Commissioner of Internal Revenue v. Brouillard
| Decision Date | 04 April 1934 |
| Docket Number | No. 888,951.,945,888 |
| Citation | 70 F.2d 154 |
| Court | U.S. Court of Appeals — Tenth Circuit |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. BROUILLARD. SAME v. SHEPHERD SYNDICATE. SAME v. PRYOR & LOCKHART DEVELOPMENT CO. |
Walter L. Barlow, of Washington, D. C. (Pat Malloy, Sewall Key, J. P. Jackson, and John H. McEvers, all of Washington, D. C., on the brief), for petitioner.
J. C. Campbell, of Charles City, Iowa, for respondent H. E. Brouillard.
George M. Morris, of Washington, D. C. (Allen H. Gardner, of Washington, D. C., on the brief), for respondents Shepherd Syndicate and Pryor & Lockhart Development Co.
Before LEWIS and BRATTON, Circuit Judges, and KENNEDY, District Judge.
These cases involve the status of Iowa-Burk Syndicate, Shepherd Syndicate, and Pryor & Lockhart Development Company for income tax purposes. The material facts are:
During September, 1918, J. C. Campbell and J. M. Burns, of Charles City, Iowa, and R. E. Wade and H. E. Brouillard, of Wapanucka, Okl., acquired an oil and gas lease covering ten acres of land situated in the Burkburnett oil field in Texas, at a cost of $20,000. Wade and Brouillard operated a small bank in Wapanucka. Burns conducted a grocery in Charles City, and Campbell was an attorney there. Burns, Campbell, and Brouillard were relatives. None of the four had previous experience in the oil business. Current reports of an oil boom caused them to decide early in 1919 to develop their lease. They were without sufficient funds to drill a well. They decided to sell a half-interest in their lease to some of their friends for the purpose of raising the necessary sum. In order to effect the sale, steps were taken to form a syndicate. The syndicate or organization was effected by means of a written instrument denominated as an "Agreement," the material parts of which were that the four original lease owners would convey an undivided one-half interest in the lease to C. L. Holden, J. C. Campbell, and R. E. Wade as trustees, with the understanding that the one-half they retained should be valued at $30,000. The interest conveyed to the trustees was to be valued at $30,000 and was to be sold by them. The interest each purchaser in the venture received was to be in that proportion which the amount he contributed bore to $60,000, and he was to receive a certificate to that effect. The trustees were to issue receipts for such interests, and were to furnish a surety bond in the sum of $30,000. When the funds were raised, a meeting of the interest holders was to be called for the purpose of electing new trustees. The new trustees were authorized to develop the lease, collect all money from the proceeds of the venture, and distribute the same, borrow money on the property, and drill all wells necessary for complete development.
Pursuant to the agreement, about one hundred and ten persons contributed to the fund. Some, but not all, received certificates. No meeting of the interest holders was called or held to select trustees to manage the lease. Burns succeeded Holden as trustee by virtue of selection by "some of the certificate holders." Wade acted as manager without objection, although he was not selected thereto. No president, secretary, treasurer, or other officer was elected and no formal meetings of the trustees or stockholders were held, except one to determine whether the lease should be sold. Some certificate holders gathered occasionally, usually on a street corner, and discussed the venture. The certificates were not the subject of frequent barter or sale. There were a few sales and assignments. They usually occurred when an investor became financially distressed and a friend took part of his investment merely to aid him. No complete record of transfers was attempted to be kept on the books of the syndicate. The syndicate kept a set of books compiled by Wade which showed the names of the original contributors, their respective shares, and the disbursements of the organization. A bank account was maintained at times in the name of the trustees.
A well was drilled and oil struck in commercial quantities in June, 1919. Two additional wells were subsequently drilled. Wade borrowed the money for that purpose, most of it being obtained from certificate holders. The lease was operated until November, 1919, when an offer to purchase was received. Burns, Wade, and Campbell were unwilling to sell their interests if compelled to pay income tax as a corporation. They went to Washington, explained the situation to a representative of the Bureau of Internal Revenue, and were assured verbally that the enterprise was a joint venture and that no corporate tax would be assessed. Following that assurance, the sale was completed for the price of $300,000; all assets except a reserve of about $40,000 were distributed among the shareholders, and the business of the organization terminated.
