1928 BTA LEXIS 3336">*3336 1. Jurisdiction. - The Board is without jusidiction to redetermine the tax liability for a year for which the respondent has determined no deficiency.
2. Partnerships. - Respondent's determination that the Marine Oil Co. was a partnership sustained for lack of evidence. Petitioner's profit from sale of an interest in the partnership determined.
3. Partnerships. - Petitioner's fractional interest in the partnership of T. B. Noble & Co. determined.
4. Income. - Where a Texas partnership in 1919 organizes a Texas joint-stock association and transfers partnership property to trustees thereof to hold in trust for members of the association in exchange for shares of stock of the association, the transaction falls within section 202(b) of the 1918 Act.
5. Valuations. - Fair market value of shares of stock on May 31, 1919, of the Fisher-Whaley Oil Co., a joint-stock association, determined.
12 B.T.A. 1419">*1420 In these proceedings the petitioners seek a redetermination of their income-tax liabilities for the years 1919 and 1920 for which1928 BTA LEXIS 3336">*3337 the respondent has determined deficiencies of $3,524.55 and $292.01, respectively, against T. B. Noble, and $4,693.40 and $292.01, respectively, against Mrs. T. B. Noble. The petitioners are husband and wife. The income involved is community income under the laws of Texas. The petitioners allege (1) that the respondent refused to consider an overassessment for 1918 in the case of T. B. Noble; (2) that the respondent erred in including as income of the petitioners for 1919 and 1920 their pro rata part of an alleged profit from an alleged partnership known as the Marine Oil Co.; and (3) that he also erred in the determination of the petitioners' distributive share of the net income of another partnership known as T. B. Noble & Co. The proceedings were consolidated for trial.
FINDINGS OF FACT.
The petitioners were during the years 1919 and 1920 and subsequent years residents of Wichita Falls, Tex.
The respondent has determined an overassessment against T. B. Noble for 1918 in the amount of $387.10, but has not reduced the deficiency for 1919 thereby, on the ground that such credit is barred by the statute of limitations. A like amount overpaid by Mrs. Noble for the year1928 BTA LEXIS 3336">*3338 1918 was refunded to her.
In 1924, at some date prior to September 6, the books of the petitioners were audited for the years 1918, 1919, and 1920 by a revenue agent. On completion of the audit, Noble signed and delivered to the agent a waiver of the limitation against assessments for the year 1918.
In 1918 Noble purchased for $1,000 an interest in an enterprise known as the Marine Oil Co. During that year he sold one-half of this interest for $500. The company was engaged in producing oil. It owned three oil leases, parts of which were disposed of in 12 B.T.A. 1419">*1421 1918. On February 7, 1919, Noble and certain other interested parties disposed of their holdings in the Marine Oil Co. in accordance with the terms of an agreement reading as follows:
THIS AGREEMENT made and entered into the 7th day of February, A.D., 1919, by and between G. C. Wood and others, whose names are signed hereto as parties of the first part, and John W. Gilliland and A. H. Richards, as parties of the second part, WITNESSETH:
WHEREAS, the parties of the first part are the owners of various undivided interests in and to certain real and personal property in the form of oil and gas leases, cash, notes, 1928 BTA LEXIS 3336">*3339 material, oil, accounts and entire assets, which property has heretofore been owned and operated as a partnership under the name and style of MARINE OIL COMPANY, and,
WHEREAS, the parties of the first part desire to sell all of their undivided interests in and to said oil and gas leases and other properties above-mentioned, and hereinafter described, to the parties of the second part, and
WHEREAS, the parties hereto have reached an agreement for the sale and purchase of the interests in said properties held by the undersigned parties of the first part, said entire property being calculated on the basis of Three Million Five Hundred Thousand ($3,500,000.00) Dollars, and,
WHEREAS, the parties of the first part are the owners of such portion thereof as is set opposite their names subscribed hereto, which portion is less than an entire interest.
NOW THEREFORE: this will evidence that the payment to the parties of the first part by the parties of the second part shall be in the following manner, to-wit:
First Parties' prorate of One Million ($1,000,000.00) Dollars to be paid in cash, as follows: First Parties' prorata of One Hundred Thousand ($100,000.00) Dollars to be deposited1928 BTA LEXIS 3336">*3340 in escrow with the execution of this agreement in the City National Bank of Wichita Falls, Texas, said money to be evidence of the good faith of the parties of the second part and to be delivered to parties of the first part through their Trustee as hereinafter set forth at the consummation of this agreement; also Parties of the First Part's prorate of the sum of Nine Hundred Thousand ($900,000.00) Dollars to be paid by the second parties to the first parties in the manner hereinafter set forth, the same to be paid upon the consummation of this agreement; also, one note for first parties' pro rata of Five Hundred Thousand ($500,000.00) Dollars, said note to be executed upon the consummation of this agreement and to be due and payable on or before December 24th, 1919, with interest at the rate of six (6%) per cent per annum; said note and cash to be delivered to G. C. Wood as Trustee for parties of the first part. Parties of the second part also agree to pay to parties of the first part their pro rata of Two Million ($2,000,000.00) Dollars in the following manner: By the payment to parties of the first part of their prorata as shown by their respective undivided interests of all the1928 BTA LEXIS 3336">*3341 proceeds derived by parties of the second part from the sale of one-half (1/2) of seven-eights (7/8 ths) of all the oil produced and saved from the premises until the amount received, together with the cash and note above mentioned shall amount to their prorata of Three Million Five Hundred Thousand ($3,500,000.00) Dollars above named, as the undivided interests which they own and hereby transfer, assign and convey in the properties herein named bears to the whole of said property, and
WHEREAS, the interests of the parties of the first part now stand in the names of G. C. Wood and C. H. Clark, and they desire to authorize and empower 12 B.T.A. 1419">*1422 the said Wood and Clark to make good and sufficient transfers and conveyances of said property so as to carry the title of the parties of the first part hereto in said property herein described.
