Bankers Mortg. Co. v. Commissioner

Bankers Mortgage Company, Petitioner, v. Commissioner of Internal Revenue, Respondent

Bankers Mortg. Co. v. Commissioner

Docket No. 106993

United States Tax Court

1 T.C. 698; 1943 U.S. Tax Ct. LEXIS 221;

March 2, 1943, Promulgated

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Decision will be entered under Rule 50.

In 1937 petitioner had a transaction with the Humble Oil & Refining Co. by which it received from that company $ 300,000 in cash and executed to Humble its two nonnegotiable notes due on or before thirty years after date, and at the same time executed a deed of trust purporting to secure payment of these notes by an assignment to a trustee of certain oil and gas and sulphur interests and royalties, and on the same day, and as a part of the same transaction, petitioner and Humble executed a contract modifying in certain important particulars the provisions of the notes and deed of trust. Held, that the transaction was a sale by petitioner to Humble of its mineral rights and previously reserved royalties contained in the instrument of assignment and petitioner is taxable on the $ 300,000 received in 1937, petitioner having no cost basis for the interest transferred; held, further, that, the $ 300,000 being the proceeds of a sale and not a bonus in the nature of advanced royalties, petitioner is not entitled to percentage depletion on the amount received. Commissioner v. Fleming, 82 Fed. (2d) 324, followed.

J. L. Lockett, Esq., for the petitioner.

Donald P. Moyers, Esq., and L. R. Van Burgh, Esq., for the respondent.

Black, Judge.

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BLACK

This proceeding involves deficiencies and penalty determinations made by the respondent for amounts and years as follows:

			Personal
		Excess	holding	25%
Year	Income tax	profits tax	company	penalty
			surtax
1937	$ 97,676.50	$ 29,035.54
1938	11,397.05		$ 22,917.27	$ 5,729.32
1939	9,255.11	1,480.44

The parties have stipulated a settlement of all questions in dispute in the pleadings, except the issue whether or not a certain transaction of June 9, 1937, between the petitioner and the Humble Oil & Refining Co. was a loan by Humble to petitioner of $ 300,000, secured by a mortgage on petitioner's interests in mineral rights in a 299 1/2-acre tract of oil lands, as contended by petitioner, or whether the transaction constituted a sale of said interests by petitioner to Humble for $ 300,000. If the Court should hold in favor of the Commissioner on this issue and should determine that the transaction was a sale, then as an alternative contention petitioner alleges that the Commissioner should have allowed a deduction of 27 1/2 percent as percentage depletion against the $ 300,000 which he has added to petitioner's income by adjustment (a) for the year 1937.

FINDINGS OF FACT.

The evidence in this proceeding consists in the main of three documents which petitioner introduced in evidence as exhibits one, two, and three. Exhibit one is a copy of resolution adopted by the board of directors of the Bankers Mortgage Co., Houston, Texas, on June 9, 1937. Exhibit two is a deed of trust dated June 9, 1937, executed by the Bankers Mortgage Co., party of the first part, N. K. Roff, trustee, party of the second part, and the Humble Oil & Refining Co., party of the third part. Exhibit three is a contract entered into on June 9, 1937, by the Humble Oil & Refining Co. and the Bankers Mortgage Co. Exhibit one we incorporate in full in these findings. Exhibits two and three we incorporate in these findings by reference, and in the findings which follow we summarize them.

The petitioner is a mortgage loan corporation under the laws of the State of Texas, with its principal office located in the city of Houston, Texas.

Prior to the years involved the petitioner acquired ownership of certain mineral and oil rights, including oil royalties, in and to a 299 1/2-acre tract of land in the Sugarland Oil Field of Texas, which mineral interests, including reserved royalties, it owned at the beginning of the periods here involved. At all times here material the said tract was held and operated by the Humble Oil & Refining Co., under a lease owned by it and made in a prior year by the petitioner to H. C. Cockburn, trustee, in which lease petitioner reserved certain mineral royalties. At these same times the Humble Oil & Refining Co., hereinafter sometimes called Humble, owned and operated other oil properties adjacent or near to petitioner's tract in the Sugarland Oil Field. These properties are referred to by the parties in transactions hereinafter mentioned as Humble's "presently producing property."

