*874 Where certain mineral lands were transferred to petitioner in consideration for all of petitioner's capital stock and the transferors in the acts of transfer reserved the first $400,000 of revenues from the lands, and during the taxable years here involved the revenues did not exceed the $400,000 and were all paid over to one of the transferors on its own account and as the assignee of the other transferor, it is held that the revenues earned during the taxable years belonged to and were owned by the transferor to whom they were paid and that the revenues in question were not taxable to petitioner as its income. Thomas v. Perkins,301 U.S. 655">301 U.S. 655.
*355 This proceeding involves deficiencies in income tax and 25 percent penalties for failure to file returns for the taxable years 1930 to 1932, inclusive, in amounts determined by the respondent as follows:
| Fiscal year ended - | Deficiency | Penalty |
| February 28, 1930 | $1,310.07 | $327.52 |
| February 28, 1931 | 4,228.89 | 1,057.22 |
| February 29, 1932 | 2,308.18 | 577.05 |
*875 *356 The two questions at issue are whether the net income for each year determined by the respondent as taxable to petitioner was, under the law and the facts, taxable to petitioner or to the A. Wilbert's Sons Lumber & Shingle Co., to which the income was actually paid, and whether petitioner was liable for the penalties determined. The entire deficiencies and penalties are in controversy.
FINDINGS OF FACT.
Petitioner is a corporation, organized February 25, 1929, under the laws of the State of Louisiana, with its principal office located at Plaquemine, Louisiana. A. Wilbert's Sons Lumber & Shingle Co., sometimes hereinafter referred to as the Lumber Co., is a corporation organized in 1887 under the laws of the State of Louisiana. Its capital stock was owned originally, and up to August 1926, share and share alike, by six Wilbert brothers, or their heirs, at which time certain shares of capital stock were surrendered by some of the stockholders in cancellation of their indebtedness to it. In 1903 the six Wilbert brothers organized Wilbert's Myrtle Grove Planting & Manufacturing Co., somethimes hereinafter referred to as the Planting Co., a corporation under the*876 laws of the State of Louisiana. All of its capital stock was owned by the six Wilbert brothers, or their heirs, share and share alike. Both the Lumber Co. and the Planting Co. owned large tracts of land with potential mineral values.
On February 13, 1929, the Lumber Co., the Planting Co., and the stockholders of both companies entered into an agreement, which we summarize as follows: The agreement recited that originally all of the capital stock of both the Lumber Co. and the Planting Co. was owned by six brothers, three of whom had died, each owing a large indebtedness to the Lumber Co.; that in settlement of the estates of the deceased brothers it became necessary for the Lumber Co. to purchase a part of its own capital stock owned by the estates of two of the deceased brothers and to agree to purchase all of the stock in both companies owned by the estate of the third deceased brother; that in reaching a fair price for these stocks no valuation had been placed on the oil, gas, and other mineral rights in and to certain lands owned by the two companies for the reason that the value thereof was too uncertain and contingent; and that it was the desire of all the stockholders of*877 both companies that the heirs of the three deceased brothers be permitted to participate in and receive a proportionate share of any benefits and revenues that might arise out of the oil, gas, and mineral rights of such lands "in the proportion and under the terms and conditions hereafter expressed in this agreement."
It was, therefore, mutually agreed by and between all the parties to the agreement that both the Lumber Co. and the Planting Co. *357 "shall through their respective Boards of Directors, transfer and convey title by way of dividend or otherwise to the above named stockholders of said companies or to a corporation to be organized by the said stockholders * * * as they may direct, all of the oil, gas and minerals or all of the oil, gas and mineral rights now owned" by the two companies in and to the lands previously described. The agreement further provided:
That should it be legally necessary, in order to give a perfect title in and to said oil, gas and minerals or to said oil gas and mineral rights in and udner said lands, that a transfer or conveyance of said lands be made, then it is agreed that said companies shall make such transfer or conveyance through*878 their respective Boards of Directors by way of dividend to said stockholders or to a corporation to be organized by them as hereinafter provided, as they may direct, provided that in the event that transfer of title to said land is made, such transfer shall be made with all the reservations and subject to all the terms and conditions as contained in the transfer and sale made by said two companies of an undivided one fourth (1/4) interest in said lands to the Adams Royalty Company, of Chicago, Illinois, of date October 10, 1928.
