Max Rosenn and James Rosen, Circuit Judges, and VanArtsdalen, District Judge.
MAX ROSENN, Circuit Judge.
The sole issue of this appeal is whether the Tax Court erred in finding that Mrs. Walker and her estate received ordinary income from the sale of sand and gravel (fill) on her land.*fn1
Appellant and the Government agree on the applicable principles of law. Burnet v. Harmel, 287 U.S. 103, 53 S. Ct. 74, 77 L. Ed. 199 (1932), held that mineral royalties paid under a lease were ordinary income to the taxpayer. However, if the minerals were sold outright, the taxpayer could take capital gain under the applicable provisions of the Internal Revenue Code, now embodied in 26 U.S.C. § 1231. Whether the necessary sale took place depended on whether the taxpayer had retained an economic interest in the minerals in place. A taxpayer retained such an interest if he had: (1) acquired by investment the interest in the minerals in place; and (2) looked to the extraction of the mineral for the return of his capital. Commissioner of Internal Revenue v. Southwest Exploration Co., 350 U.S. 308, 314, 76 S. Ct. 395, 100 L. Ed. 347 (1956). See also, Palmer v. Bender, 287 U.S. 551, 53 S. Ct. 225, 77 L. Ed. 489 (1933). In other words, the critical question that must be answered in determining the tax status of the income derived from the sale of the minerals is whether or not the taxpayer looks to payments dependent on extraction for his return. Rutledge v. United States, 428 F.2d 347, 351 (5th Cir. 1970). If the payments are not so conditioned capital gain accrues, Richard L. Ellis, 56 T.C. 1079 (1971); otherwise, ordinary income is generated. Dingman v. United States, 429 F.2d 70 (8th Cir. 1970); Laudenslager v. Commissioner of Internal Revenue, 305 F.2d 686 (3d Cir. 1962).
Where the parties differ in this case is in the evaluation of the particular contracts signed by the taxpayer, Mrs. Walker, and the contractors who removed the fill from her land. In 1922, Mrs. Walker and her husband purchased their farm, which they operated commercially until Mr. Walker's death in 1961. After the death, an appraiser evaluated the various uses to which the property could be put and concluded that the land, which fronted on a busy highway, could be valuable commercially. However, it would have to be graded before much of the area fronting on the road could be leased or sold.
In 1963, Mrs. Walker concluded an agreement with a contractor which provided that the contractor would grade part of her property and, as the grading progressed, purchase the fill he removed at sixteen cents a cubic yard. The relevant operative provisions of the contract stated:
1. Owner hereby retains the Contractor to grade the property of the Owner, described in Exhibit 'A' hereto, by removing fill dirt and other minerals therefrom, said grading operation, however, is subject to the following terms and conditions:
(a) All material removed by Contractor from the property described in Exhibit 'A' hereto shall become the property of the Contractor upon payment to Owner of the sum of Sixteen Cents (16 cents) per cubic yard of material removed; said payment to be made on or before the Fifteenth day of each month for material removed for the preceding month, said payments to be made in accordance with the cross sectionings and measurements of the material removed made by or on behalf of Contractor;
(b) Grading and the removal of material shall start at the Southeasterly right-of-way line of Route No. 13 and proceed Southeasterly to the right-of-way line of the Pennsylvania Railroad Company; provided, however that the grading of that portion of said property extending Southeasterly from Route No. 13 to a distance of Four Hundred (400) feet shall be graded to an elevation of One (1) foot above Route No. 13 and such portion of said grading shall be completed by the Contractor during the 1963 calendar year.
(h) Contractor shall have the right at all times to stock pile top soil and other materials upon any portion of the property shown on Exhibit 'A' hereto until such time as said top soil is to be restored and/or such material is sold by Contractor for construction or other purposes;
Two further provisions of the contract provided that the contractor would amesite a driveway on the farm and that he would have an option to grade and remove the fill on the rest of the property at eighteen cents (18 cents) a cubic yard for the first million cubic yards removed and at twenty cents (20 cents) a cubic yard thereafter.
The work began, the driveway was amesited, and the fill removed. The Zoning Commission of New Castle County inquired whether there was a commercial sand pit on the property, but taxpayer's counsel wrote back that taxpayer was simply having her property graded. The matter was not further pursued.
In 1965, an amendment to the original agreement was signed, providing for the contractor to grade additional parts of the farm. While it incorporated most of the provisions of the ...