*63 Decision will be entered for petitioner.
In 1951, petitioner, a widow 74 years old, transferred her entire fee interest in the surface and iron ore rights of certain properties and received as payment therefor the sum of $ 202,500. The grantee estimated that the properties contained 800,000 tons of iron ore. The instrument effecting the transfer provided that if within 50 years iron ore in excess of 800,000 tons was mined from the property, petitioner would receive in addition 25 cents a ton for such excess tonnage. Held, such transfer constituted a sale and that the sum of $ 202,500 received by petitioner in 1951 was in payment for the surface rights and iron ore in the amount of 800,000 tons or less, and was not an advance royalty.
*93 Respondent determined a deficiency in petitioner's income tax for 1951 in the amount of $ 98,747.19. The contested issue is whether a *94 cash payment of $ 202,500 received by petitioner in 1951 under a written instrument transferring certain surface rights*64 and mineral iron ore rights represented proceeds from the sale of a capital asset or a bonus or advance royalty payment taxable as ordinary income, subject to depletion.
FINDINGS OF FACT.
The stipulated facts are found accordingly.
Petitioner is a resident of Wichita, Kansas, and filed her individual income tax return for 1951 with the then collector of internal revenue for the district of Kansas, at Wichita.
In 1951 petitioner was the owner of the fee interest in both the surface and the minerals in 1 tract of land consisting of 125 acres in Cass County, Texas, near Linden, Texas, and was the owner in fee of the mineral interests only in 14 other tracts of land consisting of approximately 1,525 acres, also located in Cass County, Texas. Petitioner had acquired the foregoing interests from her husband, John Olinger, under a deed dated April 14, 1941.
Beginning in December 1948 and continuing throughout 1949, 1950, and the early part of 1951, petitioner corresponded with Sheffield Steel Corporation, an Ohio corporation (hereinafter referred to as Sheffield), which was interested in adding to its iron ore reserves, indicating her willingness either to sell or lease her iron ore interests. *65 Petitioner, who was 74 years of age in 1951, was interested in getting a return from the investment represented by this property. She was willing to sell the property if she could realize therefrom approximately $ 200,000. She was willing to enter into a "mining contract" with regard to the property if she could get "a guaranty for a certain quantity to be mined each year." Based upon notations left to her by her deceased husband, petitioner estimated that she had iron ore reserves of 1,224,286 tons. Sheffield's officers estimated that the property contained approximately 800,000 tons of iron ore.
On October 5, 1951, petitioner executed a written instrument entitled "Conveyance of Iron Ore and Iron Ore Rights" which provided in pertinent part as follows:
Know All Men by These Presents That I MAUDE WINNE OLINGER of Sedgwick County, Kansas, for and in consideration of the sum of $ 1.00 and other good and valuable consideration, cash in hand paid, receipt of which is hereby acknowledged, have granted, sold, transferred and assigned, and do by these presents grant, sell, transfer and assign to SHEFFIELD STEEL CORPORATION, an Ohio corporation, the following properties and interests*66 to-wit:
First Property: The surface and surface rights in and to that certain One Hundred twenty-five (125) acres of land out of 175 acres known as the Crow Tract, * * *
[here follows description of land]
Second Property: All and every the iron ore and iron ore rights including rights of ingress, egress and user pertaining thereto in and to each and every *95 the following lands and premises situated in Cass County, Texas, and described as follows, to-wit:
[here follows description of land]
And for the consideration hereinabove stated, grantor hereby grants, sells, transfers and assigns to grantee herein, its successors and assigns, all iron ore and iron ore rights in all land owned or claimed by grantor adjacent or contiguous to the lands particularly described or referred to above; and grantor furthermore agrees and binds herself upon the request of grantee to execute and deliver to grantee such further instrument and/or instruments as will more correctly and accurately identify and describe the land and/or iron ore and iron ore rights hereby conveyed, if grantee shall hereafter find that said descriptions are in any particulars incorrect and inaccurate.
To have and*67 to hold the above described properties and interests together with all the rights and appurtenances thereto in any wise belonging unto the said Sheffield Steel Corporation, its successors and assigns.
