*2467 Where owners of an oil and gas lease organize a trust for the purpose of issuing "units" and thus raise money to be used in sinking one well and thus ascertaining the value of the lease, and where it was their intention to sell the lease as soon as oil and gas were discovered, and where the declaration of trust provided for the immediate distribution to the shareholders of all moneys arising from royalties or the sales of the corpus, held that such an organization was not an association.
*1028 This proceeding involves the redetermination of a deficiency in income tax for the period beginning May 29, 1922, and ending April 30, 1923, in the amount of $24,664.50. Petitioner asserts that respondent erred in determining that petitioner was taxable as a corporation and in refusing to determine that it is taxable as a distributable trust or as a joint venture. At the hearing petitioner claimed the benefit of section 704 of the Reveue Act of 1928.
FINDINGS OF FACT.
In the spring of 1922 Frank Kirk, J. E. Brewer, W. J. Linnartz, R. T. Pruitt, and Edwin*2468 Lamm were and had been for some time the owners of an oil and gas lease on certain land in Eastland County, Texas, which was about to lapse. Under these circumstances these persons thought it best to drill a well on the leased property for the purpose of ascertaining the value of the lease and if oil and gas were discovered to sell the lease. For this purpose, it was necessary to raise the sum of about $10,000. Thereupon, Kirk, Brewer, Linnartz, and Lamm executed, acknowledged, and on June 1, 1922, filed for record in the office of the county clerk of Eastland County, Texas, the following declaration of trust:
*1029 DECLARATION OF TRUST.
FEBRUARY 21, 1922
Frank Kirk et al
J. E. Brewerto
Public
THE STATE OF TEXAS
COUNTY OF EASTLAND KNOW ALL MEN BY THESE PRESENTS
Whereas, Frank Kirk, J. E. Brewer and W. G. Linnartz, R. T. Pruitt and Edwin Lamm, being the owners of the oil and gas leases herein described, conveyed the same to THE EXTENSION OIL COMPANY and the said above having relinquished all of their right, title and interest in and to said leases and the Trust Estate herein created; and,
Whereas, THE EXTENSION OIL COMPANY is now owner of the said leases*2469 under the names of THE EXTENSION OIL COMPANY said oil and gas leases carrying seven eights (7/8) of the oil and gas produced from the following tracts of land: (Here follows description of five tracts of land.)
The name of the Trust shall be THE EXTENSION OIL COMPANY.
Frank Kirk, J. E. Brewer, W. G. Linnartz and Edwin Lamm are hereby designated and shall be Trustees under the provisions of this instrument, which position by their signatures hereto they do hereby accept and agree to be governed by the provisions of this instrument and Declaration of Trust.
It is hereby declared that this trust shall exist for a period of NOT MORE THAN 10 YEARS, and the property herein described and all rents, royalties and revenues derived therefrom shall be held for the benefit of all persons who are or may become the owners of fractional interest, to whom the Trustees may issue proper certificates which certificates and all others which may be hereafter issued in exchange or substitution therefor shall be deemed parts hereof and conclusive evidence of ownership of respective interests in this Trust. The Trustees shall, from time to time, on request and on surrender of the old, issue new certificates*2470 as may be proper and necessary to evidence any new or subdivided interests.
The Trust Estate hereby created shall be divided into Four Hundred Units each unit representing 1/400 part of same.
In consideration of the conveyance of the property herein described to the Trust Estate, and the drilling and completing of the well on said lease by the said THE EXTENSION OIL COMPANY for the benefit of the beneficiaries hereunder, there is hereby issued to them the four hundred (400) units in and to the Trust Estate.
The said THE EXTENSION OIL COMPANY may sell the said four hundred (400) units or any part thereof, in which case upon surrender of the old, new certificates will issue to the purchaser thereof, evidencing the number of units so sold, and the persons to whom the same are sold, shall thereupon become beneficiaries in the Trust Estate and be entitled to share therein as provided in this Declaration of Trust.
The said THE EXTENSION OIL COMPANY agree and bind themselves to drill and complete for the benefit of all who may become interested in the Trust Estate, a well on said property, connect it with the pipe line, and deliver the same to the Trust Estate, free of cost or*2471 expense and free from all liens and encumbrances. The drilling of the well shall be under the direction of the Trustees, the said THE EXTENSION OIL COMPANY, agreeing to furnish all labor, material and moneys necessary to drill and complete the well. The well and its equipment shall be the property of the Trust Estate and under the exclusive management *1030 and control of the Trustees herein named and shall be operated and sold as provided for in this Declaration of Trust.
