*205 Decision will be entered under Rule 50.
1. The petitioners, husband and wife, created four irrevocable long term trusts for the benefit of their two minor children. There was a reversionary interest in the grantors only in the event that both beneficiaries predeceased them. Held, the trust income is not includible in the petitioners' gross community income.
2. Held, the payment of $ 15,000 for one-fourth of Fischer's interest in certain leases resulted in a sale as of December 31, 1943, on which a gain was realized.
3. Held, the gain realized on the sale was a long term gain.
4. Held, the leases were not worthless on December 31, 1943.
5. On December 31, 1942, petitioner L. M. Fischer received a check in payment of legal services rendered. When he delivered the check to Fischer, the drawer stated that he was short of money at the time and would appreciate it if Fischer would hold the check for a few days, which petitioner agreed to do. Held, the check was not income in 1942.
*792 The respondent determined a deficiency of $ 6,707.52 in the income tax liability for each of the petitioners in the year 1943. The year 1942 is involved in these proceedings because of the forgiveness provisions of the Current Tax Payment Act of 1943.
Two issues were settled by stipulation, leaving in controversy the following:
*793 (1) Whether the income of four trusts created by the petitioners for the benefit of their two minor children is includible in the petitioners' gross community income.
(2) Whether the receipt by petitioner L. M. Fischer of the sum of $ 15,000 for*207 an undivided one-fourth share of his interest in certain oil and gas leases constituted a sale which resulted in the realization of a gain, or whether the contribution of $ 15,000 represented a participation in a joint venture.
(3) In the event that the $ 15,000 payment resulted in the realization of a gain, whether or not the gain was a long term capital gain within the meaning of section 117 of the Internal Revenue Code.
(4) Whether the petitioners' investment in certain oil and gas leases had proved worthless by December 31, 1943.
(5) Whether a check in payment of legal services rendered, received by petitioner L. M. Fischer on December 31, 1942, but not deposited for collection until February 10, 1943, constituted taxable income to the petitioners for 1942.
The case was submitted upon a stipulation of facts, exhibits, and oral testimony.
FINDINGS OF FACT.
The facts as stipulated are so found. Other facts are found from the evidence.
The petitioners are individuals, husband and wife, residing in Corpus Christi, Texas. Their Federal income tax returns for the calendar years 1942 and 1943, the years here involved, were filed with the collector of internal revenue for the first *208 district of Texas at Austin, Texas. Petitioner L. M. Fischer, during the taxable years, was engaged in the practice of law in Corpus Christi, Texas.
In 1941 Fischer acquired what was known as the Hugo Walters lease on some land in Nueces County, Texas. The Agua Dulce Co., with which petitioner had previous business relations, was located nearby. The Agua Dulce Co. was engaged in the business of extracting gasoline from natural gas. The Agua Dulce Co. agreed to buy the natural gas from any well which Fischer could "bring in" on the Hugo Walters lease. Fischer agreed with Tom Graham that if the latter would drill the well he would receive three-fourths of the production of the well until reimbursed for the cost of drilling and that then Fischer and Graham would each own one-half of the lease. The well drilled by Graham was productive and the Agua Dulce Co. purchased the gas extracted from it.
Fischer later acquired what was known as the Teachout lease on some property about a half mile from the Walters lease. Graham drilled a well for Fischer thereon the same terms. This second well was also productive and its output sold to the Agua Dulce Co.
*794 The petitioners, Fischer*209 and his wife, desired to provide for the future financial security of their two children, then nine and thirteen years of age. Pursuant to this plan, the petitioners each created two irrevocable trusts. Each child was the beneficiary of two trusts, one created by each parent. L. M. Fischer was the trustee for all four trusts. The res in each trust was an undivided one-fourth of the settlor's interest in the Walters and Teachout leases. The trust instruments were executed on December 31, 1941, and were recorded on December 31, 1942. In each of the trusts the trustee was given full and complete power to administer the trust as if he were the sole beneficiary owner. Each trust instrument contained a "spendthrift" clause, required the trustee to keep books and records, and contained the following provisions with respect to the distribution of income and corpus:
* * * *
During the life of this trust the income from the interest herein placed in trust may be distributed to the beneficiary in whole or in part or may be withheld entirely, all within the uncontrolled discretion of the trustee. The corpus of the trust estate may also be distributed to the beneficiary prior to the*210 termination of the trust within the uncontrolled discretion of the trustee. No part of the income from the interest herein placed in trust, nor the corpus thereof shall be used in any manner for the support, maintenance or education of the beneficiary hereunder.
