*1354 Held, petitioner was taxable as a trust for the years 1922 and 1923.
*166 This proceeding is for the redetermination of deficiencies in income tax for the calendar years 1922 and 1923 in the amounts of $4,874.77 and $24,770.32, respectively. Two issues are raised: (1) That for the years 1922 and 1923 respondent erred in classifying petitioner as an association taxable as a corporation, and (2) that for the same years respondent did not allow sufficient depletion. The second issue is raised only if this Board should hold the petitioner taxable as an association.
The first issue was also raised by this same petitioner in Docket No. 45052, decided this day, involving deficiencies for the calendar years 1925, 1926 and 1927, which proceeding was heard at the same time as this proceeding. Stipulations of facts with exhibits attached were filed in each proceeding and oral testimony introduced at the hearing, the parties agreeing that the evidence introduced*1355 should be considered as evidence in each case in so far as it is applicable to the issues involved. Our findings of fact are made from the stipulations filed and the evidence submitted.
FINDINGS OF FACT.
Petitioner was created by a declaration of trust executed on February 11, 1922, by the seven persons named therein as trustees, one of whom was Thomas H. Lipps. It was provided that the trust estate therein created should be designated by the name and known as "Twin Bell Oil Syndicate." Although the agreement recited that Thomas H. Lipps had conveyed to the seven persons named therein as trustees oil and gas leases on property described in the instrument and that the trustees had accepted the interests assigned to them, in trust for the uses and purposes set forth in the declaration of trust, such assignment was not actually executed by Lipps until April 25, 1922, on which date the declaration of trust was amended. The original declaration of trust also provided for the issuance of units of interest in the trust estate, but no units of interest were issued until after the instrument was amended. Paragraph 17 of the original instrument provided that the trustees might, with*1356 the consent of the holders of two-thirds of the outstanding units of the trust estate, alter or amend the declaration of trust.
The declaration of trust, as amended on April 25, 1922, provided that the duties of the trustees were to drill for oil to a depth of 4,000 feet unless found before in paying quantities. The trustees were given full power to develop, operate and deal in petroleum, gas and oil property. They might use a common seal. The liability of both trustees and unitholders was limited to the trust fund. No assessment could be made on the unitholders.
*167 The number of trustees was to be not less than five nor more than seven, and any vacancy in their number occasioned by death, resignation, or refusal to act was to be filled by the remaining trustees. The units of the trust estate were to be 3,000, $100 par value each, and indivisible. Certificates evidencing ownership of units were to be issued, in which were recited the facts that they were transferable on the company's books, were issued subject to the declaration of trust of February 11, 1922, and as amended April 25, 1922, and that no unitholder was personally liable. In consideration of the assignment*1357 of the lease to the trustees, Lipps was to receive 1,500 units, and "after the cost of the well and drilling operations have been repaid to the unitholders, the sum of $7,500 out of the first run of oil, as an additional bonus for the transfer of the lease to the syndicate." The 1,500 units not issued to Lipps were to be sold either publicly or privately.
The trustees were to declare quarterly dividends from the profits, the dividends to include all profits except those required for operation and maintenance. Before any dividends were to be declared, however, the unitholders were to be repaid the full amount of their investment and Lipps the amount of his bonus. Meetings of the trustees were to be held from time to time upon call of the president or any three trustees and a majority of the quorum (a majority of the total trustees) might transact all business. A president and vice president were to be elected by and from the trustees annually; they should also elect annually a treasurer-secretary. No salaries or compensation was to be paid to the officers or trustees.
The trustees were to call meetings of the unitholders annually and report to them. Death of a trustee or*1358 unitholder was not to terminate the trust. The trustees might by unanimous consent alter or amend the declaration of trust. The trust was to run for 50 years unless terminated before by all the trustees and upon liquidation the trust assets were to be distributed among the unitholders proportionately. The trustees were not to acquire other property nor dispose of trust property in whole or in part. The amended trust instrument closes with a recital that no certificates of beneficial interest had been issued and that the five undersigned trustees, including Lipps, constituted the full board of trustees.
The precise language of five significant paragraphs in the trust declaration, given in substance above, is hereafter set out:
FOURTH. The Trustees, in the name of the Twin Bell Oil Syndicate, shall have full power, except as herein limited, to develop, operate, sell and deal in petroleum, oil properties and wells, and to buy, acquire, construct, maintain, operate pipe lines, and deal in machinery, implements, tools, conveniences of all kinds capable of being used in connection with oil, gas or other utilities. The execution of all contracts, of all conveyances and transfers*1359 and of all other *168 instruments relative to the trust fund or any part thereof, by or pursuant to the authorization of a majority of the said trustees, or their successors, shall always be sufficient.
The trustees hereunder and their successors, shall have and exercise the exclusive management and control of the trust estate, they may adopt and use a common seal, collect, sue for, receive and receipt for all sums of money at any time coming due to said trust; may employ counsel to begin procedure, defend or settle suits at law, in equity, or otherwise, and to compromise or refer to arbitration, any claim in favor of or against the Trust.
