*1163 1. An individual, owner of a lease on certain oil land, sold a limited number of shares of beneficial interests in the prospective production from an oil well to be sunk thereon to the petitioners, who were to bear the expense of operation and administration thereof in proportion to their several interests. They designated certain of their number to have charge and full management of the well, termed Barham Well #1, for the benefit of all the interest owners, the managers acting as trustees, receiving pay for their services and making reports to and receiving directions from the interest owners. Held, the interest holders so organized and operating were an association taxable as a corporation, as determined by the Commissioner.
2. A proposition was made to the individual interest holders or shareholders in Barham Well #1, by a corporation, to purchase any or all their interest shares at ten dollars a share, which proposition was accepted by practically all interest holders, and the owner by quitclaim conveyed the lease to said corporation, which took immediate and entire control of Barham Well #1. Held, in the circumstances fully set forth in our findings of fact, *1164 the petitioners are not, within the meaning of the revenue statutes, transferees of the association, termed Barham Well #1, and not liable as such for income tax for 1923 assessed against such association.
*236 These cases involve the liability of the petitioners as alleged transferees of Barham Well #1, which is asserted by the respondent to be properly classified as an association, taxable as a corporation, from which is due a deficiency in income tax for 1923 in the assessed amount of $7,083.13, plus any accrued penalty and interest.
The issues for our determination are:
(1) Was Barham Well #1 properly classified by the respondent as an association taxable as a corporation for the year 1923?
(2) Are the petitioners transferees of Barham Well #1, within the meaning of the revenue statutes?
(3) If petitioners are such transferees and were at any time liable for said unpaid 1923 tax, are the assessment and collection thereof from petitioners barred by the statute of limitations?
The cases*1165 are consolidated for hearing and decision.
FINDINGS OF FACT.
*237 In 1922 Walter B. Barham acquired a lease on certain oil land in Los Angeles County, California. As such lessee he was required to drill an oil well on the property within a specified time. Being without sufficient funds to carry out the project alone, he sold interests in the oil to be produced from the well to the petitioners and others and in this way obtained the money necessary to meet the expense of drilling the well, known as Barham Well #1, which became a producing well in February 1923.
Each of the petitioners, purchasers of interests in the oil production, became the owner of a certain proportionate share of the oil production from the well and shared in the same proportion the expenses of operation and administration. Under the contracts of the petitioners (purchasers of interest units in the oil production) with Barham, he was authorized to sell the oil produced from the leased property and the Farmers and Merchants National Bank of Los Angeles was authorized to receive, receipt for and collect the money due the petitioners by reason of the sale of the oil; to pay out of the money so collected*1166 and received the pro rata share of the operating and administrative expenses of the well which were due from each of the petitioners, and to distribute to each of the unit holders of interests in the well his proportionate share of such money. Barham had charge and management of the well and during the time the same was being drilled in 1922 reports as to progress being made were sent to interest holders, such reports being signed by Frank E. Leeper, as trustee, and prepared by Barham and Leeper.
On April 2, 1923, Barham sent a letter to the unit or interest holders of Barham Well #1, notifying them of a meeting to be held on April 5, 1923, at which the interest holders "appointed" several persons - Carson, Harrison, and Cotton - who in connection with Barham and Leeper were to act as representatives of the unit holders. These designated representatives had no regular times for meeting, but whenever it was deemed advisable would be called together for consultation about the business, Leeper notifying them over the telephone.
Barham sold out his interest in the oil-well business in the latter part of 1925 or in 1926 and thereafter had no connection with it. During his connection*1167 therewith, however, it was pursuant to information contained in reports made out by him and Leeper that the Farmers and Merchants National Bank aforesaid made pro rata distribution of money to the interest or unit holders in Barham Well #1.
In some reports sent out to the unit holders in 1923, the record shows that John E. Carson, George F. Cotton, J. E. Harrison, W. B. *238 Barham, and Frank E. Leeper were designated "Trustees", Frank E. Leeper being (at least in some reports) designated "Chairman."
In report No. 8, under date of July 16, 1923, sent to said unit holders, the trustees above named advised and recommended that a certain part of the June receipts be set aside for deepening the well, stating: "A printed post card is herewith inclosed and you are requested to vote your desire in this matter and mail the card to this office or bring it with you to the meeting, as this will be the authority used by your trustees in proceeding in the matter."
In report No. 9, to the unit holders, under date of July 25, 1923, and signed by four of the trustees (one trustee being absent from the city), it was stated that Barham and Leeper (each of whom was on April 12 voted a*1168 salary of $250) had on June 15 voluntarily given up their salary and were then receiving no compensation whatever.
In report No. 10 of September 13, 1923, to unit holders, the trustees expressed the intention of "next month" declaring a dividend for September's production.