* * * *
Other pertinent portions found in each of the trusts are as follows:
* * * *
Should the beneficiary die before the termination of this trust leaving child or children living, then the interest and property to which said beneficiary would have been entitled to receive had he lived, shall be paid over to his child or children, subject to all of the terms and conditions of this trust; should the beneficiary die before the termination of this trust, without living issue, then the interest and property to which he would have been entitled to receive had he lived, shall go to * * * [the other beneficiary], subject to all of the terms and conditions of this trust. In the event of the death of the above named beneficiaries before the termination of this trust, the corpus and accumulated income shall immediately go to grantor, if living, if not, to * * * [the grantor's spouse]. In the event of the death of * * * [both of*211 the grantors], and the above named beneficiaries before they have reached the age of twenty-one (21) years, the corpus, income and benefits of this trust shall go, to-wit:
(1) One-half interest to Mary Jane Maricle and/or Vera Maricle, if living.
(2) One-half interest to Anna Fischer, if living.
(3) If either or both, Mary Jane Maricle and Vera Maricle and Anna Fischer shall be dead at such time, then the interest and property to which they would have been entitled to receive shall go to J. Howard Williams, in trust, for the use and benefit of of [sic] Christian charities, which in his uncontrolled judgment are most effective.
* * * *
This is an irrevocable trust, and shall terminate upon the death of both the grantor herein and * * * [the grantor's spouse] provided that at such time *795 the beneficiary has attained the age of twenty-one (21) years. In the event both the grantor * * * [herein, and the grantor's spouse] die before the beneficiary has attained the age of twenty-one (21) years, then this trust shall terminate upon the day the beneficiary becomes twenty-one (21) years of age.
* * * *
Separate books and bank accounts were kept for the trust and the income was*212 placed in a single bank account designated as "L. M. Fischer, Trustee, for Betty and Jerry Fischer." Subsequent to the taxable years, small distributions of the trust income were made in equal amounts to the two beneficiaries usually in the form of $ 100 payments made to each beneficiary at Christmas, to be used by them personally. Other distributions were made for the purchase, in equal amounts, of Government bonds for the account of each beneficiary.
In 1942 Fischer drew three checks in the total amount of $ 235 against the trust account in payment of the tuition of one of the beneficiaries. At about the same time, two checks were drawn against the trust account in the total amount of $ 1,000 in payment of one-half of the expense of reconditioning one of the wells on the leases in which the trusts held an interest.
Fischer's tax counsel advised him that as trustee he had no authority to make such payments from the trust accounts and Fischer reimbursed the trust account by his personal check in the amount of $ 1,235 for these withdrawals. No other use was made of the trust funds which involved payments for tuition or support of the children.
On another occasion, a check in the*213 amount of $ 2,000 which Fischer had intended to draw against a special account which he maintained for a client was erroneously drawn on the trust account. When Fischer learned of the error he reimbursed the trust account.
In 1943 Fischer, as trustee, invested $ 7,000 for the trusts in a one-fourth of Fischer's interest in a block of leases, hereinafter referred to as the Banquette leases, which he had assembled at a net cost of approximately $ 28,000 and on which a well was about to be drilled. In 1944 Fischer, as trustee, paid $ 1,250 as a contribution by the trusts for their proportionate share of the cost of drilling another well on the same block of leases.
Separate tax returns were filed on behalf of the trusts for each year of their existence and any tax due thereon has been paid.
The respondent has taxed the income from the trusts to the petitioners for the taxable years of 1942 and 1943.
