Brief for the Respondent in Opposition — Ragland v. United States

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Question. presented... ......-. -2---2--2-+------ . |

Statement_____._____.. a SLT OS 2

Argument._..._.-..-2-- Fe tA ele wean de 5

Conclusion. - - - ---.-..#-----+ i eer ae 12

CITATIONS

Cases: : .

Anderson.v. Helvering, 310 U.S. 404..- = 5

- Barker v. “Commissioner, 250 F. 2d 195.--.°- 9, 10

Bell v. Commissioner, 219 F. 2d 442. . - 8

Berry v. United States, 267 F. 2d 298 S

Burnet v. Harmel, 287 U.S. 103_. - a }.

Burton-Sutton Oil Co. v. .C ommissioner, 328 -

Ma Naw cansducaawasduneeumeuns 5

Choate v. Commissioner, 141 F. 2d 641, re-

> SIE OSnca cu cchecndsecessacd’. . 2.

Commissioner v. Smith, 173 F. 2d 470, cortio-. .

rari denied, 338.U.S. 818...... -.-.5 8

Commissioner v. ‘Southwest _ ‘Co., 350 U. S.

— RPRRRROR Ye: Gar well re 5

Crowell Land & Min. -¢ ‘orp. Vv. Commissioner,

ee ee ee ea

. Doyle v. ‘Commissioner, 102 F. 2d 86.. . .8

- Firsi Nat. Bank of Mobile v. Commissioner,

Se Gf, eee iin kaicieckaus ss, +

Gowans v. Commissioner, 246 F. 2d 448. _... 9-10.

Haggard v. Wood, 298 F. 2d ee _" 8

Helvering v. Smith, 90°F. 2d 590_..--2-.--. 8

fe) “6 .

- 670041—62

= ~ ty ifm

n

(Casne-—Dpatinved 2

Hogan v. Commissioner, 141 F. 2d 92, certiorari Page

Gemaee, S00 U.S: 790..<....5.-528556. nate 7

8

' Hulbert v. Commissioner, 227 F. -2a 399 ae

Kirby Petroleum Co. v. Commissioner, 326

5

Led v. Commissions, 905 ¥: 28400... _ §8

Linehan v. Commissioner, 297 F. 2d 276- - . -- 931i

Long v. Commissioner, 173 F. 2d 471; certiorari ‘

denied, 338 U.S, 818___.___-- uke’ ae ‘

Meyer'v. United States, 213,F. 2d 278........-. - 8

Palmer v. Bender, 287.U.S..551_...~ -. ------- - . §

Parsons v. Smith, 359\U.S. 2152. .......---. .« §

Sherlogk v. Commissioner, 294 F. 2d 863, cer-

tiorari denied, 369 U.S; 802_............--- 8

Swiren v. Commissioner, 183. F. 2d 656, cer- 7

_tiorari denied, 340 U.S. 912._..-_.-__-_-. | 8 |

ra Perkins, 301. U.S. 655...-.----:-.° 5,6 ©.

Trousdale 'v. Commissioner, 219 F#2d 563__-- e.. |

Tunnell v. United States, 259 F. 2d 916. Se Lec a SB

United States v. Donoho, 275 F. 2d 489-...---- 8.

United States v. Shapiro, 178 F. 2d 459 +___ . _- 8

United.States:v. Snow, 223 F. 2d 103, «erti- .

orari denied, 350 U.S. 831__._-.-.-.--.-- 8

Watson v. Commissioner, 345 U.S. 544, reo

hearing denied, 345 U.S. 1003________---- ae

jh the Supreme Gourt of the United States

r ‘om TERM, 1962

. | ~_No. 549 © ;

ae, Fe : a

Raymonp H. Wirre ayp Linuian B, Wirre,

, PETITIONERS |

° i Vv, \ »

>

.U NITED St ATES OF AMERICA

We

.