If it becomes necessary to transfer title to the lands * * * in order to vest title in perpetuity to said oil, gas minerals in and under said lands, under the reservations and conditions as set out in the deeds to Adams Royalty Company, above referred to, then, as consideration for the lease of said land and the reservation of the surface rights the said A. Wilbert's Planting & Manufacturing Company are to pay all taxes assessed against said lands, provided said companies may relieve themselves of the payment of said taxes any time by a written renunciation of all rights under the leases to be granted and of any and all other rights in and to said lands.
*879 The agreement further provided that "the ownership of said lands or the oil, gas and mineral rights therin to be declared as a property dividend by said two companies, shall be vested in the above named stockholders", namely, the three surviving brothers and the heirs of the three deceased brothers, and that "for the purposes of taking and holding title to said property to be conveyed to said stockholders as a dividend of the said two companies and for the purposes of carrying out the intention of this agreement and of administering said property for the benefit of the stockholders, the said stockholders agree and contract one with the other and for their heirs to organize or cause to be organized a corporation to be known as the Wilbert Mineral Corporation, the capital stock of which shall be represented by" 5,040 shares of no par value, to be issued to the three surviving brothers and the heirs of the three deceased brothers. The agreement then provided:
That the sole and only consideration of said shares of stock to be so issued shall be the value of the property or property rights transferred to such corporation as herein provided and which value is to be hereafter determined*880 and fixed as provided by law in such cases.
* * *
*358 That said corporation, as soon as organized and at the time of taking title to said property to be transferred or set aside as a dividend to the stockholders of the A. Wilbert's Sons Lumber & Shingle Company and the Wilbert's Myrtle Grove Planting & Manufacturing Company shall assume and obligate itself by proper resolution of its Board of Directors, to pay to the A. Wilbert's Sons Lumber & Shingle Company, from the first revenues earned or received, either by way of lease, royalties or otherwise, from the oil, gas and other minerals rights in and under the said lands conveyed to it, the sum of four hundred thousand ($400,000.00) dollars, without interest or other charges.
The agreement then concluded with the provision that as security for the payment of the $400,000, the certificates representing the entire capital stock of the proposed corporation (petitioner herein) should, as soon as issued, be delivered to and be held by the Lumber Co. in pledge until the full and final payment of the $400,000 from the revenues earned or received, either by way of lease, royalties, or otherwise, from the oil, gas, and other*881 mineral rights so conveyed, "provided that it is distinctly understood that said stockholders assume no personal liability for the payment of the said sum other than the duty to see that said amount is paid from said source."
On February 13, 1929, the boards of directors of the Lumber Co. and the Planting Co. adopted substantially identical resolutions as far as it is material to this proceeding, declaring property dividends of the lands, described in the above mentioned agreement of the same date, that were owned respectively by each of the two companies. The material portions of the resolutions of the Lumber Co. are as follows:
WHEREAS, an agreement has this day been entered into by and between all of the stockholders of this company * * * and,
WHEREAS, it is provided by said agreement that should it be necessary, in order to vest full and complete perpetual ownership by said stockholders in and to said oil, gas, sulphur and other minerals, that a transfer be made of said lands, and,
WHEREAS, in the opinion of the attorneys of this company, full and complete and perpetual title to said stockholders in said minerals or mineral rights can only be effectuated, accomplished*882 or made by the transfer, or dividend, of all the interest owned by said companies in and to said land, under the conditions and reservations as stated in said agreement, and,
* * *
THEREFORE, BE IT RESOLVED, That a dividend is hereby declared of the undivided three fourth interest of the company in and to the following described lands: [Description follows.]
