Before KALODNER, STALEY and SMITH, Circuit Judges.
This petition to review the decision of the Tax Court*fn1 presents the question whether amounts received by taxpayers under a contract for the excavation and removal of earth fill from their land constitute ordinary income, as the Tax Court held, or capital gain, as taxpayers contend.
The facts as found by the Tax Court are as follows:
On October 1, 1945, taxpayers, Walter R. Laudenslager and his wife Marguerite, purchased certain property in Middletown Township, Monmouth County, New Jersey, which they used as a residence and farm.
In 1952 the New Jersey Highway Authority ("Authority") fixed and announced the alignment for a proposed limited access toll highway which cut across a section of taxpayers' property. A portion of their property was taken in condemnation by the Authority. Their remaining property was located approximately 300 to 400 feet from the Red Bank entrance to the new highway.
George M. Brewster & Son, Inc. ("Brewster"), a road building contractor, became the successful bidder for the contract to construct the section of the highway adjacent to taxpayers' property. Brewster's contract with the Authority provided that it would be its responsibility to acquire "borrow" material (fill dirt required for road construction) from an outside source at its own expense to complete the highway to its final grades and elevations. Brewster, prior to submitting its bid, had determined through tests that taxpayers' property could provide the requisite quantity and quality of earth fill, and had inquired of taxpayers whether it could buy either a section of their farm from which the fill could be obtained, or the fill itself. Taxpayers refused to sell any of their property but agreed to permit Brewster to buy fill from certain sections of it. On May 1, 1953, taxpayers and Brewster entered into an agreement which provided, in pertinent part, as follows:
"WHEREAS, * * * [Brewster] desires to purchase from * * [taxpayers] earth fill to be excavated from portions of the above described premises.
"NOW THEREFORE, * * * [taxpayers] hereby * * * [agree] to permit * * * [Brewster], its agents and servants, to enter into and upon and leave from the above described premises over existing roadways with all necessary equipment therefor, and to excavate and remove from the said premises earth fill or other material therefrom in conformity with and according to the Grading Plan approved and signed by both parties hereto * * *, and * * * [Brewster] agrees to complete the excavation and grading in accordance with the aforesaid Grading Plan. It is agreed by both parties hereto that * * * [Brewster] will confine its grading operations within the limits as shown on the aforesaid Grading Plan * * *.
"Any material excavated and removed from the said property shall become the property of * * * [Brewster] according to the terms and conditions of this Agreement.
"* * * [Brewster] agrees to pay unto * * * [taxpayers], the sum of Five Cents ($.05) per cubic yeard for all material removed from said property. It is further understood and agreed between the parties hereto that a minimum quantity of 400,000 cubic yeards is to be removed from said property and that this minimum quantity is based on the original borrow material requirements of 795,700 cubic yards as specified on the contract made between * * * [Brewster] and the New Jersey Highway AuthorityGarden State Parkway. * * *
"Notwithstanding the provisions herein with respect to the minimum quantities called for under this Agreement, it is expressly understood and agreed that should the New Jersey Highway Authority reduce the original borrow material requirements on the aforesaid contract, then and in that event the minimum quantities called for herein and the total amount payable hereunder will be reduced accordingly. It is agreed by and between the parties hereto that should the aforesaid minimum quantity be decreased or increased * * * [Brewster] will provide * * * [taxpayers] with a Revised Grading Plan, if requested by * * * [taxpayers], which Revised Grading Plan shall reflect the grades and appearances of the premises based upon such increase or decrease.
"* * * [All] payments will be made on or about the 15th day of each month for material excavated, removed and used in the performance of the aforesaid contract during the preceding month. * * *
"* * * [Brewster] hereto advances to * * * [taxpayers] on account of this agreement, the sum of Five Thousand Dollars ($5,000.00) to be credited against payments due hereunder.
"The borrow material being purchased under this contract is required to meet specifications provided by the New Jersey Highway Authority. It is understood and agreed that * * * [Brewster] shall not be required to take or remove any material which does not meet such specifications and that if there shall not be sufficient quantities available which shall meet such specifications in the area involved in this contract, * * * [taxpayers] will allow * * [Brewster] to enter into and acquire further areas within which to remove suitable borrow material.* *
"IT IS AGREED by and and between the parties hereto that * * * [Brewster] will remove and stockpile outside of the adjacent grading limits all top soil from any part of said premises from which material is excavated and to respread all or part of top soil upon the graded area, at the termination of the operation if requested by * * * [taxpayers], for the sum of Twenty-five Hundred Dollars ($2,500.00), said sum to be deducted from payments due hereunder. * * *"
Attached to the May 1, 1953 agreement was a map of taxpayers' property showing the area from which Brewster was to remove earth fill and the depth of the excavation to be made in order that Brewster might obtain the 400,000 cubic yards specified in the agreement. As work on the highway progressed Brewster needed additional fill. Each time more fill was needed, Mr. Laudenslager and a representative of Brewster decided upon the area from which such material could be taken and they established an elevation down to which the material could be removed, such elevation coinciding with and matching the elevation on an adjoining area from which material had already been taken. The excavation and removal operations, which took place during the period ...