In 1943 the Agua Dulce Co. was in need of additional gas for its extraction process. An oral agreement was reached by the Agua Dulce Co., L. M. Fischer, and Graham, the drilling contractor, that if Fischer would acquire certain leases in an area recommended by the Agua Dulce Co. as productive*214 of gas capable of being used in the *796 Agua Dulce Co. recycling plant, the latter would assist Fischer financially, with the understanding that it would have the right to purchase any oil or gas discovered as a result of the drilling of the wells.
During the months of June, July, and August, 1943, petitioner L. M. Fischer acquired the Banquette block of leases for approximately $ 28,000. These leases gave the lessee the usual oil, gas, and mineral rights in the property. A description of these leases is as follows:
| Lessors | Date of acquisition | Acreage | Cost |
| D. H. Best et al | July 7, 1943 | 97.9 | $ 1,468.50 |
| J. L. Charba, et ux | July 27, 1943 | 98.4 | 1,500.00 |
| Anna Zita et al | July 13, 1943 | 98.2 | 983.00 |
| Martinez, Eulalia R | June 28, 1943 | 143.1 | 1,431.30 |
| Leona P. McElroy et vir | June 17, 1943 | 94.2 | 2,355.75 |
| J. Leo Bluntzer et al | June 12, 1943 | 639.2 | 4,794.38 |
| Barbara Prochaska et vir | June 22, 1943 | 218.0 | 2,188.00 |
| H. W. Zahn et ux | June , 1943 | 98.9 | 1,010.00 |
| (Acknowledged June 16) | |||
| Tom Graham | Aug. 23, 1943 | 311.3 | 4,669.50 |
| Frank Harmon | Aug. 17, 1943 | 75.0 | 751.10 |
| D. H. Harper et ux | July 13, 1943 | 80.0 | 1,200.00 |
| Hilda Prause Wagener (V. L. | |||
| Rossi, trustee) | Aug. 5, 1943 | 94.2 | 3,375.00 |
| Total | 2,048.4 | 25,726.53 | |
| Commissions, recording fees and | |||
| abstract costs | 1,502.50 | ||
| Total cost of leases | 27,229.03 |
*215 On July 30, 1943, petitioner L. M. Fischer agreed with Graham that if the latter would drill at his own expense four wells on the block of leases, Graham would receive an undivided one-half interest in the leases, and provided further that if the first well were dry then there would be no obligation to drill other wells.
Another company engaged in the process of extracting gasoline from dry gas was also short of reserves and approached Fischer and Graham in an effort to acquire the right to purchase whatever oil or gas might be discovered on the Banquette leases. Fischer and Graham refused to deal with the other company, considering themselves obligated to the Agua Dulce Co.
On July 27, 1943, the Agua Dulce Co. requested Fischer to draw a contract covering the purchase and sale of gas if discovered on the Banquette block. Fischer thereupon drew a formal contract, which was executed by himself, Graham, and the Agua Dulce Co. on August 2, 1943. This contract named Fischer and Graham as "Seller" and the Agua Dulce Co. as "Buyer."
In August, 1943, pursuant to their earlier agreement, Fischer discussed with representatives of the Agua Dulce Co. the question of the payment by that company*216 for a part of the cost of the Banquette leases. The Agua Dulce Co. first offered to pay Fischer one-half of his cost and to take one-half interest in the leases. This offer was not satisfactory to Fischer. On August 7, 1943, Fischer and the Agua *797 Dulce Co. agreed that the latter would pay Fischer the sum of $ 15,000 and would elect on or before December 31, 1943, either to receive a conveyance of one-fourth of Fischer's interest in the leases or to receive a repayment of the $ 15,000, with interest at 6 per cent. The repayment by Fischer was to be made out of his share of the production, if any, from the leases. On acceptance of the agreement, the Agua Dulce Co. paid Fischer the sum of $ 15,000.
