*1690 The petitioner is not an "association" and should not be taxed as a corporation under section 230 of the Revenue Act of 1921.
*150 This proceeding is for the redetermination of a deficiency in income tax of $10,556.45 for the year 1923, and also for determination of whether the deficiency so found should be increased in accordance with motion of the respondent duly made at the hearing, based upon his affirmative allegation of error numbered three herein below.
The petitioner alleges, generally, that the respondent incorrectly determined its net taxable income for 1923, assuming it to be taxable at all, and specifically, that he erred (1) in determining that it is an association taxable as a corporation, or (2) in the alternative, providing it is taxable as an association, in failing to allow any deduction in 1923 for depletion, or in failing to allow a deduction of $128,052.15 representing such depletion for said year; and the respondent affirmatively alleges that (3) the petitioner's capital investment was $45,600.55; that the oil reserves allocable*1691 to the *151 interest of the petitioner were 273,308.09 barrels, and that the production for 1923 from such interest was 191,566.68 barrels, and that the return of investment to the petitioner should be made on the basis of the production, and that it is entitled to deduct as return of its investment 191566.68/273308.09 of $45,600.55, or $31,962.90, in effect, that he erred in allowing the entire $45,600.55, and he prays for an increase in the deficiency, as found, to $12,261.16, based upon an adjusted net income of $110,502.33 instead of $96,864.68 as shown in the deficiency notice.
FINDINGS OF FACT.
The petitioner, composed of a group of individuals, known as "trustees" and "beneficiaries," was organized in 1922 under and by virtue of a "Declaration of Trust" which was "declared and accepted" on September 28, 1922, by R. W. Jackson, Fullerton, Calif., and A. G. Wermich, Los Angeles, Calif., designated in said declaration of trust as "Trustees" and "all other parties and persons who shall now or may hereafter become beneficially interested in the Estate" designated therein as "beneficiaries," the purpose of its creation being more fully set forth hereinafter.
The first*1692 of a series of agreements entered into, leading to the petitioner's inception, was on July 17, 1922, between W. G. Higley and wife and F. E. Holman and wife, "lessors," and Hugh B. Evans, "lessee," whereby in consideration of the sum of $10, and the agreements therein contained, the said lessors leased to the said Evans "the exclusive right of drilling for, developing, and removing petroleum, natural gas, asphaltum and other kindred substances" from a certain tract of land, described as "Lots 8 and 9 of the Ellis Homestead Tract in the County of Los Angeles, State of California," for the term of 20 years "and as long thereafter as oil, gas, or other hydrocarbons are produced in paying quantities therefrom, unless sooner terminated as hereinafter provided." It was provided therein that the lessee would place "a standard rotary drilling outfit" on said premises "and actually spud in a well" within 90 days, it being provided also that such time "may be extended for a period of 30 thirty days * * * upon payment to the lessors of the rental of $100.00 per month in advance," the "lease" to become "null and void" for failure to comply with said conditions within such period as extended. The*1693 lease provided for the diligent prosecution of drilling operations to a specified depth, for abandonment of unprofitable "holes" and for the drilling of an additional well or wells "until there shall have been drilled on said land one producing well." The agreement defines a "producing well" and provides, among other things not important here, for monthly payments to the lessors "As rent or royalty," the following:
*152 One-sixth (1/6) of all or other hydrocarbon substances produced from said premises shall be delivered to J. Frances Crozier until she shall have received the sum of eleven thousand dollars ($11,000.00); all other oil or other hydrocarbon substances produced from said premises shall be retained by the lessee until he shall have received the sum of forty thousand dollars ($40,000.00); that after the lessee shall have received the sum of forty thousand dollars from the sale of oil or other hydrocarbon substances produced from said premises, the lessee shall deliver to the lessors one-half (1/2) of all oils or other hydrocarbon substances produced from said premises, until said J. Frances Crozier shall have received said sum of $11,000.00 as aforesaid, the lessee*1694 shall market said one-sixth (1/6) of oil or other hydrocarbon substances and the proceeds received therefrom shall be paid by him to her credit at the First National Bank of Long Beach. Likewise, until the lessee shall have received said sum of $40,000.00 as aforesaid, he shall market said oil and retain the proceeds until he shall have received said full sum of $40,000.00. Thereupon, the fifty per cent (50%) of oil which he shall deliver to the lessors as rental as herein provided shall be either marketed, or stored as directed by the lessors, and in case the same is marketed, he shall pay to the lessors the proceeds from the sale thereof.
Said lease was to "enure to the heirs, executors, administrators and assigns of the parties" thereto.
