E. A. Landreth Co. v. Commissioner

E. A. LANDRETH CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. A. LANDRETH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ADELLE H. LANDRETH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

E. A. Landreth Co. v. Commissioner

Docket Nos. 15835, 16842, 16843.

United States Board of Tax Appeals

11 B.T.A. 1; 1928 BTA LEXIS 3877;

March 16, 1928, Promulgated

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1. Where one purchased an oil and gas lease and certain water rights and was unable financially to pay the purchase prices and develop the property, and where he from time to time solicited and received assistance from others, and where such others so contributing had no voice in the selection of contributors, and where such properties were managed by the purchaser in whose name the legal title was vested, held, that such an enterprise was a joint adventure.

2. Where individuals associated themselves together for the purpose of transacting business under corporate forms and methods, held, that the entity so formed was for income-tax purposes an association, irrespective of the fact that exclusive authority was conferred upon their managing agent who was styled trustee and who held the legal title to all its property.

3. Section 1107 of the Revenue Act of 1926 does not deprive the Commissioner of the right to review his own decisions.

4. Invested capital of an association determined in accordance with the provisions of section 331 of the Revenue Act of 1918.

5. Basis for gain or loss determined in case of sale of property of an association.

6. Where association A transferred certain of its assets to association B, and where such assets constituted all the assets of association B, and where association B paid association A for said assets with the whole of its capital stock, which capital stock was distributed by association A to its stockholders, held, that in the absence of a showing by petitioners that association A did not have a surplus equal to or greater than the amount of distribution, such distribution was taxable as a dividend.

Claude Collard, C.P.A., and M. M. Mahany, Esq., for the petitioners.

Bruce A. Low, Esq., for the respondent.

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MILLIKEN

These proceedings were by agreement consolidated for hearing and decision, and involve the following deficiencies in income and profits taxes:

In the proceeding of E. A. Landreth Co. the deficiencies are, for the year 1920, $29,411.03, and for the year 1921, $36,084.05. In the proceedings of E. A. Landreth and Adelle H. Landreth, the deficiencies are for the year 1920, and in each proceeding the deficiency is $2,312.23.

In its petition, E. A. Landreth Co. asserts the following errors: (a) That respondent classified petitioner and theLandreth Water Co. as associations; (b) that the respondent consolidated the net income and invested capital of the petitioner and of the Landreth Water Co.; (c) that respondent erred in further reviewing petitioner's return for the year 1920, after he had previously examined its return and determined its income; (d) failure of respondent to allow as a deduction from gross income for the year 1920, certain labor and teaming expenses in the amount of $14,948.54; (e) failure of respondent to determine that the amount of taxes paid by petitioner for the year 1920, was $7,339.10, the amount actually paid, instead of $8,049.33; (f) failure of respondent to allow as deductions from gross income for the years 1920 and 1921, adequate allowances for depreciation and obsolescence sustained with respect to the following assets, to wit:

Year 1920
Owned by E. A. Landreth Co.	Owned by Landreth Water Co.
(1) Hale lease equipment.	(7) Pipe and fittings.
(2) Camp equipment; furniture and fixtures.	(8) Frame building.
	(9) Machinery.
(3) Two Dodge automobiles.	(10) Automobiles.
(4) One Dodge automobile.
(5) Ford automobile.
(6) Frame shack.

Year 1921
Owned by E. A. Landreth Co.	Owned by Landreth Water Co.
(11) Hale lease equipment.	(17) Pipe and fittings.
(12) Baker-Gannon lease equipment.	(18) Buildings.
(13) Stoker lease equipment.	(19) Machinery.
(14) Automobiles.	(20) Automobiles.
(15) Camp equipment.
(16) Furniture and fixtures.

(g) failure of respondent to compute the correct amount of taxable gain or loss for the year 1921 arising from the sale or other disposition of the following assets, to wit:

Owned by E. A. Landreth Co.	Owned by Landreth Water Co.
(1) Hale lease.	(8) Pipe, fittings, buildings, machinery and automobiles.
(2) Automobiles.
(3) Camp equipment.
(4) Dismantling and salvaging losses.
(5) Casing.
(6) Furniture and fixtures.
(7) Abandonment of Thompson and Vick leases.

(h) failure of the respondent to include in gross income for the year 1921, other income in the sum of $344.70; (i) failure of the respondent to determine the correct amount of deductions from gross income for the year 1921, to wit:

(1) Production expense	$6,159.33
Instead of $6,741.58 as allowed by respondent.
(2) General expense.
(3) Drilling expense	113,390.32
Instead of $122,676.48 as allowed by respondent.
(4) Farm maintenance	1,208.38
Instead of $1,996.92 as allowed by respondent.
(5) Interest and discount.

(j) failure of respondent to allow as a deduction from gross income for the year 1921, depletion sustained in relation to the Hale lease; (k) failure of respondent to allow as a deduction from gross income for the year 1921, a bad debt; (l) failure of respondent to determine that the cost to petitioner of certain assets which were transferred to the Landreth Water Co. in the year 1920 was the sum of $60,224.44; (m) action of respondent in determining that the transfer of assets by petitioner to the Landreth Water Co. in the year 1920 constituted a dividend in kind in the sum of $81,916.11; (n) failure of respondent to determine the petitioner's correct invested capital for the years 1920 and 1921; (o) failure of respondent to correctly compute petitioner's income and profits taxes for the years 1920 and 1921; (p) failure of respondent to grant petitioner special relief under the provisions of the Revenue Acts of 1918 and 1921; (q) failure of respondent to allow as deductions for the year 1921, losses arising from abandoned leases in the sum of $48,200; and (r) action of respondent in reducing the cost of sale of certain properties by the amount of depreciation and depletion sustained for the purpose of determining gain or loss.

At the hearing, petitioner waived errors (f) 2 to 20, inclusive; (g) 2, 3 and 6; (i) 2 and 5; (j); (k); (p) and (r); and respondent admitted error as to errors (e); (h) and (i) 1, 3 and 4.

In the appeals of E. A. Landreth and Adelle H. Landreth, the following errors are asserted in each petition: (1) That respondent determined that the E. A. Landreth Co. and the Landreth Water Co. were associations during the year 1920; (2) action of respondent in including in community income dividends from E. A. Landreth Co. for the year 1920 in the amount of $24,711.25; and (3) failure of respondent to include in community income for the year 1920 distributive income of the E. A. Landreth Co. in the amount of $12,094.66.

FINDINGS OF FACT.

