*2631 Where the owners of oil property create a trust for a limited term for the purpose of selling the property, and pending such sale, of leasing it, and where all money arising from said sales or leases is to be paid at once to the beneficiaries, and where at the end of the term all property not sold is to be reconveyed to the beneficiaries, held that such device created a selling and leasing agency and not a taxable trust and, further, that the beneficiaries are the real owners and as such are entitled to deductions for depreciation and depletion.
*168 These appeals, consolidated for hearing and decision, involve redetermination of the following deficiencies in income tax: In the case of Trudie T. Munger, a deficiency for the year 1921 in the amount of $2,776.10, and in the case of L. S. Munger, a deficiency for the year 1922 in the amount of $2,306.14. In the case of Trudie T. Munger respondent has stipulated that he erred in increasing the amount of dividends received by her by the amount of $3,494.78, The facts were stipulated and in accord with the stipulation*2632 we make the following findings of fact.
FINDINGS OF FACT.
On or about November 14, 1919, certain trust instruments were executed by S. I. Munger and wife, Trudie T. Munger, and by H. M. *169 Munger and wife, Margaret C. Munger. The material parts of the instrument executed by S. I. Munger and wife read:
STATE OF TEXAS,
Wichita County.
KNOW ALL MEN BY THESE PRESENTS:
That we, Stephen I. Munger and Trudie Terrell Munger, his wife both of the County of Dallas, State of Texas, for and in consideration of the sum of ten ($10.00) dollars to us in hand paid by The City National Bank of Dallas, and for and in consideration of the love and affection which we have for our children Leroy R. Munger, L. S. Munger, Stephen I. Munger Jr. and Mrs. Rena Munger Aldredge, who are beneficiaries hereunder, and for and in consideration of the trusts hereinafter mentioned for such beneficiaries and for ourselves, have granted, sold and conveyed, and by these presents do grant, sell and convey unto The City National Bank of Dallas, a corporation, created under the National Banking laws, with its domicile and principal place of business in the City and County of Dallas, State of*2633 Texas, those certain lots, tracts or parcels of land in Wichita County, Texas as follows:
All our undivided one-half interest in and to all of the Wichita Valley Farm Lands, owned by Stephen I. Munger and H. M. Munger, southwest of Iowa Park (H. M. Munger and his wife Margaret Carlson Munger, being the owners of the other undivided one-half interest therein) described in deeds and plats duly recorded in the Deeds and Plats Records and Wichita County, Texas, to which records reference is hereby made, Said lands are more particularly described as follows:
* * *
Together with all royalties reserved and all rights, titles and estate arising under or in connection with such oil and gas development leases, and together with all reversions at the termination of said leases or any of them.
TO HAVE AND TO HOLD the above described premises, together with, all and singular, the rights and appurtenances thereto in anywise belonging unto the said The City National Bank of Dallas, its successors and assigns forever, and we do hereby bind ourselves, our heirs, executors and administrators, to warrant and forever defend, all and singular, the said premises unto the said The City National*2634 Bank of Dallas its successors and assigns, against every person whomsoever lawfully claiming or to claim the same, or any part thereof, by, through or under us, but not otherwise.
1. This conveyance, however, is intended and shall be construed to be a conveyance in trust to The City National Bank of Dallas (hereinafter termed Trustee) to have and to hold as Trustee only, and for the sole and separate use and benefit of all beneficiaries hereinafter named, their heirs and assigns respectively, in the several proportions hereinafter shown and subject to the terms, conditions, powers and estates following:
(a) For the sole and separate use and benefit, and as the separate estate of grantor, Stephen I. Munger, his heirs and assigns, an undivided interest of one-tenth (1/10) part of said properties.
(b) For the sole and separate use and benefit, and as the separate estate of grantor, Mrs. Trudie Terrell Munger, her heirs, and assigns, an undivided interest of one-tenth (1/10) part of said properties.
