*1143 1. Held, under the facts in the record, petitioner, an Oklahoma express trust, is an association taxable as a corporation, Morrissey v. Commissioner,296 U.S. 344.
2. Held, under the facts in the record petitioner is entitled to depletion computed under section 114(b)(3) of the Revenue Act of 1934. Respondent's determination as to depreciation affirmed.
3. Where petitioner did not file a capital stock tax return for the year 1934, but was assessed and paid tax on a capital stock of $500,000, held, $500,000 is the "adjusted declared value" of its capital stock for the purposes of the excess profit tax.
*800 This appeal is from a determination by respondent of deficiencies in petitioner's income and excess profits taxes for the calendar year 1934 in the respective amounts of $11,536.15 and $4,194.96. The petitioner alleges that the respondent erred in determining that it is an association taxable as a corporation, or, in the alternative, that if it is taxable as an association respondent erred (a) in computing petitioner's*1144 net income, (b) in failing to make any allowance for depreciation or depletion, and (c) in failing to allow a deduction of 12 1/2 percent of a declared capital value in computing excess profits tax.
The case is submitted upon oral testimony and documentary evidence.
FINDINGS OF FACT.
Petitioner is an express trust, created by a declaration of trust dated January 19, 1934. Its principal office is at Tulsa, Oklahoma.
According to the trust instrument W. E. Brown, A. J. Diffie, and H. I. Shanks, having acquired by assignment from the Southwest Co., an express trust, certain contracts covering an undivided one-eighth of the seven-eighths working interest in certain oil and gas leases known as the Westgate-Carey lease, located in Oklahoma City, Oklahoma, created petitioner, an express trust, under the laws of Oklahoma, to hold such interest and to "carry on and conduct the business" relative thereto, and declared themselves trustees of petitioner. Petitioner paid the Southwest Co. approximately $400,000 for the property. The Southwest Co. had, on January 5 and January 16, 1934, entered into agreements with certain oil companies to purchase the oil and gas working interest*1145 covered by these contracts. The declaration of trust also included interests in *801 four other leases which were nonproducing. There was no development under them and after the payment of some rentals they were allowed to expire.
At the date of acquisition by petitioner there were five producing wells on the Westgate-Carey lease which were being operated by the Westgate Oil Co. Additional wells were drilled on the property in 1934.
The oil produced was sold to pipe line purchasing companies on the premises and petitioner became entitled to its proportionate share of the proceeds.
Petitioner became obligated, by reason of its ownership of a working interest in the lease, to pay to the Westgate Oil Co. its proportion of the expenses of operating the oil wells on the lease and the cost of the new development. The Westgate Oil Co., representing a majority interest, operated the oil wells on the property. Petitioner had a representative checking each bill as it came in and could object to it if it was not satisfactory and go into court, if necessary, to establish its claim.
Petitioner obtained the funds with which to purchase its properties from the sale of units*1146 of beneficial interest of a par value of $100 each. There were 5,000 authorized units, which were sold for a total consideration of $500,000. The cost of marketing these units was 20 percent, and the net amount realized from the sale was $400,000. Registration was obtained with the Securities and Exchange Commission.
Each purchaser received a "Certificate of Interest in 'Second Carey Trust'" upon which was shown the purchaser's name and the number of beneficial units owned by him. The certificate was nonassessable and provided, among other things, that:
On or before the 25th day of each month, the holder hereof shall be entitled to receive said holder's pro rata share of the distributable money received during the preceding month and then available for distribution, subject to the retention and disbursement by the Trustees of the expenses, accumulations, fees and emoluments, as set forth in the above mentioned Declaration of Trust, and subject to the rights of the Trustees to reserve income for future distribution as set forth in said Declaration of Trust.
