Nature of the Case
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Facts
The Lake, Wrather, and O’Connor cases are similar. Lake (P) was engaged in the business of producing oil and gas and had a 7/8th interest in two commercial oil and gas leases. P was indebted to its president to the sum of $600,000. In consideration of his cancellation of the debt, P assigned an oil payment right in the amount of $600,000 plus interest at 3 percent on the unpaid balance payable out of 25% of the oil attributable to P’s working interest in the two leases. The pay-out was reasonably anticipated to take 2-3 years. P reported the payment assignment as a sale of property with a profit of $600,000 and a long-term capital gain. The Commissioner determined that the monies were taxable as ordinary income. The Court of Appeals started from the premise that oil payments are interests in land; this was taken from Texas law.
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