Thereafter, on September 7, 1922, the aforesaid Evans, Wermich and Jackson entered into an agreement with each other, designated therein as first, second and third parties, respectively, in which the desire of Evans to raise the $35,000 necessary to begin drilling operations was expressed and also the desire of Wermich and Jackson "of paying or providing for the use" of Riggle "the sum of $35,000.00 to be used and expended * * * for the*1695 drilling of said well," and it was agreed in part as follows:
NOW THEREFORE, for and in consideration of the covenants and agreements herein contained and the furnishing of the said $35,000.00 the said party of the first part does by these presents agree to pay or cause to be paid to the said second parties or such person or bank as they may designate, a sum equal to 25% of the net proceeds received and obtained from the operation of said well when completed.
It being hereby further expressly understood and agreed that when the said drilling company, above referred to, shall have been paid in full for the drilling of said well out of the proceeds of said well over and above the sum of $35,000.00 the said party of the first part agrees that all of said percentage provided in said drilling contract, to be paid to E. W. Riggle less an amount equal to 10% of the net proceeds from said well shall be paid to the said parties of the second part until they have received, in full, the sum of $35,000.00, provided the 25% above specified to be paid to them has not equalled the sum of $35,000.00 prior to the said E. W. Riggle having received the full amount due him for the drilling of said*1696 well over and above the sum of $35,000.00.
It was provided further in said agreement that Wermich and Jackson would pay, or cause to be paid, $10,000 upon execution of the agreement and the further sum of $25,000 within 10 days from execution thereof, to be withdrawn from the depositary stated therein *153 by checks signed by Riggle himself, countersigned by Evans; Wermich to furnish $17,000 and Jackson $18,000 of the total sum needed, and it also provided:
It is hereby further expressly understood and agreed, by and between the parties hereto, that after 50% of the gross production of said well shall have equaled the sum of $51,000.00 the said Lessors, under the above referred to lease, shall be paid out of the gross proceeds of said well, a sum equal to 50% thereof or delivered 50% of the oil produced.
It is hereby further expressly understood and agreed that after E. W. Riggle shall have received in full all moneys agreed to be paid to him for the drilling of said well, in excess of the sum of $35,000.00, and the said second parties herein shall have received, from the production of said well, a sum equal to $35,000.00 then the returns from the operation of said well*1697 shall be divided as follows: 50% of the gross to the Lessors, hereinabove referred to, and the said second parties herein shall receive a sum equal to 25% of the net proceeds received from the operation and conducting of said well and the said E. W. Riggle, doing business under the firm name and style of Southern California Drilling Company, shall receive a sum equal to 10% of the net proceeds received from the operation and conducting of said well, and the remaining 15% of the net proceeds received from the operation of said well, shall be paid to the said party of the first part herein.
And it was specifically agreed that all of the parties to the contract aforesaid should "be bound by all of the terms, covenants and conditions" of the lease agreement of July 17, 1922, in which Evans was lessee.
On the same date of the foregoing contract, to wit, September 7, 1922, the aforesaid Evans, together with Jackson and Wermich, entered into a drilling contract with one Riggle, who was doing business under the name of Southern California Drilling Company, by which he agreed to drill a well upon the said premises leased by Evans to a specified depth, in consideration of the payment of*1698 $8 per foot for drilling, including labor and tools therefor, plus the actual cost of material used, payable $35,000 in cash installments extending from the due execution of the contract to the time when the required depth should be reached, and the balance out of the first oil obtainable. The contract provided for the payment of royalty of one-sixth to J. Frances Crozier to the extent of $11,000, as provided in the said lease agreement, all reasonable expenses of operating said well and marketing the production, 25 per cent of the gross production less 50 per cent of operating expenses to be paid to Evans, Wermich and Jackson, and, should Riggle exercise his option to retain control and possession of the well -
the balance shall be retained by first party [Riggle] and applied to the balance due him under this contract until the full amount thereof shall have been paid, provided however, that when one-half of the gross production has amounted to the sum of fifty-one thousand dollars ($51,000.00), then the first party shall only retain 25% of the gross production from which he shall pay 50% of the *154 operating expenses and apply the balance of said 25% to any unpaid amount*1699 due him hereunder.
* * *
In the event that first party does not exercise the option herein given and does not retain possession and management of said well, second parties shall operate the same and from the production saved and sold shall apply the proceeds as follows:
* * *
the balance shall be paid to first party until the amount due him under this contract shall have been paid, provided however, that when one-half of the gross production has amounted to the sum of fifty-one thousand dollars ($51,000.00), then the first party shall only be paid 25% of the gross production less 50% of the operating expenses until the balance due him under this contract shall have been paid in full; after which, as additional compensation the second parties agree to assign to first party ten per cent (10%) of the total production from said well, less twenty per cent (20%) of the actual cost of the operating and maintaining the same, and no charge shall be made for superintendence.
