356 U.S. 260 (1958)
In 1950 P. G. Lake, Inc., a corporation engaged in the business of producing oil and gas, held a seven-eighths working interest in two commercial oil and gas leases.1 It was indebted to its president in the sum of $600,000.2 In consideration of the cancellation of that debt, Lake assigned the president an oil payment right in the amount of $600,000 plus an amount equal to interest at 3 percent a year on the unpaid balance remaining from month to month, payable out of 25 percent of the oil attributable to the taxpayer’s working interest in the two leases.3 At the time of the assignment it could have been estimated with reasonable accuracy that the assigned oil payment right would pay out in three or more years.4 It did in fact pay out in a little over three years.5 Lake reported the assignment as a sale of property producing a profit of $600,000 and taxable as a long-term capital gain.6
The facts in the Wrather and O’Connor cases are closely similar to those in the Lake case.7 In the O’Connor case the assignors of the oil payments owned royalty interests rather than working interests.8 In the Weed case the taxpayer was the owner of a pooled overriding royalty in a deposit known as Boling Dome.9 In 1947 the taxpayer agreed with one Munro, his tax advisor, on a sulphur payment assignment.10 The taxpayer assigned to Munro a sulphur payment totaling $50,000 and consisting of 86.254514 percent of his pooled royalty interest, which represented the royalty interest on 6,000,000 long tons of the estimated remaining 21,000,000 long tons still in place.11 The purchase price was paid in three installments over a three-year period.12 Most of the purchase price was borrowed by Munro from a bank with the sulphur payment assignment as security.13 The assigned sulphur payment right paid out within 28 months.14 The amounts received by the taxpayer in 1948 and 1949 were returned by him as capital gains.15
In the Fleming case two transactions are involved.16 Fleming and others with whom he was associated made oil payment assignments, the rights and interests involved being held by them for productive use in their respective businesses of producing oil.17 Each oil payment was assigned for an interest in a ranch.18 Each was in an amount which represented the uncontested fair value of the undivided interest in the ranch received by the assignor, plus an amount equal to the interest per annum on the balance remaining unpaid from time to time.19 The other transaction consisted of an oil payment assignment by an owner of oil and gas leases, held for productive use in the assignor’s business, for the fee simple title to business real estate.20 This oil payment assignment, like the ones mentioned above, was in the amount of the uncontested fair market value of the real estate received, plus interest on the unpaid balance remaining from time to time.21
We have here, consolidated for argument, five cases involving an identical question of law.22 Four are from the Tax Court whose rulings may be found in 24 T. C. 1016 (the Lake case); 24 T. C. 818 (the Fleming case); 24 T. C. 1025 (the Weed case).23 (Its findings and opinion in the Wrather case are not officially reported.) Those four cases involved income tax deficiencies.24 The fifth, the O’Connor case, is a suit for a refund originating in the District Court.25 143 F. Supp. 240.26 All five are from the same Court of Appeals, 241 F. 2d 71, 65, 78, 84, 69. The cases are here on writs of certiorari which we granted because of the public importance of the question presented.27 353 U. S. 982.
Whether the consideration received for the assignment of oil payment rights and sulphur payment rights is taxable as ordinary income subject to depletion?28
The purpose of section 117 was to relieve the taxpayer from excessive tax burdens on gains resulting from a conversion of capital investments.29 This exception has always been narrowly construed so as to protect the revenue against artful devices.30 The assignment of any in-oil payment right which extends over a period less than the life of the depletable property interest from which it is carved is essentially the assignment of expected income from such property interest.31 Therefore, the assignment for a consideration of any such in-oil payment right results in the receipt of ordinary income by the assignor.32
Yes. The lump sum consideration seems essentially a substitute for what would otherwise be received at a future time as ordinary income.33 The pay-out of these particular assigned oil payment rights could be ascertained with considerable accuracy.34 Such are the stipulations, findings, or clear inferences.35
Only a fraction of the oil or sulphur rights were transferred, the balance being retained.36 In the Weed case the assigned sulphur payment right paid out within 28 months. The substance of what was assigned was the right to receive future income.37 The substance of what was received was the present value of income which the recipient would otherwise obtain in the future.38
In short, consideration was paid for the right to receive future income, not for an increase in the value of the income-producing property.39 These arrangements seem transparent devices.40 Their forms do not control.41 Their essence is determined not by subtleties of draftsmanship but by their total effect.42
The consideration received for the assignment of oil payment rights and sulphur payment rights is taxable as ordinary income subject to depletion.43
Whether the exchange of oil payment rights for interests in real estate qualifies for nonrecognition of gain under section 112(b)(1) of the Internal Revenue Code of 1939?44
Section 112(b)(1) provides that no gain or loss shall be recognized if property held for productive use in trade or business or for investment is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.45 Treasury Regulations provide that one kind or class of property may not be exchanged for property of a different kind or class.46 The underlying assumption of these exceptions is that the new property is substantially a continuation of the old investment still unliquidated.47
No. In the Fleming case two transactions are involved.48 Fleming and others with whom he was associated made oil payment assignments, the rights and interests involved being held by them for productive use in their respective businesses of producing oil. Each oil payment was assigned for an interest in a ranch. Each was in an amount which represented the uncontested fair value of the undivided interest in the ranch received by the assignor, plus an amount equal to the interest per annum on the balance remaining unpaid from time to time.
The other transaction consisted of an oil payment assignment by an owner of oil and gas leases, held for productive use in the assignor’s business, for the fee simple title to business real estate. The exchange cannot satisfy that test where the effect under the tax laws is a transfer of future income from oil leases for real estate.49 These oil payment assignments were merely arrangements for delayed cash payment of the purchase price of real estate, plus interest.50 Yet the oil payment assignments were not conversions of capital investments.51
The exchange of oil payment rights for interests in real estate does not qualify for nonrecognition of gain under section 112(b)(1) of the Internal Revenue Code of 1939.52