This Certificate shall be the only evidence of the ownership of the above units, and is transferable only on the books*1147 of "Second Carey Trust" by the owner in person, or by duly authorized attorney, upon surrender of this Certificate, properly endorsed, and no owner of this Certificate, except as provided in said Declaration of Trust, shall have any authority, power or right whatsoever, to transact any business for or on behalf of "Second Carey Trust," or the Trustees thereof, in connection with said property, and shall have no right to demand a participation or division of the property, or any part thereof, and shall have no interest in the specific property belonging to "Second Carey Trust," or in any part thereof, except the rights to receive the income and distributable funds arising therefrom as set forth herein, and as set forth in the said Declaration of Trust.
*802 The owner of this Certificate shall not be personally liable for any debts, covenants, contracts or torts of "Second Carey Trust," or of the Trustees thereof.
The declaration of trust (which is included herein by reference) provided, among other things:
THIRD.
The Trustees, in their collective capacity, shall be designated as "SECOND CAREY TRUST," and under that name shall conduct all business and execute all*1148 instruments in writing in the performance of their trust. They shall elect one of the members as "President," one as "Vice-President," and one as "Secretary-Treasurer", and shall designate one of said officers so elected as the "Chief Executive Officer" of said trust, and shall designate one as the "Chief Financial Officer" of said trust. All contracts, certificates of interest, conveyances, quit claims and assignments of the title to any property shall be executed by signing the name "SECOND CAREY TRUST", By President, Attest: , Secretary, and all conveyances, instruments of assignment and transfers may be executed to and in the name of "SECOND CAREY TRUST" and the said trustees shall have power to adopt a seal and use the seal of said trust in executing such instruments.
FOURTH.
That all property, contracts, choses in action and oil and gas mining leases above described (except the fees, income, expenses, accumulations and emoluments accruing to the trustees as hereinafter set out), shall constitute a separate trust to be held, kept, managed and disposed of according to the terms of this declaration of trust, duly executed, acknowledged and recorded by the trustees hereof, *1149 for the use and benefit of the unit holders or certificate holders, as shown by the books of the trustees.
FIFTH.
The capital of "SECOND CAREY TRUST" shall be the interest in said contracts, the properties and the oil and gas mining leases and interests therein, as hereinabove described, and any and all rights thereunder, and any and all properties conveyed to said trustees or vested in them [sic] under and by virtue of the assignment of said contracts, save and except the accumulated net income from the proportionate part of the property represented by unsold units; the said proportionate part of the net income derived from the property until units are sold belonging to the trustees and being reserved herefrom. * * *
SIXTH.
This trust shall continue for a period of twenty (20) years from the date hereof, unless terminated sooner in the manner hereinafter set forth. If, at the expiration of said twenty year period this trust has not been wound up or liquidated, then the trustee shall immediately proceed to liquidate and wind up the affairs of said trust, and shall distribute to the unit owners, after all proper liquidation and other expenses and claims have been*1150 paid, the property or the proceeds therefrom. In thus liquidating and winding up said trust and its property, the trustees shall have the absolute right to sell or dispose of the whole or any part of said property, either at public or private sale, without consulting or procuring the consent of the unit owners or any of them, the same as though the property was the individual property of the trustees, *803 and anyone purchasing any part of said property shall not be required, in any way whatever, to inquire either as to the right or authority of the trustees to make the sale or to inquire as to the manner in which the trustees intend to handle, distribute or dispose of the proceeds. Before a unit owner shall be entitled to receive his or her proportionate part of the proceeds upon liquidation, said owner shall be required to surrender certificates for the units representing his or her participation.
SEVENTH.
The trustees shall have full and exclusive power and authority to demand, sue for, claim and receive any and all royalties, rents, bonuses, oil runs, gas runs, oil, gas, income, dividends and payments due from the property heretofore described, or from any other*1151 property hereafter conveyed to the "SECOND CAREY TRUST", and the trustees shall have likewise full and exclusive power and authority to hold, handle, operate and manage the property, and to distribute the income and proceeds therefrom, as herein provided.
EIGHTH.
The trustees may sell or convey all or any part of the trust property upon receiving in advance, the written consent of such sale or conveyance of the owners of two-thirds (2/3) in amount of the units in this trust.
NINTH.