On June 9, 1937, the petitioner's board of directors met and passed a resolution purporting to accept an offer from Humble to loan it $ 300,000 in accordance with terms and conditions set forth in the resolution and directing its officers to effect the loan in accordance with said terms. This resolution is in terms as follows:

Whereas, Humble Oil & Refining Company proposes to lend Bankers Mortgage Company the sum of $ 300,000, upon the following terms, conditions and considerations:

1. Bankers Mortgage Company to execute and deliver its two non-negotiable notes, payable to Humble Oil & Refining Company at Houston, Texas, No. 1 for the principal sum of $ 100,000, payable on or before 30 years after date, with interest from date at the rate of 4% per annum, interest payable monthly, and No. 2 for the principal sum of $ 200,000, payable on or before 30 years after date, with interest from date at the rate of 4% per annum, interest payable at maturity, both notes providing for 5% interest on sums past due thereon and for ten per cent attorneys' or collection fees; and

2. Payment of said notes to be secured by mortgage deed of trust covering Bankers Mortgage Company's mineral interest in 299 1/2 acres in the Wm. Stafford League and Wm. Little League in Ft. Bend County in what is known as the Sugarland Oil field, and now subject to mineral lease made to H. C. Cockburn, lessee, and now owned and operated by Humble Oil & Refining Company; and

3. Payment of said notes to be additionally secured by assignment of royalties accruing under the lease made to Cockburn; with stipulations for monthly application of said royalties, first, to (a) interest and (b) principal of note No. 1 and second, after full payment of note No. 1, to principal of note No. 2, payments on such principal as made to stop the accrual of interest on the amounts of principal so paid, but interest earned to be payable only at 30 years after date or when all principal of said note No. 2 has been paid, whichever date shall be earlier; said assignment contract to stipulate further:

(a) That 30 years after date, or when note No. 1 and all principal of note No. 2 has been paid (whichever is earlier), Humble Oil & Refining Company, may, at its election, require Bankers Mortgage Company to assign and convey the aforesaid mineral interest in said 299 1/2 acres of land to Humble Oil & Refining Company, in consideration of (1) satisfaction and discharge of all balance remaining unpaid on the aforesaid loan, and (2) assignment by Humble Oil & Refining Company of a royalty interest (.0014 of oil and gas and 5/9 of one cent per long ton on sulphur) in oil, gas and sulphur thereafter produced from lands now included within Humble Oil & Refining Company's presently producing property in the Sugarland Oil Field; and

(b) That if Humble Oil & Refining Company do not exercise the option provided for in paragraph (a) above, Bankers Mortgage Company may, at its option, assign and convey its aforesaid mineral interest to Humble Oil & Refining Company for the consideration provided in said paragraph (a); and

(c) That in event of total cessation of production and permanent abandonment of the presently producing properties of Humble Oil & Refining Company in said field before note No. 1 and principal of note No. 2 have been satisfied, Bankers Mortgage Company shall assign and convey its said mineral interest in said 299 1/2 acres of land to Humble Oil & Refining Company for the considerations set out in foregoing paragraph (a); and

(d) That Bankers Mortgage Company may, at its election at any time, assign and convey its said mineral interest to Humble Oil & Refining Company in satisfaction of all balance then unpaid on notes Nos. 1 and 2; but, if such election be made before maturity of the said indebtedness by lapse of 30 years or under terms of said assignment, Bankers Mortgage Company shall not in such event be entitled to require Humble Oil & Refining Company to assign the royalty interest in the Humble's presently producing properties in the Sugarland Oil field, as provided for in the foregoing Paragraph (a); and

(e) That, as a matter of convenience, Humble Oil & Refining Company shall in lieu of 1/12 of oil and gas and 33 1/3 cents per long ton of sulphur produced from said 299 1/2 acres, credit on account of royalties what is computed and agreed by the parties to be equivalent thereto, to-wit, 1/180 of oil and gas and 2 2/9 cents per ton of sulphur produced from all of the lands comprising Humble Oil & Refining Company's presently producing properties in the Sugarland Oil field; and

(f) That Bankers Mortgage Company shall abandon and withdraw as without merit the claims it has heretofore been asserting against Humble Oil & Refining Company for alleged failure to develop said 299 1/2 acres of land with proper diligence and pursuant to the lease to H. C. Cockburn, and shall consent that Humble Oil & Refining Company shall hereafter have the absolute right to operate its properties in said Sugarland field as a unit without regard to the boundary lines separating its several properties and without reference to any offset obligations that may arise under the terms and provisions of leases in said field or otherwise:

Now, Therefore, Be It Resolved by the Board of Directors of Bankers Mortgage Company that the officers of this corporation be, and they hereby are authorized and directed to consummate said loan upon terms substantially as set out above, and in the name of this corporation, to execute and deliver necessary and proper instruments in connection therewith, in form by such officers deemed proper for the purpose of obtaining said loan upon terms and conditions substantially as in this resolution outlined.

