34 T.C. 513">*513 These consolidated proceedings involve deficiencies in income tax and claimed overpayments for 1954 as follows:

The sole questions are whether a lump-sum payment received by petitioners for the assignment of certain oil and gas leases is 1960 U.S. Tax Ct. LEXIS 130">*131 taxable as ordinary income subject to depletion, or as long-term capital gain under section 1221, I.R.C. 1954, and if the latter, what was petitioners' basis.

FINDINGS OF FACT.

The stipulated facts are hereby found.

J. G. Dyer and S. T. Dyer, hereinafter referred to as petitioners, were in 1954, and had been for many years previous, engaged in the development, production, and operation of mineral properties. They kept their books and filed their income tax returns on a calendar year, cash basis. They filed joint income tax returns with their respective wives, Ella R. and Elizabeth C., with the district director of internal revenue, Denver, Colorado, for the calendar year 1954.

Prior to January 1, 1954, petitioners owned, in the proportions of three-fourths by J. G. Dyer and one-fourth by S. T. Dyer, 75 per cent of the working interest in each of several oil and gas leases located in an area known as the South Big Muddy Field, Converse County, Wyoming. These working interests had been obtained by petitioners in 4 or 5 separate "ram-out" transactions with the Continental Oil Company, beginning May 24, 1950. Twenty-two wells had been drilled in all, 15 of which were producing wells.

1960 U.S. Tax Ct. LEXIS 130">*132 Petitioners were required to advance all the amounts necessary for developing and operating the several wells because of Continental Oil Company's retained 25 per cent "carried working interest." Continental Oil Company's interest in any specific well did not come 34 T.C. 513">*514 into existence until petitioners had been reimbursed from the production of that well for the sums expended by them in developing and operating such well, with the exception of 3 or 4 wells in which Continental Oil Company's working interest arose after operating expenses only. With the exception of these wells, petitioners' interest would shift back and forth from a 100 per cent working interest to a 75 per cent working interest, depending upon the stage of payout in each well.

At the close of 1953, petitioners had need of a great sum of money to develop other properties which were expected to yield oil in commercial quantities. Accordingly, on January 18, 1954, for a consideration of $ 447,500, petitioners assigned to Alpha Oil Company --

an undivided ninety-nine per cent (99%) of their respective interests in and to all of the Oil and Gas Leases described above, covering all of the lands above described, 1960 U.S. Tax Ct. LEXIS 130">*133 and in and to the leasehold estates created and existing by virtue thereof, together with all other rights, privileges, and benefits incident or appurtenant thereto, or accruing or attaching to said interests, including an undivided ninety-nine per cent (99%) of all of Sellers' [petitioners'] respective interests in and to all of the oil, gas, casinghead gas, and other hydrocarbon substances produced, saved, and sold from the lands above described, * * * subject, however, to all of the terms and provisions of all of the above-described Oil and Gas Leases * * * excepting, however, the obligation to carry any part of the carried working interest of any carried working interest owner in the above-described Oil and Gas Leases covering the lands above described, reserved or assigned in the aforementioned Assignments * * * or Operating Agreements, it being expressly understood that such obligation shall remain the obligation of Sellers and that there is no obligation on Purchaser to bear or pay the cost or expense of any carried working interest owner * * * but expressly excepting and retaining, however, unto Sellers an undivided ninety-nine and ninetenths per cent (99.9%) of ninety-nine1960 U.S. Tax Ct. LEXIS 130">*134 per cent (99%) of Sellers' respective interests in and to all of the Oil and Gas Leases above described, covering all of the lands above described, and in and to the leasehold estates created and existing by virtue thereof, together with all other rights, privileges, and benefits incident or appurtenant thereto, or accruing or attaching to said interests, including an undivided ninety-nine and nine-tenths per cent (99.9%) of ninety-nine per cent (99%) of Sellers' respective interests in and to all of the oil, gas, casinghead gas, or other hydrocarbon substances produced, saved, and sold from the above-described lands under the above-described Oil and Gas Leases, * * * together with an undivided ninety-nine and nine-tenths per cent (99.9%) of ninety-nine per cent (99%) of Sellers' respective interests in all of the oil and/or gas wells located on the lands above described, and all casing, tubing, rods, pumps, pumping derricks, pipelines, flow lines, tools, machinery, warehouse supplies, equipment, houses, fixtures, lease tanks, and other fixed producing facilities and other personal property located on said above-described lands or used in connection therewith, as remains after1960 U.S. Tax Ct. LEXIS 130">*135 , but only after, the later of the following dates, namely:

