Nee v. Linwood Securities Co., 13747.

• Decision Date: 05 May 1949
• Docket Number: No. 13747.,13747.
• Parties: NEE, Collector of Internal Revenue, v. LINWOOD SECURITIES CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

174 F.2d 434 (1949)

NEE, Collector of Internal Revenue, v. LINWOOD SECURITIES CO. et al.

No. 13747.

United States Court of Appeals Eighth Circuit.

May 5, 1949.

Louise Foster, Sp. Asst. to the Atty. Gen. (Theron Lamar Caudle, Asst. Atty. Gen., George A. Stinson and Ellis N. Slack, Sp. Assts. to the Atty. Gen., and Sam M. Wear, U. S. Atty., and Earl A. Grimes and Sam O. Hargus, Asst. U. S. Attys., all of Kansas City, Mo., on the brief), for appellant.

John H. McEvers, of Kansas City, Mo. (Reece A. Gardner, G. Lee Burns and Stinson, Mag, Thomson, McEvers & Fizzell, all of Kansas City, Mo., on the brief), for appellees.

Before GARDNER, Chief Judge, and JOHNSEN and COLLET, Circuit Judges.

JOHNSEN, Circuit Judge.

Like Nee v. Main Street Bank, 8 Cir., 174 F.2d 425, decided concurrently herewith, this case involves the liability of a trust for income taxes as an association and for capital stock taxes as an association doing business.

As in that situation, the trust had been terminated before the assessments were made, and the beneficiaries, to whom the property had been conveyed, paid the taxes and sued in the District Court for their recovery. The court, on a non-jury trial, gave the beneficiaries judgment, and the Collector has appealed.

The situations in the two cases are similar in a number of respects, but there are also some material differences in the circumstances.

This trust, like that in the Main Street Bank case, arose out of the necessity of taking title to a ranch property, of 1560 acres, in Lea County, New Mexico. The ranch had been security for a series of notes which had been sold by an investment broker severally to some banks. Default occurred on the notes in 1922, and the banks involved joined in executing a declaration of trust, under which they assigned their notes to a named trustee, with authority to collect the indebtedness or foreclose the mortgage and "take title to * * * said real estate * * * and sell the same upon credit or for cash, and apply all the proceeds * * * pro rata upon said notes."

The mortgagor shortly afterward deeded the property to the trustee in satisfaction of the indebtedness. Because of the lack of a market for ranch property, the trustee did not succeed in disposing of any part of the land until 1928, when he sold 160 acres, with a reservation of the oil, gas and mineral rights.

During that year, the beneficiaries reconstituted the trust, under a new declaration, providing for three trustees instead of one, with the power of "management and disposition" of the property, "including the right to execute on behalf of the beneficiaries, oil, gas or mineral leases and the transaction of any business incident thereto and to execute and deliver oil and gas leases and leases for grazing purposes." Action by the trustees could be taken by the concurrence of a majority of them. The trustees were to have no liability except for "conduct that amounts to bad faith or gross neglect."

Shortly after the constituting of the trust, the trustees gave a ten-year oil and gas lease on 440 acres of the property, with conventional rental and royalty provisions. They apparently were unable to dispose of any more of the land itself until 1932, when they sold the rest of it. The sale of the land returned only a part of the banks' investment. As on the preceding sale, the trustees retained or reserved the oil, gas and mineral rights in the property. The trustees did nothing else until 1934, when they executed an oil and gas lease on an additional 160 acres, under conventional rental and royalty provisions.

There was again a wholly passive period for about two years. Then, in 1936, the lessee undertook to do some drilling on the land and a discovery of oil resulted. From that time on, until the termination of the trust in 1943 (when the Commissioner had threatened to assess association taxes), royalty checks were paid to the trustees and they distributed the money to the beneficiaries. The only thing the trustees did during this period, according to the testimony, was to "sit there," receive the royalty checks as they were forwarded to them through the mail, and make distribution of the proceeds.

It will be noted that, unlike the Main Street Bank case, the trust here was not reconstituted at a time of or in relation to some proceeding or culminating oil development. The situation at the time seems to have been, as it also continued to remain for a period of eight years following the making of the trust, a simply passive one, and on the record before us the trial court could properly find that there had not been any expectation or belief by the beneficiaries of some change, in relation to which they had acted in 1928, when the trust was constituted, and which they were designing to exploit. The two oil leases which the trustees executed, during an interval of six years, were, as we have stated, in conventional form. They involved no bonus payments, or agreements to pay more than the ordinary royalty share, such as did the leases which were in existence in the Main Street Bank case at the time that trust was constituted, and no other intensifying or evaluative incidents appear to have existed, such as those which prompted the creation of the Main Street Bank trust.

The present trust therefore could be...