Opinion
Docket Nos. 45294 45295.
1955-09-30
ARTHUR S. BARKER AND ALBERTA C. BARKER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ALBERTA C. BARKER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
William E. Murray, Esq., and Alvin Rush, Esq., for the petitioners. S. Jarvin Levison, Esq., for the respondent.
Amounts received by petitioner pursuant to a 15-year agreement transferring rights to sand and gravel and fixing the payments by reference to price per unit, subject to advance and minimum payments, held taxable as ordinary income subject to an allowance for depletion. William E. Murray, Esq., and Alvin Rush, Esq., for the petitioners. S. Jarvin Levison, Esq., for the respondent.
These proceedings, consolidated for hearing and consideration, involve deficiencies of $2,497.10 and $3,158.77 in income taxes of Alberta C. Barker determined by respondent for the calendar years 1946 and 1947, respectively, and a deficiency of $2,009.84 in income tax of Arthur S. and Alberta C. Barker determined by respondent for the calendar year 1948. Petitioners claim overpayments of income taxes of $2,500 for 1946 and $3,000 for both 1947 and 1948. The questions presented are (1) whether an agreement executed by petitioner Alberta C. Barker in 1946 effected a sale of a capital asset, and (2), if so, (a) what is the correct basis of the property transferred, and (b) is she entitled to recover her basis in the property before reporting any of the proceeds as income, or (c) entitled to treat the sale as an installment sale under section 44, Internal Revenue Code of 1939.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found accordingly.
Petitioners Arthur S. and Alberta C. Barker are individuals residing in Locust Valley, New York. Alberta C. Barker, hereafter sometimes called petitioner, filed individual income tax returns for the second district of New York. Petitioner and Arthur S. Barker, hereafter sometimes called petitioner's husband, filed a joint income tax return for the calendar year 1948 with the collector of internal revenue for the second district of New York. Petitioner's husband is a party to this proceeding solely by reason of filing a joint return with petitioner for 1948.
On or about November 26, 1943, petitioner inherited a tract of land at Northport, Long Island, New York, from her uncle, Charles A. Chesebrough. This tract of land consisted of 4 separate parcels (referred to as parcels 4, 5, 8, and 9) totaling approximately 33 acres. Parcels 4 and 5 were contiguous to each other as were parcels 8 and 9; however, parcels 4 and 5, which were reached by a private road, were not contiguous to parcels 8 and 9, which bordered on a public road. Parcel 4 was residential property and had shrubbery and several buildings; the other 3 parcels were undeveloped. The improvements on parcel 4 in December 1946 consisted of a dwelling house, a combination garage, stable, and living quarters, a caretaker's cottage, and a chicken house.
Steers Sand and Gravel Corporation, hereafter called Steers, owned approximately 150 acres adjacent to petitioner's property on the south and west. Since 1923 Steers has been extracting and processing sand and gravel from its property. Because the property is located in an area which is zoned for residential purposes, this operation constituted a nonconforming use in the village of Northport. To the north of petitioner's property, although not adjacent, there were other sand and gravel operations. In December 1946 petitioner's property was accessible by means of a temporary road constructed by Steers. The private driveway which had existed in the past had been cut off by Steers' gravel operation. Part of petitioner's property in parcel 4 adjoining Steers' operation had started to cave in as a result of Steers' excavating close to the line separating its property from that belonging to petitioner. Due to the steep grade decline and the dust and noise caused by Steers' operations, petitioner's property was undesirable for residential purposes.
Petitioner, through her husband, began negotiations in 1945 with Steers in regard to petitioner's property. He attempted to sell to Steers all of her right, title, and interest in the property and made several offers to sell the property for approximately $200,000. Steers refused to purchase the property because it felt that the price might be more than it wanted to pay, and, more important, that if it purchased the property the village of Northport might accuse Steers of extending its industrial operation and stop its nonconforming use. Steers had estimated that petitioner's property contained approximately 145,000 cubic yards of sand and gravel per acre.
In June of 1945 petitioner's husband sought the advice of an attorney named Ives in regard to negotiations that petitioner's husband had had with Steers. Petitioners had reached a tentative agreement with Steers with respect to the sand and gravel on the property. They instructed Ives to insert in the agreement normal protective provisions including those protecting petitioner against any recapture by Steers of the fixed payments. Ives then conducted lengthy negotiations with Steers' attorneys and they completed an agreement which was executed on December 31, 1946, by petitioner and Steers.
