Brown v. Commissioner

MRS. LENA BROWN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. E. BROWN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MRS. HAZEL MCDONALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Brown v. Commissioner

Docket Nos. 16807-16810, 24216.

United States Board of Tax Appeals

24 B.T.A. 30; 1931 BTA LEXIS 1709;

September 16, 1931, Promulgated

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">*1709 1. Depletion deductions for 1921 with respect to oil royalty rights conveyed by the taxpayers are denied, an instrument executed in 1920 being held to be a contract of sale which immediately vested title in the rights sold in the vendee, even though the greater part of the consideration for the sale was payable out of oil to be produced. L. T. Waller,16 B.T.A. 574">16 B.T.A. 574; affd., 40 Fed.(2d) 892; Mrs. J. C. Pugh, Sr., Executrix,17 B.T.A. 429">17 B.T.A. 429; affd., 49 Fed.(2d) 76, followed.

2. Held, where land inherited by a wife in Louisiana was administered by her husband and in the taxable year oil royalties pertaining to said land are sold, profit from such sale is the separate property of the wife and not community income, pursuant to Louisiana statutes. Lucas v. Bamma Baucum, 50 Fed.(2d) 806, followed.

A. B. Freyer, Esq., for the petitioners.

W. Frank Gibbs, Esq., for the respondent.

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BLACK

">*30 These cases were consolidated for hearing and decision and involve deficiencies as follows: Docket No. 16807, Mrs. Lena Brown, 1921, $1,502.10; Docket No. 16808, Mrs. Lena Brown, ">*1710 1920, $13,318.32; Docket No. 16809, W. E. Brown, 1921, $1,502.10; Docket No. 16810, W. E. Brown, 1920, $13,318.32; Docket No. 24216, Mrs. Hazel McDonald, 1921, $3,423.04.

The questions involved are, (1) whether certain mineral rights or their proceeds were the separate property of Mrs. Lena Brown and Mrs. Hazel McDonald, or were community property with their respective husbands; (2) whether said rights were sold, leased, or subleased, and (3) the right of petitioners to depletion, if any.

At the hearing the respondent amended his answers relative to the taxable year 1921 to the effect "that the sum of $55,526.32 received by Mrs. Lena Brown in 1921 and reported in her income for that year as community property, does not in fact or in law constitute community income under the laws of the State of Louisiana; and therefore, for the year 1921, the full amount, or any part thereof, constitutes the separate property of Mrs. Lena Brown and all or any part of it should be taxed to her and none to her husband." A similar ">*31 amendment as to Mrs. Hazel McDonald was made, except that the sum specified as separate property or income was $56,491.23. It was prayed that the deficiencies">*1711 be increased accordingly.

FINDINGS OF FACT.

At the hearing, the following stipulation of facts, signed by counsel for petitioners and counsel for respondent, was filed:

Petitioners are now and were during the taxable years citizens and residents of the State of Louisiana.

In connection with the appeals of Mrs. Lena Brown (Docket No. 16808) and W. E. Brown (Docket No. 16810) it is agreed that the correct tax liability of these parties for the year 1920 amounts to $5,774.13 each; that because the records of tax previously paid by each of these taxpayers are in New Orleans, Louisiana, it is agreed that the Board may determine the aforesaid sum as the correct amount due from each of these petitioners for the year 1920, leaving the matter of tax previously assessed by the Commissioner of Internal Revenue and the amount of tax previously paid to be submitted to the Board under Rule 50 after the decision of the Board has been rendered.

With respect to the appeal of Mrs. Lena Brown (Docket No. 16807), the appeal of W. E. Brown (Docket No. 16809) and the appeal of Mrs. Hazel McDonald (Docket No. 24216) the taxable year 1921 is involved. In connection with the individual income">*1712 tax returns filed by Mrs. Lena Brown and W. E. Brown under the above mentioned docket numbers, each of these two petitioners reported under Schedule A, as having been received from oil royalties, the sum of $19,933.68, and deducted therefrom a similar amount as depletion at the rate of $2 per barrel. In respondent's notices of deficiency, this entire amount of depletion has been disallowed. Respondent admits that his action in disallowing the entire amount was in error and admits that there should have been disallowed only the sum of $1,188.53.

