*1197 The petitioner is not an association taxable as a corporation.
*1054 These proceedings, duly consolidated, are for the redetermination of deficiencies in income tax for the years and amounts as follows:
| Docket No. | Year | Deficiency |
| 38872 | 1925 | $9,444.78 |
| 45668 | 1926 | 5,337.83 |
| 1927 | 1,526.53 | |
| 51326 | 1928 | 510.99 |
The principal issue is whether the petitioner is an association taxable as a corporation, and if it is so held, a secondary issue as to the proper deductions for depreciation arises. The parties have stipulated that if the petitioner is taxable as a trust there are no deficiencies for the years in controversy.
FINDINGS OF FACT.
In 1918 F. E. Lockhart and Ralph J. Pryor formed a partnership for the purpose of buying and selling oil and gas leases on land located in the mid-continent oil and gas fields in the State of Kansas. The office of the partnership is located in Wichita, Kansas.
In 1923 Lackhart purchased for the partnership an oil and gas lease on 85 acres of land in Greenwood County, Kansas, from W. *1198 B. Derbyshire and wife, who reserved the customary one-eighth royalty interest in the lease.
In 1924, several producing oil wells having been developed on adjoining property indicating the commercial value of the lease here involved, and not having sufficient funds to develop same, Lockhart and Pryor decided to invite several friends to join with them in the development of the Derbyshire lease. In order to retain absolute control of the lease and not to be hampered with corporate procedure or the necessity of consulting several partners, the petitioner trust was organized on July 1, 1924, pursuant to a declaration of trust, *1055 wherein Lockhart, as the grantor, proposed to assign the Derbyshire lease to Pryor as trustee who was to hold:
* * * said oil and gas lease, and all rights accruing thereunder, during the continuance of this Trust, together with the proceeds thereof, in trust, to manage and dispose of the same for the benefit of the holders from time to time of the Trustee's shares issued hereunder and in the manner and subject to the stipulations herein contained * * *.
The trust instrument provided, inter alia:
FIRST: The Trustee shall be designated*1199 wherever practicable by the name Pryor & Lockhart Development Company, and under that name shall, as far as practicable, conduct all business and execute all instruments in writing in performance of his Trust. The Trustee shall have the right to change said name if at any time in the future it should be found conflicting with another such name and advisable to make the change.
* * *
THIRD: The Trustee shall hold the legal title to all property at any time acquired under and by virtue of the contract hereinbefore referred to and shall have and exercise the exclusive management of same.
The Trustee may, for the purpose of developing the property, or for otherwise accomplishing the purpose of this Trust, issue promissory notes or bonds for such amount and on such terms as may seem to him best, and secure same by mortgage, deed of trust or otherwise, on the Trust property herein described, or any property belonging to said Trust estate.
The Trustee shall have full right and power to employ all of the funds and other property at any time belonging to the Trust estate in the carrying out of the terms of the contract hereinbefore referred to and in the selling and negotiating*1200 the sale of the Trustee's certificates; the drilling for oil and gas and doing all things appertaining to the development of the property.
In addition to the powers enumerated above, the Trustee shall, to the extent and value of the Trust estate held by him, but not personally, hold the subscribers and any person associated and acting with him, harmless and indemnified from and against any loss, cost, expense or liability, by reason of, or in connection with, any contract, obligation or liability entered into or incurred by him as Trustee.
He may employ counsel to begin, prosecute, defend or settle suits at law and in equity, or otherwise, and to compromise or refer to arbitration any claims in favor of or against the Trust.
FOURTH: So far as strangers to this Trust are concerned, a minute of the Trustee authorizing a particular act to be done, shall be conclusive evidence in favor of such strangers that such action is within the power of the Trustee, and no purchaser from the Trustee shall be bound to see to the application of the purchase money or other consideration paid or delivered by or for said purchaser to or for said Trustee.
FIFTH: The Trustee shall fix the compensation*1201 of any and all agents, employes or attorneys whom he may appoint and likewise pay to himself out of the Trust estate as compensation for his own services the sum of Two Hundred Dollars per month.
SIXTH: The Trustee shall keep or cause to be kept full and complete records and books of account of all transactions had and all property acquired or held by him under the Trust. The fiscal year of the Trust shall end on the 31st day of December of each year.
*1056 SEVENTH: The Trustee shall not be liable for errors of judgment either in holding property originally conveyed or delivered to him or in acquiring and afterwards holding other property or for any losses arising out of any investments, or any business undertaken, or for any act or omission to act, performed or omitted by him, in the execution of this Trust in good faith, and he shall not be liable for the acts and omissions of any agent, attorney or servant appointed by him or acting for him.
