*100 Decision will be entered under Rule 50.
Held, the gain resulting from W. F. Weed's sale and transfer of a sulphur payment carved out of his pooled royalty interests in sulphur produced from deposits in place, which interests Weed had owned for several years prior to the date of sale, was taxable as long-term capital gain on the installment basis and not as ordinary income.
*1025 The Commissioner has determined deficiencies in petitioners' income taxes as follows:
| Year | Deficiency |
| 1948 | $ 4,136.79 |
| 1949 | 1,055.76 |
*1026 The deficiency for 1948 is due to the following adjustments:
| (a) Disallowed as nontaxable capital gain | $ 1,242.52 |
| (b) Income from sulphur royalty | 12,551.00 |
| (c) Net loss not deductible in 1948 | 2,372.01 |
Adjustment (b), which is the principal adjustment, is described in the deficiency notice as follows:
(b) As stated above the amount received for the assignment of a sulphur payment less 23% depletion is included in full in income. See item (d) for reduction of capital gain.
| Amount received | $ 16,300 |
| Less: Depletion, 23% | 3,749 |
| Amount taxable | 12,551 |
*101 The petition assigns error only as to adjustment (b) described above. The assignment of error is as follows:
I. The commissioner erred in disallowing long term capital gains treatment on the sale of sulphur in place in the ground.The deficiency for 1949 is based principally upon an adjustment of the same kind and in the same amount as adjustment (b) for 1948, and the assignment of error is the same for 1949 as for 1948. There is also an adjustment for 1949 of $ 116.67 for disallowance of medical expenses but counsel stated at the hearing that that will be automatically taken care of when we decide the main adjustment in the case.
FINDINGS OF FACT.
W. F. Weed, sometimes hereinafter referred to as petitioner, resides in Beaumont, Texas. Eleanor M. Weed was petitioner's wife during the tax years 1948 and 1949, and at all other times pertinent hereto. She died testate on August 3, 1952, whereupon, by order of the Probate Court of Jefferson County, Texas, petitioner was appointed independent executor of her estate. He has continued as such to the date of this hearing.
Petitioner and his wife filed joint income tax returns for 1948 and 1949 with the collector of internal revenue, *102 Austin, Texas.
In 1945 and 1946, as principal stockholder, petitioner formed two companies, Pre-Fab Building Supply Corporation, and Star Lumber Company, and also formed, as a wholly owned subsidiary of the latter, Planet Lumber Corporation. In 1947, these companies were in need of funds and were not sufficiently sound financially to have adequate credit. In addition, petitioner contemplated the organization of another corporation whose capital requirements would exceed $ 100,000. Such corporation was actually formed in May 1948, and petitioner did supply most of its capital.
Petitioner in 1947 believed that, in 1948 and the succeeding years, he would need all (or a large part) of the credit which was available *1027 to him personally at the banks or through similar sources to obtain funds for use in the carrying on of the aforementioned business enterprises. He therefore desired some assurance that he would have a definite source of funds (other than banks and similar sources) for payment of his individual Federal income taxes due in those later years.
On December 23, 1947, petitioner was the owner of a pooled overriding royalty interest in sulphur produced by the Texas Gulf*103 Sulphur Company from a tract of land referred to as Boling Dome, in Wharton County, Texas. 1 Petitioner's royalty interest entitled him to receive $ 0.00966133 per long ton of sulphur produced from Boling Dome by the aforementioned company, irrespective of what the market price for such sulphur might be. Royalty payments were made by the company monthly, based on the previous month's production. Petitioner's $ 0.00966133 per long ton interest represented the aggregate of three pooled royalty interests, each in a lesser amount, received by petitioner (a) from his father by two inter vivos deeds dated September 1, 1933, and August 15, 1935, respectively, and (b) after his father's death, from the latter's estate by independent executor's deed dated August 1, 1945. Such interest was not held by petitioner primarily for sale to customers in the ordinary course of his trade or business.