BE IT FURTHER RESOLVED, that the said property shall be vested in the stockholders of this company in the proportions stipulated in said agreement, as follows, to-wit: [List of stockholders with the propertion to each follows.]
BE IT FURTHER RESOLVED that the President, Joseph Wilbert, be and he is hereby authorized, empowered and directed to execute the necessary deeds and conveyances os said lands to said stockholders or to any corporation formed by them, as they may direct. Said transfer is to be made subject to the following reservations and conditions [italics supplied]:
*359 1. That there is reserved to the vendor and not included in this sale, all the timber down or standing and all of the forest growth of whatever nature or kind or size now standing, growing or down, or that may hereafter grow*883 and develop on the land hereinabove described and conveyed, and the vendor reserves and is hereby granted by the vendee the right to go freely upon any and all of said lands at any time for a period of ninety nine years for the purpose of enjoying, cutting removing or manufacturing any and all timber and forest growth hereby reserved from this sale with the same freedom and right of ingress and egress as it would have if the sole and undivided owner of said lands, the vendee for itself and assigns waiving any and all right to urge the prescription or extinguishment of such right because of non-user during the period stated.
2. Without additional consideration, other than the payment by the vendor of all the taxes which may be assessed the said land during the period hereinafter stipulated, vendee, for itself and assigns, does hereby grant, let and lease to the vendor or assigns for a period of ninety nine years (99) all of vendee's right of surface use and occupancy of said lands for agricultural or other purposes, save and except the right of exploring for oil, gas, sulphur, salt and other minerals; provided, that such surface right of usage and occupancy granted to the vendor*884 for agricultural and other purposes is not to interfere in any way with the free use of the surface of the said land for exploring for oil, gas, sulphur, salt and other minerals or in any necessary operation in the mining, developing or production of the oil, gas, sulphur, salt or other minerals on, in or under said lands.
3. Purchaser recognizes the following oil and gas and mineral leases granted by the vendor herein, it being expressly understood that the said purchaser shall receive three fourths of the royalties under the said leases: [Description of leases follows.]
4. It is distinctly understood and agreed that A. Wilbert's Sons Lumber & Shingle Company may, at any time, relieve itself of the obligation hereby incurred, with reference to the taxes on the lands described by making a written renunciation of all the rights reserved to and by it herein.
Said transfer is to be made subject to a mortgage in favor of this company for $400,000.00; the condition of said mortgage to be that said $400,000.00 shall be paid to A. Wilbert's Sons Lumber & Shingle Co. from the first revenues earned or received by lease, royalties or otherwise from the oil, gas and other mineral*885 rights in and under the said lands conveyed to it, without interest or other charges.
On February 26, 1929, the day following the organization of petitioner, the Lumber Co., through its president, Joseph Wilbert, and petitioner, through its vice president, George Wilbert, appeared before a duly commissioned and qualified notary public and declared that, whereas a certain agreement dated February 13, 1929, had been executed by the Lumber Co., the Planting Co. and the stockholders of both companies, and that whereas the board of directors of the Lumber Co. had declared a dividend in compliance with the agreement,
NOW THEREFORE, in consideration of the premises, and the issuance of the stock in grantee corporation as hereinafter stipulated, and to carry into effect the said agreement of the stockholders and the resolution of the Board of Directors of A. Wilbert's Sons Lumber & Shingle Company, the said Joseph Wilbert, President, declared to me, Notary, that he does for his said constituent, by these *360 presents, grant, sell, assign, convey, transfer and deliver until all lawful guarantees and with substitution and subrogation all the rights and actions in warranty which*886 said company has against its own vendor or all former owners unto the said Wilbert Mineral Corporation, here present and accepting by and through its Vice President, George Wilbert, for its successors and assigns and acknowledging delivery and possession thereof, the following described property, to-wit: [Description follows.]