In April, 1920, E. A. Landreth purchased in his own name but for the benefit of the Metex Petroleum Corporation, a Delaware corporation of which he was then the representative, a two-thirds interest in an oil and gas lease on an 80-acre tract of land in Stephens County, Texas, known as the Hale lease. The price of the two-thirds interest was $200,000. The Metex Petroleum Corporation was financially unable to raise funds sufficient to pay for the lease and the liability on the contract of purchase devolved upon E. A. Landreth, individually. He called his brother, W. H. Landreth, to his assistance and they used their own funds to pay the purchase price of the lease and also raised money on their personal endorsements. E. A. Landreth interested friends and other relatives in the enterprise with the result that by September 8, 1920, the following persons had paid in to the enterprise the amounts opposite their respective names:

W. H. Landreth	$77,500
E. A. Landreth	77,500
J. P. Landreth	10,000
Wm. Allison	10,000
Roger Bennett	6,000
Marian Bennett	2,500
John Wise	$5,000
James L. Smith	5,000
J. A. Cotton	5,000
W. D. Mardick	1,500
	200,000

The contributors, other than E. A. Landreth and W. H. Landreth, began to make their contributions to the fund in June, 1920. Up to September 8, 1920, there was no agreement or understanding as to the form or manner in which the enterprise should be conducted, nor as to the liability of the respective contributors, as between themselves or as to third persons. During this period, the control of the enterprise was left to the sole discretion and management of E. A. Landreth. The funds so contributed and all other funds accruing to the enterprise were deposited by E. A. Landreth in bank to the credit of E. A. Landreth, trustee, this being the designation of an account to the credit of which E. A. Landreth had deposited funds belonging to himself and to the Metex Petroleum Corporation and another company which he had theretofore represented. Prior to September 8, 1920, purchases of equipment were made in the name of E. A. Landreth or E. A. Landreth & Co., or possibly E. A. Landreth Co. All credit for such purchases was extended solely to E. A. Landreth and W. H. Landreth. Prior to September 8, 1920, E. A. Landreth and W. H. Landreth had acquired, for a cost not shown, certain water rights, including a water lease on property adjacent to the Hale lease. These rights were acquired as a part of the original enterprise and for the purpose of furnishing water for the operation of that lease and also for the purpose of selling water to other oil operators in the neighborhood. Under date of September 8, 1920, the contributors above named executed the following instrument in writing:

That We, the undersigned, W. H. Landreth, of Joplin, Missouri, and E. A. Landreth, of Breckenridge, Stephens County, Texas, have acquired for E. A. Landreth Company and its successors and assigns, various oil and gas rights, including leasehold interests, contract rights, option rights, fees and various other interests in land lying and being situated in the County of Stephens and State of Texas, and elsewhere; And also certain water franchises, rights, privileges and options, including the right to conduct, maintain and operate a water system in said Stephens County, Texas; which said property shall be owned and held by E. A. Landreth Company, the legal title of which shall vest in E. A. Landreth, the sole trustee of said estate. And it is agreed by the parties hereto that the said trustee shall be known and dealt with, and said trust estate known and dealt with, and sue and be sued as E. A. Landreth Company: And all property which shall hereafter be assigned to said E. A. Landreth Company shall vest in said trustee, his successors or assigns, and shall be owned and held by him, his successors and assigns as such trustee in trust for the purposes set forth in the following articles, and which are hereby agreed to by the parties hereto:

ARTICLE I.

The trust estate herein created and hereby provided for shall exist for a term of twenty-five years from date hereof, and at the termination of which it shall be the duty of said trustee or his successor, to wind up and liquidate the affairs of said trust estate, and to distribute the cash arising therefrom pro rata among the holders of the beneficial certificates hereinafter referred to according to the number of shares held by each; provided that such distribution shall be made prior to the expiration of such period of time, if said trustee at any time shall decide to terminate said trust.

ARTICLE II.

Said trust estate shall be owned absolutely and unconditionally by the said trustee and his successors, but the beneficial interest in the dividends which may be declared by the said trustee and his successor, in the corpus of said trust estate at the termination thereof after liquidation, as hereinbefore provided, shall be evidenced by Two thousand shares, of the par value of One Hundred & No/100 ($100.00) Dollars each, which are fully paid and non-assessable, and the said shares are at the present time owned by the following persons, to-wit:

	Shares
W. H. Landreth	775
E. A. Landreth	775
J. P. Landreth	100
Wm. Allison	100
Roger Bennett	60
Marian Bennett	25
John Wise	50
James L. Smith	50
J. A. Cotton	50
W. D. Mardick	15

The shares shall be evidenced by certificates issued and signed by said trustee or his successor, and shall be personal property, and the shares shall be assignable, but so far as the interest of the trust estate shall be concerned shall be assignable only on the books kept by said trustee, and said trustee may be the owner of any number of shares.

ARTICLE III.

Said trustee and his successors shall have the power to bind and act for said trust estate, and said trust estate shall be held by said trustee and his successors, and he shall have full control and management of said trust estate according to his discretion. And he is hereby vested with the right of disposition of said trust estate and any and all parts thereof, by sale, barter, lease, mortgage or otherwise, as well as all increases arising therefrom and all of the fruits, interests and revenues which may arise therefrom, and of all properties into which said trust estate may be invested, and it shall be his duty to invest and re-invest the funds of said trust estate according to his best judgment, for the purposes hereinafter set forth. And he shall have the power to make contracts binding upon said trust estate, upon such terms as he shall deem fit; and he is hereby empowered to do and perform any and all things whatsoever which he shall deem for the benefit of said trust estate, and which shall be consistent with the general purposes set forth in this instrument. And in this connection it is understood that said trustee or his successor, shall have absolute power to do and perform any and all things herein set forth.

ARTICLE IV.

Said trustee is authorized to use said trust property and funds in conducting the following businesses, to-wit:

Leasing and purchasing the right to prospect for gas and petroleum, and buying and selling such rights; prospecting for such minerals and drilling of wells and otherwise seeking to locate the same; producing, refining and marketing gas and petroleum, and buying and selling the same; building suitable tanks, pipe lines and other means for the preservation, transportation and merchandising of any gas or petroleum so found; acquiring franchises for the laying of pipe lines and conduits for the transportation and merchandising of gas and petroleum, and selling or supplying such minerals to corporations, municipalities or individuals; manufacturing and selling gas; acquiring franchises for the transportation or conveyance and delivery of gas; and providing means for such transportation and conveyance, and utilizing the same; acquiring by lease, purchase or otherwise such property, real or personal, as said trustee may deem proper or necessary for the purpose of carrying the business and purposes of this trust. To purchase water rights, franchises, privileges and options, including the right to conduct, operate and maintain a water system for the purpose of selling water to individuals, firms, corporations, municipalities, and holding and using, selling, trading, assigning, pledging, mortgaging, transferring and conveying such property, both real, personal or mixed, which may belong to said estate, and issuing shares, bonds, certificates and other obligations; and to secure the payment thereof by mortgages, pledges or Deeds of Trust of the whole or any part thereof of the property or the funds of this trust, and generally to incur debts which shall be chargeable against such trust funds. In short, said trustee and his successor shall have the absolute right and power of using the funds of the trust estate to purchase in any manner he may deem fit, or under any terms and conditions he may deem advisable, and to sell and dispose of the same, or any part thereof, under any terms and conditions he may deem advisable, any real estate, options, chattels, real or personal property of any kind or character which may belong to said trust estate.

ARTICLE V.

The trustee shall not, nor his successor, be liable for any errors of judgment, or for any loss arising out of any act or omission in the execution of this trust so long as said trustee acts in good faith; nor shall he be personally liable for the acts or omissions of any agent or servant appointed by or acting under him; it being expressly understood that the trustee herein shall be personally liable only for his personal breach of trust. Said trustee or his successor shall not be personally liable on any contract, claim or demand, or for any torts arising out of the conduct of the business or incident thereto of this trust estate to any one whomsoever: It being expressly understood that all persons whomsoever shall look to the property and assets of said trust estate for the satisfaction of his or their claims or demands, whether contractual or otherwise, and not to the trustee personally. And if said trustee shall be required to pay any sum or sums of money on account of any act of his made and performed in good faith in the performance of his duties as such trustee, then he shall be indemnified therefor out of said trust estate, and his claim for indemnity shall take precedence and priority over any other claim or claims against said trust fund and estate, save and except the lien creditors.

ARTICLE VI.

