*1198 Petitioner is not an association taxable as a corporation.
*1062 These proceedings, duly consolidated, are for the redetermination of income-tax deficiencies as follows:
| Docket No. | Year | Deficiency |
| 48332 | Period May 1 to Dec. 31, 1926 | $3,319.71 |
| 1927 | 120.77 | |
| 51327 | 1928 | 3,569.54 |
*1063 The primary issue for determination is whether the petitioner is an association taxable as a corporation, and, if so, there are secondary issues as to (a) the profit realized in 1926 by the petitioner upon the sale of an undivided one-half interest in an oil and gas lease, and (b) the proper deduction in 1926 for depletion.
FINDINGS OF FACT.
In 1918 Ralph J. Pryor and F. E. Lockhart formed a partnership to buy and sell oil and gas leases, particularly in the State of Kansas. On May 15, 1925, they acquired an oil and gas lease (known as the Shepherd lease) covering 320 acres of land located in Greenwood County, Kansas, for which they paid $2,500, a commission to a broker, and the abstracting expense.
*1199 On June 15, 1925, Pryor and Lockhart assigned to Henry Rosenthal and H. K. Beardmore (a partnership) an undivided one-half interest in the Shepherd lease in consideration for one-half of the cost thereof, in accordance with their earlier agreement respecting this lease.
On March 20, 1926, Pryor, Lockhart, Rosenthal, and Beardmore sold an undivided one-half interest in the Shepherd lease to the Manhattan Oil Company, an oil-producing and refining company, for a cash consideration of $25,000, which was paid in equal shares to each partnership, that is, $12,500 to each. As a commission for negotiating the deal, the four vendors assigned a 1/256 interest in the lease to the broker handling the transaction.
On April 27, 1926, Pryor, Lockhart, Rosenthal, and Beardmore, as grantors, conveyed their undivided 127/256 interest in the Shepard lease to Ralph J. Pryor and Henry Rosenthal, as trustees, to "hold said oil and gas lease, and all rights accruing thereunder, during the continuance of this Trust, together with the proceeds thereof, in trust, to manage and dispose of the same for the benefit of the holders from time to time of the Trustees' shares issued hereunder and in and manner*1200 and subject to the stipluations" of a declaration of trust executed by the grantors and trustees on May 1, 1926, which, in so far as material here, provided:
FIRST: The trustees shall be designated wherever practicable by the name - Shepherd Syndicate, and under that name shall, as far as practicable, conduct all business and execute all instruments in writing in performance of their Trust. The trustees shall have the right to change said name if at any time *1064 in the future it should be found conflicting with another such name and advisable to make the change.
* * *
THIRD: The Trustees shall hold the legal title to all property at any time acquired under and by virtue of the contract hereinbefore referred to and shall have and exercise the exclusive management of same.
The Trustees may, for the purpose of developing the property, or for otherwise accomplishing the purpose of this Trust, issue promissory notes or bonds for such amount and on such terms as may seem to them best, and secure same by mortgage, deed of trust or otherwise, on the Trust propery herein described, or any property belonging to said Trust estate.
The Trustees shall have full right and*1201 power to employ all of the funds and other property at any time belonging to the Trust estate in the carrying out of the terms of the contract hereinbefore referred to and in the selling and negotiating the sale of the Trustees' certificates; the drilling for oil and gas and doing all things appertaining to the development of the property.
In addition to the powers enumerated above, the Trustees shall, to the extent and value of the Trust estate held by them, but not personally, hold the subscribers and any person associated and acting with them, harmless and indemnified from and against any loss, cost, expense or liability, by reason of, or in connection with, any contract, obligation or liability entered into or incurred by them as Trustees.
They may employ counsel to begin, prosecute, defend or settle suits at law and in equity, or otherwise, and to compromise or refer to arbitration any claims in favor of or against the Trust.
FOURTH: So far as strangers to this Trust are concerned, a minute of the Trustees authorizing a particular act to be done, shall be conclusive evidence in favor of such strangers that such action is within the power of the Trustees, and no purchaser*1202 from the Trustees shall be bound to see to the application of the purchase money or other consideration paid or delivery by or for said purchaser to or for said Trustees.