The Trustees herein shall have power and authority and it will be their duty to collect all rents, royalties and revenues from the Trust Estate, as well as the proceeds from any sale of the Trust Property, and distribute same among the unit holders in proportion of their respective interests.
Said Trustees shall have power to sell and convey the Trust Property whenever in their discretion they may see proper to do so, but in no event may said Trustees postpone the time of said sale beyond the period of five years. When the property has been sold, as herein provided for, the Trustees shall distribute the proceeds of said sale, less all proper and necessary expense, among the unit holders in proportion*2472 to their respective interests.
The Trustees shall have power to employ such agents, attorneys and other persons that may be deemed by them necessary in the discharge of the duties imposed upon them by the terms of this instrument.
Any vacancy in the office of the Trustees, however occasioned, shall be filled by the remaining Trustees who in such case shall designate in writing some person to fill such vacancy, in case of complete vacancy, successors shall be appointed by the Judge of the 17th Judicial District of Texas, Tarrant County.
The said Kirk, Brewer, Linnartz and Lamm may purchase and become owners of units in this Trust Estate the same as other purchasers.
The units outstanding shall not be voted by the holders thereof nor used in any way to control the Trust, nor the judgment, nor the discretion of the Trustees in the management of the Trust Estate, control and management of the same being conferred solely upon the Trustees herein named in their capacity as such, it being the intent and purpose of this instrument to vest absolute control, and discretion in said Trustees to manage and control the Trust, according to their own best judgment.
The Trustees herein*2473 named shall have power to amend the Trust Agreement by instrument in writing, declaring such amendment, forwarding copy of the same to each unit holder, and causing the same to be recorded.
Until the Trust Estate has been converted into money the interests of the cestui qui trusts or unit holders shall be considered for the purpose of assignment and conveyance as personal property or choses in action, said unit holders having no interest by virtue of their certificates in the corpus of the estate, but have merely the right to participate in the earnings and profits of the Trust Estate until the same have been converted into money, whereupon they will receive their respective interests.
Neither the Trustees, nor any unit holder in this Trust shall be personally liable for any debt, judgment, obligation, tort, or other obligation of any kind or character that may be incurred in the course of the business of this Trust, and all contracts entered into by the Trustees shall specifically so state, the Trust Estate, however, shall be liable for all such obligations.
The Trustees shall keep books of account showing all receipts and disbursements, and the condition of the business, *2474 and from time to time report to the beneficiaries the status of the business of the Trust.
The Certificate for units to be issued herein shall be as follows:
THIS IS TO CERTIFY, that is entitled to of the net proceeds of the sale of the properties, of the , when made, and in the meantime the holder thereof is entitled to of income from said Trust, as provided in its Declaration of Trust, recorded in the Office of the County Clerk of Eastland *1031 County, Texas, and all the terms thereof are by reference made part hereof and expressly assented.
Witness the hands of the Trustees of the this February 21, 1922.
FRANK KIRK,
J. E. BREWER, W. G. LINNARTZ,EDWIN LAMM,
Trustees.
The back of which certificate shall contain the following indorsement:
For value received, the undersigned hereby sells, assigns and transfers unto of the fractional interest represented by the within certificate, and does hereby constitute and appoint his lawful attorney in the name and stead of the undersigned to make transfers accordingly on the books or the records of the Trustees.
The above declaration of trust was acknowledged by Lamm on May 22, 1922, and by Kirk, Linnartz, *2475 and Brewer on May 29, 1922.