During the term of this Trust and to enable them to properly execute the same according to the terms, provisions and intentions hereof, the trustees shall have full power to hold or convey, grant, bargain, sell, lease for terms, to repair and make any improvements thereon or therein of such character, amount, costs and from such funds or property, subject to this trust as they may deem advisable; and to drill, operate for, develop and remove petroleum, oil naptha, natural gas, asphaltum or other kind substances in and from the real property*1360 described hereinabove; and generally in all respects to manage, handle, develop and dispose of the whole or any part of the trust estate in conformity with the terms of this trust.
* * *
TENTH: Meetings of the trustees shall be held from time to time upon the call of the president or any three of the trustees. A majority of the Trustees shall constitute a quorum, but in no event shall any meeting of said trustees be held, nor any business transacted be binding upon this trust, unless and until all of the trustees herein named shall first have received written notice of said meeting; the concurrence of all the trustees shall not be necessary to the validity of any action taken by them, but the wish of a majority of the trustees present and voting at any meeting shall be conclusive unless in this declaration of trust specifically provided otherwise. The trustees may make, adopt, amend or repeal such by-laws, rules and regulations, not inconsistent with the terms of this instrument, as they may deem necessary or desirable for the conduct of their business and for the government of themselves and their agents, servants and representatives.
* * *
TWELFTH: The trustees shall*1361 call meetings of the unitholders annually on the first Tuesday of March and shall prepare and submit to unitholders at such meeting a full report of all their operations, including moneys raised and disbursed for the year ending on the 31st day of December preceding. Special meetings of the unitholders may be called by the trustees at their pleasure by giving the notice hereinafter provided for.
* * *
SIXTEENTH: The trustees may by unanimous consent alter or amend this Declaration of Trust.
* * *
EIGHTEENTH: None of the powers in this Declaration of Trust set out shall be construed as authorizing the trustees, (without first obtaining the unanimous consent of the entire Board) to acquire any properties or oil leases, or to dispose of the whole or any part of the capital or assets or other properties of this trust either in whole or in part, it being the specific intention of this paragraph to limit the powers and duties of the trustees to the management and control of the property owned and controlled by the Syndicate, including the proceeds to be derived from the discovery and development of oil on the premises owned or controlled by the Syndicate, and to compel the said*1362 trustees *169 to make quarterly distribution of the entire net proceeds amongst unitholders as in Paragraph Nine (9) of this Declaration of Trust set forth.
Nor shall any act be done directly or indirectly in contravention of this paragraph unless the unanimous consent of the entire Board, at a regular meeting, duly called for that purpose, shall first be had and obtained.
The oil lease acquired by the petitioner was originally made on December 8, 1921, by W. O. Batson and his wife, to F. A. Andrews. It was to continue for a period of twenty years from the date of the agreement and as long thereafter as oil or gas in paying quantities might be produced. The provision with respect to royalties provided:
* * * the Lessee shall pay as rental or royalty for the use of said land one-sixth (1/6) of all oil produced and saved therefrom, said payment to be made in money or in kind at the Lessor's option. If the rental is paid in kind, the oil shall be delivered into tanks maintained on the property for that purpose, as produced, and shall be stored for a period not exceeding thirty (30) days without charge. If the royalty is paid in money, then the Lessee shall pay the Lessor*1363 on the 20th day of each and every calendar month one-sixth (1/6) of the market price at the well of all oil removed from said property during the preceding calendar month. The option of the Lessor to take the royalty in money or in kind shall only be exercised once every six (6) months, and then on thirty (30) days' notice in writing to the Lessee. If no notice be given, it shall be deemed that the royalties are payable in money.
The lease also contained a provision authorizing the subleasing of the premises or any part thereof, or an assignment of the lease.
On February 10, 1922, Andrews and his wife assigned the lease to Thomas H. Lipps, who agreed to perform each and all of the covenants and obligations of the Batson lease agreed to be performed by Andrews, and in addition agreed as follows:
That he will pay to the parties of the first part herein, over and in addition to the one-sixth (1/6) royalty agreed to be paid to the Lessors under said "Batson" lease, one-twelfth (1/12) of all petroleum, oil, gas and other oil products, and casing-head gasoline, produced and saved from each and all wells on said premises by the party of the second part, said royalty to be paid in*1364 lawful money of the United States, or in kind, at the option of the parties of the first part, and to be paid or delivered to said parties of the first part in the same manner and under the same privileges as is provided for the payment or delivery of the Lessors (one-sixth (1/6) royalty under said "Batson" lease;
The assignment to Lipps also contained a provision under which an assignment of the assignment might be made.
On April 25, 1922, Lipps executed an assignment of his interest in the lease and of his interest in the assignment of the lease to the trustees of the Twin Bell Oil Syndicate, "upon condition that the said assignees, as trustees for the said Twin Bell Oil Syndicate, shall said assignees, as trustees for the said Twin Bell Oil Syndicate, shall fully and faithfully comply with all the terms and conditions required quired in the original lease herein set forth, and also with all the *170 terms and conditions stipulated and set forth in the assignment of same * * *." The royalties which became due under the lease and the assignment during the years involved were paid in money.