The trustee shall have no power to bind the shareholders personally, or to call upon them for the payment of any sum of money or assessment whatsoever, other than such sum or sums as they may have in this agreement agreed to pay, and may at any time in the future agree to pay by way of subscription to new shares or otherwise. All persons, concerns and corporations extending to or contracting with or having any claim or claims against said trustee or his successor, shall look only to the funds and properties of the trust estate for the payment of any such contract or claim, or for the payment of any damages, judgment or decree, or any money that may otherwise become due and payable to him from the trustee, and neither shareholders nor officers, present or future, shall be personally liable therefor.

In any written order, contract or obligation which the trustee or officer of this trust shall give, authorize or enter into, it shall be the duty of the trustee and officer to stipulate or cause to be stipulated, that neither the trustee or officers, or shareholders shall be held to any personal liability under or by reason of such order, contract or obligation; and all letter-heads, bills and other stationery shall have printed thereon, notice to the public that E. A. Landreth Company is a trust estate, and that only the assets of said estate are chargeable with its debts and obligations, and that neither the trustee nor the officers nor shareholders are personally liable therefor.

ARTICLE VII.

Said trustee is authorized to use a seal upon all papers and instruments affecting the title of any real estate belonging to said trust estate; which seal shall contain the words "E. A. Landreth Company".

ARTICLE VIII.

The trustee or his successor shall from time to time appoint one of the shareholders as President, and W. H. Landreth is made, and he is hereby selected and appointed the President of said E. A. Landreth Company, with such power and authority as the trustee herein shall deem proper to confer upon him. Such officer shall hold the office at the will of the trustee herein, and said trustee shall have authority to select and appoint his successor. The trustee herein shall act as SECRETARY and TREASURER of said trust estate, but he is hereby authorized and empowered to appoint any one of the shareholders of said trust estate to act in the capacity of Secretary and Treasurer, with such powers and authority as said trustee may confer upon him by instrument in writing duly executed by such trustee, and having the seal of said E. A. Landreth Company.

ARTICLE IX.

The trustee herein shall act in such capacity during the life of this instrument, or at the will of said trustee: That is, said trustee or his successor hereunder reserves the right at any time to cease acting hereunder as trustee and to be released of any duties or responsibilities hereunder; and in the event of resignation or death of said trustee the President of E. A. Landreth Company is authorized to appoint his successor, which appointment shall be made by an instrument in writing, duly executed by the President of E. A. Landreth Company and bearing the seal of said E. A. Landreth Company, a copy of which shall be filed for record in the office of the County Clerk of Stephens County, Texas.

ARTICLE X.

The death of a shareholder or trustee shall not operate to determine the trust, nor shall it entitle the legal representative of the deceased shareholder to an accounting or to take any action in the courts or elsewhere against the trustees or his successor, but the executors, administrators or assigns of any shareholder shall succeed to the rights of the deceased shareholder, upon the surrender of the certificate for shares owned by him. The ownership of shares hereunder shall not entitle the shareholder to any title in or to the trust property whatsoever, or the right to call for a partition or division of the same, but only to receive and collect the dividends that may be declared and paid, and the beneficial interest in the event of liquidation. And it is expressly declared and agreed that the shareholders are cestuis que trustents, and hold no other relation to the trustees than that of cestuis que trustent hereunder.

ARTICLE XI.

All subscribers hereto, and all subsequent subscribers to or owners of shares, as well as their heirs, executors, administrators and assigns, shall be bound by the agreements and provisions herein contained, as well as all amendments, alterations and additions which may hereafter be made in accordance with the terms hereof.

In witness to all of the above the parties forming this trust agreement hereunto subscribe their names, this the 8th day of September A.D. 1920.

At the time of the purchase of the Hale lease, E. A. Landreth opened a set of books in which entries were made from the date of the purchase of the lease down to and through the years here involved, to wit, 1920 and 1921. Little, if any, change was made in the form of bookkeeping during the said period. At the time of the organization of E. A. Landreth Co. it acquired the two-thirds interest in the Hale lease which had theretofore been purchased by E. A. Landreth, and for which he had paid from the funds under his management the purchase price. This lease and equipment had at the date it was acquired by the E. A. Landreth Co. a fair market value of $600,000. E. A. Landreth Co. acquired and owned all the equipment on the lease. This equipment had a cost on September 8, 1920, of $193,034.84. The fair market value of the two-thirds interest in the lease acquired by the E. A. Landreth Co. plus the value of the equipment was, on said date, $464,344.95. The value of the water rights is not shown. On October 28, 1920, J. Connor Wise executed the following instrument in writing:

DECLARATION OF TRUST

LANDRETH WATER COMPANY.

STATE OF TEXAS

County of Stephens ss.

THAT I, the undersigned, J. Connor Wise of Breckenridge, Stephens County, Texas, have acquired for the Landreth Water Company and its successors and assigns, certain water franchises, rights, privileges, and options, including the right to conduct, maintain and operate a water system in Stephens County, Texas, together with reservoirs, pipe-lines, machinery and equipment. Which said property shall be owned and held by Landreth Water Company, the legal title of which shall vest in J. Connor Wise, sole trustee of said Trust Estate,

NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS:

ARTICLE I.

The said J. Connor Wise, Trustee, hereby declares to all persons who are now and may become shareholders herein, that he will hold said properties, including claims and effects of all kinds so acquired, and to be acquired, by the "Trust Estate", or by him as Trustee; together with the proceeds therefrom and the income thereof, in trust during the continuance of this Trust Estate, and shall manage and dispose of the same in the manner, and subject to the stipulations herein contained; and the said Trustee and his successors will hold all of the said properties in trust for the benefit of shareholders in the Trust Estate, in proportion to the number of shares held by each in the Trust Estate.

ARTICLE II.

The Trust Estate hereby created shall be known as Landreth Water Company which shall continue in existence for a period of twenty-five (25) years from date hereof, unless sooner dissolved in the manner hereinafter set forth.

ARTICLE III.

The Trustee is authorized to use said Trust property and funds to purchase water rights, franchises, privileges and options, including the right to conduct, operate and maintain a water system for the purpose of selling water to individuals, firms, corporations, municipalities, and holding and using, selling, trading, assigning, pledging, mortgaging, transferring and conveying such property, both real, personal, or mixed, which may belong to said Trust Estate, and issuing shares, bonds, certificates and other obligations, and to secure the payment thereof, by mortgages, pledges, Deed of Trust of the whole or any part thereof, of the property or the funds of this Trust, and generally to incur debts which shall be chargeable against such Trust funds. In short said Trustee and his successors shall have the absolute right and power of using the funds of the Trust Estate to purchase in any manner, he or they may deem fit, or under any terms and conditions he or they may deem advisable, and to sell and dispose of the same or any part thereof, under any terms or conditions he or they may deem advisable, any real estate, options, chattels, real or personal property of any kind or character which may belong to said Trust Estate.

ARTICLE IV.

The management and control of the Trust Estate and all its properties shall be vested in J. Connor Wise, and his successors, and he or they shall have sole power of management of the business of the Trust Estate, and exclusive power and authority to sell and convey, as Trustees, the said properties or any part thereof, and to distribute the revenues and the profits and all funds that may come into their hands as Trustees to and for the benefit of the respective shareholders.

ARTICLE V.

The Trustee may select a manager, or managers, for all or any part of the Trust Estate property, or business, and may employ such agents, servants, and employees, fixing their compensation, and entrusting them with such authorities and duties as he may deem wise, including the authority to buy and sell goods, wares, merchandise, material, supplies, machinery, appliances, and other things necessary to its operation in the course of business.

ARTICLE VI.

