*836 1. Petitioners acquired by purchase in 1912 at a cost of $3,000 an apparent fee simple title to 120 acres of land, which then had no mineral value. In 1923 the land became valuable as prospective oil property. Wells were brought in, and petitioners executed an oil lease on the usual royalty basis. In 1925 suit was instituted by an alleged heir of the original Indian allottee, seeking to recover the land from petitioners. In 1927 the trial court entered judgment holding that petitioners owned an undivided one-half interest in the land, and, an appeal having been taken, petitioners settled the litigation in 1928 by paying to the adverse claimants and as court costs $58,681.50. Thereupon, the appeal was dismissed and the judgment of the trial court became final. Held, the amount paid to settle the litigation constituted additional cost of petitioners' title, allocable to the mineral rights in the land. Held, further, that upon the subsequent sale of an undivided 30- acre interest in the royalty or mineral rights in the land, including impounded royalties, petitioners derived taxable gain in an amount equal to the difference between the proportion of such costs attributable*837 to the 30 acres and the consideration received therefor.
2. The profit derived from the sale of an interest in the royalty or mineral rights in the land is taxable as ordinary income, and is not capital gain. Forest Anderson,30 B.T.A. 597">30 B.T.A. 597.
3. Pending the outcome of the litigation over the fee title, petitioners' lessee declined to pay the royalty oil to any of the claimants, but impounded and held the funds in trust until settlement of the litigation in 1928, when the funds were distributed to the persons determined by the court to be entitled to receive them. Held, the amount so received by petitioners in 1928 from money impounded in 1927, except as to oil produced from 15 acres conceded to be the property of petitioners, did not constitute income taxable to them in that year. O. O. Owens,26 B.T.A. 1147">26 B.T.A. 1147, affd. (in part material here), 78 Fed.(2d) 786. Money received in 1928 from oil produced in 1928 was taxable to petitioners.
*1207 This is a proceeding for the redetermination of*838 a deficiency in income tax for the year 1928 in the amount of $5,066.02. The issues are, first, what amount of gain on the sale of an interest in certain land to one R. W. Morrison, Jr., did the petitioners realize as income in 1928; second, was the money received by the petitioners in 1928 from oil produced prior thereto and impounded until after the settlement of certain litigation on January 30, 1928, taxable income to them in 1928; and, third, was the gain derived from the sale of an interest in the land to Morrison a capital net gain from the sale of capital assets and so subject to the limitation of a 12 1/2 percent rate in the computation of the tax.
At the hearing on May 8, 1934, the parties filed a stipulation entitled "Statement of Facts", together with documents attached thereto as exhibits, and on May 29, 1935, the parties filed herein a "Supplemental Stipulation of Facts", modifying their original "Statement of Facts." From these stipulations, omitting matter deemed immaterial, we make the following findings of fact.
FINDINGS OF FACT.
The petitioners are husband and wife and filed a joint return for the year 1928, being the taxable year involved in this proceeding. *839 They are retired farmers and their address is Shawnee, Oklahoma, R.F.D. They are, and were at all times mentioned herein, citizens and residents of the State of Oklahoma. They were married and living together during the taxable year involved, and had in their family one child and a niece under eighteen years of age, both wholly dependent. They kept no books of account, and their return was made on a cash receipts and disbursements basis.
Their income for 1928 was derived wholly from oil produced from, and gain upon the sale of an interest in, a certain tract of land *1208 situated in Seminole County, in the State of Oklahoma, containing 120 acres, a technical description of the land being unnecessary here.
An apparent fee simple title to this entire tract of land was acquired in 1912 in the name of Mary B. Goforth by warranty deed from certain grantors who were assumed to be the sole heirs of the original Indian allottee. Neither at the time acquired nor at March 1, 1913, did this land have any mineral value. But in 1923 it became valuable as prospective oil-producing property.
The cost to petitioners of the deed to the land involved, and of such title as they*840 acquired thereby in 1912 was $3,000. The agricultural value of the land was not at any time relevant herein in excess of $3,000. Whatever value it had in excess of that sum was determined by the discovery of oil and gas.