*104 In the summer or early fall of 1947, petitioner, Frank C. Taylor (a C. P. A. then retained as accountant for petitioner's personal affairs and who prepared petitioner's 1947 return), and Marion Munro (a C. P. A. then retained by two of petitioner's corporations and who subsequently prepared petitioner's individual joint returns for 1948 and 1949) discussed the problem of petitioner's business commitments and the need for providing some sure source of funds with which to pay petitioner's individual income taxes, especially those due in January 1948. It was suggested that petitioner might sell a portion of his Boling Dome royalty interest, and Munro expressed the opinion that such a transaction would have the advantage of being taxed to petitioner at capital gain rates. Munro indicated a probable willingness to purchase a portion of that royalty interest and negotiations followed.
Petitioner and Munro discussed the amount of money petitioner would probably need in later years to pay his taxes, the probable amount of sulphur still in place (which they estimated to be about 45 million tons), the anticipated annual rate of sulphur production, the annual royalty payments which would probably*105 be received by a purchaser of petitioner's interest, the probable amount of time required *1028 for pay-outs from sulphur production of different sums of money, the discount factor (such as the interest Munro would have to pay on funds borrowed by him to purchase the royalty interest) which affected Munro's profit from the transaction, and the tax savings to petitioner.
It was finally agreed that the transaction would be based upon petitioner's anticipated requirements for funds to pay taxes for the succeeding 3 years, and upon a 4-year pay-out period from sulphur production to Munro. On this basis, it was determined that petitioner would assign to Munro a portion of his royalty interest on 6,000,000 long tons of sulphur, from which Munro would receive $ 50,000 within about 4 years, and that, in return, Munro would pay petitioner $ 46,500 over a 3-year period. Munro advised petitioner that the latter's tax savings resulting from the transaction would be about $ 4,000 to $ 4,500 and Munro estimated that his own profit from the transaction (after allowance for the discount factor) would approach $ 2,000.
On December 24, 1947, petitioner executed a deed conveying to Munro 86.254514*106 per cent of his pooled royalty interest of $ 0.00966133 (i. e., $ 0.00833333) per long ton on 6,000,000 long tons of sulphur to be produced from Boling Dome. In consideration therefor Munro gave petitioner:
| Check dated Dec. 24, 1947 | $ 13,900 |
| Promissory note due Dec. 24, 1948 (with 6 per cent annual | |
| interest after maturity) | 16,300 |
| Promissory note due Dec. 24, 1949 (with 6 per cent annual | |
| interest after maturity) | 16,300 |
| $ 46,500 |
Pertinent portions of the assignment follow:
I, W. F. Weed, in consideration of [$ 13,900 cash and the two $ 16,300 notes] * * *, do hereby SELL, TRANSFER and ASSIGN, unto the said Marion F. Munro, * * * 86.254514% of $ .00966133 per long ton pooled royalty on sulphur produced by Texas Gulf Sulphur Company at Boling Dome, Wharton County, Texas, from lands and premises described in said above named conveyances [to petitioner from his father and his father's estate], until six million (6,000,000) long tons of sulphur have been produced and accounted for to the said Marion F. Munro therefrom, which royalty so sold and here assigned and conveyed amounts to $ .00833333 per long ton.
* * * *
This assignment and the royalty transferred and assigned*107 hereby on sulphur produced from Boling Dome, * * * shall continue to be effective until said Marion F. Munro shall have received said royalty on six million (6,000,000) long tons of sulphur and no longer. * * *
The following statement shows the payments made by Munro to petitioner, pursuant to the above conveyances, and the method of financing used by Munro: *1029
| Munro's loans from First National Bank, | |||||
| Munro's | Beaumont, Texas | ||||
| payments | |||||
| Date | to | ||||
| petitioner | Annual | Fully paid | Total int. | ||
| Amount | int. | by -- | paid | ||
| Per cent | |||||
| Dec. 24, 1947 | $ 13,900 | $ 13,900 | 4 | 8/20/48 | $ 224.41 |
| Sept. 25, 1948 | 2,000 | ||||
| Dec. 20, 1948 | 14,300 | 8,500 | 5 | 5/19/49 | 95.14 |
| Dec. 19, 1949 | 3,000 | 5 | 2/20/50 | 18.19 | |
| Dec. 23, 1949 | 16,300 | ||||
| Total | $ 46,500 | $ 25,400 | $ 337.74 |
Munro's loans from the bank were negotiated by him independently of petitioner and were not guaranteed by petitioner. As security for the loans Munro assigned to the bank the royalty interest purchased from petitioner until such time as all his loans were paid. Concurrently with that assignment he notified the Texas Gulf Sulphur Company to make his royalty checks payable jointly*108 to himself and the bank and to mail them directly to the bank. The bank credited the royalty checks received first to the principal and interest due on the above loans and, when that was satisfied, to Munro's personal account. Receipt of royalty checks from Texas Gulf Sulphur Company averaging about $ 2,000 each from February 28, 1948, until March 20, 1950 (on which date the limited royalty interest on 6,000,000 tons was fully paid out), resulted in its being unnecessary for Munro to borrow more than $ 11,500 in order to meet the two $ 16,300 notes due petitioner, since Munro was able to pay, in part, those notes at maturity with royalties received and accumulated prior thereto.