Immediately following this meeting and the adoption of the foregoing resolution, the petitioner executed a deed of trust to an undivided two-thirds interest in mineral rights in said 299 1/2-acre tract of land, and a supplemental agreement between petitioner and Humble was also executed as provided in the above resolution.

The deed of trust, in conventional form, conveyed to N. K. Robb, trustee of the County of Harris, State of Texas:

An undivided two-thirds (2/3rds) interest in and to the oil, gas and other minerals on, in and under, and that may be produced from the following described land, together with an undivided two-thirds (2/3rds) interest in and to the royalties on oil, gas and other minerals payable under the terms and provisions of the lease now covering the hereinafter described land and owned by Humble Oil & Refining Company, said lease being dated November 3d, 1927, and executed by Bankers Mortgage Company as Lessor, to H. C. Cockburn as Lessee, said land being more specifically described as follows, to-wit:

[Here follows description of land.]

It was stated in the deed of trust that the conveyance was to secure payment of two promissory notes dated June 9, 1937, described in the deed of trust and numbered note No. 1 and note No. 2 respectively, in the amounts of $ 100,000 and $ 200,000. Except that all interest payments on note No. 2 are accumulated and deferred until maturity of that note, the general terms of the notes are the same and, omitting date and signature, we set out below note No. 1 as typical of both:

On or before thirty (30) years after date for value received, Bankers Mortgage Company hereby promises to pay to Humble Oil & Refining Company at Houston, Texas, the principal sum of One Hundred Thousand Dollars ($ 100,000.00) with interest from date at the rate of four per centum (4%) per annum, payable monthly as it acrues.

This note after maturity and past due interest shall bear interest at the rate of five per centum (5%) per annum.

In event this note with interest is not paid in full when due, and should it become necessary to place the same in the hands of an attorney for collection, or to collect same by suit or through the probate, bankruptcy or other court, ten per centum (10%) on the balance then due shall be added as attorney's or collection fees.

This note is assignable but not negotiable, and is subject to the provisions of an even dated contract between the maker and payee, reference to which is here made for all purposes.

The deed of trust contains the usual provisions to enforce payment of the notes, but states in its concluding paragraph that it and the notes do not fully express the understanding of the parties and that the contract above referred to in determining the true intent of the parties, shall be read with the notes and deed of trust. The contract, petitioner's exhibit three, with appropriate reference to the notes and deed of trust, states that the Humble Oil & Refining Co. has loaned to the Bankers Mortgage Co. the sum of $ 300,000, but that said notes and deed of trust do not fully express the understanding of the parties and "that this instrument" is executed in order that the understanding may be more fully understood and expressed. The contract then proceeds to set out the terms and conditions which the resolution adopted by the board of directors of Bankers Mortgage Co. on June 9, 1937, required should be set out in a contract between the parties. The resolution itself has been set out in full in these findings, and, inasmuch as the contract follows the lines of the requirements of the resolution, it is not copied herein but, as already stated, is incorporated herein by reference.

Long prior to June 9, 1937, petitioner adopted a policy that it would not sell any royalty or mineral interest held by it, and that in sales of lands acquired by it a mineral interest would be retained. The policy was particularly applicable to lands in what is known as the coastal area of Texas. The company's officers were familiar with the history of what is known as the Spindletop Oil Field near Beaumont in the coastal area of Texas, where the initial production brought in in 1901 or 1902 from shallow wells (2,500 to 3,500 feet) finally played out and many years later the field was again opened by production from deep wells -- wells of 8,000, 9,000 or 10,000 feet -- which yielded a very handsome return to the owner's, the Yount-Lee interests. There were also known to petitioner's officers other instances in other fields in the Gulf Coast field, following the disclosures and the experiences of the Yount-Lee interests in deep production, in which there was deep production prosecuted successfully after shallow production had failed or had not been obtained. The production in the Sugarland field, where the mineral interest here involved is located, is from 3,000 to 3,500 feet -- shallow production. In 1937 (or just prior thereto) Humble installed a repressuring system in the Sugarland field, the purpose of which is to prolong the production of shallow wells. The process is quite expensive. The instruments in evidence comprise all of the agreements, stipulations, and covenants made at the time between the Bankers Mortgage Co. and Humble with respect to the transaction; there were no other agreements, written or verbal, at the time, nor have there been any subsequent agreements, written or verbal, that in any way modified or changed the contract evidenced by those writings.