_ON PETITION FOR A WRIT OF CERTIORARI r0 THE. UNITED

STATES COURT OF XPPEALS FOR THE FIFTH CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

e

The findings of facts and opinion of the district

court (R. 111-122) are reported at 201 F. Supp. 525.

-The opinion of the court of appeals (Pet. ates is’

reported at 306 F. 2d 81.

| JURISDICTION

. The on of the court of appeals was ial

on July 25, 1962. (Pet. 16a.) . The petition for a-

writ of certioragi was filed on October 23, 1962. The

jurisdiction of this Court is invoked under 28 U.S.C.,

Section 1254(1). ;

- (1)

«

iiees eqn”

a. Ms

' taxable to the partners, inchiding this taxpayer, as or-

fo * quEsTION PRESENTED

Whether the eourt ‘pelow erred i in Holding that: the

overriding royalty or prodiiction payment, reserved by

. the Louisiana Sand hd: Gravel.Comipany, a partner- |.

ship, on the transfer “ofits assets to Ww itte: fend y

Company - was a retained economic interest in ‘the’

- . sand and gravel in place, with the result that the in-

come received therefrom duritig the taxable years is-

s

dinary income subject: to depletion, rather than as

STATEMENT ov:

capital gain.” . ae Sees ot ae

- "The sinipaaee ‘Raymond: H. Witte’ was. a partner

with two other patties: in the Louisiana Sand®and

Gravel Company, which was-in the business of produe- -

ing and: marketing sand, gravel, and related produce ts

in the vicinity ‘of Kinder, Louisiana. , Prior to Janu-

\ Bay. 1, ,1953, the partners expressed «an intent to sell

the business, the assets of Which consisted: of equip- ‘

_ment- and interests in» ‘sand and gravel properties.

\

the. related assets of the

accounts receivable, and i

instruments was A pull of Sale and Agreement; (Ex. %

+

| (R. 111-112.)

By: two separate instruments dated’ February 20,

1953, put effective J dnuary 1, 1953; the Witte Gravel’

- Company, a Delaware iceciealiai: acquired the assets —

of the Louisiana Sand’ and Gravel Company and all

assets of nominal value. (R. P 113.) One ‘of these

* Raymond's wife tis a party to this ‘suit only because of the

filing of joint returns. (R. 111.) We. will thereforé refer to

the husband as the taxpayer. -

©

‘tners, exeept. for cash, .

ifjeant miscellaneous.

I-A, R. 143.149) in which the t taxpayer and his part-

ners conveyed to’ Witte Gravel Company their’ ma-

chinery, equipment and supplies, and promised not to

compete with Witte Gravel Company for fifteen years,

all in return for a promissory note in the face amount

of $578,550. 53 (Ex, 2-B, R. 150-153) ,secured by a. |

chattel mortgage (Ex. .3-C, K.. 154-176). CR. 113.)

- The second instrument was a “conveyance and

agreement”’. providing that the taxpayer and his part-

-hets as assighors ‘‘do hereby GRANT, BARGAIN,

SELL, TRANSFER, ASSIGN, SET OVER and DE-

_ LIVER,’’ to the Witte Gravel Company as assignee

= “the following instruments of lease and/or instru-"

ments of sale ‘and conveyance Ealiied eee fo 4D, R.

177, 179.) These consisted of five leases ; two ‘instru-

ments deseribed | respectively as “Sale ot “Sand in

“Place” and “Sale of. Samd and Gravel in Place”; and —

_ one instrument described simply. as “‘ Agreement dated

October 2, 1952, between Mrs. J. O. Modisette; a

widow et al., as Vendors, and Louisiana Sand. &

_ Grgyel Company, a partnership, as Vendee’’, cover-

- ing a. certain eighty acres’ of land. (R.. 179-181.) -

'. The instrument also provided, sai as to one of the

— leases (R: 183-184), that-—

there is by Assignors excepted from this 3 as-

signment and expfessly reserved .unto them-

‘selves * *-* as a. limited overriding royalty

interest or production payment * *. * an un-

divided fractional percentage of all ‘sand and/or |

gravel, in, on or under and to be produced,

‘ saved and sold from the lands, or, any part

thereof, covered by the above-described instru-

-ments of ‘lease and/or sale arfd- conveyance

A

4

tidied. sufficient to yield, at the rat¢s and iifthe

~ manner hereinafter set forth, the full net sum

of One Million Dollars ($1,000,000) *:* *.