The declaration of trust entered into on September 28, 1922, between Jackson and Wermich, "Trustees," on the one hand, and the "Beneficiaries," on the other, to which we have referred in the first paragraph of*1700 these findings of fact, after referring to the said lease of July 17, 1922, and its purport, provided:
WHEREAS, said Hugh B. Evans, lessee in the aforesaid lease did, by agreement enter into on the 7th day of September, 1922, sell, transfer, and assign to the Trustees herein certain rights and interest in and to the production of oil, gas and other hydrocarbon substances to be produced and saved from said oil well, which said rights and interest consist of twenty-five (25%) per cent of the net production of said well, said percentage to commence with the beginning of production of the oil well to be drilled on said premises, all pursuant to the terms of said contract entered into between said Hugh B. Evans and the said R. W. Jackson and A. G. Wermich herein mentioned, and
WHEREAS, there are to be interested with said Trustees certain persons who will contribute part of the moneys required to be advanced by the Trustees herein pursuant to the terms of the aforementioned agreement,
* * *
WHEREAS, for the purpose of conveniently apportioning said interests, the moneys agreed to be advanced, to-wit, Thirty-five Thousand ($35,000.00) Dollars, are to be divided into Two Hundred (200) *1701 equal Beneficial Interests, and
WHEREAS, it is likewise proposed that such beneficial interest in the properties and all things of value from time to time acquired and held in trust by the Trustees herein, and the business conducted by them, shall be evidenced by certificates of beneficial interest as hereinafter provided, which said certificates shall represent the equity owned in this Trust Estate by the owner of said certificates, and
WHEREAS, the Trustees will be required to receive oil, gas and other products from said oil well and to distribute or disburse the proceeds from the sale thereof, and that the purposes of this Trust may be carried out, will be required to purchase, possess and dispose of necessary properties, personal or real, and to manage such properties for the mutual benefit of all the parties of this Trust, subject only to limitations, terms and conditions herein expressed and set forth:
*155 NOW THEREFORE, the Trustees hereby declare and bind themselves that they will hold such property and properties, chattels, concessions, franchises, and all other things of value by them acquired under this Declaration of Trust and in performance of their rights, *1702 duties and obligations thereunder, whether tangible or intangible, as Trustees for all parties present and future to this Trust, together wih the benefits therefrom and thereon, for the general purpose above specified as above interpreted and hereinafter stated; to employ, use, manage and dispose of the same for the benefit of the holders in this Trust, issued and to be issued according to the terms expressed in said certificates and to the stipulations herein contained, to-wit:
It is agreed by said R. W. Jackson and A. G. Wermich, as Trustees, that the twenty-five (25%) per cent of the net production of the oil well to be drilled according to the terms of the agreement hereinbefore referred to on the premises hereinabove described shall be and is hereby declared to be the property of this Trust Estate and said Twenty-five (25%) per cent of the net production of crude petroleum, oil and gas and other hydrocarbon substances produced, saved and sold from the oil well to be drilled upon the said real property hereinbefore described shall be owned and held by said Trustees for the use and benefit of the Beneficiaries under this Trust, determined as hereinbefore set forth, said Trust*1703 to be administered by them for the term and under the conditions of this Declaration of Trust.
This Trust shall be known and designated as the "JACKSON-WERMICH TRUST".
The net income received from said twenty-five (25%) per cent of the crude petroleum, oil, gas and other hydrocarbon substances produced, saved and sold from said well, has for the purpose of this Trust, been divided into two hundred (200) equal parts, each of which part shall represent one two hundredth (1/200) of the net income received from said twenty-five (25%) per cent of said net production from said well, saved and sold as aforesaid, which portion is, for the purpose of this Trust, denominated an INTEREST. The Trustees will issue a receipt to the beneficiaries under this Trust, reciting and declaring that such beneficiary shall be entitled to receive one two hundredth (1/200) of the net income received from said twenty-five (25%) per cent of said net production for each interest sold to him.
And each beneficiary shall hereafter be entitled to receive, and shall receive from these Trustees for each interest owned and held by him, one two hundredth (1/200) part of the net income received from said twenty-five*1704 (25%) per cent of said net production saved and sold from said well as aforesaid, subject to deduction of proportionate part of the expenses of this Trust.
