United States v. Stierwalt, 6503.

• Decision Date: 14 March 1961
• Docket Number: No. 6503.,6503.
• Citation: 287 F.2d 855
• Parties: UNITED STATES of America, Appellant, v. L. H. STIERWALT and Helen H. Stierwalt, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

287 F.2d 855 (1961)

UNITED STATES of America, Appellant, v. L. H. STIERWALT and Helen H. Stierwalt, Appellees.

No. 6503.

United States Court of Appeals Tenth Circuit.

March 14, 1961.

Joseph Kovner, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson and I. Henry Kutz, Attys., Dept. of Justice, Washington, D. C., and John F. Raper, Jr., U. S. Atty., Cheyenne, Wyo., were with him on the brief), for appellant.

James L. White, Denver, Colo. (Holland & Hart, J. Harley Williams, Jr., Denver, Colo., and Loomis, Lazear & Wilson, Cheyenne, Wyo., of counsel, were with him on the brief), for appellees.

Before HUXMAN, PICKETT and LEWIS, Circuit Judges.

LEWIS, Circuit Judge.

The sole issue presented by this appeal is whether a business arrangement formed by some seventy individuals, including appellees (taxpayers), is properly taxable as an association within the definitive term "corporation" contained in the Internal Revenue Code of 1954.¹ The case originated as a suit for refund for personal income tax paid as the result of the disallowance by the Commissioner of Internal Revenue of a claimed deduction for intangible drilling costs made upon taxpayers' individual tax return. The trial court granted judgment for the taxpayers, holding the Commissioner to be in error in his contention that the deduction was not available to individual participants in the venture which operated under the name of Stierwalt, McKibbon and Associates.

The facts are not in dispute and we narrate them exactly as did the trial court. 181 F.Supp. 770.

In the summer of 1953 several people living in Worland, Wyoming, became interested in participating financially in oil and gas developments near Newcastle, Wyoming. They requested L. H. Stierwalt, who had some experience in the oil and gas business, to investigate the matter for them. Shortly thereafter, Stierwalt and McKibbon made arrangements for taking oil and gas leases on lands near Newcastle owned by two separate groups of individuals. The leases taken were known as the Dixon and Wrench leases and were executed on August 31, 1953, and November 7, 1953, respectively. The next act on their part was to have a Worland attorney draft the necessary documents to effectuate the parties' plan of having Stierwalt, McKibbon and Van Buskirk conduct the business of developing the aforesaid leases on behalf of the many individuals who were interested only in investing money with the hope of making a profit. The attorney chose a trust device and the three above named persons were appointed as trustees to hold in trust the undivided lease interests which had been purchased by the several investors. However, on December 30, 1953, the trust agreement was revoked after the interest holders had learned that the trust method was inappropriate as a means for allowing the investors to individually claim tax deductions for expenses of the venture. Thereafter a system was devised whereby Stierwalt, McKibbon and Van Buskirk, acting jointly, entered into written agreements with each investor wherein they conveyed undivided shares of their interest under the leases to the named individual who in return agreed to make cash payments both for his undivided interest and his share of the initial drilling expense and also to bear his proportionate share of any eventual production costs. These agreements, which contained no termination date were binding on the heirs, successors, and assigns of all the parties thereto, gave to each investor the right to take in kind or to separately dispose of his share of produced oil and gas. Contemporaneous with the execution of his agreement, each investor also signed a power of attorney giving Stierwalt, McKibbon and Van Buskirk or any two of them acting jointly authority to arrange for the development of the leased premises and the production of oil and gas therefrom, to execute operating agreements, to sell the investor's share of the oil and gas, to borrow money for development on the security of production, and in general to transact any business in furtherance of the venture. The powers of attorney were revocable upon the giving of ten days' written notice mailed to Stierwalt.

Immediately after acquiring the Dixon leases, Stierwalt and McKibbon contacted a Mr. Bert Sager, who at that time was Vice President of the Dunbar Drilling Company, and Sager orally agreed that his firm would drill the two wells required by the terms of the Dixon leases in return for a stated cash consideration and a 25% working interest in the properties. This agreement was reduced to writing and signed by the parties on September 28, 1953. At the same time the then owners executed an agreement appointing the Dunbar Drilling Company as the operator of the Dixon leases for the life of those leases, with the qualification, however, that any party could avoid his or its obligations under the agreement by conveying to the other owners all of his or its interest in the leases. This written operating agreement contained many complicated provisions that had not been touched upon in the negotiations between Stierwalt, McKibbon and Sager. There were no written agreements covering drilling and production from the Wrench lease.

In November of 1953 oil was produced from the initial drilling on the Dixon leases, but a purchaser was not found until the latter part of 1954. By that time, however, the gas and oil ratio was so high that the wells were shut-in as directed by the Oil and Gas Conservation Commission of Wyoming. The wells were not reopened until 1954, when a gas purchase contract with the Wyton Oil and Gas Company was executed. In that same year a three-year oil purchase contract was entered into with the Sioux Oil Company.

Stierwalt, in addition to being one of the active managers of the venture, was the holder, along with his wife, of an undivided working interest in the lease properties and for present purposes is to be considered as being in the same position as any other inactive investor.

We doubt that the lay mind would find much difficulty in concluding from this factual background that the investors were business associates and that an association had been formed. But the legal complexity of the term when faced with the unhappy impact of taxation has defied definition and has led the courts to the necessity of examining each such organizational plan by comparison with standard, orthodox business entities. In such regard the government here points to functional similarities in this "association" and a corporation. The taxpayer emphasizes dissimilarities, functional and otherwise, and asserts the existence of the principal-agent relationship. Both parties claim comfort in the much-considered case of Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263.

The Morrissey case and its companion cases, Swanson v. C. I. R., 296 U.S. 362, 56 S.Ct. 283, 80 L.Ed. 273; Helvering v. Combs, 296 U.S. 365, 56 S.Ct. 287, 80 L.Ed. 275; Helvering v. Coleman-Gilbert Associates, 296 U.S. 369, 56 S.Ct. 285, 80 L.Ed. 278, dealt mainly with the distinction between Massachusetts or business trusts and traditional trusts in their exposition of the statute making unincorporated associations taxable as corporations. In accord with these decisions, lower courts have examined varied instruments creating trusts, compared the efficiency of their provisions for offering the advantages of incorporation while avoiding the corporate form, and have generally held such trusts taxable as an entity where the primary purpose of organization was to conduct a business. See Annotations 108 A.L.R. 340, 144 A.L.R. 1050, 166 A.L.R. 1461. The Morrissey case offered examination of certain features of corporate life which could be effectively introduced into an instrument of trust:

"What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization? A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of members of the corporation. The designation of trustees, who are charged with the conduct of an

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