ee Said-limited overriding royalty or production ~ —

ore ayment shall be payable out of the proceeds

0 “sale of sand and/or gravel, and only out

of same and not otherwise aiden

The instrument prov ided that ‘for “the first— four ~

"years payment was to bé made at, the rate of five

cents’ per ton on the first 300, 000 tons of sand’and/or -

_ gravel produced,, saved, and sold from the premises

each ‘year, plus ten cents per ton on, the excess, until

the partners had received a total of $750,000; and —

thereafter at the rate of-two cents per ton until.the

partners had. received the remaining "$250,000. The

agreement also expressly provided that. the assignee, .

Witte Gravel Company (R. 15)—. sa

shall never be personally liable for the pay-

ment .of the amount of the aforesaid limited

overriding royalty interest or production pay-—

ment, or any part thereof, and that. Assignors,

their heirs, ‘representatives and assigns. shall

‘look exclusively. to the sand and/or gravel

herein reserved to them for the payment thereof

and ° that Assignors, their. heirs, representa-

|. tives and assigns shall have no lien or other

~ security whatsoever for the payment of said

- limited overriding royalty interest or produc-

e - tion. paymen sig aee am

Pie Nw The Commissioner allowed the daxpayer a treet

ie the gain upon’ sale-of the equipment as capital gain,

-but asserted thatthe limited overtiding royalty or —

‘

3

-~ : r } 4 o 4

= | ee: ; _

2 * Se

_ production payment constituted ordinary, inconic sub-

a ject to depletion. (R. 12-20.) .

‘The district court-held that the entire: traitsaction ;

constituted the sale of a going partnership business

for which the lintited overriding royalty: or produc-

tion payment was a part of the purchase price and .

thus taxable as capital gain, rather than the proceeds

from a retained economic interest in the satid and

gravel in place, taxable as ordinary income subject

to depletion. (R. 119-122.) The court of appeals ‘

reversed, holding that the limited overrifling royalty

or production payment represented the retention of

al economic interest in the sand and — in place.

(Pet. la-l5a.) .

- ARGUMENT

The judgment Neda is correct and the contlicts in -

decision asserted by the taxpayer are non-existent.

“There i is no oceasion for review of the case ‘by this.

\\

Court. : nr,

_ 1. The decision -below is correct.. A long line of’

cases in ‘this Court? have established that a- ‘trans-

action involving the disposition of a natur al resource

will not be treated. as a sale of the resource “in

place’? where the grantor must look for his payment .

solely to the extraction and. sale of the resource ,by

the grantee. In such cases, the grantor is said to

retain - an “economic. interest’’ in the resource in

2 Burnet v. ‘Harel: 2987 U.S. 103: Palmer v. Bender, ‘ 2987 U.S

551; Anderson.v. Helvering, 310 U S. 404; Thomas v. Perkins,

&

301 U.S. -655; Kirby Petroleuin. Co. ¥. Commissioner, 326 US.

599; Burton-Sutton Oi Co. Vv. : y¥Commissioner, 328 U.S. 25;

Commissioner Vv. Southwest Eapk Co, 350 U.S. 308,;- Par-

sons Vv. Smith, 359 US. 215. ‘ ,

* place, find must report the viniianibe: from the tratis-

‘action ‘as orditiary income, subject to a depletion, de--

duction. Here, taxpay er (and his partners) retained,

‘‘a limited overriding réyalty” or “production pay-.