FIFTH: The trustees shall fix the compensation of any and all agents, employes or attorneys whom they may appoint and likewise pay to themselves out of the Trust estate as compensation for their own services the sum of One Hundred Dollars per month, each.
SIXTH: The Trustees shall keep or cause to be kept full and complete records and books of account of all transactions had and all property acquired or held by them under the Trust. The fiscal year of the Trust shall end on the 31st day of December of each year.
SEVENTH: The Trustees shall not be liable for errors of judgment either in holding property originally conveyed or delivered to them or in acquiring and afterwards holding other property or for any lossess arising out of any investments, or any business undertaken, or for any act or omission to act, performed or omitted by them, in the execution of this Trust in good faith, and they shall not be liable for the acts and omissions of any agent, attorney or servant appointed by them or acting for them.
*1203 EIGHTH: It is further expressly agreed that in case the Trustees, or shareholders, for any reason shall be held to or be under any personal liability as such Trustees or Shareholders, not due to their acts in bad faith, then such Trustees, or shareholders, shall be held harmless and indemnified out of the Trust estate from any and all loss, cost, damage or expense by reason of such liability, and such liability upon which said Trustees or shareholders, are so personally liable, as aforesaid, shall be deemed a direct claim against the assets of the Trust and the Trustees, or shareholders paying the same shall be and become *1065 subrogated to all the rights of the holder of said claim against assets of said Trust, and shall be deemed a creditor thereof to the extent of such claim or liability, and if, at any time, the income from the Trust estate shall be insufficient to provide for such indemnity and to satisfy all liabilities of the claims upon it, the Trust estate shall be applied to the payment of the claims against it, including the claims for which such Trustees and shareholders are liable pro rata.
NINTH: To evidence the interests of the Grantors and their assigns*1204 in the Trust estate, the Trustees shall issue certificates for Three Hundred (300) Trustees' shares of no expressed par value, each of which shares shall represent an aliquot part of the Trust estate.
All Trustees' shares, whenever issued, shall be in form substantially as follows:
SHEPHERD SYNDICATE.
(A common Law Trust.)
No.
Shares.
THIS IS TO CERTIFY, That is a full beneficiary member having made a permanent contribution to the treasury of the Trust estate of the Shepherd Syndicate, a Trust organized under the common law and subject to all the terms and conditions of a Declaration of Trust in favor of said Shepherd Syndicate, bearing date, the day of , and recorded in the office of the Register of Deeds of , , in Book , Page , of the records of said County.
The interest of the above named person in said Trust Estate is evidenced by Trustees' shares, for which this certificate is issued. Said Trustees' shares are of no expressed par value, but each share represents an aliquot part of the Trust estate, the total Trust estate being divided into Three Hundred (300) such parts. Said shares are not subject to any call or assessment and the*1205 holders thereof are not liable for any debts or obligations of the Trust. Said shares are transferable only on the books of said Shepherd Syndicate, by the holder hereof in person or by attorney, upon the surrender of this certificate properly endorsed.
IN WITNESS WHEREOF, The Trustees under the said Declaration of Trust, therein designated as Shepherd Syndicate, has caused this certificate to be signed at on the day of , A.D., .
Trustee.
* * *
ELEVENTH: The Trustees may, from time to time, declare and pay dividends out of the net earnings received by them from the Trust estate, but the amount of such dividends and the payment of them, shall be wholly in the discretion of the Trustees. The Trustees shall have authority to reserve in each year such sum as they may deem wise from the gross or net income actually collected as a reserve or surplus fund, with power to use such fund at any time for the maintenance of dividends, for the payment of the charges of the Trustees, or to treat the same or any part thereof, as surplus capital.
TWELFTH: The death, bankruptcy or insolvency of any shareholder during the continuance of this Trust shall not operate to terminate*1206 the Trust, nor shall it entitle the person or persons succeeding to his interest as legal representatives, assignees, or otherwise, to an accounting or division of property or profits, or to take action in the courts or elsewhere against the Trustees; but the person or persons succeeding to such interest as legal representatives or assignees *1066 or otherwise, shall succeed to the rights of such shareholders upon surrender of the certificate for the share or shares owned by him.
THIRTEENTH: The ownership of shares issued at any time by the Trustees hereunder shall not entitle the shareholder to any title in the Trust property whatever, or to a right to call for a partition or division of the same, or for an accounting.