These Trustees shall receive, collect, save and sell for the benefit of this Trust Estate, twenty-five (25%) per cent of the crude petroleum, oil, gas and other hydrocarbon substances produced, saved and sold from said well. They shall market the same, either with the balance of the production from said well, or separately, as to them shall seem most advisable and consistent with the disposal of other production from said well, and receive and collect in their own name, as Trustees, the proceeds from such sales, which proceeds they shall distribute, monthly, to the owners of the various interests of beneficial interest of this Trust Estate, after deducting therefrom the necessary and proper expense of operating, cleaning or deepening said well and administering this Trust, paying any taxes, costs and assesments upon the Trust Estate, or Trust property, levied under any local, municipal, county, state or Federal law or authority. They shall be entitled to no compensation for themselves as Trustees in administering this Trust, *1705 but may employ and pay for, out of the Trust *156 funds, such expenses as they may deem just and proper and are incurred by them in administering said Trust Estate, and keeping the records and accounts thereof, and performing their duties under the terms of this Trust.
The Trustees shall not be required to issue a certificate of beneficial interest for less than a 1/200 part of 25% of said production and they shall keep a record and account of the owners' respective interests of beneficial interest in this Trust Estate. No transfer of an interest of beneficial interest or ownership in this Trust Estate shall be valid or binding upon these Trustees, until the Receipt, therefor, shall have been surrendered to the Trustees, duly assigned by the record owner and holder thereof, and a new receipt issued by these Trustees to any new owner thereof. Any payments of dividends or profits under this Trust Estate shall be made by the Trustees to the owners of Interests of Beneficial Interest, as appear upon their books and accounts, and they shall not be liable, in their individual capacity, or as Trustees, for any payment made to an owner of an Interest of Beneficial Interest in this*1706 Trust Estate, appearing of record on their books, even though such owner may have sold, pledged, or assigned his receipt for his interest of Beneficial Interest, if such receipt has not been surrendered to the Trustees and a new receipt issued therefor as herein-before set forth.
For the purpose of administering the affairs of this Trust, the office of the Trustees is hereby established at the banking rooms of the First National Bank of Fullerton in the City of Fullerton, Orange County, California.
The Trustees shall, annually, or oftener, if they so desire, render to the owners of Beneficial Interest in this Trust Estate, a statement of the affairs of the Trust Estate. All books and accounts and records of the Trust Estate shall be open for the inspection of any owner of a Beneficial Interest, during business hours, in the office of the Trustees.
The Trustees shall not be liable to any owner of any Beneficial Interest in the Trust Estate, for any act or omission upon their part, resulting from a mistake of judgment, and the owner of any Beneficial Interest in this Trust Estate shall not institute any action against said Trustees, in their Trust or in their individual capacity, *1707 which shall grow out of any act or omission of the Trustees, resulting from a mistake in judgment. The Trustees shall, however, be liable for any act or omission on their part caused by fraud on their part or a willful breach of their Trust, under the terms of the Declaration.
The Trustees may, in their individual capacity, own and hold interest of Beneficial Interest under the terms of this Trust.
This Trust Estate shall exist for a term of twenty-five (25) years from and after the date hereof, unless sooner terminated by action of law or under the terms hereof.
In case an oil well upon the property hereinbefore described shall become unproductive and shall fail to produce crude petroleum, oil, gas, or other hydrocarbon substances, in paying quantities, the Trustees shall proceed to dispose of any property or assets belonging to the Trust Estate, and shall proceed to distribute said assets among the owners of Interests of Beneficial Interest and close and terminate the affairs of this Trust Estate, and this Trust shall thereupon end and terminate.
At the expiration of twenty-five years from the date hereof, if said oil well is producing crude petroleum, oil, gas or other*1708 hydrocarbon substances, in paying quantities, these Trustees shall proceed to dispose of the assets of this Estate and distribute the receipts therefrom among the Interest holders of Beneficial Interest, herein.
The Trustees shall have power and authority to lease or rent suitable offices for offices for this Trust Estate, and buy and acquire personal property necessarily *157 or properly used in the conduct of the affairs of their Trust and shall have the right to sell or dispose of any property so acquired for the benefit of the Trust.
Said Trustees may from time to time employ such agents servants or employees as may be necessary for properly carrying out the purpose of this Trust and may fix the compensation to be paid any of the same.
Either Trustee may resign and surrender his Trust, and select and appoint a successor by filing with the County Recorder of the County in which this Declaration of Trust is recorded, a resignation and appointment of the successor, duly signed and acknowledged by them with an acceptance by the successor, duly signed and acknowledged by such successor with the written consent to such appointment signed by the other remaining Trustee.
*1709 In case a Trustee dies or resigns without appointing a successor his office may be filled by the surviving Trustee in the manner above set forth, and in the event that there occurs a vacancy in the office of both Trustees at any one time, two Trustees shall be appointed to fill the vacancies occurring by written consent of by not less than thirty (30%) per cent of the Interests of Beneficial Interest under this Trust. In case a vacancy occurs in the office of either or both Trustees and lasts for a period of fifteen (15) days, any Court of competent jurisdiction may fill the same upon application of any interested party.