NOW THEREFORE, KNOW ALL MEN BY THESE PRESENTS: That we, G. C. Wood and others, whose names are signed hereto as parties of the first part for and in consideration of the premises and of the covenants and agreement herein contained, have sold, transferred, assigned and conveyed and do by these presents hereby sell, transfer, assign and convey all1928 BTA LEXIS 3336">*3342 our right, title and interest in and to the real and personal property hereinafter described, said interests being undivided interests in said property as stated and set forth after our signatures, all of said property being situated in the County of Wichita and State of Texas, and described as follows, to-wit:
First Tract: An oil and gas lease on 198.3 acres of land out of the Wm. P. Dubose Survey, Wichita County, Texas, and being all of the lease heretofore granted unto G. C. Wood by J. G. Hardin on the day of August, 1918, and recorded in the Deed Records of Wichita County, Texas, except certain transfers and assignments out of said original tract heretofore made by the said G. C. Wood to J. G. Barnard as to 40 acres, R. E. Snell, Jr., as to 40 acres; Roy B. Jones as to 20 acres and W. J. McCallister, T. P. Adams, W. E. Norton and Guy Brown as to 20 acres.
Second Tract: All of a 65 acre oil and gas lease out of Block 102, Red River Valley Lands Subdivision, Wichita County, Texas, being the identical tract transferred and assigned by The Texas Company to C. H. Clark and now standing in his name, except certain portions of said 65 acre tract heretofore transferred and assigned1928 BTA LEXIS 3336">*3343 by C. H. Clark to various assignees purchasing portions of said 65 acre tract.
Third: Also, there is sold, transferred and assigned by the said parties of the first part all of their right, title and interest in and to all of the personal property owned by the partnership heretofore operating under the name of Marine Oil Company, including tanks, pipe, pipe lines, derricks, water stations, machinery and material of every other kind and character whatsoever owned by said partnership; also, all notes and cash, belonging to the partnership and derived from the sale of portions of the leases above described and otherwise, including any interest in monies to be received from sales heretofore made of any leases owned by said partnership, also, including oil in lines and any other property of any kind or character whether specifically named or not, a complete inventory of said property to be furnished by parties of the first part to parties of the second part.
TO HAVE AND TO HOLD the same unto the said John W. Gilliland and A. H. Richards, their heirs and assigns, the undivided interests of the parties of the first part in and to said property as herein stated, subject, however, to1928 BTA LEXIS 3336">*3344 all the terms and conditions of the lease contracts between the original lessors and lessees as to the leases above-mentioned and we do hereby authorize and empower C. H. Clark and G. C. Wood, in whose names the said leases and property now stand, to transfer, assign and convey to the said John W. Gilliland and A. H. Richards, all of our right, title and interest in and to said real and personal property herein mentioned and described, for the consideration and upon the terms herein stated, hereby ratifying and confirming all that they have done and may do in about the premises.
The parties of the second part as a part of the consideration herein further covenant and agree with parties of the first part to furnish G. C. Wood, Trustee, with a pipe line statement of all the oil produced and saved from said premises, including oil in storage, said statement to be furnished monthly.
12 B.T.A. 1419">*1423 It is also mutually agreed between the parties hereto that a complete abstract of title showing merchantable title in parties of the first part shall be furnished parties of the second part, within five (5) days from this date and ten (10) days shall be allowed parties of the second part1928 BTA LEXIS 3336">*3345 within which to examine and report objections, if any, to said title, after which parties of the first part shall have five (5) days within which to cure said objections and if this cannot be done and the parties of the second part are unwilling to waive said objections, then this agreement shall be null and void, but if the title is approved, then this contract shall be consummated by the parties hereto and the note and cash delivered to G. C. Wood, Trustee, for the parties of the first part as hereinabove stated, and this, as well as other assignments of the undivided interests of the various parties, together with said personal property, oil, cash, notes and other properties, as well as the accumulations thereto shall be delivered to parties of the second part, it being understood that the property above-mentioned and described shall remain intact and the possession of the parties of the second part, shall relate back to February 1st, 1919.
The covenants and agreements herein contained shall run with the land and be binding upon the respective heirs and assigns of the parties hereto.
Under this agreement Noble received the following amounts on the dates specified, which amounts, 1928 BTA LEXIS 3336">*3346 with the exception of five or six hundred dollars received in 1921, constituted his total receipts from the Marine Oil Co.:
| March 1, 1919 | $2,500 |
| June, 1919 | 500 |
| July 10, 1919 | 750 |
| September 29, 1919 | 500 |
| November 6, 1919 | 500 |
| November 20, 1919 | 500 |
| Total for 1919 | 5,250 |
| September 5, 1920 | $1,500 |
| April 7, 1920 | 500 |
| July 1, 1920 | 300 |
| September 15, 1920 | 200 |
| October 14, 1920 | 500 |
| Total for 1920 | 3,000 |
T. B. Noble was one of the original group of twelve partners in T. B. Noble & Co. He owned a one-twelfth interest in the business. Early in 1919, the partnership acquired oil and gas leases amounting to 1,207 acres of Indian lands in Tillman County, Oklahoma, at a cost of $175.50 per acre. Noble had previously been interested in several losing ventures with certain individuals and, believing that T. B. Noble & Co. had some valuable leases, he proposed to share his interest in the partnership with these former business associates. They paid to him a proportionate part of the total cost of the one-twelfth interest, thereby acquiring a right to three-fourths of the profits received by him from the partnership. They were not considered as members of T. B. 1928 BTA LEXIS 3336">*3347 Noble & Co., although the members of that firm knew of their arrangement with Noble.