The declaration or act of transfer then incorporates the same reservations and conditions as are contained in the resolutions quoted above, and states that the Wilbert Mineral Corporation, its successors or assigns are to have and to hold forever the property thus granted, sold, assigned, conveyed, transferred, and delivered and that the "consideration of this transfer is the issuance as fully paid stock of Five thousand forty shares (5040), of no par value of the capital stock of Wilbert Mineral Corporation." It then concludes as follows:
The said Wilbert Mineral Corporation does hereby obligate itself to pay to A. Wilbert's Sons Lumber & Shingle Co. the sum of $400,000.00 (Four hundred thousand dollars), without interest or other charges from the first revenues earned or received, either by way of lease, royalties or otherwise from the oil, gas and other*887 mineral rights in and under the said lands conveyed to it, and/or lands conveyed to Wilbert Mineral Corporation this day by Wilbert's Myrtle Grove Planting & Manufacturing Co.; and in order to secure the payment of said amount, does hereby specially mortgage, affect and hypothecate unto and in favor of A. Wilbert's Sons Lumber & Shingle Co. all of the above described lands, the same to remain mortgaged and hypothecated until the full payment of said amount.
* * *
Except for the description of the lands, substantially the same declaration or act of transfer was made on the same day before the same notary by the Planting Co. and the petitioner herein.
The capitalization of petitioner was the 5,040 shares of no par value stock which were issued to the stockholders and former stockholders (or their heirs) of the Lumber Co. and the Planting Co., in consideration of the transfer of the lands included in the above mentioned declarations or acts of transfer, which were executed on February 26, 1929.
On March 25, 1929, the board of directors of petitioner held a special meeting, at which the president stated that the company had been organized primarily as a holding company by its*888 incorporators to administer and manage mineral rights received by them as dividends from the Lumber Co. and the Planting Co. and that the meeting was called for the purpose of determining whether or not the Wibert Mineral Corporation would accept such property in payment of the stock subscriptions, and to value the property in case it should be accepted. The president then presented to the board of directors the two acts of transfer executed on February 26, 1929, which were read and spread upon the minutes, and after a full discussion thereof, the *361 board unanimously adopted a resolution, the material part of which is as follows:
BE IT RESOLVED that the company do accept from the subscribers of its capital stock, in payment of their stock subscriptions, and in lieu of cash, the property described in and covered by said two acts, under the terms and conditions therein stated, at a valuation of Ten Thousand Two hundred & oo/100 dollars ($10,200). Said property being particularly described as follows: [Description follows.]
Subject to the following exceptions, reservations and conditions:
1. * * * [The first four being in substance the same reservations and conditions*889 as are contained in the resolutions dated February 13, 1929, quoted above.]
* * *
5. That this company pay to A. Wilbert's Sons Lumber & Shingle Company the sum of Four hundred thousand dollars ($400,000.00), without interest or other charges from the first revenues earned or received either by way of lease, royalties or otherwise from the oil, gas and other mineral rights in and under said lands.
BE IT FURTHER RESOLVED that the entire capital stock of the company, viz.: 5040 shares, be and the same is hereby allotted, in payment of said property as follows, to-wit:
* * *
BE IT FURTHER RESOLVED, that the President and Secretary are hereby authorized and directed to issue fully paid certificates of the capital stock to said stock subscribers and to deliver the same to A. Wilbert's Sons Lumber & Shingle Company to be held in pledge in conformity with the agreement of February 13, 1929.
Be it further resolved that this company does now undertake and assume the obligation incurred by its incorporators to pay to A. Wilbert's Sons Lumber & Shingle Company the sum of $400,000.00 without interest or other charges from the first revenues earned or received either by way of lease, *890 royalties or otherwise from the oil, gas, and other mineral rights in and under the lands received by it in payment of said stock subscriptions.