The two notes, No. 1 for $ 100,000 and No. 2 for $ 200,000, described in the deed of trust were placed on the books of the Bankers Mortgage Co. as liabilities in the nature of bills payable, and have at all times since been carried on those books as liabilities -- bills payable. Those notes have been, in each year since 1937, reflected in the verified financial statement which petitioner is required by the law of Texas to publish in January or February each year; and have also been shown in the notes and indebtedness that are required by law of Texas to be included in petitioner's annual franchise tax reports for 1938, 1939, 1940, and 1941, and included in the amount on the basis of which its annual franchise tax is computed.

The Bankers Mortgage Co. has not at any time exercised the option, reserved in the written contract, to transfer or assign the mineral interest involved to Humble in satisfaction of said notes. Petitioner acquired the mineral interest through a foreclosure many years before 1937, possibly eight or ten years. At that time there was no oil development in that immediate vicinity.

The Commissioner in his determination of the deficiency for 1937 made the following adjustments to the net income as disclosed by the income tax return filed by petitioner for that year:

(a) Gain on sale of royalty	$ 300,000.00
(b) Interest	2,072.34
(c) Depletion	997.27
(d) Discount -- sales	1,825.00
(e) Discount -- collections	316.48
Total	$ 305,211.09
Nontaxable income and additional
deductions:
(f) Royalty income	$ 3,626.42

Only adjustments (a), (b), (c), and (f) are now involved in this proceeding. Adjustments (d) and (e) have been settled by the stipulation.

The Commissioner in his deficiency notice explained adjustments (a), (b), (c), and (f) as follows:

(a) This amount represents the gain realized from sale of Sugarland royalty interest to Humble Oil & Refining Company on June 9, 1937. As the entire cost has been recovered through depletion, the total selling price constitutes gain realized.

(b) This amount represents deduction claimed for interest expense on note payable to Humble Oil & Refining Company. As it is held the transfer of the Sugarland royalty interest to the Humble Oil & Refining Company constituted a sale, the interest claimed on the note has been disallowed.

(c) and (f) Depletion of $ 997.27 claimed on royalty income of $ 3,626.42 has been disallowed and the royalty income of $ 3,626.42 eliminated from income as it is held the amount of $ 3,626.42 retained by the Humble Oil & Refining Company did not constitute income to you and that you are not entitled to depletion on such amount.

The Commissioner also made several adjustments in each of the years 1938 and 1939 to the net income as disclosed by the income tax return of petitioner for those years. All of these adjustments have either been settled by stipulation, waived by the petitioner, or will be settled by our determination of the main issue involved in the year 1937. Therefore, we do not state separately the adjustments determined by the Commissioner in his deficiency notice for the years 1938 and 1939. Recomputation under Rule 50 will take care of these, in view of the agreement between the parties and the state of the record.

OPINION.

As has already been stated, the primary question in this proceeding is whether the transaction by which Humble paid $ 300,000 to petitioner in 1937 and took petitioner's nonnegotiable notes therefor and also received a transfer from petitioner of certain mineral interests, including oil and gas royalties, was a sale by petitioner to Humble, as the Commissioner has determined, or whether it was a loan by Humble to petitioner -- repayable by petitioner and secured by a mortgage, as petitioner contends. If it was a loan, then of course it follows that the $ 300,000 in question was not income to petitioner in 1937, for it is axiomatic that bona fide loans do not constitute income.

There is no real dispute as to the facts. The decision of the question before us depends upon a construction of certain written instruments which were executed at the time the transaction was consummated. They constitute the evidence of the case except the oral testimony of F. J. Heyne, president of petitioner, who stated that it had been the policy of petitioner for many years not to sell its mineral rights in property which it owned but to lease them and retain royalties.

We think this evidence is of no great importance in this proceeding because, after all, the effect of the transactions which the parties consummated must be determined by the written contracts which they executed. This is certainly true unless there is some claim that the contracts as signed did not represent the true intent of the parties. There is no such claim in the instant case. Heyne also testified that petitioner carried the notes which it executed to Humble as bills payable on its books and included them in its liabilities in the statements which it filed with the State of Texas in the payment of its corporate franchise tax. These facts are, of course, evidentiary, but they are not conclusive. .