For the purpose of developing the leases and drilling for oil, T. B. Noble & Co. organized the Fisher-Whaley Oil Co., an unincorporated association, to which it transferred leases to 300 acres of the lands mentioned above, receiving therefor one-half of the total authorized stock of $300,000 par value. Part of the stock remaining sold for 12 B.T.A. 1419">*1424 par and some above par. The pertinent parts of the articles of the Fisher-Whaley Co. read as follows:
Know All Men By These Presents; - That, we C. W. Gilliland, J. A. Fisher, T. B. Noble, Ed Sheegog, C. F. Spencer, N. B. Chenault and Floyd E. Ard of Wichita Falls, Texas, A. E. Boger of Dallas, Texas, L. O. Blanton, C. E. Wilcoxsen and J. C. Whaley of Gainesville, Texas, and C. H. Boedeker of Bowie, Texas, the owners of the oil and gas lease, hereinafter described, desiring to develop said properties for oil and gas, and to that end to raise funds for so doing, and for the purpose of enabling the holders of trust shares hereunder to distribute the advantages and risks of their investments over different securities and business enterprises in a1928 BTA LEXIS 3336">*3348 way not ordinarily possible to investors dealing separately and individually, and to that end to hold as a common or joint investment for the common and equal benefit of the shareholders, ratably, according to their several holdings of shares, personal property transferred or conveyed to, vested in or acquired, as well as real estate or interests therein which may be hereafter acquired by the Trustees under this agreement, and to invest and reinvest such money and funds as may be paid to the Trustees or be realized by them from the disposition of shares issued hereunder, or from the management and investment of the trust estate and the profits derived therefrom, in such manner and in such business enterprises, securities, and personal and real property as under the terms of this instrument shall be permissible, and in the judgment of the Trustees exercised under the powers given them by this instrument shall tend to enhance the value of the shares issued hereunder as investments; do hereby agree as between ourselves, and acknowledge and declare, for the benefit of those purchasing shares of beneficial interest as herein provided for, and the parties with whom this trust may deal; -
1928 BTA LEXIS 3336">*3349 I.That we and each of us, and our successors in this trust, shall, as Trustees, hold and administer the hereinafter described property and all property of any and all kinds whatsoever that may be hereafter conveyed or delivered or transferred to us, or received by us, as such Trustees, or that may in any manner come into our hands as such Trustees, together with the profits and the mutations, in trust for the use and benefit of the purchasers of beneficial interest in and to said properties, subject to the terms, limitations, covenants and agreements hereinafter set forth.
II.This trust shall continue for a term of twenty (20) years after the death of the last surviving person whose name is signed hereto, unless incorporated or otherwise dissolved in the manner hereinafter set forth prior to that time; and at the end of such period of time, the Trustees provided for herein, or their successors, shall proceed to wind up the affairs of this trust, liquidate the assets and distribute the same among the then existing shareholders.
III.The principal office of this trust shall be in Wichita Falls, Texas, but the Trustees, within their option, may maintain a branch office1928 BTA LEXIS 3336">*3350 of this trust in the State of Oklahoma, and the Declaration of Trust shall be recorded in the Deed Records of Tilman County, Oklahoma.
12 B.T.A. 1419">*1425 IV.
The purchasers of beneficial interest in said properties shall be known as shareholders, and this trust shall be known as the "Fisher-Whaley Oil Company," in which name it may contract and transact its business; and the title of the Trustees herein shall be "Trustees of the Fisher-Whaley Oil Company" and the term "the trustees," whenever used, shall mean the trustees hereunder for the time being, whether original or substituted. The term "shareholder," used in this agreement, shall mean holder of record of the share receipt or share certificate from the trustees hereunder.
V.This trust shall have a capital stock of Three Hundred Thousand ($300,000.00) Dollars, divided into three thousand (3,000) shares of a par value of One Hundred ($100.00) Dollars each.
Fifty (50) per cent of said stock shall be issued to the said C. W. Gilliland, J. A. Fisher, T. B. Noble, Ed Sheegog, C. F. Spencer, N. B. Shenault, Floyd E. Ard. A. E. Boger, L. O. Blanton, C. E. Wilcoxsen, J. C. Whaley, and C. H. Boedeker as a full and complete consideration1928 BTA LEXIS 3336">*3351 for the assignment of the hereinafter described oil and gas lease; and said stock shall belong to said parties as individuals, to be handled and disposed of as by them may be deemed meet and proper, and may, if said parties so elect, be offered for sale in the name of this trust, the proceeds derived from such sale, however, to belong to said parties as individuals and not as Trustees.
Twenty-five (25) per cent of said stock shall be retained by the Fisher-Whaley Oil Company as Treasury Stock to be managed, controlled and disposed of by the Trustees, under the terms and provisions of this Declaration of Trust in the manner and way as to them may seem most advantageous to the shareholders herein. In event the said Trustees elect to sell or dispose of said Treasury stock, they shall not, by reason of their Trusteeship, be barred from purchasing said stock, but shall have the right, along with other shareholders, to purchase said stock, and hold the same as individual property.
