1932 BTA LEXIS 1572">*1572 A trust declared for the mere convenience of a group, with authority only to collect rent from an oil lease and disburse it among them in accordance with their respective interests as intervening cotenants, is not taxable as a corporation upon the income collected and disbursed from said lease.
25 B.T.A. 119">*119 These consolidated appeals, respectively, relate to income-tax liabilities and penalties asserted by the respondent against the petitioner for the years as follows:
| Docket No. | Year | Deficiency | Penalty |
| 39242 | 1922 | $253.12 | $63.28 |
| 1923 | 794.48 | 198.62 | |
| 40939 | 1924 | 5,602.52 | 1,400.63 |
| 1925 | 3,790.48 | 947.62 | |
| 45741 | 1926 | 4,035.93 | |
| 51507 | 1927 | 2,533.77 |
25 B.T.A. 119">*120 Two basic issues are common to all the appeals and will be considered first. They are whether or not, in the periods considered, the petitioner was trustee of an association taxable as a corporation, as held by the respondent; and, whether or not such income as it may have derived from the sale of oil produced from land owned by a California school district is subject1932 BTA LEXIS 1572">*1573 to Federal income tax.
In appeals docketed at Nos. 39242 and 40939 the petitioner alleged that the respondent committed error (a) in holding that the trust had any income in the years 1922 to 1925 and (b) in imposing a penalty for failure to file income-tax returns for said years.
FINDINGS OF FACT.
On the date shown therein, Julius Blum and others entered into a certain contract, as follows:
THIS AGREEMENT, Made this 30th day of August, in the year of our Lord one thousand nine hundred and twenty-two
BETWEEN: CHARLES MALCOM, EDGAR F. DAVIS and ALF WILLIAMS, doing business under the firm name and style of THE MALCOM-DAVIS CO., a co-partnership, FRED B. LEWIS, C. C. LEWIS, IRVING W. HELLMAN, GLENN C. BURBANK, J. E. DAVIS, E. D. WILLIAMS, MRS. H. B. ZIEGLER and MRS. HARRY I. SHAEFER, the parties of the first part,
AND: JULIUS BLUM, the party of the second part:
WITNESSETH:
WHEREAS, on the 26th day of June, 1922, the Long Beach City School District of Los Angeles County, a public corporation, sold a certain oil and gas lease in the manner provided by law covering the following described real property situate in the County of Los Angeles, State of California:
The South1932 BTA LEXIS 1572">*1574 three hundred forty (340) feet of the East one-half (E-1/2) of the East one-half (E-1/2) of Farm Lot Sixty-seven (67) of the American Colony Tract, in the County of Los Angeles, State of California, as per map recorded in Book 19, pages 89 and 90 of Miscellaneous Records of said County; excepting the South thirty (30) feet thereof included within the lines of Willow Street.
AND WHEREAS, said lease was sold to the highest and best bidders in accordance with the "Resolution of Intention to Make Oil Lease and Notice Requesting Bids for Same", and
WHEREAS, Charles Malcom, Edgar F. Davis and Alf Williams, doing business under the firm name and style of The Malcom-Davis Co., a co-partnership, and Fred B. Lewis and C. C. Lewis were the highest and best bidders, offering the highest and best cash bonus offered for said lease, amounting to the sum of Forty Thousand Six Hundred Thirty-five Dollars ($40,635.00); and
WHEREAS, the said sum of Forty Thousand Six Hundred and Thirty-five Dollars ($40,635.00) covering said bid as aforesaid, was supplied by the following named persons in the amounts set opposite their respective names as follows:
| The Malcom-Davis Co | $8,127.00 |
| Fred B. Lewis | 4,063.50 |
| C. C. Lewis | 4,063.50 |
| Irving W. Hellman | 8,127.00 |
| Julius Blum | $8,127.00 |
| Glenn C. Burbank | 3,250.80 |
| J. E. Davis | 3,250.80 |
| E. D. Williams | 812.70 |
| Mrs. H. N. Ziegler | 406.35 |
| Mrs. Harry I. Shaefer | 406.35 |
1932 BTA LEXIS 1572">*1575 25 B.T.A. 119">*121 AND WHEREAS, an Oil and Gas Lease covering said described lands was executed on the 27th day June, 1922, whereby the Long Beach City School District of Los Angeles County, a public corporation, leased said above described lands to Charles Malcom, Edgar F. Davis and Alf Williams, doing business under the firm name and style of The Malcom-Davis Co., a co-partnership, and Fred B. Lewis and C. C. Lewis, which lease is hereunto attached, made a part hereof and market "Exhibit A" for identification; and
WHEREAS, on the day of August, 1922, Charles Malcom, Edgar F. Davis and Alf Williams, doing business under the firm name and style of The Malcom-Davis Co., a co-partnership, and Fred B. Lewis and C. C. Lewis, entered into an agreement, in writing, with the United Oil Company, a corporation, organized and existing under and by virtue of the laws of the State of California, whereby a certain interest in said lease was assigned to The United Oil Company, and whereby The United Oil Company agreed to comply with the terms of said lease, a copy of which Agreement is hereunto attached, made a part hereof and marked "Exhibit B" for identification; and
