Court Opinion

ID: 4474850
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:10.309152+00
Date Added: 2024-06-11T15:08:36.771926
License: Public Domain

Disney, J., dissenting: I can not agree with the majority on the question reflected in the first paragraph of the headnote. In my opinion, deduction of accrued interest should have been allowed. The fact that there was no personal liability is immaterial. New McDermott, Inc.. 44 B. T. A. 1035; Louis Schoen, 30 B. T. A. 1075; 77. S. Fidelity & Guaranty Co., 40 B. T. A. 1010; Hoppers Co., 3 T. C. 62. The petitioner had and retained the equitable, if not the legal, interest in the property, for when the banks had received the amount due them the contract of October 3, 1938, would become null and void and the royalty interest would revert to the grantor. Regulations 111, section 29.23 (b)-l, provides that “Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.” If the interest had not been paid, the petitioner would have lost the property, which is the basic reason for allowing deduction of interest in the cases above cited. No case cited in the majority opinion involves the particular question here involved. The royalty deed was by its terms mere security for the payment of the $132,365.39. Under legal principles too well known to require discussion it. therefore, was a mortgage, with right of redemption. There can be no doubt, I think, that the petitioner could at any time, by the payment of the amount of principal and interest, have required retransfer of the royalty interest. Indeed, the facts found by the majority recite that there was agreement “that, as long as the $132,365.39 so-called note remained unpaid, 25 per cent of all royalties payable to petitioner or Acme under the sale to Conover should be paid to the present or future holder of the $132,365.39 so-called note * * *” — indicating plainly that redemption could have been made at any time. Under these facts, I see here nothing more than legal or equitable ownership of property subject to indebtedness, which bore interest and upon which under the “note” the oil or mineral royalties were first to be applied. The regulation seems to apply squarely, and is not attacked. Thomas v. Perkins, cited by the majority, is simply to the effect that the assignor of an oil and gas lease in consideration of some cash and oil payments until the full sum is paid, who receives such payment directly from the pipe line companies, is chargeable with the income and the assignee is not. This is in line with Anderson v. Helvervng, 310 U. S. 404, merely to the effect that if a taxpayer purchases oil property under a contract under which he pays part cash and the rest from proceeds of oil and gas produced from the property, the taxpayer to receive the proceeds and bank them to the seller’s credit, the seller having nothing but a lien upon the production, the amount paid over to the seller was the income of the taxpayer. Palmer v. Bender holds, in substance, that if a lessee of oil property sells operating rights in consideration, in part, of payment from the oil produced, he keeps economic rights and, therefore, rights to depletion. I can not apply these cases here, where a bank lends money upon the sole security of property conveyed, but subject to defeasance upon payment. I would allow deduction of the accrued interest. I, therefore, respectfully dissent.