Cowden v. Commissioner

289 F.2d 20 (5th Cir. 1961)

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Nature of the Case

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Facts

The Cowden family (D) made an oil, gas and mineral lease with Stanolind. The lease was on lands in Texas. Stanolind agreed to pay advance royalties of $511,192.50. On November 30, 1951, Ds assigned the payments due from Stanolind in 1951 to First National Bank. Assignment of payments due in 1953 were made in 1952. The face values of the payments were discounted. Ds reported the amounts received on the assignments as long-term capital gains. The IRS ruled that the contractual obligation of Stanolind to pay the monies in future years represented ordinary income subject to depletion to the extent of fair market value of the obligations which were not interest bearing by a deduction of 4%. The 1951 cash value was thus $487,647.46, and that sum was taxable as ordinary income in 1951. The tax court agreed that the payments were not only readily but immediately convertible to cash and were the equivalent of cash and had a fair market value equal to their face value and that Stanolind was willing to pay the full amount all at once but only deferred the payments based on the desires of Ds. The tax court decided that no discount was due and that the entire $511,192.50 was taxable as income in 1951.