(It is the purpose and intent of grantors by this instrument, insofar as this trust is created, for the uses and benefit of grantors respectively, to convert their interests, which*2635 heretofore have been their community property, into separate estates of said grantors respectively in the undivided proportions stated in Sub-sections (a) and (b) hereof).
*170 (c) For the sole and separate use and benefit, and as the separate estate of, Leroy R. Munger, his heirs and assigns, an undivided interest of one-fifth (1/5) part of said properties.
(d) For the sole and separate use and benefit, and as the separate estate of L. S. Munger his heirs and assigns, an undivided interest of one-fifth (1/5) part of said properties.
(e) For the sole and separate use and benefit, and as the separate estate of Stephen I. Munger Jr. his heirs and assigns, an undivided interest of one-fifth (1/5) part of said properties.
(f) For the sole and separate use and benefit, and as the separate estate of Mrs. Rena Munger Aldredge, her heirs and assigns, an undivided interest of one-fifth (1/5) part of said properties.
2. Trustee shall hold said properties and all rents, profits, income, royalties and proceeds of the same, and from time to time, at regular intervals not more than three months apart, shall distribute to the beneficiaries above named and to their heirs and*2636 assigns respectively, in the proportions above stated, all monies coming into the possession of the Trustee, whether from rents, profits, income, royalties, sales, exchanges, encumbrances or other uses or dispositions of the trust estate or any portion thereof or interest therein subject only to all reasonable and legitimate expenses actually incurred by Trustee in the discharge of its duties under this trust, and subject to reasonable allowances to Trustee for its services hereunder, which reasonable allowances it may charge and withhold, and subject to expenses and disbursements legitimately incurred by others for the benefit, or in the handling of the property constituting the trust estate or any portion of the same and allowed by Trustee.
3. During the continuance of this trust and until the trust estate shall be conveyed by Trustee to the beneficiaries hereunder, as hereinafter provided, Stephen I. Munger, acting alone and in his own name (with the full power of an unlimited attorney-in-fact for Trustee and beneficiaries, and without being obliged to describe himself in any transaction, conveyance or other disposition or contract as attorney-in-fact and without being obliged*2637 otherwise to refer to this instrument), or Stephen I. Munger, acting in conjunction with Trustee, may sell, exchange, encumber, rent, lease for oil, gas or other minerals development or otherwise charge, let, dispose of or make any other character of contract with reference to, said properties or any portion of the same, or any royalties or other interests or estates therein, at such prices and upon such terms, or for such considerations in money or otherwise, as said Stephen I. Munger, acting alone or said Stephen I. Munger and Trustee, acting together, may deem to be to the interest of beneficiaries, but all monies, credits, properties, rents, income or royalties accruing or arising in or from any such transactions (less all legitimate expenses incurred in producing, realizing or collecting same, which expenses may be deducted) shall be and remain charged with this trust, shall be forthwith delivered and accounted for to Trustee, and forthwith distributed by Trustee to beneficiaries, their heirs and assigns respectively, in the proportions hereinabove provided. Trustee shall be in nowise responsible for any acts of Stephen I. Munger on behalf of the trust estate or any portion thereof*2638 under this instrument. In case of the death or inability to act of Stephen I. Munger with respect to any of the matters and things hereinabove described, the Trustee alone may exercise any of the powers hereinabove described, without the joinder with it of the said Stephen I. Munger. In like manner, the Trustee and any individual beneficiary, or his or her heirs and assigns, acting together, may sell, exchange, encumber, rent, lease for oil, gas or other minerals development, or otherwise charge, let, dispose of, give away, or make any other character of contract with reference *171 to, the interest of such beneficiary in the trust estate, or any part hereof, and in such case, Trustee shall account to such beneficiary only with respect to such transactions.
