Commissioner of Internal Revenue v. Turney , 82 F.2d 661 ( 1936 )

WALKER, Circuit Judge.

The petitioner challenges the decision of the Board of Tax Appeals that one-half of the amounts of bonus money paid in 1929 to the respondent, the taxpayer, by the lessee under two oil and gas leases made by the respondent, covering land the surface right to which was owned by the respondent, the right to minerals in that land having been reserved by the state of Texas when it granted the surface rights therein, was not taxable as income of the respondent. Each of the leases contained the following:

“If any of the above described land is State School Land, carrying a mineral classification, it is hereby understood and agreed as to such part or parts so classified, the lessee shall deduct and pay to the State of Texas as royalty a one-sixteenth (1/16th) of the oil, gas, casinghead gas or other by-products of petroleum, out of the royalties hereinafter provided for.

“If, by decision of the Supreme Court of Texas, it shall hereafter be determined that out of the bonus or rentals specified in this lease to be paid by lessee to lessor, now due or hereafter to become due, there shall be payable to the State of Texas by reason of certain of the lands herein leased being State School Lands bearing mineral classification, a sum or sums of money, the lessor hereby agrees and binds himself, his heirs, executors, administrators or assigns to pay to the State of Texas such sum or sums of money so determined to be due it out of said bonus or rentals. In the event lessor, his heirs, executors, administrators or assigns, fail or refuse to pay such sum or sums which may be determined to be due the State of Texas, as hereinabove set forth, if any, lessee hereby reserves the right to pay same, in which event such payment or payments by such lessee shall constitute a lien upon the State School Lands herein leased to secure to the lessee the repayment of such sum or sums, of money advanced by it.”

An act of the Legislature of Texas, passed in 1919 (Revised Civil Statutes of Texas 1925, art. 5367 et seq.), made the surface owner of such lands the agent of the state for the making of sales and leases of the state’s mineral interest, specified the terms and conditions for such sales or leases, and fixed the amounts to be paid to the state from the proceeds of such sales or leases, and the part of such proceeds to which the surface owner was to be entitied by way of compensation. That act was construed and sustained by the Supreme Court of Texas in the case of Greene v. Robison, Land Com’r, 117 Tex. 516, 533, 8 S.W.(2d) 655, which was decided on June 25, 1928. Under that statute the above-mentioned payment to the respondent had the effect of obligating him to pay over to the state of Texas one-half of the bonus money received. Empire Gas & Fuel Co. v. State of Texas, 121 Tex. 138, 47 S.W.(2d) 265. As to one-half of the amount of bonus money paid to respondent, he received and held it as the duly authorized agent of the state of Texas. Prior to respondent’s receipt of the bonus money, his obligation to pay to the state one-half of the amount so received by him had been fixed by law and was absolute. The instant case is unlike the case of North American Oil Consol. vs. Burnet, 286 U.S. 417, 52 S.Ct. 613, 76 L.Ed. 1197, and other similar cases, in that in each of those cases the taxpayer’s right to the money in question was undetermined at the time he received it, while in the instant case when the taxpayer received the bonus money the state’s right to one-half of that bonus money was not subject to be disputed. So far as we are advised, no court has gone so far as to decide that the fact that the taxpayer, at the time he received a sum of money, asserted a claim thereto requires tax officials to include that sum in the taxpayer’s income of the year he received it, though it then was apparent to any informed person that that claim was wholly unfounded, as confessedly the taxpayer received that money as the agent of another, whose right to that money, before it was received by the taxpayer, had been finally determined by the decision of a court of last resort. From the time the respondent received the bonus money, it was not only manifest that under then well-settled law he received and held one-half .of it as agent of the state of Tfexas, but by the terms of the leases under which it was paid he was obligated to pay one-half of that money to the state of Texas. In no real sense was the question of the taxpayer’s liability as agent an open one throughout the year 1929, as when he received the bonus money his liability as agent was fixed and absolute. Blum v. Helvering, 64 App.D.C. 78, 74 F.(2d) 482, 484. As to one-half of the bonus money it was received and held under such, circumstances that tax . officials were not required to treat it as included in the taxpayer’s taxable income. Tax officials are not required to treat as income money received by a taxpayer when, under well-settled law, his receipt of it has the effect of obligating him unconditionally to pay that money to another. The fact that at the time of the hearing before the Board of Tax Appeals respondent had not complied with his obligation as agent did not make what the state was unconditionally entitled to receive taxable income of the respondent. That money being income of the state, in the hands of its agent, was forbidden to be included in respondent’s gross income. Section 22 (b) (9) of Revenue Act of 1928, 45 Stat. 799, 26 U.S.C.A. § 22 and note.

The petition is denied.