Taxation-Federal Income Tax-Transfers of Mineral Rights in Soil Deposits as Lease or Sale

Petitioner executed a written agreement with a contractor in 1954 whereby the contractor acquired the right to enter petitioner’s land and extract sand and gravel for a fixed amount per cubic yard. This agreement was terminated in 1955 when the excavations had reached the desired level of street access. Petitioner had entered into a previous oral agreement in 1949 with a different party for the sale of the gravel on the same land down to the same elevation, but that party had not fully exploited the agreement. Petitioner claimed that the agreements were sales of sand and gravel in place down to the level required to make the land marketable. The Commissioner contended that these arrangements were merely leases of the property with the payments constituting rent and therefore taxable as ordinary income. The Tax Court decided in favor of the Commissioner. On appeal, held, reversed. The terms of the 1949 and 1954 agreements, considered in light of the intent and purpose of the parties, and the divestiture of any rights of petitioner in the sand and gravel after severance, indicate a transfer of all economic interest in the in-place mineral rights; therefore, the proceeds are to be treated as gain from the sale of a capital asset. Linehan v. Commissioner, 297 F.2d 276 (1st Cir. 1961).