*2943 Held that the petitioner is an association for income-tax purposes.
*1420 The petitioner in seeking the redetermination of a deficiency of $11,504.84 in income and excess profits taxes for the period from February 5, 1920, to December 31, 1920, inclusive, claims that the respondent erred in holding it to be an operating trust taxable as an association.
FINDINGS OF FACT.
On February 20, 1919, the trustees of the Woodrow Lee Oil Co., a joint stock association owning a certain lease for the production of oil and gas on a 2 1/2-acre tract of land situated in Wichita County, Texas, together with certain personal property located thereon, *1421 entered into a written agreement with Roberts & Hill, a copartnership, having as its members, W. H. Roberts and J. J. Hill, to drill three wells on the lease and to manage and operate the lease. The pertinent provisions of the agreement read as follows:
Parties of the second part [Roberts & Hill] shall at their own cost and expense furnish the necessary derrick, casing, water, fuel, labor, rig, and all*2944 and everything else reasonably necessary to drill and complete said wells. By "completion" as used in this contract is meant that parties of the second part shall drill said wells to the top of the sand, and shall, if necessary, cement the same and set the casing therein, and to bail said wells, and to see that said casing is properly set.
Thereafter all expenses in the standardizing of said wells, the furnishing of pumps and equipment, tankage, pipe lines, and all other reasonable and necessary expense in drilling said wells shall be at the joint expense of the parties hereto, as follows: Parties of the first part shall pay one-third of all such expenses and parties of the second part shall pay two-thirds of all such expenses.
It is further agreed that parties of the second part shall have the control and management of said wells and the operation, production, and marketing of oil therefrom, and all of the costs and expenses of operating said wells shall likewise be at the joint expense of the parties hereto, to wit: Parties of the first part to pay one-third of all such expenses, and parties of the second part two-thirds thereof.
Parties of the second part shall keep an*2945 accurate set of books as to all expenses and that are chargeable to the joint account of the parties hereto, and shall furnish to parties of the first part at reasonable times, once each thirty days an itemized statement of such expenses.
In consideration of the drilling of said wells and the things to be done by parties of the second part, as above provided, it is agreed that parties of the second part shall have, own, and be entitled to one-half of seven-eighths, to wit, seven sixteenths, of all of the oil and gas produced and saved from said wells, and parties of the first part shall have a like seven-sixteenths of the oil and gas produced and saved from said wells.
It is understood that the oil produced from said wells shall be run to the pipe line to the credit of parties of the second part, who shall from the proceeds of the sale of such oil repay themselves for any and all actual and necessary expenses chargeable to the joint account as above provided and thereafter parties of the second part shall immediately pay over to the parties of the first part the net proceeds of the sales of their seven-sixteenths of the oil.
It is further provided, however, that parties of*2946 the first part shall pay in cash their proportion, to wit, one-third of the Actual and necessary expenses chargeable to them as the same shall accrue, that is to say for all such expenses created prior to the production of sufficient oil from said wells to so pay such expenses, parties of the second part drawing on parties of the first part therefor.
Prior to the execution of the agreement with Roberts & Hill, the Woodrow Lee Oil Co. started the drilling of well No. 1 on the lease. The drilling of this well was completed by Roberts & Hill at the sole expense of the owner before the trust agreement hereinafter referred to was executed.
*1422 At a meeting held on January 21, 1920, the shareholders of the Woodrow Lee Oil Co. authorized the transfer of all of its assets, subject to its liabilities, to J. D. Avis, W. H. Roberts, and A. M. Liddell, subject to a trust agreement approved by them. The trust agreement approved by the shareholders and entered into with Avis, Roberts, and Liddell, on February 4, 1920, as trustees of the petitioner, reads as follows:
STATE OF TEXAS,
County of Wichita:
KNOW ALL MEN BY THESE PRESENTS:
THAT WE, J. D. AVIS, W. H. ROBERTS, *2947 J. S. NELSON, J. J. HILL and MARVIS LIDDELL, the present duly elected and qualified Trustees of the WOODROW-LEE OIL COMPANY, and acting herein as such Trustees under and by virtue of a resolution adopted by the shareholders of the WOODROW-LEE OIL COMPANY at a meeting of said shareholders duly and legally held on January 21, A.D. 1920, for and in consideration of the sum of TEN DOLLARS (10.00) and other valuable consideration to us in cash paid by J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, the receipt of which is hereby acknowledged and confessed, have bargained, sold, transferred and assigned, and by these presents do hereby bargain, sell, transfer and assign unto the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL - the oil and gas lease and all of the leasehold interest and estate conveyed thereby now held by us as Trustees in and to the following described property, situated in the County of Wichita, State of Texas, towit: -
The South one-half of the following described two and one-half acre tract out of the William P. B. Dubose Survey: BEGINNING at a point in the South Boundary line of the Clark 45 acre tract 1205 1/2 feet west of the Southeast corner of said tract: THENCE*2948 in a Westerly direction 275 1/2 feet; THENCE in a Sougherly direction of 803 feet to the South Boundary line of a Cline tract; THENCE in an Easterly direction along the South Boundary line to the Southeast corner of a 10 acre tract transferred by Floyd E. Ard to E. Rockhill et al 275 1/2 feet; THENCE in a Northerly direction along the West line of the tract sold by Ard to Rockhill et al 777 1/2 feet to the place of BEGINNING, together with all of the personal property, improvements, oil and all and singular of all of the property of every kind and character heretofore belonging to the said WOODROW LEE OIL COMPANY, including money, accounts receivable, choses in action, rights, claims and demands, as well as real and personal property of every kind and character.