EIGHTH: It is further expressly agreed that in case the Trustee, or shareholder, for any reason shall be held to or be under any personal liability as such Trustee or shareholder, not due to his acts in bad faith, then such*1202 Trustee, or shareholder, shall be held harmless and indemnified out of the Trust estate from any and all loss, cost, damage or expense by reason of such liability, and such liability upon which said Trustee or shareholder is so personally liable, as aforesaid, shall be deemed a direct claim against the assets of the Trust and the Trustee, or shareholder paying the same shall be and become subrogated to all the rights of the holder of said claim against assets of said Trust, and shall be deemed a creditor thereof to the extent of such claim or liability, and if, at any time, the income from the Trust estate shall be insufficient to provide for such indemnity and to satisfy all liabilities of the claims upon it, the Trust estate shall be applied to the payment of the claims against it, including the claims for which such Trustee and shareholder are liable pro rata.
NINTH: To evidence the interest of the Grantor and his assigns in the Trust estate, the Trustee shall issue certificates for Six Hundred (600) Trustee's shares of no expressed par value, each of which shares shall represent an aliquot part of the Trust estate.
All Trustee's shares, whenever issued, shall be in form substantially*1203 as follows:
PRYOR & LOCKHART DEVELOPMENT CO.
(A Common Law Trust)
No.
Shares.
THIS IS TO CERTIFY THAT is a full beneficiary member having made a permanent contribution to the treasury of the Trust estate of the PRYOR & LOCKHART DEVELOPMENT COMPANY, a Trust organized under the common law and subject to all the terms and conditions of a Declaration of Trust in favor of said Pryor & Lockhart Development Co., bearing date the day of , and recorded in the office of the Register of Deeds of , in Book , Page , of the records of said County.
The interest of the above named person in said Trust estate is evidenced by Trustee's shares, for which this certificate is issued. Said Trustee's shares are of no expressed par value, but each share represents an aliquot part of the Trust estate, the total Trust estate being divided into Six Hundred (600) such parts. Said shares are not subject to any call or assessment and the holders thereof are not liable for any debts or obligations of the Trust. Said shares are transferable only on the books of said Pryor & Lockhart Development Co. by the holder hereof in person or by attorney, upon the surrender of this certificate properly endorsed.
*1204 IN WITNESS WHEREOF, the Trustee under the said Declaration of Trust, therein designated as Pryor & Lockhart Development Co., has caused this certificate to be signed at on the day of , A.D.,
,
Trustee.
* * *
*1057 ELEVENTH: The Trustee may, from time to time, declare and pay dividends out of the net earnings received by him from the Trust estate, but the amount of such dividends and the payment of them, shall be wholly in the discretion of the Trustee. The Trustee shall have authority to reserve in each year such sum as he may deem wise from the gross or net income actually collected as a reserve or surplus fund, with power to use such fund at any time for the maintenance of dividends, for the payment of the charges of the Trustee, or to treat the same, or any part thereof, as surplus capital.
TWELFTH: The death, bankruptcy or insolvency of any shareholder during the continuance of this Trust shall not operate to terminate the trust, nor shall it entitle the person or persons succeeding to his interest as legal representatives, assignees or otherwise, to an accounting or division of property or profits, or to take action in the courts or elsewhere against the*1205 Trustee; but the person or persons succeeding to such interest as legal representatives or assignees or otherwise, shall succeed to the rights of such shareholders upon surrender of the certificate for the share or shares owned by him.
THIRTEENTH: The ownership of shares issued at any time by the Trustee hereunder shall not entitle the shareholder to any title in the trust property whatever, or to a right to call for a partition or division of the same, or for an accounting.
FOURTEENTH: The trustee shall have no power to bind the shareholders personally, and the subscribers and their assigns and all persons or corporations extending credit to, contracting with, or having any claim against the Trustee or the Trust Estate, shall look only to the funds and property of the Trust estate for the payment of any amount claimed as owing under such contract, or claim, or for the payment of any debt, damage, judgment, decree, or of any money that may otherwise become due or payable to them from the Trustee, so that neither the Trustee nor the shareholders present or future, shall be personally liable therefor.
FIFTEENTH: The Trustee may call a meeting of the shareholders at any time, *1206 and upon the death, resignation or permanent inability of the Trustee to act, a meeting of the shareholders may be called by a notice signed by three of the said shareholders.
* * *
EIGHTEENTH: This Trust shall continue during the life of the Trustee, and for the term of twenty (20) years thereafter, at which time he shall proceed to wind up the affairs, liquidate the assets and distribute same among the holders of the shares according to any priorities that may then be in force.
NINETEENTH: For the purpose of winding up the affairs and liquidating the assets of the Trust, the person then constituting the Trustee shall continue in office until such duties shall have been fully performed.