The trustees may liquidate and wind up such trust and all of its property in such manner and at such times prior to the expiration of the twenty (20) year period as the owners of two-thirds (2/3) in amount of the units in this trust may in writing direct.
* * *
ELEVENTH.
The trustees, their successors and assigns, shall have the right to receive and deduct from the gross receipts all of their actual expenses incurred or accrued in operating the property, if operation be necessary, or in attending conferences with the operator, and the trustees shall have the power and right to bind the frust estate herein conveyed for all necessary or needful expenses, including court costs, accountant's*1152 fees, witness fees and attorney's fees covering litigation, or necessary legal advice involving the trust property, or any other necessary or needful expenses or services, and to pay therefor out of said receipts, or to reimburse themselves therefor.
The said trustees, if they deem it necessary or to the advantage of said trust or to the beneficiaries thereof, may advance moneys to said trust for the use of said trust or of the beneficiaries hereunder, from time to time, and shall be reimbursed therefor out of any income from the properties of said trust.
* * *
THIRTEENTH.
The ownership of units of beneficial interest by any person or persons shall not create any partnership between the trustees and such person or persons, nor between or among the unit holders, nor shall the trustees have the right or authority to create a partnership between themselves and any other person, firm or corporation with reference to the trust estate, but they shall at all *804 times have the sole and exclusive right to manage the business of the trust estate and no unit owner shall ever have the right as such to interfere with the trustees' management or control of the trust estate nor*1153 shall any person employed by the trustees ever have the right to bind or obligate the trustees in any transaction except with the full knowledge or consent of the trustees, and no indebtedness or obligation of any kind whatsoever shall ever be an obligation of the trust estate, unless same is contracted in the manner set forth in this trust conveyance, and by and with the full knowledge and consent of the trustees, nor shall the unit owners or any of them ever have the right to require or compel by court action or otherwise the partition or distribution of the assets or properties of the trust estate prior to the termination of the period for which this trust was created, but they may consent thereto in the manner set forth hereinabove.
FOURTEENTH.
The death, insolvency or bankruptcy of any unit owner or the transfer of his interest by sale, gift, devise, descent or otherwise during the continuance of this trust shall not operate as a dissolution or termination of the trust, nor shall it have any effect whatsoever on the trust estate, nor shall any of said events entitle the heirs, assigns or representatives to any accounting or to take any action in court against the trustees*1154 or the property of the trust estate or business, but such heirs, assigns and representatives shall succeed only to the rights of the former unit owner in the same manner as if their ownership was one of purchase hereunder. This trust shall continue in full force and effect, notwithstanding the death of any one or more unit owners.
Paragraph fifteen provides that neither the unit owners not the trustees shall be held liable for the debts and obligations of the trust.
Paragraph nineteen provides that the trust may be modified or amended by the trustees acting with the written consent of two-thirds of the trust holders.
Paragraph twenty provides that all acts of the trustees shall be done in the name of the "Second Carey Trust."
Paragraph twenty-one provides for the selection of successors to the trustees.
Paragraph twenty-three provides that the trustees shall hold the property as if they were the exclusive owners thereof and have the power to employ servants, agents, and employees to perform the duties necessary in the operation and management of the property.
The working interest in the Westgate-Carey lease acquired by petitioner included an interest in the physical*1155 properties on the lease, and that purchased for subsequent development.
The trust never purchased any property other than that described in the declaration of trust. No additional property was ever conveyed to it and no part of its property was sold by it.
The trust did not set up on its books any capital or surplus accounts. Distributions to beneficiaries were made from the net receipts from the sale of oil and gas.
*805 For the calendar year 1934 petitioner filed an income tax return as a trust on form 1040 showing a net loss of $7,552.79. Among the deductions from gross income claimed were "Distributions to unit holders $55,986.00" and "Depletion and depreciation $35,466.05." Petitioner did not file with its return information data on form O in support of the claimed deduction for depletion and depreciation, as required by the Commissioner's regulations.
