Rev. Rul. 59-282

Advice has been requested as to the applicability of the documentary stamp tax imposed by section 4361 of the Internal Revenue Code of 1954 to conveyances for valuable consideration of production payments reserved from a transfer of oil, gas, and mineral interests.

Owners of certain interests in oil, gas and mineral leases assigned their interest in such leases to an oil company for a cash consideration, reserving to themselves a `Primary Production Payment,' payable out of 90 percent of all the oil, gas, and hydrocarbons and other minerals that may be produced from the property. They also reserved a `Secondary Production Payment,' which is payable out of 90 percent of all the oil, gas, etc., produced from the leased properties from and after the time the Primary Production Payment is fully liquidated and discharged. On the day the assignment to the oil company was executed, the assignors sold to other parties the retained Primary Production Payment and the retained Secondary Production Payment.

Section 4361 of the Internal Revenue Code of 1954 imposes a tax on each deed, instrument, or writing, whereby any lands, tenements, or other realty sold shall be granted, assigned, transferred, or otherwise conveyed to, or vested in, the purchaser or purchasers, or any other person or persons, by his, her, or their direction, when the consideration or value of the interest or property conveyed, exclusive of the value of any lien or encumbrance remaining thereon at the time of sale, exceeds $100. Section 43.4361-1(a) of the Documentary Stamp Tax Regulations provides, in part, as follows:

(3) For purposes of the tax imposed by section 4361, the determination of what constitutes `realty' is not controlled by the definition or scope of that term under State law. State law determines the character of the rights conveyed by an instrument, but whether such conveyance constitutes a conveyance of `realty' is to be determined under Federal law.

See G.C.M. 23295, C.B. 1942-2, 271; and Phillips Petroleum Co. v. Jones , 176 Fed.2d) 737, Ct. D. 1733, C.B. 1950-2, 135.

It has been held that the leasing of oil and gas property, which creates in the lessee an interest in the natural resource content of the land, is a conveyance of realty within the meaning of section 4361 of the Code and is subject to the tax imposed by that section. See M.T. 16, C.B. 1943, 1170; Phillips Petroleum Co. v. Jones, supra . To the extent that the assignors reserved to themselves the right to the production payments, they excluded from the assignments of their interests in the leases and retained for themselves interests in the oil, gas and minerals in place. It is held, therefore, that the sale, by the assignors, or such retained interests in the oil, gas and minerals in place is a conveyance of realty sold within the meaning of section 4361 of the Code and is subject to the tax imposed under that section.

It should be noted in this connection that the Supreme Court of the United States in Commissioner v. P. G. Lake, Inc., et al. , 356 U.S. 260, Ct. D. 1823, C.B. 1958-1, 516, proceeded on the premise that `oil payments are interests in land,' while holding that the consideration received for oil payment rights is taxable as ordinary income subject to depletion.

Because the Internal Revenue Service has previously ruled that similar conveyances are not subject to the stamp tax, and under the authority contained in section 7805(b) of the Code, this ruling will not be applied prior to August 31, 1959, the date of its publication in the Internal Revenue Bulletin.