Court Opinion

ID: 9639290
Source: CourtListenerOpinion
Date Created: 2023-08-22 16:11:18.57745+00
Date Added: 2024-06-11T18:10:15.381258
License: Public Domain

L. HAND, Circuit Judge
(dissenting).
Although the stipulation describes the "bonuses” as “advance royalties,” I assume, not only that they are not recoverable, no matter how little gas the lessee withdraws from the land, but that the leases do not expressly apportion against them whatever withdrawals the lessee does make, or in any other way treat them as additions to current royalties. It was certainly possible to hold that such “bonuses” are the consideration in solido, for grants of profits á prendre; of rights in the land; of immediate interests in the gas. If so, it would seem to follow that they must be items in capital transactions; unlike current royalties which fall within Article 22(a) (5) of Regulations 86 and 94, and are part of the “cost” to the lessee of the gas he withdraws, as he withdraws it. Be that as it may, we all agree that the Supreme Court, in the decisions cited in my brothers’ opinion, has held that such a “bonus” is income of the lessor; and that too, so far as I can see, regardless of whether it is spread out beyond the year in which it is paid. The reason for this, as I gather, is that such a “.bonus” is payment in advance for units of gas, in which, although the lessee has the right to withdraw them in the future, the lease gives him no immediate interest. Conversely, the lessor does not part with any interest in the gas until the lessee withdraws it. These decisions thus put a “bonus” on the same footing as current royalties, in spite of the fact that it is not apportioned to future withdrawals, and is not recoverable, if there are no withdrawals; and it is because it is upon that footing that it is income. The important thing to observe is that this consequence is a deduction from the rights which the lease creates.
The plaintiff merely asks that the lease shall be construed in the same way, when the lessee is taxed. It says that if a “bonus” is “advance royalties,” and a payment for units to be later withdrawn, which remain the lessor’s while they are in situ, it must be “advance royalties,” when the opposite party, the lessee, is taxed: that the rights created cannot vary as one looks through different ends of the same document. My brothers find it a sufficient answer to say that the same payment may be at once income to the payee, and a capital expenditure to the payor. That is true: for example, when a customer buys goods from a merchant, he may be making a capital expenditure, yet the merchant will receive income. Nevertheless, the legal effect of the transaction does not shift; the same contract is not construed to create one kind of right when the customer is to be taxed, and another when the merchant is. Yet that is what we must do here, if we are to escape the force of the decisions I have. mentioned. For one purpose, we must interpret the same lease as giving the lessee an immediate interest in the gas, and for another, as giving him no interest in it whatever until he actually withdraws *958it. It is indeed true that the same payment is the source of the tax in either case; but payment never of itself creates a tax. It becomes taxable only by virtue of the nexus of facts of which it is a part, and which constitutes the legal transaction. It is the transaction which determines the character of the tax: i. e., whether it is to be imposed upon income, or upon capital gain; and there is no more warrant for making the lease create a different set of rights, out of which we can then spell a capital transaction, than for substituting an entirely new document.