Court Opinion

ID: 9444425
Source: CourtListenerOpinion
Date Created: 2023-08-03 21:00:47.784056+00
Date Added: 2024-06-11T17:29:52.181279
License: Public Domain

RIVES, Circuit Judge
(dissenting).
With the legal principles set forth in the majority opinion with such admirable clarity and vigor, I am in hearty accord. The question as to which of those principles is applicable to the transactions here involved gives me more concern. A solution of that question depends upon the nature of those transactions. Were they simple sales of interests in realty as the majority holds, and as they appeared in form, or were they, in substance and reality, assignments of income?
To pierce the form and uncover the realities of the transactions, it is necessary to review more of the precise factual situation disclosed by the undisputed evidence. The oil royalty interests which the taxpayer owned were located in the East Texas, Van Hawkins, and other Texas oil fields, long-life fields in which production was reasonably certain for a period of at least twenty-five years from 1948. The D. K. Caldwell Foundation was the creature of the taxpayer and controlled by him. Just before these transactions, its total assets amounted to only $14,176.78. Except for the differing amounts of the agreed sums of money, each of the conveyances of oil payment rights to the Foundation contained an identical limitation as follows:
“This conveyance shall be effective as of 7 A.M. August 1, 1948 and shall remain in effect until such times as the Trustees of the D. K. Caldwell Foundation, their successors and assigns, have received from the proceeds of oil or gas produced, saved and marketed from the above mentioned mineral interests, the total aggregate sum of Three Hundred Fifty Thousand and No/100 ($350,000.00) Dollars. And after the said D. K. Caldwell Foundation has received said total sum of Three Hundred Fifty Thousand and No/100 ($350,000.00) Dollars, then the royalty interests herein-above conveyed shall revert to and revest in said D. K. Caldwell, his heirs and assigns.”
*574The proceeds of the oil sales to be received by the Foundation, the cash consideration and the face amount of notes payable to the taxpayer, provided for in the several conveyances, were as follows:
Location Oil Proceeds to Cash to be Face Amount of1 of be Received by Received by Notes Payable to Property the Foundation Taxpayer the Taxpayer E. Texas No. 1 $350,000 $ 500 $233,000 E. Texas No. 2 356,100 400 237,000 Hawkins 136,000 1,000 135,000 Van 572,000 1,000 380,000 Coke 31,000 500 20,000
The approximate pay out periods were as follows:
Months Required for Location Months Required Pay Out of Face of for Pay Out of Amount of Oil Property Consideration Proceeds Transferred E. Texas No. I 88 131 E. Texas No. 2 78 ' 117 Hawkins 127 127 •Van 78 123 Coke 103 154
Other than the statutory warranty implied from the use of the words “grant" and “convey”, Art. 1297 Vernon’s Revised Civil Statutes, the conveyances contained no warranty of title. The taxpayer retained a vendor’s lien on the oil payment rights to secure the payment of the notes. The taxpayer testified that the Foundation, at the time these oil payments were transferred to it, had no facilities for receiving and storing the oil for resale, and that it was expected that the oil would be sold as produced. The proceeds of such sales constituted the only sources from which the Foundation could pay the notes. Its other assets were, comparatively speaking, of nominal value. The Foundation acquired no dominion over the oil before it was produced. Its rights were limited to the profits from the land to the extent of a specified number of dollars as the oil was produced over a period varying from 117 months to 154 months. In return for his right to receive this income, the taxpayer got notes which concededly had an immediate fair market value of $489,433.00.
It seems to me that, if by this process the taxpayer could convert his ordinary income from these properties into capital gain, then hereafter there will be no necessity for an owner of oil royalty interests to receive therefrom ordinary income. He need only “convey” the oil payment rights for one year, ten years, thirteen years, or such other period of time as may be most profitable, and report his receipts as capital gains. Of course, an owner of oil royalty interests stands upon the same footing as any other taxpayer, that is with the exception of the depletion allowance to which he is entitled by law. The situation is analogous to that of an ordinary lessor under a long term, say thirty year, lease, who sells some of his annual rent notes, say ten or thirteen of them. Would that be a transfer of the fruits or of the tree on which they grew? See Lum v. Com*575missioner, 3d Cir., 147 F.2d 356; 2 Mertens Law of Federal Income Taxation, Sec. 18.12.
Unless the property itself is transferred, or some more substantial economic interest in the corpus than appears from the facts of this case, it seems to me that the taxpayer is merely collecting some of his royalty income in advance. See Harrison v. Schaffner, 312 U.S. 579, 61 S.Ct. 759, 85 L.Ed. 1055. The assignment in that case was of specified amounts in dollars from the income of a trust for the year following the assignment. Does it make any difference that the time involved was one year instead of from nine to thirteen years, as in the present case? I think not, so long as the transfer passes nothing substantially more than the right to collect future income, and when so many of the attributes of ownership remain in the transferor as to justify the conclusion that he continued to be the owner of the oil royalty interests within the meaning of Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. § 22(a).
I therefore respectfully dissent.

. Eleven per cent of the notes were determined by the Commissioner of Internal Revenue to have belonged to others.