Royalton Stone Corporation v. CIR, 443-449

• Decision Date: 14 June 1967
• Docket Number: No. 443-449,Dockets 31056-31062.,443-449
• Citation: 379 F.2d 298
• Parties: ROYALTON STONE CORPORATION, Frontier Stone Products, Inc., Holman O'Connor, Mary W. O'Connor, James M. Switzer and Dorothea W. Switzer, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Second Circuit

379 F.2d 298 (1967)

ROYALTON STONE CORPORATION, Frontier Stone Products, Inc., Holman O'Connor, Mary W. O'Connor, James M. Switzer and Dorothea W. Switzer, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 443-449, Dockets 31056-31062.

United States Court of Appeals Second Circuit.

Argued May 11, 1967.

Decided June 14, 1967.

Albert R. Mugel, Buffalo, N. Y. (Timothy C. Leixner, Jaeckle, Fleischmann, Kelly, Swart & Augspurger, Buffalo, N. Y., on the brief), for petitioners.

Jonathan S. Cohen, Washington, D. C. (Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson and Grant W. Wiprud, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.

Before SMITH, KAUFMAN and HAYS, Circuit Judges.

HAYS, Circuit Judge:

These are petitions for review of decisions of the Tax Court holding that certain payments received by the taxpayers¹ were ordinary income, to wit, royalty payments on minerals extracted from taxpayers' property, and not payments of the purchase price for the sale of the property. We affirm the decisions of the Tax Court.

Royalton Stone Corporation and Frontier Stone Products, Inc. are engaged principally in the business of quarrying stone for road building. The stock of the two corporations is owned fifty percent each by the taxpayers Switzer and O'Connor.

Switzer and O'Connor each owned a half interest in three parcels of real property. During the years 1957 to 1959 Switzer and O'Connor executed agreements with Royalton and Frontier under which the corporations were to quarry the deposits of stone and other materials on the real property.

Since the agreements were substantially identical, it is sufficient to set forth as an example the relevant parts of the agreement executed by Switzer and O'Connor with Frontier in respect to one of the parcels of real property:

1. The parties of the first part O\'Connor and Switzer agree to sell, and the party of the second part Frontier agrees to purchase the premises situate in the City of Lockport, in the County of Niagara and State of New York, particularly described in a certain deed dated the 1st day of October, 1956, duly recorded in the Office of the Clerk of the County of Niagara, as follows:

Land Description

2. Said premises are to be conveyed by the parties of the first part by Covenant against Grantor Deed conveying good and marketable title to the premises, free from all encumbrances upon payment of the purchase price to be fixed and paid in the following manner, to-wit: The party of the second part shall enter into immediate possession of the premises hereinabove described for the purpose of quarrying and removing therefrom sand, gravel, stone and other materials useable in its business and shall pay to the parties of the first part, on or before the 31st day of December of each year after date, the sum of twenty cents (20¢) per ton of materials so quarried and removed during the preceding period.

3. When the party of the second part has completed its quarrying operations on said property and paid on account of the purchase price of the premises, the full sum of twenty cents (20¢) per ton for materials quarried and removed as hereinabove set forth, the parties of the first part shall thereupon execute and deliver title to the premises in the manner hereinbefore described.

4. The parties of the first part shall pay all taxes and assessments levied against said premises prior to the delivery of the deed and the party of the second part shall indemnify and harmless save the parties of the first part of and from any and all liability, in law and in equity, for loss or damage to any person or property arising out of its operations on the described premises from and after the date hereof.

It is the contention of the Commissioner that the amounts paid by the corporations to the taxpayers at the rate of 20 cents per ton for the minerals removed represented royalty payments and therefore ordinary income. The taxpayers urge that the payments were the purchase price for the sale of the land and should receive capital gains treatment.

The provisions of the agreements designating the transactions as "purchases" and "sales" are, of course, not conclusive. In order to determine the tax consequence of the transactions, we must look to their essential character rather than their form. Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 78 S.Ct. 691, 2 L.Ed.2d 743 (1958); Anderson v. Helvering, 310 U.S. 404, 411, 60 S.Ct. 952, 84 L.Ed. 1277 (1940).

Upon close examination the incidents of the transactions into which the parties...