*134 Decisions will be entered under Rule 50.
Held, where capital rather than labor and services predominates in the production of income, the tax liability for such income follows ownership. Cf. Blair v. Commissioner, 300 U.S. 5">300 U.S. 5; Lyman A. Stanton, 14 T. C. 217, affd. (C. A. 7) 189 F. 2d 297, and held, where petitioners acquired by parol agreement a legal part ownership of certain oil and gas leases and producing wells, and all parties at interest recognized petitioners' ownership, respondent, for lack of privity, cannot question petitioners' title because of the statute of frauds. Cf. Francis M. Camp, 21 B. T. A. 962; Abraham Greenspon, 8 T. C. 431, and, therefore, held, petitioners, who conveyed one-half of their interest in such properties to their son, are not taxable upon the income from such interest so conveyed, the son being a part owner to that extent.
*1436 In these consolidated proceedings respondent determined deficiencies in income tax against the petitioners as follows:
| Docket No. | Petitioner | Year 1943 | Year 1944 |
| 25449 | J. N. Wheelock | $ 1,741.34 | $ 1,486.64 |
| 25450 | Wilma B. Wheelock | 1,741.34 | 1,486.64 |
Because of the provisions of the Current Tax Payment Act of 1943, the year 1942 is also involved.
The sole question for decision is whether the petitioners, on December 5, 1942, made a valid and completed gift to their son, J. N. Wheelock, Jr., of one-half of the one-eighth interest which they owned in certain oil and gas leases and property appurtenant thereto, so that subsequent income therefrom was not taxable to them.
Another issue relating to a gain from involuntary conversion was abandoned by petitioners *136 at the hearing, and respondent's determination accepted.
FINDINGS OF FACT.
Petitioners, J. N. and Wilma B. Wheelock, husband and wife, are residents of Corsicana, Texas, and under the community property laws of Texas each filed an income tax return for the taxable years involved with the collector of internal revenue for the second district of Texas. J. N. Wheelock, as head of the marital community, is herein referred to as petitioner.
Petitioner, his brother, R. L. Wheelock, hereafter called "R. L.," and J. L. Collins, hereafter called "Collins," have been associated in the oil business at Corsicana, Texas, for 26 years.
Some years prior to 1937 petitioner, R. L., Collins and E. L. Smith, hereafter called "Smith," furnished H. M. Harrell, hereafter called "Harrell," a drilling rig under an oral agreement that Harrell would use the rig to drill for oil and gas and thereby acquire oil and gas leases and drill and develop same, and that all properties so acquired would be owned one-half by Harrell and one-eighth each by petitioner, R. L., Collins, and Smith.
In 1937, pursuant to the agreement, Harrell acquired oil and gas leases on some 4,000 acres of land in the so-called Bammel oil*137 and gas *1437 field, in Harris County, Texas, and he drilled many producing oil and gas wells thereon, most of them gas wells, and built a recycling plant, with money borrowed from a Dallas bank upon the credit and personal guarantees of R. L., Collins, and Smith. Petitioner did not endorse or guarantee such loans. Harrell handled the oil and gas properties acquired under the oral agreement, sometimes herein called the Bammel properties and sometimes referred to as "H. M. Harrell Trust No. 2" and also as "H. M. Harrell, Trustee," and at all times exercised exclusive control in the management and operation of same, and kept all of the books and records pertaining thereto, which property, prior to December 5, 1942, belonged one-half to Harrell and one-eighth each to petitioner, R. L., Collins, and Smith. Neither petitioner, R. L., Collins, nor Smith contributed personal service thereto and did not participate in the management or operation thereof. Practically all negotiations between them (the other four owners) and Harrell were conducted by R. L. Harrell lived in Houston, Harris County, near the Bammel properties, and the other parties lived in Corsicana, about 200 miles *138 distant, and are sometimes called the "Corsicana group."
