23 T.C. 516">*516 The Commissioner has determined a deficiency in petitioners' income tax for the year 1949 of $ 30,457.06. The deficiency is due to two adjustments made by the Commissioner to the net income reported by petitioners on their joint return, as follows:

1954 U.S. Tax Ct. LEXIS 15">*17 Adjustment (a) is explained by the Commissioner in his deficiency notice, as follows:

(a) It is held that the consideration received by you for the assignment of the oil payment made by you to A. E. Hinman is ordinary income subject to the depletion allowance. The total of $ 120,000.00 received by you therefore has been included in ordinary income and 27 1/2% thereof, or $ 33,000.00, has been allowed as depletion, and the amount $ 60,000.00 reported by you as capital gain upon the transaction has been eliminated from your taxable income.

Petitioners assign error as to the correctness of the foregoing adjustment and contend that the gain received from the transfer of the oil payment in question is properly taxable as long-term capital gain. Petitioners also assign error, as follows:

23 T.C. 516">*517 (e) The Commissioner erred in failing to hold that only part of the consideration for the sale of said oil payment was received by, and therefore was taxable to, the Petitioner John David Hawn in the year 1949; which error resulted further in the failure of the Commissioner to allow the Petitioners a refund for the year 1949.

FINDINGS OF FACT.

The facts were stipulated except the income tax1954 U.S. Tax Ct. LEXIS 15">*18 return of petitioners which was placed in evidence. The facts as stipulated are so found.

John David Hawn and Bette Hawn are husband and wife, residing at Corpus Christi, Texas. Their joint income tax return for the calendar year 1949 was filed with the collector of internal revenue at Austin, Texas. For the year 1949 petitioners used the calendar year reporting period and the cash receipts and disbursements method of accounting for Federal income tax purposes.

On October 1, 1949, John David Hawn, hereinafter referred to as petitioner, had owned for a period of more than 6 months an oil payment in the original amount of $ 1,000,000 in certain oil properties located in Refugio County, Texas. His basis at that time in the oil payment was zero.

On October 1, 1949, petitioner entered into the following agreement with A. E. Hinman, a general contractor:

Mr. A. E. Hinman

Wilson Building

Corpus Christi, Texas

Dear Sir:

In consideration of my assignment to you of an oil payment in the amount of $ 120,000.00 out of an oil payment in the amount of $ 1,000,000.00 which was given to me by my grandmother, Mrs. Christie Hewit, which assignment to me is of record in Volume 68, page 107-1111954 U.S. Tax Ct. LEXIS 15">*19 of the Deed Records of Bee County, Texas, ¹ you agree to erect for me a one (1) story, ranch type, combination masonry and frame residence to be located in Hewit Estates in Corpus Christi, Texas, pursuant to a contract executed between yourself and me on the 1st day of October, 1949.

As a part of this agreement you agree to furnish me all bills for materials, labor, furnishings, etc., in connection with the above mentioned residence to the extent of $ 115,000.00.

It is understood and agreed that you are financing the furnishing of the above mentioned items with one of the local banks. You are to reimburse yourself for any interest paid out of the difference between the $ 120,000.00 oil payment and the amount you are paying for the oil payment, namely, $ 115,000.00 and any excess of any amount above the $ 115,000.00 with interest at 5% will be returned to me out of the oil payment.

Should, however, the amount of $ 115,000.00 plus interest at 5% exceed $ 120,000.00 I will personally be liable to you for such amount.

23 T.C. 516">*518 If the above is in accordance with our agreement will you please execute and return to me the original of this letter.

Yours very truly,

/s/ John D. Hawn

Accepted: 1954 U.S. Tax Ct. LEXIS 15">*20 October 1, 1949

/s/ A. E. Hinman

Pursuant to this agreement and on the same date, petitioner executed the following instrument which was notarized and thereafter recorded in the deed records of Refugio County, Texas:

The State of Texas

Whereas, on the 14th day of May, 1948 Christie Hewit, Individually and as Independent Executrix of the Estate of W. E. Hewit, deceased, assigned and delivered to John David Hawn an oil payment in the sum of One Million ($ 1,000,000.00) Dollars payable out of five percent of one-half of seven eighths (5% of 1/2 of 7/8) of all oil in and under and which may be produced from the following described property:

[Description of property here omitted.]

said assignment being recorded in Volume 68, pages 107-111 of the Deed Records of Refugio County, Texas, to which reference is made for all purposes.

