Ben Gralapp and Lelia Gralapp v. United States of America, James Watson and Marcella Watson v. United States

458 F.2d 1158, 42 Oil & Gas Rep. 491, 29 A.F.T.R.2d (RIA) 1066, 1972 U.S. App. LEXIS 9842

• Court: Court of Appeals for the Tenth Circuit
• Decided: May 1, 1972
• Docket: 704-70
• Status: Published

Opinions

LEWIS, Chief Judge.

These are tax refund suits, consolidated for trial and appeal, wherein taxpayers seek recovery of income tax and interest in the sum of $113,428.02 paid for the taxable year ending December 31, 1960. The trial court denied recovery, 319 F.Supp. 265, and the decision of the court below details in great part the stipulated and determinative facts which we deem unnecessary to restate except as generalizations. We affirm, but in so doing do not accept as an absolute the ruling below, or the position of the government, that a taxpayer cannot properly elect in any instance to report on an installment basis the proceeds of a sale received on a contract having an open end selling price. So, too, we must reject the claim of taxpayers to an absolute right to the privilege of installment reporting simply based on the fact that less than 30% of the minimum selling price is received during the first year and which must remain less than 30% if the open end contingency materializes.

In the case at bar taxpayers sold, in 1960, their respective interests in designated oil and gas leases for a sum certain received in 1960 and promissory notes payable the following year. The contract of sale provided for a “contingent additional consideration,” in the amount of 48% of the estimated future net revenues, which estimate was to be made and discounted to the then present value only if and when total production from the leases had reached 495,852 barrels of oil.¹ This amount was reached in 1965, the estimate was then made, and the amount of the contingent additional consideration was determined to be $512,366. A cash payment was made in 1966 and promissory notes were executed and payment made thereunder in 1966, 1967 and 1968 in satisfaction of the notes. The taxpayers reported the cash payments received in 1960 and 1961, and in 1966, 1967 and 1968 on the installment basis of reporting, pursuant to 26 U.S.C. § 453.

The taxpayers’ election to report under the installment method contains no element of deliberate write off because nearly 100% of each amount received by them was fully taxable in the year received. However, the value of the contingency under the sales agreement here considered is by no means de minimus as an element of actual sales price and, as the parties have stipulated, could not be specifically determined until the eventuality occurred and could not be valued before that time. This peculiarity which we emphasize dictates the conclusion that in 1960 it was impossible to determine the total contract price and therefore impossible to calculate the ratable portion of each payment which represented gain under installment payments.

The judgment is affirmed for the reasons stated by the trial court except as qualified by the views expressed herein.

1 . That this was a sale of a separate asset was apparently raised early in the suit, but was not pursued and was not raised on appeal.