Tippett v. Commissioner

J. H. TIPPETT, ADMINISTRATOR OF THE ESTATE OF LAURA TIPPETT, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Tippett v. Commissioner Docket No. 46719. United States Board of Tax Appeals 25 B.T.A. 69; 1932 BTA LEXIS 1584; January 4, 1932, Promulgated *1584 1. COMMUNITY PROPERTY - SURVIVOR - FIDUCIARY. In Texas the surviving husband who has qualified as the administrator of the community estate has the exclusive management, control and disposition of the community property for the purpose of paying debts and settling its affairs and occupies a fiduciary relation thereto until there is a partition and settlement thereof. Until such settlement the income from the share of the deceased wife in the community property should be taxed as a whole against the survivor as a fiduciary. J. R. Brewer, Administrator,17 B.T.A. 704. 2. CAPITAL GAIN. Cash received as bonuses from oil and gas leases in Texas, which under the laws of that State conveyed a vested fee title to the oil and gas in place, when owned and held the required length of time, is taxable as capital gain. Ferguson v. Commissioner, 45 Fed.(2d) 573; W. T. Waggoner Estate,24 B.T.A. 711. 3. MINERAL CLASSIFIED LANDS - TEXAS. Where the petitioner received income from bonuses for the sale of leases of mineral classified lands and in a year subsequent to the year of receipt, the State of Texas brought suit against petitioner*1585 for one-half of the bonus received for sale of the lease on one of the tracts of land and recovered judgment therefor, from which judgment petitioner has appealed to the Supreme Court of Texas and is still contesting his liability and no final decision has been rendered, and where the facts show that petitioner's books as to these items of income were kept on the cash receipts and disbursements basis, such items of income are properly returnable in the year when received and may not be excluded from income for that year merely because the State of Texas has recovered a judgment against petitioner, where the judgment remains unpaid and petitioner is still contesting said suit. C. O. Harris, Esq., and M. E. Sedberry, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent. BLACK *70 The petitioner, as administrator of the estate of Laura Tippett, deceased, seeks redetermination of deficiencies in income taxes of $2,546.84 for 1926, and $28,072.21 for 1927. The deficiency letter was addressed to "Mr. J. H. Tippett, Administrator, Estate of Laura Tippett, San Angelo, Texas." The deficiency was determined against him in that capacity, *1586 and he is so designated in the caption of the petition. Errors alleged by the petitioner will be stated in detail and passed upon in the opinion. FINDINGS OF FACT. The petitioner, J. H. Tippett, and Laura Tippett were married in 1906 and resided during their married life in the State of Texas. Petitioner now resides at San Angelo, Tom Green County, Texas. Laura Tippett died intestate January 28, 1924, and left surviving her the petitioner and four children, to wit, Velma, Annie, Homer J. and June Tippett. The children were all under age and unmarried during the taxable years, but Velma has since become of age. At no time have the children had a legal guardian of their estate. On September 26, 1924, petitioner, J. H. Tippett, filed in the County Court of Tom Green County, Texas, his application for a community administration of the estate of Laura Tippett, deceased, and after the appointment of appraisers, execution of bond and filing of inventory and appraisement, the court entered the following order: *71 On this the 29th day of September 1924, came on to be considered the inventory, appraisement, list of claims, list of indebtedness of such estate, and bond*1587 of J. H. Tippett, Survivor of Laura Tippett, deceased, filed herein on the 29th day of September 1924, the Court having examined same and found them to be proper and correct, it is of the opinion that they should be approved. And it is accordingly ordered, adjudged and decreed that such inventory, appraisement, list of claims, list of indebtedness of such estate, and bond be, and they are hereby approved; and that they and this order be recorded upon the minutes of the Court; and further, that the said J. H. Tippett be, and he is hereby authorized to control, manage, and dispose of the community property of himself and the said Laura Tippett, deceased, in accordance with provisions of Chapter 29, Title 52 of the Revised Statutes of Texas. The appraisement showed the value of the community estate as follows: Real estate $97,903.00 Personal property 62,620.00 Claims due community 49,989.29 Grand total 210,512.29 Debts owing by community 64,240.91 Separate property to be deducted 24,000.00 Total deduction 88,240.91 Net value community estate 132,271.38 The indebtedness of the estate consisted of $59,000 deferred payments on school lands purchased*1588 from the State, and a note for $5,240.91, payable to R. H. Schooler. The evidence shows that the debt to Schooler represented an undivided interest of Schooler in certain sheep, and that his interest was closed out prior to January 1, 1927. The