. .- .
Honorable George H. Sheppard
Comptroller of Public Accounts
Austin, Texas
Dear Sir: Opinion No. O-4035
Re: Construction of Stock Transfer
Tax as applied to "certificates of
interest in any business conducted
%y trustee or trustees.*
Your letter of September 22, 1941, requests cur opinion relating
to the taxability of the transfer of certain interest in oil and gas under
the Stock Transfer Tax Law, being Article 15 of House Bill No. 8, Acts,
Regular Session, Forty-seventh Legislature. We quote your several questions;
"(a) A, B, C, and D own the working interest in an oil
and gas lease which, for convenience, stands in the name of
D, trustee. There is nothing on record showing who are the
beneficial owners, but A, B, and J have, in fact, an assign-
able interest in the lease. No trust certificates are issued.
If A assisgns his interest in the lease to B, is this tranaac-
tion taxable7
"(b) In the case supposed in (a), would it make any dif-
ference that D had issued trust certificates evidencing the
interest of A, B, C, and D in the lease, and that the trust
certificate itself was actually assigned by A to BP
"(c) A is the cmer of the working interest in an oil and
gas lease. He sells a small interest in the working interest
to several other persons and gives each of them an assignment
of such interest. By mutual agreement, A is permitted to cper-
ate the lease, paying the expenses of operation out of the in-
come, and remitting to each cmer the portion of the proceeds
to which he is entitled. A is not, however, designated as
trustee. If one of the other persons holding an undivided in-
terest in the working interest assims his interest to another,
is this assigrmmnt taxable?
- L
Hon. George H. Sheppard - Page 2 (O-4036)
s(d) If, instead of transferring a portion of the wcrk-
ing interest, A had assigned an overriding royalty interest
in the case supposed in (o), would the assignment of the over-
riding interest be taxable?
"(8) A, the owner of the working interest, assigns l/4
of the production to B until B shall have reoeived the sum of
$lO,OOO.OO. (This is ordinarily termed an oil payment). If B
assigns this oil payment to G, would the assignment be taxable?"
If any of the trahsfera described in your several questions are
subject to payment of a stock transfer tax it is because they are desorib-
ed by the phrase underlined in Section 1 of Article 15 of said House Bill
Ho. 8, which reads in part;
"Seoticn 1. There is hereby imposed and levied a tax as
hereinafter provided on all sales, agreements to sell, or memo-
randa of sales, and all deliveries or transfers of shares, or
oertifioates of stock, or oertjfiaates for rights to stock, or
certifioates of deposit representing an interest in or represent-
ing certificates made taxable under this Seoticn in any domestic
or fcreigh association, company, or acrpcraticn, or certificates
of interest in any business eonduoted by trustee or trustees made
after the eff'eotiw date hereon, ðer made upon or shown by
the books of the asspoiation, company, corporation, or trustee, or
by any assignment in blank or by any delivery of any papers or
agreement or memorandum or other evidence of sale ortransfer or
order for or agreement to buy, whether intermediate or final,
and whether investing the holder with the beneficial interest in
or legal title to such stock or other certifioate taxable hereun-
der, or with,the possession or use thereof for any purpose, or to
secure the future paymentof money or the futuretransfer of any
such stock or oertificate, on eaoh hundred dollars of face value
or fraction thereof, three (3) cents, exoept in cases where the
shares or oertifioates are issued without designated mcneta
value, invhich case the tax shall be at the rate of three (37
cents for each and every share. , . ." (Underscoring curs)
It seems apparent to us that this Act does not purport to tax
transfers of interest8 in all partnerships and trusts. From the context
of the Act oonsidemd as a whole as well as from the plain meaning of the
words themselves, it seems to us that the phrase "certificates of interest
in any business conducted by trustee or trustees" oan only refer to cer-
tificates of stock or interest in those business entities known as joint
stock associations, business trusts or Massachusetts trusts. The language
is not susceptible of a construotionwhich would inolude partnership inter-
ests or interests of the beneficiaries of a "pure" trust.
.
Hon. George H. Sheppard - Page 3 (o-4035)
Although, since the decision by the Supreme Court of Texas
of Thompson V. Schmidt, 115 Tex. 63, 274 S.W. 554, the shareholders in
a business trust have been held to be liable as partners, there are
nevertheless, certain characteristics of a Eusiness trust which dis-
tinguishes it from a partnership on one hand and a "pure" trust cn the
other. It may be useful to review come of the definitions which have
been given of "business trusts."
