Jordan v. Commissioner

*372 This is a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $457.59. The sole issue is whether or not the petitioner is an association taxable as a corporation.

FINDINGS OF FACT.

The facts were stipulated by the parties, which are here adopted as our findings of fact, as follows:

On the 19th day of January 1926, G. E. Jordan with other individuals associated themselves together for the purpose of developing for gas, oil and other minerals on leased land located in the Parish of Ouachita, State of Louisiana, and selling such products as might be found thereon. To carry out this purpose the individuals drew up and signed an agreement on the 19th day of January 1926, under the terms of which it was agreed that the business of developing said leases for gas, oil and other minerals, and the sale of same should be carried on under the name and style of G. E. Jordan, Trustee.

Since the signing of the agreement of January 19, 1926, including*1140 the taxable calendar year here involved, 1929, petitioner's business, consisting of the development and sale of oil and gas produced on the leased land, has been carried on in accordance with the terms specified in the agreement, and at no time has petitioner engaged in or carried on any other business.

For each of the years, including the year 1929, since the organization of the petitioner, it has filed a partnership return on Form 1065.

In 1929 the following changes occurred in the ownership of interests in the organization. A. Gunther and B. Mullins each transferred interests of 2/64ths to Dan Glaxner. G. E. Jordan transferred an interest of 4/64ths to G. L. Melebeck. The said G. L. Melebeck was not an original member of the organization. M. L. Hewett sold an interest of 1 1/2/64ths to B. L. Coleman, J. B. Thornhill acquired an interest of 8/64ths during the year. He was also not a member of the original organization.

*373 Upon audit of petitioner's partnership return filed for the calendar year 1929, the respondent held that petitioner's organization is an association taxable as a corporation.

The agreement of January 19, 1926, omitting caption and signatures, *1141 reads as follows:

BE IT KNOWN, That before me Parker McComb, a Notary Public, duly commissioned and qualified in and for the Parish of Ouachita, State of Louisiana, and in the presence of the hereinafter named and undersigned witnesses, personally came and appeared: V. F. Sackett, Carl Tillstrom, J. G. Tousinau, Parker McComb, T. G. Johnson, H. J. Glaxner, D. Glaxner, Boston Mullins, R. L. Morgan, B. L. Coleman, all of Fairbanks, and:

D. E. Morrison, E. R. Johnson of Swartz, Louisiana, and M. L. Hewett, of Stamford, Texas, represented by B. L. Coleman, and G. E. Jordan, and R. H. Oliver, represented by G. E. Jordan, and B. J. Dickinson, of Albuquerque, New Mexico, represented by G. E. Jordan, who declare and acknowledge that they have and by this act form and constitute themselves into a Trusteeship for the purpose of conducting and carrying on the business for which this Trusteeship is formed that they have and do hereby contract and agree among themselves as follows:

FIRST

This firm shall do business under the name of G. E. Jordan, Trustee, and under this name it shall have power and authority to sue and to be sued, to own property, to make contractual obligations through*1142 its president and general manager, approved by the Treasurer, and to do and transact all of this business incident for the purpose for which it is formed.

SECOND

Its domicile and principal place of business shall be and is hereby established at Monroe, Ouachita Parish, Louisiana.

THIRD

It shall continue and be in force for a period of ten (10) years from the date hereof, or as much longer thereafter as the purpose for which it is formed may require, provided, however, that it may be dissolved and liquidated at any time upon the vote of those owning at least 51% or more of interest in Trusteeship.

FOURTH

The principal business for which this Trusteeship is formed is to develop gas, oil and other minerals, and to sell such as may be found on the following described land, situated in the Parish of Ouachita, State of Louisiana.

[Technical description of land omitted as immaterial.]

FIFTH

To G. E. Jordan for services to be rendered as Trustee for a period of five years is retaining a one-thirty-second (1/32) undivided interest in the Trusteeship, and V. F. Sackett for services rendered and to be rendered as Secretary and Treasurer of the Trusteeship for a period*1143 of five years is retaining a one-thirty-second (1/32) undivided interest, of the Trusteeship, and also together will supply whatever money as may be required to carry out terms of lease and drilling operations. It is distinctly understood that no two parties are holding the controlling interest in this Trusteeship.

*374 SIXTH

The undivided interests in the Trusteeship are represented as follows:

Each shall*1144 share in the profits and losses of this Trusteeship in proportion to the undivided interest held by each of the above, and is liable and limited to the extent of his interests in Trusteeship only.

SEVENTH

Each of the members of this Trusteeship agree that if at any time he should want to sell his interest in this Trusteeship that he will first offer it to the Trustee, or to each of the individual members thereof, at its appraised value at the time of the offer. The appraisement to be made by one appraiser appointed by him, the person who offers to sell, and the other by the Trustee, and in the event that the two appraisers cannot agree that then, they, the two, shall call in the third appraiser. In the event that neither the Trustee nor any member of the Trusteeship is willing to buy and to pay such person the appraised value of his interest in the Trusteeship for it he may then offer it on the market for what it will bring, provided, however, that he shall at no time sell his interest in this Trusteeship to any one other than the Trusteeship or its members, if the Trusteeship, or any member of the Trusteeship will give him as much for his interest as he can sell it to any one*1145 else for.