The remaining twenty-five (25) per cent of the stock shall be offered for sale by the Trustees on such terms and for such prices, as to them may seem most advantageous.
The Trustees of the Fisher-Whaley1928 BTA LEXIS 3336">*3352 Oil Company agree with the purchasers of beneficial interests herein that an oil and gas well shall be drilled by the Fisher-Whaley Oil Company, upon the hereinafter described lease, the actual drilling of same to be commenced within sixty (60) days after the stock of the company is sold in accordance with the terms of the preceding paragraph.
Said well shall be drilled and equipped with funds derived from the sale of stock, as above provided, and shall be drilled with cable tools in a good and workmanlike manner and in accordance with the best practices and customs for the kind and character of work to be performed to a maximum depth of twenty-five hundred (2500) feet, unless oil or gas in paying quantities is discovered at a lesser depth.
Further development of said property may be made by the trustees in such a manner as to them may seem most advantageous to the shareholders herein.
VI.Ownership of shares of beneficial interest in this trust shall be evidenced by certificates, fully paid and non-assessable, in an appropriate form to be approved 12 B.T.A. 1419">*1426 by the Trustees, but no share certificates shall be issued for any fraction of a share. Each certificate shall1928 BTA LEXIS 3336">*3353 contain the name of the owner, shall state the number of shares it represents and shall be signed by the presiding officer of the trustees, and counter-signed by the Secretary of the trustees.
Shares of beneficial interest shall be transferable only on the books of the company upon surrender of the certificate to be transferred, properly endorsed, and by the payment of a transfer fee of Fifty (50) Cents.
Such certificate shall be the sole and only evidence of ownership of shares of beneficial interest in this trust estate; and ownership of such certificate, as shown by the books of the Trustee, shall be conclusive evidence of the right of any person to share in all the rights, privileges, profits and benefits arising from ownership of shares of beneficial interest in this trust estate; and neither the trustees, nor any officer of agent of this trust shall be in any way liable to any person by reason of acting upon such evidence of ownership; and the right so to do shall not be affected or abridged by any kind or character of notice.
VII.The management and control of the trust estate shall be vested in a board of twelve (12) Trustees herein appointed. The primary object1928 BTA LEXIS 3336">*3354 of the trust is to develop for oil and gas the properties hereinafter described and to market the products thereof, and generally to do and perform all of the things mentioned in paragraph VIII hereof; and in the conduct of said business the Trustees herein appointed, or their successors in office, shall, subject to the terms and limitations hereof, possess and exercise dominion and control over all the property of this trust now owned, or hereafter acquired.
* * *
X.* * *
A Trustee may resign at any time by delivering to the Board of Trustees a written resignation, together with such instruments, duly acknowledged for record, as may be reasonably necessary to divest from him all his title, as such trustee, in the trust estate. A Trustee may be removed at any time for misconduct or breach of trust, by vote of two-thirds of the shareholders at any special meeting called for this purpose, and in accordance with subsequent provisions contained herein.
In case of death, removal or resignation of any trustee, the remaining trustees shall at their first meeting after such death, or at the meeting at which such resignation is accepted or removal effected, elect from the owners1928 BTA LEXIS 3336">*3355 of shares of beneficial interest in this trust, a new trustee, who shall succeed to all the rights, duties and obligations of the old trustees, as such, and shall qualify for the office by executing and causing to be placed of record a written acceptance of this trust.
XI.At each regular annual meeting of the Board of Trustees, the Board shall require the officers to submit a full statement of the conditions of this trust, and all business transacted by it, and when said statement is approved, shall cause a copy of same to be sent to each owner of one or more shares of beneficial interest in this trust. The books and records of this trust shall be open to inspection by any such owner at all reasonable times and places.
* * *
XIII.12 B.T.A. 1419">*1427 All of the property, real, personal or mixed, belonging to or hereafter acquired by this trust, shall be taken in the name of the trustees, who shall hold the legal title to all such property in trust for the owners of beneficial interest in this trust in the proportion which the amount of their interest bears to the total number of interests outstanding. All deeds or conveyances, assignments or transfers shall set forth that1928 BTA LEXIS 3336">*3356 the grant is to the trustees of the Fisher-Whaley Oil Company, to be held subject to this Declaration of Trust. The interest and estate held by the trustees in and to the trust property shall be held as joint tenants and not as tenants in common, provided, however, that in no event shall any reight or interest in the trust estate vest in any heirs or beneficiary of the trustee, even though such trustee should at the time of his death be the sole surviving trustee, but said estate and all right, title and interest held herein by such trustee, as such, shall pass to and vest in his successor or successors, appointed by the Board of Trustees in the manner herein provided.
XIV.All owners of shares of beneficial interest in this trust shall own an undivided equitable interest in and to all of the property of this trust, of every kind and character, in the proportion which the number of shares owned by them bears to the total number of shares then outstanding, and they, and each of them, shall be entitled to have and receive a like proportion of all profits and benefits arising from the operations of this trust, when and as soon as dividends are declared by the trustees. It is, 1928 BTA LEXIS 3336">*3357 however, understood and agreed that absolute control, dominion over, and the right to dispose of said property, and the income, revenue and proceeds thereof, is hereby vested in said trustees and their successors during the period of their trusteeship as herein defined.