Petitioner employed at a nominal salary Walter L. Holmesly, who had no interest whatever in petitioner, as its bookkeeper. Holmesly drew the above declaration of trust. All moneys received from oil runs were distributed by him to the shareholders in proportion to their respective holdings. This was done by him under no specific instructions on the part of trustees but by common understanding. There were no meetings of trustees or shareholders. Kirk and Brewer attended to the drilling of the well provided for in the declaration of the trust. The well was completed in October, 1922. No other well was drilled. In January or February, 1923, the lease on which the well was drilled was sold to the Magnolia Oil Co. for the sum of $200,000, which was distributed by Linnartz and Holmesly to the shareholders in proportion to their respective holdings. In addition to the above, petitioner had an interest in an oil lease which produced a slight amount of income. After the sale to the Magnolia Oil Co. the trustees ceased active management of petitioner, and its affairs were would up by the bookkeeper, Holmesly. Petitioner engaged in no activities after*2476 the filing of the income-tax return hereinafter referred to. In July, 1923, Linnartz and Holmesly went to the office of the collector of internal revenue at Austin, Tex., for the purpose of ascertaining in what manner the income of petitioner should be returned for the period May 29, 1922, to April 30, 1923. They consulted the "Chief Clerk" in the office was advised them to make the return as a fiduciary on Form 1041. The "Chief Clerk" prepared the return, which was on Form 1041 and was signed and verified by Linnartz on July 12, 1923, and filed with the collector July 13, 1923. Said return shows that there were returned as rents and royalties the amount of $4,674.60, and as profit from the sale of real estate, etc., the sum of $184,445. From this was deducted as "loss" the amount of $14,184.91 and taxes paid $921.78, leaving the amount *1032 of $174,012.91, which was returned as net income. The said sum of $14,184.91 deducted as a "loss" was the difference between the total production of oil amounting to $48,933.94 and deductions for salaries, wages, rent, interest, depletion, and other expenses amounting to $63,118.85. These expenses are itemized as follows: fuel, $984; *2477 abstract, $76; tool repairs, $69.45; sundry expenses, $180.82; replacement of tools, $1,335.80; water line operation expense, $1,573.92; insurance, $103.02; and general expense, $1,019.66.
The profit on the sale of real estate, amounting to $184,445, is reported as amount received, $200,000, less subsequent improvements, $15,555. Said return reports the share of net income whether distributed or not of each fiduciary as follows:
| Name | Address | Percent | Attributable | Attributable |
| in units | to 1922 | to 1923 | ||
| of 400 | ||||
| A. Mitrovich | San Antonio, Tex | 10 | $400.00 | $5,275.00 |
| H. F. Haycock | do | 5 | 200.00 | 2,637.50 |
| H. P. Goodman | do | 5 | 200.00 | 2,637.50 |
| Mrs. Geo. Corning | do | 5 | 200.00 | 2,637.50 |
| Otto Relling | do | 1 | 40.00 | 527.50 |
| O. W. Almy | do | 1 | 40.00 | 527.50 |
| Joseph Obriotta | do | 10 | 400.00 | 5,275.00 |
| H. G. Williams | do | 1/2 | 20.00 | 263.75 |
| T. W. Labatt | do | 5 | 200.00 | 2,637.50 |
| Linnartz & Frey | do | 5 | 200.00 | 2,637.50 |
| W. N. Capurre | do | 3 | 120.00 | 1,882.50 |
| W. G. Linnartz | do | 72 | 2,880.00 | 37,980.00 |
| Edwin Lamm and Pruitt | do | 55 | 2,200.00 | 29,012.50 |
| Kirk & Brewer Oil Co | Gorman, Tex | 222 1/2 | 8,900.00 | |
| J. E. Brewer | do | 111 1/4 | 55,625.00 | |
| Frank Kirk | do | 111 1/4 | 55,625.00 | |
| Kirk & Brewer, Partnership | do | 222 1/2 | 6,118.75 |
*2478 You will please note that Kirk & Brewer Oil Co. was discontinued after first dividend was paid and that Kirk & Brewer as individuals drew the second payment and the third amount was handled by Kirk & Brewer as a partnership, but in fact the whole amount of 222 1/2 shares was owned and in the name of J. E. Brewer and Frank Kirk, but the payments were only made to the Oil Company and to the partnership as the money was used for each for its promotion.
The return showed no tax due. Respondent reaudited the return and determined that the net income was the amount of $197,316.03, and determined that petitioner was an association and therefore taxable as a corporation in the amount of the deficiency above set forth.
OPINION.
MILLIKEN: The controlling question to be decided in this proceeding is whether petitioner is an association taxable pursuant to section 2(2) of the Revenue Act of 1921, as a corporation. "Association," as specified in the statute, supra, was defined in , as follows:
*1033 The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout*2479 the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise." 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3d Rev.) 269; 3 Am. & Eng. Enc. Law (2 Ed.) 162; and , in which this definition was cited with approval as being in accord with the common understanding. Other definitions are:
"In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation." Webst. New Internat. Dict.
"[U.S.] An organized but unchartered body analogous to but distinguished from a corporation." Pract. Stand. Dict.
