, or both.’ There followed ‘schedules of minimum royalties,‘ which varied according to type of natural ore removed or concentrate produced and ranged upwards from a minimum of 12 cents per gross ton.

Provisions were then set forth relating to such subjects as payment dates, reports and statements, mailing and furnishing of ore samples, weighing, beneficiation, stockpiling of concentrates, inspection and inspection facilities, and payment of taxes assessed against the land and improvements thereon, following which it was stated that ‘the party of the second part (Charles) shall have the right at any time to terminate this lease in so far as it requires the party of the second part to mine stockpiled ore on said land, or to pay royalty therefor, by delivering written notice of such intention to terminate sixty days thereafter, and all arrearages and sums which shall be due under this lease up to the time of such termination shall be paid upon settlement and adjustment thereof by the party of the second part.’ The lease provided also that ‘if any quarterly payment or any payment for royalties * * * shall remain unpaid’ for 60 days after the due date, or if the lessee ‘shall fail to perform any of the covenants or conditions' placed upon him, ‘then it shall be the duty of the commissioner of conservation to cancel this lease, ‘ first giving 20 days' written notice, whereupon the State ‘shall re-enter and again possess said premises as fully as if no lease had been given * * * , and the party of the second part and all persons claiming under such party shall be wholly excluded therefrom, but such re-entry shall not work a forfeiture of the rents, royalties or taxes or other sums to be paid at the time of such re-entry.’ The lessee was given 90 days following termination of the lease, ‘whether by act of either party or by limitation,‘ within which to remove machinery and structures installed by him, but he was forbidden to remove supports and tramways on or within the stockpiles themselves. The State reserved ‘a lien upon all stockpiled ore mined, treated or beneficiated, and upon all improvements made by the party of the second part upon the premises, for any unpaid balances due under this lease.’ The lease provided in conclusion that its ‘covenants, terms and conditions * * * shall run with the land and be in all respects binding upon all sublessees and grantees under the party of the second part.’

At all times since before 1943 Charles and his father, E. F. Remer, have been the owners of all the outstanding capital stock, 333 common shares, of Charleston Iron Mining Company, a Minnesota corporation engaged in the business of mining and concentrating iron ore; 167 of the shares have been owned by the father, and 166 by Charles. At a directors' meeting in November 1946, reference was made to approaching exhaustion within a possible 2 years of a mine know as Missabe Mountain Mine which the corporation was then operating on State-owned land under lease and to the consequent necessity of acquiring...