Wе are here presented with the question whether funds derived from oil and gas leases should be characterized as long-term capital gain from the sale of those leases, or as proceeds from the production of oil and considerеd ordinary income, subject to an allowance for depletion. *•
Plaintiffs filed a complaint claiming that they were entitled to refunds for the years 1970 and 1971, denied by the I.R.S. The district court determined that plaintiffs were not entitled to capital gain treatmеnt concerning such proceeds and, consequently, were not entitled to the claimed refunds. We affirm.
This dispute stems from transactions occurring during the 1950’s. In July 1951, the holder (A. G. Bailey Co., Ltd.) of an undivided 37.5 per cent interest in two oil and gas leases on property in the province of Alberta, Canada, entered into an agreement (entitled the “Buck Lake Participation Agreement”) with an individual named R. M. Hardy, Sr., whereby Hardy acquired a 17.5 per cent interest in the undivided 37.5 per cent interest in the “net proceeds of production” from all subsequent drilling. In August 1951, Hardy entered into an agreement with Mr. Yeaman and a third party, whereby the three parties would share equally in the net proceeds of production as provided in Hardy’s earlier agreement with the Bailey Company. At this point in time, Mr. Yeaman had a two per cent interest in the oil and gas leases (37.5% X 17.5% X 33.3%).
On 13 December 1954, Mr. Yeaman, Mr. Hardy, and the third party entered into an agreement, called an assignment, with the Crow’s Nest Pass Coal Company. Under this agreement, Yeaman “assigned” his intеrest to Crow’s Nest in consideration of his share of $149,222.66, plus 50 per cent of the future “net money profit” derived from his interest. The assignment defined the term “net money profit” as the “net proceeds of production” under the earlier Buck Lake Participation Agreement between the Bailey Company and Hardy. One month later, on 13 January 1955, the parties signed an “Agreement Amending Assignment”, wherein it was provided that if the owner disposed of any lands relating to the oil and gas leases, the “Assignee shall promptly pаy to the assignor one-half of all moneys received. . . . ” The effect of this amended assignment is disputed by the parties and is the decisive issue in this case.
From 1954 through 1969, plaintiffs filed their income tax returns and reported the funds received from Crow’s Nest as caрital gains. In 1970 and 1971, plaintiffs received $61,421.36 and $69,974.26, respectively, as proceeds from the Crow's Nest assignment, and reported the funds as long-term gain from the sale or exchange of a capital asset. Upon audit, the I.R.S. determined that these amounts cоnstituted income from mineral production, taxable as ordinary income, with an allowance for depletion, and assessed plaintiffs deficiencies. The deficiencies were paid, claims for refund were *324 denied and a complaint was filеd in the district court. The case was tried to a jury but the court granted the defendant's motion for a directed verdict. Thereafter, the plaintiffs instituted this appeal.
Plaintiffs argue that under the assignment to Crow’s Nest, Mr. Yeaman made a sale of all his interest in the oil and gas leases and that he retained no economic interest therein; and that, therefore, plaintiffs are entitled to capital gains treatment on the funds received annually from Crow’s Nest. In plaintiffs’ opening brief, only one case is cited tо support this contention,
Helvering v. Elbe Oil Land Development Co.,
Furthermore, plaintiffs argue that while they had an economic interest in the contract with Crow’s Nest, they hаd no right to the oil as such. This economic interest in the contract is explained as simply a “right to one-half of Crow’s Nest’s profits if any”, without any right to drill wells on the property. (Appellants’ brief p. 12.) Plaintiffs cite a General Counsel’s Memorandum 1 apparently to support the contention that in having only a right to the net profits of Crow’s Nest, they retained no economic interest in the oil in place. In that General Counsel’s Memorandum, the distinction is made between “a right to share in production, or the gross inсome therefrom, [which] is very different from the right to share in the net income of the producer (a right measured not by the production of mineral, as such, but by the degree of success in the operation of such a right owned by another).” It is further stated therein:
Thаt rights to share in the oil produced are analogous to rights to share in gross proceeds derived from the sale of oil produced has been repeatedly stated by the highest Court. It would seem to follow that a right to a share of the proceeds from the sale of oil produced would give the payee ownership of a corresponding depletable economic interest without regard to conveyancing formalities . For example, an instrument purporting to be a “leasе” of oil or mineral lands, which gave a “lessee” a right to explore for and produce all the oil or mineral found thereon and required the lessee to pay the “lessor” only a share of the net profits derived from the operation (as distinguished from a share of the product or the proceeds from the sale of the product), would leave the lessor without a depletable economic interest in the oil or mineral in place . . . .” (Emphasis added.)
p. 222. Plaintiffs argue that the assignment entitlеd them only to a share of the net profits derived from the operation.