In addition to the cash consideration hereinabove recited to have been paid, grantee herein for itself, its successors, in interest agrees that if and when there shall be produced and mined from the ore and ore rights hereinabove conveyed in excess of 800,000 gross tons (2240 lbs.) then in such event the party producing such excess shall pay to grantor herein and/or her successors in interest, for each such excess gross ton of iron ore mined, the sum of twenty-five cents (.25 cents), said payments to be made quarterly and during the months of April, July, October and January, and each payment to cover the calendar quarter next preceding the month in which payment is to be made; provided, however, that this obligation to make payment for iron ore in excess of 800,000 gross tons shall not be applicable to any iron ore mined subsequent to the expiration of fifty (50) years from date hereof. In connection with the matter of twenty-five cents (.25 cents) per gross ton payment, grantee herein*68 for itself and its successors in interest agrees to keep reasonable and accurate records with reference to production of iron ore from the properties and interests hereby conveyed, which records will be available at reasonable times for inspection by grantor herein and her successors in interest and their duly authorized representatives, and if and when iron ore production in excess of said 800,000 gross tons shall be produced from said properties and interest, the quarterly payments herein provided for shall be accompanied by a written report showing the facts as to production during the period covered by said payment.
For all purposes of this conveyance a gross ton or [sic] iron ore is defined as two thousand two hundred forty (2240) pounds of merchantable iron ore, suitable for blast furnace use after being washed, crushed, or otherwise beneficiated, mined and shipped from the property and interests hereby conveyed as determined by railway car weights or truck weights from bonded truck scales.
It is further expressly agreed that while grantor herein does not warrant the titles to the properties and interests hereby conveyed grantor does transfer and assign to grantee herein*69 all the grantor's rights as against prior warrantors and all rights of subrogation which grantor might now have or may hereafter have on account of or in connection with the properties and interests hereby conveyed.
Concurrent with the execution of the above instrument Sheffield paid petitioner the sum of $ 202,500, of which amount $ 2,500 was paid for the surface rights and the balance of $ 200,000 was in payment for the ore rights not in excess of 800,000 gross tons of iron ore.
There has been no production of iron ore from the properties in question up to the time of the trial of this proceeding.
*96 In her income tax return for 1951 petitioner returned as long-term capital gain the amount of $ 75,075.21, representing 50 per centum of the alleged net realized gain of $ 150,150.42. In his statutory notice of deficiency respondent disallowed the long-term capital gain and increased petitioner's gross income by the amount of $ 170,963.98, which amount was computed by deducting from the total payment of $ 202,500 depletion in the amount of $ 30,375 and expenses of $ 1,161.02.
OPINION.
The question presented in this case is whether the payment of $ 202,500 received by petitioner*70 in 1951 was an advance royalty under a mining lease, as determined by respondent, or was gain realized from the sale of a capital asset, as contended by petitioner. The solution of this question requires us to consider whether the transaction evidenced by the written instrument dated October 5, 1951, described in our findings, effected a leasing arrangement of the property for which the payment was made, or a sale thereof. "In construing the contract we may look not only to the language employed, but to the subject matter and surrounding circumstances, and we may avail ourselves of the same light which the parties possessed at the time the contract was made." , affd. .
In three recent cases we have considered similar problems: ; ; and . In those cases the taxpayers granted to another the right to exploit certain deposits or minerals from lands which they continued to own, *71 the parties contemplated that payments to the taxpayers would be made from the results of such exploitation, and the terms of the exploitation rights were either for definite periods of time or were subject to forfeiture, the taxpayers retaining a reversionary interest in the property covered by the grant. As we said in , "Payment for deposits only as removed and retention (or retransfer) of title to the balance are typical indicia of the existence of an economic interest," i. e., typical indicia of a lease transaction rather than a sale.
In the instant case, unlike the three cases cited above, petitioner conveyed in perpetuity to the grantee her fee interests in the property in question, retaining no reversionary rights whatever, and the payment received by her in 1951 was not contingent upon and had no relation to any exploitation of the mineral contents of the property by the grantee. The large cash payment to petitioner was received by her in consideration for her conveyance to the grantee in fee of all her interests in the property conveyed, without any obligation on the part *97 of the grantee*72 to remove from the property any ore at any time. As late as January 26, 1956, the grantee had not mined any ore from the property. The grantee was interested in acquiring the property as an ore reserve and there is nothing in the record indicating that it contemplated the mining of iron ore therefrom during the lifetime of petitioner. Therefore the dominant motive of petitioner in entering into the transaction evidenced by the written instrument of October 5, 1951, was not to secure the exploitation and development of her property for mining purposes. Cf. Petitioner, being a widow 74 years of age, was only willing to enter into a lease arrangement with regard to the property if she could get "a guaranty for a certain quantity [of iron ore] to be mined each year." The instrument in question contains no such provision and the record indicates that Sheffield, which was interested in acquiring the property as a reserve, would not have been interested in the transaction if it carried with it any such obligation.