Now, 1954 U.S. Tax Ct. LEXIS 15">*21 therefore, in consideration of the sum of Ten ($ 10.00) Dollars and other good and valuable consideration, the receipt of which is hereby acknowledged, to me in hand paid by A. E. Hinman, of Nueces County, Texas, I, John David Hawn, to [sic] hereby grant, sell, transfer, assign and convey unto the said A. E. Hinman all of my right, title and interest in and to said oil payment above described until the said A. E. Hinman shall have received from the proceeds of the sale of said interest in said oil the sum of One Hundred Twenty Thousand ($ 120,000.00) Dollars, whereupon the interest herein conveyed to said A. E. Hinman shall terminate and revert to and revest in said John David Hawn, his heirs, representatives and assigns without the necessity of the execution of any character of release or reconveyance.

To have and to hold the same unto the said A. E. Hinman, his heirs, successors and assigns, subject to the terms and provisions of the assignment from said Christie Hewit, I do hereby bind myself, my heirs, executors and administrators to warrant and forever defend, all and singular, said interest herein conveyed to said A. E. Hinman, his heirs, successors and assigns against every1954 U.S. Tax Ct. LEXIS 15">*22 person whosoever lawfully claiming or to claim the same or any part thereof.

This conveyance shall become effective at 12:01 a. m. on the 1st day of October, 1949.

In witness whereof, this instrument is executed this the 1st day of October, 1949.

/s/ John David Hawn

The house referred to in the agreement between petitioner and Hinman was constructed on a city lot owned by petitioner in the city of Corpus Christi, Texas. Petitioner did not receive any note or other security for the contractual obligation of Hinman to construct the house.

As of the date of the above assignment to Hinman the balance remaining out of the original $ 1,000,000 production payment was 23 T.C. 516">*519 $ 854,993.25. This oil payment automatically reverted to petitioner on approximately May 1, 1951, in accordance with the terms of the assignment to Hinman. Hinman on or about that date had received an aggregate amount of $ 120,000 from said oil payment directly from the companies purchasing the production.

The lease, as to which this oil payment applied, was fully developed and producing oil at the time of the assignment to Hinman, and also at the time of the reversion to petitioner. The production from this lease1954 U.S. Tax Ct. LEXIS 15">*23 was fairly consistent at such times, the allowable production being regulated by the Railroad Commission of the State of Texas and the field price for the production at the time of the assignment of the production payment to Hinman was ascertainable. On the basis of the information available at the time of the assignment of the production payment to Hinman and assuming the production from the lease in question continued to produce at its then average rate and assuming that the field price of the production remained substantially the same, it could have been estimated that $ 120,000 would be received from said production payment within a period of approximately 2 years.

Construction of the house was begun on October 17, 1949, and the expenditures of Hinman in the construction of the house during the calendar year 1949 amounted to a total of $ 20,809.79.

From October 1, 1949, the date of the assignment of the said production payment to Hinman, through December 31, 1949, of the $ 120,000 Hinman received a total of only $ 12,782.53 from the production of the lease to which the said production payment was applicable.

Petitioners were not dealers or brokers in oil and gas properties during1954 U.S. Tax Ct. LEXIS 15">*24 the calendar year 1949.

In their joint income tax return for the year 1949, petitioners reported the assignment of the oil payment to Hinman on their schedule of capital gains, as follows:

The amount of $ 60,000 was included on the income schedule attached to their return as a "Net Long Term Capital Gain."

OPINION.

Petitioner states the issues in his brief, as follows:

The primary issue in this proceeding is whether, for Federal income tax purposes, the consideration received during the calendar year 1949 by Petitioner 23 T.C. 516">*520 John David Hawn in exchange for an oil payment constituted long-term capital gain proceeds, or whether such proceeds constituted ordinary income subject to depletion.

The second and subsidiary issue is the extent of the consideration received by and taxable to Petitioner John David Hawn during the calendar year 1949 in connection with the exchange of such oil payment.

With reference to the primary issue stated by petitioner as above, respondent contends that the consideration received by petitioner for the assignment of an in-oil payment1954 U.S. Tax Ct. LEXIS 15">*25 right carved out of a larger in-oil payment right, such consideration not being pledged for use in further development, is ordinary income subject to the depletion allowance, not capital gain as contended by petitioner.

There is no difference between the parties as to the oil payment owned by petitioner in the original amount of $ 1,000,000 being a capital asset under the provisions of section 117, Internal Revenue Code of 1939. Respondent's contention is not directed toward a holding that such oil payment right owned by petitioner was not a capital asset. His contention, rather, is that the transactions between petitioner and Hinman did not add up to a transfer of any part of such right to Hinman but that what was done amounted to a mere assignment of income and that the income when received by Hinman was taxable to petitioner, notwithstanding such assignment, under the doctrine of such cases as Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122; and Helvering v. Horst, 311 U.S. 112">311 U.S. 112.