In 1936 a revenue agent made an examination of petitioner's books and records for the year 1934 and submitted a report which formed the basis for the determination of the deficiency here in question. Following the recommendation in this report the respondent held petitioner to be an association taxable as*1156 a corporation and disallowed the claimed deduction of $55,986 as distributions to unit holders on the ground that they constituted dividends. He also disallowed the claimed deduction of $35,466.05 for depletion and depreciation in the absence of form O to substantiate the deduction, although the report of the revenue agent stated that in accordance with his request the form O data had been compiled and was "available for inspection" in the taxpayer's office but that "Upon advice of counsel, the trustees declined to file it, believing that to do so would, in effect, act as an admission that the trust is a taxable entity." The report also stated that "Examiner could obtain information from taxpayer's files from which cost depletion depreciation and allowable depletion could be computed, as taxpayer will make all information available."
Petitioner did not file a capital stock tax return for the period ended June 30, 1934, nor has it made a declaration of the value of its capital for capital stock tax purposes. Subsequently, a capital stock tax for the year 1934, based on a valuation of $500,000, and additional tax of 25 percent, was assessed October 1, 1937, and paid by petitioner*1157 February 14, 1938.
In computing the deficiency here in question the respondent followed the recommendation of the revenue agent and computed the excess profits tax on the entire adjusted net income without the deduction of 12 1/2 percent or any other amount from capital stock value. The deficiency notice herein was dated February 23, 1938.
OPINION.
KERN: It is necessary to first consider the question of whether petitioner was, during the taxable year before us, an association taxable as a corporation, within the meaning of section 801(a)(2) of the Revenue Act of 1934, as determined by the respondent.
Petitioner contends that it is not so taxable for the reason that during the year 1934 it was not engaged in carrying on a business *806 for profit, but was a liquidating trust, and its entire activities were in pursuance of its purpose of liquidation. It contends in the alternative that if found to be an association taxable as a corporation it is entitled: (a) to depletion and depreciation, and (b) to a deduction of 12 1/2 percent of the value of its capital in determining its excess profits tax liability.
*1158 The respondent contends that the petitioner was created solely for the purpose of operating, and did operate, a business in a manner so similar to the form commonly used by corporations that it must be taxed as a corporation within the rationable of the decisions of the Supreme Court in ; , and related cases.
Petitioner's contention that it is a liquidating trust is based on the premise that its income for the taxable year was from the sale of oil and gas and constituted a pro tanto liquidation of its "sole assets." Petitioner's assets consisted in an interest in oil and gas leases and the same interest in the machinery and equipment necessary to explore and operate these leases. The trust was created for a period of 20 years and provided for liquidation and sale of assets at the end of that period unless terminated and liquidated sooner as therein provided. Obviously, it presupposed not only the operation of the producing wells then in existence but further exploration, drilling, and operation of new wells. The mere fact that its income was from the sale of oil*1159 and gas does not make it a liquidating trust or prevent its classification as an association for tax purposes, The same reasoning might be applied to any corporation receiving income from a wasting asset.
Nor is the fact that the actual operation of the property was conducted by the Westgate Oil Co. determinative of the question before us. Petitioner not only owned an undivided interest in the oil property but the same interest in the machinery and equipment required for operation, and it paid its proportionate share of the cost of operation. Obviously to the extent of such undivided interest, the Westgate Oil Co. operated the property for petitioner. Cf. The trustees were authorized to sell beneficial interests which were registered with the Securities and Exchange Commission; to use the proceeds therefrom to pay for the trust property; to take title to all property and property rights so acquired or thereafter coming into the trust; to hold such property the same as the sole and exclusive owners thereof and to convey good title to any property sold; to pay trust debts; to hold as*1160 their own any unsold beneficial interests; to operate the property and to employ agents and employees necessary in the operation and management of the property; to pay all costs incident to the operation and development *807 of the working interest and all necessary expenses of carrying on the business of the trust; to withhold any reserves deemed necessary for future expenses and to pay over to the holders of the certificates of beneficial interest the remaining net income from the property; and to change, alter, or terminate the trust with the consent of the owners of two-thirds of the beneficial units of the trust.