At the outset it is well to point out that the Revenue Act of 1921 contains provisions for the taxation of both trusts and associations and thus recognizes such entities as subject to the separate methods of taxation. It is our duty to determine within which class petitioner shall fall. Did petitioner possess the characteristics of a trust or*2480 those of an association, as above defined? The question presented is whether petitioner bore more resemblance to the one class than to the other and, if so, to which class. Petitioner possessed every characteristic of a trust cognizable and enforceable by a court of equity. There was present a corpus, the separation of the equitable and legal titles, trustees and beneficiaries. While all this is true, yet it was an association within the meaning of the Act, if it was voluntarily organized to transact business under corporate forms and did so transact business. ; . Was petitioner so organized and did it so transact business? To put it otherwise, what was there, if anything, in its organization and operation which would classify it as an association rather than a trust. We can perceive that it possessed only two elements, if that many, which it had in common with a corporation. First, it issued "units" which were similar to shares of stock issued by a corporation but this standing alone would not necessarily convert it into a corporation. *2481 .
With reference to the second element, that is, whether petitioner was organized to transact or carry on trade or business, or did so, the record discloses that certain persons were the owners of an oil and gas lease which was about to lapse, that they deemed it good business policy to ascertain the value of the lease by drilling one well and if it was ascertained that oil existed, to forthwith sell the proven lease, otherwise to permit the lease to lapse by operation of time. For this purpose, money was needed and it was determined to raise the same by issuing "units" which gave their owners an *1034 interest in the undertaking. It thus appears that the sole purpose of the trust was to raise money sufficient to drill one well, ascertain the possible value of the property and then sell it and distribute the proceeds. The purpose for which petitioner was organized was accomplished in the short taxable period before us. The things were done that were planned to be done. The money raised was placed in the hands of the trustees for a single purpose and not for the purpose of obtaining gain from a repetition of investments or*2482 business undertakings. As soon as money was received by the trustees, if even from the sale of assets, it was not retained or kept in a business but immediately distributed to the "unit" holders.
The petitioner was not organized for the purpose of "continued efforts in the pursuit of profit or gain and such activities as are essential to those purposes," (), but rather to advantageously dispose of property already owned by securing additional funds and thus to wind up a business undertaking. , and . The fact that as a trust it engaged in the limited and restricted business necessary to accomplish such a purpose would not convert it from a trust into an association. .
We recur to the query of what resemblance petitioner bore to a trust and what resemblance it bore to a corporation. A question which has troubled the Board is whether the absence of control of the trustees by the shareholders converts what would otherwise be an association into a trust. *2483 This question we decided in the negative in , a proceeding which involved an entity which possessed every attribute of a corporation except, as was there contended, the power of the shareholders to control the trustees. We there held that what was otherwise clearly an association was not converted into a trust by reason of the absence of such control. While this is true of what otherwise would clearly be an association, we should not forget that it is the usual custom for stockholders of a corporation to meet at stated intervals and elect directors for stated terms and thus to a certain extent exert control over corporate affairs. The absence of such control is assuredly an element which should be taken into consideration. Here the shareholders could exert no control whatever over the trustees, who were self perpetuating. In this respect petitioner more closely resembled a trust than an association.
Further, the declaration of trust provided:
The Trustees herein shall have power and authority and it will be their duty to collect all rents, royalties and revenues from the Trust Estate, as well as the proceeds from any sale of the Trust*2484 Property, and distribute same among the unit holders in proportion of their respective interests. (Italics supplied.)
*1035 In thus providing for the distribution of the corpus, when and as often as any part of it was converted into money, petitioner was unlike an ordinary business corporation which has a capital stock either paid in or subscribed, which is owned by the corporation and which, upon insolvency or dissolution, becomes a trust fund for the payment of its obligations. It was unlike an ordinary business corporation which pays dividends only out of net earnings and usually distributes its capital only upon liquidation, partial or final. Here again petitioner resembles a trust rather than an association. See ; .
Taking into consideration all the facts of the record and particularly that petitioner was organized for a very limited purpose; that it transacted its affairs only for the accomplishment of such purpose; that it would up its affairs within a few months after the date of its organization and distributed the entire proceeds to its shareholders; the absence of corporate*2485 form and method, and the fact that it bears a much closer resemblance to a trust than to an association, we are of opinion that respondent was in error in taxing petitioner as an association. Having reached this conclusion, it is unnecessary to discuss or decide the question of whether petitioner is entitled to the benefits of section 704 of the Revenue Act of 1928.
Reviewed by the Board.
Judgment will be entered for the petitioner.
ARUNDELL concurs in the result.