Ltr. Rul. 8135048 (June 3, 1981)

Code Secs. 1031, 61

   This is in reply to a letter dated November 20, 1980, and subsequent
correspondence, submitted on your behalf by your authorized
representative, requesting rulings that an exchange of properties between
you and Corporation A will qualify as a "like-kind" exchange under section
1031(a) of the Internal Revenue Code and that such exchange will not
constitute an assignment of income by you to Corporation A.

   Corporation A is incorporated in State C. It is owned totally by both
of you, each of you holding 50% of the outstanding capital stock.

   Corporation A owns mineral interests, mineral leases and overriding
mineral royalties in land located in State C and State D. The mineral
interests consist of approximately k acres of land at a current fair
market value of $m per acre.

   In addition to the mineral interests, leases, and royalty rights,
Corporation A owns an apartment building and office building in State C
and a 50% interest in a condominium in State D. The estimated fair market
values of the apartment building, office buildings, and 50% interest in
the condominium are $n, $z and $o, respectively. Each is subject to an
existing mortgage which is estimated to be $p and $q for the apartment
building and office building and $r for the 50% interest in the
condominium.

   You own overriding mineral royalties on approximately s acres of land
in State C. The royalties have an unappraised estimated fair market value
of approximately $t to $u per acre for a total estimated fair market value
of approximately $v to $w. An appraisal will be done to establish the
exchange value of your royalty interest.

   You hold these mineral royalties for investment, not as dealers. Your
basis in the royalties is $x.

   The royalties represent the interest in mineral leases retained by you
as lessees on leases sold to mineral developers. If the intital term of
the mineral lease sold to mineral developers expires without discovery or
production of minerals, your retained royalty interest expires with the
lease. If minerals are discovered or produced or both within the initial
term of the lease, your overriding royalty interest will extend until
exhaustion of the deposit.

   The overriding royalties are rights in a specific percentage of gas or
oil produced. There is no limitation on the amount of royalties which may
be paid under the royalty agreement, aside from the percentage limitation.

   You propose to transfer a number of your overriding royalty interests
to Corporation A in exchange for the apartment building, the office
building and the interest in the condominium. The relative exchange fair
market values of all of these properties would be supported by appraisals.
After this exchange, you propose to transfer the balance of your
overriding royalty interests to Corporation A outright. You characterize
this subsequent transfer as a contribution to the capital of Corporation
A.

   After these transfers have taken place, a statutory merger of
Corporation A with Corporation B is proposed. Corporation A will be the
surviving entity and will be publicly-held following the merger.

   The proposed merger is under review by the Securities and Exchange
Commission. The S.E.C. is requiring Corporation A to reflect the values of
the overriding royalty interests at their show value to you. Corporation A
had proposed to book the interests in an amount equal to the book values
of the properties relinquished.

   Under the S.E.C. view the book value of Corporation A will decrease
immediately following the exchange of the overriding royalty interests for
the buildings. Since Corporation A will be a publicly-funded corporation
following the merger, it cannot afford to jeopardize its book value. It is
for this reason that you propose to transfer the balance of your
overriding royalty interests to Corporation A outright as described
previously.

   The purpose of the transfers is to consolidate the overriding royalty
interests in Corporation A as related business properties and to remove
the building as unrelated business properties from Corporation A prior to
the merger. The transfer of the overriding royalty interests will be
accomplished absolutely and unconditionally. You will retain no further
interest in the royalties or the related real property.

   Section 1031(a) of the Code provides that no gain or loss shall be
recognized if property held for productive use in trade or business or for
investment (not including stock in trade or other property held primarily
for sale, nor stocks, bonds, notes, choses in action, certificates of
trust or beneficial interest, or other securities or evidences of
indebtedness or interest) is exchanged solely for property of like kind to
be held either for productive use in trade or business or for investment.

   Section 1031(d) of the Code provides that if property was acquired on
an exchange described in section 1031(a), then the basis shall be the same
as that of the property exchanged, decreased in the amount of any money
received by the taxpayer and increased in the amount of gain or decreased
in the amount of loss to the taxpayer that was recognized on such
exchange.

