Opinion
Docket No. 4410.
1945-06-5
ST. LOUIS OIL ROYALTY TRUST, GEO. W. CALE, RALPH D. GRIFFIN, AND C. D. LUKENS, TRUSTEES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Stanley S. Waite, Esq., for the petitioner. Harlow B. King, Esq., for the respondent.
Petitioner, established by deed of trust under which trustees had discretion in selection of investments in oil royalties and were given sole power of management and control of the property acquired, held to be capable of carrying on business in virtually corporate form and hence an association taxable as a corporation. Stanley S. Waite, Esq., for the petitioner. Harlow B. King, Esq., for the respondent.
By this proceeding petitioner challenges respondent's determination of deficiencies of $537.32 and $426.87 in income tax for the years 1941 and 1942, respectively.
The sole issue is whether petitioner is an association taxable as a corporation, within the meaning of Internal Revenue Code, section 3797(a)(3).
The case was presented by a stipulation of facts and evidence adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are facts otherwise found from the record.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
On January 29, 1924, Geo. W. Cale, Jr., Ralph D. Griffin, and C. D. Lukens, hereinafter referred to as the trustees, executed a declaration of trust in favor of holders of trust fund participation certificates who were subscribers to the fund and are hereinafter sometimes referred to as beneficiaries. The subscribers were originally ten in number and thereafter in 1924 increased to thirteen, and at all times included the trustees.
In substance the ‘Declaration of Trust‘ provides: (1) That the total amount which could be deposited with the trustees was not to exceed $35,000; (2) that all funds deposited and property acquired were to be used by the trustees in the acquisition of interests in oil and mineral right royalties; (3) that the trustees were to have ‘sole power and authority in the expenditure of said funds and in the management and control of property and rights acquired‘; (4) that the trustees ‘may, in their discretion, distribute among the holders of participation certificates all moneys received from said interest and royalties and upon the termination of the trust herein the Trustees shall convert all properties in their hands into cash and distribute the same among the holders of certificates of participation‘; (5) that any two trustees, or under some circumstances one, may conduct necessary business and act for all of the trustees; (6) that upon making deposits the subscribers were to receive participating certificates in the denomination of $50 or multiple thereof which were transferable by the holder thereof; (7) that the holders of certificates of participation should ‘not be liable (except to the extent of funds contributed) for any acts of the Trustees * * * ‘; (8) that the trustees could employ necessary agents and employees and were not to be personally responsible for their misconduct; (9) that it was not ‘intended to create hereby any relation of partnership or of agency among the cestui que trusts, or between any or all of the cestui que trusts‘; (10) that the title to all property constituting the trusts was to be vested solely in the trustees, the beneficiaries being without legal or equitable estate therein; (11) that the rights of the beneficiaries would relate only to the net distributable proceeds of the liquidation of the trusts and in the meantime to the income from the administration thereof; (12) that the trustees should have no power to bind the beneficiaries personally, and the beneficiaries should not be personally liable as partners or principals on account of any contract made by the trustees or liable upon account of any tort committed by the trustees or their employees; (13) that anyone dealing with the trustees should ‘look only to the funds and property of the trust for payment or for indemnity, or * * * damage * * * ‘; (14) that any negotiable instrument or contract in writing should give notice of these limitations by reference to this declaration of trust; (15) that the trustees, at the expense of the trust, could enter into contracts of insurance to protect and indemnify themselves as they deemed proper; (16) that the ‘death of any cestui que trust shall not terminate the trust nor entitle his legal representative to claim on account, or to take any action in the courts, or otherwise, against the trust or the Trustees, but the executors, administrators or assigns of the decedent shall succeed the decedent to all the rights of the decedent upon producing his certificate of beneficial interest‘; that at the end of 20 years from and after the death of the last survivor of Geo. W. Cale, Jr., Ralph D. Griffin, and C. D. Lukens, and of the lawful issue now living of any of them, unless the trust had heretofore been otherwise lawfully terminated, all the property then held under the trust was to be sold by the trustees and equitable distribution made among the persons entitled to it.
