*1423 In 1934 petitioner leased mineral rights from X, with an option to purchase the rights in 5 years for $5,000. In 1937 petitioner executed an agreement with Y giving him a 90-day option to buy the mineral rights covered by the 1934 lease and option agreement for $36,000. The evidence fails to show that petitioner agreed to sell his option to Y. The agreement with Y refers to a sale of mineral rights only. Y exercised his option. Petitioner paid $5,000 to X. Thereafter Y received a deed to the mineral rights. Held, the transactions in 1937 resulted in purchase of mineral rights by petitioner and a resale to Y. Acquisition of the mineral rights in 1937 did not relate back to 1934. Petitioner sold a capital asset held less than one year. The entire gain is taxable under section 117(a) of the Revenue Act of 1936.
*1006 Respondent determined a deficiency of $2,207.75 in income tax for the year 1937. The sole question is whether the capital gain realized by petitioner in connection with a certain transaction in the taxable year was from*1424 the sale of a lease and an option on certain mineral rights, which lease and option had been held for more than two years, or from the sale of the fee title to such mineral rights, which fee title had been held by petitioner for less than one year.
FINDINGS OF FACT.
Petitioner is a resident of Marion, Kentucky, and filed his income tax return for 1937 with the collector of internal revenue for the district of Kentucky.
On September 15, 1934, petitioner entered into a lease and option contract with the Crittenden County Zinc, Lead & Fluorspar Co., referred to hereafter as Crittenden. Under the contract Crittenden leased to petitioner the mineral rights owned by it in and under certain lands for a period of five years "for the purpose of prospecting for and mining fluorspar and other minerals." Petitioner agreed to pay to Crittenden a royalty of $1.50 per ton on each ton of fluorspar mined and removed by him during the term of the lease and a royalty of 10 percent on the market value of all other minerals. Crittenden agreed, at any time the lease was in force, to sell and convey to petitioner or his assigns, the mineral and mining rights for the sum of $5,000 cash, by a deed*1425 of general warranty.
On July 15, 1937, petitioner entered into a contract entitled "Option and Agreement" with Arthur J. Lay. The contract recited that petitioner was the owner of a lease and option from Crittenden of the date of September 15, 1934, "with the right to prospect for, mine and remove minerals and mineral substances of all kinds, as well as the option to purchase said mineral right"; that petitioner was desirous of selling the "minerals and mining rights"; and that Lay was desirous of obtaining "a firm option upon same," and of examining the premises so as to determine whether or not he wished to purchase "said mineral rights." Under the contract of July 15, 1937, petitioner granted an option to Lay to "buy and purchase the FEE TITLE to said mineral rights" within 90 days for $36,000 in cash. Lay paid to petitioner on the above date $1,000 as consideration and as a deposit to be forfeited as liquidated damages in the event he did not exercise the option. Under the contract, in order "to make the execution of this option effective," Lay agreed to give notice to petitioner that he wished to exercise the option, and then, to deposit in the Farmers Bank & Trust Co. at*1426 Marion, Kentucky, $35,000, the amount of the purchase price less the deposit of $1,000 received by petitioner, *1007 which was to be credited to the purchase price if the option should be exercised. Lay was given the right to go on to the property and sink prospect holes, provided prospecting work did not interfere with mining operations which were being carried on on the property.
Petitioner agreed to convey the mineral rights to Lay or to whomsoever he should direct, upon receiving notice of his desire to exercise the option, and to furnish a complete abstract of title showing a clear title. Upon compliance with the above by petitioner the Farmers Bank & Trust Co. was directed, by the contract, to pay to petitioner the $35,000 deposited with it and "said deed of conveyance shall be delivered over to the second party forthwith." The contract also provided as follows:
It is understood and agreed that should this option be exercised within the time specified and in the manner specified, and proper conditions carried out by second party, and the owner, first party fail to forthwith take proper steps to clear said title to said mineral rights and surface, to pay all back*1427 taxes, liens, mortgages, furnish certified abstract, etc., or should fail to have said title properly cleared, then the said second party may take care of any of said items and shall credit upon the purchase price for all such expenditures, and said bank shall take notice hereof in making payment to the first party in case it is necessary for second party to act as stated.
In the execution of the above contract Lay acted as an agent or trustee on behalf of George A. Ball. At the time of the execution of the above contract Lay delivered to petitioner a check in the sum of $1,000. The check was signed by Lay as trustee.
Within the 90-day period provided in the above contract Ball notified petitioner of his intention to exercise the option and deposited in the Farmers Bank & Trust Co. a check payable to petitioner's order in the sum of $35,000, dated August 27, 1937.
On or about September 19, 1937, petitioner delivered his check in the sum of $5,000 to Crittenden. The check bore the following notation: "For purchase mineral rights under H. G. Butler land."
Under date of September 10, 1937, Crittenden executed and delivered to Ball a general warranty deed conveying to Ball*1428 the minerals and mining rights referred to in the contract between Lay and petitioner dated July 15, 1937. At about the same time the Farmers Bank & Trust Co. delivered to petitioner the check of Ball dated August 27, 1937, for $35,000 made payable to petitioner. The delivery of petitioner's check for $5,000 to Crittenden, the delivery of the deed to Ball, and the delivery of Ball's check to petitioner were all done at about the same time, on or about September 10, 1937.
