Document: 356 U.S. 260 78 S.Ct. 691 2 L.Ed.2d 743 COMMISSIONER OF INTERNAL REVENUE et al., Petitioners,v.P. G. LAKE, Inc., al. No. 108. Argued March 11, 1958. Decided April 14, Rehearing Denied May 19, See 964, 991. Mr. John N Stull, Washington, D.C., for petitioners. Messrs. Harry C. Weeks, Fort Worth, Tex., and J. Paul Jackson, Dallas, respondents. Justice DOUGLAS delivered the opinion of Court. 1 We have here, consolidated argument, five cases involving an identical question law. Four are from Tax Court whose rulings may be found in 24 T.C. 1016 (the Lake case); 818 Fleming 1025 Weed case). (Its findings Wrather case not officially reported.) Those four involved income tax deficiencies. The fifth, O'Connor case, is a suit refund originating District 143 F.Supp. 240. All same Appeals, 241 F.2d 71, 65, 78, 84, 69. here on writs certiorari which we granted because public importance presented. 353 982, 77 1283, 1141. facts closely similar to those cases. corporation engaged business producing oil gas. It has seven-eighths working interest1 two commercial gas leases. In 1950 it was indebted its president sum $600,000 consideration his cancellation debt assigned him payment right amount $600,000, plus equal interest at 3 percent year unpaid balance remaining month month, payable out 25 attributable taxpayer's At time assignment could been estimated with reasonable accuracy that would pay three or more years. did fact little over return reported as sale property profit taxable long-term capital gain under § 117 Internal Revenue Code 1939, 26 U.S.C.A. 117. Commissioner determined deficiency, ruling purchase price (less deductions material here) ordinary income, subject depletion. some variations facts. assignors payments owned royalty interests2 rather than interests. But these differences decision. 4 different only involves sulphur rights, rights. taxpayer owner pooled overriding deposit known Boling Dome.3 entitled receive $0.00966133 per long ton produced Dome, irrespective market price. Royalty were made each based previous month's production. 5 1947, taxpayer, order obtain sure source funds individual taxes, agreed one Munro, advisor, assignment. Munro totaling $50,000 consisting 86.254514 interest, represented 6,000,000 tons 21,000,000 still place. paid installments three-year period. Most borrowed by bank security. within 28 months. amounts received 1948 1949 returned gains. 6 bit complicated presents additional other Here assignments made, cash but real estate. Two transactions involved. others whom he associated assignments, rights interests being held them productive use their respective businesses oil. Each ranch. uncontested fair value undivided ranch assignor, annum time. transaction consisted leases, assignor's business, fee simple title This assignment, like ones mentioned above, estate received, 7 First, whether proceeds gains s 1174 Appeals started premise, laid down Texas decisions, see especially Tennant v. Dunn, 130 Tex. 285, 110 S.W.2d 53, land. too proceed basis; yet conclude (and right) 8 purpose 'to relieve * excessive burdens resulting conversion investments, remove deterrent effect such conversions.' Burnet Harmel, 287 103, 106, 53 74, 75, L.Ed. 199. And this exception always narrowly construed so protect revenue against artful devices. Corn Products Refining Co. Commissioner, 350 46, 52, 76 20, 24, 100 29. 9 do any investment. lump seems essentially substitute what otherwise future income. pay-out particular ascertained considerable accuracy. Such stipulations, findings, clear inferences. assured purchaser obtained $9,990,350 money loan 1/2 without security deed trust $10,000,000 right, receiving taxpayer. Only fraction transferred, retained.5 Except will discuss later, accrue during term assignee compensated advance. substance present recipient future. short, increase income-producing property. 10 These arrangements seem us transparent Their forms control. essence subtleties draftsmanship total effect. Helvering Clifford, 309 331, 60 554, 84 788; Harrison Schaffner, 312 579, 61 759, 85 1055. if one, date bond compensation services, makes grant anticipatory realizes had collected salary then over. That teaching Horst, 311 112, 144, supra; applicable here. As stated supra, 117, 147, 'The equally enjoyed fruits labor investment satisfaction desires collects uses procure satisfactions, disposes collect means procuring them.' There detached coupons negotiable bonds presented gift son. when father. Here, even clearly there, converting into 11 Second, case. tax-free 112(b)(1) provides: 12 'No loss shall recognized trade (not including stock primarily sale, nor stocks, bonds, notes, choses action, certificates beneficial securities evidences indebtedness interest) exchanged solely kind either investment.' Stat. 37. 13 alternative second ground, too, governed 14 agree Court, 818, exchange 112(b)(1). Treasury Regulations 111, promulgated 1939 Act, provide 39.112(b)(1)—1 respects words 'like kind,' used 112(b)(1), 'One class class.' cannot satisfy test where laws transfer leases seen, merely delayed estate, interest. Moreover, 39.112(a)—1 states 'underlying assumption exceptions new substantially continuation old unliquidated.' Yet conversions seen. 15 Reversed. An lease ordinarily conveys entire mineral less retained lessor. said own 'working interest' develop produce minerals. Anderson Helvering, 310 404, 952, 1277, described 'the specified money, percentage oil, if, produced.' Id., page 410, 955. A 'a all produced' but, unlike payment, limited money. lasts lease. 409, note 1, supra. Dome tract composed various parcels owners separate entered pooling agreement royalties anywhere distributed pro rata among holders. sense 'pooled.' Section 117(a)(1) provides relevant part: 'capital assets' (whether connected business), does include properly included inventory hand close year, customers course property, character allowance depreciation provided section 23(l), taxpayer.' 50, amended, 56 846. 117(a)(4) 'long-term gain' asset months, extent taken account computing net income.' 51, 843. 117(b) 'In corporation, following percentages upon gain, loss, income: '100 centum months; '50 months.' Until 1946 contention taxpayers gain. changed mind ruled 'consideration pledged development) short-lived in-oil carved type depletable place (including larger depletion hands.' G.C.M. 24849, 1946—1 Cum.Bull. 66, 'only after 1946,' I.T. 3895, 1948—1 39. further represents view Commissioner. 4003, 1950—1 10, reads part follows: 'After careful study experience application now concluded there no legal practical basis distinguishing between long-lived is, therefore, position Bureau development), extends period life carved, expected Therefore, results receipt assignor accrued, depending method accounting employed him. Where donative, considered donor arises. 'Notwithstanding foregoing, 3935, apply constitutes extending property.' pre-1946 administrative practice reflected published regulation. therefore presumed Congress incorporated law re-enactment. New York Trust Co., 292 455, 467—468, 54 806, 809—810, 1361. Cf. United States Leslie Salt 383, 389—397, 416, 420—424, 441. prior change 'through exercise agency continuing rule-making power.' Reynolds, 313 428, 432, 971, 973, 1438.

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