Royal Syndicate v. Commissioner

ROYAL SYNDICATE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Royal Syndicate v. Commissioner

Docket Nos. 37374, 39101, 40685.

United States Board of Tax Appeals

20 B.T.A. 255; 1930 BTA LEXIS 2168;

July 18, 1930, Promulgated

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Petitioner held not taxable as a corporation during the years involved.

Albert A. Jones, Esq., for the petitioner.

F. R. Shearer, Esq., for the respondent.

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SMITH

These proceedings are for the redetermination of deficiencies in petitioner's income tax for the calendar years 1923, 1924, 1925, and 1926, in the respective amounts of $801.20, $689.07, $1,686.22, and $1,052.13. Each year involving one and the same issue, viz., whether the petitioner is taxable as a corporation, the proceedings were consolidated for hearing and decision.

FINDINGS OF FACT.

In January, 1922, a group of individuals residing at or near Winfield, Kans., decided to form a syndicate to which each should contribute a small amount of capital to engage in the business of buying and selling oil and gas leases and trading in other oil and gas interests. Everett Carpenter, a geologist, had agreed to take on interest in the enterprise in consideration for his services in making surveys and recommending properties to be acquired by the syndicate. At a meeting held on January 14, 1922, at the office of H. W. Herrick, an attorney of Winfield, and one of the prospective members, a syndicate agreement prepared by him was adopted and signed by 19 members. Sixteen of the members were to contribute $250 each, two other members $500 each, and Carpenter, the nineteenth member, was to receive an interest, the equivalent of two shares. There were, therefore, 19 members and 22 interests.

Material parts of the agreement are as follows:

(1) That said parties hereby associate themselves together for the purpose of buying and selling oil and gas leases and royalties, and procuring oil and gas leases, with a view to securing drilling contracts on the same, and for such other purposes as they may hereafter agree upon.

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(5) Said parties have elected Ed. L. Hepler of Winfield, Kansas as Trustee to hold the title of oil and gas leases and royalties procured for said Syndicate, and for the purpose of making proper assignments and releases of the same. Said Trustee shall continue to act in such capacity, unless his resignation shall be requested by a majority of the members of said Syndicate, in which case he shall resign as Trustee, and turn over all property in his hands as such Trustee to his successors, chosen by such Syndicate, said Trustee shall execute a proper Declaration of Trust, setting forth the manner in which he is to hold and handle the property of said Syndicate. Such Trustee shall act also as treasurer and secretary of said Syndicate and receive and pay out all money belonging to said Syndicate, keeping accurate books of account, and minutes of all meetings of said Syndicate; all expenditures shall be by checks signed by the Trustee and countersigned by either member of the advisory committee hereinafter referred to.

(6) Said Trustee shall be allowed to charge all his reasonable actual expense incurred by him in looking after the business of said Syndicate, such expenses to be allowed only when approved by said advisory committee.

(7) It is further agreed that J. F. McGregor and T. R. Ferry, both of Winfield, Kansas, have been chosen by the members of said Syndicate to act with said Trustee in an advisory capacity, but the leases shall be taken in the name of said Trustee alone and all assignments made by him alone.

(8) All purchases of leases and royalties and sale of the same shall be approved by said J. F. McGregor and T. F. Ferry as well as by the Trustee.

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(11) Any member unable to attend a meeting called by the Trustee may give his proxy to any other member to vote in his place and stead. Such proxy may be for a stated meeting, or may be general, for all meetings thereafter held, until revoked by the maker thereof.

(12) Whenever said Syndicate shall deem it advisable, by a majority vote, the money arising from sale of leases, royalties or other properties may be distributed to the certificate holders or reinvested from time to time in other leases or royalties.

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(14) On the signing of the agreement by the parties hereto, the Trustee shall issue to each person entitled thereto, a certificate signed by such Trustee, setting forth the interest of such person in the Trust property, which certificate shall be transferable on the books of said Syndicate in the hands of said Trustee.

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(16) The death of a member of this Syndicate holding a certificate of interest therein during the continuance of this agreement shall not operate to determine the same, nor entitle his legal representatives heirs or successors in interest to any accounting, dissolution or said Syndicate or other relief to which the original holder of said interest would not have been entitled.

(17) It is further agreed by all parties hereto that should any certificate holder desire to sell his interest in said Syndicate that he shall first offer it for sale to the Syndicate, and in no case shall any sale of an interest be valid or effective unless approved by a majority of the interest of the certificate holders * * *.

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(18) This agreement shall be in force for a term of five years from its date, unless sooner dissolved and abrogated by a majority vote of the parties interested therein.

(19) For the purpose of voting, each person holding an interest in said Trust proposed under this agreement as above set forth shall be entitled to only one vote for each 1/22 interest or fraction thereof.

(20) It is the intention of the parties to this agreement that parties contributing money, and said Everett Carpenter contributing his time, shall be owners of the property purchased by said Trustee for said Syndicate or the proceeds thereof, in the proportions above set forth.

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(21) Amendments may be made to this agreement at any time, by unanimous consent of all members of the Syndicate.

The provisions of the agreement, however, were not strictly carried out. No certificates of interest were ever issued to the members. The so-called advisory committee did not function as such. The two members named as the advisory committee in the agreement took no part different from the other members in the conduct of petitioner's business. Leases and other interests were purchased and sold by Hepler, generally in his own name and not as trustee for the petitioner, upon the recommendation of Carpenter and the approval of at least a majority of the other members with whom he would discuss the transaction informally. One royalty interest was taken in the name of McGregor, another of the members. No formal meetings were ever held and no interest were ever voted. Dividends were not formally declared, but the accumulated profits were distributed by Hepler whenever convenient, upon approval of the other members. Several leases were purchased and several sales were made during the taxable years. Among the leases acquired were several known as the Rock leases on which a drilling contract was let for the petitioner. Practically all of petitioner's income was derived from production from the Rock leases. The petitioner paid out no compensation for services except the actual expenses incurred on its behalf by Hepler and other members. It had no by-laws and no organization other than that provided for in the agreement. During its existence the petitioner purchased the interest held by Carpenter. One of its members sold his interest to another individual with the approval of the other members. There were no other changes in petitioner's membership.

For each of the years incolved the trustee filed income-tax returns on Form 1041 showing the amount of income taxable to each of the members, and each of the members reported income on his individual return as partnership income.

OPINION.

SMITH: The petitioner contends that it was not, during the taxable years involved, an association taxable as a corporation as determined by respondent, but that it was a partnership, the income of which is taxable to the individual members. In its brief, it has submitted extensive argument directed towards distinguishing this case from , and more specifically , and subsequent court and board decisions holding that organizations similar in some respects to the petitioner were to be classified as associations under the revenue laws and taxed as corporations.

The facts in this case are essentially similar to those in , and since our only question here is whether the petitioner is taxable as a corporation we are of the opinion, upon the authority of the Myers, Long & Co. decision, that it is not so taxable.

Judgment will be entered for the petitioner.