During the years 1924 to 1927, the subscribers paid to the trustees amounts aggregating $24,625, representing 493 1/2 certificates of participation. No further amounts have been subscribed or paid to the trustees, and in 1935 the trustees decided that no additional subscriptions should be accepted. In 1924 one certificate was issued by the trustees to their attorney in payment for services he had rendered to them.
In 1924 the trustees entered into a contract with E. A. Stiller, a geologist, to purchase oil royalties for them and agreed to pay him one-eighth of the net profit. This agreement was carried out over a period beyond its expiration date in 1926.
The trust funds were used to purchase oil royalties in Arkansas, Oklahoma, Kansas, Louisiana, and Texas, almost entirely without success up to the year 1932. An investment in an East Texas oil field in 1931 resulted in royalty receipts in 1932 and thereafter. No royalties or other property was purchased, acquired, sold or disposed of by the trustees since 1932. Each year since 1932 all royalty receipts, after deducting and paying expenses, have been distributed to the certificate holders, with the exception of the year 1941, during which the trustees accumulated some of the royalties received in order to pay deficiencies in tax determined by respondent.
Petitioner's assets consist of royalty interests in oil and gas leases. Under the terms of such leases, the trustees acquired an interest in and to all the oil, gas, and other minerals to be produced from the property. Such minerals as and when produced were sold by the trustees to pipeline companies under division order contracts. Petitioner's income averages approximately $5,700 per year and is received in the form of checks from pipeline companies.
The enterprise was conceived by Geo. W. Cale, Jr., father of Geo. W. Cale, one of the trustees, as a means of making investments in oil and gas royalties. The idea was discussed with his personal friends, who voluntarily entered into the enterprise for the purpose of receiving income from their investments.
Petitioner's income tax returns for the years 1941 and 1942 were filed with the collector of internal revenue for the first district of Missouri at St. Louis.
Aside from the original purchase of the royalty interest, the only activities of the trust have been to deal with the above mentioned division orders, to collect the royalty income, and, after paying certain nominal expenses, to distribute it to the beneficiaries. The only expenses of the trust for the year 1941, as shown by its income tax return, were commission, $246.75, salaries of $40 per month to Ralph D. Griffin, trustee, and of $25 per year to a bookkeeper, the rental charge of a safe deposit box, the cost of a subscription to an oil and gas journal, and certain taxes payable in Texas.
The trustees have never drilled any oil wells or operated any oil or mineral leases. They do not have anything to do with the control. or operation of the properties from which the royalties received by the trust are derived.
The trust has no office or place of business. Its transactions are handled by Griffin, trustee, from his desk at a bank where he is vice president. The only meeting of the trustees was held in 1935, following the death of Geo. W. Cale, Jr., who was one of the original trustees and father of Geo. W. Cale, a cotrustee at the present time. No minute book has ever been kept, and the trust has no bylaws and has never had a listing in either the telephone or city directory.
Petitioner is an association taxable as a corporation within the meaning of Internal Revenue Code, section 3797.
OPINION.
OPPER, Judge:
With the decision in Morrissey v. Commissioner
and its companion cases it has become settled that the powers conferred in the instrument creating an organization rather than some more limited actual conduct is determinative of whether the enterprise is an association taxable as a corporation, Helvering v. Coleman-Gilbert Associates,
Morrissey v. Commissioner, 296 U.S. 344.
and that the mere fact that the venture is small does not prevent that result, Helvering v. Combs.
Petitioner concedes that as far as its form is concerned it possesses all of the resemblances to corporate organization that were found significant in the Morrissey case. We think the contention that it was not so constituted as to permit it to engage in the operation of a business is no longer tenable in the light of such cases as Kettleman Hills Royalty Syndicate No. 1 v. Commissioner,
Adkins Properties v. Commissioner,
(C.C.A., 9th Cir.), 116 Fed.(2d) 382; certiorari denied, 313 U.S. 582.
and Commissioner v. Trust No. L.B. 791-A.
(C.C.A., 5th Cir.), 143 Fed.(2d) 380.
We conclude that petitioner was organized in corporate form with powers to undertake the operation of a business, and hence that it is an association taxable as a corporation.
(C.C.A., 9th Cir.),— Fed.(2d)— (Apr. 30, 1945).
Reviewed by the Court.
Decision will be entered for the respondent.