Under the agreement Steers was given the exclusive right to enter the 4 parcels and to dig and remove therefrom during the existence of the agreement all or any part of the sand and gravel on the 4 parcels including that found on the private road. It was agreed that Steers was not under obligation to remove any sand and gravel. Steers was given a right-of-way in, over, and across the subject land for the purpose of moving, transporting and conveying sand and gravel and other material on, over and across the lands. It was agreed that Steers use such methods of taking out and removing all material as it might in its discretion decide, and it was given a right of access either from the property of Steers or from the other lands of petitioner, or from any adjacent or adjoining property, for its men and machinery for the purpose of digging and removing sand and gravel. Both parties were interested in having the sand and gravel found on the private road removed, and agreed to make every effort to accomplish that end. The term of the agreement was 15 years with the right to an additional 10-year extension of the option of Steers. Steers could terminate the agreement after the removal of all material of commercial quality and availability, in the event that petitioner failed to meet obligations which could become a lien against the land, or in the event that it was prevented from extracting materials by reason of zoning ordinance or other governmental authority; petitioner could terminate the agreement if Steers failed to leave safe slopes on the property, if it defaulted in money payments, or after it had removed all material which it desired. Steers was to pay $10,000 in advance and 6 cents per cubic yard for the commercially useable material with payments to be made quarterly for material taken out during the preceding 3 months; however, minimum payments of $3,000 were to be paid on the quarterly dates whether or not material was being or had been removed. If in any quarterly period the price of materials removed exceeded $3,000, Steers had the right to pay the excess by applying the $1,000 advance payment until that sum had been exhausted; thereafter, any payments made in excess of the minimum $3,000 for all previous quarters could be so applied. If in ay quarter the materials removed were less than $3,000 worth, steers could cover such quarterly payment by taking credit for cash payments previously made in excess of the minimum $3,000 for all previous quarters. Petitioner had the right to lease for her own benefit the buildings on parcel 4 until such time as Steers gave notice that it would require the premises; in such event petitioner reserved the right to remove the buildings and shrubbery on parcel 4, such removal in no way to affect the payments to be made to her. If she failed to remove the buildings, Steers was authorized to demolish and remove them. Steers agreed, if requested by petitioner, to remove at its own expense a cottage located on parcel 4.
During the calendar year 1946, petitioner received $10,000 as an advance payment and during the calendar years 1947 and 1948, she received $12,000 in each year pursuant to the agreement. With each quarterly payment Steers wrote an accompanying letter explaining the payment, and beginning with the letter of October 15, 1947, Steers accompanied each quarterly payment with a statement of account, setting forth the payments to date, the amount of material removed, and payments made by Steers on behalf of petitioner for her share of the cost, pursuant to the contract, of the measurements made of the materials removed. In the letters of July 13, 1948, October 15, 1948, and January 14, 1949, Steers stated: ‘Also enclosed is statement showing the payments made for royalty and engineering services and yardage removed to date.’ During 1947 and 1948 Steers removed 46,234 cubic yards of sand and gravel from petitioner's property. The price of 46,234 yards of sand and gravel pursuant to the agreement at 6 cents per yard was $2,774.04. In the years subsequent to those in question, Steers has paid petitioner sums in excess of the stipulated minimum annual payments. A substantial payment was made to petitioner during 1950.
The agreement with Steers is the only agreement ever entered into by petitioner in respect of sand and gravel or real estate in the village of Northport, except the outright sale to Steers in May 1953 of an undivided interest in 7.743 acres contiguous to Parcel 9 covered by the agreement, and petitioner has never otherwise in any manner dealt in sand and gravel or real estate. Petitioner's husband is not a party to the agreement and has never in any manner dealt in sand or gravel or real estate.