The Trustee shall hold office for the entire life of the Trust, but may be removed at any time for misconduct, or breach of trust, by a majority vote of the shareholders at a meeting held for that purpose only. That in the case of the death, resignation or removal of the Trustee a new Trustee may be appointed by a majority in interest of the outstanding shareholders at a meeting held for that purpose only.

ARTICLE VII.

The title to all property which is ever acquired by the Trust Estate shall be in the Trustee, as such, the survivor of him, under a Declaration of Trust for and on behalf of the Trust Estate. In all deeds of conveyances to said Trustee, or to his successors, it shall be set forth that such grant, conveyance, or transfer is to him or them as Trustees of Landreth Water Company to be held subject to the Declaration of Trust made pursuant to the Trust Estate, and the amendments thereto.

ARTICLE VIII.

Shareholders in this Trust Estate shall have no legal or equitable right to the Trust properties held from time to time by the Trustee herein provided for, and especially shall they have no right to call for any partition of the trust property, or dissolution of the Trust; but the shares shall be personal property carrying the right of division of the net profits when and as the same may be distributed by the Trustee, and at the termination of the Trust by expiration of the period fixed for its existence or dissolution otherwise, the shareholders shall be entitled to a division of the principal and the profits in due proportion to the number of shares held by each.

ARTICLE IX.

The debt, insolvency, or bankruptcy of a shareholder or the transfer of his interest by sale, gift, devise, descent, operation of law, or otherwise during the existence of the trust shall not work a dissolution thereof, or have any effect on the same, its operation, or mode of business, nor shall it entitle his representatives, heirs, or assigns, to an accounting, or to take any action in the courts, in law or in equity, or otherwise against the Company, its members, its Trustee, or its property, or assets, or business operations, which shall remain intact and undisturbed thereby; but they shall only succeed to the right of the original member to the certificate of membership and the shares it represents subject to this Declaration of Trust and amendments thereto.

ARTICLE X.

The Trustee shall have no power to bind the shareholders personally, or to call upon them for payment of any sum of money or assessment whatsoever, other than such sum, or sums, as they may have in this agreement agreed to pay and may at any time in the future agree to pay by way of subscription to new shares, or otherwise. All persons, concerns, and corporations extending to or contracting with, or having any claim, or claims, against said Trustee, or his successors, shall look only to the funds and properties of the Trust Estate for the payment of any such contract or claim, or for the payment of any damages, debt, judgment or decree, or any money that may otherwise become due and payable in any way to him from the Trustee, and neither the Trustee nor the shareholders, present or future, shall be personally liable therefor, or any debt incurred, or engagement, or contract made by the Trustee, or any agent, or servant acting under them on behalf of the Trust Estate. Furthermore, the funds and property of the Trust Estate of every character shall stand primarily charged with the burden of paying any claim or money demand established or existing on account of the operations and business of the Trust Estate, whether founded on contract or tort, to the end that the shareholders of the Trust Estate may be protected from personal liability on account thereof.

ARTICLE XI.

The Trustee, nor his successors, shall not be liable for any errors of judgment, or for any loss arising out of any act or omission in the execution of this Trust, so long as said Trustee or his successors act in good faith; nor shall he, or they, be personally liable for the acts or omissions of any agent or servant appointed by or acting under him or them; it being expressly understood that the Trustee herein shall be personally liable only for his personal breach of trust. Said Trustee, nor his successors shall not be personally liable on any contract, debt, claim, or demand, or for any torts, arising out of the conduct of the business, or incident thereto, of this Trust Estate to any one whomsoever; it being expressly understood that all persons whomsoever shall look to the property and assets of said Trust Estate for the satisfaction of his or their claims or demands, whether contractual or otherwise, and not to the Trustee personally. And if said Trustee shall be required to pay any sum, or sums of money on account of any act of his made and performed in good faith in the performance of his duties as such Trustee, then he shall be indemnified therefor out of said Trust Estate and his claim for indemnity shall take precedence and priority over any other claim or claims against said Trust Fund and Estate, save and except the lien creditors.

ARTICLE XII.

The Trustee shall distribute the net profits annually, or at shorter intervals, after sufficient provision has been made for reserves for depreciation, depletion and obsolescence.

ARTICLE XIII.

The number of shares of said Landreth Water Company shall be five hundred (500) shares of the par value of one hundred ($100.00) dollars each. Additional shares may be issued by the Trustee at such times, in such amounts, and for such considerations as he may determine. Provided that the owners of shares appearing of record at the time of issuance of additional shares, shall have a prior right, for at least ten (10) days, after notice to them to subscribe for and purchase such additional issue in the same proportion in which they then own the existing shares, after the expiration of which period of time, if not taken by them, such increase shall be subject to sale to others. The notice provided for in this Article shall be given by mailing a letter to each holder of share or shares to his registered Post Office address, and notice period shall begin with the day such notice or letter is mailed.

ARTICLE XIV.

A dissolution of the Trust Estate may be effected by the Trustee upon obtaining the written consent of a majority in interest of the registered shareholders; but the Trust Estate shall not be dissolved at any time prior to the period fixed herein for its dissolution while there is outstanding against the property of the Trust Estate the bonds or obligations of the Trustee, as such, secured by a mortgage on the property of the Trust Estate, without the written consent of the bondholders, and any dissolution shall be made without prejudice to any debts or claims against the Trust Estate, contracted by the Trustee. The Trust Estate may be continued beyond the period fixed for its termination by the Trustee, or the form of organization may be changed by the Trustee for purposes not inconsistent herewith.

IN WITNESS WHEREOF, the said J. Connor Wise, Trustee, hereinbefore mentioned, has hereunto set his hand and seal in token of his acceptance of the Trust hereinbefore mentioned, for himself and his successors, this 28th day October of 1920.

On the same day E. A. Landreth Co. sold to the Landreth Water Co., for the recited consideration of $50,000, the following described property in Stephens County, Texas:

Casing and pipe	$33,791.20
Buildings	4,734.00
Machinery	8,432.60
Automobiles	3,042.20
	50,000.00

The fair market value of said property on the date of sale was $50,000. This property included three Bessemer gas engines which cost $3,300; three Dodge automobiles which cost $4,500; and three Ford automobiles which cost $2,100. Prior to October 28, 1920, E. A. Landreth and the E. A. Landreth Co. had expended for the construction of the water plant on said property, $14,948.54. On the same day, the E. A. Landreth Co. conveyed to Landreth Water Co. the water lease and rights above referred to. The Landreth Water Co. paid the recited consideration of $50,000 with the whole of its capital stock, to wit, 500 shares. These shares the E. A. Landreth Co. immediately distributed among its stockholders in proportion to their holdings in the E. A. Landreth Co. E. A. Landreth was the holder of 775 shares of such stock out of a total of 2,000 shares issued, and received thirty-one eightieths of the Landreth Water Co. stock. Respondent valued the assets of the Landreth Water Co. at the date of the transfer at $81,916.11, valued E. A. Landreth's share of the Landreth Water Co. stock at $31,742.50, and determined that this payment in stock was a dividend, the whole of which was subject to a surtax, and deducted said sum of $81,916.11 from the consolidated invested capital of petitioner and the Landreth Water Co.

During the early part of 1921, petitioner abandoned wells Nos. 1, 7, and 8 on the Hale lease and thereby suffered a loss on the equipment of such wells in the amount of $3,078.57. Thereafter, in the year 1921, the Hale lease was sold to the Humble Oil & Refining Co., for $250,000. Petitioner received as its share of the purchase price, being for its share in the lease and for the equipment, all of which it owned, the sum of $183,666.