Application was made by the trustees to the commissioner of corporations for*1365 a certificate authorizing them to issue and sell unit shares as follows: 1,500 unit shares to Thomas H. Lipps as consideration for the transfer to applicants of his leasehold interest, and 1,500 unit shares, at par, for cash, for the purpose of securing funds with which to drill for oil on the leased premises. Such a permit was issued by the commissioner of corporations on February 18, 1922, was amended on March 7, 1922, and an amended permit was issued on May 17, 1922.
During 1922 and throughout 1923 the petitioner operated under the trust declaration above summarized.
In actual practice, no meeting of the unitholders was ever called by the trustees, and the unitholders never held a meeting. The trustees kept the books, negotiated all contracts, and were never subjected to the supervision or control of the unitholders. The trustees controlled the dividend policy which was to create a reasonable reserve, pay charges, and distribute the balance to the unitholders. Nothing was done except by the collective action of the trustees and all notices and letters were sent out in their names. Certain trustees were designated as officers, but no particular duties were assigned to*1366 them as such and they received no salaries during the years here in question. The officers of the syndicate were not required to hold units of interest and not all of them were unitholders. Two oil wells were drilled on the property in 1922 under contracts made in the name of the Twin Bell Oil Syndicate by the president and secretary.
For the years 1922 and 1923 the petitioner filed returns as a trust. The return for 1922 was filed with the collector of internal revenue at Los Angeles on May 15, 1923, and the return for 1923 was filed with the same collector on March 14, 1924.
The parties stipulated and agreed that the rulings of the Commissioner referred to in section 704(a) of the Revenue Act of 1928, are such rulings as are referred to or found as a fact by the United States Board of Tax Appeals in its decisions reported in ; ; ; and .
It was also stipulated and agreed that should the Board find petitioner is taxable as an association rather than as a trust for the years 1922 and*1367 1923, then petitioner is entitled to depletion for the year 1922 in the sum of $249,899.28 and depreciation on wells for the year 1922 in the sum of $82,358.44, and depletion for the year 1923 in the sum of $494,153.40 and to depreciation for the year 1923 in the *171 sum of $37,677.75, in lieu of any and all amounts for depletion allowed in the notice of deficiency.
OPINION.
MATTHEWS: The only issue which need be considered is whether the petitioner is a trust or an association taxable as a corporation.
The petitioner filed returns as a trust for 1922 and 1923, the 1922 return being filed on May 15, 1923, and the 1923 return on March 14, 1924. The petitioner contends that it is taxable as a trust for these years by virtue of section 704(a) of the Revenue Act of 1928, set out in the margin. 1 The rulings of the Commissioner referred to in this section are those cited in ; ; ; and *1368 .
In actual practice, as well as under the terms of the trust instruments, the trustees had exclusive and complete control and management of the trust property. They kept the records of the trust; they determined the policy with respect to the declaration of dividends; they fixed the*1369 amounts of reserves to provide for contingent liabilities; they negotiated and executed the contracts for the disposal of the oil and gas produced from the trust property, and in general conducted all the affairs of the trust, whatsoever they might be. The trustees alone could renew their numbers and alone (but unanimously) could alter or amend the trust. The beneficiaries had no voice in these matters, never held a meeting, and had no rights in connection with the actual operation of the trust. All certificates of beneficial ownership declared on their face that they were issued subject to all the provisions of the original trust instrument as amended, and that the liability of holders was limited to the trust property.
The petitioner was organized to carry on actively, and did so carry on, the business of drilling for oil and selling oil from its wells. In doing so, however, it was controlled absolutely by the trustees. It bore no resemblance in this respect to a corporation which is controlled and directed by its stockholders acting through directors. The trustees were here the real masters of the situation, unchecked by the veto of the holders of the beneficial interest.
*1370 *172 We held in the four decisions of the Board cited above that under the rulings of the Commissioner in force during the years 1922 and 1923, the Bureau was consistently holding that irrespective of whether the taxpayer was engaged in business under corporate forms, it was taxable as a trust in all cases where the shareholders could not control the actions of the trustees. The petitioner meets this test.
As the petitioner filed returns as a trust for the years 1922 and 1923, and is within the definition of a trust applied by the Commissioner in 1922 and 1923, it is taxable as a trust for such years. Our conclusion makes it unnecessary to consider the second issue.
Judgment will be entered for the petitioner.
Footnotes
1. Sec. 704. (a) If a taxpayer filed a return as a trust for any taxable year prior to the taxable year 1925 such taxpayer shall be taxable as a trust for such year and not as a corporation, if such taxpayer was considered to be taxable as a trust and not as a corporation either (1) under the regulations in force at the time the return was made or at the time of the termination of its existence, or (2) under any ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue applicable to any of such years, and interpretative of any provision of the Revenue Act of 1918, 1921, or 1924, which had not been reversed or revoked prior to the time the return was made, or under any such ruling made after the return was filed which had not been reversed or revoked prior to the time of the termination of the taxpayer's existence. ↩