19 T.C. 114">*115 The respondent has determined a deficiency in income tax for the year 1948 in the amount of $ 4,248.16. By amended answer the respondent seeks an increased deficiency based upon the erroneous allowance of a deduction in the amount of $ 510.

The issues presented are (1) whether the amount received by the petitioners pursuant to a so called "Lease and Agreement," dated March 1, 1948, is to be taxed as ordinary income or as a long term capital gain, and (2) whether the respondent erred in allowing an offset in the amount of $ 510 as damages to the property covered by such agreement.

FINDINGS OF FACT.

Petitioners are husband and wife, residing at Clarksburg, West Virginia. Their joint return for the period involved was filed with the collector of internal revenue for the district of West Virginia.

On April 5, 1932, the petitioners purchased for a consideration of $ 2,000 a tract of 80 acres1952 U.S. Tax Ct. LEXIS 59">*61 situate in the coal district of Harrison County, West Virginia. The tract was acquired for investment purposes and since 1932 has been continuously leased to farmer tenants. The deed to the petitioners expressly reserves and excepts all coal and mining rights theretofore sold and conveyed and is made subject to all valid leases for oil and gas executed by former owners of the premises conveyed.

Under date of March 1, 1948, the petitioners and the Wilson & Ingram Construction Company, a West Virginia corporation, hereinafter referred to as "Construction Company," entered into an agreement reading as follows:

THIS LEASE AND AGREEMENT, Made and entered into in duplicate this the 1st day of March, 1948, by and between Ebb B. Nay and Lottie F. Nay, his wife, parties of the first part, hereinafter called "Lessors," and Wilson & Ingram Construction Company, a corporation, party of the second part, hereinafter called "Lessee."

WITNESSETH: That in consideration of the sum of Twenty Five Thousand ($ 25,000.00) Dollars cash in hand paid by the Lessee to the Lessors, the receipt of which is hereby acknowledged, the Lessors do hereby grant and convey unto the Lessee for the term of three (3) 1952 U.S. Tax Ct. LEXIS 59">*62 years beginning with the date hereof, the exclusive right and privilege to enter in and upon and to use the overlying ground and surface lying upon and above the Pittsburgh or nine (9') foot vein of coal as may be necessary or convenient for mining, removing, excavating, stripping and marketing said coal which can, in the opinion and judgment of the Lessee, be practically and economically mined and removed by strip mining methods within and underlying a certain tract of land containing eighty (80) acres, more or less, situate on the waters of Crooked Run, in Coal District, Harrison County, West Virginia, and being the same real estate that was conveyed unto the Lessors by Levi D. Williams and Lula Williams, his wife, by deed dated April 5, 1932, and of record in the office of the Clerk of the County Court of Harrison County, West Virginia, in Deed Book No. 434, page 18.

19 T.C. 114">*116 It is understood and agreed by and between the parties hereto that the Lessors do not own the coal underlying said land and that the Lessee shall secure said coal by lease or purchase from the proper owners thereof before beginning strip mining operations on said property. The Lessors covenant that they 1952 U.S. Tax Ct. LEXIS 59">*63 are the owners of the surface of said land; that the same is free from all encumbrances and that they have the right and power to make and execute this lease.

The parties hereto do hereby mutually agree as follows:

1. That the Lessee shall secure from the Chief of the Department of Mines of the State of West Virginia the permit required in connection with strip mining operations and shall give bond to the State of West Virginia as required by law in connection with said operations. Upon completion of said operations the Lessee shall backfill and restore said premises as required by the strip mining law of the State of West Virginia to the satisfaction of the West Virginia Department of Mines and shall sow grass seed on the stripped area in accordance with said law and under the supervision of the said Department of Mines and of the Agricultural Extension Division of the West Virginia University.