The adjusted basis on December 31, 1946, of each parcel for Federal income tax purposes was as follows:
+----------------------------------------------------------------------+ ¦ ¦Item No. on¦ ¦ ¦ ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦Federal ¦ ¦Original¦Adjusted¦ +-------------+-----------+--------------------------+--------+--------¦ ¦Parcel Nos. ¦estate tax ¦Description ¦basis ¦basis ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦agreement ¦return of ¦ ¦Nov. 26,¦Dec. 31,¦ +-------------+-----------+--------------------------+--------+--------¦ ¦Dec. 31, 1946¦Augustus ¦ ¦1943 ¦1946 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦Chesebrough¦ ¦ ¦ ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦4 ¦48 ¦Residence and outbuildings¦$20,500 ¦$16,425 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦ ¦Cottage ¦ ¦1,000 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦ ¦11.920 acres of land ¦15,496 ¦15,496 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦5 ¦49 ¦6.615 acres of land ¦5,300 ¦5,300 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦8 ¦50 ¦4.613 acres of land ¦1,153 ¦1,153 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦9 ¦51 ¦10.026 acres of land ¦4,500 ¦4,500 ¦ +-------------+-----------+--------------------------+--------+--------¦ ¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------------------------+--------¦ ¦Total adjusted basis ¦$43,874 ¦ +----------------------------------------------------------------------+
Petitioner held all of the sand and gravel as a part of the tract of inherited land for a period of more than 6 months prior to December 31, 1946. Petitioners have never controlled the operations or activities of Steers in relation to the sand and gravel, and have never held or claimed any interest in the business or profits of Steers.
Petitioner reported, on her 1946 Federal income tax return, income of $2,225 from two frame houses in Northport. She reported depreciation of $1,025 on the main dwelling on parcel 4. She claimed depreciation in 1947 and 1948 in the same manner as in 1946. Steers demolished the main dwelling house in 1953. The garage was demolished in 1952. The small cottage was sold and moved off the premises by the purchaser. Petitioners reported in their income tax return for 1949 that the cottage on parcel 4 was sold on June 1, 1949, for $1,000. At the time the agreement was executed, it was gravel it would be necessary to demolish or move the main dwelling, garage and barn on parcel 4 and to remove the tenant house to another location designated by petitioner.
On her 1946, 1947, and 1948 returns petitioner reported the total payments from Steers as long-term capital gains from the sale of sand and gravel. No cost basis of the property was shown; instead there was the explanation that ‘The land from which the sand and gravel is taken is estimated to have a fair market value for building purposes after the removal of the sand and gravel equal at least to its value prior to such removal. Therefore, cost basis is ‘None,“
OPINION.
OPPER, Judge:
Except for the descriptive terms in the documents this case seems to us indistinguishable from Otis A. Kittle, 21 T.C. 79, and William Louis Albritton, 24 T.C. 903. Although the ‘agreement’ here is cast in the form of a sale whereas in the Kittle and Albritton cases the terms used ar ‘lease’ and ‘royalties,‘ such references as those to the power to enter and remove are common to both transactions.
And in substance, the rights and obligations generally of the parties are not different in the three cases. ‘It is well established * * * that the name used by the parties in describing a contract and payments thereunder, do not necessarily determine the tax consequences of their acts.’ Hamme v. Commissioner, (C.A. 4) 209 F.2d 29, certiorari denied 347 U.S. 954. See also Bankers' Pocahontas Coal Co. v. Burnet, 287 U.S. 308; Palmer v. Bender, 287 U.S. 551. On the authority of Otis A. Kittle, and William Louis Albritton, both supra, accordingly, and without being required to consider the other issues, we conclude that the receipts in controversy were ordinary income.
‘the payments made by the lessee are consideration for the right which he acquires to enter upon and use the land for the purpose of exploiting it, as well as for the ownership of the oil and gas; under both the bonus payments are paid and retained, regardless of whether oil or gas is found, and despite the fact that all which is not abstracted will remain the property of the lessor upon termination of the lease.‘Bonus and royalties are both consideration for the lease, and are income of the lessor. We cannot say that such payments by the lessee to the lessor, to be retained by him regardless of the production of any oil or gas, are any more to be taxed as capital gains than royalties which are measured by the actual production. * * *‘ Burnet v. Hamel, 287 U.S. 103.
Respondent apparently concedes that in that circumstance petitioner is entitled to a depletion allowance. It was stated at the hearing that this could be disposed of in the recomputation. For that purpose.
Decisions will be entered under Rule 50.
Reviewed by the Court.