Graham began drilling a well in the Banquette block in September, 1943, in a location recommended by several competent geologists. This well was found to be dry and was abandoned before December 31, 1943. After the abandonment of the well and prior to December 31, 1943, the parties were advised by their geologists that, since the well had been located on the most favorable site in the block of leases and had proved to be dry, the leases were worthless. On December 27, 1943, *217 the Agua Dulce Co. elected to receive title to one-fourth of Fischer's interest in the block of leases, and the conveyance was made on December 31, 1943.
The petitioners, L. M. Fischer and his wife, treated the conveyance of the undivided one-fourth interest in the Banquette leases to the Agua Dulce Co. as a sale in their returns for 1943. Petitioners reported a portion of the gain as a long term capital gain in the proportion that the cost of the leases held for six months or more bore to the total. The respondent treated the transaction as a sale, but determined that the entire gain constituted a short term capital gain. The petitioners deducted their remaining interest in the Banquette leases as worthless at December 31, 1943, in computing their taxable income for 1943.
In the spring of 1944 the Agua Dulce Co. proposed to Graham and Fischer that another well be drilled on the Banquette block. Graham and Fischer did not think the lease block would be productive, inasmuch as the first well was dry, but agreed to undertake the drilling of another well on the provision that the Agua Dulce Co. bear a large portion of the cost. Graham wanted $ 20,000 "dry hole money" to dig another*218 well, that is, to be paid that amount of money only if the well turned out to be dry. The Agua Dulce Co. agreed to pay $ 15,000 toward the cost of this second well and Fischer agreed to contribute $ 5,000 as his share. The parties then found it necessary to pay additional rentals on the leases in order to hold them while the second well was being drilled. This second well was completed in July, 1944. It was also a dry well and the project was abandoned. No further attempts were made to drill other wells on the leases and they were allowed to lapse. The dry hole money of $ 20,000 was paid to Graham. The respondent has disallowed the deduction for the loss on the Banquette leases which petitioners took in 1943.
Shortly before the noon hour on December 31, 1942, petitioner L. *798 M. Fischer received from one of his clients a check in the amount of $ 5,000, representing a partial payment for legal services rendered prior to December 31, 1942. When the client delivered the check to Fischer he stated that he was short of money at the time and, as a matter of accommodation, would appreciate it if Fischer would hold the check for a few days. Petitioner agreed to hold the check. *219 The client had in the bank account against which the check was drawn a balance of approximately $ 17,000 on December 31, 1942. Other checks had been drawn against that account in the amount of approximately $ 80,000 which were held for release when funds became available.
When he received the check Fischer placed it in his desk. Several weeks later he was asked by his client whether or not the check had been deposited. When he was told by Fischer that it had not, the client stated that it could be deposited at any time. Fischer deposited the check on February 10, 1943, and it was paid by the bank on which it was drawn. On his income tax return filed for the year 1942, the petitioner reported the $ 5,000 check as income in that year. The respondent treated the $ 5,000 as taxable income for the year 1943.
OPINION.
The first issue is whether the income of the four trusts created by the petitioners for the benefit of their two minor children is includible in the petitioners' gross community income under the provisions of section 22 (a) of the Internal Revenue Code.
The general theory under which the income of a trust is taxed to the grantor under section 22 (a) is that one should*220 be taxed on income which one is "free to enjoy at his own option," subject to "unfettered command."
Under this broad general power, a host of cases have been decided following Helvering v. Clifford, 309 U.S. 331">309 U.S. 331, which cases have explored almost every conceivable argument in their resolution of the problem. Since the question is largely factual, out of this maze of litigation there has developed no single test or rule which we may apply. It will serve no useful purpose, therefore, to probe anew among these cases in the hope of finding an exact factual duplicate of the instant case or to seize upon some one set of facts which in a particular case has been held to be controlling.
The respondent contends that the petitioners have the power to control the beneficial enjoyment of both the income and corpus of the trust and that this is tantamount to ownership of such income.