On motion of John A. Wilbert, seconded by Charles Wilbert, the following resolution was unanimously adopted:
WHEREAS, the Wilbert Mineral Corporation is the owner of an undivided three fourths (3/4) interest in and to certain lands described in a deed from the A. Wilbert's Sons Lumber & Shingle Company to Wilbert Mineral Corporation of date February 26, 1929, the said deed having been filed for record in Iberville Parish, Louisiana, on February 26, 1929, and,
WHEREAS, certain reservations were made in the said deed in favor of the said A. Wilbert's Sons Lumber & Shingle Company and the said deed provided that the A. Wilbert's Sons Lumber & Shingle Company should receive the sum of $400,000.00 from the first revenues earned or received from the oil, gas and other mineral rights in and under the said lands, and
WHEREAS, the A. Wilbert's Sons Lumber & Shingle Company has requested the Wilbert Mineral Corporation to authorize and direct the Standard Oil Company of Louisiana to pay to the said A. Wilbert's Sons Lumber & Shingle Company*891 3/4 of such rental as may fall due on April 1, 1929 under the terms of that certain oil and gas lease executed by the A. Wibert's Sons Lumber & Shingle Company unto and in favor of the Standard Oil Company of Louisiana on May 12, 1927, said rental, if paid to be credited by the A. Wilbert's Sons Lumber & Shingle Company towards the payments of the above mentioned sum of $400,000.00, and
*362 WHEREAS, there is no objection on the part of the Wilbert Mineral Corporation to the said rental being paid direct to the A. Wilbert's Sons lumber & shingle company, THEREFORE,
BE IT RESOLVED, that this company authorize and direct the Standard Oil Company of Louisiana to pay to the A. Wilbert's Sons Lumber & Shingle Company three fourths (3/4) of the rental falling due under the said lease on April 1, 1929, the remaining one fourth (1/4) of the said rental to be paid to the owners or owners, of the said one fourth (1/4) interest, and George Wilbert, the Vice President of this Company, is hereby authorized to execute for this company any and all papers or other documents necessary to carry into effect this resolution such documents to contain such terms and stipulations as the said George*892 Wilbert deems best.
BE IT FURTHER RESOLVED that this company authorize and direct the various oil companies now holding and owning leases on lands of this company, which it acquired from A. Wilbert's Sons Lumber & Shingle Company and Wilbert's Myrtle Grove Planting & Manufacturing Company, to pay to A. Wilbert's Sons Lumber & Shingle Company the three fourths (3/4) interest of this company in any and all rentals hereafter falling due under said leases, to be credited against the sum of $400,000.00 agreed to be paid to A. Wilbert's Sons Lumber & Shingle Company from the first revenues received by this company from said lands.
Petitioner's shares of stock were divided into six equal lots and distributed to the six branches of the Wilbert family in order that each branch would have the same proportion of the capital stock in petitioner as was owned in the Lumber Co. prior to the transfer by the certain members of the Wilbert family of their stock in the Lumber Co.
On April 4, 1929, the stockholders of the Planting Co. held a meeting and adopted resolutions to dissolve and surrender the charter of the Planting Co. and appointed three liquidators to fully liquidate its affairs. *893 On or about May 28, 1929, the three liquidators of the Planting Co. and the Lumber Co., acting through its vice president, duly authorized, entered into an indenture wherein the Lumber Co. purchased from the liquidators and the liquidators sold to the Lumber Co. all of the assets of the Planting Co. of every kind and description, subject to a provision contained in the indenture as follows:
This sale and conveyance is made subject * * * to a sale of mineral rights to Adams Royalty Company * * * and subject to a sale and conveyance of mineral rights to Wilbert Mineral Corporation * * * but does include and cover, and parties of the first part [the liquidators] do hereby grant, sell, assign, convey, transfer, and deliver to party of the second part [the Lumber Co.], all of the reservations to Wilbert's Myrtle Grove Planting & Manufacturing Company under said mineral contracts, and each and every right, claim, or demand accruing to Wilbert's Myrtle Grove Planting & Manufacturing Company thereunder, and, party of the second part does now and hereby assume and undertake the obligations and duties of Wilbert's Planting & Manufacturing Company under said mineral contracts.