The petitioners W. E. Brown and Lena Brown are husband and wife and for the calendar year 1921 reported their income as community income.

George T. Shaw was the father of the petitioners, Mrs. Lena Brown and Mrs. Hazel McDonald. Some time prior to 1916, the mother of these two children died and Shaw later remarried. Some time after his remarriage, he sold a farm situated in the State of Louisiana to Len Langston. During the year 1919 oil was discovered on this farm. After oil was discovered some contest arose over the deed of conveyance to Langston, it being contended by Mrs. Lena Brown and Mrs. Hazel McDonald and the other children">*1713 (whose names are not material here) that immediately upon the death of their mother they inherited, under the laws of Louisiana, a one-half interest in the property. Just prior to the discovery of oil, or shortly thereafter, the children, and also Len Langston began the execution of various oil leases, but the entire controversy was thrown into the courts to await the clearance of the title to the property.

The dispute was finally adjusted by the execution of an agreement between petitioners, Mrs. Lena Brown and Mrs. Hazel McDonald, and the other parties concerned. Mrs. Lena Brown reported under Schedule C of her individual income tax return for the year 1921 that she received in 1921 from the sale of mineral rights the sum of $55,526.32. Mrs. Hazel McDonald in Schedule D of her individual income tax return for 1921 reported that she received from the sale of mineral rights $56,491.23. The mineral rights referred to in said returns, ">*32 and which were received under the above mentioned agreement in 1921, had no March 1, 1913, value for oil or no value at the date of inheritance from their mother. It is contended by the respondent that the instrument executed as aforesaid">*1714 constitutes a sale and therefore neither Mrs. Lena Brown nor Mrs. Hazel McDonald are entitled to any deduction to be applied against the receipt of the aforesaid sums on account of depletion, and that the entire amount constitutes taxable income since the property so transferred under the foregoing instrument had no value for oil either on March 1, 1913, or on the date of inheritance when the mother of these children died.

On the other hand, these petitioners, Mrs. Lena Brown and Mrs. Hazel McDonald contend that the title to the oil, out of the value of the proceeds, of which these petitioners and the other owners were to receive the sum of $225,000.00, referred to in the agreement, did not vest or pass to A. R. Heinz under the terms of the agreement.

It has been stipulated and agreed between the parties that if the Board, in interpreting the instrument and the evidence, upholds the contentions of the taxpayer, Mrs. Lena Brown is entitled to deduct by way of depletion the sum of $31,923.76, and Mrs. Hazel McDonald the sum of $32,471.04.

Mrs. Lena Brown married W. E. Brown November 12, 1918. Mrs. Hazel McDonald married Mr. McDonald in the spring of 1920.

Between the date">*1715 of the death of the mother of these two petitioners, Mrs. Lena Brown and Mrs. Hazel McDonald, and the year 1919, neither of the aforesaid petitioners transferred to their respective husbands any interest in the property which they had received by inheritance from their mother.

The above mentioned agreement between the parties reads as follows:

STATE OF LOUISIANA,

PARISH OF CADDO.

BE IT KNOWN, That this day before me, the undersigned Notary Public in and for the said Parish, duly commissioned and sworn, came and appeared MRS. RUBY INEZ MOORE MOODY, wife of George W. Moody, and MRS. LENA BROWN, wife of William Brown, residents of the Parish of Caddo, and MRS. LESSIE VADA GANDY, wife of Glen Gandy, a resident of theParish of Claiborne, who declared that they do by these presents grant, bargain, sell, convey and deliver, with full guaranty of title, and with complete transfer and subrogation of all rights and actions of warranty against all former proprietors of the property herein conveyed, unto A. R. Heinz, unmarried, a resident of the State of Louisiana, Caddo Parish, the following described property, to-wit:

An undivided three-one hundred and twenty-eighths (3/128) of all">*1716 the oil saved from that produced from the hereinafter described land, either under leases now in effect on said lands or any subsequent leases upon the same land, said land being described as follows: (Here follows description of land).