mént” in the sand and gravel properties—that is, an

undivided fractional percentage of all the sand and

. gravel in, on or to. be produced, saved and sold from

- the lands,. sufficient to yield $1, 000,000. This amount _—

was to be payable, on the basis of a unit price per ton,

; ‘solely out of the proceeds from the sale of the ma- ~~ ,

terial by the transferee.” (R. 183-184). “The court

below properly held that the retention of such an

interest is the’ retention. of an *‘econemic interest” i

the ‘sand and gravel in place and that the proceeds

from it are -accordingly taxable as ordinary income |

. - subject to — Thomas v. Perkins, 301 U.S

ats 655: a ‘

._* This. result. is. or altered i the fact that the

transaction also ‘irivolved the eonveyatice of the

_ partnership’s equipment, and | may therefore—-be—

— as.. the transfer of a “gg ing " business enter-

_ prise.” (Pet. 4a.) - For the sartners expressly

withheld from this transfer, and’ retained the eco-

nomic ownership of, a portion of the minerals in,

place. And the proceeds whose tax status is in

question here derive’ not. from the ‘elements of the

partnership business which were sold, but rather from

the property which. was retained. Moreov er, peti-

tioner’s contention (Pet. 12-16) that the sale of a ‘

io. 6

“going business” should not be broken down into

ordinary income and capital ‘gain .components; as

though there had been separate sales of the underly-

ing assets (cash, inventory, good ‘will, ete.) is beside *”

a

a ~- t

. Ps

;

; +

j

?

accepted, it does not follow’ that an asset’ whieh is

expressly withheld from the sale must be treated as

though it wére an integral part gt |

This case is ‘stubstantially similar’to eae vy. Com--

missioner, 141 F, 2d 92 (CLA. 5th), certiorari denied,

323 U.S. 710, and Choate v. Commissioner, 141 -F. 2d

- (C.A.°10th), reversed on another ground, 324 U.S.

1, which involved. the same transaction but different

partners. The partners, operating under oil: ‘and gas

leasés, conveyed, in a single transaction, their entire

interest in the leases, wells and equipment for a cash,

consideration, ‘but reserved a royalty ‘interest in the

“ the ‘point. For even if this “entity” pres ne -

“oil w hich Inight be produced. Both. courts held tliat.

the proceeds from the retained: royalty interest were °

taxable as ordinary income subject to-depletion. In .

viey « of the differing results reached by the: two courts

in Telation | to the manrier in which the partners ‘were ©

to recover the cost of the equipment—whether through

_ depletion or deduction of its costs as on a sale—this

_ Court granted certiorari-in-the-Cheate case_and_re-

solved the conflict by treating the transfer of equip-

ment as a sale. .The Court’s Choate decision thus

implicitly approves what the taxpay er in the present ©

case refers to as the fragmentadiien of a single transac-

tion. And compare Watson v. Commissioner, 345

U.S. 544, rehearing dented, 345 U.S. 1003.

2. The decision below is not in conflict with any of

the numerous decisions. cited by the taxpayer (Pet.

12-16) relating to-‘the sale of a partnership interest.

As the decisions show, the courts are agreed that the

sale of a partnership interest constitutes the sale of a

bed ° ? Py

: - ‘°

. &

< ws rues 8

capital asset,’ ‘the only area .of disagreement being

whether income already earned is a. ‘part of. that

capital asset.‘ . But the present case obviously does not ~

3 Leff v. Commissioner, 235 F. 2d 439 (CLA. 2d)2 Tunnell v.

he Pnited States, 259 F. 2d 916 (CA. 3d); Commissioner v.

—<— Smith, V3 Fo 2d 470° (CLA. Sth), certiorar’ denied, 338 U.S.