The entire 120 acres of land involved was allotted to Ida, a member of the Seminole Nation or Tribe of Indians, duly enrolled opposite Roll No. 1860. While said allottee was enrolled as a female, he was in fact a male and his correct name was Eddie.
The allottee died intestate in 1905, at the age of 14 years, unmarried and without issue. His parents were both Seminole Indians, and died prior to his death. He was survived by the following relatives in the maternal line of ascent:
(a) Bessie Sena, maternal grandmother.
(b) The descendants of Lizzie Deer, maternal sister.
(c) The descendants of Melinda Letka, maternal sister.
(d) The descendants of Adam, maternal brother.
His surviving relatives in the paternal line of ascent were the descendants of seven paternal uncles and aunts.
Bessie Sena, the maternal grandmother of the allottee, executed a warranty deed to petitioners' grantor, covering the 120 acres of land involved, in 1906, and this*841 was the only source of secord title to this land which petitioners acquired by the deed from their grantor in 1912, and they had no other source of title at the time of the filing of the lawsuit of Lena v. Goforth et al., hereinafter referred to, or at the time of the trial thereof, except possession by them and their grantor since 1906.
On March 17, 1925, a suit was filed in the District Court of Seminole County by an alleged heir of the original Indian allottee against the petitioners and 72 other persons who were considered to have or claim some interest in the land as heirs of the original allottee or otherwise. The object of the suit was to recover the land or certain interests therein from the petitioners, and to quiet title thereto in the claimants, the style of the case being Martha Lena, Plaintiff, vs. Mary B. Goforth, et al., Defendants, No. 7908.
On January 23, 1923, the petitioners executed an oil and gas lease on the entire tract to Terry G. Smith, who, on January 25, 1923, *1209 assigned it to the Indian Territory Illuminating Oil Co. By the terms of this lease the lessee agreed to deliver or pay to the lessors as royalty one eighth of all*842 the oil produced and saved from the leased premises or its value at the market price. No attack was made on this lease in the lawsuit, but all parties thereto consented to a judgment and decree of the court validating it and establishing a good title to it in the lessee as against all parties to the suit, and all subsequent controversies and proceedings in the case were had concerning and were confined only to the fee title to the land subject to the lease.
On December 11, 1926, the petitioners entered into a written contract and agreement with one R. W. Morrison, Jr., to sell to him an undivided one-fourth, or 30 acres, interest in the oil, gas, and minerals in the land in question, being commonly known as a royalty interest therein, in consideration of the sum of $60,000, of which $3,000 was paid and received in cash at the time of execution of the contract. This contract provided that it was made subject to the above mentioned lawsuit then pending and was to be performed as soon as the litigation was disposed of by final decree or settlement. It also provided that if, as the result of the litigation, the petitioners were not awarded, and did not receive good title to as much*843 as an undivided one-fourth, or 30 acres, interest in the land, then they were released from liability under it, and in such event, the $3,000 cash payment was not to be returned to the purchaser, but was to remain their property. It also provided that one fourth of all royalties accruing from oil produced from this land subsequent to the date of its execution, in the event the sale to the purchaser of the undivided one-fourth interest was finally consummated, should be received by him. On December 16, 1926, the contract was filed and recorded in the land title records of Seminole County.
The mineral deed conveying the undivided one-fourth interest to Morrison was executed by the petitioners on December 11, 1926, and was not delivered until about January 7, 1928, on which date it was filed and recorded in the land title records of Seminole County.
On July 10, 1927, said cause No. 7908 in the District Court of Seminole County was tried and judgment rendered. The court found that Mary B. Goforth owned an undivided one-half, or 60 acres, fee simple interest in the land and that she and her grantors had been in the quiet, peaceable, and undisputed possession of the same, claiming*844 the entire fee simple estate, openly, notoriously and adversely against the world since the year 1906.