WHEREAS, the parties of the1932 BTA LEXIS 1572">*1576 first part, for convenience only, and for no other consideration, desire to assign all of their right, title and interest in and to said lease, which is attached hereto and marked "Exhibit A" for identification; and
WHEREAS, the parties of the first part, for convenience only, and for no other consideration, desire to assign to the party of the second part all of their right, title and interest in and to said Agreement and Assignment, a copy of which is attached hereto and marked "Exhibit B" for identification;
Now, THEREFORE, in consideration of the premises it is mutually agreed between the parties of the first part jointly and severally, and the party of the second part as follows, to-wit:
1. That the interest of each of the parties named in this Agreement in and to said Oil and Gas Lease, a full, true and correct copy of which is hereunto attached, made a part hereof and marked "Exhibit A" for identification, and the interest of each of the parties herein named in and to that certain Agreement, a full, true and correct copy of which is hereunto attached and marked "Exhibit B" for identification, is as follows:
| NAME | INTEREST |
| The Malcom-Davis Co | 1/5th |
| Fred B. Lewis | 1/10th |
| C. C. Lewis | 1/10th |
| Julius Blum | 1/5th |
| Irving W. Hellman | 1/5th |
| Glenn C. Burbank | 2/5th of 1/5th |
| J. E. Davis | 2/5th of 1/5th |
| Mrs. H. B. Ziegler | 1/20th of 1/5th |
| Mrs. Harry I. Shaefer | 1/20th of 1/5th |
| E. D. Williams | 1/10th of 1/5th |
1932 BTA LEXIS 1572">*1577 2. That the parties of the first part herein are hereby termed "Beneficiaries"; that the party of the second part herein is hereby termed "Trustee."
25 B.T.A. 119">*122 3. That the parties of the first part, as the beneficiaries hereunder, do hereby convey and assign to the party of the second part, known as the Trustee, all of their and each of their right, title and interest in and to said Oil and Gas Lease, a full true and correct copy of which is hereunto attached, made a part hereof and marked "Exhibit A" for identification; and in and to that certain Agreement and Assignment, a full, true and correct copy of which is hereunto attached, made a part hereof and marked "Exhibit B" for identification, to be so held by the said party of the second part, as Trustee, upon the following trusts:
(a) Said Trustee shall hold the same in his name as such Trustee for such time as the persons holding a majority interest herein shall elect and determine.
(b) Said Trustee shall collect and receive all moneys, royalties and income derived through or by means of said Oil and Gas Lease, a full, true and correct copy of which is attached hereto and marked "Exhibit A" for identification, and said1932 BTA LEXIS 1572">*1578 Agreement and Assignment, a full, true and correct copy of which is attached hereto and marked "Exhibit B" for identification, and he is hereby empowered, whenever necessary, to take such steps as shall be required to enforce the payment of all moneys which shall become due to the persons herein named from said trust property, but said Trustee shall not be liable for any failure to collect the same if he shall use due diligence in the premises.
(c) Said Trustee shall pay for the benefit of the said beneficiaries and for himself, according to his respective interest, all taxes of whatsoever kind or character which shall be a charge against said property and which shall become due and payable according to the terms of said lease marked "Exhibit A" for identification.
(d) After the deduction of expense property chargeable to each interest herein, said Trustee shall pay monthly to each person herein named, in the proportion which his interest bears to the whose thereof, all income received from any source in connection with this trust.
(e) That the interest of the Trustee herein in and to the property concerning which this trust is created shall at all times be deemed a part of1932 BTA LEXIS 1572">*1579 the trust property and subject to the terms of this trust.
(f) If any controversy shall arise effecting this trust, the Trustee shall at once, in writing, notify the beneficiaries of the nature of such controversy and shall give all information connected therewith.
(g) If any litigation shall arise affecting this trust, it shall be the duty of the Trustee to at once, in writing, notify all beneficiaries herein, but the Trustee shall not be obligated to defend any actions involving this trust or the trust property, except when the beneficiaries hereof representing a majority interest in the trust property shall direct him to defend such action.
(h) Said Trustee shall keep full, true and correct books of account wherein shall be set down all money received by said Trustee, together with all money disbursed by him, showing the source of all income, how and when received and how paid out and expended.