The petitioner contends that the transaction was a loan on security, with subjoined options; the options requiring affirmative action to convert the transaction into a sale. The respondent takes the position that no loan obligation was created against the petitioner and in favor of Humble in the transaction. That, under the circumstances, the assignment of petitioner's interests in oil and gas, including reserved royalties to Humble, amounted to a sale of such interest to the latter; or at least a sale pro tanto of production in place in the tract involved equal in value to the amount of the loan obligation. In our opinion the record supports the respondent's version of the transaction. At the outset we take notice that the notes and deed of trust stand modified by the contract to which they are made a part. . And, as so modified, they do not evidence a money loan obligation against the petitioner. A money debt is an obligation which binds the debtor to pay without condition a sum of money to another. . A money loan implies a positive promise on the part of the borrower to repay the sum borrowed, without conditions. ; .

Obviously the petitioner was not definitely committed to pay any sum of money in this transaction. On this point we need only cite the provision in paragraph 8 of the contract giving the petitioner the right at any time to absolve itself from all liabilities on the notes by surrendering the properties pledged to Humble.

Section 8 of the contract which was executed along with the execution of the note and mortgage provides, among other things, as follows:

Mortgage Company shall have the option at any time to satisfy and discharge all its liability under the terms of the notes herein described by executing and delivering to Humble, its successors or assigns, a valid written assignment and conveyance with covenants of general warranty of the interest of Mortgage Company as stated above in said 299 1/2-acre tract; provided, that if such option be exercised at any time prior to the maturity of said notes under the terms of said notes and this instrument, Humble shall not be under any obligation to convey to Mortgage Company the fourteen ten-thousandths (0.0014) royalty on oil and gas, and the five ninths of one cent (5/9 cent) per long ton royalty on sulphur thereafter produced and marketed by Humble from Humble's presently producing properties in the Sugarland Field, as hereinbefore provided.

In discussing the rule applicable to contracts conditioned in a similar way to the above, 41 Corpus Juris, at page 228 [§ 22] (2), among other things, says:

Obligation or Option to Pay Money. The absence of a personal obligation on the part of the grantor to pay the money, which would entitle him to a reconveyance of the property, does not furnish a conclusive test to determine whether the transaction was a mortgage or a conditional sale. But the fact that there was no covenant or promise or undertaking on his part to make such payment is evidence, entitled to considerable weight, that the conveyance was not intended as security for a debt or obligation. Hence as a general rule, if the arrangement between the parties left it optional with the grantor to pay the money and recover his land, or to abandon it to the grantee, the transaction should be held a conditional sale; but if it imposed on the grantor an obligation to make the payment, such as the grantee could enforce by an action at law or by foreclosure proceedings, it must be taken as a mortgage.

Clearly, it seems to us, the arrangement here made for discharge of the note obligations brings the transaction under the general rule stated in the above text. It seems plain that no foreclosure of the deed of trust would ever be possible or necessary by Humble because, although the deed of trust recites that the transfer is made to a trustee for security of Humble's debt, as a matter of fact there was no debt in the sense that there was an unconditional promise on the part of the Bankers Mortgage Co. to pay and Humble was put in complete possession of the mineral interests and remained so throughout the taxable years here in question.

Other provisions of the contract support the view that the petitioner was not expected to pay the notes if oil and gas production should fail on the property which Humble was operating. Thus, under paragraph 2, Humble agrees to apply recoveries from its "presently producing properties" toward liquidation of the notes, conditioned in paragraph 3, that if permanent cessation of production from and permanent abandonment of said properties occur before liquidation of all but interest on note No. 2 is complete, Humble will cancel the entire note obligation and petitioner will be released from all liability on them. This duty put upon Humble, to either liquidate out of its own production or cancel the notes if production ceased, we think, released the petitioner from all real obligation to pay them. Cf. . Likewise the outward circumstances seem out of harmony with any theory that the petitioner would have been a borrower and Humble a lender of money in this transaction.