2. That the Lessee shall have the right to enter in and upon said lands and to strip mine and remove all the Pittsburgh coal underlying the same that can, in the opinion and judgment of the Lessee, be practically, economically and profitably strip mined and removed, together with the right1952 U.S. Tax Ct. LEXIS 59">*64 to deposit the spoil or overburden from said operations below the outcrop line of said coal and to build two roads, at the locations hereinafter specified, leading from said coal to the public road, one of which roads shall be built at the lower end of the meadow and one at or near the dwelling house on said property. If necessary for the purpose of allowing free flow of water, the Lessee shall tile said roadway in such manner that water from natural drainage on said land shall flow under said roads and said tile shall be placed at such points as may be necessary for such purposes. Upon the completion of the strip mining operations the Lessee shall grade three (3) ramps or passageways leading from the stripped area to the land above the highwall to permit passage of livestock to and from said area. The Lessee shall strip the lower end of said farm from the barn down Crooked Run to the property line before stripping the other portion of said farm. The Lessee shall so conduct its operations as not to damage buildings on said land and shall protect said buildings from damage by using adequate precaution for said purpose. The Lessee shall have the right to use such of the surface1952 U.S. Tax Ct. LEXIS 59">*65 of said lands lying both in the stripped area and the land above and below the stripped area as may be necessary or convenient in conducting said operations and in protecting the same and in regrading and backfilling said premises, as above provided, after strip mining operations are completed and shall have free ingress and egress by the roads above mentioned for all said purposes and for general purposes of ingress and egress, transportation of equipment and supplies and transportation of coal by the roads hereinabove provided to such extent as is necessary or convenient. The Lessee shall also have the right during the term of this lease to haul and transport over and across said lands by roads above mentioned strip coal from adjacent, coterminous and neighboring lands and to drain the water from said lands and the coal thereunder in, over and across the lands herein described into nearby streams or drains, all without liability for any injury or damage done thereby to said lands or to anything therein or thereon, but subject to the limitations hereinabove set forth.

3. Subject to the Lessee securing similar permission from the owners of the coal underlying said lands and from 1952 U.S. Tax Ct. LEXIS 59">*66 the owners of the land and coal adjoining the same, the Lessee shall have the right to strip mine said coal to the actual boundary lines of said property.

19 T.C. 114">*117 4. As a part of the consideration for the strip mining rights and privileges and other rights and privileges hereby granted the Lessee covenants and agrees that it will make or cause to be made to the Lessors a deed conveying to them the surface of 25 acres of land immediately adjacent to the 80 acres tract above described and located on the south side thereof, if said 25 acres of land can be acquired by the Lessee. If, however, said land cannot be so acquired and if the Lessee is unable to secure and convey said 25 acres of land to the Lessors, the Lessee shall pay the Lessors the additional cash sum of Five Hundred ($ 500.00) Dollars in lieu of said conveyance and said payment shall be made within 2 months from the date hereof. If said tract of 25 acres is so acquired and conveyed to the Lessors, it shall be surveyed and staked off by a competent engineer in a compact body adjoining said tract of 80 acres on the south thereof.

5. A house and barn on said property are located below and near to said coal. No dirt or 1952 U.S. Tax Ct. LEXIS 59">*67 other spoil shall be piled or cast within twenty-five (25') feet of said house and barn. If necessary, in order to protect said house and barn, spoil and dirt shall be hauled a short distance on either side thereof.

6. On the completion of its strip mining operations on said property, the Lessee shall replace any line fences removed or damaged in connection with said operations and shall also restore the fence along the public highway at the entrances of the two haulroads above mentioned.

7. If the Lessee completes its operations and backfills said property before the expiration of three (3) years term of this lease, this lease shall expire when said operations are completed and said backfilling is done whether or not the full term of this lease shall have expired, and the Lessee in that event shall surrender this lease.

Pursuant to such agreement the petitioners received in March 1948 the cash consideration of $ 25,000, and in May 1948 received a deed to the 25 acres adjoining petitioners' property. The latter deed excepted and reserved, inter alia, all coal, oil, gas and other mineral rights. The fair market value of the 25-acre tract was $ 6 per acre, or $ 150.

The cash consideration1952 U.S. Tax Ct. LEXIS 59">*68 of $ 25,000 provided by the so called lease and agreement was based on an estimated removal from the property of approximately 100,000 tons of coal at 25 cents per ton. The actual tonnage mined was 112,569.75 tons. No part of the consideration paid to the petitioners pursuant to such agreement represented payment for damages to the property.

About April 15, 1950, Construction Company completed its mining operations and regraded and reseeded the premises as provided by the agreement to the extent possible. However, as a result of the mining operations portions of the premises were rendered unfit for farming operations.

In their joint return for 1948 the petitioners reported the sum of $ 12,575 as a long term capital gain.

In determining his deficiency the respondent included the sum of $ 24,640 as ordinary income, which amount was computed by allowing the sum of $ 510 as an offset for damages against the total consideration of $ 25,150 received by the petitioners.

19 T.C. 114">*118 The total amount received by the petitioners pursuant to the so called lease and agreement of March 1, 1948, was ordinary income and not the proceeds from the sale of a capital asset.