Certain*894 members of the Wilbert family and stockholders of the Lumber Co. were indebted to the Lumber Co. and, by mutual agreement entered into in February 1929, this indebtedness was liquidated *363 and paid by the transfer from the debtors to the Lumber Co., some in whole and some in part, of their stockholdings in the Lumber Co. The price at which the Lumber Co. accepted its capital stock in satisfaction of the debts owed to it by its debtors was $6,200 per share. In arriving at this price of $6,200 per share, no consideration was given to the value of the potential minerals underlying the lands which were later transferred to petitioner under the circumstances set forth above.
The lands so transferred to petitioner by the Lumber Co. and the Planting Co. are low swamp lands which are subject to overflow and not fit for cultivation. They had and have little or no value exclusive of the timber reserved to the Lumber Co. and the minerals thereunder. Petitioner has no other assets than the lands so transferred.
At the time of the execution of the agreement between the Lumber Co., the Planting Co., and the stockholders of both companies entered into on February 13, 1929, both*895 corporations had outstanding indebtedness in the amount of about $400,000. Those stockholders who had parted with none of the shares of their stock in the Lumber Co. and the Planting Co. required the provision in the agreements above referred to by which the sum of $400,000 should be paid to the Lumber Co. in order to liquidate or offset the indebtedness.
Petitioner, believing it had no income to report, did not file Federal income tax returns for the taxable years 1930, 1931, and 1932, which were its fiscal years ending on the last day of February. The respondent determined that by reason of the lands thus acquired from the Lumber Co. and the Planting Co. petitioner realized income and was entitled to deductions for depletion during each of the above taxable years as follows:
| 1930 | 1931 | 1932 | |
| Income from leases | $14,673.35 | $14,103.35 | $8,430.00 |
| Income from royalties | 80.88 | 29,155.00 | 17,640.09 |
| Total gross income | 14,754.23 | 43,258.35 | 26,070.09 |
| Less depletion deduction | 22.24 | 8,017.63 | 4,851.02 |
| Net income upon which deficiencies were determined | 14,731.99 | 35,240.72 | 21,219.07 |
The Lumber Co. in its income tax return for the fiscal year ended*896 February 28, 1930, reported a portion of said income as taxable, and in its returns for the fiscal years ended February 28, 1931, and February 29, 1932, reported the above amounts for those years as nontaxable income in schedule L of the returns. The returns of the Lumber Co. disclosed net losses as follows:
| February 28, 1930 | $95,379.37 |
| February 28, 1931 | 131,085.78 |
| February 29, 1932 | 69,951.43 |
*364 Five of the six brothers hereinbefore referred to as being the owners of the capital stock of the Lumber Co. originally, and later either they or their heirs, owners of the capital stock of petitioner, had died before the required time for filing the income tax returns of any of the years before the Board. At the death of George Wilbert, the last survivor of the six brothers, his nephew, Louis Wilbert, was elected president February 26, 1931, and has continued up to the present time. Several of the other brothers, including the father or Louis Wilbert, died only a short time previous and they were succeeded in the business by other younger members of their respective families. None of the younger generation of Wilberts had any previous experience in the accounting*897 or financial part of the business, their previous duties being confined to logging operations, as employees of the company. The younger members of the Wilbert family who became officers of the two companies in 1931 were unfamiliar with income tax laws and the Treasury regulations and employed a local accountant to prepare whatever returns were required for either company.
Petitioner has never opened any books or bank account. It has received no moneys or revenues, and has carried on no operations of any kind. The revenues from the lands here in question have gone directly to the Lumber Co. and are shown on its books and records.
The officers of petitioner were not informed that no returns had been filed by the local accountant for the three taxable years here under review until notified by a Government examiner. They had relied upon the local accountant to make whatever returns were necessary, and, upon being informed in the premises by the Government examiner, and after investigation of the matter, discharged the local accountant and employed their present auditors.
OPINION.