   Section 1.1031-1(b) of the Income Tax Regulations provides that, as
used in section 1031(a) of the Code, the words "like kind" have reference
to the nature or character of the property and not to its grade or
quality. The fact that any real estate involved is improved or unimproved
is not material, for that fact relates only to the grade or quality of the
property and not to its kind or class. Unproductive real estate held by
one other than a dealer for future use or future realization of the
increment in value is held for investment and not primarily for sale.

   Section 1.103-1(c) of the regulations provides that no gain or loss is
recognized if a taxpayer who is not a dealer in real estate exchanges city
real estate for a ranch or farm, or exchanges a leasehold of a fee with 30
years or more to run for real estate, or exchanges improved real estate
for unimproved real estate.

   Revenue Ruling 72-117, 1972-1 C.B. 226 holds that overriding oil and
gas royalties are interests in real property for the purpose of
replacement of property under section 1033.

   You have held the overriding mineral royalty interests for investment.
You intend to transfer these interests to Corporation A in exchange for an
apartment building, office building and a 50% interest in a condominium.
The appraised fair market values of the royalty interests will equal the
appraised fair market values of the buildings. The buildings will be
subject to existing mortgages.

   "Like-kind" as used in section 1031(a) has reference to the nature or
character of the property and not its grade or quality. Consequently,
improved real estate may be exchanged for unimproved real estate, city
real estate may be exchanged for a farm, or a leasehold of a fee with 30
years or more to run may be exchanged for real estate. However, to qualify
under section 1031(a), the real estate exchanged may not be held by a
dealer.

   According to Rev. Rul. 72-117, overriding royalty interests are
interests in real property for purposes of section 1033 of the Code. By
analogy, overriding royalty interests are interests in real property for
purposes of section 1031(a) of the Code.

   Accordingly, the exchange of your overriding royalty interests for the
apartment building, office building, and 50% interest in the condominium
constitutes a "like-kind" exchange within the meaning of section 1031(a)
of the Code resulting in no recognized gain to you. Your basis in the
buildings will be the basis of the royalty interests transferred to
Corporation A.  Section 61(a)(6) of the Code provides that unless
otherwise excluded by law, gross income means all income from whatever
source derived including royalties.

   The assignment of income doctrine provides that a taxpayer who assigns
a right to income is generally taxable on income received by the assignee.
However, a shift of income to an assignee may be accomplished if the
income producing property itself is transferred. See Lucas v. Earl, 281
U.S. 111 (1930); Helvering v. Horst, 311 U.S. 112 (1940), 1940-2 C.B. 206.

   Rev. Rul. 67-118, 1967-1 C.B. 163, provides that an overriding royalty
interest is an interest in oil and gas in place, created from the working
interest and entitling its owner to a specified fraction of gross
production, free of operating and development costs. The overriding
royalty interest is coextensive with the term of the working interest from
which it was created. The transfer of an overriding royalty is an
assignment of a property interest and is not an anticipatory assignment of
income. Compare Commissioner v. P.G. Lake, Inc., 356 U.S. 260 (1958), 1958-
1 C.B. 516.

   You will transfer the overriding royalty interests to Corporation A
absolutely and unconditionally, retaining no further interest in them. The
royalties are property interests. As such you are conveying property
producing income, not just the privilege alone to receive income.

   Accordingly, the exchange of your overriding royalty interests for the
buildings will not constitute an anticipatory assignment of income.

   Except as specifically ruled above, no opinion is expressed as to the
federal income tax consequences of the transaction described above under
any other sections of the Code.

   This ruling is addressed only to the taxpayers who requested it.
Section 6110(j)(3) of the Code provides that it may not be used or cited
as precedent.

   Pursuant to the power of attorney on file with this office, we are
sending a copy of this letter for your authorized representative.
Sincerely yours, Anthony Manzanares, Jr. Chief, Individual Income Tax
Branch