Court Opinion

ID: 4497928
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:41.003483+00
Date Added: 2024-06-11T14:54:15.573548
License: Public Domain

Aenold,
dissenting: I respectfully dissent from the conclusion reached in the majority opinion that cost must be allocated between cash received and contingent future payments in order to determine the amount of gain derived from the sale of property. If apportionment is necessary, or practical, the method used in the majority opinion is, perhaps, better than that used in Ortiz Oil Co., 37 B. T. A. 656, or by the respondent here, but, in my opinion, it is unnecessary to allocate cost in order to properly determine the amount of gain realized from the sale of property herein.
The gain from the sale of property is the excess of the amount realized over the cost basis as adjusted, section 111 (a), Bevenue Act of 1932. The amount realized from a sale is the sum of money received plus the fair market yalue of the property (other than money) received, section 111 (b), Bevenue Act of 1932. The amount realized from the present sale was $550,000 cash, and I agree with the majority opinion that petitioner did not receive any additional property as consideration for the sale.
In my opinion the majority’s allocation includes, by indirection, $48,763.99 of the fair market value of future oil payments in petitioner’s taxable income, although prohibited by the decided cases from including therein the entire fair market value of such future oil payments. It seems to ine that the same contingency and uncertainty as to the receipt of the future payments exist in apportioning costs as exist in increasing a taxpayer’s gross income by the estimated present worth of such eontingent future payments. I can see no more justification for its use in apportioning costs than for its use in increasing gross income. The contingent nature of the oil payments remains the same in either event.
In view of the known fugacious nature of oil and the necessarily contingent nature of oil payments to be received from the production of oil, if any, an allocation of cost between cash received and oil payments to be received out of production may result in petitioner’s failure to recover $48,763.99 of its costs. If cost be not recovered the taxation of a portion of the cash received as gain realized from the sale would in effect be a tax upon capital and not upon income. Commissioner v. Laird, 91 Fed. (2d) 498; Commissioner v. Fleming, 82 Fed. (2d) 324; Burnet v. Logan, 283 U. S. 404.
In the last mentioned case the respondent valued the right to receive payments for ore extracted as being the equivalent of cash, and used his valuation as the basis for apportioning subsequent annual receipts between income and return of capital. The Supreme Court held that the promise of future money payments was wholly contingent upon facts and circumstances not possible to foretell with anything like certainty and that the promise was in no proper sense the equiva*54lent of cash.. The Court’s opinion points out that the taxpayer “might never recoup her capital investment from payments only conditionally promised” and that she “properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture.”
In the Fleming case, supra, the court held that in “sales of interests in oil leases a money payment unconnected with production of oil is to be dealt with as representing a conversion of capital by sale * * *.”
In the Laird case, supra, the Fifth Circuit differentiated between oil payments and oil royalties. It held that all payments received on account of the devise of certain “oil payments” were returns of capital until the aggregate capital.sum devised had been recovered, and no question of income would arise until the entire capital value was received. The court pointed out that it would not do to permit the Commissioner to press the analogy between royalty and oil payments “to the point of taxing as income what is inescapably a return of capital.”
I do not believe the holding in Cook Drilling Co., 38 B. T. A. 291, at page 297, respecting the Alford and Shaw leases, is authority for the allocation of costs. Those leases were sold for a consideration to be paid out of oil to be produced. No cash, plus oil payments, was involved. This proceeding is therefore factually different on this point.
The majority opinion states the real essence of its argument when it assumes that the oil payments will pay out the $350,000 reserved and further assumes that petitioner will claim the statutory percentage depletion allowance, and then states that, if both assumptions materialize, the petitioner will secure double deductions, totaling $47,486.01 in excess of cost. These assumptions by the majority overshadow all other considerations. The essential facts are that petitioner sold certain property for cash and reserved the right to participate in future production, if any. The right reserved is so conjectural that its fair market value can not be included as a part of the gain realized from the sale, and the practical solution, in my opinion, is to first permit the recovery of cost to the extent of cash received. This solution guarantees that the taxpayer will at least recover his costs to the extent of cash received, and recovery of cost will not be dependent upon a wholly conjectural and contingent possibility. Thus the constitutional inhibition against the taxation of capital as income is preserved.
If tax laws are to be administered in a practical manner and upon an annual accounting basis, this taxpayer has realized gain on the sale of a capital asset in the taxable year only to the extent of the cash received in excess of its cost. Any formula for the allocation *55of cost, however, just and equitable it may appear to be, which forces a taxpayer to postpone the recoupment of his investment to the happening of unpredictable future events which may never occur, is a direct violation of the Sixteenth Amendment, and the revenue acts enacted pursuant thereto, which lay a tax upon income and not upon capital.