*1539 1. Petitioner Galbreath Lease, Trust No. 314, held to be a trust and not an association, taxable as a corporation.
2. Held, further, that petitioner E. B. Galbreath is entitled to a deduction in 1924 for depletion.
*1108 These proceedings were consolidated for hearing and involve deficiencies of $2,706.04, $2,925.67, $2,348.72, $1,198.77, and $336.15 in income taxes for 1924, 1925, 1926, 1927, and 1928, respectively, in the case of Galbreath Lease, Trust No. 314, and a deficiency of $296.34 in income taxes for 1924 in the case of E. B. Galbreath. The issues are whether the Galbreath Lease, Trust No. 314, is a trust or an association taxable as a corporation, and if the former, whether petitioner Galbreath is entitled to a deduction for depletion sustained in 1924.
FINDINGS OF FACT.
By instruments executed on March 1, 1922, petitioner Galbreath and his wife, together with four other married couples and two single men, deeded to the Security Trust and Savings Bank, a California corporation, hereinafter for convenience to be called*1540 the "trustee," all of their rights to oil, asphaltum, gas and other hydrocarbon substances in six adjoining lots located near Long Beach, Calif., together with the right to enter upon the land for the recovery of such minerals by drilling or mining. The trustee accepted the property in trust in an instrument executed the same day between the trustee and the grantors.
The trust agreement provided, among other things, that the grantors were to be recognized as the beneficiaries of the trust in proportion to their interest in the lots until such time as the trustee received notice in a specified manner of a conveyance of the lots to others; that the trustee had the right to execute a lease at any time thereafter covering all the rights held in trust and "upon any terms and conditions that the then owners of four of said six lots in writing shall direct * * *"; that any income received by the trustee as lessor, less expenses of the trust, was to be held by it and distributed on the 20th day of each month to the then beneficiaries of the trust; that upon the written request of the owners of four of the six lots, the trustee "shall retransfer to the then owners of said lots * * * such*1541 rights as have been conveyed to it"; that the trust was in no event to continue after the death of the last surviving then beneficiary; and that the trustee might at its option resign at any time by giving written notice thereof to the beneficiaries, in which event the beneficiaries should designate in writing a successor to the trustee, failing in which the trustee might select its successor.
On December 4, 1922, the trustee, with the written consent of all of the beneficiaries of the trust, leased the lots for drilling for oil, gas and other hydrocarbon substances on a royalty basis to George F. Getty. The lease was for a term of twenty years and so long thereafter as oil and other minerals could be produced in quantities deemed by the lessee sufficient to pay to pump or otherwise save. It provided *1109 for the payment of royalties in cash or kind under certain circumstances, and that any water developed by the lessee and not needed in his operations or abandoned by him should, on certain conditions, belong to the lessor.
On July 10, 1923, the beneficiaries authorized the trustee in writing to instruct the lessee to sell their royalty oil along with the oil belonging*1542 to the lessee. The royalty oil was so sold and the proceeds turned over to the trustees and by it distributed to the beneficiaries of the trust, in accordance with their interests in the trusteed property.
The trustee never acquired any additional land for administration under the trust agreement, drilled any wells on the lots, or received royalty oil in kind. The trust did not have any offices of its own, or any officers, by-laws, or stationery.
On January 12, 1923, the petitioner, Galbreath, and his wife, transferred a 35 per cent interest in lot 8 and the trustee was notified to recognize the assignee as the owner of the interest conveyed. This property had always belonged to the assignee, who was Galbreath's partner, but stood in Galbreath's name.
At the time the lots were conveyed to the trustee some oil companies would not issue more than two checks for royalties on one purchase of oil. The agreement of March 1, 1922, was entered into by the beneficiaries in order, among other things, to permit the leasing of the lots to a responsible drilling contractor, and to obtain a more advantageous lease than was possible by leasing each lot separately.
The trustee filed*1543 fiduciary returns for the taxable years.
During 1928 the trustee filed with respondent a notice of its election to be taxed as a trust in accordance.with the provisions of section 704(b) of the Revenue Act of 1928.
The respondent determined that the Galbreath Lease, Trust No. 314, was an association, taxable as a corporation. In computing the deficiencies against it for the taxable years he allowed deductions for depletion.
It has been stipulated that in case we held the Galbreath Lease, Trust No. 314, to be a trust, and petitioner Galbreath is entitled as a beneficiary thereof to an allowance in 1924 for depletion, the amount thereof is $6,016.07.
OPINION.
ARUNDELL: In the recent case of , we concluded, after a review of numerous cases of both the Board and the courts dealing with questions such as the one before us in this proceeding, that the real tests to be applied in determining whether a particular taxpayer is a trust or an association taxable as a corporation are whether the beneficiaries of the alleged trust "have *1110 voluntarily associated themselves together in 'the general form and mode of procedure*1544 of a corporation' and are organized to and in fact are engaged in the active conduct of a business for profit, or whether the trustees are merely holding the property and collecting the income therefrom and distributing it to those beneficially interested." , and (affd., ), are to the same effect.
The petitioner has none of the essential characteristics of a corporation. It bears the name of a trust rather than that of a corporation; it did not issue capital stock or other similar evidence of beneficial interest in the trusteed property; it had no officers, offices of its own, by-laws or stationery; it did not declare and pay dividends out of earnings in a manner peculiar to corporations, but distributed the proceeds from the sale of royalty oil monthly to those entitled thereto; and it did not operate under a charter. The interests of the beneficiaries were not subject to transfer without an assignment of the lots themselves, a restriction never found in stock certificates, due probably to the well established rule that stockholders hold no title to corporate*1545 property. The declaration of trust did not provide for meetings of the beneficiaries of the trust and none was ever held.
The beneficiaries of the trust were fee owners of adjoining lots in which it was believed oil could be found in paying quantities. To make their properties more attractive to responsible oil companies they pooled their interests and placed them in trust for the sole purpose of negotiating a lease on the whole tract and if oil were found, to receive their royalty interest through the agency of a trustee. The declaration of trust evidences no intention to actively engage in business. Rather it shows a desire merely to dispose of such minerals as were under the premises through the instrumentality of a lease, with a royalty on any minerals found as a consideration for its execution. This was done by the trustee with the approval of the beneficiaries as provided for in the trust instrument. Thereafter, the only activities carried on by the trustee were the receipt of moneys paid by the lessee for the sale of royalty oil and the monthly distribution of the remittances, less its charges for services performed, to those entitled thereto. Such acts do not constitute*1546 doing business. .
Control by the beneficiaries over the management and operation of the trusteed property is not determinative of the question. ; ; and Such control as the beneficial owners of the property had here was confined to the approval of a lease on the tract and the selection of a new trustee. The former was merely a preliminary matter to the placing of the trust in operation *1111 and does not make the case any different than it would be if the lease had been executed concurrently with the declaration of trust.
Our conclusion is that the trust under review was not of the general form and mode of a corporation and was not organized to and did not in fact actively engage in business for profit, but for the purpose of collecting the income earned by property and distributing the same to those entitled thereto. The respondent erred in holding it to be an association taxable as a corporation. Having reached this conclusion, it is not necessary to decide*1547 whether petitioner is within the provisions of section 704(b) of the 1928 Act which are applicable to the years prior to 1928.
Petitioner Galbreath is entitled to a deduction of $6,016.07 in 1924 for depletion of his property interest in the corpus of the estate. ; ; and .
Decisions will be entered for the petitioners.