4. At its election, Trustee may permit the mere management and possession of the trust estate, or any portion of the same (prior to its conversion into money) to remain with the beneficiaries or any of them, without being responsible to the beneficiaries or any of them, for any of the acts of such beneficiaries, but Trustee must distribute all money received by it pro rata to each beneficiary, his heirs and assigns, *2639 as elsewhere herein provided. Trustee shall not be responsible for acts done or discretion exercised in good faith under this instrument, except for gross neglect and willful abuse of its powers hereunder.
5. The trusts created and provided for herein shall continue for a term of years, unless the trust estate shall sooner be converted into money and distributed to the beneficiaries, in which case the trusts herein created shall terminate. Upon the expiration of the term stated, the trusts herein created shall expire and Trustee, upon making its final accounting, shall stand discharged. If, when the trust shall terminate or be about to terminate, any properties other than money be and remain a part of the trust estate, the Trustee shall fairly partition the same among, and deliver the same to, beneficiaries, their heirs and assigns respectively, in the proportions to which they may be severally entitled under this instrument. Unless the beneficiaries, their heirs and assigns, respectively, agree with the Trustee as to distributions under any proposed partition or final accounting, trustee or any party at interest may invoke aid of the Courts in such partition. In case of partition, *2640 whether pursuant to approval of beneficiaries or with the aid of the Courts, Trustee shall execute or deliver conveyances to the respective beneficiaries of their portions of the partitioned estate, whereupon such beneficiaries shall hold perfect and complete legal and equitable titles to the properties so conveyed, free of the trusts herein created.
6. Trustees shall cause this instrument to be recorded in the deed records of Wichita County, Texas, whenever it is given written instructions to cause the same to be so recorded by any beneficiary, his heirs or assigns, but until such written instructions are given, Trustee shall not be obliged to record the same.
7. In case of the failure, refusal or inability of Trustee to perform its duties under this trust instrument, the holders of more than fifty one-hundredths (50/100) parts of the trust estate may, by an instrument in writing, duly executed and acknowledged, designate a new Trustee, which new Trustee, upon its acceptance of the trust, shall succeed to all of the rights, estates, duties and powers provided for herein.
IN TESTIMONY WHEREOF, witness our hands at Dallas, Texas, this the 14th day of November, A.D. 1919.
*2641 The above deed was acknowledged by the grantors on November 14, 1919, and was recorded in the office of the Clerk of the County Court of Wichita County, Texas, on July 7, 1922. The deed from H. M. Munger and wife, above referred to, conveys to the City National Bank of Dallas their undivided one-half interest in the same tract of land described in the deed from Stephen I. Munger and wife. The blank after the word "years" in the fifth paragraph of the habendum clause of the deed from Stephen I. Munger and wife is filled out in *172 the deed from H. M. Munger and wife and the material part of said paragraph in the last-named deed reads: "The trusts created and provided for herein shall continue for a term of five (5) years * * *." There is also a paragraph in the deed from H. M. Munger and wife making provision for a minor child of H. M. Munger and wife. The deed from H. M. Munger and wife was dated and acknowledged November 13, 1919, and recorded February 26, 1924. Except for the difference above noted and except for the difference in names and amounts of interest, the wording of the two deeds is precisely the same. It is under and by virtue of the said instrument*2642 executed by S. L. Munger and wife, Trudie T. Munger, above mentioned, that the petitioners Trudie T. Munger and L. S. Munger have and claim their respective interests in the property described in said instrument and whose interests in said property are limited by the terms of the said instrument.
The said property produced oil in the taxable years involved in these appeals.
The petitioner, Trudie T. Munger, maintains:
That the trust estate created by the instrument last mentioned is entitled to a deduction for depletion in the year 1921 in the amount of $67,339.05, and depreciation in the amount of $2,844.44. The deficiency arises through the action on the part of the respondent in disallowing any deduction for depletion and depreciation.