Defendant maintains that the effect of the assignment to Crow’s Nest was merely to transfer one-half of plaintiffs’ interest in the proceeds of production from the oil leases, and that this constituted a retention of an economic interest. We agree.
Palmer v. Bender,
There is no question of Mr. Yeaman’s ecоnomic interest in the oil prior to the assignment. By the assignment to Crow’s Nest, Mr. Yeaman did no more than transfer one-half of his interest, retaining 50 per cent of his interest in the net proceeds of production. In the sixth paragraph of the assignment, dated 13 Deсember 1954, the expression “net money profit” is defined as the net proceeds of production as used in the prior Buck Lake Participation Agreement. The retention of an economic interest is further established by the agreement of 13 January 1955, wherein the parties amended the original assignment and agreed that Yeaman, Hardy, and the third party were guaranteed 50 per cent of all the money received from any disposition or sale of the land covered by the December 1954 agrеement (original assignment). If plaintiffs were entitled to any money received upon sale of the land, surely they had retained an economic interest. Because of this retention of an economic interest and plaintiffs’ receipts from oil рroduction, the
Palmer v. Bender
test is satisfied. Therefore, the proceeds constitute ordinary income, subject to depletion, and not capital gain.
See Kirby Petroleum Co. v. Commissioner of Internal Revenue,
We find plaintiffs’ reliance on the
Elbe Oil
сase to be misplaced. Later Supreme Court cases have limited
Elbe Oil
to its own facts and it can be distinguished by further pointing out that the focus of
Elbe Oil
was on the character of fixed installments from the complete sale of oil property, and not subsequent production payments of indefinite duration. See
Burton-Sutton Oil Co. v. Commissioner of Internal Revenue,
Plaintiffs statement that all they owned was an interest in the net profits of Crow’s Nest is incorrect. We find that the assignment nowhere provided any interеst in the net profits of the Crow’s Nest Company, which might be derived from efficient operations unrelated to oil production. Rather as previously mentioned, the assignment provided in the sixth clause, that the expression “net money profit” shall mean the nеt proceeds of production “derived from the Buck Lake Participation Agreement.”
Finally, we find no merit in plaintiffs’ other arguments:
(1) Plaintiffs argue that the trial court erred in excluding testimony and exhibits relating to the intention of the parties that all interest in the leases was to be sold. Plaintiffs’ intent to hаve a complete transfer of interest is nothing more than an attempt to obtain favorable capital gains treatment, hardly relevant to the characterization of income — a determination controlled by whether the various agrеements allowed plaintiffs to retain an economic interest. In
Commissioner of Internal Revenue v. Duberstein,
*326
(2) Plaintiffs argue that it was error for the trial court to exclude evidence concerning the fact that the I.R.S. had, prior to 1970, audited and accepted plaintiffs’ returns with the oil proceeds reported as capital gain. The prior I.R.S. inaction has no bearing on thе issue herein.
Continental Insurance Co. v. United States,
In determining whether a verdict should have been directed, an appellate court applies the same standard as does the trial court originally. As Wright and Miller suggest, 2 a good statement of the test is quoted from a decision of the Second Circuit:
Simply stated, it is whether the evidence is such that, without weighing the credibility of the witnesses or otherwise considering the weight of the evidence, there can be but one conclusion as to the verdict that reasonable men could have reached.
Simblest v. Maynard,
We hold that in applying the test to the case at bar, there can be but one conclusion as to the verdict that reasonable men could have reached, and the trial court correctly reached that conclusion.
AFFIRMED.