Pursuant to this finding, judgment was rendered awarding her an undivided one-half interest in fee simple in the land. Following the rendition of this judgment, certain parties to the suit adverse *1210 in interest to the petitioners filed a general appeal therefrom to the Supreme Court of Oklahoma, in which they disputed and contested the title and interest awarded Mary B. Goforth by said judgment. On its face there was no basis for disputing her title to an undivided one-eighth, or 15 acres, interest in the whole 120 acres, and it was conceded that in any event she would be entitled to a final judgment for at least that much. The appeal was docketed as Jarvis et al vs. Goforth et al., No. 19,114, in the Supreme Court of Oklahoma.
Soon thereafter a decision in a case involving a similar question was rendered in the United States Circuit Court of Appeals for the Eighth Circuit, being the circuit in which the State of Oklahoma was at that time included, adverse to the contention of Mary B. Goforth in the appeal pending in the Supreme Court of Oklahoma. This*845 decision led the attorneys for the petitioners to advise that a settlement be made with the claimants as to her disputed title and interest in the land on the best terms possible.
Accordingly, it was agreed between the petitioners and the claimants, consisting of a large number of Indian heirs, that petitioners would pay them the sum of $45,000 and would also pay all costs of the litigation, and that the claimants would dismiss their appeal in the Supreme Court of Oklahoma and thus, in effect, cause the judgment of the District Court of Seminole County to become final. This agreement was promptly carried into execution and on January 30, 1928, the plaintiffs in error in the appeal case filed their motion to dismiss their appeal. Immediately on the filing of the motion and on the same day an order was entered in the case by the Supreme Court of Oklahoma, dismissing the appeal and directing that the mandate of the court be issued forthwith to the trial court.
The cash cost to the petitioners of the settlement above set forth and of the litigation, including attorney fees and other expenses, was the sum of $58,681.50, this being the amount set out in the revenue agent's final*846 report upon which the respondent's notice of deficiency in this proceeding is based.
One of the attorneys for the petitioners in the litigation and the one first employed by them therein, was W. W. Pryor of Wewoka, Oklahoma. By his contract of employment, made at the commencement of the suit, he was to have one tenth of all that was saved for them out of it. Upon settlement of the suit, Pryor received a conveyance of an undivided one twentieth of the mineral rights only in 120 acres, which would be one tenth of those rights in the 60 acres saved by the petitioners out of the litigation.
There was some slight production of oil and gas from the property in the year 1926, but during the year 1927 it was drilled and developed by the Indian Territory Illuminating Oil Co., as lessee, *1211 and a number of big producing wells were brought in. Pending the outcome of the litigation over the fee title as above set forth and the ascertainment of the persons who owned it and the proportion or share in which they owned it, the Indian Territory Illuminating Oil Co., as lessee, and the pipe line companies to which it sold oil from the lease declined to pay the petitioners or any other*847 claimants for any part of the disputed royalty oil, but with the assent of all interested parties impounded the proceeds thereof and held them in trust for the persons who should thereafter be ascertained to be the rightful owners. All the oil from the property was taken by the Indian Territory Illuminating Oil Co. as lessee and run by it or sold to various pipe line companies as rapidly as produced. Those that took oil prior to the settlement of the litigation on January 30, 1928, and impounded and held the money proceeds of it at the market price for the benefit of the unascertained owners thereof, were the Indian Territory Illuminating Oil Co., Empire Companies, Sinclair Crude Oil Purchasing Co. (the name of which has since been changed to Stanolind Crude Oil Purchasing Co.), and Prairie Oil & Gas Co.
Upon the settlement of the litigation referred to between the petitioners and adverse claimants as above set forth, the contract with Morrison was promptly performed. The deed conveying the mineral interest in the land was delivered to him and the balance of the purchase price of $57,000, as set forth in the purchase agreement, was paid. The interest due Pryor for his fee as*848 attorney was also conveyed to him.