TO HAVE AND TO HOLD the properties above described unto the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL forever, subject however, to all of the debts and demands of every kind and character now due or owing by the said WOODROW-LEE OIL COMPANY whether direct or contingent, and subject to the trusts, covenants and agreements hereinafter contained.
The said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, who will be hereinafter*2949 styled TRUSTEES, by accepting and signing this instrument, declare and agree that they will and their heirs and successors shall hold said granted premises and all other funds and property at any time transferred to or received by the TRUSTEES hereunder for the purposes with the powers and subject to the provisions hereof, for the benefit of the Cestui Que Trusts, who *1423 shall be Trust Beneficiaries only, without partnership, associate or any other relation whatever Inter Sese, and upon the Trusts following: -
1st:
In Trust to convert the same into money and distribute the net proceeds thereof among the persons at the time of such conversion holding and owning beneficial interests therein, as evidenced by the receipt certificates issued by the Trustees, as hereinafter provided; it being however, expressly understood and agreed that the Trustees may, in their uncontrolled discretion, defer or postpone such conversion and distribution, except that the same shall not be postponed beyond the end of twenty years from and after the date hereof. During such postponement and until such conversion, the interest of the Cestui Que Trust shall be considered for purposes of the*2950 transmission and otherwise as personal property.
2nd:
In Trust pending final conversion and distribution of said property, to manage and control the same, the Trustees having for such purposes and for all purposes of sale, lease, mortgage, exchange, improvement, and development, and any and other arrangements, contracts and dispositions of the Trust property, or any part thereof, all and as full discretionary powers and authority as they would have if they themselves were the sole and absolute beneficial owners thereof in fee simple.
3rd:
In trust to collect and receive all rents, revenue and income from the property, and semi-annually, or oftener at their convenience, to distribute the net income to and among the several Cestui Que Trusts according to their respective fractional interests. The Trustees in this connection having full authority from time to time to use any funds on hand, whether received as capital or income, for purpose of repair, improvement, protection or development of the property held hereunder pending its conversion and distribution, it being, however, expressly understood and agreed that the income arising from the operations of this Trust*2951 is not to be accumulated beyond a necessary reserve for repair, improvement, protection or development of the property held hereunder. The determinations of the Trustees made in good faith as to all questions as between capital and income shall be final.
4th:
The said WOODROW-LEE OIL COMPANY, an unincorporate joint stock association, having determined to wind up its affairs and be dissolved without waiting for final cash sale of its property, this Trust is declared in favor and for the benefit of the present Shareholders of said WOODROW-LEE OIL COMPANY, according to their respective interests in said WOODROW-LEE OIL COMPANY, and to them or their assigns the Trustees shall issue proper receipt certificates, which certificates and all others which may be heretofore issued in exchange or substitution thereof shall be deemed parts hereof and conclusively evidence the ownership of respective interests in this Trust; and the Trustees shall from time to time on request (on surrender of the old) issue such new certificates as may be proper and necessary to evidence any new or subdivided interests.
*1424 5th:
The Trustees shall have the authority to borrow money and*2952 fix the terms of any loans, and give any pledge, mortgage or other security which they may deem wise. No purchaser from or lender to the Trustees shall ever have any liability to the application of any proceeds.
6th:
The Trustees may employ all such agents and Attorneys as they may think proper and find expedient and prescribe their powers and duties and shall not be personally responsible for any misconduct, errors or omission of such Agents or Attorneys employed and retained with reasonable care.
7th:
The Trustees, at all times, shall keep full and proper books of accounts and records of their proceedings and doings, and shall at least annually, render account of the Trust to any beneficiary requesting the same. No Trustee serving hereunder shall have any liability, except for the results of his own gross negligence or bad faith.