In the early part of 1921, petitioner acquired an oil and gas lease known as the Vick lease on a 20-acre tract of land in Stephens County, Texas, for which it paid $15,000, $10,000 of this amount being for the lease and $5,000 for equipment. Soon thereafter, petitioner sold a one-half interest in the lease for $40,000, and in its income-tax return for 1921, reported a gain of $35,000. Petitioner sunk two wells which produced oil but not in quantity justifying further operation. These wells were plugged and the lease abandoned in 1921. Petitioner then removed its equipment to other leases, except pipe and casing in well No. 2, which had cost $2,247.56. Of this latter amount, petitioner sold part for $349.60. The remainder which was abandoned had cost $1,897.96.

In November, 1921, petitioner purchased an oil and gas lease, known as the Thompson lease, on a 16-acre tract of ground in Limestone County, Texas, for which it paid $48,000 cash and agreed to pay the further sum of $16,000 out of oil to be extracted. The cash payment was made and petitioner incurred expenses in connection with the sale for commissions to agents in the further amount of $4,800. On this property petitioner sunk a well to a depth of 850 feet, without striking oil. The depth which oil is found in this field is about 3,000 feet. Immediately east of the leased property a fault was discovered. Thereupon and in 1921, petitioner abandoned said lease and removed its equipment. Prior to the time petitioner abandoned the lease, wells had been sunk west of this fault and had come in dry. At the date of the abandonment of the lease, it had been demonstrated that to sink the well deeper would have been to incur an unnecessary expense. Petitioner abandoned equipment on this lease which cost it $2,019.68.

Petitioner, in 1921, abandoned other leases which it had acquired and by reason of such abandonment lost certain equipment. The losses of equipment on said leases are as follows:

Mussbaum	$4,902.65
Steuben Ranch	2,362.83
Graham	5,372.97
Stoker	3,231.80
Baker-Gannon	1,547.23

In 1921, the Landreth Water Co. sold all its assets for a price, the exact amount of which is not shown, but which was in the neighborhood

In August, 1925, petitioner received the following letter:

AUGUST 8, 1925.

E. A. LANDRETH COMPANY,

P.O. Box W, Breckenridge, Texas.

SIRS:

Reference is made to your protest dated July 6, 1925, in which exception is taken to the proposed assessment of additional tax in the amount of $1012.39 for the period April 20 to December 31, 1920, as set forth in office letter dated June 27, 1925.

In view of the statement made in your brief the net income as reported in your amended return has been accepted without change and the proposed additional assessment cancelled.

You are, however, entitled to an overassessment of $60.48 due to the fact that you prorated the $2,000.00 specific exemption for 8-11/30 months, whereas, you were entitled to the full $2,000.00.

Net income reported on amended return			$80,631.85
Profits tax shown on return, Sec. 302			$27,652.43
Net income		$80,631.85
Less:
Profits tax	$27,652.43
Exemption	2,000.00
		29,652.43
Balance taxable at 10%		$50,979.42	5,097.94
Total tax assessable			$32,750.37
Tax assessed			32,810.85
Overassessment			$60.48

The overassessment shown herein will be made the subject of a Certificate of Overassessment which will reach you in due course through the Office of the Collector of Internal Revenue for your district and will be applied by that official in accordance with Section 281(a) of the Revenue Act of 1924.

Respectfully,

J. G. BRIGHT,

Deputy Commissioner.

Thereafter, on March 13, 1926, respondent determined the deficiency for the year 1920 above set forth.

OPINION.

MILLIKEN: Respondent has determined that from the date of the purchase of the Hale lease in April, 1920, petitioner was taxable as a corporation as that term is defined in section 1 of the Revenue Act of 1918, and section 2 of the Revenue Act of 1921. These sections provide that "The term 'corporation' includes associations, joint stock companies, and insurance companies." It remains to apply this definition to the facts as found.

Up to September 8, 1920, the date the deed of trust was executed, the contributors to the fund which was held and managed by E. A. Landreth had entered into no agreement as to their rights as between themselves or as to third persons. There was not even an understanding between them. The only testimony on this point is that of E. A. Landreth. On cross examination he testified:

Q. In discussing this matter with your bank, did you inform them at that time that you expected to perfect some sort of an organization?

A. No, sir.

Q. It was just between you and the members that this matter was understood?

A. We had not even an understanding with the members.

Q. Well, they were not led to believe, or they did not put their money into your charge under the assumption that it would remain a partnership or joint venture or something of that sort, did they? They expected you to make some sort of organization, perfect some sort of organization which would exempt them from liability?

A. They put their money in there solely on my responsibility and in any way I wanted to handle the proposition.

Q. Yes, sir; but was it the understanding that some sort of organization would be perfected whereby they would be exempted from further liability?

A. That never was brought up. Q. You are positive as to that? A. Absolutely.

It is clear that prior to September 8, 1920, the contributors had not attempted to secure a corporate charter; they did not constitute a stock company since they had issued no stock and had no authority to issue stock (33 C.J. 878); and they were not an insurance company. The question remains, Were these contributors during this period operating as an association? In Hecht v. Malley,265 U.S. 144">265 U.S. 144, it is said:

The word "association" appears to be used in the Act in its ordinary meaning. It has been defined as a term "used throughout the United States to signify a body of persons united without a charter, but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise." 1 Abb. Law Dict. 101 (1879); 1 Bouv. Law Dict. (Rawle's 3d Rev.) 269; 3 Am. & Eng. Enc. Law (2 Ed.) 162; and Allen v. Stevens (App. Div.), 54 N.Y.S. 8">54 N.Y.S. 8, 23, in which this definition was cited with approval as being in accord with the common understanding. Other definitions are: "In the United States, as distinguished from a corporation, a body of persons organized, for the prosecution of some purpose, without a charter, but having the general form and mode of procedure of a corporation." Webst. New Internat. Dict. "[U.S.] An organized but unchartered body analogous to but distinguished from a corporation." Pract. Stand. Dict. * * *

A careful review of the testimony fails to disclose that during the period from April to September 8, 1920, the persons who contributed to the fund in the hands of E. A. Landreth conducted their business "upon the methods or forms used by incorporated bodies" or that their enterprise had the "general form and mode of procedure of a corporation." On the other hand, the evidence shows that at the beginning only E. A. Landreth was interested in the Hale lease and this solely by reason of the fact that the Metex Petroleum Corporation, for whose benefit the purchase was made, was financially unable to pay the price and handle the enterprise. Thereupon, E. A. Landreth first called upon his brother, who aided him by endorsing notes for borrowed money. Thereafter, and in June, 1920, others began to contribute. This continued until September 8, 1920, when all had contributed. It is shown that during this period E. A. Landreth carried on the business without consultation with the others. It appears that when he needed additional funds he secured them from whomsoever he pleased and without regard to the wishes or consent of the other contributors. The enterprise conducted up to September 8, 1920, was in the nature of a joint adventure. Cf. Alger Melton v. Commissioner,7 B.T.A. 717">7 B.T.A. 717. The fact that the Hale lease and the water rights stood in the name of E. A. Landreth does not detract from this view. In Irvine v. Campbell,121 Minn. 192">121 Minn. 192; 141 N.W. 108">141 N.W. 108, it is said:

