*1270 The petitioner acquired certain property in exchange for its capital stock and is taxable on the income therefrom.
*960 The respondent has asserted deficiencies in income taxes for 1925, 1926 and 1927, in the respective amounts of $521.27, $4,509.31 and $2,316.89. The only issue presented is whether the petitioner is taxable on the income from a certain oil and gas property.
FINDINGS OF FACT.
The petitioner is a South Dakota corporation, organized on September 24, 1924, with its principal office in St. Paul, Minnesota. It was organized to take over a certain oil and gas property from the majority stockholders of the Iowa Oil and Refining Company which was in process of liquidation.
Prior to 1924 the Iowa Oil and Refining Company and certain individuals, who were the majority stockholders of that company, became indebted to the First National Bank of Sioux City, Iowa, the Sioux Falls Trust and Savings Bank of Sioux Falls, South Dakota, and the Midland National Bank of Minneapolis. As collateral *961 security for such indebtedness*1271 the individuals deposited their stock of the Iowa Company. Early in 1924 dissension arose among the stockholders and it was determined to liquidate by transferring to the majority stockholders a certain oil and gas property known as the Horton lease, the minority stockholders receiving certain other property. Before the proposed liquidation could be effected, it was necessary to satisfy the creditor banks. Under date of June 12, 1924, the individuals executed and delivered a warranty deed covering the Horton property to C. B. Mills, who was president of the Midland National Bank, one of the creditors. On September 5, 1924, the Iowa Company assigned to Mills all of its right, title and interest in and to its oil and gas lease on the Horton property. On December 10, 1924, a trust indenture was entered into, which provides in part as follows:
THIS INDENTURE, Made and entered into in multiple copies at Minneapolis, Minnesota, this 10th day of December, 1924, by and between
C. B. Mills, of Minneapolis, Minnesota, party of the first part, hereinafter termed the Trustee, the First National Bank of Sioux City, Iowa a corporation, W. E. Ward, as Examiner-In-Charge of the Sioux Falls*1272 Trust and Savings Bank, a corporation, and the Midland National Bank of Minneapolis, Minnesota, a corporation, all parties of the second part, hereinafter termed the Banks, A. D. Horton, Annie Horton, Charles M. Horton, J. E. Gearhart and W. S. Randall, all of Hawarden, Iowa, John J. Large of Sioux City, Iowa, M. D. Watkins of Healdton, Oklahoma, and M. D. Watkins as Executor, and Flora E. Watkins, as Executrix of the Estate of F. E. Watkins, deceased, all parties of the third part, hereinafter termed Parties of the Third Part, and the Marquette Oil Distribution Company, a South Dakota corporation, party of the fourth part, hereinafter termed the Company:
WITNESSETH:
THAT, WHEREAS, A. D. Horton, John J. Large and the Estate of F. E. Watkins, deceased, are jointly and severally indebted to the Banks, in various amounts hereinafter set forth, and
WHEREAS, heretofore there had been deposited with the Trustee certain stock of the Iowa Oil & Refining Company belonging to some of the Parties of the Third Part, as collateral security for the payment of said obligations, among other things and
WHEREAS, there are certain other obligations existing on the part of the Iowa Oil & Refining*1273 Company to be paid, which obligations are hereinafter specifically described, and
WHEREAS, there are certain other obligations existing as between some of the parties of the third part, to which specific reference is hereinafter made, and
WHEREAS, It was desired by all the parties hereto that arrangements be made for the purpose of reducing and discharging all of said indebtedness under the terms and conditions hereinafter set forth, and
WHEREAS to that end and purpose the Iowa Oil and Refining Company transferred certain properties located in the State of Oklahoma, described as the Horton Lease, to some of the Parties of the Third Part, in consideration among other things, of the surrender of said Third Parties of their stock in the Iowa Oil & Refining Company, hereinbefore described, and
*962 WHEREAS, said property was afterwards deeded to the Company, for the sum of One Hundred Thousand Dollars ($100,000) paid in and by the capital stock of said Company which stock was duly issued and is now held in the following amounts;
* * *
WHEREAS, said stock, except certain qualifying shares thereof, has been transferred to the Trustee for the purposes and under the terms*1274 and conditions hereinafter set forth and contained, and
WHEREAS, there will be from time to time paid to the Company certain royalty payments upon said Horton Lease (under and pursuant to certain written instruments covering such payments) which royalty payments as hereinafter provided, are to be applied against said indebtednesses before any distribution thereof shall be made to the stockholders of the Company, and
WHEREAS, the parties hereto desire to enter into this Indenture defining, determining and limiting the various rights and interests of the parties hereto existing and growing out of the premises and by reason of the facts hereinbefore recited and to that end and purpose have entered into this Indenture,
NOW, THEREFORE, For and in consideration of One ($1.00) Dollar and other valuable consideration paid and received by each of the parties hereto, to and from each of the other parties, the receipt and sufficiency whereof is by the execution of these presents acknowledged by each and all the parties hereto, and in further consideration of the promises, agreements and undertakings of the parties hereto to be kept and performed as hereinafter contained, and in consideration*1275 of other valuable consideration paid and received by each of the parties hereto, the parties hereto do promise and agree, to and with each other, as follows, that is to say:
ARTICLE 1.