Respondent, in support of his determination, strongly relies on G. C. M. 24849, 1946-1 C. B. 66.1954 U.S. Tax Ct. LEXIS 15">*26 The headnote of that G. C. M. reads as follows:

Consideration received for the assignment of a short-lived in-oil payment right carved out of any type of depletable interest in oil and gas in place is ordinary income subject to the depletion allowance where such consideration is not pledged for use in further development.

In the course of this G. C. M. it is said as follows:

In-oil payment rights, royalty rights, and operating rights are analogous in that they are essentially rights to production income characterized as ordinary income when realized. All are regarded as depletable economic interests in oil and gas in place entitling the owner to tax-free return of his investment through the depletion allowance. In-oil payment rights are distinguishable from royalty interests and operating rights in that the latter interests, by definition, extend to the entire oil and gas resource content of the land and, as such, represent forms of fractional property rights into which the property interests in oil and gas in place are commonly divided, whereas an in-oil payment right is a right to income for a limited time or amount. This difference is emphasized by the fact that an in-oil 1954 U.S. Tax Ct. LEXIS 15">*27 payment right may be carved out of either of the specified property interests in oil and gas in place, but the reverse is not true. Thus, sales of royalty rights or operating rights are sales of property rights, whereas assignments of in-oil payment rights carved out of such property rights, are, with 23 T.C. 516">*521 respect to the assignor, essentially mere assignments of expected income from such property rights for a fixed or determinable period of time.

Later on, the foregoing G. C. M. was clarified by I. T. 4003, 1950-1 C. B. 10, in the following manner:

After careful study and considerable experience with the application of G. C. M. 24849, supra, it is now concluded that there is no legal or practical basis for distinguishing between short-lived and long-lived in-oil payment rights. It is, therefore, the present position of the Bureau that the assignment of any in-oil payment right (not pledged for development), which extends over a period less than the life of the depletable property interest from which it is carved, is essentially the assignment of expected income from such property interest. Therefore, 1954 U.S. Tax Ct. LEXIS 15">*28 the assignment for a consideration of any such in-oil payment right results in the receipt of ordinary income by the assignor which is taxable to him when received or accrued, depending upon the method of accounting employed by him. Where the assignment of the in-oil payment right is donative, the transaction is considered as an assignment of future income which is taxable to the donor at such time as the income from the assigned payment right arises.

It will be noted that in the foregoing I. T. it is said: "Where the assignment of the in-oil payment right is donative, the transaction is considered as an assignment of future income which is taxable to the donor at such time as the income from the assigned payment right arises."

Recently our Court had before it the case of Lester A. Nordan, 22 T.C. 1132, which involved a donative transfer of an oil payment right. In that proceeding the facts may be briefly stated as follows: The taxpayers had executed a deed of gift to a church of an oil payment having a face value of $ 115,000 but which had a fair market value on the date of gift of $ 111,925.95. The taxpayers claimed a deduction of that amount1954 U.S. Tax Ct. LEXIS 15">*29 on their 1949 return as a charitable contribution on the ground that they had made a completed gift of the oil payment. The Commissioner in determining the deficiency disallowed the deduction. He explained that the deduction "was based upon the donative in-oil assignment of $ 115,000" to the church which received no payments during 1949 and "you donated only a right to share in future income." The Commissioner added $ 109,825 to the taxpayers' income in the following year, 1950, and allowed a like amount as a charitable deduction and $ 30,201.87 as depletion on that income. Under these facts, we held that the taxpayers' contribution was deductible under section 23 (c) of the 1939 Code in the year of transfer, 1949, even though payments from production were not available until the next year. In other words, we held in the Nordan case, supra, that the taxpayers had made more than a mere assignment of income to the church; they had, in the taxable year 1949, made a transfer of the property itself which produced the income in the following year and they were entitled to the deduction of the fair market value 23 T.C. 516">*522 of their gift in the year when the transfer of the oil 1954 U.S. Tax Ct. LEXIS 15">*30 payment was made. They were not the owners of the oil payment in the following year, 1950, when the new owner made collection of it.

In T. W. Lee, 42 B. T. A. 1217, affd. 126 F.2d 825, cited by us in the Nordan case, supra, after quoting the Supreme Court's decision in Anderson v. Helvering, 310 U.S. 404">310 U.S. 404, we stated the principle involved as follows:

It seems clear * * * that the Supreme Court regards any oil payment right (a right to a specified sum of money payable only out of a specified percentage of oil or the proceeds received from the sale of such oil, if, and when produced) as an economic interest in oil in place, the holder thereof being the owner of the share of gross income from production represented by the payments to him and being entitled to the attending depletion allowance.

