Brief Fact Summary. Frank Cowden, Sr. and his wife leased the mineral rights to Stanolind Oil in exchange for “bonus: or “advance royalty” payments. The payments were not conditioned on production but were deferred over a period of years. The Cowdens assigned the payments to a bank for face value.
Synopsis of Rule of Law. Parties may enter into legal agreements for the purpose of reducing taxes, but if the consideration for one of the parties is equal to cash then it should be taxed accordingly.
Issue. Were the future bonus payments the equivalent of cash and taxable as current income?
Held. Circuit Judge Jones issued the opinion for the United States Fifth Circuit Court of Appeals in remanding to the Tax Court because the Tax Court improperly considered the willingness of the lessee to pay and the willingness of the Cowdens to receive the full bonus upon execution of the leases. The Tax Court should have considered other facts to determine if the promise in this case was a cash equivalent.
Discussion. In determining whether a promise is the equivalent of cash the Court of Appeals found that the factors to be considered are whether the promise to pay is unconditional and assignable, not subject to set-offs, and is the kind that is frequently transferred to lenders or investors at a small discount.