The definition found in 25 Texas Jurisprudence 174 reads as
follows:
*A 'business trust,' or, it is sometimes called,
a 'Massachusetts trust,' may be said to be a form of
business organization which is the product of an arrange-
ment whereby property is conveyed to trustees, in accord-
ance with the terms of an instrument of trust, to be held
and managed for the benefit of such persons as may, from
time to time, be the holders of transferable certificates
issued by the trustees, showing the shares into which the
beneficial interest in the prcpertv is divided. These
certifiaates -- which resemble cert$ficates of shares of
stock in a corporation, and are issued and transferred in
like manner -- entitle the holder to share ratably in the
income of the property, and, upon termination of the trust,
in the proceeds. . . .s
Professor Bcgert in his work on Trusts devotes a chapter to
business trusts and describes them in the following manner (Vol. 2, page
971)s
"For many years the trust has been used in ?dassmhu-
setts.as a form of business orgmieaticn, a substitute for
incorporation, and in the years following the Wcrld War the
device came widely to be used elsewhere, especially in
Texas and other states in the Southern oil fields. Suoh
organizations are usually referred to as 'business trusts'
or 'Wassaohusetts trusts,' although the term 'common-law
trust' is also frequently used, emphasizing the faotthat
the organization is one formed without the aid of statute.
The usage of these terms has no entirely crystalised,~and
in such a field definitions are often of little value; but
in general, the term %assachusetts trust'is used 'to de-
note an unincorporated organization created for profit
under a written instrument or declaration of trust, the
management to be conducted by compensated trustees for the
benefit of persons whose legal interests am represented
by transferable certifioates of participation, or shares.'"
That the nature of a business trust is essentially different
frcm that of a "pure" trust and that the rules of law applicable thereto
. .
Ron. Geo. H. Sheppard - Page 4 (o-4036)
differ widely is indicated by the fact that the &nericm Law Institut@'s
Restatement of the Law of Trusts expressly excludes from the treetim my
discussion of business trusts, declaring in Section I(b) thereof:
I
. . . The business trust is a special kind of
business association and can best be dealt with in oon-
motion with other business associations."
Perhaps the simplest way to try to describe the type of orgrn-
ization whioh ms contemplated by the Legislature in the phrase "any bus-
iness conducted by trustee or trustees" would be to say that it is I quasi-
corporate unincorporated association. .I9 the case8 concerned with the ap-
plication of federal taxes to such organizations we find the courts again
and again laying emphasis upon rnalogies to corporate struoture.
In the cqse of In re Associated Trust, 222 Fed. 1012, the court
held the Xasstichusetts-trustthem invo'lvadto be an "unincorporated corn-
pany" within the meaning of the Fedsral Bankruptcy hot because it found
the trust to have the following features in c-on with oorporations:
(a) A capital contributed by the certificate holders
(b) future mmnagsrs are to be chosen by the certifi-
cate holders
(a) the character, scope, size of the enterpries may
be ahanged or terminated by certificate holders
(d) these rights and powers are given to the certifi-
oate holders in the instrument by which the trust
is constituted.
In Burk-mggoner Oil Ass'n V. Hopkins, 269 U.S. 110, 46 S.Ct. 46,
70 I,.Ed. 163, the court in holding that the joint stock association was sub-
ject to the payment of federal income taxes 18 though it were a corporation,
after reciting variou$ characteristics of the association whioh were similar
to those of corporations declared: "Because of this resemblance in form and
effectiveness, these business orglnisations are subjected bythe Act to
these taxes as corporations."
In his artiole in 26 Columbia Law Review 305 entitled "Massachu-
setts Trust under Federal Tax Law," H. Rottsohaefsr sumnariaed his conolu-
sions at page 314 as follolrsc _
"A business trustis, therefore an association under ex-
bstiixg federal tax laws only if operating under a
declaration of trust that provides for I division of
the m%ole interest in the enterprise into shares trans-
ferable with only sash restrictions as would be valid
in the case of ocrponts stocks that vests the conduct
. of the enterprize in trustees responsible to the hens-
ficiaries as a group and insures the ultimate oontrol
of the trust by the latter as a group. Only then is
Hon. Gee. H, Sheppard - Page 5 (o-4035)
there both association among the beneficiaries and
quasi-corporate form of organication. The last two
features srs incompatible with the existence of a
real trust, where the trustees act as principals.
Hence no such trust can be an association."