We conclude that the facts of the instant case distinguish it from the three cases above cited, that the written instrument*73 executed October 5, 1951, effected a sale of the property rather than a lease, and that this was in conformity with the intent of the parties.
Respondent contends, however, that a part of the instrument reserved to petitioner an economic interest consisting of the right to receive 25 cents a ton on all iron ore mined from the property in excess of 800,000 gross tons and that therefore the payment of $ 202,500 received by petitioner in 1951 necessarily constituted an advance royalty payment includible in petitioner's income for that year as ordinary income, within the doctrine of .
It should be pointed out that the provisions of the "Conveyance of Iron Ore and Iron Ore Rights" upon which respondent relies in this contention only apply to the possible excess of iron ore on the property over the amount of 800,000 gross tons estimated by Sheffield's officers to be present on the property, and because petitioner felt, on account of some notes left by her deceased husband, that there might be such an excess. It should also be noted that the price to be paid to her for such possible excess of iron ore was determined with reference*74 to the amount paid her for the 800,000 tons estimated to be on the property ($ 200,000 divided by 800,000, or 25 cents a ton) and that her possible rights to payment for such excess expired within 50 years.
In our opinion it is clear from the entire record that there was an absolute and immediate sale in 1951 by petitioner to Sheffield of her surface rights and her rights to iron ore on the properties involved, that the money received by her in that year was in payment for the surface rights and rights to iron ore in the amount of 800,000 tons *98 or less, and that no part of such payments depended upon, related to, or was applicable on moneys due from the possible production of iron ore from the properties in excess of 800,000 tons within 50 years, as advance royalties or otherwise.
It is unnecessary for us to determine whether, if Sheffield did produce within 50 years after 1951 iron ore from these properties in excess of 800,000 gross tons, the payments made therefore would be considered as adjustments to the purchase price or as royalties under That question is not entirely free from doubt since there is here a complete*75 and immediate conveyance of all of petitioner's interest in the property involved, i. e., surface rights and rights to iron ore, for a substantial cash payment not dependent upon or related to the successful exploitation of the property by the grantee. See . Cf. . In any event, we do not here decide it.
Decision will be entered for petitioner.
LeMire, J., dissenting: I am unable to distinguish the instant proceeding in principle from Burnet v. Harmel, 287 U.S. 103">287 U.S. 103; Palmer v. Bender, 287 U.S. 551">287 U.S. 551; Bankers Pocahontas Coal Co. v. Burnet, 287 U.S. 308">287 U.S. 308; Otis A. Kittle, 21 T. C. 79, affirmed per curiam 229 F. 2d 313; Arthur S. Barker, 24 T. C. 1160, on appeal C. A. 2; Crowell Land & Mineral Corporation, 25 T. C. 223, on appeal C. A. 5.
I interpret those cases to hold that where*76 any part of the consideration for the transfer of mining rights is based on production, an economic interest is retained and the payments received constitute ordinary income.
The record shows that the parties were at considerable variance as to the probable commercial ore content of the lands in which petitioner held mining rights. The negotiations leading up to the execution of the contract indicate that petitioner was willing to either sell or lease on a basis of 1,224,286 tons, and that Sheffield preferred a mining lease based on its estimate of 800,000 tons. Based on a unit price of 25 cents per ton, the difference in the total consideration to be paid would amount to $ 100,000, or one-third more than the payment of $ 200,000 which petitioner received in the taxable year involved. The reservation in the agreement was to protect petitioner in the event more than 800,000 tons were mined, and in my opinion requires the contract to be construed as a leasing arrangement.
The contract provides for a consideration of $ 1 and other good and valuable consideration. The ultimate amount of consideration to *99 be received by petitioner can be ascertained only on the basis of production. *77 In a sale all the absolute and unqualified rights pass. If strings are attached, something other than a sale emerges.
The fact that the advance payment was large bears on the hardship involved but does not furnish a legal basis for altering the determinative principle of law to be applied. Therefore, I respectfully dissent from the conclusion reached in the majority opinion.