Thereupon, the money for oil impounded and held by the pipe line companies, 1 as heretofore stated, was paid out and apportioned to the parties in accordance with their royalty or fee interests therein. The petitioners received the following sums:
| Attributable to 1927 | Attributable | |||
| Total | to 1928 | |||
| impounded | 10.5 acres | 13.5 acres | 24 acres | |
| Empire Companies (Exhibit F) | $10,785.44 | $4,718.60 | $6,066.84 | $650.94 |
| Sinclair Crude Oil Purchasing | ||||
| Co. (Exhibit G) | 2,464.50 | 1,078.22 | 1,386.28 | |
| Prairie Oil & Gas Co. | ||||
| (Exhibit H) | 2,667.79 | 1,167.16 | 1,500.63 | |
| Carter Oil Co. (Exhibit I) | 12,489.06 | |||
| Indian Territory Illuminating | ||||
| Oil Co. (Exhibit E) | 13,930.39 | 13,930.39 | 8,613.13 | |
| Total | 29,848.12 | 20,894.37 | 8,953.75 | 21,753.13 |
*849 *1212 At the instance of Morrison, the sum of $18,910 was paid direct to the petitioners by the Indian Territory Illuminating Oil Co. out of his share of the money for impounded oil and was applied on the purchase price payable to them under his contract. All of the impounded oil here referred to represented the royalty or fee owner's interest of one eighth of the production from an undivided one half of the entire 120 acres, the remaining seven eighths being payable to the lessee in charge of operations.
The impounded royalties from the interest purchased by Morrison and received by him in accordance with his contract were as follows:
| Indian Territory Illuminating Oil Co | $41,288.60 |
| Do. (casing head gas) | 851.11 |
| Empire Companies | 13,481.80 |
| Sinclair (Stanolind) Crude Oil Purchasing Co | 3,080.63 |
| Prairie Oil & Gas Co | 3,334.74 |
| Total | 62,036.88 |
No payments other than as above stated for oil and gas from said property, or from any other source, were received by the petitioners during the year 1928, whether from oil purchased prior to 1928 and impounded and held by the pipe line companies as above stated until 1928, or from oil produced in 1928, nor did*850 they have any income from any source other than as stated herein.
The items making up the petitioners' total gross receipts for the year were as follows:
| From sale of royalty to Morrison | $57,000.00 |
| From oil produced and impounded in 1927 | 29,848.12 |
| From oil produced in 1928 | 21,753.13 |
| 108,601.25 |
The petitioners' deductions from income in the year in question, other than for the depletion allowance on oil produced, consisted of:
| Net loss in business | $5,200.00 |
| Bad debts | 850.00 |
| Contributions | 200.00 |
| Taxes paid | 1,963.54 |
| Total | 8,213.54 |
OPINION.
TRAMMELL: The principal issue in this proceeding relates to the proper method of computing the profit derived by petitioners in 1928 from the sale to Morrison of an undivided 30-acre interest in the mineral rights in their land. Petitioners contend that the taxable gain derived by them was $24,399. By a radically different *1213 method of computation respondent has determined the profit at $48,192.37.
Respondent approved the revenue agent's report in which the profit was computed by assuming that, upon settlement on January 30, 1928, of the litigation involving title to the lands, *851 petitioners thereby acquired title to 45 acres having a royalty value of $90,000. The impounded oil attributable to the 45 acres was $53,517.45. The cost of acquiring title, comprising $45,000 paid to the Indian heirs, plus the litigation costs, in the total amount of $58,681.50, was allocated as follows: To the royalty from 45 acres, $36,799.25, and to the impounded oil, $21,882.25. On the basis of the proportion allocable to 30 acres, respondent determined a profit on the sale of the royalty interest to Morrison in the amount of $27,735.25, and a profit on the impounded oil of $20,457.12, making an aggregate gain on the Morrison sale of $48,192.37.
In his brief respondent concedes that the report of the revenue agent is erroneous to the extent it allots the cost and sale price between the fee and oil interest, on the ground that there is no evidence that petitioners paid anything for the oil rights sold Morrison, and seeks approval of his computation because the petitioners "have not presented to the Board any more correct method than used in the sixty-day letter." We can not agree with respondent's proposition.