XV.Any person, firm or corporation acquiring a share or shares in this trust by purchase, gift, inheritance, in satisfaction of or as security for any debt, or in any other manner assents to, accepts and approves all of the terms, conditions, covenants and agreements thereto and from the date such share is so received, this Declaration shall have like binding force and effect upon him as if he were one of the original parties hereto.
XVI.This Declaration of Trust and the continuance of the trust herein provided for shall not be terminated or the administration thereof in anywise interfered with or suspended by the death of any shareholder in same, or by his incapacity for any reason, or by his share or shares being by process of law subjected to the payment of debt, or in any way vested in an heir, purchaser, creditor, or assignee or such shareholder, or in any trustee, receiver or officer of any court, 1928 BTA LEXIS 3336">*3358 or in any other person, corporation or association, but any such person, association, firm or corporation that may in any manner acquire or become vested with the ownership of such shares, shall simply and only succeed to and become entitled to all the rights and titles of shareholders named herein, and his beneficial interest in the property of this trust, upon surrendering the original certificate to the trustees in proper form and manner duly signed in writing by the transferee, and receiving therefor a new certificate. And notwithstanding such change of interest or ownership in any such certificate, or the death, incapacity 12 B.T.A. 1419">*1428 or insolvency of the original owner thereof, this trust shall continue and this Declaration remain in full force until terminated as herein provided for.
XVII.Shareholders in this trust shall have no legal right to the property of this trust, real, personal or of any kind or character now held, or hereafter acquired, and particularly they shall have no right to call for any partition of same or for the dissolution or termination of this trust, except as provided for in this Declaration, but the shares in this trust shall be personal property, 1928 BTA LEXIS 3336">*3359 carrying with it the right of division of the profits made by the trust, and at the expiration of the time fixed herein for the continuance of this trust, and at dissolution in the manner provided for, a division of the principal and profits.
XVIII.No shareholder in this trust shall ever be personally liable for any debt, demand or obligation of this trust of any kind whatsoever, whether arising out of contract or tort, and neither the trustees nor any agent or agents appointed by them shall ever have or acquire any right or authority to bind any shareholder personally by any contract, agreement or otherwise. Every act done, power exercised, or obligation assumed by the trustees, pursuant to the provisions of this agreement, or in carrying out the trusts herein contained, shall be held to be done, exercised or assumed, as the case may be, by them as trustees, and not as individuals, and every person or corporation contracting with the trustees, as well as every beneficiary hereunder, shall look only to the funds and property of the trust for payment of any debts, mortgage, judgment or decree, or the payment of any money that may otherwise become due or payable on account of1928 BTA LEXIS 3336">*3360 the trusts herein provided for; and neither the trustees nor the shareholders, present or future, shall be personally liable therefor. Furthermore, the trustees shall give such notice as may be necessary of this limited liability of the shareholders and trustees of this trust to the persons, firms and corporations with whom this trust may deal; and in every written or oral contract entered into by the trust, or in its behalf, reference shall be made to this Declaration of Trust, and such contract shall contain a covenant or agreement on the part of the other party or parties to the contract that such a party or parties will look only to the funds and property of this trust for the satisfaction of all claims and demands arising from or out of such contract, and for all debts, engagements, contracts and liabilities of any kind or character incurred by this trust, the funds and properties of this trust shall stand primarily charged to the end that the shareholders of this trust may be protected from personal liability.
XIX.Shareholders of this trust shall meet at any time at Wichita Falls, Texas, when such meeting is called by the Board of Trustees. Meetings of shareholders shall1928 BTA LEXIS 3336">*3361 be called only to determine and act upon the following matters:
(1) To determine whether or not the trust shall be terminated prior to the time fixed herein, and if so, to provide the terms and conditions for so doing;
(2) To determine whether or not the capital of the trust shall be increased or decreased, and to provide the terms and conditions of so doing;
(3) To determine whether or not one or more trustees have violated their duties and obligations imposed herein, or have been guilty of breach of trust, and, if so, to remove such trustee or trustees.
12 B.T.A. 1419">*1429 It shall require the presence in person, or by proxy, of the owners of two-thirds in number of all the shares then outstanding to constitute a quorum to transact business at any stockholders' meeting; and it shall require the vote of two-thirds in number of all the shares represented at any meeting to decide any matter before the meeting.
Meetings of shareholders may be called by the shareholders owning one-third in number of all the shares in the trust then outstanding, for the same purpose for which a meeting may be called by the trustees.
Notice of the time and place of such meeting shall be given by1928 BTA LEXIS 3336">*3362 the persons calling same, by mailing at least seven (7) days prior to the date of the meeting to each shareholder at his last address, as shown by the books of the company, a written or printed notice of said meeting, which notice shall state the time and place of said meeting, the object or objects for which it is called, and shall be signed by those calling said meeting.
* * *
XXI.Trustees, or agents or servants appointed by them, actively engaged in administering this trust, shall be entitled to reasonable compensation for their services.
All expense incurred in administering this trust and in carrying out the purposes for which it was created, as well as the expense of safely keeping and caring for the trust properties, shall be proper charges on the trust funds and shall be paid therefrom.
The trustees shall pay such dividends from time to time, from the profits accruing from the operations of this trust, as to them may seem best.
XXII.The shareholders in this trust shall have the right and authority to:
(1) Remove any trustee or trustees for misconduct or breach of trust.
(2) Increase or decrease the capital of this trust.
(3) Terminate this trust1928 BTA LEXIS 3336">*3363 at any time, and such incidental powers as may be necessary to carry out the powers above stated. These powers may be exercised at meetings called and held in the manner provided for in Section XIX hereof.
