Cline v. Commissioner

¶1dissenting: I cannot escape the conclusion that petitioners herein simply received royalty income representing compensation for services. Assuming, for the purposes of decision, that the right which they received under the February 1, 1966, agreement constituted "property” sufficient to support their claim of an economic interest for purposes of depletion (an issue which respondent concedes and we are therefore not called upon to decide), it does not necessarily follow that such property constituted a capital asset for purposes of determining the nature of the income which they subsequently derived therefrom. Cf. H. B. Zachry Co., 49 T.C. 73, 80 n. 5 (1967), where we indicated that, although a carved-out oil payment was "property” for purposes of section 351, the transferor might still remain taxable on the payments when received under the principle established by Commissioner v. P. G. Lake, Inc., 356 U.S. 260 (1958). See Bittker & Eustice, Federal Income Taxation of Corporations and Shareholders 3-12, 3-13 (3d ed. 1971). See also Miller, Oil & Gas Federal Income Taxation 18-25 (1976 ed.).

¶2Similarly, while I recognize that property received as compensation for services, the value of which at the time of receipt is considered ordinary income, can on occasion be considered a capital asset, I am not convinced that such a result follows where, as is the case herein, that property cannot be valued at the time of receipt. In Ford S. Worthy, Jr., 62 T.C. 303 (1974), the taxpayer received stock which did not have a readily ascertainable fair market value at the time of receipt. The stock was subsequently redeemed and the question before us was whether the taxpayer realized ordinary income or capital gain therefrom. We held that the proceeds of the redemption constituted compensation for personal services and should be treated as ordinary income. We reached the same result, under section 1.421-6, Income Tax Regs., where warrants instead of stock were received. Frank L. Shamburger, 61 T.C. 85 (1973), affd. per curiam 508 F.2d 883 (8th Cir. 1975). See also sec. 1.61-15, Income Tax Regs. It seems to me that both Worthy and Shamburger furnish a useful analogy for resolving the question before us. A further analogy can be found in United States v. Frazell, 335 F.2d 487 (5th Cir. 1964), on rehearing 339 F.2d 885 (5th Cir. 1964), where the court held that the fact that the taxpayer had received a partnership interest for services did not preclude a holding that the subsequent substitution of corporate stock for that interest gave rise to ordinary income. Cf. Vestal v. United States, 498 F.2d 487 (8th Cir. 1974), rehearing denied 498 F.2d 495 (8th Cir. 1974).1

¶3In my view, petitioners’ right to royalties under the February 1, 1966, agreement (which the parties herein concede was incapable of being valued at that time) was not a capital asset, with the result that the royalties received thereunder (or in substitution therefor under the December 30, 1966, agreement) should be treated as ordinary income representing compensation for services. In this connection, I should add that, even if the right to royalties created by the February 1, 1966, agreement were treated as a capital asset, the December 30, 1966, agreement represented no more than a modification of the earlier agreement in respect of the measure of payment and did not constitute a sale or exchange of that right sufficient to justify treating the royalties subsequently received as capital gain.