A partnership return was seasonably made. The Commissioner thereafter imposed a jeopardy deficiency assessment of income and excess profits tax in the sum of $142,672.28, which included a penalty of 50 per cent., holding that the enterprise was an association taxable as a corporation under the relevant provisions of the Revenue Act of 1918 (40 Stat. 1057). Due to the fact that the syndicate had distributed all of its assets, except the reserve referred to, the Commissioner asserted a deficiency assessment for the taxable year 1919 against each distributee of assets as transferee in an amount equal to the proceeds received in the nature of a liquidating dividend. The Board of Tax Appeals reversed the action of the Commissioner. The case came here on petition to review that action so far as it relates to the respondent.
In May, 1925, a partnership composed of Ralph J. Pryor and F. E. Lockhart, engaged in the business of buying and selling oil and gas leases, acquired a lease called the Shepherd lease, covering 320 acres of land situated in Greenwood county, Kan. Pryor and Lockhart, in June following, assigned to Henry Rosenthal and H. K. Beardmore — a partnership — an undivided one-half interest in the lease for one-half of its cost, and in March, 1926, the two partnerships sold an undivided one-half interest in it to Manhattan Oil Company, a corporation, for $25,000, the purchase price being paid in equal shares to the partnerships; that is, $12,500 to each of them. A 1/256 interest in the lease was assigned to a broker for negotiating the sale. After the sale, the members of the two partnerships decided to permit certain of their friends who had furnished financial assistance in a previous venture to share in the enterprise. In order to accomplish the desired purpose, Pryor, Lockhart, Rosenthal, and Beardmore conveyed their remaining 127/256 interest to Pryor and Rosenthal as trustees under the terms of a trust indenture executed on May 1, 1926. The material provisions of the instrument were that the trustees should hold legal title to the property and manage it; issue bonds, borrow money, or mortgage the property for the purpose of development; employ labor, also counsel, and institute legal proceedings; declare dividends and call meetings of the share holders. They had full control of the trust res, and were to keep a record of all proceedings. A provision purported to exempt the shareholders from personal liability. Pursuant to the trust, about ten persons subscribed to the fund and received certificates of beneficial interests. They contributed no capital, but were charged $100 for each 1/300 interest, and were credited with a proportionate interest in the $25,000 secured from the Manhattan Company. Any balances charged against them were deducted from their shares of the trust income.
Manhattan Oil Company developed the leasehold estate, drilled wells, pumped and sold the oil therefrom. It furnished the trustees monthly statements for their half of the expenses and remitted semimonthly one-half of the proceeds from the sale of oil. The exclusive duties of the trustees consisted of checking and paying accounts and distributing the dividends to the shareholders. Pryor, as trustee, attended to the business of the trust. There were no by-laws, minute books, officers, or seal. The beneficiaries did not attempt to control or direct the activities of the trustees. No meetings of the shareholders were called or held, and they did not inspect the books of the enterprise at any time. The trust filed fiduciary returns for the taxable period in controversy. The Commissioner determined that the entity was taxable as a corporation, and accordingly made deficiency assessments for the taxable years 1926, 1927, and 1928. The Board of Tax Appeals reversed the ruling, and held that the syndicate was taxable as a trust. This case likewise is here on petition to review.
In 1918 F. E. Lockhart and Ralph J. Pryor formed a partnership for the purpose of buying and selling oil and gas leases on land situated in the mid-continent fields in Kansas. In 1923 the partnership acquired a lease known as the Derbyshire lease, covering 85 acres in Greenwood county, Kan. Producing wells were drilled on adjoining property during the ensuing year. The partners then decided to develop their lease. They did not have sufficient funds for that purpose. They decided to invite several of their friends to join them in the venture. In order to retain control and not be hampered with corporate procedure or the necessity of consulting several partners, a trust, called Pryor & Lockhart Development Company, was organized on July 1, 1924. By the terms of the trust agreement, Pryor was made trustee. The provisions of the trust were substantially the same as those detailed in case No. 945, except that there was only one trustee. On the following day the Derbyshire lease was assigned to the trustee in exchange for trustee's shares provided for in the trust agreement. Thereafter, about fifteen...
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