Report No. 11, under date of October 13, 1923, referred to a meeting of the "directors" that was held on the 11th of the month, when a contract was let for the deepening of the well, and stated that in November "another dividend" would be declared.
Report No. 26, dated April 13, 1925, advised unit holders in Barham Well #1, aforesaid, "* * * the present Board of Trustees will have served the year for which they were elected on April 15, 1924. You are hereby notified that a unit holders meeting will be held in our offices at 10:30 A.M., the 21st of April for the purpose of electing a new Board."
The trustees each received (at least during portions of their term of service) $10 for each day's attendance at their trustee meetings.
In December 1926, it was ascertained that water had gotten into the well and as a result the question of making a sale thereof was being discussed by the trustees, with a view*1169 to submitting the matter to the unit holders. Thereafter satisfactory terms were arranged for a sale to the Olympic Refining Co., of the character hereinafter indicated, and on January 12, 1927, the trustees sent out letters notifying the unit holders of a meeting to be held on January 24, 1927, for the purpose of disposing of their holdings to the best advantage for all concerned "as it appears to be impossible to operate the well at a profit." A card was enclosed in the letter to be signed and returned to the trustees, authorizing them (in the event the unit holder could not attend the meeting) "to act to the best of their discretion." The meeting was held and about 85 percent of the unit holders authorized the trustees to dispose of Barham Well #1, no vote being cast to the contrary. The trustees had *239 several propositions made them, but the best and the one accepted was that of the Olympic Refining Co., which was made by letter of February 21, 1927, addressed to the unit holders aforesaid and signed "Olympic Refining Company, by C. P. Ritter, Pres.", proposing "to purchase all or any part of the units of ownership of the above property. [Barham Well #1] now outstanding*1170 at $10.00 per unit, payable in cash, it being understood and agreed that the total number of units issued and outstanding is two thousand."
The letter indicating acceptance of the Olympic Refining Co.'s offer was dated February 25, 1927, was signed "Barham Well No. 1, Frank E. Leeper, John E. Carson, Erle Gerard, J. E. Harrison, Trustees," and stated the acceptance of the offer was "to be effective at midnight February 28, 1927. It being understood that all money on hand as well as what may be received from the production from all oil and gas to above mentioned date, shall be retained by the undersigned Trustees and distributed to the unit holders of record as of February 28, 1927." Immediately after the acceptance of its offer, the Olympic Refining Co. took possession of Barham Well #1, with certain building equipment, casing in the hole and a derrick on the property that belonged to Barham Well #1.
Under date of March 9, 1927, the trustees sent out a letter to the unit holders of Barham Well #1, informing them of the sale to the Olympic Refining Co. and telling them that the latter company had deposited $20,000 in escrow with the Farmers and Merchants National Bank of Los Angeles*1171 and that the money was being paid out, $10 per unit, as fast as the unit certificates were received. Unit holders were in said letter advised that if they would call in person or mail their certificates to the trust department of said bank they would receive therefor $10 per unit and that the surrender of their certificates would not exclude them from participating in a pro rata distribution of money on hand, which on final distribution amounted to $1.70 per unit. All but two unit holders, one owning five units and the other one unit, accepted the aforesaid offer of the Olympic Refining Co. Why all units were not turned in or sold to the Olympic Refining Co. is not disclosed, though the record tends to show that at the date of the hearing herein only one unit was still outstanding.
Under date of April 22, 1927, report No. 47 was sent to unit holders, in which it was stated that report No. 46 "covered the sale of our holdings to the Olympic Refining Company of the Barham Well No. 1." There was also set forth in report No. 47 a statement of the financial condition of Barham Well #1 from January 1, 1927, to date, April 22, 1927, followed by: "The above is a complete report of all*1172 conditions, receipts and expenditures, since the first of the year and closes the affairs of the Barham Well No. 1." It was *240 also stated therein that a motion was unanimously carried to make Erle Gerard "the custodian of all papers, books, records, etc., pertaining to our well."
Under date of March 3, 1927, Walter B. Barham quitclaimed, assigned and transferred to the Olympic Refining Co. all his right, title and interest in the oil lease involved herein.