BLACK: The principal question in this proceeding is whether the income earned by way of leases*898 and royalties from the mineral rights in and under the lands conveyed to petitioner by the Lumber Co. and the Planting Co., respectively, it taxable to petitioner, as the respondent contends, or to the Lumber Co., as petitioner contends. There is no issue as to the correctness of respondent's determination of the amount of income. It is fundamental that the owner of the income is the proper party to tax. Poe v. Seaborn,282 U.S. 101">282 U.S. 101. The determination of the ownership of the income here involved turns on whether, under the agreements, resolutions, and acts of transfer referred to in our findings, the Lumber Co. and the Planting Co. in their acts of transfer of the mineral lands in question on February *365 26, 1929, reserved an "economic interest" in the lands to the extent of the first $400,000 to be "earned or received, either by way of lease, royalties or otherwise from the oil, gas and other mineral rights in and under the said lands conveyed", or whether, under such agreements, resolutions, and acts of transfer, no such economic interest was reserved. If, under the agreements, resolutions, and acts of transfer, such an economic interest in the lands*899 was reserved, the proceeding would be controlled by Thomas v. Perkins,301 U.S. 655">301 U.S. 655, and petitioner would not be taxable on the income in question. If, however, no such economic interest was reserved by the grantors, and the agreements, resolutions, and acts of transfer be construed as having transferred to petitioner, with no reservation of income to the grantors, the entire economic interests in and to the lands conveyed in consideration for petitioner's capital stock and a purchase money debt and mortgage of $400,000, payable at all events at petitioner's convenience and from any source that might be available, then it would follow that all of the income earned from the mineral rights in and under the lands would belong to and be owned by and taxed to the petitioner and the payment of such income direct to the Lumber Co., as one of the grantors, and the assignee of the other, would, under those circumstances, be regarded simply as a liquidation pro tanto of the mortgage. Reynolds v. McMurray, 60 Fed.(2d) 843. Cf. *900 Helvering v. Bankline Oil Co.,303 U.S. 362">303 U.S. 362; Helvering v. O'Donnell,303 U.S. 370">303 U.S. 370; and Helvering v. Elbe Oil Land Development Co.,303 U.S. 372">303 U.S. 372, in which cases an economic interest was distinguished from a mere economic advantage.
The respondent places considerable emphasis upon the giving of the mortgage and the pledging of petitioner's capital stock. In his brief he says:
The best evidence that ownership of lands had passed to petitioner and that the Lumber Company did not consider seriously that any reservations in said transfer had been made with respect to the $400,000, is shown by the fact that petitioner was required to give the Lumber Company a mortgage, of the lands, and to turn over all its capital stock as security for the payment of the $400,000.
We do not regard the giving of the mortgage and the pledging of petitioner's capital stock as controlling. We think effect must be given to all of the agreements, resolutions, and acts of transfer taken as a whole, and when this is done it is our opinion that the agreements, resolutions, and acts of transfer, collectively construed, reserved to the grantors*901 such an economic interest in the lands conveyed to the extent of the first $400,000 to be earned or received, either by way of lease, royalties, or otherwise from the oil, gas, and other mineral rights in and under the lands conveyed, as would entitle *366 the Lumber Co. to depletion on the oil and royalty payments received during the taxable years, under Palmer v. Bender,287 U.S. 551">287 U.S. 551, and, as the Fifth Circuit said in Perkins v. Thomas, 86 Fed.(2d) 954 (affd., Thomas v. Perkins, supra ): "The broad and general view of local transactions which has been held proper in determining whose are the depletion deductions under the federal tax statutes must for consistency's sake be applied to questions of whose is the income." We do not think that the $400,000 represents in any way a part of the purchase price of the lands. The acts of transfer provide specifically that "The consideration of this transfer is the issuance as fully paid stock of Five thousand forty shares (5040), of no par value of the capital stock of Wilbert Mineral Corporation * * *." We think that the mortgage and pledge should be regarded merely as*902 precautionary measures to guarantee the carrying out of the intention of all the parties concerned, namely, that petitioner was not to enjoy any of the revenues from the mineral rights until the Lumber Co. had received the first $400,000 from that source. Cf. Ortiz Oil Co.,37 B.T.A. 656">37 B.T.A. 656. In other words, we think the controlling fact is that every precaution was taken to make sure that the first $400,000 of "revenues earned or received, either by way of lease, royalties or otherwise from the oil, gas and other mineral rights in and under the said lands" would go to the Lumber Co., to be used in paying its debts and the debts of the Planting Co., which it took over in April 1929. It was a reservation of income to the grantors out of the lands conveyed and was not purchase money. Perkins v. Thomas, supra.While we do no have the Lumber Co. before us, there seems to be no doubt but that the amounts received should be included in its return, not as the receipt of a capital item, but as taxable income received.