8th:
The Trustees shall be entitled to reimbursement and indemnification from the Trust property for all their proper expenses and liabilities, and shall be entitled at all times to the advice of Counsel, and it being contemplated that one of said Trustees shall be in active charge of the affairs of the Trust, said Trustee shall*2953 be entitled to receive for his services the sum of $175.00 per month; the two remaining Trustees shall be entitled to receive the sum of $10.00 per annum each. The Trustees shall designate which one of them shall have direct charge of the Trust's affairs.
9th:
Any Trustee hereunder may resign by written instrument, duly acknowledged and recorded in the Deed Records of Wichita County, Texas. Any vacancy in the office of Trustee, however occasioned, shall be filled by the remaining Trustee by an instrument in writing signed by him and assented to in writing by the holder or holders of a majority in amount of the Beneficial interests herein, such appointment to be in like manner recorded as in the case of resignations.
10th:
The terms and provisions of this Trust may be modified at any time or times by instrument in writing, signed and acknowledged by the then Trustees, assented to in writing by a majority in interest of the Cestui Que Trusts and recorded in the Deed Records of Wichita County, Texas.
11th:
The certificate in writing of the Trustees as any resignation from the office of Trustee hereunder, and as to the appointment of any new Trustee hereunder, *2954 and as to the existence or non-existence of any modifications hereof, may always be relied upon and shall always be conclusive evidence in favor of all persons dealing in good faith with said Trustees in reliance upon such certificates.
*1425 12th:
The title of this Trust fixed for convenience, shall be the Woodrow-Lee Trust, and the term "Trustees" in this instrument shall be deemed to include the original and all successor Trustees. At the end of twenty years and after the date hereof, the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL, or their successors, unless this Trust shall thereafter have been otherwise lawfully terminated, shall sell all of the property of every kind then held by them hereunder, and make equitable distribution of the net proceeds among the several persons then entitled.
IN WITNESS WHEREOF the Trustees of the WOODROW-LEE OIL COMPANY, acting under the authority above set forth, have executed this instrument, and the said J. D. AVIS, W. H. ROBERTS and A. M. LIDDELL to evidence their assent and acceptance of said Trust, have signed their names at Wichita Falls, Texas, this 4 day of February, A.D. 1920.
The parties have stipulated that*2955 the balance sheet of the Woodrow Lee Oil Co. at the time of the transfer, was as follows:
| Assets | |
| Cash | $10,243.58 |
| Lease | 50,000.00 |
| Equipment | 16,199.44 |
| Accounts receivable, Humble Oil & Refining Co | 3,570.09 |
| Accounts receivable, Roberts & Hill | 2,815.13 |
| Deficit | 19,416.76 |
| Total | 102,245.00 |
| Liabilities | |
| Capital stock | $70,000.00 |
| Reserved for income tax | 1,925.1 |
| Depletion reserved | 26,860.1 |
| Depreciation reserved | 3,459.7 |
| Total liabilities | 102,245.00 |
The petitioner did not acquire any additional property.
At a meeting held a short time after the trust agreement was filed, the trustees of petitioner elected A. M. Liddell, president of the board of trustees, J. D. Avis, general manager, and W. H. Roberts, field manager. The trustees did not meet again and the shareholders of the petitioner never held a meeting. A. M. Liddell never performed any service for petitioner as president of the board of trustees. J. D. Avis supervised the keeping of petitioner's books by a bookkeeper employed for that purpose; paid out on the first of each month to the beneficiaries of the trust so much of the earnings as were not necessary to meet the obligations payable during*2956 the balance of the month; assisted Roberts in the making of contracts for the sale of oil produced on the lease, and gave the buyer of the oil division orders therefor. These duties did not differ in any material respect from the work performed by Avis as secretary and treasurer of the Woodrow Lee Oil Co. He never consulted the beneficiaries of the trust as a body concerning the amount of earnings to distribute. Roberts superintended the production of oil and gas on the lease.
The firm of Roberts and Hill continued the management and operation of wells Nos. 2 and 3 on the lease under the contract of February 20, 1919, after the petitioner acquired the property. The *1426 firm's employees also handled the production of well No. 1 under the supervision of Roberts as a trustee of petitioner.
The expense for managing and operating, and the revenue from, well No. 1, and wells Nos. 2 and 3, were kept separate. Roberts and Hill received all the income from the wells and paid all of the expenses incident to the operation of the lease. Once every month the firm rendered a statement to petitioner showing total receipts from the sale of oil and gas, and disbursements made in*2957 managing and operating the lease, and after deducting its share of the net proceeds, remitted the balance to petitioner. As owner of well No. 1, petitioner ultimately paid all of the expenses of its operation and received all the income from it, except the royalty of one-eighth. Pursuant to the terms of the contract of February 20, 1919, petitioner received seven-sixteenths of the income from, and paid one-third of the operating expenses of, wells Nos. 2 and 3. The firm of Roberts and Hill received the balance of the income, except royalty rights, and paid the remainder of the expenses. Petitioner handled its receipts and disbursements, and kept its books, in the same manner as its predecessor had.