FOURTEENTH: The Trustees shall have no power to bind the shareholders personally, and the subscribers and their assigns and all persons or corporations extending credit to, contracting with, or having any claim against the Trustees or the Trust Estate, shall look only to the funds and property of the Trust estate for the payment of any amount claimed as owing under such contract, or claim or for the payment of any debts, damage, judgment, decree, or of*1207 any money that may otherwise become due or payable to them from the Trustees, so that neither the Trustees nor the shareholders, present or future, shall be personally liable therefor.
FIFTEENTH: The Trustees may call a meeting of the shareholders at any time, and upon the death, resignation or permanent inability of the Trustees to act, a meeting of the shareholders may be called by a notice signed by three of the said shareholders.
* * *
EIGHTEENTH: This Trust shall continue during the life of the Trustees, and for the term of twenty (20) years thereafter, at which time they shall proceed to wind up the affairs, liquidate the assets and distribute same among the holders of the shares according to any priorities that may then be in force.
Prior to the sale of the undivided one-half interest in the Shepherd lease to the Manhattan Oil Company, the four owners of the lease decided to give some of their friends, who had helped finance another venture, an interest in the Shepherd lease and to form a trust in which these friends would become beneficiaries. The above trust agreement and assignment to the trustees were executed to carry out these plans. These friends contributed*1208 no capital to the trust, but were charged with $100 for each 1/300 interest in the trust estate (which consisted of an undivided 127/256 interest in the Shepherd lease), and credited with a proportionate interest in the $25,000 received from the Manhattan Oil Company, and any balances charged against them were deducted from their shares of the trust income. Typewritten sheets of paper showing their fractional interests in the trust were issued to the grantors and their friends as beneficiaries of the trust. In 1928 there were about ten beneficiaries of the trust. At no time material hereto did the trustees own as much as a one-half interest in the trust.
The Manhattan Oil Company managed the Shepherd lease, drilled the wells, purchased equipment, pumped and sold the oil, and billed the trustees monthly for one-half of the operating expenses and remitted to them, semimonthly, one-half of the proceeds from the sale of the oil, in accordance with their agreement for the operation of the leasehold. The activities of the trustees consisted of checking and paying the bills for the trust's share of the operating expenses, receiving *1067 the semimonthly payments from the Manhattan*1209 Oil Company, and distributing the income to the beneficiaries.
Pryor as trustee looked after the affairs of the trust with only an occasional conference with the other trustee, Rosenthal. Pryor gave to the trust affairs an average of about two or three hours a month. The trust had no office and its necessary office work, such as bookkeeping and correspondence, was handled by a bookkeeper employed by the Pryor & Lockhart partnership, who devoted two or three hours each month to such affairs.
The trust had no by-laws, minute book, directors, officers, or seal.
The beneficiaries did not in any way control, or attempt to control, the actions of the trustees or the affairs of the trust. They never inspected the books of account, which were kept on the accrual basis, or had them audited. They never held meetings.
The trust filed fiduciary returns for the taxable periods in controversy.
In his deficiency notice for the period May 1 to December 31, 1926, the Commissioner included in the petitioner's net income an amount of $23,616.20 as profit upon the sale of the undivided one-half interest in the Shepherd lease to the Manhattan Oil Company, and allowed a deduction for*1210 depletion "limited to 50% of net income from oil sales."
The parties have stipulated that if the petitioner is not taxable as a corporation, there is no net income taxable to the trust except for 1927, for which year there is an admitted net income of $2,894.59.
OPINION.
SMITH: The petitioner was organized to enable some friends of the members of two partnerships to participate in the profits from the latter's interest in the Shepherd lease. Although there were two trustees, only one conducted the affairs of the petitioner, and his activities were few, as shown by the record, being limited practically to the receipt and disbursement of the income from the lease. The petitioner's organization lacks the indicia of incorporated bodies necessary to classify it as an association taxable as a corporation. The facts here involved are analogous to those considered in , and the principles of law discussed and applied there are applicable here. For the reasons more fully stated in that decision, we hold that the petitioner is not an association taxable as a corporation.
Having concluded that the petitioner is*1211 a trust, the secondary issues raised by the pleadings need not be decided. Pursuant to the stipulation of the parties,
Judgment will be entered under Rule 50.