The terms of the trust do not permit the beneficial enjoyment of the income by one other than the trust beneficiary. True, the trustee may withhold the income, but this in itself does not make the income subject to use by the trustee for his own purposes. Such a use *799 *221 would violate the trust purpose. The trust instruments provide that none of the income or corpus shall be used for the "support, maintenance or education of the beneficiary * * *." The respondent alludes to the use by the trustee of part of the trust income for payment of the tuition of one of the beneficiaries, which sums were returned to the trust by the trustee on advice of counsel. We do not think this isolated event should control the decision. It is only a factor to consider.
The respondent further contends that in the event one beneficiary predeceases the other and leaves issue surviving, the trustee can not only accumulate or distribute that beneficiary's share of the income, but can apportion it among the successor beneficiaries as he desires. The trust instruments provide that such interest as the deceased beneficiary would have received "shall be paid over to his child or children, subject to all the terms and conditions of this trust: * * *." It is not implied in these terms that the trustee is given authority to apportion the trust benefits among the survivors of the deceased beneficiary as he sees fit. The rights of the surviving children or a beneficiary would be*222 preserved and protected in a court of equity following such unjust apportionment by the trustee. The possibility that the trustee may mismanage the trust should not bear great weight in deciding whether or not the trust income is in fact income to the grantor, regardless of the fact that the grantor and trustee are one.
The respondent points to the fact that in 1943 Fischer invested $ 7,000 for the trust in one-fourth of his interest in a block of gas leases. The first well drilled on these leases turned out to be dry. Fischer had to put up $ 5,000 as his share of the cost of drilling a second well. This amount was based on Fischer's aliquot interest in the leases before he transferred one-fourth of these interests to the trusts. Fischer then paid $ 1,250 out of the trust funds as the trust's share of the cost of drilling the second well. This second well was also dry and the leases were abandoned. The respondent contends that Fischer satisfied a personal obligation out of the trust funds, in violation of the trust agreements, thereby indicating the real nature of the trusts. We can not agree that Fischer's acts in this respect are susceptible of the implication that the respondent*223 would make. We are not unaware that certain principles of equity, if applied to the management of the trusts in the instant case, might find in Fischer's management such a degree of laxity as would permit him personally to be held liable for the losses suffered by the trust. These principles, however, do not dictate a finding here that the income of the trusts was in fact income to Fischer and his wife.
The correct solution to this problem requires an answer to the query, Was the "bundle of rights" retained by the grantors of these trusts *800 shown to be sufficient to warrant the taxation of the trust income to the petitioners? Our answer is that there was not here such a retention of rights as to attribute taxability to petitioners.
We are accordingly of the opinion that the trust income should not be taxed to the petitioners, and we so hold.
The second issue is whether or not the receipt by petitioner L. M. Fischer of $ 15,000 from the Agua Dulce Co., in return for the transfer to that company of an undivided one-fourth share of his interest in the block of oil and gas leases known as the Banquette leases, constituted a sale by Fischer.
The petitioners contend that the *224 Agua Dulce Co., Graham, and L. M. Fischer were engaged in a joint venture and that the payment by the Agua Dulce Co. for a one-fourth interest in Fischer's interest in the leases was an equalization of the cost of the leases among the parties. The respondent contends that the payment by the Agua Dulce Co. to Fischer was a sale on which Fischer realized a gain.
The petitioners' contention that this was a joint venture is first made in their amended petition. In the original petition the statement is made that Fischer "sold one-half of his remaining interest in the block of leases for the sum of $ 15,000."
Whether the transaction was a joint venture or a sale depends on the facts. In this connection, petitioners have shown us no facts nor given us any reasons which are persuasive in support of their present claim that Fischer participated in a joint venture in respect of the Banquette leases and did not make a sale of part thereof. Therefore, the respondent is sustained in his contention that Fischer sold to the Agua Dulce Co. part of his interest in the Banquette leases, on which sale a gain was realized.
The third issue is whether this gain is a short term or a long term capital*225 gain.