The trustees, collectively, were charged with the conduct of all business and the execution of all instruments in writing in the name of the trust and they could adopt a seal. The trust instrument provided that they should elect one of their number president, one vice president, and one secretary-treasurer, and designate one of the officers so elected as "Chief Executive Officer." The trustees had no individual liability except for willful misconduct.
The beneficial unit shares had a fixed par value. The holders of beneficial units were not personally liable*1161 for the acts of the trustees or the obligations of the trust. They owned no property of the trust and their rights as unit holders were limited to the receipt of a pro rata share of the net income of the proceeds from the sale of the assets on liquidation. Their certificates of beneficial interest, which were the sole evidence of their interest, were transferable on the books of the trust in person or by attorney when properly endorsed.
The trust provided a medium of centralized management of the enterprise and the sale and transfer of beneficial units did not affect its continuity. Under the terms of the trust the parties secured the advantage of perpetuation of trustees, limitation of liability, centralized control, and the united capital of a large group for the purposes of the enterprise - advantages usually incident to a corporate organization - and avoided the responsibilities of a partnership.
We hold the petitioner is an association taxable as a corporation. ;*1162 ;.
We come then to consider petitioner's alternative contentions.
In computing the deficiency in question the respondent refused to allow any deduction for depreciation or depletion for the reason that petitioner had failed to file a statement, designated as "Form O", containing certain information from which depreciation and depletion may be computed, as required by article 23(m)-12 of Regulations 86. Did this result in an erroneous determination of petitioner's tax liability?
The determination of the respondent is prima facie correct and the burden is on the petitioner who alleges error to show by competent evidence that it is erroneous. At the hearing in this case the petitioner, who it appears was in possession of the necessary facts, introduced no evidence to show that it is entitled to depreciation or *808 allowable depletion based on cost and there are no facts in the record upon which either depreciation or cost depletion can be computed. We are, therefore, unable to determine that petitioner is entitled to any depreciation or that allowable*1163 depletion based on cost is greater than depletion computed on the basis of 27 1/2 percent of the gross income from the property in accordance with section 114(b)(3) of the Revenue Act of 1934.
At the close of the hearing, petitioner filed a motion asking that, if the Board should hold petitioner to be an association taxable as a corporation, then a further hearing be had to determine the correct amount of tax tax. It was a motion asking for a further hearing at some future date contingent upon our decision of one of the several issues then before us contrary to petitioner's contention. This motion was made after both parties announced at the hearing that they rested. To grant the motion under the facts and circumstances of this case would be tantamount to permitting the issues to be tried piecemeal after they were submitted as a whole. This we will not do. The necessary data was in the possession of petitioner at the time of the hearing, and we see no good reason why it should not have been introduced in evidence at that time in support of petitioner's alternative allegations of error. Obviously, it could not have prejudiced petitioner's position on the primary issue in the*1164 case. A petitioner before this Board may make alternative allegations of error, but it may not at the hearing withhold evidence material to those allegations and, after the primary issues have been decided against it, reopen the case on motion to introduce such evidence. The motion to reopen the case for the purpose of submitting additional evidence is therefore denied.
Since petitioner has not furnished us with figures as to value or costs, we can not hold that the respondent erred in his determination as to depreciation or in his determination that petitioner is not entitled to depletion based upon cost. However, it does appear from the record that the income here in question was from oil and gas wells, and, since the petitioner has not shown that allowable depletion based on cost is greater than percentage depletion, we hold that petitioner is entitled to depletion in the amount of 27 1/2 percent of its gross income from the properties as provided under section 114(b)(3) of the Revenue Act of 1934.
The second alternative issue raised by the pleadings involves the question of whether petitioner is entitled to a deduction from net income of 12 1/2 percent of the declared*1165 value of its capital stock in computing its excess profits tax.
The petitioner did not file a capital stock return for 1934, but in 1937 a capital stock tax based upon a valuation of $500,000 was *809 assessed against it, together with a penalty of 25 percent of the tax. This assessment was paid by the petitioner. Since petitioner did not have an income taxable year prior to June 30, 1934, the declared value of its capital stock, as expressed in the assessment, was apparently based on the value of its units of beneficial interest at the date of its organization, which were sold for $500,000.