On December 5, 1942, petitioners executed, duly acknowledged before a notary public and delivered to their son, J. N. Wheelock, Jr., a warranty deed conveying to the son as a gift, which he accepted, an undivided one-half of the one-eighth interest which the petitioners owned in the Bammel leases and oil and gas properties which Harrell had acquired under the oral agreement. The deed described the property conveyed fully and in detail, and among the items enumerated therein were: (1) oil, gas, and mineral leases embracing approximately 5,000 acres of land in Harris County, Texas, "known as the Bammel Gas Field"; (2) 19 producing oil and gas wells in said field and all oil and gas wells to be thereafter drilled on said properties, together with the casing, pipe lines, connections, etc.; (3) gas recycling and pressure maintenance plant, etc.; (4) one 3-inch pipe line "approximately 7 miles in length used to transport oil, gas," etc.; (5) two 10,000-barrel storage tanks; (6) all easements, surface leases or other rights and appurtenances to said oil and gas leases and oil and gas wells thereon.
The deed contained no restrictions, *139 being an outright conveyance and warranty of title, and complied in all respects with the laws of Texas governing conveyance of real and personal property. On December 5, 1942, J. N. Wheelock, Jr., was 18 years old, was in school, but had previously purchased an interest in a ranch.
Pursuant to the gift made by the deed, petitioners each filed a timely gift tax return for the calendar year 1942 with the collector of internal revenue for the second district of Texas, reflecting the gift to their son of said properties, the value of which was therein stated *1438 to be $ 34,600. J. N. Wheelock, Jr., filed a donee's information gift tax return for the year 1942 with the collector, reflecting the gift received by him. After December 5, 1942, petitioners divided equally with J. N. Wheelock, Jr., all income they received from the Bammel properties.
Before making the deed to J. N. Wheelock, Jr., petitioner discussed it with R. L., Collins, and Smith, and it was agreeable with them, and they knew of its execution and delivery in December 1942. Thereafter, J. N. Wheelock, Jr., was at all times recognized by petitioner, R. L., Collins, and Smith as the owner of an undivided one-sixteenth*140 interest in the Bammel properties. Collins and Smith were not related to each other, or to the Wheelocks.
Harrell knew of the deed from petitioners to their son, conveying one-half of their interest in the Bammel properties, but though requested by the other owners to do so, he refused to recognize J. N. Wheelock, Jr., as the owner of an interest until 1949, when petitioners conveyed to J. N. Wheelock, Jr., their remaining one-half interest. The only reason Harrell ever gave for his non-recognition of young Wheelock's ownership was that he "had too many partners already and did not want any more."
Harrell was dominating and autocratic in the handling and operation of the Bammel properties, the title to all of same being in his name as "Trustee," and he did not consult the other owners with reference thereto.
In his income tax returns for 1942 and subsequent years Harrell claimed to be the owner of only one-half of the Bammel properties, and he filed partnership returns in each of those years under the name of "H. M. Harrell, Trustee No. 2," reporting one-half of the income therefrom to be his and one-eighth each belonging to petitioner, R. L., Collins, and Smith.
Harrell, while *141 recognizing the ownership of petitioner and his associates in the properties, and though often promising to execute to them written assignments of their interest, failed to do so, and also failed to distribute to them their share of the profits therefrom, although he had withdrawn for himself a sum in excess of $ 250,000.
In 1945 the Corsicana group employed a Houston law firm to establish their record interest in the Bammel properties and to secure from Harrell a distribution of its profits. As a result of negotiations with Harrell and his attorney, an instrument prepared by Harrell's attorney, called a "partnership agreement," dated June 1, 1945, was executed by Harrell, petitioner, R. L., Collins, and Smith, which agreement in effect provided, viz., "confirmed the oral agreement made prior to January 1, 1937" and bound Harrell to "immediately execute and deliver" assignments 1 conveying to R. L., Collins, petitioner, and *1439 Smith each one-eighth interest in the Bammel properties; Harrell was to continue to manage, operate, and develop the properties under the name of "H. M. Harrell, Trustee," furnish the other owners periodical statements of receipts and disbursements, *142 and make disbursements of profits according to the interest of each, Harrell to retain no profits until he reimbursed the other owners for his $ 250,000 overdraft.
The so-called partnership agreement did not include J. N. Wheelock, Jr., 2 as an owner of any interest in the properties, although the Corsicana group insisted that it should, but Harrell was adamant in his refusal to recognize young Wheelock as part owner or to make any change therein, and the Corsicana group were impelled to accept the agreement as written rather than incur the expense of litigation and a receivership. They continued, however, to recognize J. N. Wheelock, Jr., as the owner of a one-sixteenth interest therein.
