17 B.T.A. 429 | B.T.A. | 1929
Lead Opinion
Maequette : These proceedings involve the income-tax liability for the years 1920 and 1921 of four men and their respective wives. Four issues are raised by the pleadings, three of which are found only in the cases of J. C. Pugh, Sr., and Mrs. J. C. Pugh. The other issue is common to all of the cases. It appears to be accepted by the parties that the incomes on which the taxes are based .were community incomes and were reported on that basis.
The evidence herein also shows to our satisfaction that J. C. Pugh, Sr., sold on his own account, in the year 1920, certain cotton for which he received $4,320. The respondent has increased the amount of such sales to $13,181.30. It appears that other cotton was in fact sold by Pugh, but that it was not for his own account but for the accommodation of other persons, and that he was not entitled to the proceeds. Mrs. Pugh testified positively that the cotton sold by J. C.
The third question is whether J. C. Pugh, Sr., was entitled to deduct any amount for depletion of the mineral rights covered by the written instrument executed by him and witnessed on August 1, 1919. The respondent denies that Pugh was entitled to any allowance for depletion of that interest, on the ground that he conveyed the entire interest to Eastham on August 1, 1919. The petitioners contend that Pugh and Eastham intended that the conveyance to • Eastham should cover only the interest remaining after Pugh had received $200,000 in royalties and that Pugh was the owner of the mineral rights until they had been depleted to that extent. We do not agree with that contention. In the case of H. C. Walker, Jr., et al., 6 B. T. A. 1142, the same contention was made by the petitioner relative to the effect of a written instrument which, in its essentials, is practically identical with the instrument executed by Pugh and Eastham. In holding adversely to the petitioners, we stated:
The contract between the petitioners and West on one side, and Foster, Looney & Wilkinson on the other, refers to the petitioners and West as “ vendors ” and to Foster, Looney & Wilkinson as “ vendees,” which term we adopt for the purpose of this opinion. It recites that in consideration of $200,000, to be paid entirely out of the oil produced on the tract of land described in the contract “ the said H. O. Walker, Jr., and Elias Goldstein do sell, transfer and convey unto the aforesaid vendees the excess royalties of one twenty-fourth (⅛) of all the oil, gas and other minerals, reserved for them under the aforesaid lease * *
Petitioners claim that we should disregard the words used in the contract and look to its substance, and that when so viewed it was not a contract of sale but that under it their rights as lessors were continued until they had received $200,000 out of the oil and that by the contract the petitioners and George West were recognized as the owners of the one-sixteenth royalty interest which was the subject of the contract. These contentions are not borne out by the recitals and the provisions of the contract. It clearly appears that the vendors and vendees were claiming under adverse titles, and that the purpose of the agreement was not to recognize the rights of each other, but to settle the controversy by a compromise of that which had theretofore been contested. The sum of $200,000 was “ to be paid entirely out of the oil produced from the above described tract of land, either by the lessees of the said George West and their assigns, or by the lessees of the said Lillie G. Taylor, and their assigns, and accruing to the credit of the undivided one-sixteenth (1/16) interest that is vested in the said vendees by reason of the purchase above referred to by them from the said Lillie G. Taylor on the one hand, and by reason of their purchase from the said vendors under this contract on the other hand.”
It thus appears that the $200,000 was not payable to the petitioners and West out of their interest in the oil, but was payable out of the interest of the ven-dees, which they had acquired from Lillie G. Taylor, and from the petitioners and West.
*436 Putting aside the fact that the contract uses the words “ sell, transfer and convey,” and the words “ vendors ” and “ vendees,” and looking to the substance of the contract alone, the conclusion can not be escaped that the contract was a contract of sale which divested the taxpayers and West of all interest in the property therein referred to, and vested eo mstanti the title thereto in the vendees for the consideration of $200,000 payable out of the royalties the contract for which was assigned to the vendees. Such being the case, the respondent did not err in refusing to allow the petitioner a deduction for depletion.
We are of opinion that the instrument under consideration was a contract of “ sale to be operative from the first day of August 1919,” and that Pugh was on that day divested of the title to the property described in the instrument and that the respondent did not err in refusing to allow him deductions for depletion thereof in 1920 and 1921.
The last question is whether the several petitioners are entitled to deduct from gross income in the years 1920 and 1921, any amount for the depletion of the mineral rights covered by the donation deed executed by Pugh, Sr., on July 12, 1920. The respondent denies the right of the petitioners to this deduction, on the ground that the property was held in trust, the income to be collected and distributed by a trustee, and that the deductions for depletion should be allowed only to the trust as an entity. The petitioners also proceed on the theory that the property was held in trust for them. We think, however, that the instrument of July 12, 1920, merely created an agency, and that the petitioners, as the owners of the property, are entitled to allowances for depletion according to their respective interests.
Reviewed by the Board.
Judgment will be entered under Bule 50.