To have and to hold said described property unto said purchaser, his heirs and assigns forever.

This sale is made for the considerating of the sum of One Hundred Thousand Dollars (100,000.00), cash in hand paid, the receipt of which is hereby acknowledged, and the payment to the vendors herein of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) out of the first oil accruing to the interest above conveyed and the payment to Len Langston, his heirs or assigns, of One Hundred Thousand Dollars ($100,000.00) out of the first oil run after ">*33 the payment to the vendors herein of the sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) and accruing to said interest.

The obligation to pay the aforesaid sums of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) and One Hundred Thousand Dollars ($100,000.00) are not personal obligations of this vendee, but are to be paid only in the event that the property produces">*1717 sufficient oil to pay the same, and such payments are to be made only from the oil accruing to the royalty interest above conveyed from and including May 4, 1920.

And the parties hereto constitute J. A. Thigpen, a resident of Caddo Parish, Louisiana, trustee, to whom the proceeds of the sale of the oil accruing to the aforesaid interest from and including May 4, 1920, shall be paid and who shall pay the said sum of Two Hundred and Twenty-five Thousand Dollars ($225,000.00) to these vendors, and thereafter shall pay the said sum of One Hundred Thousand Dollars ($100,000.00) to the said Len Langston, his agents or attorneys or parties designated by him, and when said sums shall have been so paid, said trust shall be at an end and the moneys accruing from the sale of the oil belonging to the interest above conveyed shall be payable to the vendee herein.

DONE AND PASSED at my office in said Parish of Caddo, in presence of the undersigned competent witnesses, on this the 6th day of May, A.D. 1920.

(Signed) Mrs. RUBY INEZ MOORE MOODY

Mrs. LESSIE VADA GANDY

Mrs. LENA BROWN

Mrs. A. R. HEINZ

Mrs. J. A. THIGPEN, Trustee.

ATTEST:

(Signed) W. M. WALLACE

C. KELLER

">*1718 (Signed) J. M. GRIMMET,

Notary Public.

( $100 documentary stamps attached)

During the taxable year and prior thereto the husbands of Mrs. Lena Brown and Mrs. Hazel McDonald managed the business and property affairs of their respective wives.

OPINION.

BLACK: In accordance with the stipulation, we hold that the tax liability of Mrs. Lena Brown for 1920 in Docket No. 16808 is $5,774.13, and that of W. E. Brown for 1920 in Docket No. 16810 is $5,774.13.

The deficiency notices attached to each of the petitions in the above dockets show a total asserted tax liability against each of the petitioners of $16,121.92, with $2,803.60 theretofore assessed and paid in each case, leaving a deficiency claimed against each petitioner in said dockets of $13,318.32. The stipulation, which has been agreed upon, will materially reduce the amount of each deficiency, and therefore the deficiences, if any, in Docket Nos. 16808 and 16810 will be recomputed in accordance with the stipulation which has been filed herein. This leaves for our consideration the issues raised by ">*34 the pleadings and not settled by stipulation in Docket Nos. 16807, 16809, and 24216, as follows:

(1) ">*1719 Petitioners contend that the instrument of settlement marked Exhibit D at the hearing, which has been set out in detail in our findings of fact, did not pass any title from petitioners to Heinz covering petitioners' interest in any oil under said property whatever, but said Heinz acquired, so far as petitioners were concerned, only the right to reduce that interest in the oil under the land to possession and under the terms of the agreement was to pay to petitioners and their coheirs the pro rata share of each in the proceeds of such oil as and when produced, to the extent stipulated in the agreement, and accordingly the proceeds from such oil constituted income subject to depletion claimed.

(2) The respondent contends that not only should no depletion be allowed as to these two items of income accruing under the agreement to Mrs. Lena Brown and Mrs. Hazel McDonald, but that the income in question was derived from the separate estates of the wives and therefore did not constitute community property, and should have been reported as income solely by the wives, and that therefore the deficiencies claimed against Mrs. Lena Brown and Mrs. Hazel McDonald should be increased and the deficiency">*1720 claimed against W. E. Brown decreased.