Real estate belonging to a partnership, whether the legal title be in one or more of the partners, is impressed with a trust for the benefit of the partnership, which follows it until it passes into the hands of a bona fide purchaser. Arnold v. Wainwright,6 Minn. 358">6 Minn. 358 (Gil. 241), 80 Am.Dec. 448; Harvin v. Jamison,60 Minn. 348">60 Minn. 348, 62 N.W. 394">62 N.W. 394; Stitt v. Rat Portage Lumber Co.,98 Minn. 52">98 Minn. 52, 107 N.W. 824">107 N.W. 824. The same rule applies where the parties engage in a joint enterprise the subject-matter of which is real estate. Bond v. Taylor,68 W. Va. 317">68 W.Va. 317, 69 S.E. 1000">69 S.E. 1000; Floyd v. Duffy,68 W. Va. 339">68 W.Va. 339, 348, 69 S.E. 993">69 S.E. 993, 33 L.R.A. (N.S.) 883; Botsford v. Van Riper,33 Nev. 156">33 Nev. 156, 110 Pac. 705; King v. Barnes,109 N.Y. 267">109 N.Y. 267, 16 N.E. 332">16 N.E. 332; Withers & Gates v. Pemberton 3 Cold (Tenn.) 56; Davis v. Kellar,74 S.W. 1100">74 S.W. 1100, 25 Ky. Law Rep. 279; Fueschsel v. Bellesheim,14 N.Y.St.Rep. 610; Crenshaw v. Crenshaw (Ky.) 61 S.W. 366">61 S.W. 366; Kauffman v. Baillie,46 Wash. 248">46 Wash. 248, 89 Pac. 548; Jones v. Davis,48 N.J.Eq. 493, 21 Atl. 1035.

Taking all the facts into consideration, we are of the opinion that during the period April, 1920, to September 8, 1920, the enterprise was conducted as a joint adventure and that the contributors to the fund should be taxed as joint adventurers.

When we come to the trust agreement of September 8, 1920, a more difficult problem is presented. On this date for the first time the various contributors agreed upon a form of business organization. We say "business organization" for the reason that article 4 of the trust agreement provides that the company was authorized to conduct every branch of the oil and gas business from acquiring and selling oil and gas leases to refining and marketing the finished product, including the acquisition of franchises for and the installation and operation of pipe lines. The trust agreement also authorized the company to own and operate water plants and to sell water to individuals, corporations, and municipalities. The company was organized to transact business and the evidence shows that it did transact business. Cf. Appeal of Durfee Mineral Co.,7 B.T.A. 231">7 B.T.A. 231. The company had a capital stock represented by shares which were transferable but against the company only on its books. It had a name similar to a corporate name and a seal. It differed from an ordinary corporation or joint stock company only in that instead of having a board of directors, or trustees, as they are sometimes called, it operated through one person, styled a trustee, who for the term of the trust had uncontrolled authority in the management of its affairs and who was not subject to removal, except, of course, by a court for cause.

Respondent asserts that the company was an association and relies solely upon Appeal of Durfee Mineral Co., supra. This case is not directly in point, since it was there found that the shareholders had a modicum of control over the trustees. Petitioner contends that since the shareholders could not and did not exercise any control over the trustee, the enterprise was a trust and, therefore, taxable as such, and cites Williams v. Milton,215 Mass. 1">215 Mass. 1; 102 N.E. 355">102 N.E. 355; Crocker v. Malley,249 U.S. 223">249 U.S. 223; and Hornblower v. White, 21 Fed.(2d) 82, and attempts to differentiate Hecht v. Malley,265 U.S. 144">265 U.S. 144.

With respect to the fact that there was in the instant case but one trustee, it may be said that we do not think it can be successfully maintained that there could be no association or joint stock company if the sole trustee was subject to control of the shareholders. We pass, therefore, to the vital question - whether for income-tax purposes such control is the distinguishing test between an association or a joint stock company, on the one hand, and a trust or partnership, on the other. We use the qualifying phrase "for income-tax purposes, " since the classification of taxpayers by the various revenue acts controls as against the classifications adopted by State courts for State purposes. See Burk-Waggoner Oil Association v. Hopkins,269 U.S. 110">269 U.S. 110. This disposes of the fact that the Massachusetts courts hold that trusts similar in many respects to the company here involved are partnerships or pure trusts, depending on whether the beneficiaries can or can not exercise control over the trustees. It is immaterial for the purpose of this proceeding whether the Massachusetts courts would hold that E. A. Landreth Co. was a trust (Williams v. Milton, supra), or that the Texas courts might hold it to be a partnership (Thompson v. Schmitt,115 Tex. 53">115 Tex. 53; 274 S.W. 554">274 S.W. 554). The question is not what this company would be deemed under the laws of either of these States or of any State, but what it was for income-tax purposes under the Revenue Acts of 1918 and 1921.

In Hecht v. Malley, supra, the case of Crocker v. Malley, supra, is discussed at length and the effect of its decision limited to the particular facts of that case. The Hecht case involved three "Massachusetts trusts," which are described by the court as follows:

The Hecht Real Estate Trust was established by the members of the Hecht family upon real estate in Boston used for offices and business purposes, which they owned as tenants in common. It is primarily a family affair. The certificates have no par value; the shares being for one-thousandths of the beneficial interest. They are transferable; but must be offered to the trustees before being transferred to any person outside of the family. The trustees have full and complete powers of management; but no power to create any liability against the certificate holders. There are no meetings of certificate holders; but they may, by written instrument, increase the number of trustees, remove a trustee, appoint a new trustee if there be none remaining, modify the declaration of trust in any particular, terminate the trust, or give the trustees any instructions thereunder.

The Haymarket Trust is strictly a business enterprise. It was established by the original subscribers who furnished the money for the purchase of a building in Boston used for store and office purposes. The shares are of the par value of $100 each. Except as otherwise restricted, the trustees have general and exclusive powers of management, but no power to bind the certificate holders personally. At any annual or special meeting of the certificate holders, they may fill any vacancies in the number of trustees, depose any or all the trustees and elect others in their place, authorize the sale of the property or any part thereof, and alter or amend the agreement of trust.

The Crocker, Burbank & Co. Ass'n is also a business enterprise. It was formerly entitled the Wachusett Realty Trust. The certificates have no par value; the shares being for ninety-six thousandths of the beneficial interest in the property. The trustees originally held the fee of certain lands subject to a long lease and the stock of a Massachusetts corporation engaged in manufacturing paper and owning and operating several mills. In Crocker v. Malley,249 U.S. 223">249 U.S. 223 (1919), in which the original trust instrument was before the court, it was held that the trustees were not subject as to the dividends received from the corporation to the tax imposed by the Income Tax Act of 1913 (38 Stat. 172) upon the net income of "every corporation, jointstock company or association * * * organized in the United States," but were subject only to the duties imposed by the Act upon trustees. The original trust agreement involved in that case has now, however, been modified, with the assent of the certificate holders. By this modification, "the form of (the) organization" was specifically "changed to that of an association," under its present name. The trustees were authorized to surrender the stock of the manufacturing corporation, to acquire instead its entire property, and to carry on the business theretofore conducted by it, or any substantially similar business. The title to all the trust property "and the right to conduct all the business" were vested exclusively in the trustees, who were authorized to designate from their number a president and other officers and to prescribe their duties. The certificate holders were authorized, at any meeting, to remove any trustee and elect trustees to fill any vacancies. Since the modification of the trust agreement, the trustees have carried on the manufacturing business in substantially the same manner as it was formerly conducted by the corporation.