On August 7, 1943, the Agua Dulce Co. accepted Fischer's offer to the effect that if the Agua Dulce Co. would then pay Fischer $ 15,000, at the election of the Agua Dulce Co., Fischer would either assign to it one-fourth of his interest in the leases, or repay the $ 15,000, with interest at 6 per cent, out of the production of gas discovered on the leases. On August 6, 1943, the Agua Dulce Co. had sent Fischer a check for $ 15,000. On December 27, 1943, the Agua Dulce Co. wrote to Fischer, stating that it was electing to take a conveyance of one-fourth of Fischer's interest in the Banquette block rather than a repayment of the $ 15,000. On December 31, 1943, Fischer conveyed this interest to the Agua Dulce Co.
The question is, When was the sale made -- on August 7, December 27, or December 31?
The respondent offers no argument on this point in his brief, but in *801 his notice of deficiency he treated all of the leases as having been held for less than six months, resulting in a short term gain. This would imply that he considered the sale to have been made on August 7, 1943, since the leases were acquired in June, July, and August of 1943.
In our opinion the sale was*226 made on December 31, 1943, when Fischer made a formal conveyance to the Agua Dulce Co. of one-fourth of his interest in the leases. Until this conveyance was made, the Agua Dulce Co. had no rights in the property other than its contractual rights under the agreement of August 7 and the letter of December 27, 1943, exercising its right to an option. The sale having been made on December 31, 1943, the gain will be taxed accordingly.
The fourth issue is whether or not the petitioners' investment in the Banquette leases became worthless in 1943. Prior to December 31, 1943, when the petitioners wrote off their investment in these leases, they had been advised by geologists that, since the well already drilled in the most favorable location in the block had proved to be dry, the leases were worthless.
The controversy arises from the fact that Fischer was persuaded by the Agua Dulce Co., which was in need of a gas supply, to invest with that company in the drilling in 1944 of another well on the leases. In order to get Graham to drill another well, the Agua Dulce Co. agreed to pay $ 15,000 of the $ 20,000 dry hole money that Graham demanded as reimbursement for the cost of the second*227 well in the event it also turned out to be dry. Petitioner agreed to put up the remaining $ 5,000 as his share.
The respondent contends that this transaction in 1944 indicates that Fischer did not really consider the leases worthless in 1943 and that they actually possessed value after that year.
We agree with the respondent. If we had before us only the drilling experience of 1943, we might be persuaded that petitioner was justified in claiming a deduction, but when we look at 1944 we find petitioner making a further investment of $ 5,000 in the drilling of the second well. This action did not corroborate, rather it negatives, the petitioner's claim of worthlessness. The record does not convince us that the $ 5,000 was an investment in extremis -- a desperate attempt to salvage something from the ruins of a former large investment. Rather, it speaks more loudly than petitioner's words of protest of a persisting value in the leases as gas and oil property. On the whole record, we conclude that the leases did not become worthless until they were abandoned after the second well proved to be a dry hole. Since this occurred in 1944, it follows that petitioner was not justified*228 in claiming a deduction for worthlessness of his investment in 1943.
The fifth issue is whether or not a check in payment of legal services rendered, received by petitioner L. M. Fischer on December 31, 1942, *802 but not deposited for collection until February 10, 1943, constituted taxable income to the petitioner in 1942.
The petitioners contend that the payment on the check in February, 1943, related back to the time the check was delivered. In support of this view, the petitioners cite Estate of Modie J. Spiegel, 12 T. C. 524, and Estate of M. A. Bradley, 19 B. T. A. 49. The cases cited by the petitioners support the familiar theory that, under certain circumstances, payment on a check relates back in point of time to the date of delivery. This theory, however, is not dispositive of this issue, because here we have the impact of an oral condition imposed at the time of delivery of the check which restricts the time when the proceeds of the check may be collected.
The obvious fact is that the check was not income to Fischer in 1942. He could not use the money in that year. What he did receive was in 1942 still*229 subject to a very substantial restriction, arising from his agreement that he would not deposit the check until after the first of the year 1943. Income is not realized until the taxpayer has the funds under his dominion and control, free from any substantial restriction as to the use thereof. This principle of our tax law is now too familiar to require citation.
On this issue, therefore, we sustain the respondent in his contention that the check was not income in 1942, when it was received.
Decision will be entered under Rule 50.