That the amount claimed by her as a deduction for depreciation and depletion for the year 1921 is shown in the following statement:
S. I. Munger trust estate, 1921, based upon allowance of depletion and depreciation
| Income based upon agent's report p-18. | ||
| Lease Sales | 13,200.00 | 6,600.00 |
| Lease Rentals | 1,255.00 | 627.50 |
| House Rentals | 285.00 | 142.50 |
| Interest | 4,245.43 | 2,122.72 |
| Firm Income | 24.21 | 12.10 |
| Royalty Income | 163,242.45 | 81,621.23 |
| $91,126.05 | ||
| Expenses and deductions (same reference) | ||
| Operating Gulf Lease | 9,022.40 | 4,511.20 |
| Operating Bower & Dillard Lease | 2,573.60 | 1,286.80 |
| Drilling Bonus ABA Syndicate | 2,500.00 | 1,250.00 |
| Drilling Bonus Casper Well | 3,653.32 | 1,826.66 |
| Salaries | 4,296.40 | 2,148.20 |
| Salaries | 10,000.00 | 5,000.00 |
| Taxes S. & C | 3,059.97 | 1,529.98 |
| Depreciation | 5,688.88 | 2,844.44 |
| Miscl. Expenses | 17,174.63 | 8,587.32 |
| $29,284.60 | ||
| Depletion as per IT:PA-4-FHB | ||
| Dated 8-22-25 | ||
| Total | 67,339.05 | |
| $96,623.65 | ||
| Loss | $5,497.60 |
| Distribution per above letter | ||
| Operating Lease Sale | ||
| Loss | Gain | |
| S. I. Munger | $277.95 | $155.49 |
| Estate of S. I. Munger Dec'd | 901.82 | 504.51 |
| Mrs. S. I. Munger | 1,179.76 | 660.00 |
| L. R. Munger | 2,359.52 | 1,320.00 |
| L. S. Munger | 2,359.52 | 1,320.00 |
| S. I. Munger, Jr | 2,359.52 | 1,320.00 |
| Mrs. Rena M. Aldredge | 2,359.52 | 1,320.00 |
| $11,797.61 | $6,600.00 |
*173 There is no dispute above the correctness of the foregoing figures, if the petitioner, Trudie T. Munger, be entitled to depreciation and depletion.
Respondent denies that any depreciation and depletion should be allowed for the yaer 1921 and claims that the distributable income from the trust estate should be as follows:
S. I. Munger Trust Estate, 1921, based on disallowance of depreciation and depletion
| Loss per preceding computation | $5,497.60 | |
| Less Depreciation allowed | $2,844.44 | |
| Depletion allowed | 67,339.05 | |
| 70,183.45 | ||
| Adjusted income | $64,685.85 |
| Distribution | ||
| Operating Gain | Lease Sale Gain | |
| S. I. Munger | $1,368.44 | $155.49 |
| Estate of S. O. Munger dec'd | 4,440.15 | 504.51 |
| Mrs. S. I. Munger | 5,808.58 | 660.00 |
| L. R. Munger | 11,617.17 | 1,320.00 |
| L. S. Munger | 11,617.17 | 1,320.00 |
| S. I. Munger | $1,368.44 | $155.49 |
| Mrs. Rena M. Aldredge | 11,617.17 | 1,320.00 |
| $58,085.85 | $6,600.00 | |
| 58,085.85 | ||
| Total | $64,685.85 |
*2644 There is no dispute about the foregoing figures if the petitioner, Trudie T. Munger, be not entitled to depletion and depreciation.
The petitioner, L. S. Munger, maintains:
That the trust estate created by the instrument heretofore referred to is entitled to a deduction for depletion in the year 1922 in the amount of $44,372.60, and depreciation in the amount of $2,785.75. The deficiency arises through the action on the part of respondent in disallowing any deduction for depletion and depreciation.
*174 The amount claimed by petitioner, L. S. Munger, as a deduction for depreciation and depletion for the year 1922 is shown in the following statement:
| 1922 | |
| Based upon allowance of depletion | $44,372.60 |
| and depreciation | 2,785.75 |
| Loss | |
| Mrs. S. I. Munger, Sr | $846.69 |
| L. R. Munger | 846.69 |
| L. S. Munger | 846.69 |
| S. I. Munger, Jr | 846.69 |
| Mrs. Rena M. Aldredge | 846.69 |
| Adjusted total loss | $4,233.46 |
There is no dispute about the correctness of the foregoing figures if the petitioner, L. S. Munger, be entitled to depreciation and depletion.
