## Facts

- Frank Cowden, Sr. and his wife, together with their children, executed an oil and gas lease covering Texas land to Stanolind Oil and Gas Company in April 1951.
- Supplemental agreements required Stanolind to pay “bonus” (advance royalty) amounts totaling $511,192.50: a small amount in 1951 and two large fixed sums payable in early January 1952 and early January 1953.
- The agreements stated Stanolind’s duty to pay was an absolute personal obligation, not conditioned on development or production, and payable “in all events.”
- In late 1951, the taxpayers assigned their rights to the 1952 payment to a local bank for nearly face value (only a small discount); in late 1952, they similarly assigned their rights to the 1953 payment for a nominal discount.
- The taxpayers reported the amounts realized on the assignments as long-term capital gain.
- The Commissioner treated the fixed payment rights as taxable in 1951, as ordinary income, based on the view that the obligations were cash or its equivalent when created; valuation and depletion treatment were disputed.

## Issues

1. Whether the fixed, future “bonus” payment obligations under the lease were cash equivalents includible in income in 1951 (when the rights arose), rather than in later years when assigned or paid.
2. Whether cash equivalence depends on the obligation being in negotiable instrument form, and what criteria govern the cash-equivalence determination.
3. If includible in 1951, how the fair market value of the payment rights should be determined.

## Decision

- The Fifth Circuit rejected a categorical rule that only negotiable instruments can be cash equivalents, and stated that even a promissory note is not necessarily a cash equivalent.
- The court held cash equivalence turns on economic characteristics and market facts, not merely on whether the obligor could have paid cash immediately or the taxpayer structured deferral for tax reasons.
- The court articulated factors relevant to whether a promise to pay is the equivalent of cash, including whether the promise is unconditional, made by a solvent obligor, assignable, free of setoff, readily marketable, and not speculative or contingent.
- The court held the Tax Court applied an incorrect approach by focusing primarily on the parties’ willingness and ability to pay and receive the full bonus in 1951.
- The judgment was remanded to the Tax Court to determine (1) whether the obligations were cash equivalents and, if so, (2) their fair market value in 1951.

## Legal Principles

- A taxpayer who receives a contractual right to future payment may have current income if, in substance, the right received is a cash equivalent.
- Cash equivalence does not require a negotiable instrument; the analysis turns on whether the right is effectively convertible to cash at a small discount in the market.
- Relevant cash-equivalence considerations include: unconditional promise, obligor solvency at delivery, assignability, lack of setoff defenses, ready marketability, and limited risk or contingency.
- Even where timing doctrines such as constructive receipt may be implicated, inclusion requires evaluating the nature of what was actually received and, if treated as property, determining its fair market value rather than presuming face value.

## Conclusion

The Fifth Circuit required a fact-based cash-equivalence and valuation analysis for fixed future lease “bonus” obligations, rejected formal negotiability requirements, and remanded for findings on whether the payment rights were cash equivalents and their fair market value in 1951.


Cowden v. Commissioner, 289 F.2d 20 (5th Cir. 1961)