Stierwalt v. United States
| Citation | 181 F. Supp. 770 |
| Decision Date | 09 March 1960 |
| Docket Number | Civ. No. 4218. |
| Parties | L. H. STIERWALT and Helen H. Stierwalt, Plaintiffs, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — District of Wyoming |
Loomis, Lazear & Wilson, Cheyenne, Wyo., and Holland & Hart, Denver, Colo., for plaintiffs.
John F. Raper, Jr., U. S. Atty., Cheyenne, Wyo., and Jack F. Blair, Tax Division, Dept. of Justice, Washington, D. C., for defendant.
The sole question presented by this action is whether the original Declaration of Trust and subsequent agreements entered into by Stierwalt, McKibbon and Van Buskirk make them an "association" taxable as a corporation within the meaning of 26 U.S.C.A. § 7701, Internal Revenue Code of 1954.
There is no uncertainty in the principles of law to be followed by the courts since the decision of Morrissey v. Commissioner, 296 U.S. 344, 56 S.Ct. 289, 80 L.Ed. 263. The difficulty, as always, comes when the Court applies a principle of law to a given state of facts. Under the Morrissey decision the decisive factor is whether the trust is an orthodox or pure trust as distinguished from a business trust or "association". The court states at page 347 of 296 U.S., at page 290 of 56 S.Ct.:
"We granted certiorari because of a conflict of decisions as to the distinction between an `association' and a `pure trust', the decisions being described in one of the cases as `seemingly in a hopeless state of confusion.'"
The Ninth Circuit in Porter v. Commissioner, 130 F.2d 276, has stated there are two tests to be applied to a trust in order to determine whether or not it is taxable as a corporation. (1) What is its purpose? (2) What is the extent of its business?
In Fidelity-Bankers Trust Co. v. Helvering, 72 App.D.C. 1, 113 F.2d 14, on page 17 there appears a statement of law on this subject well worth repeating:
Having stated the principle of law involved I will now turn to the facts of the case and attempt to determine how they square with the decided cases on the subject.
The facts are not in dispute. The taxpayers, L. H. Stierwalt and his wife Helen, have sued to recover $803.48 of taxes and interest representing an assessment made after the Commissioner had disallowed their claimed deduction for intangible drilling expense. The Commissioner took the position that the deduction was available only to Stierwalt, McKibbon & Associates, which, in his view, is an association taxable as a corporation within the meaning of 26 U.S. C.A. § 7701, Internal Revenue Code of 1954.
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 1956, 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...
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United States v. Stierwalt, 6503.
...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......