As above indicated the limited royalty interest which petitioner assigned Munro on December 24, 1947, was paid out within 28 months thereafter. In his income tax returns Munro reported the royalties he received as ordinary income, less cost depletion, in the year of receipt.
Petitioner used the $ 13,900 received from Munro on December 24, 1947, in paying the January 15, 1948, installment on his 1947 Federal income tax.
Separate individual Federal tax returns for 1947 were filed, on a community property *109 basis, by petitioner and his wife. The above transaction was fully disclosed in those returns, was treated as resulting in capital gain, and the profits therefrom were reported on the installment basis. After adjustments for basis and costs of sale, the profit realized in 1947 from the $ 13,900 received that year was reported as $ 13,380.78. Fifty per cent thereof, $ 6,690.39, was taken into account as a community long-term capital gain and petitioner and his wife each reported half of that sum ($ 3,345.19) as their community share in the separate returns they filed.
*1030 Petitioner and his wife filed joint income tax returns for both 1948 and 1949. In each of those years petitioner received from Munro, pursuant to the terms of the aforementioned transaction, $ 16,300. In their return for each year they reported, after adjusting the $ 16,300 for basis, a profit of $ 15,691.11 on the installment basis, and took 50 per cent thereof ($ 7,845.56) into account as long-term capital gain.
OPINION.
Some of the adjustments made by the Commissioner in his determination of the deficiencies are not contested and these adjustments will be given effect in a recomputation under Rule 50.
*110 The issues which we do have before us are common to both years. Petitioner states the issues in his brief as follows:
1. Whether the Commissioner erred in taxing to petitioner as ordinary income for the years 1948 and 1949 proceeds from the 1947 sale of a sulphur royalty and whether such proceeds are long term capital gains and properly reported on the installment basis.
2. If it be determined that petitioner realized ordinary income from the sale of such sulphur royalty, whether all the proceeds should be reported as ordinary income for the year 1947.
The amounts which petitioner has received in each of the taxable years in return for the limited sulphur royalty (hereinafter referred to as a sulphur payment) which he conveyed to Munro in 1947, are not in dispute. Petitioner, in joint returns filed with his wife, returned the profits from those receipts in each taxable year as capital gain on the installment basis. The Commissioner does not question use of the installment basis in returning the income for taxation nor does he question the accuracy of the amounts of the profits reported. He does question petitioner's right to use the capital gain method and has determined that *111 the gain from the conveyance of the sulphur payment is taxable as ordinary income and not as capital gain. That determination is based on the Commissioner's conclusion that the transaction in issue was an assignment of income itself rather than the conveyance of income-producing property.
In support of the treatment of gains from the transaction as capital gains petitioner cites and relies upon our recent decisions in Lester A. Nordan, 22 T. C. 1132; John David Hawn, 23 T.C. 516">23 T. C. 516, now on review in the Fifth Circuit; and other cases which were cited and discussed in the Nordan and Hawn cases. We think petitioner must prevail on the strength of these authorities, as well as the more recently decided Caldwell v. Campbell, (C. A. 5) 218 F. 2d 567; Wm. Fleming, 24 T. C. 818; and A. J. Slagter, Jr., 24 T.C. 935">24 T. C. 935. It is true that in the aforementioned cases the mineral interests which were involved were oil payments, whereas here sulphur payments are involved. However, we think that fact makes no difference and that the same*112 rule *1031 must be applicable to the sale and transfer of sulphur payments as applies to the sale and transfer of oil payments. 2 We so hold and, following the above decisions, we decide this issue in favor of petitioner. Since those cases adequately discussed the point of law involved it is unnecessary to here repeat the discussion.