(i) No sale or transfer of the interest of the beneficiaries hereunder shall be valid or binding on said Trustee unless and until an executed original assignment or other instrument evidencing such sale or transfer has been filed with said Trustee, excepting only where such interest1932 BTA LEXIS 1572">*1580 may pass or be transferred by a decree or judgment of a Court of competent jurisdiction.
(j) All costs, charges and outlay of the Trustee in connection herewith shall be a first lien on all of the trust property hereunder and shall be first 25 B.T.A. 119">*123 paid or deducted before any conveyances of any interest herein shall be made or any distribution thereof is made.
(k) That the Trustee shall abide by and be bound by any decision of the owners of a majority of the beneficial interests of this trust upon any question of management or control or upon any question in any manner affecting this trust.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals this 30th day of August, 1922.
[Signed - THE MALCOM DAVIS CO., and by all parties of the first part and beneficiaries; also signed by party of second part and trustee.]
Under the terms of the drilling contract, the United Oil Company, designated as the "Second Party," agreed to divide equally with the first parties the net cash proceeds of its recovery from development of said lease, after having first deducted its expenses of operation and the royalty due to the school district. The contract also provided1932 BTA LEXIS 1572">*1581 that the cost of all improvements to the lease, including buildings, storage tanks, pipe lines, roads, etc., should be "considered as a part of the necessary operating expense," and:
That when the party of the second part shall have received, out of and from the value of the first oil and gas produced and saved from said premises, over and above the royalty of the lessor, the full cost of the drilling of all wells drilled on said premises by it, the parties of the first part shall thereupon acquire an absolute one-half (1/2) ownership and interest in and to all equipment and materials used and employed in the drilling of wells and the equipment of the property which were paid for in the first instance hereunder and charged to the cost and expense of the drilling of wells and operation of the property, subject only to the terms and conditions of said oil leases.
* * *
That the assignment of this lease by the parties of the first part to the party of the second part shall not have the effect of conveying to the party of the second part the absolute interest of the parties of the first part in and to said leasehold, but only such interest as the parties of the second part acquire1932 BTA LEXIS 1572">*1582 under and by virtue of this agreement through compliance herewith, which represents an undivided one-half (1/2) interest in and to said leasehold, and that no conveyance, sale or assignment of the interest of either party herein and to said leasehold shall be made without the written consent of all parties hereto.
During 1922 and 1923, nothing accrued to the first parties of this contract, since all income from the lease in excess of the 40 per cent royalty paid to the lessor was retained by the second party to reimburse it for expenditures made; but, in 1924 and subsequent years, the second party paid to the bank, for the benefit of the first parties, certain amounts due them under the profit-sharing terms of their contract. These amounts, as received from time to time by the bank, were, by common consent of the parties concerned, disbursed direct by the bank to the beneficiaries under the trust agreement. The trustee at no time performed any active services in the affairs of 25 B.T.A. 119">*124 the trust, nor was he paid any compensation by it for services rendered. After the execution of the trust instrument it was lodged with the bank, which was authorized to transact all of the1932 BTA LEXIS 1572">*1583 business made necessary by its terms to carry into effect the intent of the parties to it. No income-tax returns were filed on behalf of the trust for either 1922 or 1923, but on February 2, 1927, delinquent fiduciary returns, on IT-Form 1041, were filed on its behalf by the petitioner for 1924, 1925 and 1926. The respondent has held that the petitioner is a trustee of an association taxable as a corporation and, in addition to the deficiencies above shown, has imposed penalties for failure to file returns for 1922 and 1923, and for belated returns for 1924 and 1925.
OPINION.
LANSDON: The respondent has held that the petitioner is a trustee of an "association" within the provisions of section 2(2) of the Revenue Act of 1921, and taxable as a corporation on its income in the years considered. The petitioner contends that his status, at all times material, was that of a simple trustee empowered only to receive and disburse income.
In the leading case of , which has been cited by both parties to this controversy, the Supreme Court of the United States held that the word "association" as used in the act signifies "a body of1932 BTA LEXIS 1572">*1584 persons united without a charter, but upon the methods and forms used by incorporated bodies, for the prosecution of some common enterprises."