XXIII.This Agreement and Declaration may be amended or altered, except as regards the liability of the trustees and shareholders, with the consent of the trustees for the time being, provided any such proposed amendment or alteration shall be authorized and approved at a meeting of the shareholders by at least two-thirds of all the shares outstanding. Notice of the proposed amendment or alteration shall be given in the call for the meeting, but no alteration or amendment or alteration shall affect any person not having notice thereof, nor shall any alteration or amendment, or other action, affect previously acquired rights of any third person other than shareholders hereunder.
* * *
The fair market value of one-half of the stock of the Fisher-Whaley Oil Co. on May 31, 1919, was $52,650.
In determining the petitioner's distributive share in the net income of T. B. Noble & Co. for 1920, the respondent has failed to make allowance for a loss sustained by the partnership1928 BTA LEXIS 3336">*3364 in that year in the amount of $34,175.05.
12 B.T.A. 1419">*1430 OPINION.
GREEN: In support of the contention that the Board should reduce the deficiency determined against T. B. Noble for 1919, in an amount equal to the overassessment for 1918, petitioner's counsel has called attention to our decisions in ; ; and . We have consistently held that we have no authority to prescribe the year or years to which the Commissioner shall apply a credit for an overpayment to tax for an earlier year not before us. .
The respondent has determined that the Marine Oil Co. was a partnership and has included in the income of the taxpayers for the years 1919 and 1920 amounts purporting to be Noble's distributive share of the income whether or not distributed. The petitioners have raised the question as to whether or not the Marine Oil Co. was in reality a partnership but have made no effort to show the nature of the enterprise. Furthermore, the facts show that the parties in1928 BTA LEXIS 3336">*3365 interest referred to the organization as a partnership. Under these circumstances the finding of the respondent with reference to the nature of the organization must stand. But even though the Marine Oil Co. was a partnership and T. B. Noble was at one time a partner, his relation as such ended on February 7, 1919. On that date Noble and certain other members of the firm sold their interests in the enterprise. The language of the agreement of sale is clear and unequivocal. The agreement states that the parties of the first part (T. B. Noble being one of those parties) "have sold, transferred, assigned and conveyed and do by these presents hereby sell, transfer, assign and convey all their right, title and interest in and to the real and personal property hereinafter described." This language is followed by a description of all property of whatever kind held by the Marine Oil Co.
Prior to February 7, 1919, Noble was a partner in the Marine Oil Co., and under section 218 of the Revenue Act of 1918, the petitioners are taxable on his distributive share in the profits of that company whether or not distributed, but on that date his relation as a partner ceased and profits subsequently1928 BTA LEXIS 3336">*3366 derived from that source were profits from the sale of his interest in the company and should be treated as such. The facts show that the total amount received by Noble from the Marine Oil Co. was his pro rata share of $3,500,000, the value placed on the assets of the company as of February 7, 1919. Noble's interest in the enterprise cost him $500, and the basis for determining his gain from the sale is this amount increased by his share of the profits in the period from the date of the partnership's last 12 B.T.A. 1419">*1431 accounting period to the date of the sale. .
We are of the opinion that the sale, by its terms, constituted a closed transaction in 1919 and that the taxpayers are taxable for that year on the gain derived. Under the provisions of section 212(d) of the Revenue Act of 1926, made retroactive by section 1208 of the same Act, profits derived from the sale of such property where the initial payment does not exceed one-fourth of the purchase price, may be reported in the year in which the payments are actually received. That these provisions are not applicable to this sale is beyond question. Two-sevenths of the1928 BTA LEXIS 3336">*3367 purchase price was paid in cash on consummation of the agreement of sale, and another one-seventh was paid by notes redeemable on or before December 24, 1919, and as a matter of fact almost two-thirds of the total amount due had been paid before the end of 1919.
It also appears from the facts shown by the record that the claim of the vendors for the sale price was worth face value. There was no contingency set up in the instrument with reference to the price or any other item except that title must be good. This conclusion is also supported by the fact that the initial payments were made as agreed and by the close of 1920 only a small amount, which was paid in 1921, was outstanding. On these facts and in the absence of proof to the contrary we are constrained to hold that the claim of the vendors was worth face value and the petitioner's income for 1919 should include as total profit from the sale Noble's pro rata share of the sale price less $500, increased by his distributive share in the partnership profits up to the date of the sale.
The question as to what share of the profits of T. B. Noble & Co. is taxable to the petitioners is answered in our decision in 1928 BTA LEXIS 3336">*3368 . So far as T. B. Noble & Co. and the public were concerned, Noble was the owner of a one-twelfth interest in the partnership and, even though he entered into an agreement with certain individuals whereby they paid to him a proportionate part of the cost of his interest in the partnership and were to receive a like share in the profits, these transactions were purely personal between Noble and such individuals and had no bearing on the organization or conduct of business of T. B. Noble & Co. At the most, the agreement resulted in the formation of a subpartnership for the division of Noble's share of the partnership profits. The fact that some or all of the partners in T. B. Noble & Co. knew of the arrangement between Noble and his friends and business associates is of no consequence. These individuals had no connection with the partnership nor the partnership with them. As was clearly shown in our decision in Appeal of Ormsby McKnight12 B.T.A. 1419">*1432 , a partner is taxed under the law on his distributive share of partnership profits whether such profits are distributed or not, and the1928 BTA LEXIS 3336">*3369 law is not concerned with his disposition of such profits subsequent to the accrual or receipt thereof.
