Crabb v. Commissioner of Internal Revenue ( 1941 )

SIBLEY, Circuit Judge.

Three married sisters and their brother, all residents of Texas, had deficiencies assessed on their income tax returns for the year 1936. Their petitions for redeter-mination by the Board of Tax Appeals were consolidated and by stipulation a consolidated petition for review is before us. The Commissioner “restored to income” in 1936 the amount deducted in 1934 as percentage depletion allowances from bonuses received for two oil and gas leases, because in 1936 both leases were surrendered, one having produced nothing and the other a trifling amount of which the taxpayers got $36.98. Because there was some production on the latter lease the Board held the depletion deduction as to it should stand, but upheld the Commissioner’s action as to the lease on which there was no production. The Commissioner has not sought review so we express no opinion as to the proper effect of the slight production. The taxpayers raise these questions: 1. Can there be an income charge in 1936 of the sort made when nothing was received in that year? 2. Can the two leases, made on parts of a single tract of land, be considered one “property”, so that production from one lease is production from the whole “property”? 3. Is the restored income the individual income of the sisters, or is it community income of each and her husband ?

The first two questions are concededly the same as were made and decided against the taxpayer in Sneed v. Commissioner, 5 Cir., 119 F.2d 767. On the authority of that case we uphold the income charge as respects the lease on which there was no production.

The facts pertinent to the third question are these: Mrs. Kate B. Welder, the mother of the taxpayers, on October 28, 1931, conveyed by way of gift to her four children a large quantity of Texas land called the Duval County Ranch “as their separate property and estate and for their sole and separate use and benefit” in fee simple. On Feb. 15, 1932, Mrs. Welder and her four grantees, the married women being joined by their respective husbands, executed an instrument which began, “This instrument of agency, contract and trust”, and recited a purpose that the Duval County Ranch and certain personal property should for ten years be managed and conducted as a ranch and farm business, and increased and improved as such under the control of Mrs. Welder and the brother who were named as trustees with very broad powers; and it then conveyed the children’s interests in the land in trust to the trustees, “to have and to hold said undivided shares and interests * * * in trust for the term of ten years beginning at the date of the execution of this instrument * * * for the purpose of carrying on and conducting certain farming and ranch businesses as hereinafter more specifically set forth.” There followed pages of details about such business. The trust could be amended or terminated prior to the ten years by unanimous consent of the beneficiaries. On expiration or termination for any cause of the trust, the trustees were to recouvey to the beneficiaries. At the very end of the instrument there is the first reference to oil and gas leases, and power is given the trustees, or either of them, to make such leases extending beyond the ten-year term, and “it shall not be necessary for the beneficiaries hereunder or any party to this instrument to join in such leases, but they or he as the case may be are hereby appointed attorneys in fact or attorney in fact of each and every party hereto to execute such lease or leases.” By similar words provision is made for selling royalties or other mineral interests. No oil or gas had at the date of the instrument been discovered in the vicinity, and the land had been used only for farming and ranching.

On June 7, 1932, Mrs. Welder made a gift of land in another county to her children, this deed reciting a purpose to make it a part of the above trust, and conveying it to the son and his successor trustees “for the term of ten years beginning Feby. 15, 1932”; and subject to the trust, conveying the land “to said James F. Welder, Jr., Mrs. Elizabeth Wood, Mrs. Madeline Smith, and Mrs. Dolores Crabb as their separate property and estate.” The trust agreement of Feb. 15, 1932, is expressly referred to, and with certain exceptions, all the powers and discretions vested by it in the trustees are to apply to this laud. It also had been used only for farm and ranch purposes and was not known to be valuable for minerals. The oil development began in 1934. The leases here involved were on parts of the land in the second conveyance.

As to all the lands, aside from the trust, the interests of the married daughters were their separate and not community property. Rev.Civ.Stats.Tex. Art. 4614, Vernon’s Ann.Civ.St.Tex. art. 4614. In Texas, oil and gas leases of the kind here made are considered conveyances of a base fee title to the oil and gas in place, so that bonuses and royalties received for the lease are separate property if the land is. Stephens v. Stephens, Tex.Civ.App., 292 S.W. 290; Chesson v. Commissioner, 5 Cir., 57 F.2d 141; Commissioner v. Wilson, 5 Cir., 76 F.2d 766. The taxpayers argue that they have conveyed their separate property to the trustees for a business partnership purpose, and being married women whose disabilities have not been removed, they cannot be partners, so that their husbands are the partners, and they are creditors, owning now only a debt against the partnership, and what is received from it is their husbands’ in community. It is alternatively argued that if not a partnership, there is a taxable trust. We do not think it necessary to decide what the trust business is, because the lease and sale of mineral deposits was not included in it. Farming and ranching business was contemplated and the trust was created for that alone. All save the last of the many pages of the instrument relate to that only. The land was conveyed for but ten years, and “for the purpose of carrying on certain farming and ranch businesses.” The conveying of a base fee in minerals by lease, or selling'them outright was not included. The power of the trustees to convey minerals is a separate and superadded matter, for which the trustees are created expressly the attorneys in fact of the landowners to execute the leases or deeds. They do not convey their title as trustees, but the title of the reversioners, acting as their attorneys or agents. The proceeds come not from the operations of the trust, but from the disposal of minerals which were nev.er conveyed to the trustees. The lease bonuses are separate property.

Affirmed.