school land indebtedness, amounting to $59,000, was purchase money indebtedness, said lands having been sold by the State under the statutes on forty years time, one-fortieth down and balance in thirty-nine years, and fifteen years yet remain to pay the balance of the principal, with interest payable annually November 1, and it was the general custom that if the interest was paid, even though no annual principle installment was paid, the account would remain in good standing, and it was not the custom generally to pay anything on the principal annually, but merely to pay the annual interest. The school land statutes of the State of Texas, regulating the sale of school land, authorize the Commissioner of the General Land Office to forfeit the sale for failure to pay interest. The title to all lands until full payment is made and patent issues, is reserved in the State. The effect of forfeiture in any given case is to revest the title in*1589 the State of Texas. After petitioner's appointment and qualification as administrator of the community estate he continued to manage and control the entire *72 community estate, including his own interest therein as well as the interest inherited by his four children. He kept account of both the corpus and the income with respect to the community property, but did not prior to the end of the period involved herein make any actual division with his children, either of the corpus or of the income of the property. Not all of the indebtedness due the estate had been collected by the end of the year 1927. For the year 1926 petitioner filed a fiduciary return, one of the items of which was "Rents and royalties - oil lease - $35,328.47." The amount of this item of income is not in dispute. For the year 1927 petitioner ftled a fiduciary return. This return included, among other items of income, an item reading "Rents and Royalties - oil leases on ranch lands - $237,430.04." Petitioner claims the total amount of income of J. H. Tippett and the estate of Laura Tippett for 1927 should be divided as follows: Ordinary net income $65,345.57 Capital net gain 228,112.15 *1590 Included in the capital net gain claimed was $103,880.86 realized by petitioner from the proceeds of sales of oil and gas mining leases in 1927 on lands known as "Mineral Classified Lands," and the balance of $124,231.28 was proceeds of oil and gas mining leases on lands owned by the community estate and not mineral classified. The entire income of the community estate was returned for both years on these fiduciary returns and in naming the beneficiaries' shares, J. H. Tippett, Community Administrator, divided the income into five parts, viz., one-half to himself and one-eighth to each of the four children. Returns were filed on Form 1040 for himself, and for each of the four children, and the tax paid on their respective incomes as thus divided. The respondent held that during the taxable years petitioner J. H. Tippett was acting in a fiduciary capacity and that one-half of all the income should be taxed to him as an individual and the other one-half against petitioner as administrator and none should be returned by the children, and determined overassessments as to the children and refunded the amounts paid by each of them with interest as follows: 1926, $149.06; 1927, $3,187.43. *1591 These checks had not been cashed at the time of the hearing, but were still being held by petitioner. With the exception of one lot in San Angelo, the real estate owned by J. H. Tippett and his wife, Laura Tippett, consisted of farming and grazing lands in Crockett, Pecos and Upton Counties, Texas, and had been owned and held for more than two years prior to the taxable years. Most of these lands were school lands set apart by the State for the benefit of educational purposes and were obtained by petitioner directly from the State, or by transfer from or through *73 the State's original grantee. Some of these lands were owned by the community in fee simple, including mineral rights, while in others the community owned only the surface rights and the mineral rights were reserved to the State, and these were known as mineral classified lands. By an act of the legislature in 1919, commonly known as the Relinquishment Act and subsequently incorporated in the Revised Statutes of 1925, as articles 5367 to 5382, inclusive, the State authorized the surface owner of mineral classified lands to act as its agent in the sale or leasing of the reserved mineral rights of the State*1592 on the terms and conditions set forth in the act. In the year 1926 petitioner received $35,328.47 from the sale of oil leases, one-half of which, $17,164.23, was credited to the estate of Laura Tippett. During 1927 petitioner received as bonuses and rentals on gas and oil leases the sum of $249,031.40. Of this, $103,880 was from mineral classified land and the balance of $145,151.40 was from lands including mineral rights owned in fee simple by the community. One-half of said sum of $103,880, or $51,940, was credited as income to the estate of J. H. Tippett, and the other half to the estate of Laura Tippett. After the deduction of