This Declaration of Trust may be amended or modified by the consent of the Trustees and the consent of the owners of fifty-one or more of the Interests of Beneficial Interest under this Trust, which Amendment or modification hereof must be in writing, signed by the owners and holders of fifty-one (51) or more of the Interests of Beneficial Interest herein, and these or the then acting Trustees, and acknowledged by said Trustees and recorded in the Office of the County Recorder, in which this Declaration of Trust may be filed for record. The certificate of the*1710 Trustees to the effect that such Amendment or Modification has been signed and consented to by the owners of fifty-one or more Interests of Beneficial Interest in said Trust Estate, shall be sufficient evidence of the genuineness and verity of such signature.
The Trustees may use such of the Trust funds as may be necessary and proper in paying the proportionate share as may be chargeable to the Trust Estate, in cleaning, deepening, repairing, and operating the oil well on the property hereinbefore described, and in doing such other acts as may be necessary and proper in attempting to bring or keep said well in a condition to produce oil in paying quantities to its maximum capacity.
The Trustees may act jointly in the administration of this Trust or the said Trustees may delegate either one of them the power to act individually in the administration of this Trust and if they elect so to do, the act of such Trustee so designated shall be the binding and valid act of the Trust Estate.
All persons, partnerships or corporations extending credit to, contracting with or having any claim against the Trust arising from any right, contract or tort, shall look only to the funds and property*1711 of the Trust for the payment of any such contract or claim, or for the payment of any debt, damage, demand, judgment or decree, or for any money that may otherwise become due or payable to them from the Trust, so that neither the Trustees, the beneficiary nor the officers, present or future, shall be personally liable therefor.
It is further expressly agreed that in case the Trustees shall at any time for any reason be held liable as such Trustees, for any act not due to their bad faith, then the Trustees shall be held harmless and indemnified out of the Trust against any and all loss, cost, damage or expense by reason of such liability.
*158 The Trustees may sell and convey all of the property of the Trust to a corporation that may hereafter by [be] organized and may accept in full payment for the property sold, shares of the capital stock in such corporation, and may thereupon proceed to terminate the Trust and its affairs by the payment of all obligaions due or to become due or owing by the Trust, and the collection of all its assets and the division among the beneficiaries of all the assets of the Trust in accordance with their respective interest therein and in*1712 such division of the assets of the Trust they may issue and deliver to the beneficiaries certificates of stock in any such corporation to which they may sell the property of the Trust and may thereupon collect in and cancel all outstanding certificates of the members in this trust and take all steps necessary to wind up its affairs.
Pursuant to the foregoing declaration of trust the 200 interests provided for and authorized therein were subscribed for and issued, and for each interest there was issued a receipt in the following form:
BENEFICIARY'S RECEIPT OF JACKSON-WERMICH TRUST
This Receipt and Agreement, Witnesseth:
That is the owner of Interest of the JACKSON-WERMICH TRUST, which said Trust is divided into two hundred (200) equal parts, designated 'interests', and which said Trust consists of Twenty-five (25) per cent of the net proceeds of the crude petroleum, oil, gas and other hydro-carbon substances produced, saved and sold from the oil well to be drilled upon the real property situate in Los Angeles County, California, described as:
Lots 8 and 9 of the Ellis Homestead Tract in the County of Los Angeles, State of California, as per map recorded in Book 11, page 66, *1713 of Maps in the office of the County Recorder of said County.
This Receipt and Agreement is given pursuant to the provisions of that certain Trust Agreement, dated September 28th, 1922, and recorded on the 30th day of October, 1922, in the office of the Recorder of Los Angeles County, Calif., wherein A. G. Wermich and R. W. Jackson are named as Trustees of the said Trust Estate, and said Interest holder accepts the same subject to all of the terms and conditions set forth in said Declaration of Trust and particularly also subject to the right of the Trustees to sell, dispose of, and distribute the proceeds received from the Trust Estate's share of the production from said well.
THIS RECEIPT IS TRANSFERABLE ONLY SUBJECT TO THE PROVISIONS AND CONDITIONS AND REQUISITES PROVIDED BY THE TERMS OF THE SAID DECLARATION OF TRUST.
This Agreement shall inure to the benefit of the interest holder herein designated or his heirs, successors, executors or assigns.
Until otherwise, in writing notified, the address of the Interest holder herein named, for the purpose hereof is
Dated at the Trustees' place of business for the purpose herein, to-wit: Fullerton, California, this day of *1714 , 192 .
Trustee.
Trustee.
(Signature of Interest Holder herein named)
*159 On the reverse side of said receipt provision was made for the sale, transfer, and assignment thereof.
Wermich himself was the owner of 38 and Jackson 3 of the outstanding interests.