The Revenue Act of 1934 1 imposed a tax upon the adjusted declared value of the capital stock of corporations and an excess profits tax upon the net income of such corporations "as is in excess of 12 1/2 per centum of the adjusted declared value of its capital stock * * *." The purpose of the statute is "* * * To allow the taxpayer to fix for itself the amount of the taxable base for purposes of computation of the capital stock tax, but with the proviso that the amount thus fixed for the first taxable year shall be accepted, with only such changes as the statute prescribes for the*1166 purpose of computing the capital stock and excess-profits taxes in later years." . Obviously the amount of declared value of capital fixed for the first year, which is the *810 year before us, is a matter of practical indifference to the Government, since the statute guards against the loss of revenue from capital stock taxes through an understatement of capital, by a corresponding increase in excess profits taxes.
*1167 The capital stock tax and the excess profits tax are interrelated and the statutes must be construed together in the light of their purpose. Cf. The primary purpose of the excess profits tax was to assure a reasonable valuation for capital stock purposes. Finance Committee Report No. 558, p. 5(1), 73d Cong., Revenue Act of 1934. The provision in the capital stock tax statute that the "declaration of value" for the "first year" can not be amended was inserted in order to avoid controversy by fixing the value of capital stock for succeeding years. Finance Committee Report, supra. We held in , that these purposes were not served where the taxpayer did not file a "first return" within the time prescribed by the statute, and in a subsequent year filed a late return with the sole purpose of reducing its excess profits tax liability. But where, as here, the taxpayer has not filed any return for the "first year" and the Commissioner from the information available to him has determined and declared a value for the "first year" and has assessed and collected the capital stock tax on*1168 such declared value, we think the value so declared and determined should be considered the declared value for the purposes of the excess profits tax. We hold, therefore, that the petitioner is entitled to an adjusted declared value of its capital stock in the amount of $500,000 for the purpose of computing its excess profits tax, and direct that the computation be made accordingly.
There is some evidence to the effect that during the taxable year approximately $36,882.84 of income applicable to unsold units was permitted by the trustees to be retained by the trust for distribution to the unit holders. The reason for this action does not appear. This amount was included in income by the respondent in determining the deficiency here in question. The petitioner has raised no issue as to this in the pleadings. Under the evidence before us, we can not disturb this determination.
Reviewed by the Board.
Decision will be entered under Rule 50.
BLACK dissents from the holding in the majority opinion that petitioner is an association taxable as a corporation.
Footnotes
1. SEC. 701. CAPITAL STOCK TAX.
(a) For each year ending June 30, beginning with the year ending June 30, 1934, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
* * *
(d) Every corporation liable for tax under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed to the collector for the district in which is located its principal place of business or, if it has no principal place of business in the United States, then to the collector at Baltimore, Maryland. Such return shall contain such information and be made in such manner as the Commissioner with the approval of the Secretary may by regulations prescribe. * * *
* * *
(f) For the first year ending June 30 in respect of which a tax is imposed by this section upon any corporation, the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value cannot be amended), as of the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section (or as of the date of organization in the case of a corporation having no income-taxable year ending at or prior to the close of the year for which the tax is imposed by this section). * * *
SEC. 702. EXCESS-PROFITS TAX.
(a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 701, an excess-prfits tax equivalent to 5 per centum of such portion of its net income for such income-tax taxable year as is in excess of 12 1/2 per centum of the adjusted declared value of its capital stock (or in the case of a foreign corporation the adjusted declared value of capital employed in the transaction of its business in the United States) as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined as provided in section 701. If the income-tax taxable year in respect of which the tax under this section is imposed is a period of less than 12 months, such adjusted declared value shall be reduced to an amount which bears the same ratio thereto as the number of months in the period bears to 12 months. For the purposes of this section the net income shall be the same as the net income for income tax purposes for the year in respect of which the tax under this section is imposed. ↩