certain expenses and the $103,880 derived from mineral classified lands, the net amount derived from fee-owned lands was $123,006.30, of which one-half amounting to $61,503.15, is applicable to the estate of Laura Tippett. No evidence was introduced relative to the alleged error as to depletion on $1,690.83 oil royalty income in 1927. All the leases for 1927 were introduced in evidence; likewise a statement showing the amount of cash bonus received for each lease. A typical lease of the nonmineral classified owned lands is as follows: AGREEMENT, *1593 made and entered into this 5th day of March 1927 by and between J. H. Tippett, individually and as administrator of the community estate of himself and his deceased wife Laura Tippett, party of the first part hereinafter called lessor (whether one or more) and Roxana Petroleum Corporation, party of the second part, hereinafter called lessee. WITNESSETH: That said lessor, for and in consideration of Six Thousand and no/100 dollars cash in hand paid, receipt of which is hereby acknowledged, and of the covenants and agreements hereinafter contained on the part of the lessee to be paid, kept and performed, have granted, coveyed, demised, leased and let, and by these presents do grant, convey, demise, lease and let unto the said lessee, for the sole and only purpose of mining and operating for oil and gas, and of laying pipe lines and of building tanks, power stations and structures thereon to produce, save and take care of said products all that certain tract of land situated in the County of Pecos, State of Texas, described as follows, to-wit: [Here follows description.] It is agreed that this lease shall remain in force for a term of ten years from this date, and as much longer*1594 thereafter as the lessee in good faith shall conduct drilling operations on said land and as much longer thereafter as oil or gas is produced from said land by the lessee. *74 In consideration of the premises the said lessee covenants and agrees: 1st. to pay to the lessor as royalty the one-eighth (1/8) part of all oil extracted and saved from said premises, to be delivered to the lessor on the part of the land where produced and saved. [Here are certain provisions in the lease not material to this proceeding.] The money consideration hereinabove mentioned is the true and sole consideration for this lease, and no further drilling obligation shall be imposed upon the lessee through implied covenants or otherwise. In testimony whereof, we sign, this the 5th day of March, 1927. J. H. Tippett, Individually and as Community Administrator of the Estate of Laura Tippett, deceased. WITNESS: Leases of the mineral classified lands were the same, except that there was added to the introductory clause the description of Tippett, as agent of the State of Texas, and his signature to these leases of mineral classified lands was as follows: "J. H. Tippett, individually*1595 and as Community Administrator of the Estate of Laura Tippett, his deceased wife, and as agent for the State of Texas." At the end of the lease, the following was added: "1/16 of all oil and gas produced hereunder and the rental of ten cents per acre per annum due the State of Texas shall be paid direct to the State and deducted from the royalties and rentals herein before reserved and otherwise payable to the lessor." In making his returns for taxation, petitioner included therein as ordinary income all of the bonuses received on mineral classified lands, under the belief that the community estate was entitled to it, and also included all sums received from fee owned lands. Petitioner now alleges that he should have returned as income to the community estate, only one-half the bonuses received from a sale of the leases covering mineral classified lands; and that one-half such bonuses belonged to the State of Texas and was not income to the community estate. The State of Texas, prior to the hearing in this proceeding, instituted its action against Tippett and his lessee in the District Court of Travis County, Texas, seeking to recover one-half of a bonus of $16,800, collected by*1596 him in 1927, on the leasing of 480 acres of mineral classified land involved in this proceeding. Judgment was rendered in favor of the State of Texas against both Tippett and his lessee, the Empire Gas and Fuel Company, for $8,592, which was affirmed by the Court of Civil Appeals, at Austin, Texas, and is now pending on appeal before the Supreme Court of Texas. So far as the record shows petitioner has never paid over to the State of Texas any of the sums received in the taxable years as bonuses and royalties from these mineral classified lands and has not been sued therefor by the State of Texas, except in the one suit just above mentioned. *75 In the operation of his ranch, petitioner kept his books on the accrual basis. All other items of income and disbursement, including bonuses from oil leases, were kept on the cash receipts and disbursements basis, and returns of income therefrom for taxation were made that way. OPINION. BLACK: The issues in this proceeding will be stated and ruled upon in their order. Issues 1 and 2 will be treated together, and are as follows: 1. That petitioner should not have been proceeded against as administrator, it being averred*1597 that prior to the years 1926 and 1927 his administrative duties had been completed, and that the income involved was properly returned by and tax paid by and on behalf of petitioner and his four children as individuals and as tenants in common of the property. 