Fred W. Alkire and Lois O. Alkire v. Robert A. Riddell

The issue involved in this appeal is whether royalty payments based upon the extraction of sand and gravel are entitled to capital gains treatment or whether, as the District Court found, they are ordinary income subject to the depletion allowance.

Beginning in December, 1954, Fred W. Alkire (the taxpayer) conducted a sand and gravel business on leased property. In the summer of 1955, Star Rock Products, Inc., acquired this business. It paid the taxpayer $60,000 for his rock crush ing plant, truck scales, and other leasehold improvements. The taxation of this income is not in dispute. As part of the transaction, the taxpayer assigned his leasehold right to mine the property to Star Rock Products in return for a royalty of three cents a ton of sand and gravel extracted and sold from the premises. Star Rock Products did not assume an obligation either to mine a minimum quantity or to pay a minimum royalty. The assignment was to remain effective as long as Star Rock Products extracted minerals from the premises.

The taxpayer contends that he sold the minerals to Star Rock Products and that royalties of $132,051.53 for the period 1959 to 1962 inclusive should be taxed at long-term…