After June 1, 1945, Harrell *143 made distribution of the profits in accordance with the agreement of that date, petitioner being paid one-eighth thereof in monthly checks payable to his order which, as received, he divided equally with J. N. Wheelock, Jr. Petitioner's secretary would take each check from Harrell, as received, to the First National Bank of Corsicana and deposit one-half of same to petitioner's credit and the other one-half in the separate bank account of J. N. Wheelock, Jr., over which petitioners had no control.
On January 1, 1949, petitioners conveyed to J. N. Wheelock, Jr., one-sixteenth or the remaining one-half interest owned by them in the Bammel properties, and thereafter J. N. Wheelock, Jr., was recognized by Harrell as the owner of a one-eighth interest therein, and payments from profits were thereafter paid directly to J. N. Wheelock, Jr., by Harrell.
On December 5, 1942, petitioners were the owners of one-eighth of the oil and gas leases, oil and gas wells, and other property known as H. M. Harrell, Trustee, or H. M. Harrell Trust No. 2, 3 and on that date they made a valid, completed gift to their son, J. N. Wheelock, Jr., of an undivided one-half interest therein, and thereafter J. *144 N. Wheelock, Jr., owned a one-sixteenth interest in said properties and income therefrom at all times between December 5, 1942, and January 1, 1949.
The income of H. M. Harrell, Trustee, was from the sale of crude oil and gas extracted by it from the 5,000 acres of oil and gas leases owned by it in the Bammel field. The business of H. M. Harrell, Trustee, was primarily that of mining for oil and gas by extracting *1440 same from the earth, and the sale of such products was merely incidental to its mining and production. None of its owners or partners therein contributed personal services, other than Harrell, and while his services were of value, the income of H. M. Harrell, Trustee, was in the main attributable to the large volume of oil and gas contained in the lands upon which it owned leases, and*145 the richness and productivity of said leases and the oil and gas produced therefrom.
Petitioners reported as community income one-eighth of the distributable income of H. M. Harrell, Trustee No. 2, for 1942 and one-sixteenth for each of the years 1943 and 1944. J. N. Wheelock, Jr., reported in his 1943, 1944, and subsequent returns the income received by him from H. M. Harrell, Trustee No. 2.
Respondent, in his notices of deficiency, determined that one-eighth of the distributable income of H. M. Harrell, Trustee No. 2, was taxable to the petitioners under the provisions of section 22 (a) of the Internal Revenue Code.
OPINION.
The facts are not in dispute. Whether in the taxable years petitioners are taxable upon one-sixteenth of the distributable income from the Bammel properties, as they contend, or upon one-eighth, as the respondent has determined, depends upon the effect given to the deed from petitioners to their son, J. N. Wheelock, Jr.
Petitioners contend that this warranty deed conveyed title to one-half of their one-eighth interest in the oil leases and property therein described and that J. N. Wheelock, Jr., thereby became the owner of same and the income therefrom, and*146 such income was taxable to him and not to them.
Respondent insists that petitioners' contention must be denied because of the holding in Burnet v. Leininger, 285 U.S. 136">285 U.S. 136, and the recent decision of the Fifth Circuit in United Statesv. Atkins (decided May 1, 1951), in which latter case the court said:
* * * The law is well settled that a partner remains taxable on his full share of income from a partnership of which he is a member even though he assigns a part of his interest to another, unless such assignee actually becomes a partner in the original enterprise. * * *
The facts in the instant case differentiate it from the two cases above cited. In both of these the taxpayer, a member of a general or commercial partnership, assigned a part of his interest in the business, or profits therefrom, to a third person in such manner that the assignee did not become a partner in the business nor acquire ownership therein, and hence the taxpayer's ownership in the business and taxability on its income remained the same.
*1441 In the Leininger case, supra, the taxpayer made no formal assignment, but had an "agreement" with his wife*147 that she "was a full, equal partner with him in the interest in the Eagle Laundry Co. and entitled to share equally in the profits and obligated to bear equally any losses." She was not admitted as a partner; the books and records of the firm and partnership returns verified by the taxpayer disclosed no ownership by her; she contributed neither capital nor personal services, while the taxpayer contributed both, and checks covering firm profits were payable to the taxpayer and by him deposited in a joint account, although she had a separate bank account.
