Commissioner of Internal Revenue v. P. G. Lake, Inc.

PETITIONER: Commissioner of Internal Revenue
RESPONDENT: P. G. Lake, Inc.
LOCATION: Shotwell Manufacturing Co.

DECIDED BY: Warren Court (1957-1958)
LOWER COURT: United States Court of Appeals for the Fifth Circuit

CITATION: 356 US 260 (1958)
ARGUED: Mar 11, 1958
DECIDED: Apr 14, 1958

Facts of the case


Media for Commissioner of Internal Revenue v. P. G. Lake, Inc.

Audio Transcription for Oral Argument - March 11, 1958 (Part 1) in Commissioner of Internal Revenue v. P. G. Lake, Inc.

Audio Transcription for Oral Argument - March 11, 1958 (Part 2) in Commissioner of Internal Revenue v. P. G. Lake, Inc.

Earl Warren:

Mr. Stull, you may proceed.

John N. Stull:

May it please the Court.

Where I stopped I -- in this hypothetical example of mine, I was sitting back with my royalty receiving $300 a year taxable to me as ordinary income with 27.5% -- percentage depletion tax free to me off the top.

Of course the capital gain was a lot better because instead of deducting 27.5% off the top, they deduct 50% and the highest tax rate is only 25%.

Now, I could have realized a capital gain by getting out of this deal completely and selling out my interest but I don't want to because this interest maybe more valuable than even the engineers say now that maybe that through these new methods of gas injection, and water flooding, and so on, that instead of a thousand barrels, that royalty may produce actually before the field is exhausted perhaps 1500 barrels.

Furthermore, Texas is a prolific state and it may be that when this field is about exhausted, somebody will come along and draw much deeper and hit a whole new oil bearing sand.

In that case I might discover that I've got 10,000 additional barrels applicable to this royalty.

So I'm in a dilemma.

I want a capital gain but I want to stay in.

I want to get out but only out enough to get a capital gain.

So what I do is use this device called the carved out oil payment.

Now to return to my example, I think I'll get $300 a year every year for 10 years.

I go around to X who is financially responsible or otherwise men.

If he's not responsible, he can probably borrow the money because this is a good field and I tell him that for $580 cash that he'll give me $580 cash, I will assign to you X an oil payment which means that the -- while this oil payment is in effect, the pipeline company that is purchasing the oil and was sending those checks to me, monthly checks, as this oil was being produced, we'll now send those checks to you.

I've got $580 cash.

You will receive those checks until you've received enough -- enough checks to make $600 plus interest of 4%, we say.

I'm certainly sure -- I'm reasonably sure that this will pay out on a little over two years, $600 plus whatever the interest is.

Now the mechanics of this, the assignment is carried out by a formidable looking document by which I grant bargain, sell, transfer, assign, and convert my royalty interest to X until he has received $600 plus 4% interest.

Thereafter, that assigned interest -- interest according to this instrument, terminates and the royalty reverts and revests in me.

Its sign, sealed, delivered, and recorded.

Because it's recorded, the pipeline company purchasing the oil stopped sending me the checks and sends them to my friend X until this temporary assignment terminates.

William O. Douglas:

You make it -- you make it sound rather transparent that --

John N. Stull:

Well, Your Honor --

William O. Douglas:

Are those the facts of these cases?

John N. Stull:

Your Honor, I'm honestly not exaggerating.

William O. Douglas:

What I'm getting at is this.

Is -- are there -- do we have here involved a complete sell -- sale of -- of a one quarter interest or a --

John N. Stull:

Well, Your Honor let me -- may I give you the facts (Voice Overlap) --

William O. Douglas:

-- transfers for pledges for notes or mortgages?

John N. Stull:

No, sir.