*113 In his brief, respondent attempts to distinguish the Nordan, Hawn, and Caldwell cases, all supra, upon the grounds that the taxpayers therein transferred their entire interests in oil in place, retaining only a reversionary interest therein after satisfaction of the oil payments from the interests conveyed, whereas here petitioner conveyed merely a fractional part of his interest in sulphur in place (86.254514 per cent of his pooled royalty interest of $ 0.00966133, that is to say $ 0.00833333 per long ton on 6,000,000 long tons of sulphur to be produced) and retained not only a reversionary interest in the fraction conveyed (after satisfaction of the sulphur payment therefrom) but a continuing interest in sulphur in place to the extent of $ 0.001328 per long ton produced. Respondent argues, therefore, that the principle applied in those cases is not here applicable.
We fail to see any merit in this argument. Having once determined in the aforementioned cases that the conveyance of a mineral payment constitutes the transfer of property rather than the assignment of income, we see no distinction in carving out that interest in the manner herein employed by petitioner*114 so long as the transaction itself is bona fide. The only particular in which respondent's argument differs from those made by him in the aforementioned cases is as regards the fractioning and, certainly, it is clear that the conveyance of a fractional part of one's interest in income-producing mineral property is not itself regarded by respondent as resulting in tax treatment different from that which would be applicable if the entire interest were conveyed. 3 Moreover, a careful study of the whole record in Nordan, as well as in Wm. Fleming and A. J. Slagter, Jr., all supra, reveals that in fact the taxpayers therein did not convey their entire interests but, as did petitioner here, carved out the transferred mineral payments from the entire interests which they owned.
*115 *1032 Respondent in his determination of the deficiencies has allowed petioner percentage depletion on the money received from Munro for sale of the sulphur payment. But petitioner was not the owner of the sulphur royalties at the times he received such money from Munro and, therefore, was clearly not entitled (nor does he claim to be so entitled) to any deductions for depletion. See John David Hawn, supra.
Having decided the primary issue in petitioner's favor it is not necessary to decide his alternative contention that, if we should hold that his gains from the sale and transfer to Munro are taxable as ordinary income, then it should all have been reported in 1947, the year of sale, and that none should have been reported in 1948 and 1949.
Decision will be entered under Rule 50.
Footnotes
1. The Boling Dome tract was composed of a number of parcels of land. The owners of the royalty interests in sulphur produced from each of those individual parcels entered into a pooling agreement pursuant to which royalties from sulphur produced anywhere in Boling Dome were to be distributed pro rata among all such royalty interest holders. Thus, petitioner's interest is referred to as "pooled."↩
2. Cases dealing with minerals other than oil and gas have played their parts in the development of the law applicable to oil and gas. See, e. g., G. C. M. 22730, 1941-1 C. B. 214, citing Bankers' Pocahontas Coal Co. v. Burnet, 287 U.S. 308">287 U.S. 308 (coal). Conversely, we think that those principles stated in oil and gas cases are applicable alike to other minerals, absent evidence of special circumstances compelling a distinction (such as substantial differences in controlling provisions of the Internal Revenue Code). As stated in G. C. M. 22730, supra↩, at page 219, "Like issues arise in the oil and mineral cases which are cited interchangeably in the evolution of the applicable rules."
3. In G. C. M. 12118, XII-2 C. B. 119, respondent stated that a taxpayer's unlimited conveyance, with no retained reversion, of a fraction of his royalty interest (e. g., conveyance in fee of one-half of a one-eighth overriding royalty) may be treated as the sale of a capital asset. Similarly, in I. T. 4003, 1950-1 C. B. 10↩, 11, respondent's apparent position is that the assignment of an oil payment representing a fraction of the taxpayer's interest, but extending over the entire life of the mineral property, may be treated as the sale of a capital asset.