Chief Justice Hughes, author of the opinion, said:
* * * Upon the facts as found, the agreement with Mrs. Leininger cannot be taken to have amounted to more than an equitable assignment of one-half of what her husband should receive from the partnership, * * *
In the Atkins case, supra, the taxpayer was a partner in three different firms, 4 and he transferred "his interest" in each to a newly formed partnership of himself and his son, called Atco Investment Company. His partners in the three original firms were consulted and agreed to the transfer, but the Court found that it was not intended that the Atco Investment Company*148 or the son should become partners in the three original partnerships. After the transfer, the books of the three partnerships were unchanged as to the interest owned by the taxpayer and disclosed no ownership of Atco Investment Company nor of the son therein; the tax returns showed the same membership as theretofore, and distributive share of the profits continued to be made payable to the original partners as before.
The essential facts in the Atkins case, supra, and the Leininger case, supra, are alike and Chief Justice Hughes' conclusion in Leininger we think applicable also in Atkins, viz., that the assignment of one-half interest in the business amounted to nothing more than "an equitable assignment of one-half of what" the taxpayer "should receive from the partnerships."
In the instant case there was no "equitable assignment" of future profits, nor was there a mere assignment*149 of an "interest in a business," but an outright legal conveyance by warranty deed of title in and to specific properties, real and personal, therein described, to-wit: oil and gas leases on 5,000 acres of land, 19 producing oil and gas wells and property appurtenant thereto. The deed referred to no assignment of an interest in a partnership or profits therefrom, but treated only of one-half of the one-eighth interest which the grantors owned in the property conveyed.
*1442 Here, unlike the Leininger case, there was a transfer of the "corpus," which produced the income in question. In that case Chief Justice Hughes said:
The respondent urges that the assignment to his wife was of one-half of the "corpus" of his interest and that this "corpus" produced the income in question. The characterization does not aid the contention. That which produced the income was not Mr. Leininger's individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination through the partnership relation in the conduct of the partnership business. * * *
Here it cannot be said that the labor and skill of *150 the members of the so-called partnership contributed to the production of the income, for none of them contributed any services, other than Harrell, and we have found that while his services were of value, the income in question was in the main attributable to the large volume of oil and gas contained in the lands upon which leases were owned and the richness and productivity of the leases and the oil and gas produced therefrom.
Where income is derived from capital or where capital rather than labor and services so largely predominates in the production of the income that labor as a contributing factor may be considered de minimis, the tax liability for such income follows ownership. Cf. Lyman A. Stanton, 14 T. C. 217, affd. (C. A. 7), 189 F. 2d 297; Blair v. Commissioner, 300 U.S. 5">300 U.S. 5. Such is the case here and accordingly, petitioners having parted with the ownership of that interest in the properties which produced the income in question are not taxable thereon, and respondent's adverse determination is reversed. This holding for petitioners makes it unnecessary to consider the question*151 of a mining partnership presented in their brief.
When the deed to Wheelock, Jr., was executed, the record title to the properties conveyed was not in petitioners, but in H. M. Harrell, Trustee. Notwithstanding this, respondent correctly concedes petitioners' ownership of the property. Under Texas law, where there is a parol agreement to acquire interest in land for the joint benefit of the parties and the deed is taken in the name of one of them, it is enforcible as a trust upon the legal title and all parties to the parol agreement own an equitable or beneficial interest in the property. Schultz v. Scott, 210 S. W. 830; Macias v. Macias, 148 S. W. 2d 240. Furthermore, since all parties at interest recognize petitioners' ownership, respondent, for lack of privity, cannot question their title because of the statute of frauds. Francis M. Camp, 21 B. T. A. 962; Abraham Greenspon, 8 T. C. 431; Isaac W. Frank, 44 B. T. A. 934.
Petitioners concede respondent's determination on another issue.
Decisions will be entered under*152 Rule 50.
Footnotes
1. Harrell failed and refused to execute these assignments until February 5, 1947.↩
2. He did not sign same nor was he a party thereto.↩
3. While the record title to these properties on that date was in H. M. Harrell, Trustee, Harrell and all parties at interest recognized petitioner as the owner of a one-eighth interest therein, as does respondent.↩
4. The business of two of the firms was "marketing petroleum products," and of the other, a "dehydrating business."↩