In a statement attached to the deficiency notice the respondent explained his determination of the deficienies in part as follows:
*903 Any payments to the lumber company would be a payment on the mortgage and, therefore, a capital transaction to the lumber company. The income from the mineral rights owned by the mineral company is income to the mineral company even though by order of the mineral company, paid directly to the lumber company by the oil companies operating the leases. * * *
The amount is held to be your income in accordance with the decision of the Tenth Circuit Court of Appeals rendered April 17, 1933 in the case of Comar Oil Company v. Burnet (64 F.(2d) 965) and with the decision of the United States Board of Tax Appeals in the case of J. C. Pugh, et al.,17 B.T.A., page 429. This latter decision was affirmed by the Circuit Court 49 Fed.(2d) 76.
In his brief the respondent still relies upon the Comar Oil Co. and the Pugh cases as authority for his determination. These cases no *367 doubt support the respondent's determination but are no longer regarded as valid authority for the question here presented. See *904 Commissioner v. Fleming, 82 Fed.(2d) 324; Perkins v. Thomas, supra;Thomas v. Perkins, supra;Holly Development Co. v. Commissioner, 93 Fed.(2d) 148; Rocky Mountain Oil Co.,36 B.T.A. 365">36 B.T.A. 365; petition for review dismissed April 22, 1938; I. Rudman (first issue therein), 36 B.T.A. 803">36 B.T.A. 803, 806; and Ortiz Oil Co., supra.
The respondent in his brief says that "while the Pugh and Comar Oil cases may have been overruled in principle in the Perkins case and by Palmer v. Bender, (1932), 287 U.S. 551">287 U.S. 551, in so far as the question of depletion was involved we submit that it still declares valid law as to the questions of title and the construction of the contracts." As far as title is concerned, the Supreme Court, in the Perkins case, said: "We need not decide whether technical title to the oil while in the ground was in assignors, or in assignee." As far as the construction of the contracts here involved are concerned, we hold that there was reserved to the grantors of the land an economic interest as distinguished from an economic*905 advantage in the several transfers to petitioner to the extent of the first $400,000 earned or received either by way of lease, royalties, or otherwise from the oil, gas, and other mineral rights in and under the lands conveyed to petitioner by the Lumber Co. and the Planting Co., and that under Thomas v. Perkins, supra, the ownership of the income involved in this proceeding was in the Lumber Co., and it was not, therefore, taxable to petitioner. The respondent's determination on this issue is reversed.
The facts, as disclosed in our findings, with reference to filing income tax returns for each of the taxable years before us show that petitioner did not file a return for either of the taxable years. Under the Commissioner's regulations petitioner was required to file a return, whether it had any income or not. See art. 391, regulations 74 and Regulations 77. Failure to file a required return subjects a taxpayer to penalties, even though he offers a plausible and reasonable excuse. The penalties are mandatory where no return is filed. *906 Paul L. Case,37 B.T.A. 365">37 B.T.A. 365; Scranton, Lackawanna Trust Co., Trustee,29 B.T.A. 698">29 B.T.A. 698; affd., 80 Fed.(2d) 519; certiorari denied, 297 U.S. 723">297 U.S. 723. But there are no penalties unless there is a tax. See supplement M, section 291, Revenue Acts of 1928 and 1932.
Inasmuch as petitioner had no income other than the income which we have held belonged to and was owned by the Lumber Co., it follows that there is no tax liability or deficiency or penalty for any of the taxable years involved.
Decision will be entered for the petitioner.