While our decision in the recent Nordan case, supra, involved an oil payment which had been transferred as a gift and the instant case involves one which had been transferred for a valuable consideration, we do not see any distinction in principle between the consequences of the two transfers1954 U.S. Tax Ct. LEXIS 15">*31 insofar as the issue, whether the transfer was of property itself as the taxpayers contend or a mere assignment of income as the Commissioner contends, is concerned. In the Nordan case the deed provided that as soon as the $ 115,000 had been received by the church from the production under the leases the conveyance would expire and title to the remaining oil, gas, and minerals under the land would revert to the grantors. In the instant case the conveyance of the oil payment from petitioner to Hinman provided:

I, John David Hawn, to [sic] hereby grant, sell, transfer, assign and convey unto the said A. E. Hinman all of my right, title and interest in and to said oil payment above described until the said A. E. Hinman shall have received from the proceeds of the sale of said interest in said oil the sum of One Hundred Twenty Thousand ($ 120,000.00) Dollars, whereupon the interest herein conveyed to said A. E. Hinman shall terminate and revert to and revest in said John David Hawn, * * * without the necessity of the execution of any character of release or reconveyance.

What happened in the instant case, as we view it, is briefly this: For a valuable consideration, namely, 1954 U.S. Tax Ct. LEXIS 15">*32 Hinman's contract to build him a residence, petitioner transferred to Hinman an oil payment. Thereafter, Hinman was the owner of the oil payment until he had collected $ 120,000, when it was to revert to petitioner. In 1949, the taxable year which we have before us, Hinman collected $ 12,782.53 from the oil payment. That amount was gross income to him from oil production and he was entitled to depletion. It was not income to petitioner. T. W. Lee, supra.In the same year Hinman paid to petitioner from whom he had acquired the oil payment, $ 20,809.79. This was part payment to petitioner for the capital asset which 23 T.C. 516">*523 Hinman had purchased from petitioner and the gain realized therefrom is taxable as capital gain. Sec. 117, Internal Revenue Code of 1939.

We hold for petitioner on the first issue.

With respect to the second issue respondent concedes error. In his brief respondent says:

Respondent here concedes that petitioners realized and received during 1949 only $ 20,809.79, of the consideration due them for the assignment of the oil payment. No greater amount should be included in their income for said year.

Effect to this concession1954 U.S. Tax Ct. LEXIS 15">*33 will be given in a computation under Rule 50. Petitioners are not entitled to any depletion deduction from this $ 20,809.79. See Alice G. K. Kleberg, 43 B. T. A. 277. It is our understanding that petitioners do not claim any deduction for depletion in case we decide the primary issue in their favor. Having decided that issue in their favor, it is clear they are not entitled to any deduction for depletion. They were not the owners of the oil payment which Hinman received.

Decision will be entered under Rule 50.

Arundell, J., dissenting: There is no dispute that the oil payments constituted ordinary income and if they had been collected by the taxpayer they would have been taxable to him. But, petitioner assigned his right to collect these oil payments to the extent of $ 120,000 to a builder in consideration of the latter's erecting a house for petitioner. In the terms of the assignment the oil payments were transferred to the builder until the latter "shall have received from the proceeds of the sale of said interest in said oil the sum of One Hundred Twenty Thousand ($ 120,000.00) Dollars, whereupon the interest herein conveyed1954 U.S. Tax Ct. LEXIS 15">*34 to said A. E. Hinman [builder] shall terminate and revert to and revest in said John David Hawn [petitioner], his heirs, representatives and assigns without the necessity of the execution of any character of release or reconveyance." Approximately 2 years were estimated to pay out the builder for erecting petitioner's house.

It can no longer be successfully argued that one vested with the right to receive income can "escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, since, by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is laid." Harrison v. Schaffner, 312 U.S. 579">312 U.S. 579. See Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Horst, 311 U.S. 112">311 U.S. 112; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122.

23 T.C. 516">*524 The majority seem to think there is a different treatment called for when income from an oil well is assigned and that the assignment of such income constitutes an assignment of a property interest in the corpus from which flows the income1954 U.S. Tax Ct. LEXIS 15">*35 assigned even though the amount assigned is limited and is temporary in nature. It is true the Supreme Court has held where the entire interest in the income of a trust was disposed of that the transaction may be regarded as a transfer of the corpus from which flowed the income. Blair v. Commissioner, 300 U.S. 5">300 U.S. 5. But, this has not been the Court's holding where there has been a temporary disposition of the income from property even though the transfer takes the form of a temporary disposition of the property itself. 312 U.S. 579">Harrison v. Schaffner, supra.In all such cases the income has been taxed to the grantor.

In my opinion the oil payments constituted ordinary income to petitioner and should be taxed accordingly.