Respondent denies that any depreciation and depletion should be allow for the year 1922 and claims that*2645 the distributable income from the trust estate should be as follows:
| 1922 | |
| Based upon disallowance of above depletion and depreciation shown above: | |
| Mrs. S. I. Munger, Sr | $8,584.98 |
| L. R. Munger | 8,584.98 |
| L. S. Munger | 8,584,98 |
| S. I. Munger, Jr | 8,584.98 |
| Mrs Rena M. Aldredge | 8,584.98 |
| Adjusted income | $42,924.89 |
There is no dispute about the foregoing figures if the petitioner, L. S. Munger, be not entitled to depletion and depreciation.
The sole question presented to the Board under the facts herein stipulated is whether or not petitioners are entitled to a deduction for depletion and depreciation in the years involved in these appeals in view of the terms of the instruments above referred to executed by S. I. Munger and wife, Trudie T. Munger.
OPINION.
MILLIKEN: The sole question presented by these appeals is whether petitioners are entitled to a deduction from their income derived from the properties covered by the conveyance of Stephen I. Munger and wife, to the City National Bank of Dallas, Tex., hereafter referred to as the Bank. It is asserted by petitioners that although the deed vested in the Bank the legal title to the property conveyed, *2646 nevertheless the sole purpose of the deed was the liquidation of the *175 properties into money and, in so far as the Bank was concerned, was in fact nothing more or less than a power of attorney. They further contend that the deed did not create a trust within the meaning of section 219 of the Revenue Act of 1921. On the other hand, respondent contends that the deed conveyed to the Bank the legal title to the property upon the trusts set out in the deed; that the deed created a taxable trust and that since petitioners are the beneficiaries of such a trust they can not take deductions from their income for capital losses or for depletion or depreciation of its capital assets. In support of this contention, respondent cites ; , and . Before discussing these cases it is proper to determine what was the end to be accomplished by the scheme adopted by the grantors and what was the actual effect of their deed.
The first purpose to be effected by the deed was to change the property rights of the grantors from a*2647 community property to a separate property basis and to reduce their respective holdings from the ownership of the whole of the one-half interest in the property conveyed to a one-tenth interest each therein and to vest a like ownership to the extent of one-fifth in each of their children. The children are parties to the deed and therefore to the creation of the so-called trust. This is just as true as though the grantors had first conveyed to the children and then the children had joined in the deed to the Bank as grantors. It thus appears that each of the parties owns his or her interest as separate property subject to the legal title conveyed to and the power vested by the deed in the trustee.
The next question is how long the trust was to continue. Paragraph 5 of the habendum clause reads in part:
The trusts created and provided for herein shall continue for a term of years, unless the trist estate shall sooner be converted into money and distributed to the beneficiaries, in which case the trusts herein created shall terminate. Upon the expiration of the term stated, the trusts herein created shall expire and Trustee, upon making its final accounting, shall stand discharged. *2648 If, when the trust shall terminate or be about to terminate, any properties other than money be and remain a part of the trust estate, the Trustee shall fairly partition the same among, and deliver the same to, beneficiaries, their heirs and assigns respectively, in the proportions to which they may be severally entitled under this instrument. Unless the beneficiaries their heirs and assigns respectively, agree with the Trustee as to distributions under any proposed partition or final accounting.
