United States Supreme Court Cases & Opinions

U.S. Supreme Court

Burton-Sutton Oil Co., Inc. v. Commissioner, 328 U.S. 25 (1946)

Burton-Sutton Oil Co., Inc. v. Commissioner of Internal Revenue

No. 361

Argued March 25, 28, 1946

Decided April 22, 1946

328 U.S. 25

Syllabus

1. The taxpayer, an operating company for the production of oil, was assignee of a contract relating to oil land whereby the grantee agreed to pay to the grantor 50% of net profits from operations. The contract required the grantee to drill promptly, to account for production, and to sell the production to the grantor on specified terms if the grantor desired to purchase. The landowner and the grantor's transferor retained underlying and overriding royalties.

Held, under the Revenue Acts of 1934 and 1936, that the 50% payments made by the taxpayer to the grantor were deductible from the taxpayer's gross income. Pp. 328 U. S. 26, 328 U. S. 32.

2. The contract here involved could not properly be construed as a sale; it was, rather, an assignment of the right to exploit the property, with a reservation in the assignor of an economic interest in the oil. P. 328 U. S. 37.

3. Ownership of a royalty or other economic interest in addition to the right to net profits is not essential to make the possessor of a right to a share of the net profit the owner of an economic interest in the oil in place. P. 328 U. S. 32.

4. Helvering v. Elbe Oil Land Co., 303 U. S. 372, distinguished. P. 328 U. S. 36.

150 F.2d 621 reversed.

The Tax Court sustained the Commissioner's determination of a deficiency in petitioner's income tax. 3

Page 328 U. S. 26

T.C. 1187. The Circuit Court of Appeals affirmed. 150 F.2d 621. This Court granted certiorari. 326 U.S. 755. Reversed, p. 328 U. S. 37.