The court, after quoting at length from its opinion in the Crocker case, said:

This opinion is based primarily upon the view that the Income Tax Act, considering its purpose, did not show a clear intention to impose upon the trustees as an "association" a double liability in reference to the dividends on stock in the corporation that itself paid an income tax, when considered as "trustees" they were by another provision of the Act exempt from such payment. And the language used arguendo in reaching this conclusion that the trustees could not be deemed an association unless all trustees with discretionary powers are such, and that there was no ground for grouping together the beneficiaries and trustees in order to turn them into an association - is to be read in the light of the trust agreement there involved, under which the trustees were, in substance, merely holding property for the collection of the income and its distribution among the beneficiaries, and were not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business. Zonne v. Minneapolis Syndicate,220 U.S. 187">220 U.S. 187, 190, 31 Sup.Ct. 361, 55 L. Ed. 428">55 L.Ed. 428. And see Smith v. Anderson, L.R., 15 Ch.Div. 247.

It results that Crocker v. Malley is not an authority for the broad proposition that under an Act imposing an excise tax upon the privilege of carrying on of business, a Massachusetts Trust engaged in the carrying on of business in a quasi-corporate form, in which the trustees have similar or greater powers than the directors in a corporation, is not an "association" within the meaning of its provisions.

We conclude, therefore, that when the nature of the three trusts here involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; this being true independently of the large measure of control exercised by the beneficiaries in the Hecht and Haymarket cases, which much exceeds that exercised by the beneficiaries under the Wachusett Trust. We do not believe that it was intended that organizations of this character - described as "associations" by the Massachusetts statutes, and subject to duties and liabilities as such - should be exempt from the excise tax on the privilege of carrying on their business merely because such a slight measure of control may be vested in the beneficiaries that they might be deemed strict trusts within the rule established by the Massachusetts courts. (Italics supplied.)

The outstanding thought that runs through the whole of this opinion is that the "Massachusetts trusts" therein involved were associations for Federal tax purposes for the reason that the shareholders had associated themselves together under the form of a corporation for the purpose of engaging in a business. The Crocker case is distinguished, not on the ground that the shareholders could exert no control over the trustee, but on the ground that the Wachusett Trust was not engaged in business. Then following the statement to the effect that where a trust is organized for the purpose of carrying on a business under corporate forms, it is an association independently of whether the beneficiaries exercised such a measure of control over the trustees as to constitute the trust a partnership under the laws of Massachusetts, and, on the other hand, that such a trust is an association even though it would be held by the Massachusetts courts to be a strict trust by reason of lack of such control. It thus appears that the court discards the test of control in determining whether such a trust is an association, under the revenue acts, and makes the test whether it was or was not organized for purely business purposes. This seems to be the true distinction. See Cook on Corporations, Vol. III (8th ed.), p. 2251.

In appeal of Durfee Mineral Co., supra, we said:

Shareholders have little or no authority practically, in any case, and it appears that the use of the control test, alone, is illogical and prolific of litigation and further confusion.

In the instant case the shareholders voluntarily entered into the trust agreement. The trust was not imposed upon them by a third person. They, themselves, granted to the trustee the authority covered by the trust agreement and whatever powers he exercised and whatever rights the contributors denied themselves arose from a contract voluntarily entered into by all the parties. These persons could have voluntarily conferred such authority upon trustees on directors for a specified term. There is nothing sacred in a one-year term for directors and there is no logical reason why such authority could not be conferred for a longer period. The vital question presented is not whether the absence of control of the trustee by the shareholders determined that E. A. Landreth Co. was a trust as distinguished from a partnership, but whether, under all the facts of this case, E. A. Landreth Co. was as association, even though the shareholders had by contract voluntarily divested themselves of the right to control the trustee for the whole life of the company.

The nature of the right of stockholders to vote their stock is discussed at length in General Inv. Co. v. Bethlehem Steel Corporation,87 N.J.Eq. 234, 100 Atl. 347. The facts in that case were that the Bethlehem Steel Corporation had originally a capital stock of $30,000,000, divided equally between preferred and common stock, all stock having voting rights. The corporation increased its capital stock by $45,000,000, all the new stock being common stock but none of which had voting rights. It was the intent of those who proposed the plan that the management of the corporation should be retained by its old management. This plan was attacked on the ground, among others, that the purpose of the plan was to continue the old management, irrespective of the fact that the new issue, which was common stock, amounted to three-fifths of the entire capital stock, and that this would result in giving to a minority the control of the corporation. The court in holding the new issue of stock valid said.

It is almost impossible to get a definition of "common stock" or a statement of what classes of stock may be issued, and the necessary rights and privileges of the classes, that is satisfactory. Thompson, § 3426, in referring to common stock, says that the name itself indicates its nature, and it is so called because it is the common stock, or the stock which private corporations generally issue; and is usually the only kind authorized. He says the universal rule is that the owners of common stock are entitled to a pro rata dividend of profits, and to a pro rata participation in the management of the corporation; that the holders of common stock sometimes have a preference in the management of the corporation. In section 3425 with reference to classes of stock he states:

"The first general division of stock in into common or preferred stock; and these two classes are again subdivided into almost an infinite variety."

Section 859: "The rule that a right to vote follows the ownership of stock means only that in the absence of any common restriction upon all the stock, or upon a class of stock, this right prevails. That is, the right of a stockholder to vote can not be arbitrarily abridged and is not subject to universal restriction. But the rule is equally emphatic, if not so general, that restrictions may be placed upon the right to vote; or, as sometimes stated, the right to vote may be separated from the ownership of stock. It must be remembered, in this connection, that stockholders can make any agreement respecting their stock, or the voting of it, that they may see fit or deem wise, except agreements that are void as against public policy."

He cites Miller v. Ratterman,47 Ohio St. 141">47 Ohio St. 141; 24 N.E. 496">24 N.E. 496, Supreme Court of Ohio. There the question was as to whether preferred stock might be issued without voting privileges. The court said:

"It is true that one characteristic of stock, generally, is that it can be voted upon. But this is not essential. Indeed, instances may arise where it is good policy to prohibit the voting upon stock" - citing cases.

Thompson, § 859, contains the statement:

"So, it has been established that holders of preferred stock may be denied the right to vote the same at any meeting of the holders of the capital stock of the corporation. The legality of such restriction is not based on the theory that preferred stockholders are guaranteed a dividend but rather on the inherent power of the corporation to restrict the voting power. It is simply a contract relation between two classes of stockholders, in which the public has no concern."

He instances a great number of cases where restrictions with respect to voting has been imposed upon common stock; i.e., one stockholder should not vote more than a fourth of the total, a stockholder should not vote more than 100 shares, nonresidents should not vote, purchasers of forfeited stock should not vote, even though not liable for the amount due until the amount due was paid.

"There is no rule of public policy which forbids a corporation and its stockholders from making any contract they please in regard to restrictions on the voting power." Cook on Corporations, § 622B.

"Inasmuch as preferred stockholders are members of the company, and except in so far as their rights may be altered by the contract, statute, or by-law under which the shares are issued, entitled in all respects to the same rights as other shareholders, it follows that they have the same voting rights as other shareholders. The right of shareholders to vote is, however, like the right to dividends or to participate equally in a division of capital on liquidation regarded as a private matter for each shareholder which he may waive if he choose. Consequently, a provision that shareholders of a certain class shall have no right to vote is, if assented to by them, quite valid. Such a provision might theoretically be made as to either the preferred to the deferred (Machen calls common deferred shares), but it is much more common with respect to the preferred shares so as to compensate the other shareholders for the preference of the preferred stockholders as to dividends." Machen, § 570.

"A stockholder has no right to vote at corporate meetings, whether the stock is common or preferred, if it is so stipulated when the stock is issued, for the stipulation is then a term of his contract." 3 Clark & Marshall, p. 1966.