The basic error lies in respondent's determination that*852 petitioners acquired the mineral rights in 45 acres in 1928 at a cost in the amount paid to settle the litigation. Since the court held petitioners had a good witle to 60 acres before settlement of the litigation, it follows that the mineral rights were acquired by them in 1912 as part of the fee title. The amount paid to settle the litigation is merely additional cost of the title, and by the stipulation is applicable only to the mineral rights.
The petitioners did not sell to Morrison an interest in the fee for $60,000, and in addition the impounded royalty at the face value of the fund. What petitioner sold to Morrison was an undivided interest in the mineral rights, which constituted part of the fee title to the land, as of the date of the contract and deed, namely, December 11, 1926, with the right in Morrison specifically granted to receive his proportionate part of the royalties accruing from oil produced from the land subsequent to December 11, 1926, in the event the sale was finally consummated. The sale was finally consummated in 1928 and Morrison thereupon became entitled to and did receive a deed to a 30-acre undivided interest in the mineral rights in the*853 land, together with his share of the impounded royalties, for all of which he paid to the petitioners $60,000.
*1214 By the judgment of July 10, 1927, the District Court of Seminole County held that the petitioner, Mary B. Goforth, owned an undivided one-half or 60-acre fee simple interest in the land. The effect of the dismissal on January 30, 1928, of the appeal then pending in the Supreme Court of Oklahoma was to cause the judgment of the district court to become final. The title thus confirmed in petitioners was acquired by them in 1912 at a cost of $3,000, which it is stipulated represented the agricultural value. The land had no mineral value prior to 1923. Thus, prior to January 30, 1928, the mineral rights in the land had cost the petitioners nothing. On that date they paid $58,681.50, to settle the litigation. This amount, being ascribable entirely to the mineral rights, represents the cost to the petitioner of the mineral rights in the 60 acres. However, six acres went to Pryor for attorney fees, which constitutes additional cost of title, leaving petitioners with a net 54-acre interest at a cost in the amount above stated. This gives a cost of $1,086.694*854 per acre, or a total cost basis to the petitioners of the 30-acre interest sold to Morrison in the amount of $32,600.82. Having received a total cash consideration of $60,000 from Morrison, the petitioners realized taxable profit of $27,399.18.
This conclusion is substantially in agreement with the petitioners' computation, except that they contend that the initial payment of $3,000 made by Morrison in 1926, since it became at that time their property unconditionally, constituted taxable income to them in that year and should not be included as part of the consideration in computing the profit realized in 1928. The argument we think is unsound. What the taxable status of the initial payment would have been if the sale to Morrison had not been consummated we need not consider here, for the reason that the sale was in fact fully consummated in 1928, and the $3,000 so paid clearly represents a part of the total consideration paid by Morrison for his 30-acre interest. The amount should, in our opinion, be included in computing the profit derived in 1928.
In this connection petitioners further assert that they are entitled at this time to elect to have the profit realized from*855 the Morrison sale taxed as capital net gain, if it is to their advantage to do so, which can not be determined prior to our decision on the other issues herein. Respondent resists petitioners' contention on this point only on the ground that the 30-acre mineral interest sold Morrison was acquired by the petitioners as a result of the settlement of the litigation in 1928, and so did not constitute "property held by the taxpayer for more than two years", as the term "capital assets" is defined in section 101 of the Revenue Act of 1928.
*1215 Respondent's position can not be sustained on the ground stated, but we have held in , that amounts received as consideration for mineral deeds in Oklahoma constitute ordinary income and not capital gain. On authority of that decision, the contention of the petitioners is denied.
