(2) BRADLEY shall, in the event the net returns as herein defined, from all metals, minerals, ores and values from the above described IMA property, and also upon all of the net returns from all metals, minerals, ores or values extracted by BRADLEY from the aforesaid adjoining MAZDA Group of mining claims * * * exceed the sum of $ 400,000.00 in any one year (April 1st of one year to Midnight March 31st of the next year), BRADLEY shall pay to IMA, in addition to said $ 25,000.00 annual installment, five per cent (5%) of the amount of such net returns in excess of said $ 400,000.00, which payment shall apply on the last annual installment then unpaid on the purchase price of the above described property; and any and all1959 U.S. Tax Ct. LEXIS 73">*81 payments made to IMA hereunder, whether as royalty payments or as annual payments, or otherwise, shall apply on the purchase price of the above described property.

(3) BRADLEY shall make the aforesaid royalty payments to IMA by depositing the same with the Escrow Holder named herein to IMA's account on or before the 20th day of April following the termination of any year wherein the net returns are in excess of $ 400,000.00, and, whether BRADLEY shall be required to make such royalty payment in any one year under the provisions hereof, BRADLEY shall send a statement to IMA on or before said date showing the amount of money received by BRADLEY from the sales of products from the properties described in Subdivision TWO (2) above, and a statement of marketing charges.

Petitioner required that royalty payments be made on production from Mazda as well as from its own properties because it did not want to have its tunnelways and equipment used by Bradley to mine out the Mazda group without having some protection insofar as its contract with Bradley was concerned.

Bradley agreed, among other things, to pay the real and personal property taxes assessed against the property and to perform 1959 U.S. Tax Ct. LEXIS 73">*82 the required annual assessment work on the unpatented mining claims. These obligations were subject to Bradley's right to surrender its option and be relieved from proceeding thereunder.

32 T.C. 1360">*1364 Petitioner and Bradley agreed that petitioner had deposited in escrow copies of the option agreement of November 22, 1944, and supplemental agreements thereto; a bill of sale for machinery, tools, and equipment; and a mining deed and abstracts of title for all the property demised. Petitioner further agreed to deposit a copy of the April 1, 1946, option agreement in escrow, to instruct the escrow holder to deliver all the above instruments to Bradley when Bradley had completed the payments provided for, to pay and discharge all liens on the property and all debts which might become liens on the property, to protect the title to the property, and to permit Bradley to have full and complete management and operation of the property.

Bradley could elect to abandon the agreement and be released from its terms. In such case it was to give petitioner 30 days' written notice, pay all royalties due, pay petitioner for certain tools, pay certain real and personal property taxes, pay the escrow 1959 U.S. Tax Ct. LEXIS 73">*83 holder $ 250, and surrender possession of the property to petitioner. Bradley could not elect to abandon the agreement or be released from its terms so long as it owned, possessed, or controlled the Mazda group of mining claims.

On April 1, 1946, the date of the option agreement, petitioner and Bradley entered into an escrow agreement and petitioner placed all instruments required to convey title to all of the Ima property with an escrow holder.

Pursuant to the provisions of the option agreement Bradley remained on petitioner's properties, in exclusive possession thereof, and explored for, developed, and produced ores and concentrates of tungsten trioxide.

Bradley performed all obligations imposed upon it under the terms of the option agreements, and made payments to petitioner in the amounts and at the times shown in the following schedules:

1959 U.S. Tax Ct. LEXIS 73">*84 32 T.C. 1360">*1365 Performances Under Basic Agreement of April 1, 1946, and Supplemental Agreements Thereto

32 T.C. 1360">*1366 At Bradley's request no payment was made for the year ending March 31, 1948. There had been a fire at the mine and petitioner excused payment in order that production might be resumed. ²

1959 U.S. Tax Ct. LEXIS 73">*86 Upon receipt of the final payment on March 31, 1955, all of the instruments held by the escrow holder were delivered to and recorded by Bradley. At the time Bradley acquired title from escrow a substantial quantity of hubernite ore remained en bloc in four of the Ima claims.

As a result of the conveyance of title to the Ima properties to Bradley, petitioner was divested of all its fixed assets and has not since conducted any business for profit.

Petitioner's adjusted basis in all the Ima properties as of November 30, 1951, was $ 82,999.95.

Petitioner reported the proceeds received under the provisions of the option agreement of April 1, 1946, as capital gains. Respondent determined that these proceeds were ordinary income and determined the deficiencies here in issue.

Petitioner retained no economic interest in the Ima properties. The amounts received by petitioner from Bradley during the taxable years were payments received in exchange for the sale of a capital asset held for a period in excess of 6 months.

OPINION.

The question presented is whether all or any part of the moneys received by petitioner pursuant to an agreement entered into on April 1, 1946, were proceeds from the1959 U.S. Tax Ct. LEXIS 73">*87 sale of a capital asset or were ordinary income received under a lease agreement.

On April 1, 1946, petitioner entered into an option agreement with the Bradley Mining Company granting Bradley sole option to purchase the Ima Mine properties from the petitioner for the total purchase price of $ 500,000. The pertinent details of the agreement appear in the Findings of Fact.