OPINION.
HARRON: The parties present the question for determination on the premise that the sale of a capital asset is involved. They are in *1008 agreement that petitioner realized a gain in 1937 of $25,950. Respondent computed the gain, in determining the deficiency, as follows:
| Amount realized on sale - September, 1937 | $36,000 | |
| Purchase price of mineral rights - September, 1937 | $5,000 | |
| Development costs | 5,050 | |
| 10,050 | ||
| Capital gain as corrected (100 percent taxable since the property was not held more than one year) | $25,950 |
Petitioner reported capital gain of $15,570,60 percent of $25,950, as gain from sale of a capital asset held over two years. Respondent increased*1429 the capital gain by $10,380, thereby taxing all the gain. The question is whether that which was sold in 1937 was held for over two years or less than one year for purposes of determining the amount of capital gain taxable under section 117(a) of the Revenue Act of 1936, and the answer to this question turns upon a determination of what petitioner sold.
Petitioner contends, but his argument is not clear, that under the 1937 agreement with Lay and under the transactions carried out in September of 1937 he transferred all his rights under the "Lease and Option Agreement" of September 15, 1934, and that, having held such rights under that agreement for more than two years, he is taxable on only 60 percent of the gain realized. Petitioner argues that, while he had the right to exercise his option to purchase the mineral rights from Crittenden, he "never took title to the property" and so he sold something other than title to the mineral rights to Lay and his principal, Ball. Petitioner appears to place reliance upon the factor that the deed to the mineral rights was from Crittenden to Ball. It is true that there were not two deeds, one from Crittenden to petitioner and one from*1430 petitioner to Ball, but in view of the fact that petitioner apparently exercised the option he had by giving his check for $5,000 to Crittenden, and that Ball did not pay anything to Crittenden, it appears that all parties concerned eliminated one step in an economy of effort and that the deed from Crittenden to Ball was in reality a deed on behalf of petitioner, conveying title which he had acquired under exercise of his option, to Ball, who exercised the option he obtained from petitioner. In our opinion, the substance rather than the form of the transaction is controlling.
We believe that petitioner can not say that he did not exercise his option under the lease and option agreement of September 15, 1934. Petitioner paid $5,000 to Crittenden. Neither Lay nor Ball paid anything to Crittenden. When petitioner paid $5,000 to Crittenden, Crittenden did not have thereafter any title to the mineral rights to convey to Ball except as agent for petitioner.
Petitioner is exceedingly technical in contending that he did not obtain title to the mineral rights which were conveyed to Ball. We *1009 think the terms of his agreement of July 1937 with Lay are controlling. Nowhere*1431 in that agreement is any reference made to an assignment or a sale of all of petitioner's rights under the lease and option agreement of September 15, 1934, with Crittenden, or to a sale of his option under that agreement. Rather, the agreement, clear in its terms, deals with a sale by petitioner of the fee title to the mineral rights covered by the 1934 agreement with Crittenden. Of course, mineral rights are classed as distinct corporeal hereditaments which are subject to conveyance separate from other property. ; ; Thompson, Real Property, sec. 80. Also, while an option in itself is property and in some instances is assignable, the evidence here, the terms of the agreement with Lay, does not indicate in any way whatsoever that petitioner sold or agreed to sell his option to Lay, or that the $5,000 which petitioner paid to Crittenden was paid on behalf of Lay or his principal, Ball. Petitioner's testimony is to the effect that he paid the $5,000 out of his own funds. The evidence, outside the agreements and the checks involved, is meager. Petitioner appeared and gave testimony but his*1432 testimony is brief. Petitioner did not testify as to the details of what was done and neither has he, by his testimony or otherwise, shown that his delivery of his check to Crittenden was not in exercise of his option under his agreement of 1934 with Crittenden. Petitioner relies almost entirely upon the written agreements. The checks are almost the only bits of evidence to indicate what steps were taken. All of the evidence upon its face indicates that petitioner exercised his option, thereby acquiring title to the mineral rights, and Ball exercised his option under his agreement with petitioner and acquired title to the mineral rights from petitioner. All was done at about the same time and we believe it is immaterial that a deed to petitioner was not executed, and that the deed received by Ball was executed by Crittenden. No explanation is given and petitioner has failed to prove his contentions, assuming, arguendo, that his proof could have gone any further than it did go.
Also, petitioner testified that he received the $36,000 "for all my mineral rights." Petitioner's check to Crittenden has the notation "For purchase mineral rights under H. G. Butler land." The record*1433 indicates that the balance of the purchase price, or $35,000, was paid over to petitioner by the bank after he had purchased the mineral rights by payment of $5,000 and after delivery of the deed thereto to Ball.
When petitioner paid $5,000 to Crittenden he became the owner of the mineral rights both at law and in equity, ; ; Thompson, Real Property, sec. 1297; and his leasehold merged with the fee. ; *1010 . The ownership resulting to petitioner from the exercise of his option and the payment of the purchase price does not relate back to the time when Crittenden originally gave the option to petitioner in 1934. ; .
It clearly appears that the property which petitioner sold was the fee title to mineral rights; that such fee title was held for a short time by petitioner, for less than one year; and that petitioner is taxable on the entire gain under section 117(a). Respondent's*1434 determination is sustained.
Decision will be entered for the respondent.