The amounts received by certain unit or interest holders in Barham Well #1 as the result of the sale thereof to Olympic Refining Co. are, as regards the petitioners herein, as follows:
| Petitioner | Number of units | Amount received |
| Erle Gerard | 642 | $6,420 |
| Mrs. Pearl E. Leeper | 100 | 1,000 |
| Pearl E. Leeper, Executrix, | 222 | 2,220 |
| Estate of Frank E. Leeper | ||
| Mrs. Egerton Crispin | 30 | 300 |
| George Zobelein | 10 | 100 |
| Mrs. Edward Zobelein | 10 | 100 |
| Henry O. Feldman | 30 | 300 |
| Edward L. Keeys | 10 | $100 |
| J. E. Harrison | 22 | 220 |
| Earl W. Mueller | 20 | 200 |
| Mrs. S. Streefkerk | 20 | 200 |
| Albert Miller | 10 | 100 |
| John E. Carson | 48 | 480 |
| Mrs. Rose L. Carson | 48 | 480 |
In addition to the receipt by the petitioners*1173 $10of per unit as indicated above, there was distributed to them, at the rate of $1.70 per unit or interest share, the money of Barham Well #1 accumulated and on hand prior to the effective date of the sale of Barham Well #1 to the Olympic Refining Co. as aforesaid.
Barham Well #1 had no charter, no bylaws, no seal, and no shares of stock or other certificates of interest in the enterprise other than the contracts or certificates evidencing to unit holders their interest or share in the oil production from the well.
Barham Well #1 filed a fiduciary return for 1923 on March 15, 1924. A deficiency notice from the Commissioner asserting a tax of $7,083.13 was mailed it on February 24, 1928. From such proposed assessment there was no appeal to the Board of Tax Appeals. The tax was assessed May 12, 1928. Deficiency notices were mailed to the petitioners as transferees on June 10, 1929.
OPINION.
SEAWELL: The record shows that Walter B. Barham owned an oil lease and was required under the terms of his lease to drill a well thereon. In order to raise sufficient money to meet the expense incident to the drilling of the well, he sold interest units or shares in the prospective*1174 oil production from the well to be drilled. The purchasers of such interests or interest units were to bear the expense of operation and administration in the same proportion that they were to share in the proceeds from the sale of the oil produced.
*241 After these interests were acquired as stated, the well was drilled, oil was struck, and the well became producing and paying one. A meeting was held, at which certain of the interest holders, thereafter designated "trustees", represented themselves and other interest holders and carried on the business of Barham Well #1 in a manner similar to directors of a corporation. These aforesaid trustees, the evidence indicates, were elected annually by the interest holders, approved expenditures, made decisions relating to deepending of the well, declared dividends, called meetings of the interest holders, arranged for the sale of Barham Well #1 and advised and recommended to the interest holders its sale to the Olympic Refining Co. on the terms and basis set forth in our findings of fact. Barham Well #1 was not, however, incorporated, had no seal, issued no stock, and had no body always designated "board of directors", though*1175 its board of trustees exercised powers and performed duties similar to those discharged by a board of directors of a corporation. The reports which the trustees sent the numerous interest or unit holders informed them of the progress of the project in which they were all interested and advised them of the action taken at the various meetings held in the interest of the unit holders. Such is disclosed in our findings of fact.
The Revenue Act of 1921 provides in part:
SEC. 2. That when used in this Act -
* * *
(2) The term "corporation" includes associations, joint-stock companies, and insurance companies.
In Regulations 62 it is stated:
ART. 1502. Association. - Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the members or shareholders on the basis of the capital stock which each holds or, where there is no capital stock, on the basis of the proportionate share or capital*1176 which each has or has invested in the business or property of the organization. * * *
ART. 1504. Association distinguished from trust. - * * * If, however, the cestuis que trust have a voice in the conduct of the business of the trust, whether through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute.
The respondent determined Barham Well #1 was, within the meaning of the revenue act and regulations quoted, an association taxable as a corporation.
In the instant case, the record does not disclose any declaration of trust or any trust instrument and the manner in which the active *242 operations of Barham Well #1 were carried on, in our opinion, brings it within the classification of an association avd taxable as a corporation, as determined by the respondent.
In support of their claim that Barham Well #1 was taxable as a trust, the petitioners quote in their brief and rely on subsection (a) of section 704 of the Revenue Act of 1928. That subsection appears to have been enacted to abrogate the retroactive effect of the decision in *1177 , with respect to trusts that had reasonably relied on the prior interpretation of the law before that decision was promulgated. It had been previously ruled that control by the beneficiaries was essential in order that a trust should be classed as an association. In , it was held that where the trustees are actively carrying on business in quasi-corporate form, the trust is properly classed as an association, regardless of the control vested in the beneficiaries.
In filing its return for 1923 as a trust, Barham Well #1 did not rely on any ruling of the Bureau of Internal Revenue. Its claim to classification as a trust was directly contrary to the position taken by the Bureau, as expressed in article 1504, regulations 62, supra, which provides that if the beneficiaries have a voice in the conduct of the business of the trust through the right periodically to elect trustees or otherwise, the trust is an association within the meaning of the statute. The mere filing of a fiduciary return does not under section 704(a) of the Revenue Act of 1928 entitle a taxpayer to classification as*1178 a trust where, as in the present case, under the law and regulations in force when the return was filed and at all times since, the taxpayer was classed as an association for income tax purposes.
