Twin Bell Oil Syndicate v. Helvering
| Decision Date | 12 April 1934 |
| Docket Number | No. 7190.,7190. |
| Citation | 70 F.2d 402 |
| Parties | TWIN BELL OIL SYNDICATE v. HELVERING, Commissioner of Internal Revenue. HELVERING, Commissioner of Internal Revenue, v. TWIN BELL OIL SYNDICATE. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Claude I. Parker, John B. Milliken, and George H. Koster, all of Los Angeles, Cal. (L. A. Luce, of Washington, D. C., of counsel), for taxpayer.
Sewall Key and Francis H. Horan, Sp. Assts. to Atty. Gen., for Commissioner.
Before WILBUR, SAWTELLE, and GARRECHT, Circuit Judges.
Petitions for review from a decision of the Board of Tax Appeals have been brought to this court by both the taxpayer and the Commissioner. The Board held that there were income tax deficiencies for the years 1925, 1926, and 1927 in the amounts of $52,835.31, $9,194.63, and $2,631.60, respectively. 26 B. T. A. 172.
On May 3, 1929, the Commissioner notified the taxpayer that he had determined deficiencies in the latter's income tax for the years 1925, 1926, and 1927 in an aggregate amount of $68,451.77. From this determination the taxpayer appealed to the Board, which on May 25, 1932, promulgated its findings of fact and opinion, and on September 3, 1932, entered its decision. By agreement between the parties, the record in both petitions for review was consolidated in one transcript.
The taxpayer was organized under a declaration of trust executed on February 11, 1922, to take over the lease to certain oil properties for the purpose of developing them, to secure the proceeds from the disposition of any oil and gas produced therefrom, and to distribute the proceeds to the beneficiaries.
Under the declaration of trust, the trustees took title to the lease through an assignment to them from Thomas H. Lipps. The original declaration of trust of February 11, 1922, was amended on April 25, 1922, and subsequently a second amended declaration of trust was executed on March 14, 1925.
The amendment of March 14, 1925, made the following changes: The minimum number of trustees was made three, and the maximum five. Such salaries or compensation to the officers or trustees as might be agreed upon by unanimous consent of all the trustees were authorized. In 1925 and thereafter, the trustees voted themselves salaries. Paragraph 12 was amended by substituting "may" for "shall," so that the first sentence thereof reads: "The trustees may call meetings of the unit holders annually. * * *" A paragraph designated "Seventeenth-A" was added, which allowed the trustees to amend the trust by any resolution, minute, or motion passed by unanimous vote of all the trustees, without further formality, "the intent of this paragraph being to permit the trustees by unanimous vote to make such changes from time to time in the Declaration of Trust and the various Amended Declarations of Trust as the conditions of the trust estate may be to sic them deemed advisable without the necessity of executing any additional instruments or documents." Paragraph 18 was so amended as to permit in effect the purchase of additional property and sales by the trustees, but such acts could be done only by unanimous consent of all of the trustees at a meeting called for that purpose.
The essential characteristics of the organization as it existed under the three declarations of trust were not materially different, in so far as they affected the nature of the syndicate for the purpose of income tax. The purpose of the amended declaration of April 25, 1922, however, was to strengthen the trust provisions that the trustees should have exclusive management and control of the trust property. It is not necessary for us to detail those provisions, since the Commissioner concedes in his brief that "the trustees kept the books, negotiated all contracts, and were never subject to the supervision or control of the unit holders."
Certificates of beneficial interest, which were transferable on the books of the trust, were issued to persons who, by the contribution of a price of at least $100 for each unit, became beneficiaries or unit holders under the trust. All the certificates bore the stamp that they were subject to the provisions of the declarations of trust dated February 11, 1922, April 25, 1922, and — as to certificates issued after the second amended declaration of trust — March 14, 1925. No units were issued prior to April 25, 1922.
As amended on April 25, 1922, the trust instrument empowered the trustees to drill wells, develop them, deal in petroleum, and "hold or convey, grant, bargain, sell, lease for terms, repair and make any improvements thereon * * * subject to this trust as they may deem advisable." They might use a common seal. Neither trustees nor unit holders were to be held personally liable for debts of the trust, and creditors were to "look only to the funds or property of the trust for payment." No assessment should ever be made upon the unit holders. Any vacancy among the trustees was to be filled by those remaining. The trustees could declare quarterly "dividends." Meetings of the trustees were to be held on the call of the president or of any three of the trustees. The death of a unit holder or trustee should not operate to terminate the trust, but his executors or other representatives were to succeed to his rights. The trustees might by unanimous consent amend or alter the declaration of trust. The trust was to run for 50 years, and might then or at any time prior thereto be terminated by unanimous consent of the trustees.
Paragraph 18 of the declaration of trust provided: "None of the powers in this Declaration of Trust set out shall be construed as authorizing the trustees to acquire any properties or oil leases, or to dispose of the whole or any part of the capital or assets or other properties of this trust either in whole or in part, it being the specific intention of this paragraph to limit the powers of the trustees to the management and control of the property now owned, and controlled by the Syndicate, including the proceeds to be derived from the discovery and development of oil on the premises owned or controlled by the Syndicate, and to compel the trustees to make quarterly distribution of the entire net proceeds amongst unit holders of record as in Paragraph Ninth of this Declaration of Trust set forth."
The certificates referred to the syndicate as a "company," and were to be signed by the "President of the Board."
All three declarations of trust contained specific provisions for the annual election of officers by the trustees from among their own number. The officers were president, vice president, treasurer, and secretary, and all were to be removable at the trustees' pleasure.
"In actual practice," says the taxpayer in its brief,
The foregoing excerpts from the various declarations of trust, together with the taxpayer's own picture of the organization in action, would seem to bear out the Board's finding that, "aside from the exclusive control resident in the trustees, petitioner's taxpayer's organization resembles in purpose and in form that of a corporation."
The Commissioner classified the taxpayer as an association taxable as a corporation.
The original oil lease, from W. O. Batson, which was finally assigned to the taxpayer and which is the trust property, contained the provision that "the Lessee shall pay as rental or royalty for the use of said land one sixth (1/6) of all oil produced and saved therefrom, said payment to be made in money or in kind at the Lessor's option."
On February 10, 1922, this lease was assigned by F. A. Andrews to Thomas H. Lipps. The agreement of assignment contained the provision that, in addition to the payment of the one-sixth royalty specified in the original lease, the assignee would pay a one-twelfth royalty to the assignor. On April 25, 1922, Lipps assigned all his rights under the lease to the taxpayer's trustees.
The one-sixth royalty paid to Batson and the one-twelfth royalty paid to Andrews, by the taxpayer herein, during the taxable years, were as follows:
Year Batson Andrews
Royalties Royalties
1925 ........ $159,853.20 $79,926.60
1926 ........ 143,253.02 71,626.51
1927 ........ 70,946.34 35,473.17
The parties herein stipulated as follows:
This 27½ per cent. allowance will, in its proper place, be hereafter discussed.
The taxpayer has never acquired any property other than the lease assigned to it by Lipps, and has never sold any part of such lease. The taxpayer had a contract under which it sold all the oil produced, to the Associated Oil Company, and was under contract with the Norwalk Gas Company to sell to it all the gas...
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...The Board of Tax Appeals sustained the ruling, 26 B. T.A. 172. The Circuit Court of Appeals reversed the Board, Twin Bell Oil Syndicate v. Helvering, 9 Cir., 70 F.2d 402. The United States Supreme Court The Twin Bell lease, it is true, provided, among other things: "* * * The Lessee is here......
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