The remaining question in this appeal may well be divided into two parts. First, was the transaction wherein T. B. Noble & Co. exchanged property in the form of an oil and gas lease for stock of the Fisher-Whaley Oil Co. such transaction as would result in taxable gain or deductible loss to these taxpayers? Second, the amount of taxable gain or deductible loss, if either resulted.
Several salient facts should be stated in order that the fact basis of the question be clearly apparent. T. B. Noble & Co. was a partnership. The petitioner T. B. Noble was a member of the partnership. The partnership organized the Fisher-Whaley Oil Co. under the laws of Texas and conveyed to it a certain oil and gas lease in exchange for one-half of its authorized capital stock. A portion of the remainder of the authorized stock was subsequently sold. The Fisher-Whaley Oil Co. was an unincorporated joint-stock association. The question thus presented is whether a partner derives taxable gain when his partnership exchanges partnership assets for the outstanding stock of a Texas joint-stock1928 BTA LEXIS 3336">*3370 association organized by the partnership.
The petitioner admits that the Fisher-Whaley Oil Co. was a joint-stock association and, by virtue of section 1 of the Revenue Act of 1918, taxable as a corporation. See . He further admits, for purpose of argument, that if the Fisher-Whaley Oil Co. had in fact been a corporation, the transaction would be taxable providing the stock received in exchange was worth more than the cost of the lease exchanged. But it is the petitioner's contention that the very fact that the Fisher-Whaley Oil Co. was not a corporation and hence could not itself hold the legal title to the lease transferred to its trustees, makes the transaction in question one which does not result in a taxable gain or deductible loss to Noble and his associates. Stated in another way, the petitioner contends that in substance he merely changed his evidence of ownership in the same property and did not exchange property for other property within the purview of section 202(b) of the Revenue Act of 1918, which reads in part as follows:
When property is exchanged for other property, the property1928 BTA LEXIS 3336">*3371 received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * * *.
This section of the statute has been before us many times. See ; ; 12 B.T.A. 1419">*1433 and , citing ; ; and other cases. See also . In the Burge case, several individuals acquired, subsequent to March 1, 1913, undivided interests in certain oil leases which, after the leases had appreciated in value, they transferred to a corporation in exchange for substantially all the latter's capital stock. In determining whether the transaction was taxable, we, in the course of the opinion, said:
The true test is laid down in , where the court says, at page 254, that, if a stockholder is to be taxed on an exchange of property the transaction must be1928 BTA LEXIS 3336">*3372 "something which gives the stockholder something really different from what he theretofore had." This test, when applied here, gives the real solution to the question. The taxpayers, prior to the exchange, had the direct ownership, hence complete and full control, over their interests in the leases; after the exchange they were at most beneficial owners of the assets of the corporation, their shares therein being evidenced by stock certificates which carried with them no direct right of ownership in the assets. , and cases therein cited. In other words, by this transaction the taxpayers received shares of stock which were property of a distinctly different kind from, and having entirely different attributes than, the property paid in by them.
We think that the test to be applied in this case is whether the petitioner, as a partner in the T. B. Noble & Co. partnership, received property of a distinctly different kind from, and having entirely different attributes than, his interest in the lease paid in by the partnership in exchange for half of the shares of the capital stock of the Fisher-Whaley Oil Co. Shares of stock in1928 BTA LEXIS 3336">*3373 a joint-stock association are property. ; ; . In the former case, the Supreme Court of Pennsylvania held that a share of stock in a joint-stock association was personal property even though the assets of the joint-stock association consisted of real estate held by a trustee. The court said in part:
As we have seen, they require the title of the association's property to be in the name of the trustee, and not in the names of the individual members. The interest of any member is determined by the number of shares he holds in the capital stock of the company. He could only dispose of his interest by transferring on the books of the company, in the presence of the president or secretary, his shares of stock to the purchaser, who should "thereby as to such share or shares succeed and become subject to all the rights and obligations of an original party thereto." Such was the nature and character of the interest of W. J. Kountz in the Pittsburg Wagon Works Association in November, 1883, and it is clear that it was not subject1928 BTA LEXIS 3336">*3374 to levy and sale as real estate.
In , there was involved the effect to be attributed to a decree of foreclosure and sale by a court of New York 12 B.T.A. 1419">*1434 of certificates of shares in an Arkansas joint-stock association, which shares had been pledged in New York but the property of which association was located in Arkansas. The pledgor contended that the decree of the New York court was void because the court acquired no jurisdiction of the res. A part of the court's opinion follows:
It was indispensable to the acquisition by the New York court by substituted service on McDonnell of jurisdiction to decree the foreclosure of his pledge and the sale of his pledged certificates that those certificates should constitute property having a situs in the state of New York, and the contention on which the first ground for the reversal of the decree rests is that they were not property, but were, like deeds of land, mere evidences of title to the interest of McDonnell in the property of the association. But certificates of shares of stock in a corporation are not only evidences of interests in the property of the corporation, but representatives1928 BTA LEXIS 3336">*3375 of those interests having a situs wherever they are present to such an extent that they are property of value which will sustain the jurisdiction of a court to decree the sale and transfer of both the certificates and the interests they represent by its judgment or decree founded on substituted service upon the owner, although he is not a resident of the state in which the judgment or decree is rendered, and neither he nor any of the property of the corporation is present within its jurisdiction. , 24 C.C.A. 530; . Why are not certificates of shares of the capital of a joint-stock association in the same class? A joint-stock association is a partnership, but the members of such an association are free to make and to estop themselves from denying every lawful contract regarding their interests in the partnership property, regarding the representation of those interests by certificates of shares in the company and regarding the pledge, levy upon, transfer, and sale of such interests by means of the pledge, levy upon, 1928 BTA LEXIS 3336">*3376 and transfer of the certificates evidencing and representing them.