EIGHTH

If interest of Trusteeship amounting to 51% or more, desire to put in more money, and to drill one more well on the said lease, they may do so but on the condition that they pay to the parties who do not desire to be interested in further drilling their proportionate parts of the undeveloped acreage of the lease, allowing to the one well forty (40) acres. The proportionate part to be paid to the partners not desiring to be interested in further development shall be their proportionate part of the appraised value of the acreage to be developed, said appraisement to be made by appraisers to be appointed, one by the parties desiring further development, and the other by the parties not desiring further development and in the event these parties cannot agree, then they, the two that cannot agree to appoint the third appraiser. Such appraisement shall be made on the basis of forty (40) acres to the well.

*375 Those who do not desire to go into further drilling operation other than one well will participate in that well as a separate unit, and those who desire to go into further drilling operations will participate in the first well as a separate unit, and*1146 then likewise in the second well, or wells as a separate unit, each partner participating in proportion to the amount invested in each well.

NINTH

It is distinctly understood that the lease on which the first well is to be drilled carries with it a three-sixteenth (3/16) royalty, this royalty to be deducted from the gross returns of the well before payment is made to shareholders in the Trusteeship, and any well that might be drilled after the first well started carries with it only a one-eighth (1/8) royalty.

IN TESTIMONY WHEREOF, the parties hereto in the presence of me, Parker McComb, a Notary Public, duly commissioned and qualified in and for the Parish of Ouachita, State of Louisiana, and in the presence of the undersigned witnesses.

[Signatures omitted as not material.]

Signed and Sealed this 19th day of January, 1926.

OPINION.

TRAMMELL: The sole issue in this case is whether or not the petitioner is an association taxable as a corporation. If so taxable, it is agreed that the deficiency asserted by the respondent is correct; if not so taxable, there is no deficiency due.

The petitioner contends that it is a partnership or joint venture, and in support*1147 of such contention cites the statutes of Louisiana and the decisions of the supreme court of that state.

Assuming without deciding that under the laws of Louisiana the petitioner is a partnership, yet that fact is not controlling here. In , it was held that an unincorporated association taking the form of a "Massachusetts trust", while technically a partnership, not possessed of legal entity under Texas law, although permitted by the laws of that state to sue in its own name, was an "association" subject to the income and excess profits tax imposed by the Revenue Act of 1918. In the cited case, the association made the same contention that is urged upon us here, namely, that it was a partnership by state law, not subject to tax, and the Supreme Court disposed of that contention by saying:

It is true that Congress cannot convert into a corporation an organization which by the law of its state is deemed to be a partnership. But nothing in the Constitution precludes Congress from taxing as a corporation an association which, although unincorporated, transacts its business as if it were incorporated. The power*1148 of Congress so to tax associations is not affected by the fact that, under the law of a particular state, the association cannot hold title to property, or that its shareholders are individually liable for the association's debts, or that it is not recognized as a legal entity. Neither the *376 conception of unincorporated associations prevailing under the local law, nor the relation under that law of the association to its shareholders, nor their relation to each other and to outsiders, is of legal significance as bearing upon the power of Congress to determine how and at what rate the income of the joint enterprise shall be taxed.

For 1929, the year before us, corporations were taxable at the rate specified in section 13(a) of the Revenue Act of 1928, and section 701(a)(2) of that act further provides that: "The term 'corporation' includes associations, joint-stock companies, and insurance companies." Admittedly the petitioner is neither a jointstock company nor an insurance company, and hence it is not taxable as a corporation unless it is an "association" within the meaning of the above quoted statute. Each of the Revenue Acts of 1918 to 1926, both inclusive, contains*1149 in section 1 of Title I substantially the same provision as section 701(a)(2) of the 1928 Act, supra.

Neither party to this proceeding suggests that the petitioner is a trust and taxable as such, nor do we think the facts would support such a conclusion. It is either a nontaxable partnership or an association taxable as a corporation.

The stipulated facts herein show that certain individuals associated themselves together to "develop for gas, oil and other minerals" and to sell such as might be found, on certain lands described in the agreement, and that during the taxable year it was actively engaged in such undertaking. Thus, during the taxable year a group of persons associated together was engaged in a business enterprise for profit. Their interests were transferable. The business was carried on in many respects as if it had been incorporated. It had a president and general manager, and a treasurer; it had power and authority to sue and to be sued in its own name, to own property, and to make contractual obligations through its president and general manager, approved by the treasurer. The organization was to continue for a period of ten years or longer, but might*1150 be dissolved or liquidated at any time upon the vote of those owning 51 percent or more of the beneficial interests. While it was further provided that the owners of interests should share in the profits and losses in proportion to their respective interests, the liability of each was limited to the extent of his interests. We think a business enterprise so organized and operated meets the test of an association taxable as a corporation. ;; ; .

Even if the enterprise did meet the tests of a partnership under local law, it may still be taxed as if it were a corporation, when it is organized and operated as shown by the facts here. See

*377 The burden is upon the petitioner here to show that the respondent erred in determining that it is a taxable association. On the record presented, it is our opinion that the petitioner has failed in this respect, and the respondent's*1151 determination is, therefore, approved.

Judgment will be entered for the respondent.