During 1923 there were eleven transfers of interests from one holder to another, aggregating 20 interests in all.
The income of the alleged trust was derived solely from oil sold under the said declaration of trust. Checks were received from Evans, which were sent directly to the First National Bank of Fullerton and deposited to the account of the members. A bookkeeper was employed, whose duties were to record the receipts of checks from Evans and the amounts issued to beneficiaries.
Distributions were made each month to the beneficiaries of the petitioner to the extent of the amount received except that, if after the determination of the amount distributable there was an excess insufficient to distribute an additional dollar per interest, said amount was carried over until the following month. The practice of the bookkeeper was to communicate with Jackson and Wermich once a month*1715 and have them sign the checks for beneficiaries, which he mailed to said beneficiaries with a statement showing the amounts so distributed.
The petitioner maintained no office, owned no furniture, and held no official meetings.
The trustees had nothing whatsoever to do with the operation of the well and were never consulted with respect thereto, nor were they ever consulted respecting the sale of the oil or gas therefrom.
The trustees have never operated any kind of business other than as described. The alleged trust is still in operation, although the well was abandoned in or about 1925 and all of its proceeds except a small balance of about $100 have been distributed.
Under date of March 27, 1924, an agreement was entered into between said Hagh B. Evans, Inc., one party, and the Southern California Drilling Company, Wermich and Jackson Trust, R. W. Jackson, and A. G. Wermich, the other parties, reciting the fact that the first party was lessee of the tract of land hereinbefore discussed and the respective interests of the said parties in the oil production thereon; that the first party was managing all of the interests in the well; that it had been the custom of the*1716 first party to retain for general expenses a sum equal to $4,000; that production of the well had been off since February 10, 1924, a condition which may continue for some time; that there was on hand, over and above the sum of $4,000, $3,602.50, and it was, therefore, agreed between the parties to make distribution of said sum to the parties in interest.
*160 In addition to stipulating with respect to the several documents hereinbefore referred to, upon which our findings of fact are largely based, the parties have entered into the following stipulation of facts:
1. The oil well producing inter alia the income in controversy resulted from drilling under a certain contract, dated September 7, 1922, [Exhibit referred to]. The discovery value on said well resulted in a depletion unit of $0.31481 per barrel. The reserves at the date of discovery, as allocated to Petitioner's interest, were 273,308.09 barrels, and during the taxable year in question, the production allocable to said interest amounted to 191,566.68 barrels. The depletion on the production for said year, allocable to Petitioner's interest is, therefore, 191,566.68 barrels at a depletion rate of $0.31481, *1717 resulting in a total depletion of $60,307.11 based on discovery value. The depletion rate, the number of barrels and the discovery value, in so far as the well is involved, are admitted to be correct as set forth above. However, the Petitioner contends and the Respondent denies that Petitioner had a depletable interest in the said well. If the Petitioner be entitled to deduct from gross income any amount on account of depletion, it is hereby agreed that the correct amount so deductible is $60,307.11. The basis for computation of such amount is set forth above. This stipulation is made without prejudice to the contention of the Respondent that the interest of the Petitioner in said well was such that it was not entitled to any deduction on account of depletion.
2. It is further agreed that the capital investment of the Petitioner was $45,600.55. If the Board finds that the Petitioner be not entitled to deduction from gross income on account of depletion, but be entitled to deduct its entire capital investment from gross income for the calendar year 1923, then it is agreed that such deduction should be in the amount of $45,600.55. This agreement is made without prejudice to*1718 the contention of the Respondent that the Petitioner is not entitled to deduct its entire capital investment from gross income for said calendar year.
3. If the Board should find that the Petitioner is not entitled to any deduction on account of depletion, and is not entitled to deduct from its gross income, for said calendar year, its entire capital investment, but is entitled to a proportionate return of its capital investment, then it is agreed that one-fourth of the oil reserves of the said well was 273,308.09 barrels and that one-fourth of the production for the calendar year 1923 from said well was 191,566.68 barrels, and that the capital investment of the Petitioner was $45,600.55, and that the proportion of the total capital investment, which the Petitioner is entitled to, as a return of its investment, is, therefore, $31,962.90. This stipulation is made without prejudice to the contention of the Petitioner that it is entitled to depletion, or in the alternative, to the return of its entire capital investment during the calendar year 1923.
* * *
The petitioner filed a corporation income-tax return on Form 1120 for the calendar year 1923, in which it stated that it*1719 was "Not Incorporated," and in reply to the question "Kind of Business," it replied, "Own interest in Oil well for payment of certain development expenses."
In that return petitioner showed gross income received and receivable of $142,765.23, from which was deducted secretary's salary of $300 and depletion of $128,052.15, leaving net income of $14,413.08.