Petitioner contends that the agreement constituted a sale of its interest in the Ima Mine properties and that it is entitled to capital gains treatment of all the proceeds received. In the alternative, petitioner contends that some portion of the proceeds received is entitled to capital gains treatment.

Respondent argues that the option agreement entered into between petitioner and Bradley was, in reality, a lease and that the sums received pursuant thereto constituted ordinary income to the petitioner.

32 T.C. 1360">*1367 The proper characterization of contracts for the disposal of mineral rights has long been a fruitful area for tax litigation.

In determining whether a particular transaction is a sale or lease we may look to the language employed by the parties, the subject matter, and the surrounding circumstances. 1959 U.S. Tax Ct. LEXIS 73">*88 Wesley W. West, 3 T.C. 431">3 T.C. 431, 3 T.C. 431">448 (1944), affd. 150 F.2d 723 (C.A. 5, 1945).

The key to the problem is whether the party disposing of the property right retained an economic interest in the property. Palmer v. Bender, 287 U.S. 551">287 U.S. 551 (1933); Commissioner v. Southwest Expl. Co., 350 U.S. 308">350 U.S. 308 (1956).

After careful study of the agreement of April 1, 1946, and of the attendant circumstances, we are convinced and have found that petitioner retained no economic interest in the Ima Mine properties and that the agreement was a contract of sale.

The agreement itself is couched in terms descriptive of a sale. It gave Bradley sole option to purchase petitioner's interests in the Ima Mine properties for the total purchase price of $ 500,000. Because of prior payments, the balance due at the time of the execution of the agreement was $ 380,000. This balance was to be discharged by annual payments of $ 25,000 each, to be made until the debt was satisfied. These payments were fixed and were wholly unrelated to production.

In the event that the net returns from metals, minerals, 1959 U.S. Tax Ct. LEXIS 73">*89 and ores extracted by Bradley from the Ima Mine and the Mazda group of mining claims (adjoining Ima and for the working of which Bradley used Ima's tunnels) exceeded $ 400,000 in any one year, Bradley was to pay petitioner 5 per centum of the excess. These payments were termed royalties and were to be made in addition to the regular $ 25,000 payment and were to be applied on the $ 500,000 purchase price.

Bradley, in fact, made annual payments of $ 25,000 to petitioner during each of the years ended March 31, 1947, through March 31, 1955, with the exception of 1948 when petitioner excused payment because of a fire at the mine. In addition, Bradley made payments equaling 5 per centum of production in excess of $ 400,000 during each of the years ended March 31, 1951, through March 31, 1955. These payments, based on production, in no way altered the total purchase price. Their only effect was to hasten the time when the $ 500,000 obligation was satisfied. It was, in truth, unnecessary that petitioner look to production for the return of any part of its capital investment.

Upon receipt of the final payment on March 31, 1955, the instruments conveying title to the properties were delivered1959 U.S. Tax Ct. LEXIS 73">*90 from escrow to Bradley. The conveyance of title divested petitioner of all its fixed assets and it has not since conducted any business for profit.

32 T.C. 1360">*1368 Bradley did not acquire a worked-out mine. At the time it obtained the instruments of title from the escrow holder a substantial quantity of hubernite ores remained en bloc in four of the Ima claims.

We have held that the transaction here in issue constituted a sale of petitioner's property rights in the Ima Mine, that petitioner retained no economic interest in the properties, and that petitioner was entitled to capital gains treatment on all the proceeds of the transaction. ³ This conclusion finds ample support in many decided cases. Helvering v. Elbe Oil Land Co., 303 U.S. 372">303 U.S. 372 (1938); Barker v. Commissioner, 250 F.2d 195 (C.A. 2, 1957); Crowell Land & Min. Corp. v. Commissioner, 242 F.2d 864 (C.A. 5, 1957), reversing 25 T.C. 223">25 T.C. 223; Maude W. Olinger, 27 T.C. 93">27 T.C. 93 (1956); Charles H. Remer, 28 T.C. 85">28 T.C. 85 (1957), affd. 260 F.2d 3371959 U.S. Tax Ct. LEXIS 73">*91 (C.A. 8, 1958).

Respondent relies heavily on this Court's opinion in Lincoln D. Godshall, 13 T.C. 681">13 T.C. 681 (1949). That case is similar to the case at bar in that there, as here, title deeds to mining properties were placed in escrow to be delivered to a mining company upon final satisfaction of a fixed sum. There is, however, a crucial difference. In Godshall the annual payments were payable solely out of the proceeds of mined ores. Here, the annual payments of $ 25,000 were due, regardless of production.

Respondent asserts that the agreement between petitioner and Bradley cannot be regarded as a contract of sale since it was devoid of a forfeiture provision. Bradley could abandon the agreement by giving petitioner 30 days' notice, making certain payments, and surrendering possession of the property. This same factor was present in 303 U.S. 372">Helvering v. Elbe Oil Land Co., supra,1959 U.S. Tax Ct. LEXIS 73">*92 and Barker v. Commissioner, supra.It was not regarded as controlling in those cases and we do not so regard it here. Moreover, it should be noted that Bradley could not abandon the agreement so long as it owned, possessed, or controlled the Mazda group of mining claims.

Our holding on petitioner's primary contention makes it unnecessary for us to consider his alternate theories.

Decision will be entered for the petitioner.