The power of the trustees to engage lotivsly in business as dis-
tinguished from the mere colleotion and distribution of revenus frcxsthe
specific property conveyed to them is unquestionably an essantial element
of a business trust. Hecht v. Ralley (1924), 265 U.S. 144, 44 S. Ct. 462,
There is, however, some conflict in the cases as to whether the criterion
shall be the powers enumerated in the trust indenture or the powers actually
exercised by the trustees. In Tyson vi Commissioner of Internal Revenue
(Cr. Ct. 0f bpp. 1931), 54 Fed. (2d) 29, the court held that the Zenith
Real Estate Trust was not an association vdthin the meaning of the Federal
Revenue Acts of 1924 and 26 although by the trust indenture the trustees
were given the power to buy and sell real estate, because actually this
trust owned only a single building under a longtsnn lease, and the trustees'
only duty was to collect the rent, pay taxes, etc., and distribute the net
income among the certifioate holders. Said the court:
"Our question then is, when is a Massachusetts
trust an association under these acts, and when
is it a trust?
"Probably the best test is to be found in the ac-
tivities of the entity . . . in determining when a
txst is an association courts must look to the
substance rather than the form of the entityused to
carry on the business. Likewise, it must be more
influenced by the instrument's activities than the
ascertainment of the possible field of its activity.
. . ."
The "activity" test of business trusts is recognieed by H.
Rottschaafer, page 306,.op. cit.8 "Trusts ars now classified fortax purnoses
into holding and operating trusts.. The former are defined as those ir which
the trustees merely hold property for the collection and distribution of its
income; they are held not to be associations, The latter are defined as
those in which the trustees are not so restricted 'but areassociated together
inmuch the same mannor as directors in a corporation for the purpose of, and
are actually engaged in carrying on some business enterprise'; they are deemed
associations ~independently of my control exercised by the beneficiaries'."
The New York stock transfer tax statute recognizes the distinction
between 'holding" and *operating" trusts in that it expressly exempts fras the
tax "certificates issued under a noncorporate investment test agreement of
the fixed typs". (emphasis ours) Ws believe a like distinction is intend=
in the Texas Act since it makes taxable only "certificates of interest in any
business conducted by trustee or trustees." Trustees of a purely "holding"
trust can hardly be said to be oonducting a business.
Bon. Gee. H. Sheppard 0 Page 6 (o-4035)
Another question suggests itself: lhat arethe minimwn numbers
of certificate holders and trustees possible in a business trust? Mr.
Rottschaefer answers these questions at page 515 of his article:
"The mere fact that there was but a a&r&e beneficiary,
either at its inception or at some subsequent +&as, should
not affect the conclusions.
"The case is not as clear when there is but a single
trustee. The difficulty arises from the absence of instmc-
es in which corporations have but a single director."
However, he concludes that (E&s 31, page 312) "Business trusts are conceiv-
able that have but a single trustee or a single,benaficiary.s In view of the
fact that the Texas statute expressly names "trustee or trustees* we believe
that multiple trustees are not a necessary prerequisite to the existence of
such a business trust tcwhich the stock transfer tax would be applicable.
In the light of the general principles deducible frms the fbrego-
ing authorities, we shall consider the specific fact situations presented
in your request.
In the situation presented in your question (a) there appears to be
neither a trust indenture prescribing the respective rights and duties of the
trustees and beneficiaries nor trust certificates isaued:to the,beneficiaries.
The relationship among the four owners of the lease appears to be in the nature
of an informal partnership with legal title in the name of ens of the partners.
It is certainly not a quasi-oorporate organication meeting the .,qualifications
of a business trust, and in our opinion the transfer ofthe interest of one of
the partners is not subjeot to payment of a stock transfer tax.
The situation in (b) differs only to the extent that the person hold-
ing legal title to the lease has issued trust certificates to evidence the in-
terest of the other men in the lease: Cn its face, this does not describe a
businsss trust. However, if there exists a trust indenture conferring upon
the trustee or trustees the powers to engage in an active Imsiness, to buy and
sell leases, etc., and confers uponthe beneficiaries the power to elect a
new trustee or trustees, it would be a business trust andthe transfer of
certificates oftrustsould be taxable under the Stock Transfer Tax Act.
In each of the situations involved in your questions (o), (d) and
(0) the transfer is a transfer of a legal, fee interest in realty end could
not besubject to the payment of a stocktransfer tax.
Yours vsry truly
APPROIED OCT 27, 1941
/*/ Grover Sellsrs ATTORSEYGENERAL OF TEXAS
FIRSTMSISTAET
b6IpIFpmacEBpL By ,&/Walter R. Koch
WRKrtilrgw Walter R. Kooh
Assistant