On July 2, 1924, the Derbyshire lease was assigned to Ralph J. Pryor, as trustee, in exchange for the trustee's shares provided for in the trust instrument, and thereafter about 15 friends of Lockhart and Pryor purchased 68 per cent of the total shares issued.
The trustee made an agreement with Rosenthal and Beardmore, drilling contractors, for drilling oil wells on the Derbyshire property at a stipulated price for the first well complete to oil-bearing sand; if the well produced oil, *1207 the trustee bought the derrick, casings, etc., for an agreed sum, if not, this equipment remained the property of the drilling contractors. Under these terms, the drilling contractors *1058 drilled six wells for the petitioner between October, 1924, and July, 1925. Two of these wells were dry, but the other four continuously have produced oil in commercial quantities.
In 1926 the Herbert Oil Company, a Texas corporation, owning a lease on property about six miles from the Derbyshire property, proposed to the partnership of Pryor and Lockhart that they drill a well on this lease for an undivided one-half interest therein. The trust estate (the petitioner), through the trustee (Pryor), made arrangements to use the material from the two dry wells on the Derbyshire property and had Rosenthal and Beardmore drill a well on the Herbert Oil Company property. The well produced only a few barrels of low quality unmarketable oil. In 1927 G. V. Basom, who owned a lease on the Evans property, near the Derbyshire property, made a similar proposition to the partnership, which was acted upon by the trustee, who had Rosenthal and Beardmore drill a well, using the material which had been*1208 pulled from the Herbert Oil Company lease. That well was dry. No other drilling operations were undertaken by the petitioner.
The oil produced under the Derbyshire lease was pumped into storage tanks and from these tanks run to the Pipe Line Company, which thereafter looked after the transmission of the oil. The petitioner sold its oil to the Skelly Oil Company, later the White Eagle Oil & Refining Company, during the years 1924 to 1928. The trustee received payment on the 10th and 25th of each month for the oil run in the preceding month. From such payments he retained sufficient funds for current expenses, but not for expansion, determined the amount to be distributed to the beneficiaries, and when the oil runs warranted made monthly distributions to the beneficiaries.
From 1924 to 1928, the petitioner employed a superintendent and a pumper on the Derbyshire property. The petitioner maintained no office of its own, but used the office of the partnership for its business, which required the time of the partnership's employees for about two days a month. The partnership employed in 1924 and 1925 only a bookkeeper-stenographer, but in subsequent years had also a bookkeeper*1209 and a clerk. The office work incident to the petitioner trust consisted of paying for expenses and supplies necessary to the operation of the lease, depositing checks received from the Pipe Line Company, and distributing proceeds to the beneficiaries.
The trustee was in charge of the affairs of the trust, consulting no one concerning its management except F. E. Lockhart. There were no meetings of the beneficiaries, who never attempted to exercise any control over the venture, never questioned the distributions, and never asked to see the books of account or to have them audited.
The trust had no by-laws, minute book or seal. There were neither directors nor officers. The trustee issued no bonds or debentures.
*1059 For the calendar year 1925 the petitioner filed a "Corporation Income Tax Return" (Form 1120) covering the period January 1 to July 31, and a return on Form 1040 for the period August 1 to December 31. Fiduciary returns were filed for 1926 and 1927. In 1929 the trustee filed with the collector of internal revenue at Wichita, Kansas, notices of election to have the petitioner taxed as a trust for the years 1925, 1926, and 1927, as provided in section*1210 704(b) of the Revenue Act of 1928.
During the years 1924 to 1927, inclusive, the petitioner used on the Derbyshire leasehold the following equipment, which was acquired at the date and cost indicated:
(Table Omitted)
*1060 Except as hereinafter indicated, the useful life of the above equipment was limited to the production of the oil and had practically no salvage value after the run of oil ceased. The three secondhand engines had a remaining useful life of seven years when acquired by petitioner. The new engine had a useful life of 10 years when acquired. The wood tanks and derricks last about six years, after which the pipe in the latter had an estimated junk value of about $150 per derrick. The tubing, rods, line pipe, and casings (10 inches and larger) have an estimated value as junk of about 10 per cent of cost. The "swab" is a tool used to recover oil from the ground before the installation of equipment at a well; if properly repaired its useful life is practically unlimited.
In the deficiency notices, the respondent allowed deductions for depreciation on this equipment as follows: 1925, $4,702.42; 1926, $6,960.00; 1927, $7,225.43; and 1928, $5,455.69.