2. That if a fiduciary his relation to the property was "trustee" and not "administrator"; that in connection with his control of the community estate he kept books showing the respective undivided interests of petitioner and his children in the corpus and income of said estate; and that the action of petitioner in reporting one-eighth of the income as distributable and taxable to each of the four children was in effect equivalent to a distribution to each of them of her pro rata share of the corpus and income. Petitioner further contends that if J. H. Tippett, as such fiduciary, was required to return and pay the tax on said estate, there were four trusts instead of one, and the tax should be calculated upon the interest of each of said Annie, Velma, Homer J. and June Tippett, both as to the normal tax and surtax. Section 219 of the Revenue Act of 1926 reads: SEC. 219. (a) The tax imposed by Parts I and II of this*1598 title shall apply to the income of estates or of any kind of property held in trust, including - * * * (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and * * * (b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that [None of the enumerated exceptions apply in the present proceeding]. In this proceeding it appears plain that the community administration has not been closed. Article 3670, Revised Civil Statutes of Texas, reads: ART. 3670 (3601) (2228) (2173) SURVIVOR SHALL KEEP ACCOUNT - The survivor shall keep a fair and full account and statement of all community debts and expenses paid by him, and of the disposition made of such community property; and, upon final partition of said estate, shall account to the legal heirs of the deceased for their interest in such estate, and the increase and profits of the same, after deducting therefrom all community*1599 debts, unavoidable losses, necessary and reasonable expenses, and a reasonable commission for the management of the same. *76 So far as appears from the evidence, the community property of J. H. Tippett and his wife, Laura Tippett, has been held together and managed by the petitioner as a unit just as it was before the death of Laura Tippett. No partition or settlement of any kind up to and including the taxable years in question had been made and there is no evidence of any payments or credits made to any of the children. No guardian of their estate has ever been appointed. It is of course true that upon the death of Laura Tippett, her interest in the community real estate immediately vested in her heirs, who were the minor children, whose names have already been stated in our findings of fact. But that fact does not affect the control of the community administrator or survivor over the property. Until the community administration is closed, the income from the estate would be taxable in the hands of the administrator, the same as any other estate, under section 219, which we have quoted. We held in the case of *1600 J. R. Brewer, Administrator,17 B.T.A. 704, that the survivor of the community in Texas occupies a fiduciary relation thereto until there is a partition or settlement of the estate and that it is immaterial whether he is denominated administrator, executor or survivor of the community, so long as it is clear that the purpose is to tax that part of the community property that belonged to the deceased spouse and which is under his control as a fiduciary. On the authority of that case, we approve the respondent's action in holding that the income from Laura Tippett's half of the community estate is taxable, for 1926 and 1927, as a whole against J. H. Tippett, administrator, subject to proper deductions as prescribed in section 219 of the Revenue Act of 1926. Petitioner's assignments of error 3 and 4 are as follows: 3. That for the year 1926 the sum of $17,164.23 should have been taxed as capital net gain instead of ordinary income. 4. That for the year 1927 the sum of $114,056.07 should have been taxed as capital net gain instead of ordinary income. The Texas courts and recently the Court of Appeals for the Fifth Circuit in *1601 Ferguson v. Commissioner, 45 Fed.(2d) 573, and this Board in W. T. Waggoner Estate,24 B.T.A. 711, have held that leases of oil and gas in Texas convey a vested fee title to the oil and gas in place and the cash consideration or bonus received therefor is taxable as a capital gain if the property has been owned and held the required length of time. The leases involved in W. T. Waggoner Estate, supra, for which bonuses were received, were in all essential respects the same as the leases involved in the instant case. On issues 3 and 4 petitioner is sustained. *77 We will next consider petitioner's fifth assignment of error, which is as follows: 5. That $25,970.21, being 1/4th of the sum of $103,880.86 collected by J. H. Tippett for oil and gas leases on mineral classified lands and credited to the Laura Tippett Estate, as ordinary income, was funds belonging to the State of Texas and not taxable to J. H. Tippett, as such fiduciary, unless the Supreme Court of Texas overrules the decision (on that point) of *1602 Green v. Robison, 8 S.W.