The remaining issue is whether the royalty from oil produced and impounded in 1927 and received by the petitioners in 1928 is taxable to them as a part of their gross income for that year, as contended by the respondent. The parties have stipulated, and we have so found, that the petitioners' lessee and the pipe*856 line companies to which it sold oil from the lease declined to pay the disputed oil royalty to the petitioners or any other claimant, but, pending the outcome of the litigation over the fee title, impounded the proceeds thereof and held them in trust for the persons who should thereafter be ascertained to be their rightful owners. Subsequent to the settlement of the litigation on January 30, 1928, the impounded royalty was distributed to those persons ascertained to be the owners under the judgment of the court, and the petitioners received the sum of $29,848.12, which was impounded in 1927.
The Revenue Act of 1928, in section 161, provides among other things that income accumulated in trust for the benefit of unascertained persons shall be subject to the taxes imposed upon individuals, but that the tax shall be paid by the fiduciary. Section 701 of the same act defines the term "fiduciary" as including a trustee, and section 143 provides that every fiduciary, except a receiver appointed by authority of law, who is in possession of part only of the property of an individual, shall make a return under oath for any trust for which he acts.
*857 In , we held that where income from royalties was impounded in the custody of a court receiver during litigation to determine the unknown heirs of the original owner, the receiver was a fiduciary and under the provisions of the Revenue Acts of 1916, 1918, and 1921, which are substantially the same as those contained in the Revenue Act of 1928, supra, the fiduciary should have filed returns and paid the income taxes thereon. We further held that, when the funds were released and paid to the beneficiary determined by the court to be entitled to receive them, they were not income taxable to the beneficiary in that year. In our opinion we reviewed at some length the history of the provisions of the revenue acts applicable to receivers and other fiduciaries for individuals, for corporations, and for "unascertained persons." We also reviewed and distinguished the facts in , upon which respondent relies in the instant case.
*1216 The Circuit Court of Appeals, at Fed.(2d) (C.C.A., 10th Cir., July 3, 1935), affirmed our decision in the Owens case, so far*858 as material here. In that case, the court held that the portion of the income accumulated in the hands of the receiver up to July 9, 1917, on which date Owens and Brazell acquired the interest of the heir of the original Indian allottee in the allotment, was received by them by virtue of their contract of purchase, and that they that it was the duty of the receiver to return such income for taxation the cost to him of the estates and interests acquired under the contracts of July 9, 1917. But the income accumulated by the receiver after that date, the court held, was "income accumulated in trust for the benefit of * * * unascertained persons", and it held that it was the duty of thr receiverto return such income for taxation and to pay the tax thereon to and including March 25, 1922, the date on which the persons entitled to receive the funds were finally determined by judicial decision.
In the Owens case, the land in question was allotted to Barney Thlocco, a Creek Indian, who died about the time the allotment was made, and after the discovery of oil and gas in 1913, the United States brought suit against persons claiming to be the heirs of Thlocco to cancel the allotment*859 and recover the land for the benefit of the Creek Nation. In 1915 the court entered a decree against the United States, adjudging that the allotment was valid, which decree was affirmed by the Supreme Court of the United States in 1917. Thereafter, the only question left for determination was the heirship of Thlocco.
In the present case, the land in question was allotted to "Ida" a Seminole Indian, whose correct name was "Eddie." He died intestate and without issue in 1914. So far as the record discloses the validity of the allotment to Ida was not in controversy. The only question for determination in this case, as in the Owens case subsequent to 1917, was the heirship of the original allottee. In the cited case some 225 persons claimed to be such heirs, or assignees or vendees of heirs. In the instant case some 75 persons, including the petitioners, claimed to be such heirs, or assignees or vendees. In distinguishing the Owens case from , the court said:
There, the equitable title was in fact in the North American, an ascertained person, and its title was challenged by the suit brought by the government. It*860 simply was a controversy respecting the title between two ascertained persons. Here, the title was admittedly in a person occupying a particular status, to-wit, the heir to Thlocco, but the identity of the person occupying that status was not determined. He was an unascertained person. There, either the land belonged to the North American and the income therefrom was a part of its gross income, or it belonged to the United States and was exempt.
*1217 The same facts, we think, also distinguish our decision in ; affd., .