(a) The date on which all indebtedness secured by said Mortgage and Deed of Trust owing by Purchaser unto the Noteholder, its successors or assigns, shall have been fully paid, satisfied, and discharged, and said Mortgage and Deed of Trust above mentioned shall have been released or satisfied; or

34 T.C. 513">*515 (b) If the interests hereby sold and assigned are sold or assigned by the Trustee under said Mortgage and Deed of Trust pursuant to the power of sale contained therein or under judicial foreclosure, the date on which the purchaser thereof, his or its heirs, personal representatives, successors, or assigns shall have realized from the proceeds received from the sale of the oil, gas, casinghead gas, or other hydrocarbon substances allocated to said interests, or any other interests covered by said Mortgage and Deed of Trust purchased by such purchaser at said sale, a net amount (after operating and development expenses payable by such purchaser including ad valorem, severance and production taxes payable by such purchaser) equal to the aggregate purchase price paid by such purchaser for all such interests covered by1960 U.S. Tax Ct. LEXIS 130">*136 said Mortgage and Deed of Trust purchased by him or it at such sale, plus interest accrued thereon from the date of purchase at the rate of six per cent (6%) per annum, and also excepting, reserving, and retaining to Sellers the respective share of any carried working interest owner in and to any and all oil, gas, casinghead gas, and other hydrocarbon substances produced, saved, and sold from all of the lands above described under the aforementioned Oil and Gas Leases, * * * to which Sellers are entitled under the terms and provisions of said aforementioned Assignments, * * * and Operating Agreements. [Emphasis added.]

The assignment, which was effective as of January 1, 1954, also stated:

It is understood and agreed that J. G. Dyer shall continue to operate all of the above-described Oil and Gas Leases covering the lands above described, in accordance with all of the terms and provisions of all of the aforementioned Assignments, Agreements, Stipulations, Working Agreements, and Operating Agreements until such time as J. G. Dyer shall resign as Operator or shall die or become incapacitated, or until such time as Purchaser herin [sic] shall desire to select and designate a1960 U.S. Tax Ct. LEXIS 130">*137 successor Operator; whereupon the owners of a majority of the working interest in the above-described Oil and Gas Leases covering the lands above described shall select and designate a successor Operator. Any successor Operator selected or designated hereunder shall operate the Oil and Gas Leases above described covering the lands above described, in accordance with all the terms and provisions of all of the aforementioned Assignments, Agreements, Stipulations, Working Agreements and Operating Agreements.

The assignment was signed on behalf of Alpha Oil Company by Wm. H. Quinette, its president. At the time of the assignment, Alpha Oil Company had 100 shares of stock of $ 1 par value outstanding, 85 shares of which were owned by Quinette's wife, 5 shares by his daughter, 5 shares by his son, and 5 shares by Quinette. Its net worth was $ 260.83. Quinette, a certified public accountant, had dealt with petitioner J. G. Dyer in the past and had given him professional advice. Quinette's office prepared the income tax returns here involved.