The Trustee does hereby promise and agree:
1. That he will receive and hold as the same are paid him from time to time by the Company, during the existence of this indenture, said royalty payments, IN TRUST NEVERTHELESS, for the following uses and purposes:
(2) To apply the same upon the indebtedness in the next succeeding paragraph hereof described and which indebtednesses are defined immediately in the terms of the obligees thereof, but which indebtednesses are to be paid in the sequence hereafter in this Indenture provided and not otherwise:
* * *
3. To account from time to time to the parties to this Indenture for his receipts and disbursements in connection herewith, provided that such accounting need not be rendered more often than once every three (3) months.
4. To return the stock of the Parties of the Third Part now endorsed in blank and held by him as collateral hereunder, to the respective owners thereof, or to persons duly designated by them in writing upon the termination*1276 of this indenture by the discharge of the indebtedness herein described, but not otherwise.
ARTICLE II.
The Banks, and each of them, do hereby promise and agree, for themselves, as the case may be, and individually, but not jointly:
1. To forbear any enforcement at law, or by action or other procedure of any of the obligations or notes hereinbefore described of which they are the respective *963 owners and holders so long as they shall receive payments from said Trustee under the terms and conditions hereof. * * *
* * *
ARTICLE III.
The Parties of the Third Part, and each of them, do hereby promise and agree:
1. To endorse in blank and deposit with the Trustee their respective stock in the Company as collateral security for the payment of the obligations hereinbefore described, but said collateral shall be held by the Trustee as security for said obligations in the same sequence as said obligations are described in paragraph (1) of Article (1) hereof and not equally or ratably for all of said obligations, and the execution by the Trustee of a copy of this Indenture will be an acknowledgment by the Trustee of the receipt and deposit of all of said stock.*1277
2. To, and by the execution of this indenture do jointly and severally consent that no distribution of the funds of the Company shall be made to the stockholders of the Company as dividends or other distribution, regardless of form (except, however, expenses of the Company) until all of said obligations and the accrued interest thereon shall have been paid and the terms of this Indenture performed and discharged.
3. To vote their stock at any meeting of the stockholders of the Company during the term of this Indenture as the Trustee shall indicate; * * *
* * *
5. To, and by the execution of this indenture do hereby consent to the payment by the Company to the Trustee of any and all sums received by the Company as royalties or otherwise from time to time, during the existence of this indenture, without further action by the stockholders or Directors of the Company, and all such payments made by the Company to the Trustee and all acts of the officers of the Company under the provisions hereof, are in all respects ratified, confirmed and adopted.
The company does hereby promise and agree
1. To pay to the Trustee from time to time, as the same shall be received, its*1278 income, less all expenses, charges, deductions, taxes and other disbursements necessary in the course and conduct of its business, but such payments made to the Trustee are made without any liability whatsoever on the part of the Company as to the distribution thereof by the Trustee; and provided further, that the Company shall be under no liability or duty to account to the Trustee for its income, but the amount to be paid by the Company to the Trustee hereunder shall be determined solely and exclusively by the Company.
* * *
That no salaries shall be paid to its officers so long as this indenture shall remain in force and effect, and the entire income of the Company from said Horton lease, less its taxes and other expenses and deductions, shall be paid to the trustee until this trust shall have been fully administered.
ARTICLE IV.
AND IT IS FURTHER UNDERSTOOD AND AGREED, by all the parties hereto:
* * * Nothing in this indenture shall be in any way construed as requiring the Trustee to take any steps at law or equity or otherwise to carry out and perform the terms of this indenture, except those to be performed by *964 himself; but in the event any of the parties*1279 hereto shall for any reason fail or refuse to perform any part of this indenture to be carried out or performed by such party or parties, the Trustee shall, upon written request of a majority * * * and upon being furnished with assurance sufficient to the Trustee of proper indemnification to the Trustee, for all purposes, proceed to employ counsel and to take such action against such defaulting party or parties as may be necessary or advisable, and as often as the same may occur.
The provisions of the above trust agreement were carried out.
The petitioner's stock was issued to the individuals and by them transferred to Mills. By warranty deed dated " day of February 1924," but bearing an acknowledgment under date of February 5, 1925, Mills conveyed the Horton property to petitioner. There was no physical delivery of the deed to it.
Mills acted as trustee until the latter part of 1927. He was also the owner of one share of petitioner's stock and was its president during the taxable years. He conducted all operations of the Horton property, which consisted entirely of collecting the proceeds from the sale of oil. Money received by him was deposited in a bank account entitled*1280 "Marquette Oil Distribution Company," and was then applied as directed in the trust instrument.
OPINION.
LANSDON: The petitioner contends that it is not taxable on the income in question since it did not own the Horton property during the taxable years. It contends that the property was owned by Mills.
The facts show clearly that Mills received all income from the Horton property and paid it to the creditor banks. Whether he received it as trustee or as president of petitioner we are unable to determine from the facts. The trust instrument provides that petitioner should receive the Horton property in exchange for its stock and that it would pay the income therefrom to Mills for distribution to the creditors. Mills received a conveyance of the Horton property from the individuals. He also held petitioner's stock, which had been issued to the individuals in exchange for the Horton property. In such circumstances we think the petitioner is taxable on the income in controversy. Amounts received from the sale of oil belonged to petitioner until distributed to the individuals and by them paid to their creditors. Under the terms of the trust Mills paid the amounts directly*1281 to creditors of the individuals, which can not affect tax liability. Cf. .
Reviewed by the Board.
Decision will be entered for the respondent.