*161 The respondent has disallowed the depletion deduction of $128,052.15, thus increasing the net income as reported to $142,465.23, on the ground that the petitioner's interest "pertains not to the production of oil and other substances but to the right to receive certain income after the payment of expenses." The respondent allowed, however, a deduction of $45,600.55 as a return on petitioner's investment in said transaction, thereby reducing net income to $96,864.68, resulting in the present deficiency of $10,556.45.
OPINION.
MORRIS: The principal question for consideration is whether the petitioner is an "association" within the meaning of section 2 of the Revenue Act of 1921 and, therefore, taxable as a corporation under section 230 of said act, or whether it is an ordinary common law trust, as it contends.
*1720 Section 704 of the Revenue Act of 1928 is inapplicable, for the reason that the petitioner did not file a return as a trust, but filed an ordinary "Corporation Income Tax Return" on Form 1120 for the period in question. See Russell Tyson et al., infra.
The respondent relies upon ; ; and . It is proper to state at the outset that we consider those cases clearly distinguishable upon all of the vital fact elements involved.
In , the Supreme Court adopted the following definitions of the word "association":
* * * It has been defined as a term "used throughout 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." [Citations.] "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*1721 Internat. Dict. "[U.S.] An organized but unchartered body analogous to but distinguished from a corporation." * * *
And, concluding that the petitioners were "not merely trustees for collecting funds and paying them over," but were "associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises," it held that they were "to be deemed associations within the meaning of the Act."
In the Lansdowne case, supra, which was reversed on appeal, , the Board held that the trust was not "merely passively holding property and collecting income therefrom," but "It was engaged in maintaining and renting a building which it owned, *162 being thus similar to the Hecht Real Estate Trust," and held that it was taxable as an association.
In , the Board, upon the evidence adduced, held that the petitioner was an association, and in doing so directed attention to the similarity between that case and the Lansdowne case.
Respecting the distinctions referred to by the respondent in *1722 ; affd., , we find that he urged the same point in , and our views in the matter are there set forth as follows:
The Commissioner, however, urges the inapplicability of the foregoing case because of the statements of the court that:
"* * * A distinction is to be made between an agreement between individuals in the form of a trust and an express trust created by an ancestor, although they may have some features in common. The controlling distinction is that one is a voluntary association of individuals for convenience and profit, the other a method of equitably distributing a legacy or donation. Congress has recognized this distinction, classing the former as associations, to be taxed as corporations, and at the same time providing for a separate and distinct method of taxing the income of estates and trusts created by will or deed, classing them together for that purpose. * * *"
But we do not understand the court to lay down the rule that all express trusts created by an ancestor are to be treated as trusts and not as associations*1723 and all agreements between individuals in the forms of trusts are to be considered as associations. In general, we think it is true that the circumstances surrounding the creation of a given trust are strong evidence as to its purpose, but of more importance is whether the trust is carrying on business for profit, or whether it is merely in existence for the distribution of property, and we think the court recognized this fact in the statements quoted above. * * *
We deduce, therefore, from the foregoing and other cases bearing upon this question, that the really significant tests for determining whether an alleged trust is to be treated as an association for tax purposes or not are whether the certificate holders have voluntarily associated themselves together in "the general form and mode of procedure of a corporation" and are organized to and in fact are engaged in the active conduct of a business for profit, or whether the trustees are merely holding the property and collecting the income therefrom and distributing it to those beneficially interested. *1724 ;; ; ; and .
As to what may be termed the purely formal test, that is, whether the trust enjoys the same form and manner of organization as a corporation, it must be said that the petitioner here does not. In the *163 first place, while the name of an enterprise is of little or no importance, it may, and probably should, be considered as one of the elements bearing upon its implied relationship with the public. If an unincorporated body uses a name commonly employed only by those incorporated, the reasonable inference may be, and usually is, that it is incorporated, and consequently it will be dealt with by the public as though it were a corporation. On the other hand, if the term "trust" is employed, as here, the public is put upon notice; consequently, there can be no possible misunderstanding. Cf. *1725 , where the corporate name there used was commented upon as an element of consideration.
The petitioner here was unchartered, and was organized under no State statute, but was created by a trust indenture under the general trust laws of the State, as in , where the petitioner was held to be a trust and not an association. The trust had no officers such as are common to corporations, nor did it have any body of officials even resembling a board of directors. It was conducted by trustees, so designated in the declaration of trust, who were self appointed by reason of the fact that they were the creators of the trust. The trustees, according to the declaration of trust, were required to serve without compensation and they were unrestricted as to their terms of office. Upon the resignation of either trustee he himself was empowered to select and appoint his own successor, and in case of the death of a trustee or the resignation thereof without the appointment of a successor the surviving trustee was vested with such authority. In no case, therefore, did interest holders have any power whatsoever*1726 over the appointment or selection of trustees, except where both should expire at the same time, in which event both of the trustees would be appointed by not less than 30 per cent of the beneficial interests under the trust. Cf. ; affd., . And in this particular the trust theory is eminently stronger here than in , for there the trustees could be removed by the interest holders.