*1211 The estimated oil reserves computed on the decline curve method as of the end of 1925, the estimated oil reserves computed in the same manner as of the end of 1931, and the amount of oil actually recovered from the Derbyshire property follows:
| Year | Oil reserve estimated | Oil reserve | Amount |
| as of end of 1925 | estimated as of end of 1931 | actually recovered | |
| Barrels | Barrels | Barrels | |
| 1924 | 4,726.24 | ||
| 1925 | 106,313.97 | ||
| 1926 | 43,970 | 50,031.07 | |
| 1927 | 19,200 | 28,851.64 | |
| 1928 | 10,000 | 19,891.83 | |
| 1929 | 6,800 | 18,275.03 | |
| 1930 | 4,400 | 14,641.74 | |
| 1931 | 2,800 | 8,028.30 | |
| 1932 | 2,000 | 5,480 | (1 mo.) |
| 415.80 | |||
| 1933 | 1,600 | 4,000 | |
| 1934 | 1,400 | 3,000 | |
| Total | 203,180 | 251,175.62 |
OPINION.
SMITH: The principal issue is whether the petitioner is an association taxable as a corporation. If it is, there is an issue as to proper deductions for depreciation; if it is not, the parties have stipulated that there is no net income subject to income tax in the years before us and consequently no deficiencies.
The petitioner contends that its organization is merely a trust, with a single trustee, lacking the forms and methods of incorporated*1212 bodies - indicia necessary to characterize it as an association taxable as a corporation, citing ; ; . The respondent contends that the petitioner was organized for the purpose of carrying on a business enterprise, the activities of which were as extensive as its nature required, and is an association taxable as a corporation, citing ; *1061 certiorari denied, ; ; ; certiorari denied, ; Trust No. 5833, . In , the Circuit Court of Appeals for the Third Circuit said:
* * * The theory that the distinction between trusts of these classes and their consequent liability for taxes is based on the powers exercised by the shareholders - great*1213 or little - is no longer seriously regarded. The real test is whether the shareholders or trustees, or both combined, carry on business for profit, and, if they do, they constitute a business trust - in legal effect an association or a joint-stock company - with liability for taxes. * * *
The court there concluded that the Little Four Oil & Gas Company was "an unincorporated association conducting a business for profit in quasi-corporate form, liable for taxes at the corporation rate." Thus, in that case, as in others cited by both parties, the presence or absence of "quasi-corporate" forms were factors considered in the determination of such controversies.
In , we said:
* * * that the really significant tests for determining whether an alleged trust is to be treated as an association for tax purposes or not ate [1] whether the certificate holders have voluntarily associated themselves together in "the general form and mode of procedure of a corporation" and [2] are organized to and in fact are engaged in the active conduct of a business for profit, or [3] whether the trustees are merely holding the property and collecting*1214 the income therefrom and distributing it to those beneficially interested. * * *
The facts or record show that the partnership, not having funds sufficient to develop the Derbyshire lease, decided to invite some friends to contribute the necessary funds and share in the profits, leaving the operations exclusively in the hands of the single trustee. Admittedly, the trustee conducted the business for the purpose of making profits for the beneficiaries of the trust, but he engaged only in activities essential to the development and operation of the Derbyshire lease and the full utilization of the equipment acquired for that purpose; he conducted the affairs of the petitioner without a quasi-corporate organization. The partnership contributed the lease, the other individuals contributed the capital, and Pryor rendered the services. Thus, we have a situation involving a single trustee, independent of the beneficiaries, acting without corporate form, holding no meetings, and consulting no one except his partner, carrying on a business, which the respondent asserts is an association, which is "an unincorporated body of persons organized in the general form of a corporation and employing*1215 usual corporate methods in carrying on a business for profit." See . ; *1062 ; . Counsel for petitioner insists that its affairs were conducted "as though the venture was the partnership affair of Proy & Lockhart," and as such should not be treated as an association taxable as a corporation, calling attention to the partnership relation in the Myers, Long & Co. case, supra.
In , a case involving a trust with a single trustee, we said that the respondent:
* * * argues that the several beneficiaries and the trustees were engaged in the oil business, and, considered collectively, that the trust agreement tied them together in an association which gave corporate form and effect to their operation within the law. The same contention was raised in Crocker v. Malley, supra, respecting which the court said:
"* * * We perceive no ground for grouping the two - beneficiaries and trustees*1216 - together, in order to turn them into an association by uniting their contrasted functions and powers, although they are in no proper sense associated. It seems to be an unnatural perversion of a well known institution of the law."
That contention is equally untenable in the instant proceedings.
The petitioner does not meet the tests set forth in (see also ; ), for an association taxable as a corporation, and we accordingly hold that the respondent erred in his determination. See also ;; affd., ; ;; Cf. . Having decided that the petitioner is not an association taxable as a corporation, it is unnecessary to determine the applicability of section 704(b) of the Revenue Act of 1928 (*1217 ), or to discuss the secondary issues. Pursuant to the stipulation,
Judgment will be entered under Rule 50.