Reynolds v. Commissioner of Internal Revenue, Docket No. 7829.

• Citation: 10 BTA 651
• Decision Date: 10 February 1928
• Docket Number: Docket No. 7829.
• Parties: J. D. REYNOLDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

10 B.T.A. 651 (1928)

J. D. REYNOLDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 7829.

Board of Tax Appeals.

Promulgated February 10, 1928.

P. J. O'Connor, Esq., for the petitioner.

A. H. Murray, Esq., for the respondent.

The Commissioner determined a deficiency in income tax of $21,589.89 for the calendar year 1922. Petitioner claims that the Commissioner erred in refusing to tax certain royalties from oil and gas leases as a capital gain under section 206 of the Revenue Act of 1921 and in holding that a profit derived by petitioner from the sale of his interest in oil and gas underlying land owned by him for more than two years prior to the date of sale was not a capital gain as defined by the Act of 1921. The facts are found as stipulated.

FINDINGS OF FACT.

Petitioner is a resident of Camden, Ark. For several years prior to 1922 he was the owner of certain real estate in fee simple in Ouchita and Calhoun Counties, Ark. The net taxable income of petitioner for 1922 was $96,845.63, of which amount $60,277.88 represents the income received in consideration of the execution of oil and gas leases on property owned by the taxpayer in fee simple and held for a period of more than two years prior to the time of sale, and $7,500 represents the income from the sale of royalty rights for oil and gas on property owned by the petitioner in fee simple for a period of more than two years prior to the time of sale.

During the year 1922, the income from the execution of oil and gas leases was paid to the petitioner by divers parties as consideration for the execution of the said oil and gas leases which transferred to the lessees a seven-eighths interest in any oil or gas discovered on the property owned by the petitioner as covered by the respective leases and the net income from this source aggregates $60,277.88.

During the year 1922, the petitioner also disposed of certain royalty rights which accrued by reason of the ownership of real estate which he had held for a period of more than two years and on which oil had been discovered in 1922. The net income from this source aggregated $7,600.

On the original return as filed by the petitioner, the tax on the income from the above sources was computed at 12½ per cent, on the theory that such computation was authorized by section 206 of the Revenue Act of 1921 and that the transactions the petitioner engaged in to produce this income constituted the sale of capital assets.

Upon an audit of the return, the Commissioner did not consider the profits arising out of the leasing of the oil and gas rights and from the sale of oil royalties as coming within the provisions of section 206 of the Revenue Act of 1921, but computed the tax under sections 210 and 211 of that Act and he arrived at a deficiency in tax of $21,589.89 due by the petitioner, as more particularly appears by reference to the deficiency letter of August 8, 1925.

The oil and gas leases from which the royalty income mentioned was received provided:

* * * That the said lessors for and in consideration of TEN THOUSAND DOLLARS, cash in hand paid, * * * and the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed, have granted, conveyed, demised, leased and let, and by these presents do grant, convey, demise, lease and let unto said lessee for the sole and only purpose of mining and operating for oil and gas, and laying of pipe lines, and of building tanks, towers, stations and structures thereon to produce, save and take care of said products, and all that certain tract of land * * * in consideration of the premises the said...