In the case at bar the litigation was not a controversy respecting the title between two or more "ascertained" persons. There was no claim of defect in the title. The validity of the allotment was not questioned. Admittedly the title was in a person or persons occupying a particular status, to wit, the heir or heirs of "Ida", the original Indian allottee, or in the assignees or vendees of such heirs. Only the identity of the persons occupying that status was in controversy. They were "unascertained persons" and prior to the settlement of the litigation on January 30, 1928, when*861 the appeal was dismissed and the judgment of the trial court became final, the income consisting of the oil royalties was being accumulated for the benefit of such "unascertained persons." This income should have been reported and the tax thereon paid by the several fiduciaries, and it is not thereafter taxable to the beneficiaries. We do not know, and it is immaterial, whether the fiduciaries did in fact return such income and pay the tax. That question is not presented here.
On authority of the cited decisions, we hold that the royalty received by the petitioners in 1928 from oil produced in 1927, to the extent that the amount so received constituted income accumulated for the benefit of unascertained persons, is not taxable to the petitioners as a part of their gross income for 1928. See also ; ; and .
Petitioners received in 1928 the amount of $29,848.12 as royalty from oil produced and impounded in 1927. This entire amount, however, does not*862 represent income accumulated for the benefit of unascertained persons. The parties stipulated and we have found as a fact that in the litigation involving the land herein referred to there was no basis for disputing the title of the petitioners to an undivided one-eighth, or 15 acres, interest in the whole 120 acres, and it was conceded in any event that petitioners would be entitled to a final judgment for at least that much. Thus petitioners acquired the 15 acres by purchase in 1912. Under the decisions of the Circuit Court in the Owens case, supra, it would follow that so much of the impounded royalty received by the petitioners from the trustee in 1928 as was allocable to the 15 acres, or one fourth of $29,848.12, was not accumulated for unascertained persons, but was received by the petitioners by virtue of their ownership of the 15-acre interest acquired by purchase in 1912. Under the decision of the Supreme Court in the North American case, supra, the amount allocable to the 15-acre interest would be taxable to the petitioners *1218 in 1928, the year in which it was received by them upon termination of the litigation, if the amount represents taxable*863 income. But, as the Circuit Court of Appeals points out in its decision in the Owens case, impounded royalty acquired by purchase is taxable income only to the extent that the amount received exceeds the cost basis.
Here, the royalty or mineral rights in the land cost petitioner $58,681.50, but of this amount $32,600.82 has been allocated to the 30 acres sold to Morrison, and this leaves $26,080.68 unrecovered of the $58,681.50 expended by the petitioners in the compromise settlement. As has already been pointed out, petitioners received in 1928, in addition to anything received from Morrison, the sum of $29,848.12 from oil produced and impounded in 1927 and $21,753.13 from oil produced in 1928, making a total of $51,601.25. From this should be deducted the $26,080.68 unrecovered cost of the compromise settlement, which leaves a taxable profit of $25,520.57 from oil royalties to be taxed to petitioners in 1928. This $25,520.57 should of course be reduced by the depletion allowance to which petitioners are entitled under the applicable statute. While it is true that none of the $29,848.12 received in 1928 from oil produced and impounded in 1927, except that produced from*864 the 15 acres which it was certain petitioners would retain, would be taxable to petitioners under the doctrine of the Owens case here followed, nevertheless the money when received would go to reduce the remaining basis of cost, and that is the way we have applied it in the foregoing statement and so to treat it does not in our opinion in any way do violence to the doctrine of the Owens case.
Judgment will be entered under Rule 50.
Footnotes
1. The distributions by the Indian Territory Illuminating Oil Co. (see Exhibit E) are the sums that became due, after the settlement, on petitioners' royalty interest after distributions had been made to petitioners and W. W. Pryor during 1927 in accordance with the acceptance as a fact by the Indian Territory Illuminating Oil Co. that petitioners had a good fee title at all times to at least an undivided 15 acres of the 120-acre tract. ↩