The parties have stipulated that petitioner's gross income, and expenses, subject to an additional allowance for depletion, for the taxable period, were as follows:
| Revenue | Amount |
| Production well No. 1 | $44,610.53 |
| Production wells Nos. 2 and 3 | 30,234.64 |
| Production, gas | 1,537.25 |
| Total | 76,382.42 |
| Expenses | Amount |
| Labor | $2,768.13 |
| Lease expense for shooting wells, etc | 2,511.70 |
| Repairs | 610.51 |
| Salaries | 2,500.00 |
| Taxes - Production, county and State | 1,684.21 |
| Insurance | 35.31 |
| Donations | 50.00 |
| General expense | 1,545.10 |
| Bad accounts | 34.33 |
| Depletion | 13,670.65 |
| Depreciation | 4,000.00 |
| Total | 29,409.94 |
| Net income | 46,972.48 |
*2958 All of petitioner's property was sold August 1, 1925. Petitioner ceased to exist some time between August 1, 1925, and November 8, 1926.
OPINION.
ARUNDELL: In the case of , after a careful consideration of the authorities, particularly the cases of , and , we concluded that the question of whether a particular organization, such as the petitioner here, is a trust or an association for income-tax purposes should be determined by applying the double *1427 test of control, and doing business, especially the latter, the sole test of control not being sufficient. In , we again had occasion to consider the effects of the Crocker and Hecht decisions on questions of this character. In that proceeding we said at page 20:
It thus appears that the court discards the test of control in determining whether such a trust is an association, under the revenue acts, and makes the test whether it was or was not organized for purely business purposes. This seems to be the true distinction.
*2959 See also . The Hecht decision was interpreted in a similar manner by the Circuit Court of Appeals for the First Circuit in the case of , wherein it was said that:
The measure of control over the trust vested in the beneficiaries does not seem to be the determining factor, but rather whether the trustees are conducting a business for profit or gain.
Here the shareholders of petitioner gave the trustees very broad powers under the agreement of February 4, 1920, set out in full in our findings of fact. Pending the conversion of the property assigned to them for management and control into money, which was not to be deferred longer than 20 years, the trustees had, among other powers, unrestricted power (1) to not only collect and receive the income from the property, but to lease, mortgage, exchange, improve and develop the property; (2) to use any funds on hand, whether received as capital or as income, for the purpose of repairing, improving, protecting, or developing the property held by them, subject only to the condition*2960 that the sum set aside as a reserve for such purposes should not exceed a necessary amount; (3) to borrow money; (4) to employ agents and attorneys, and (5) to fill any vacancy on the board of trustees and modify the declaration of trust, with the consent of a majority in interest of the shareholders.
The powers thus voluntarily granted by the shareholders under the declaration of trust were broad enough to enable the trustees to carry on such a business as would necessarily follow from the active operation and development of oil and gas-producing land. That the trustees actually carried on a business enterprise for profit in a manner similar to corporate bodies, appers evident from the evidence before us. The trustees maintained and operated the lease, paying all of the cost of extracting oil and gas from well No. 1, which petitioner owned in its entirety, and their proportionate share of the upkeep and operating costs of wells Nos. 2 and 3, which had been drilled by Roberts & Hill under the contract of February 20, *1428 1919, and sold all of the oil and gas produced on the lease. The fact that the men who actually did the pumping, maintained the wells in operating condition, *2961 etc., were not employees of the trustees, but of the copartnership of Roberts & Hill, is immaterial, since the work was under the supervision of Roberts as a trustee of petitioner, and it eventually paid all or its share of the whole cost, depending upon which of the wells the expenditure was made.
In the Durfee Mineral Co., case, it appears that the only act performed by the trustees was the leasing of the property held by them, yet we held the taxpayer to be an association for income-tax purposes. In , the court said that "a corporation owning and renting an office building is engaged in business within the meaning of an excise statute", citing , and .
We are of the opinion that the shareholders were associated together in a manner similar to corporate bodies, for business purposes; that it did engage in business, and that it is taxable as an association.
The petitioner is not asking us to apply any of the tests provided by section 704 of the Revenue Act of 1928 to determine its taxable status. We do not*2962 know when it filed its return for the taxable period or the date of the termination of its existence beyond the fact that it occurred some time between August 1, 1925, and November 6, 1926. Regulations 45, 65, and 69, one of which was in effect when petitioner was required by law to file a return or at the time it ceased to exist, do not appear to be contrary to our decision, and we have not been referred to any applicable ruling of the Commissioner or any duly authorized officer of the Bureau of Internal Revenue that is opposed to our conclusion.
Judgment will be entered for the respondent.