Appeal of Sullivan

[1015] OPINION. Phillips: The decision of this appeal involves two questions: (1) Whether the assignment made by the taxpayer to his wife on July 28, 1919, was an assignment of his interest in the Prater lease or of the proceeds of a sale of that lease; and (2) if the Commissioner is wrong in his first contention, whether the taxpayer realized taxable income at the time the contract was executed between him and the Gulf Production Co., conveying to him a one-eighth interest in the oil produced from the Prater lease, subject to the payment of the amounts mentioned in that contract. The decision of the first question depends upon whether taxpayer, at the time of the assignment to his wife, had made an agreement for the sale of his interest to the Progressive Production Co. After a careful review of the oral and documentary evidence we conclude that at the date of such assignment the negotiations for the sale were in an inchoate state and not enforceable by or against either the taxpayer or the Progressive Production Co. The evidence also establishes that the assignment was a bona fide assignment and that, while the husband continued the negotiations for the sale of the property, he was acting on behalf of his wife, who was not familiar with such business, and that the proceeds were received and retained by the wife. The bona fides appears to be conceded. The Commissioner has determined that for subsequent years the income from investments by the wife of the proceeds of the contract was taxable as her income. The contract provided for a total sale price of $238,000, of which only $5,000 was paid in cash, and the evidence establishes that the Progressive Production Co. was without any considerable assets. The Commissioner determined that the proceeds from the contract with the Progressive Production Co. were to be reported as income for the years in. which the notes of that company were paid and not as income for 1919. This appears to have been upon the theory that the notes of the Progressive Production Co. had no readily realizable market value. The Commissioner further contends that, if no income was realized by the taxpayer when the interest in the Prater lease was sold to [1016] the Progressive Production Co., nevertheless the taxpayer realized some taxable gain at thé time the contract was entered into between himself and the Gulf Production Co., giving to him a one-eighth interest in the oil produced from the Prater lease. No value of this interest has been fixed by the Commissioner, nor can any value be determined from the proof before us. The Commissioner relies upon the presumption that„a deficiency in tax having been determined, the burden of proof is upon the taxpayer to establish that such deficiency is incorrect. Where the facts upon which the Commissioner bases his determination are shown to be incorrect it may well be doubted whether any presumption of correctness can result because certain other sums might be taxable as income to the taxpayer. It appears in this case, however, that the interest of the taxpayer, when received, had no more than a speculative value. The tract had not been proven; the nearest producing well was 1% miles from the property and the next 20 miles. No well had been drilled, and before the taxpayer could receive income from his interest it was essential that the sum of $35,000, paid for the lease, be reimbursed to the Gulf Production Co., as well as the cost and expense of drilling the well. Certainly, the value of the taxpayer’s interest in the Prater lease, when received by him, was at most a very small fraction of the amount subsequently realized when the land had been proven. In the absence of any proof that this interest had a market value, the deficiency, so far as this phase of the appeal is concerned, must be disallowed.