Nor does it appear that the certificate holders had any control whatsoever over the management and operation of the trust, a factor which, while not determinative of the issue, is important and should be considered. , and
The trust employed no seal, it had no by laws, and it held no official meetings. In fact it does not appear that any meetings were ever held except, of course, as business was discussed between the two trustees upon informal meeting.
*164 It has been urged that there was indirect control over the trustees by the beneficial interests through their right to amend or modify*1727 the declaration of trust, but it must be borne in mind that such an amendment or modification was possible under the said trust agreement only by the joint "consent of the trustees and the consent of the owners of fifty-one or more of the interests of beneficial interest" under the trust.
Therefore, we can see little or no similarity between the manner and form of this trust organization and that of a regularly chartered corporation, except possibly that it issued "Interest Receipts" having some of the characteristics of stock certificates, but this factor alone will not "covert it into a corporation," ; "something more is required than the mere issuance of so-called shares." .
It is perfectly possible that under the declaration of trust the trustees may have been "required to receive oil, gas and other products from said oil well," in which event, being compelled to engage in the marketing of said oil, it may have been engaged in a business within the meaning of the decided cases. The fact is, however, that it was never required to do so and we doubt seriously, considering all of the other*1728 agreements entered into, that it was ever contemplated that the trust should receive oil and gas and other products from the well or anything else other than the proceeds therefrom. See .
A brief resume of the events leading up to the creation of this trust will bear out the real purpose of its creation and existence. To begin with, Evans procured the lease to the property in his own name, with the understanding that he would drill for oil, he to pay the lessors therefor, as rental, a percentage of the production. Evans himself was apparently without sufficient funds with which to promote the venture alone and he thereupon sought the aid of Wermich and Jackson, who were willing to provide the necessary funds for drilling operations, resulting in the agreement of September 7, 1922, whereby they were to furnish $35,000 and receive a stated percentage of the net proceeds from the operation of the well when completed. Wermich and Jackson, being unable or unwilling to carry the entire financial burden or risk, enlisted the aid of others in providing the sum agreed upon, and for the purpose of setting forth the proportionate interests*1729 of those who were to advance the funds, the declaration of trust of September 28, 1922, was entered into. The sole purpose of this trust, therefore, was to provide the funds for drilling one well, and in this particular the instant case is identical with
Of course, all of the parties engaged in this venture were primarily interested in the prospective profits to be derived from the *165 sale of oil and gas, and in that particular all may be said to have had a common interest. But it seems clear to us that the parties in interest, in so far as their endeavors were concerned, were divided into two well defined classes, each functioning independently of the other: (1) those concerned with the drilling and operation of the well and the sale of the production therefrom, and (2) those whose prime function was to finance the venture, receiving as their compensation profits derived from the sale of the products.
As we have already stated, the trustees were never required to receive any oil, the income of the trust being derived solely from oil sold by those in charge of drilling and operating the well. The record shows that the trustees*1730 had nothing whatsoever to do with the operation of the well and, furthermore, that they were never even consulted with respect thereto. Nor, indeed, were they ever consulted respecting the sale of the oil or gas therefrom. In fact, the testimony shows that Wermich knew nothing about the contracts entered into for the sale of oil or gas until 30 or 60 days afterward, and it was only through casual inquiry that he learned then.
The trust maintained no office, owned no furniture, and it has never operated any kind of business other than as described. Its only employee during 1923 was a bookkeeper, whose duties were to receive the checks from Evans and disburse specified sums to those beneficially interested and record them in the accounts kept for the purpose. The trustees served without compensation and it appears from the record that their primary function as such was to sign and countersign checks issued to beneficiaries.
In one of the most recent cases promulgated, , the purposes of the trust were extremely broad and diversified. There, the Board found that the trustees carried on "an elaborate business," which clearly distinguishes*1731 the instant case therefrom without necessity for further consideration.
We are of the opinion, therefore, that the trust here was not of the form and mode of a corporation and that it was not organized to nor did it in fact engage in the conduct of a business, but merely collected the income accruing under the declaration of trust and distributed it to those beneficially interested, and that it is not an "association" and should not be taxed as a corporation under section 230 of the Revenue Act of 1921.
Since the remaining specifications of error are predicated upon our holding the petitioner to be an association, we need not consider them.
Judgment will be entered under Rule 50.