Mackintosh et al. v. Flint P.M.R. Co. (C.C.) 32 Fed. 350, and Id.34 Fed. 582, is referred to in Clark & Marshall as authority for the proposition that preferred stock may be given the exclusive privilege of voting, at least in that case for a time. Counsel have not referred me to any case enunciating a public policy which would require that all common stockholders should have the voting privilege. In this state it has been held that the matter is purely one of contract. McGregor v. Home Ins. Company of N.J.,33 N.J.Eq. 181; In re Newark Library Ass'n. 64 N.J. Law, 218, 43 Atl. 435. This seems to be the rule in the other states. (Italics supplied.)

The above case and the numerous authorities cited therein seem to make clear that stockholders can by contract deprive themselves of the right to vote the stock and thereby remove from themselves the right to control a corporation. This is precisely what the persons who signed the trust agreement did.

We are of opinion that the shareholders voluntarily associated themselves together under the name of E. A. Landreth Co. for the purpose of engaging in business, using that term in its broadest sense, under the methods and forms used by corporate bodies; that they did so engage in business; that the fact that they by voluntary contract delegated to the trustee powers which they might have exercised, except for such delegation, in no way alters the fact that they constituted an association within the meaning of the Revenue Acts of 1918 and 1921; and that on September 8, 1920, there came into existence a new taxable entity which was taxable as a corporation, which possessed all the rights and privileges of a corporation for tax purposes, and that on that date the company acquired the assets theretofore held by E. A. Landreth for the benefit of his co-joint adventurers in consideration of the issue of its capital stock. In reaching this conclusion, we have not overlooked the decision of the United States District Court of Massachusetts in Hornblower v. White, supra, where the court adheres to the distinction which is drawn by the Courts of Massachusetts between trusts and partnerships. Until the Supreme Court expresses views at variance with their decision in Hecht v. Malley, supra, we feel called upon to follow what we believe to be the correct interpretation of that decision.

What we have said with reference to the E. A. Landreth Co. applies with equal force to Landreth Water Co.Both companies were taxable as associations.

Since the stock of both companies was held by the same persons and in the same proportions, respondent did not err in determining that the two companies were affiliated.

Petitioner contends that since respondent had once determined its tax for the year 1920 as shown by the letter of August 8, 1925, he could not thereafter redetermine the tax and on this point relies on section 1107 of the Revenue Act of 1926, which provides:

In the absence of fraud or mistake in mathematical calculation, the findings of facts in and the decision of the Commissioner upon (or in case the Secretary is authorized to approve the same, then after such approval) the merits of any claim presented under or authorized by the internal-revenue laws shall not, except as provided in Title IX of the Revenue Act of 1924, as amended, be subject to review by any other administrative or accounting officer, employee, or agent of the United States.

It appears that the determination made in the letter of August 8, 1925, and in the deficiency letter which is the basis of this proceeding, were made by the same officer, to wit, the Commissioner of Internal Revenue, and we know that the same individual held this office during the whole period involved. No administrative or accounting officer other than the Commissioner has attempted to review his first finding. This contention is without merit.

As shown in the findings of fact, the amount of $14,948.54 which petitioner claimed in his petition as a deduction in 1920 on account of labor and teaming expenses was in fact a capital expenditure made on the water plant which was transferred to the Landreth Water Co. Respondent is affirmed as to this item.

We have found that petitioner's interest in the Hale lease had a value as of September 8, 1920, the date of petitioner's organization, of $464,344.95 and that this amount included the value of the equipment which had theretofore cost $193,034.84. The exact cost of the equipment is shown and the value which we have placed upon petitioner's interest in the lease is, we believe, conservative. E. A. Landreth, who has had long experience in the oil and gas business, testified that this lease, including equipment, had a value on September 8, 1920, of from $500,000 to $750,000, and that in January, 1921, an offer of $600,000 was made for the lease. Petitioner introduced a computation made in 1927 which shows a higher value, but this computation contains facts which were not known in September, 1920. Taking into consideration the opinion of E. A. Landreth as to the value of the lease and the fact that an actual offer for it of $600,000 was made, we are of opinion that the lease and equipment was well worth $600,000 on September 8, 1920. Since the interest or control of the joint adventurers remained the same in the association formed on September 8, 1920, the invested capital could not be computed with an allowance greater than the cost of acquisition to the prior owners. See section 331 of the Revenue Act of 1918. Cf. W. A. Sheaffer Pen Co.,9 B.T.A. 842">9 B.T.A. 842. The amount of $464,344.95 should be included in the cost of the lease to petitioner in computing the gain or loss arising from its sale in 1921.

Next, petitioner asserts error as to respondent's determination of the depreciation sustained during the year 1920 upon the equipment on the Hale lease. There is no dispute as to the rate. We have found the original cost of the equipment to be $193,034.84. Depreciation should be computed upon this amount, plus any addition to the equipment that may have been made after September 8, 1920.

The losses incurred by petitioner in 1921 in the sale of the Hale lease and loss of equipment thereon and by the abandonment of the Vick, Mussbaum, Steuben Ranch, Graham, Stoker, and Baker-Gannon leases should be computed in accordance with the facts found.

Petitioner asserts that respondent erred in determining that the cost of the assets conveyed by it to the Landreth Water Co. was $81,916.11 instead of $60,224.44, which amount petitioner asserts was a true cost and that respondent erred in determining that said transfer resulted in a dividend in kind to the extent of $81,916.11. The allegation with respect to the first error was denied, and it may be pointed out in passing that although petitioner has proven that the property set forth in the findings of fact had a then market value of $50,000, it has failed to prove what was the cost of such property, and also what was the cost or value, if any, of the water rights which were transferred at the same time. In the absence of such evidence, the determination of respondent as to the value of the property acquired by the Landreth Water Co. is approved. In so far as petitioner, E. A. Landreth Co., is concerned, only two results can flow from this valuation (1) what was the amount of loss on the sale of the assets of Landreth Water Co. in 1921, and (2) what was the amount of the consolidated invested capital as of October 28, 1920. On the first point, as above shown, there is not sufficient evidence to show that respondent's determination was erroneous. When we come to the second point, we find that respondent has reduced the consolidated invested capital by the amount of the value of the stock of Landreth Water Co., which was distributed by petitioner to its stockholders. While this distribution served to reduce invested capital of petitioner, E. A. Landreth Co., it could not reduce the invested capital of the group. To hold otherwise would be to lose sight of the well defined distinction between the statutory concept of invested capital and capital stock. The consolidated invested capital of the group could be neither increased nor decreased by transfers of shares of stock which did not "break up the affiliation." Cf. Farmers Deposit National Bank,5 B.T.A. 520">5 B.T.A. 520. Since it appears that respondent has reduced the invested capital of the group by the amount of the value of the dividend, this amount should be restored to the consolidated invested capital.

E. A. Landreth and Adelle H. Landreth, in their respective appeals, assert three errors. The first error alleged is to the effect that respondent erred in determining that the E. A. Landreth Co. and the Landreth Water Co. were associations. This contention has already been disposed of adversely to petitioners' contention. The second and third allegations are quite confusing and nothing can be found in the record which in any way indicates what was the basis upon which the amounts therein alleged can be predicated. It is sufficient to say that if E. A. Landreth Co. had on October 28, 1920, an earned surplus of equal or greater value than the value of the dividend as found by respondent, there was no error in respondent's determination in this respect. Since we are not informed as to what, if any, was the surplus of E. A. Landreth Co. on said date, respondent's action in determining that the whole of said dividend was taxable at surtax rates must be affirmed.

Reviewed by the Board.

Judgment will be entered upon 15 days' notice, under Rule 50.