Article 1312 of Regulations 74 defines associations within the class taxable as corporations as organizations, by whatever name known, which act or do business in an organized capacity. Organization, then, and the doing of business in substantial conformity with the methods and forms used by incorporated bodies, would seem to be the requirements recognized by the courts and the Treasury regulations. "Organization," and the "doing of business" must unite before the entity may be taxed as a corporation. ; ; and . Such a lack of organization was pointed out by this Board in its opinion in There seventeen individuals subscribed to a fund which they paid over to a real estate operator to invest in exploiting Long Island real estate. For identification purposes their project was called the "Brighton Syndicate," and each contributor to the1932 BTA LEXIS 1572">*1585 fund was to share ratably in the profits from any investment made by the operator, who was made "Syndicate Manager." No control, however, was retained over the manager in any form by the contributors 25 B.T.A. 119">*125 and no form of organization was provided for in the seventeen separate contracts. We held there, although the manager was carrying on business as a corporation might have carried it on, that no organization was formed, and, therefore, there could be no association within the statute. In , there was some resemblance of organization, but no carrying on of any business as contemplated in law. There a corporation, prior to dissolution, conveyed the fee to certain paper mills, under lease, and its interest in such leases to trustees for the benefit of its stockholders. The trust instrument directed the trustees to collect all rentals from the leased property and all proceeds from the sale of any of it, in case of a sale; and, at their discretion, but not later than 20 years after the death of persons then living, to distribute ratably the funds of the trust to the stockholders. The participating stockholders were issued1932 BTA LEXIS 1572">*1586 transferable trustees' receipt certificates representing their respective interests in the trust and were given a voice in filling any vacancy in the trustees and in any change in the terms of the trust agreement. In view of this quasi-corporate structure, the Government argued that the trustee and the certificate holders, when considered collectively, constituted an association within the statute. The Supreme Court, however, took a contrary view, and held that the trustees must be considered alone; and that, when so considered, their functions, so long as limited to the single duty of collecting and disbursing rents, could not be construed as carrying on business within the rule. Later, however, a change in the affairs of these associates came about which reversed their taxable status and changed the simple trust into an association taxable as a corporation.
This change was brought about as a result of a repurchase, by the Crocker interests, of a number of paper mills they had sold to the leasing corporation, and the cancellation of the leases they had made to it of others, which the trustees were holding under the trust agreement. 1932 BTA LEXIS 1572">*1587 To meet this situation the trustees and their beneficiaries amended the trust agreement so as to authorize the trustees to "acquire instead its entire property and to carry on the business theretofore conducted by it, or any substantially similar business." The title to all the trust property "and the right to conduct all business" were vested "exclusively in the trustees," who were authorized to select from among them a president and other officers with prescribed duties. The certificate holders were authorized to remove and elect the trustees in meetings, the same as stockholders of a corporation would elect directors. In these changed conditions these associates came before the court a second time, as one of a consolidated group whose cases were considered together in In this second consideration of the Crocker associates, the Supreme 25 B.T.A. 119">*126 Court of the United States, in its opinion, pointed out the structural changes in their organization, as above mentioned, and said: "By this modification 'the form of [the] organization' was specifically 'changed to that of an association' under its present name." Also, taking notice of the1932 BTA LEXIS 1572">*1588 change from a passive trust to that of active business, the court said: "Since the modification of the trust agreement the trustees have carried on the manufacturing business in substantially the same manner as it was formerly conducted by the corporation." Accordingly, it held that the Crocker associates were taxable as a corporation within the law.
We do not understand it to be the respondent's contention that a single individual, as in this case, considered alone in his limited capacity as trustee, would be taxable as a corporation upon the bare rents collected and disbursed by him; but, he argues that the several beneficiaries and the trustee were engaged in the oil business, and, considered collectively, that the trust agreement tied them together in an association which gave corporate form and effect to their operation within the law. The same contention was raised in , respecting which the court said:
* * * We perceive no ground for grouping the two - beneficiaries and trustees - together, in order to turn them into an association, by uniting their contrasted functions and powers, although they are in no proper sense associated. 1932 BTA LEXIS 1572">*1589 It seems to be an unnatural perversion of a well-known institution of the law.
The circumstances herein bring this appeal clearly within the purview of the decision in . There, the trustees held only such assets as were the property of the beneficiaries before the trust was declared and the income from such property was already provided for under the terms of a certain five-year lease theretofore executed, during which period, including the taxable year, they did nothing more than collect and distribute the rentals. Here, the corpus of the trust was property owned by the beneficiaries before the declaration of trust was executed and the disposition of the income therefrom was already provided for during the term of the drilling contract. The only function of the trustee was to receive and distribute the income in the manner provided by the trust instrument, and even this duty was delegated to a bank, which received and distributed income from the sale of oil as it accrued.
In our opinion there was no corporate attribute in the organization structure here involved, or in the business, that brought it1932 BTA LEXIS 1572">*1590 within the provision of the section of the tax laws, and that it is not an association taxable as a corporation. ;; .
25 B.T.A. 119">*127 In view of our conclusions, as stated, upon the basic issue, it becomes unnecessary to consider the remaining assignments of error.
Decision will be entered for the petitioner.