OPINION.

The principal question1952 U.S. Tax Ct. LEXIS 59">*69 presented is whether the petitioners, by the agreement of March 1, 1948, effected the sale of a capital asset entitling them to the benefit of the capital gain and loss provisions of section 117 of the Internal Revenue Code.

The petitioners contend that the lease and agreement of March 1, 1948, was in legal effect the granting of an easement, an interest in real property, and a capital asset. The respondent contends that the instrument in question was a lease of the surface lands and not an absolute transfer of title to real property.

We think the instrument in question is not free from ambiguity. While the term "lease" is employed in its various provisions, and the parties thereto are denominated "lessors" and "lessee," the operative clause is "grant and convey," terms ordinarily employed in deeds. The use of certain terms is not controlling. The cardinal rule of construction of an ambiguous instrument is to ascertain the intention of the parties. The intention is to be gathered from the language of the instrument, the situation of the parties, and the purposes to be accomplished.

The petitioners were owners of the surface lands of the property involved and had no right to the1952 U.S. Tax Ct. LEXIS 59">*70 minerals beneath the surface. The agreement was not to become effective until Construction Company acquired the right from the owners of the coal deposits to remove the same. The owners of the coal deposits had an easement in the surface lands in question to remove the coal by shaft mining, but not by the so called stripping method. Construction Company was not interested in acquiring the fee to the surface lands, but desired merely the right and privilege to remove the coal by the stripping method. Obviously, the purpose of the agreement in question was to meet such a situation.

The instrument provides, in part, that the lessors "do hereby grant and convey * * * the exclusive right and privilege to enter in and upon and to use the overlying ground and surface * * * as may be necessary or convenient for mining, removing, excavating, stripping and marketing said coal."

The words "grant and convey" are not incompatible with the conveyance of a lesser interest than a fee. Winona & St. Peter Land Co. v. Minnesota, 159 U.S. 526">159 U.S. 526, 159 U.S. 526">531.

19 T.C. 114">*119 The instrument contains no habendum clause, thus indicating the existence of a personal privilege in the1952 U.S. Tax Ct. LEXIS 59">*71 nature of an easement. The petitioners contend that the instrument merely grants a right of way. They make no contention that title to the surface land was conveyed. A conveyance of a right of way conveys no interest in the soil, but is merely an easement, an incorporeal hereditament, with the fee remaining in the grantor. Uhl v. Ohio River R. Co., 51 W. Va. 106">51 W. Va. 106, 41 S.E. 340, 342.

If, as petitioners argue, the instrument is to be construed as granting an easement, since the right or privilege transferred is limited to the time required to remove the coal and, in any event, not to exceed three years, it was a very limited easement. In the cases of H. L. Scales, 10 B. T. A. 1024, and Inaja Land Co., 9 T.C. 727, on which the petitioners rely, the easements involved were perpetual and transferred the fee. They are clearly distinguishable from the instant case.

We think it is unnecessary for us to determine whether the instrument here involved is a lease, an irrevocable license in the nature of an easement, or a limited easement, as all such interests are incorporeal 1952 U.S. Tax Ct. LEXIS 59">*72 rights or privileges and do not constitute transfers of absolute title. A grant of a limited easement, such as here involved, does not constitute a sale of real property. The term "sale" generally imports the transfer of all the right, title, and interest in the property transferred.

The instrument in question, when read in its entirety and viewed in the light of the facts and circumstances surrounding its execution, in our opinion, did not effect the sale of a capital asset within the purview of section 117 of the Internal Revenue Code. We, therefore, hold that the entire consideration received by the petitioner under such agreement constituted ordinary income under section 22 (a) of the Code.

The remaining issue presents the question whether the respondent erred in allowing the amount of $ 510 against the total consideration received by the petitioners under such agreement as damages to petitioners' property. By amended answer the respondent alleges error in making such allowance and seeks an increased deficiency based on the amount of $ 510.

Since we have determined that the instrument in question effected no sale of a capital asset, the deduction allowed for shrinkage in the1952 U.S. Tax Ct. LEXIS 59">*73 fair market value of the premises was improper. Mrs. J. C. Pugh, Sr., Executrix, 17 B. T. A. 429, affd. 49 F.2d 76, certiorari denied 284 U.S. 642">284 U.S. 642. The increased deficiency is allowed.

Decision will be entered under Rule 50.