After reciting the provisions of the articles of association which are substantially the same in their essential particulars with the articles of association of the Fisher-Whaley Oil Co., the court proceeded:
* * * These certificates evidence and represent the interests of their owners in the property of the joint-stock association as completely as certificates of shares of stock in a corporation represent the interests of their owners in its property. * * *
Certificates of joint-stock associations are bought and sold as chattels, they may be hypothecated and sold, they have an inherent market value, and they are generally classified as personal property. They have every attribute that renders certificates of shares in a corporation either representative of the interests of their holders in the property of the corporation or transferable by assignment, or by legal proceedings, or valuable, or leviable, or adjudicable, and they therefore constitute personal property, valuable in proportion to the value of the property of the joint-stock association they represent, whose presence in any state is sufficient to1928 BTA LEXIS 3336">*3377 sustain the jurisdiction of a court to adjudicate and sell the interest of the owner thereof therein and in the property of the partnership they represent on substituted service upon him, although all the property of the association is situated and the owner of the certificates resides and is present in another state. * * *
12 B.T.A. 1419">*1435 Joint-stock associations, the interests of whose members are represented by certificates of their shares, transferable with the interests they represent by private and judicial assignment of the certificates, are valid at common law, * * *. Their analogy to corporations is much closer than to ordinary partnerships, ; .
Our conclusion has not been reached without a thoughtful consideration of the argument of counsel for the appellants to the contrary, based on the facts that a corporation holds the title to its property and the shareholders have no title thereto, while the title to the property of a partnership is in the partners, and that, in the absence of such agreements as have been found in the1928 BTA LEXIS 3336">*3378 articles of partnership in this case, a levy may be made on the interest of a partner by levying on the property of the partnership, while a levy on the interest of a shareholder of a corporation is not effected by a levy upon the property of the corporation. But the representative character of the certificates of shares and the effect of their transfer by private assignment or judicial decree is conditioned, not by the nature or extent of the interests represented by them, but by the agreement of the owner thereof with those interested with him in the partnership and with the partnership itself, and all the owners of all the certificates of the shares in this joint-stock association, and the association itself, have contracted that the certificates of the shares shall represent the respective interests of the owners thereof in the property of the association, that the certificates and the interest in the property they respectively represent shall be transferable by private assignment and by judicial assignment of the certificates under legal process, and they are all estopped by these contracts from maintaining that these certificates were not valuable personal property, or that1928 BTA LEXIS 3336">*3379 the rights in them and in the property they represent were not judicable and transferable by the decree of the court in New York within whose territorial jurisdiction the certificates were present.
The articles of association of the Fisher-Whaley Oil Co. show that it was organized along corporate lines; that it had stock which was transferable on the books of the association; that it had trustees which corresponded to the directors of a corporation; that it had officers; and that during the years in question it was engaged in the business of drilling for and selling oil and gas. Before the transfer the petitioner and the other partners in the T. B. Noble & Co. partnership owned the full legal and equitable right to the lease in question. After the transfer they owned stock in the Fisher-Whaley Oil Co. In our opinion these shares were in themselves, first, property and, second, property of a distinctly different kind from and having entirely different attributes than the lease exchanged therefor. The legal title to the lease was held by trustees "in trust for the owners of beneficial interest in this trust in the proportion which the amount of their interest bears to the total1928 BTA LEXIS 3336">*3380 number of interests outstanding" (P XIII of Articles and Declarations). We conclude, therefore, that the transaction was one giving rise to taxable gain or deductible loss under section 202(b), supra, depending on how the fair market value of the stock received compared with the cost of the lease purchased subsequent to March 1, 1913.
12 B.T.A. 1419">*1436 Since the transaction is an exchange, we must determine from the evidence the fair market value of the stock of the Fisher-Whaley Oil Co. on the day of the exchange, namely, May 31, 1919. The partnership purchased the lease in question at public auction just 15 days prior to the date it was transferred to the trustees of the Fisher-Whaley Oil Co. The purchase price was $52,650. The partners received 1,500 shares of the association's stock, having a par value of $150,000. The respondent determined that the partners profited by the difference, or $97,350. Shortly after the association was organized some of the stock was sold at par, but how much stock was sold, when it was sold, or what events happened between the date of organization and subsequent sale are lacking. 1928 BTA LEXIS 3336">*3381 On the other hand, the uncontradicted evidence shows that nothing whatsoever occurred to enhance the value of the lease in question between May 14 and May 31, 1919. At the time of the transfer the shares exchanged for the lease constituted all of the outstanding stock of the association. The method of determining the value of stock issued in exchange for property has been considered by the Board in , where we held that:
The usual method of appraising stock issued for property where there is no evidence of the market value of the stock is to say that the stock is deemed equivalent in value to the property for which it was issued, and by determining the value of the property one can determine the value of the stock.
See also , page 740. After consideration of all the evidence we find that the fair market value of the 1,500 shares of stock of the Fisher-Whaley Oil Co. received by the partners in exchange for the lease on the day of the exchange was $52,650. It follows that the petitioners realized neither gain nor loss on the exchange.
1928 BTA LEXIS 3336">*3382 Reviewed by the Board.
Judgment will be entered under Rule 50.
SMITH dissents on the second point.