Alpha Oil Company had borrowed the funds necessary to pay petitioners from the United States National Bank, Denver, Colorado. It executed a promissory1960 U.S. Tax Ct. LEXIS 130">*138 note dated January 20, 1954, for $ 450,000. Alpha Oil Company promised to pay 5 per cent interest on the unpaid 34 T.C. 513">*516 balance thereof and to pay the bank the principal sum of $ 450,000 on or before March 1, 1958. The note was secured by a mortgage and deed of trust effective as of January 1, 1954, covering the properties Alpha Oil Company acquired from the petitioners in the assignment described above. This was the "said Mortgage and Deed of Trust owing by Purchaser unto the Noteholder" referred to in subparagraph (a) of the assignment already quoted. The note contained no guaranties or endorsements.

On December 17, 1953, E. A. Polumbus, Jr., an engineer well regarded in the oil fields, prepared an evaluation as of January 1, 1954, of petitioners' interest in the oil and gas leases here involved. That evaluation estimated the future net profits of petitioners' interest in those properties to be $ 1,371,626, which amount should have been $ 1,326,626 if properly computed arithmetically. Based upon this evaluation, it was estimated that Alpha Oil Company's loan of $ 450,000, plus interest and a commission to Alpha Oil Company, would be repaid in 40 2/3 months, after which the1960 U.S. Tax Ct. LEXIS 130">*139 properties would revert to petitioners. Actually, the loan was not fully repaid until March 2, 1959.

Quinette did not rely on Polumbus' estimate of 40 2/3 months' payout, and, when he applied for Alpha Oil Company's loan, he requested the bank to loan the money for a 50-month period rather than a 40 2/3 months' period. In preparing petitioners' income tax returns, his office calculated petitioners' gain on this transaction on the 40 2/3 months' estimate. Petitioner J. G. Dyer agreed with Polumbus' report.

During the negotiations which led to the assignment already described, Quinette and J. G. Dyer discussed two offers. One was for a "walk-away" sale for $ 525,000. The second was the one which was entered into. J. G. Dyer elected to take $ 447,500 and to retain an interest in the properties and to retain the chance to recover something more than the additional $ 75,000.

In their income tax returns for the calendar year 1954, petitioners reported the assignment to Alpha Oil Company as a sale producing a profit taxable as long-term capital gain. Respondent determined that the $ 447,500 was taxable as ordinary income subject to depletion.

OPINION.

The principle and, indeed, the1960 U.S. Tax Ct. LEXIS 130">*140 essential facts, of the five cases disposed of in Commissioner v. P. G. Lake, Inc., 356 U.S. 260">356 U.S. 260, rehearing denied 356 U.S. 964">356 U.S. 964, are so similar to those involved here that it is impossible for us to distinguish them. There, the Supreme Court said (pp. 265, 266):

The lump sum consideration seems essentially a substitute for what would otherwise be received at a future time as ordinary income. The pay-out of 34 T.C. 513">*517 these particular assigned oil payment rights could be ascertained with considerable accuracy. Such are the stipulations, findings, or clear inferences. In the O'Connor case, the pay-out of the assigned oil payment right was so assured that the purchaser obtained a $ 9,990,350 purchase money loan at 3 1/2 percent interest without any security other than a deed of trust of the $ 10,000,000 oil payment right, he receiving 4 percent from the taxpayer. Only a fraction of the oil or sulphur rights were transferred, the balance being retained. * * * The substance of what was assigned was the right to receive future income. The substance of what was received was the present value of income which the recipient1960 U.S. Tax Ct. LEXIS 130">*141 would otherwise obtain in the future. In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.

The only difference here is that the duration of the assignment was not measured directly by the amount of collection of the in-oil payments by the assignee but rather was limited to the period it would take for the assignee's loan to be repaid, presumably out of the oil payments. But the loan, in turn, was essentially the same as the payment made for the assignment since the consideration which petitioners received was supplied by the loan. The loan could, to be sure, have been paid sooner by the assignee, in the unlikely event that it chose to contribute other funds for that purpose. But in that case, the payments to be received by it would have come to an end even sooner. Here, as there, the amounts in controversy were "essentially a substitute for what would otherwise be received at a future time as ordinary income." See Hort v. Commissioner, 313 U.S. 28">313 U.S. 28.

Decisions will be entered for the respondent.