(2) 655. During 1927 petitioner sold a number of leases on mineral classified lands, viz., lands in which the State of Texas reserved the minerals. These sales were made under what was known as the Relinquishment Act, under which the landowner was constituted the agent of the state to dispose of these mineral rights. The amount received as bonuses from the sale of these leases has been stated in our findings of fact. In an extended opinion in the case of Green v. Robison,8 S.W.(2d) 655; 117 Tex. 533, the Supreme Court of Texas, in passing upon the constitutionality of and construing the Relinquishment Act said: We think the act, as it says in article 5367, creates the owner of the soil the state's agent for the purposes mentioned therein. For the accomplishment of those purposes, said agent is authorized, "to sell or lease * * * the oil and gas * * * upon such terms and conditions as such owner may deem best, subject only to the provisions" of the act. There is no vesting of title or interest in the oil and gas in the owner of the soil. No rights pass to any one until a sale or lease is effected*1603 according to the terms of the act. What is sold, the consideration therefor, the provisions inuring to the benefit of the owner of the soil, what are the proceeds of the sale, and their application, must all be determined from the act. * * * We interpret the act to fix a minimum price of 10 cents per acre per annum and the value of one-sixteenth of the gross production free of cost to the state, for which the state is willing to sell the oil and gas, and the agent is authorized to secure the highest price obtainable for the benefit of the fund to which the land belongs; like amounts received by the state to be paid by the purchaser to the owner of the soil. If a bonus is paid, if a larger royalty or other amounts are contracted for, the state and the owner of the soil receive equally in like amounts. Subsequent to the sale of the leases of the mineral classified lands involved in this proceeding, the State of Texas instituted an action against J. H. Tippett, individually, and as community survivor of his deceased wife, and the Empire Gas and Fuel Company, lessee, to recover one-half of $16,800 cash bonus and one-half of $1 per acre rental remaining after deducting 10 cents*1604 per acre paid the State. The trial court rendered judgment of $8,592, as prayed for, which *78 on appeal to the Court of Civil Appeals of Texas, at Austin, was affirmed upon the authority of Green v. Robison, supra, and Empire Gas & Fuel Co. v. State,21 S.W.(2d) 376. Petitioner has appealed the decision of the Court of Civil Appeals to the Supreme Court of Texas, and, so far as we have been advised, no final decision by the Supreme Court of Texas has yet been rendered on the appeal. The last session of the Texas Legislature passed an act for the relief of land holders who had purchased mineral classified land from the State of Texas and were affected by the decision of the Supreme Court of Texas in Green v. Robison, supra. This act was approved by the Governor on March 13, 1931, and sections 3 and 8 thereof seem clearly to cover petitioner's situation. In view of the act of the Texas Legislature just cited, and of the fact that there is no evidence to show that petitioner has ever paid over to the State of Texas any of the sums received as bonuses from the sale of mineral classified lands, except the 10 cents per acre called for in*1605 the General Leasing Act, and that the evidence does not show that petitioner has ever been sued for an accounting by the State of Texas, except in the one suit of State of Texasv.Empire Gas & Fuel Co. and J. H. Tippett, already referred to, and that he is contesting his liability in said suit, it is not believed that any of the sums received as bonuses for these mineral classified lands should be excluded from petitioner's gross income. As to these items, petitioner's books were kept on the cash receipts and disbursements basis and the items of income were properly returnable in the years when received. Our decision on this issue is for respondent. Cf. Ford v. Commissioner, 51 Fed.(2d) 206; Board v. Commissioner, 51 Fed.(2d) 73. Petitioner's sixth assignment of error is as follows: 6. That petitioner is entitled to additional depletion on the sum of $1,690.83 reported on Exhibit 2 as income from the sale of oil from producing wells. The fiduciary return for 1927 on Form 1041 shows that the only item of oil royalties from producing oil wells was $1,690.83, and from this the full depletion allowance of 27 1/2 per cent, amounting*1606 to $464.98, was deducted and this deduction respondent has allowed. Petitioner is not entitled to any further deduction on this account. Decision will be entered under Rule 50.