Commissioner of Internal Revenue v. Owens

Decision Date03 July 1935
Docket Number1075.,No. 1074,1074
Citation78 F.2d 768
PartiesCOMMISSIONER OF INTERNAL REVENUE v. OWENS. SAME v. BRAZELL.
CourtU.S. Court of Appeals — Tenth Circuit

F. W. Dewart, Sp. Asst. to Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and Sewall Key and J. P. Jackson, Sp. Assts. to Atty. Gen., on the briefs), for the United States.

Maxwell M. Mahany, of Bartlesville, Okl., for respondents.

Before LEWIS and PHILLIPS, Circuit Judges, and KENNEDY, District Judge.

PHILLIPS, Circuit Judge.

The Dawes Commission allotted a tract of land in Creek County, Oklahoma, to Barney Thlocco, a full-blood Creek Indian, who died about the time such allotment was made. Oil and gas were discovered in Creek County, and on November 1, 1913, the United States brought a suit in the District Court of the United States for the Eastern District of Oklahoma against Bessie Wildcat and others claiming to be the heirs of Thlocco, to cancel the allotment and recover the lands embraced therein for the benefit of the Creek Nation.

On April 17, 1914, the District Court appointed a receiver for the property and directed him to lease the land, for the term of the receivership, for oil and gas purposes, at a royalty of 25% of the gross revenue and income, for the benefit of whomever might ultimately be determined to be the rightful owners of the property. On April 30, 1914, the receiver in accordance with the order, entered into a lease with the Black Panther Oil & Gas Company.

Between November 1, 1913, and May 3, 1915, approximately 225 persons, many of whom were Indians, entered appearances in the suit. Each set up that he was either an heir of Thlocco or the assignee or vendee of an heir.

On May 8, 1915, the court entered a decree against the United States adjudging that the allotment was valid. This decree was affirmed by the Supreme Court of the United States on May 21, 1917. See United States v. Wildcat, 244 U. S. 111, 37 S. Ct. 561, 61 L. Ed. 1024. This left for determination the question of the heirship of Thlocco. Among those who asserted claims of heirship were Saber Jackson, who claimed a life estate as tenant by the curtesy, and Martha Jackson his daughter, who claimed a fee simple title.

On July 6, 1916, Saber Jackson, in consideration of $10,000 in cash and an agreement to pay him an additional equal amount out of the impounded royalties, conveyed his interest by deed to one Morley, acting as agent for Owens, Brazell and Johnson. On August 6, 1916, Morley conveyed such interest by deed to his principals. On October 7, 1918, Owens, Brazell and Johnson conveyed such interest by quit-claim to the Black Panther Oil & Gas Company.

On July 9, 1917, Parmenter, as guardian of the estate of Martha Jackson, entered into a contract with one Kelly, acting as agent for Owens, Brazell and Johnson, whereby it was agreed that as such guardian he would convey her interest in such allotment and transfer her interest in the impounded royalties, and that Kelly, in consideration therefor, should pay $12,000 in cash and 25% of such of the royalties as should be adjudged to belong to Martha Jackson, and should prosecute her claim and have decreed to her the largest possible interest in the allotment, and defeat or purchase all adverse claims. Pursuant to such agreement and in consideration of $12,000, Parmenter as such guardian conveyed her interest in the allotment to Kelly by deed dated July 9, 1917. On that date the county court of Seminole County approved and ratified such deed. See McKinney v. Black Panther O. & G. Co. (C. C. A. 8) 280 F. 486, 489, 490. On July 24, 1917, Kelly transferred his interest to his principals, who assumed Kelly's obligations under the contract of July 9, 1917.

On July 9, 1917, the impounded royalties amounted to $698,836.89.

On February 26, 1918, Owens, Brazell and Johnson entered into a contract with the Black Panther Company. This contract recited the receivership, the lease by the receiver; a prior lease by Saber Jackson, and Martha Jackson by her guardian, for a one-eighth royalty; the assignment of the last mentioned leases to the Black Panther Company, and the acquisition by Owens, Brazell and Johnson of the interests of Saber and Martha Jackson in the allotment. It provided that Owens, Brazell and Johnson should receive one-half of the impounded royalties when distributed under the order of the court and an additional one-eighth of the oil and gas produced from the allotment, that the Black Panther Company should receive the other one-half of the impounded royalties when disbursed by the order of court, that the Black Panther Company should pay all expenses theretofore incurred or to be incurred in establishing the claim of Martha Jackson, and that after the discharge of the receiver, Owens, Brazell and Johnson should receive as royalty only one-eighth of the oil and gas produced. On February 26, 1918, the impounded funds amounted to $893,365.94.