Our determination that Barham Well #1 is taxable as an association is in accordance with the principle enunciated in , and in other cases therein cited. The petitioners cite and rely on , in support of their contention that Barham Well #1 should be considered as a trust and not as an association or corporation. The facts in that case and in the instant proceedings are quite different, so dissimilar that the decision in the former is not applicable and controlling herein. In the former there was in fact a trust; the trustees alone could renew their numbers and could alone alter or amend the trust. The beneficiaries had no voice in such matters and never held a meeting. It was controlled absolutely by the trustees and in this respect bore no resemblance to a corporation which is controlled and directed by its stockholders, acting through directors. The trustees*1179 were the real masters of the situation, unchecked by the veto of the holders of the beneficial interest. In the *243 instant case, the record indicates that the interest holders elected the trustees annually; that the trustees asked "authority" of the interest holders before proceeding in certain matters and did not claim nor exercise absolute control as they did in As before stated, in our opinion the respondent did not err in considering Barham Well #1 an association, taxable as a corporation within the meaning of the Revenue Act of 1921.
The respondent contends that the transaction through which the Olympic Refining Co. acquired the assets of Barham Well #1 for a consideration of $20,000 was a sale of the assets and not a sale of the units of interest or shares held by the sundry petitioners. It is true that the negotiations leading up to the acquisition of the well by the Olympic Refining Co. were largely carried on through the trustees, who were acting in a sense as a board of directors of the Barham Well #1, but the consummation of the deal was explicitly a purchase of the shares, and from the unit holders. The letter*1180 of the Olympic Refining Co. dated February 21, 1927, was addressed, not to Barham Well #1, but to the individual unit holders, and proposed to purchase from them, or such of them as agreed to sell, their shares of interest in the property at $10 per unit. The offer was accepted, and all previous negotiations were thereby merged into the contract thus formed. The shares were taken up from the individuals holding them and the individuals, not the association nor the trustees representing it, were paid therefor. This is comparable to the sale by stockholders of a corporation of their individual stock to new stockholders, and cannot be said to be a liquidation of the assets of the association. The transaction was merely a transfer or assignment by the individual unit holders in Barham Well #1 to the Olympic Refining Co. of their interests or right to receive the future profits or dividends, if any, realized from oil production from Barham Well #1. The well thereafter still existed and the evidence fails to show its operation ceased or that the association was insolvent or that there was a liquidation of the association, termed Barham Well #1. So far as this transfer of shares or*1181 units of interest to the Olympic Refining Co. is concerned, we hold that the unit holders or shareholders who received the purchase price of their shares from the Olympic Refining Co. were not by reason thereof transferees under section 280 of the Revenue Act of 1926 and liable for the tax assessed against Barham Well #1.
This conclusion is not in conflict with the case of , relied on by the respondent. In that case it is said (p. 603):
* * * As *244 we interpret the evidence it appears to us that the Bank of Hampdon sold its assets to the Baltimore Trust Company. The resolutions of the stockholders of the bank are all to this effect, as well as the actual documents of conveyance. The corporation simultaneously with the sale of assets passed resolutions of liquidation which were carried out before the end of the year by its own officers. While it is true that the original offers were made on the basis of a purchase of the shares of stock at $40 per share, as soon as there was an apparent acceptance of the offer the transaction was then placed in the hands of the attorney for the Baltimore Trust Company and from that time*1182 on every entry in the minutes of the Bank of Hampden is to the effect that the assets were being sold.
Other differences, if necessary, between the Brady case, supra, and the case at bar might be pointed out.
In the circumstances detailed in our findings of fact, we are of the opinion, and so hold, that none of the petitioners is a transferee of the association, termed Barham Well #1, within the meaning of the revenue statutes, and there is no liability on the part of any of them as transferees for the tax assessed against said Barham Well #1. This, of course, eliminates the third issue.
Reviewed by the Board.
Judgment of no deficiency will be entered in each case.
TRAMMELL, MURDOCK, GOODRICH, and LEECH concur in the result.
Footnotes
1. Proceedings of the following petitioners are consolidated herewith: Pearl E. Leeper; Pearl E. Leeper, Executrix, Estate of Frank E. Leeper, Deceased; Mrs. Egerton Crispin; George Zobelein; Mrs. Edward Zobelein; Henry O. Feldman; Edward L. Keeys; J. E. Harrison; Earl W. Mueller; Mrs. S. Streefkerk; Albert Miller; Rose L. Carson; John E. Carson. ↩