The petitioner is and at the time of this transaction was a mortgage loan company, engaged in the business of making loans to others. Humble is an oil company engaged in exploiting oil, gas, and mineral leases, and it is not in the business of lending money. The petitioner was not indebted to Humble; it did not, as we view it, seek a loan; and no business reason appears why it should have borrowed money in the settlement here made. . On the other hand, the presettlement situation clearly implies that Humble's business needs and not the petitioner's desire for a loan prompted the transaction. On June 9, 1937, when petitioner's directors considered Humble's so-called offer to lend it $ 300,000, the parties were in dispute over the manner in which Humble had been performing its obligations under the lease then owned by it on petitioner's said tract of land. Petitioner was asserting a claim against Humble based upon charges that the latter was not developing the lease with diligence, as required under its terms. Humble was then engaged in developing all of its leases in Sugarland as a single unit and was "repressuring" its wells to increase and prolong their flow. The petitioner's lease was included in Humble's development program, and it is obvious that the dispute was a handicap to Humble's free hand in carrying out its production program. The record shows that Sugarland is a shallow field where normal production is ordinarily short lived unless prolonged by "repressuring" methods. Obviously Humble needed to get rid of the petitioner and its claim that Humble was neglecting the development of petitioner's tract to enable it to go forward without interruption in its oil and gas production program in said field. It seems clear to us in view of this situation and the terms of Humble's offer, that the offer must be treated as a proposal of settlement of the pending dispute, including as a necessary part of such settlement the purchase by Humble of petitioner's interests and control in and over the lease in question, including previously reserved royalties.

Thus we view the transaction as consummated to be a sale and not a loan by Humble to petitioner of $ 300,000 secured by a mortgage on the oil and gas and sulphur interests which petitioner conveyed to Humble. Cf. ; affd., ; ; affd., ; .

Among the cases cited and relied on by petitioner is the recent case of . We have carefully examined that case, as well as the other cases cited by petitioner, and we think they are distinguishable on their facts.

In the alternative, petitioner contends that, if this Court should hold that the transaction in question was a sale and not a loan and that all of the $ 300,000 which Humble paid to petitioner in 1937 should go into its gross income for that year, then in such event it is entitled to have allowed as a deduction a percentage allowance of 27 1/2 percent on the $ 300,000 which petitioner so received.

On this point respondent contends that in order for a cash payment to qualify as an advance bonus or royalty within the import of , it must be attended by a reserved royalty giving or reserving to the taxpayer an economic interest in the oil and gas in place; that in the absence of a retained royalty interest against which the cash payments may be treated as an advance, such cash payment must be regarded as consideration for the assignment of oil and gas in place which passed in the transfer. .

We think respondent must be sustained in this contention. Treating the transaction as a sale, as we do, then petitioner reserved nothing in the contracts except the right to exercise certain options. Of course, if we had sustained petitioner's primary contention, that the transaction was a loan by Humble to petitioner of $ 300,000 to be paid in all events and that petitioner's mineral rights, including reserved oil royalties, were only mortgaged to Humble to secure the payment of its debt to Humble, then in each year when these royalties were collected by Humble and applied to the payment of the debt they would be petitioner's property and petitioner would be taxable on the gross amount of the royalties so applied and would be entitled to 27 1/2 percent percentage depletion thereon and would be entitled to deduct 4 percent interest on the notes. But, since we do not sustain petitioner in its main contention, its other claims based thereon fall with it.

What we have held is that petitioner sold its mineral rights in the land, including reserved royalties, and in such a case percentage depletion is not allowable on the amount of cash consideration received. We definitely decided that question in . In the Kleberg case we held that the transfer there involved was a sale of the taxpayers' right to receive certain payments for twenty years from the lessee and that the taxpayers were taxable in 1933 on the amount of the consideration which they received in that year. We further held that, since the taxpayers sold their right to receive any of the twenty-year lease payments and parted with the title thereto, they were not entitled to percentage depletion on the cash received in 1933. We further held that, such transaction being a sale, the taxpayers were entitled to receive tax-free their entire cost basis of the property which was sold.

Undoubtedly the latter would be true in the instant case, but it seems to be conceded that petitioner had no unrecovered cost basis of the mineral rights and royalties transferred to Humble in this transaction.

In denying the taxpayer depletion on the sale payments received in the Kleberg case, we said:

Petitioners next contend that they are entitled to a percentage depletion allowance upon the $ 74,670.75 which they received from the King estate during 1933 as a result of the transactions just above discussed. They contend that the payment to them of $ 74,670.75 in 1933 represents a cash advanced royalty payment and as such is depletable. It seems to us that this contention can not be sustained for the reason that petitioners did not retain their right to receive three thirty-seconds of the annual rental of $ 127,824.60 * * *. * * * they sold that right to the King estate * * *. [Citing cases, among them ]

On the strength of these authorities we do not sustain petitioner's contention that it is entitled to 27 1/2 percent percentage depletion on the $ 300,000 in question.

Decision will be entered under Rule 50.