In carrying out the obligations of Owens, Brazell and Johnson, $395,480.34 was expended by the Black Panther Company and its assignee, Bay State Oil & Gas Company. $315,274.10 thereof was expended in 1918.

On May 11, 1918, Owens, Brazell and Johnson acting through Kelly their agent, and the Black Panther Company entered into a supplemental contract with Parmenter, as guardian of Martha Jackson, which construed the contract of July 9, 1917, and provided that Martha Jackson should receive $111,870.74 of the impounded royalties and in addition thereto one-eighth of the funds that should be accumulated by the receiver between March 31, 1918, and the date of the final determination of her interest by the District Court, and that Owens, Brazell and Johnson should purchase or attempt to defeat all claims adverse to Martha Jackson. A bond of $125,000 was given to guarantee performance of such contract.

On May 10, 1919, Saber Jackson with leave of court filed an intervening petition by which he sought to have his conveyance of July 6, 1916, set aside on the ground of fraud.

On June 17, 1919, the District Court entered a decree in which it adjudged that Martha Jackson was the sole heir of Thlocco, and, subject to the estate by the curtesy of Saber Jackson, on June 9, 1917, was the owner of such allotment and entitled to the royalties impounded up to that date.

It further adjudged that, by reason of the conveyances above mentioned, Owens, Brazell and Johnson were the owners of the allotment and the royalties impounded and to be impounded in the hands of the receiver, subject to the amounts due Saber and Martha Jackson and the equities of the Black Panther Company.

It found that the equities of the Black Panther Company and the Bay State Company could not be determined until the Saber Jackson intervention had been disposed of, and it reserved for future determination the rights and equities of Saber Jackson and the two oil companies.

On September 9, 1919, the court entered a decree dismissing the intervention of Saber Jackson.

About September 9, 1919, Martha Jackson filed an application to intervene and challenge the validity of her contracts and conveyances, on the ground of fraud. This application was denied.

In May, 1920, one Saley a Seminole Indian intervened and set up a claim that she was the sole heir of Thlocco. The trial court entered a decree dismissing her petition and that decree was affirmed by the Circuit Court of Appeals of the Eighth Circuit on March 25, 1922. Saley v. Black Panther O. & G. Co. (C. C. A. 8) 280 F. 496.

Saber and Martha Jackson appealed from the decree of June 17, 1919, and the orders of September 9, 1919, dismissing his petition in intervention and denying her leave to intervene.

While these appeals were pending, a supplemental contract was entered into between Martha Jackson, the Black Panther Company and Owens, Brazell and Johnson, whereby it was agreed that she should receive $308,000 of the impounded funds. On March 25, 1922, the Circuit Court of Appeals approved such contract, directed that the decree of the District Court be modified accordingly and as modified affirmed, and directed the District Court to pay out of the impounded funds $308,000 to the Superintendent of the Five Civilized Tribes for the use and benefit of Martha Jackson. McKinney v. Black Panther O. & G. Co. (C. C. A. 8) 280 F. 486.

On February 3, 1923, the Circuit Court of Appeals entered a decree finally adjudging the rights of Saber Jackson.

In September, 1922, $318,261.04 was paid out of the impounded funds to the Superintendent of the Five Civilized Tribes for the benefit of Martha Jackson.

On May 29, 1923, all interventions having been disposed of, a final decree was entered by the District Court ordering the distribution of the impounded funds. Owens received $202,523.30 and Brazell received $237,148.28 from such funds.

The commissioner included the above amounts in the gross income of Owens and Brazell for the year 1923, and proposed an additional tax of $54,221.92 against Owens and $32,381.80 against Brazell. Owens and Brazell filed petitions for redetermination with the Board of Tax Appeals. The board reversed the determination of the commissioner and held that the sums received by Owens and Brazell in 1923 were not income taxable to them in that year; and that the royalties received by the receiver constituted income that had accumulated in trust for the benefit of unascertained persons, and that the receiver should have returned and paid the tax on such income annually from September 8, 1916, the effective date of the Revenue Act of 1916, to and including the date when the ownership of the allotment and the impounded royalties was finally determined, under the provisions of the Revenue Acts of 1916, 1918, and 1921.1

On July 9, 1917, Owens and Brazell acquired Martha Jackson's interest in the allotment and, subject to her right to receive certain payments therefrom, her interest in the royalties that had accumulated in the hands of the receiver up...

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