Opinion ID: 312230
Heading Depth: 1
Heading Rank: 2

Heading: Surface Rights

Text: 16 The second issue on this appeal concerns a lease agreement between the Vests and Standard Oil. Under its terms, the lease, which was executed in 1965, was to run for five years and as long thereafter as gas, oil and other minerals were produced from the land. 16 Paragraph 10 of this lease is the specific provision now in question; it required that Standard make payments to the Vests for well locations, tank batteries, flowlines and roads all of which were surface rights necessary to the exploration of the mineral rights acquired. 17 For the tax year 1965, the total amount of these payments was $33,422. 18 17 The Vests assert that these payments should be given capital gain treatment because they were to last for an indefinite period and their purpose was to restore the depreciation in the surface value of the property caused by Standard's mineral exploration. We reject this argument on both scores. 18 First of all it is not entirely accurate to suggest that Standard's payments were to last for an indefinite period. Despite the fact that no one can say precisely when they will terminate, it is, nonetheless, indisputable that they will terminate eventually, if for no other reason, because of the exhaustion of the minerals subject to the Standard lease. The reason, of course, is that once this occurs the purpose of the surface rights will cease to exist. All payments would end and the surface rights would revert to the Vests or their successors in interest. In light of these considerations, the Vests' restoration of capital loss argument has a hollow ring. 19 A brief reference to Paragraph 10 of the lease serves to confirm these doubts. It reveals that Standard agreed to pay the Vests for all actual damage caused to the surface of their property, independent of its obligation to pay for the well locations, tank batteries, flowlines and roads. 19 Were we to accept the Vests' interpretation of this paragraph, it would mean either that the Vests were entitled to be compensated twice for capital loss or that Standard's duty to reimburse for actual damages were superfluous language without any legal significance. This position is patently untenable. We are compelled to conclude that Standard's payments for the surface rights were in the nature of rental income, Lindley's Trust No. 1 v. Commissioner, 120 F.2d 998, 1000 (8th Cir. 1941), and accordingly that there was no error in the decision of the Tax Court to this same effect. 20 The decision of the Tax Court is reversed in part and affirmed in part. 21 Reversed in part; affirmed in part.