: - 818; Long v. Commissioner, 173 F. 2d 471 (C.A. 5th), cer-

_tiorari denied, 338 U.S. 818; First Nat. Bank of Mobile v. Com-

missioner, 183° F. 2d 172 (C.A. 5th) ; Sherlock v. Commissioner,

294 F. 2d 863 (C.A: 5th), certiorari denied, 369 U.S. 802;

Berry ¥. United@States, 267 F. 2d 298 (C.A. 6th); Swiren v. -

"Commissioner, 183 F, 2d 656. (C.A. 7th), certiorari anatedl, 340

U.S. 912;’Meyer v. United States, 213 F. 2d 278 (C.A. 7th);”

Hulbert. vy. Commissioner, 227 F. 2d 399 (C.A. 7th): U ‘ited

Liew States v, Shapiro, 178 F. 2d 459 (C.A. 8th); U ‘nited: States v.

-! + Donoho, 275 F. 2d 489 (C.A. 8th) ; United States v. Snow, 223

F. 2d 102 (C.A. 9th), certiorari’ denied, 350 U.S. 831. oa

*The Second, Third, Fifth and Ninth Circuits have held that ="

on the sale of a partnership - -interest income already earned is

"taxable as ordinary income. See Leff.v. Commissioner, supra;

\. Tunnellv. United States, supra; Sherlock. v. Commissioner.

supra; United States v. Snow, supra; cf. Helvering v. Smith, _

~. 90 F.2d 590 (C.A. 2d). The Seventh Circuit is apparently: .

- now in.agreement. See Hulbert v. Commissioner, supra.‘On .

‘the other hand, the Sixth and Eighth Circuits have held to the

contrary. See Berry -vUnited States, supra; nited States Vo

Donoho, supra. :

- Other decisions cited by the taxpayer in relation to partner-

ships: are explainable as follows: Bell v. Commissioner, 219 F.

- 2d 442 (C.A. 5th), did-not involve the’saie’ of a partnership

4 . interest. Trousdale v. Commissioner, 219 F. 2d 563 (C.A. 9th),

~ a) and Haggard v. Wood, 298 F. 2d 24 (C.A. 9th), are cases .

a where it was Hld that, considering the substance Of the trans-

‘action, there was no sale of a partnership interest. In Doyle v.

Commissioner, 102 F. 2d 86 (C.A. 4th), which involved the

+. . ~~ transfer’ by one partner to another, on the dissolution of the

“- partnership, of a claim to fees for professional services, it. was

held that the amount received for the’ claim was taxable as

ordinary income rather than as capital. gain.

9

involve the sale ofa partnership. interest or interests

as such. . And. eVen if the transaction were so treated,

. the f fact would remain that the partners ‘held back

from the transfer an interest in property which is

productive of ordinary income (subject. to depletion)

rather than capital gain, noe

3. Contrary to, the taxpayer's contention (Pet. 16-

\.2 28), the decision helow ts not in contliet with the court

of. appeals decisions in Gowans v. C ommissioner, 246,

F.2d 448" (CA. 9); Barker v.. Commissioner, 250. F.

‘2d 195 (C.@. 2); or Linehan v.. Commissioner, 297

F.\ 2d 276 .(C.A, 1). In es ach of those cases, the

court found that the particular transaction in ques-

tion was a sale: of sand and gravel ‘‘in place,” and

that the taxpayer-vendor had. not . retained an _

‘economic, interest” in the extracted material. ‘The

decisions of the Second and Ninth Circuits hinge

upon the terms of | their respective contracts, which

the courts. construed as: imposing an absolute obliga-

tion upon the purchaser either to take a fixed quantity ~

of material, or to pay a fixed price irrespéctive of

the quantity of material. in fact excavated. Thus, in

Barker, supra, in addition to a $10,000 advance de-

posit, the contractor was required te pay no less than

— $3,000 quarterly ‘‘regardless of the amount of material

actually taken.” Similarly, .in Gowans, supra, . , the? =

court held that. the owner of thetand retained no eco-

nomic interest in the “black sand’” to be’ removed _

since the agreement provided .for the removal of all

the sand at’a given unit price. Another, factor

, een

|

stressed by the court in -Gowans was that the princi-—

10

-. pal, if not controlling, - purpose of the contract was

to prepare the property for development as a real

_ estate subdivision, not, as in the present case, to_ar-

range for the economic exploitation of the sand: and

gravel deposits. ip

-The Fifth Cireuit’s own. a pace -Aéelbion in —

Land d& Min. Corp. v. Commissioner, 242 ¥. 2d. 864,

is substantially similar to Barker and Gowans.

