William P. Cheng v. Commissioner Internal Revenue Service

William P. Cheng deducted $30,000 from his income in 1977 and $60,000 in 1978 based on royalty payments he made in those years on diamond mining investments. The Commissioner of the Internal Revenue Service disallowed the deductions, proposing a deficiency in taxes paid for those years. Cheng petitioned the Tax Court for a review of the ruling.

Cheng appeals from the Tax Court’s order granting summary judgment in favor of the Commissioner. He argues that the payments were deductible as minimum annual royalty payments under Treas.Reg. 1.612-3(b)(3). This case also presents the preliminary question whether the filing of a bankruptcy petition automatically stays an appeal from a final judgment of the Tax Court. We hold that our proceedings are not stayed, and we reverse and remand.

I

Imperial Finance, N.Y., (Imperial) possesses a leasehold right to mine diamonds on certain properties in Namibia. Imperial conveys subleases to others authorizing them to engage in diamond mining on its leaseholds for a minimum annual royalty payment of $150,000. The sublease entitles the sublessee to remove up to 1200 carats of diamonds per year on the property without paying additional royalties.…