It should be explained at this point that although Mrs. Hazel McDonald, one of the petitioners herein, did not sign the instrument of conveyance set out in our findings of fact and her name does not appear therein, nevertheless, she had an interest in the oil royalties conveyed by said instrument, the same as the other children of George T. Shaw. Her interest had been previously conveyed, while she was a minor, to her sister, Lessie Vada Gandy, for purposes of convenience, it being difficult and inconvenient to get the approval of the court every time an oil lease was negotiated. Her beneficial interest in the property as one of the children of George T. Shaw and wife, deceased, as between the parties, was in no wise diminished by the prior conveyance of her interest to Lessie Vada Gandy. On this point there was no contest.

As to petitioners' contention that the instrument of conveyance was not a sale of oil in place, but merely a grant of the right to Heinz to go upon the premises and extract oil from beneath the surface of the earth and remove it therefrom and therefore petitioners were the owners of the oil until it was extracted from">*1721 the ground and have the right to deduct depletion from the amounts which they received under the agreement, it is sufficient to say that this contention has been passed upon adversely to the contention now ">*35 made by petitioners in numerous decisions by the Board and the courts. Some of these cases are: ; affd., ; ; affd., ; ; affd., . In the latter case, after setting out in the opinion the material parts of the instrument of conveyance, in affirming the Board's decision, the court said:

* * * We construe this to be a conveyance, operative from its date, of a half interest in the royalty right for a total consideration of $250,000.00, $50,000.00 being paid in cash, and a special arrangement being made for the payment of the remainder. The arrangement did not involve Eastham in personal liability, but appropriated the proceeds of his royalty oil to the payment until the $200,000.00 should be paid. It is specially referred to as the half ">*1722 belonging to said Eastham. As the oil was produced, that due to this half of the royalty right was Eastham's oil. The risk of market price was his. When the proceeds were paid over to Pugh they were paid not because the oil was Pugh's but because it was pledged to Pugh. The money went to discharge the price due on Eastham's purchase, and to pay for the right which he had bought "operative from August 1st, 1919." After that date it was Eastham's royalty right which was being depleted by the removal of oil, and he, and not Pugh, was entitled to the depletion allowance, although Pugh was to get and did get the proceeds of the oil when sold. The same principle was applied in , and , in which a lease interest was transferred instead of a royalty. Our decision in , is cited as to the contrary, but that case did not directly involve any question of depletion. The question was to whom certain royalties belonged as income. Nor did it really involve any sale of a royalty, for the parties were claiming under">*1723 adverse titles, and made a compromise agreement which effected a division of the disputed royalty.

The instrument of conveyance involved in the instant case is substantially the same as that which was involved in Following the above cited authorities, we hold that the respondent did not err in refusing to allow depletion deductions from the $55,526.32 received by Mrs. Lena Brown in 1921 from the sale of mineral rights, and from the $56,491.23 received by Mrs. Hazel McDonald in 1921 from the sale of mineral rights.

We now take up respondent's contention that the above stated amounts received by petitioners, Mrs. Lena Brown and Mrs. Hazel McDonald, in 1921 were from the sale of their separate property and the amounts were therefore separate income and that petitioners erred in returning these amounts on their income-tax returns as community income, and that the deficiencies should be recomputed on the basis that such income was the separate income of Mrs. Lena Brown and Mrs. Hazel McDonald and not the community income of ">*36 themselves and husbands. This contention of respondent must be sustained. The same question">*1724 was recently before the U.S. Circuit Court of Appeals for the Fifty Circuit in the case of , and the court there held that where land inherited by a wife in Louisiana was administeed by her husband, who in 1921 negotiated oil leases and sold part of the retained royalty interest, profit from such sale is separate property of the wife, and not community income, pursuant to Louisana statutes. The court said: "We think it perfectly plain that upon no reasonable theory can a sale, as here, by the wife of a part of her mineral interests operate to convert separate into community property."

Following the above quoted authority, we sustain respondent on this issue.

Decision will be entered under Rule 50.