_ There the contract provided that taxpayer “as vendor

_ *.* * gold and conveyed * * * with full warranty of

_« title, all ‘sand and gravel unde rljing certain described

| property” at a fixed price per cubie yard (emphasis *

in- original), Since the vendee was not required to

pay for material not taken, and since all sand: and

gravel not removed at the end of. five years was to. -

revert to the taxpayer,: the transaction was- not,

_ Strictly, the salesof a fixddl quantity of material.

~ However, the Fifth Cireuit. construed it as such,

pointing out that all the material had in fact been

removed by thé vendee and dismissing the provision . |

for reverter as merely ‘the equivalent of a -vendor’s _

lien to secure the payments due the taxpayer. More-

over, in according the transaction capital gains treat- -

ment, the court noted that the contraet contained no —

provision or suggestion for the retention and payment Yas

of a royalty as in oil and gas leases, and. that the

parties’ intent to. make a bona4ide sale was expressed

in terms free from ambiguity throughout the instru-

‘ment. -Heve, :by contrast, the instrument unambigu-

‘ously provided for the retention: of a ‘‘limited

overriding royalty or produetion payment. 7

we

4 ey ‘

u .

- s

" Petitioner chiefly" re lies ° for a showing: of conflict |

upon the First Cireuit’s decision in the Linehan

‘ease, supra. There the purchaser r acquired an. ex-

clusive “right to. remove” sand_and gravel from, the

taxpayer's land at a fixed price per ‘cubie foot, there

being ‘no obligation to take or payefor a fixed amount.

The court of. appeals, thongh acknowledging the |

validity of the “economic interest” test, thought that ,

the taxpayer had not retained such an interest be-

cause “in every instance the sold sand and gravel fer

‘fixed prices per cubie yard’ without” reference to the.

- prices naericgn or the profits, if any, made. bythe —~ Ni

“profits” and “prices

exploiters.” ee tia

_ —

This language—insofer™ as. it focuses upon the

of the exploiters rather than |

their sales ‘and proceeds—states the “economic ‘in-

terest’? test more narrowly_than the decisions of,

this Court warr ant ov-the Facts ra Linehan required,

The taxpayer ‘there had no interest ‘of any kind in

the’ economic exploitation of the materials, if any,

after they were severed from his property. Indeed,

as the court’s opinion indicates, his sole\yuxpose in

undertaking the tri insaction: Was to lower the eles va-

tion ‘of his sand -and . the reby render it. stitablé- for

industrial use. 1n contrast, the taxpayer here retained

of continuing interest..in the exploitation venture,

~ could look only to the proceeds of ‘sueli

. limited” royalty, Unlike. his connterpa

for he was- to: be compensated — only for: materials’

““produced, saved, and sold’’. by the: explaiter and

sdles for his:

‘in Linehan,

taxpayer here bore. the risk that th: materials, ance

a: extracted, might not find a market or might be Ww asted,

.

ag at Ss

=

damaged, or destroyed sateen the peibit of severance

and- the point of sale. We submit, therefore, that - oe

--despite the broad language used by the First Circuit”

“in.,the sentence quoted above, the _transaction in :

‘Linehan, ‘is readily distinguishabiy” from the’ one

involved here. - SP , \

; " CONCLUSION :

espe

™ 7

‘en ions reasons; the: petition for a writ of =

~ eertiorari should. be denied:

- Respectfully submitted, :

ARCHIBALD Cox, |

: i Solicitor General.

.. yy Louis F. OBERDORFER,

. Assistant Attorney General.

“MELVA M. GRANEY,

s : em.

U.S. GOVERNMENT PRINTING OFFICE: 1962 :

5 2.

ae of.