We here find a blank before the word "years" and this followed in the same paragraph by the words "upon the expiration of the term stated the trust shall expire * * *." It is clear that the *176 trust may expire before all the property had been converted into money. Under the circumstances presented by this record, we are of opinion that this deed should be read in connection with the contemporaneous deed of the owner of the other half of the property, which, except for difference to names and provisions for an infant child, is the same in wording. As the latter deed provides that the trust shall terminate in five years, we think we have the right to insert the same limitation*2649 in the deed before us. If we are wrong in this, it still remains clear that the trust is terminable within a reasonable period, taking into consideration the conditions and purposes expressed in the deed.
The major purpose of the trust is to be found in the second and third paragraphs of the habendum clause. These paragraphs disclose that the purpose of the trust is the sale of the corpus and the immediate distribution of the proceeds among the beneficiaries, and pending such sale, the leasing of the property for oil and other purposes, and the immediate distribution of the rents and royalties. We find that these duties and powers could be exercised by Stephen I. Munger without power of attorney so long as he lived and was able to act. That this was a private arrangement between the parties and was not to affect the conveyance by Stephen I. Munger of the legal title to any part of the properties is further shown by the sixth paragraph of the habendum clause, where it is provided that the trustee is not to have the conveyance recorded until so ordered by a beneficiary. Unlike any of the trusts involved in the cases above cited, this trust was not created for the purpose*2650 of preserving or conserving the trust res, but for the very opposite purpose of converting the trust res into money and the immediate distribution of the cash. Unlike any of said cases, no beneficial interests are vested or divested by reason of the termination of the trust. The only bars to complete title and ownership are the bare legal title in the trustee and certain powers vested in him which could as well have existed under an irrevocable power of attorney. Unlike any of the above cases, petitioners have a direct and immediate interest in capital gains and capital losses. In Baltzell v. Mitchell Supra, the court took pains to point out:
* * * The beneficiary is not interested in the capital of the trust, but only in the income. If there are accerations to the capital, these are not distributable as income, so that the beneficiary may receive any part of them; and if there are capital losses they cannot be made good out of the income. The capital may be depleted by such losses; but the income for that taxable year is not. It may in future years be diminished because of the diminution of the capital.
* * *
If the trust estate of which Hannah P. Weld*2651 is the beneficiary had made a gain in the sale of securities of the same amount as the aggregate of losses in *177 the sale of securities for that year, Mrs. Weld would have received no part of these gains, although, in determining the net income of the estate, the fiduciary must include them. * * *
In Whitcomb v. Blair, Supra, the court thought it necessary to state with reference to the trust involved in that action that "Capital losses in such cases fall upon the reversioners or remaindermen and not upon the life tenant." In , we said:
One case, the , contains language which might be construed to take a contrary view. The basis of that decision, however, is found in the last paragraph of the opinion, wherein it is stated:
* * * Where it is shown, as it was here, that it was the beneficiary who created the trust for himself and that he is also the remainderman, we find no justification for the conclusion that he may not get the benefit of the allowance for the exhaustion of his property temporarily and for convenience only in the hands of a trustee*2652 to collect the income and pay it to him. We think in cases of this character the separate entity of fiduciary and beneficiary should be ignored and that the petitioner should be allowed a deduction for the exhaustion of her interest in the patent.
In the De Forest appeal the trustee was designated merely as an instrumentality for the purpose of collecting the income and paying it over to the same persons who had theretofore owned the patents and continued to own them beneficially to the same extent. In such situation it was unnecessary to either overrule or reconsider what the Board had already held to be the law in the appeals hereinbefore set out.
Looking through the form to the substance of the transaction before us, we are of opinion that the so-called trust was in fact but a selling and leasing device, with power to sell and lease the property of the beneficiaries and pay them the proceeds. We do not think that the fact that the bare legal title was vested in the trustee for a very short period for the purpose of sale and lease should serve to transform this leasing and selling agency into a taxable trust. Cf. *2653 ; ; and .
We are of opinion that the income of the property conveyed to the Bank is taxable directly to the beneficiaries, including the petitioners, and that each of them has the right to deductions for depletion and depreciation.
Reviewed by the Board.
Judgment will be entered under Rule 50.
TRAMMELL dissents.